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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] 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 000-29667
VOICESTREAM WIRELESS CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 91-1983600
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
12920 - 38TH STREET S.E.
BELLEVUE, WASHINGTON 98006
------------------------- -----
(Address of principal executive offices) (Zip Code)
(425) 378-4000
--------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title Shares Outstanding as of November 1, 2001
----- -----------------------------------------
Common Stock, $0.000001 par value 268,862,185
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VOICESTREAM WIRELESS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets ......................................................... 2
Consolidated Statements of Operations and Comprehensive Loss ........................ 3
Consolidated Statements of Cash Flows ............................................... 4
Notes to Consolidated Financial Statements .......................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .......................................................... 18
PART II - OTHER INFORMATION ........................................................... 19
ITEM 1. LEGAL PROCEEDINGS .......................................................... 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .................................. 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................ 19
ITEM 5. OTHER INFORMATION .......................................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................... 19
1
VOICESTREAM WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
September 30, 2001 | December 31, 2001
------------------ | -----------------
(unaudited) |
|
ASSETS |
|
Current assets: |
Cash and cash equivalents ..................................................... $ 26,474 | $ 1,154,896
Short-term investments ........................................................ -- | 1,175,636
Accounts receivable, net of allowance for doubtful |
accounts of $101,867 and $100,600, respectively ............................. 544,053 | 469,475
Inventory ..................................................................... 121,576 | 340,284
FCC license deposits and other current assets ................................. 260,281 | 223,634
------------ | ------------
Total current assets .................................................... 952,384 | 3,363,925
|
Property and equipment, net of accumulated depreciation of |
$265,302 and $740,956, respectively .......................................... 4,046,920 | 3,467,550
Goodwill, net of accumulated amortization of $264,433 and |
$348,575, respectively ....................................................... 15,618,852 | 9,075,605
Licensing costs and other intangible assets, net of accumulated |
amortization of $367,929 and $118,923, respectively .......................... 20,294,383 | 3,827,317
Investments in and advances to unconsolidated affiliates ........................ 427,389 | 498,869
Other assets and investments .................................................... 36,786 | 44,477
------------ | ------------
$ 41,376,714 | $ 20,277,743
============ | ============
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
Current liabilities: |
Accounts payable .............................................................. $ 138,509 | $ 150,632
Accrued liabilities ........................................................... 516,188 | 404,621
Deferred revenue .............................................................. 80,429 | 60,272
Construction accounts payable ................................................. 61,782 | 207,462
Current portion of long-term debt ............................................. -- | 32,113
------------ | ------------
Total current liabilities ................................................ 796,908 | 855,100
|
Long-term debt .................................................................. 2,829,494 | 5,719,886
Long-term notes payable to affiliates ........................................... 3,453,550 | --
Deferred tax liability .......................................................... 4,253,433 | --
Other long-term liabilities ..................................................... 22,997 | --
Minority interest in equity of consolidated subsidiaries ........................ 51,375 | 16,563
Preferred stock of consolidated subsidiary ...................................... -- | 312,513
|
VoiceStream voting preferred stock; $0.001 par value; |
100,000,000 shares authorized; 3,906,250 shares issued and outstanding ....... 5,000,000 | 5,000,000
|
Commitments and contingencies |
|
Shareholders' equity: |
Common stock, $0.000001 and $0.001 par value, respectively, and paid-in |
capital; 1.0 billion shares authorized, 268,862,185 and 250,791,145 |
shares issued and outstanding, respectively ................................ 25,859,671 | 11,572,083
Deferred compensation ......................................................... (39,604) | (8,412)
Accumulated other comprehensive income (loss) ................................. 1,566 | (45,238)
Accumulated deficit ........................................................... (852,676) | (3,144,752)
------------ | ------------
Total shareholders' equity .............................................. 24,968,957 | 8,373,681
------------ | ------------
$ 41,376,714 | $ 20,277,743
============ | ============
See accompanying notes to consolidated financial statements.
2
VOICESTREAM WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(dollars in thousands)
(unaudited)
Nine month periods
--------------------------------------------
June 1, 2001 | January 1, Nine months
Three months ended through | 2001 through ended
September 30, September 30, | May 31, September 30,
2001 | 2000 2001 | 2001 2000
----------- | ----------- ------------- | ------------- -------------
| |
Revenues: | |
Subscriber revenues ............................... $ 624,832 | $ 336,247 $ 808,056 | $ 868,667 $ 780,708
Prepaid revenues .................................. 100,347 | 69,617 135,110 | 158,893 162,253
Roamer revenues ................................... 42,817 | 35,844 59,667 | 73,128 74,174
Equipment sales ................................... 82,840 | 87,357 116,482 | 150,958 177,113
Affiliate and other revenues ...................... 19,939 | 37,550 30,184 | 18,922 87,067
----------- | ----------- ----------- | ----------- -----------
Total revenues ........................... 870,775 | 566,615 1,149,499 | 1,270,568 1,281,315
----------- | ----------- ----------- | ----------- -----------
| |
Operating expenses: | |
Cost of service (excludes stock-based | |
compensation of $949, $1,023, $1,188, $610 | |
and $2,735, respectively) ...................... 213,002 | 149,490 283,552 | 286,897 337,336
Cost of equipment sales ........................... 188,383 | 154,507 250,544 | 265,629 317,174
General and administrative (excludes stock-based | |
compensation of $2,216, $19,318, $2,772, | |
$2,298 and $25,714, respectively) .............. 305,306 | 216,760 399,981 | 466,641 443,576
Sales and marketing (excludes stock-based | |
compensation of $791, $853, $990, $508 | |
and $2,280, respectively) ...................... 310,093 | 271,809 412,264 | 466,513 502,006
Depreciation and amortization ..................... 675,184 | 260,293 900,988 | 559,409 541,197
Stock-based compensation .......................... 3,956 | 21,194 4,950 | 3,416 30,729
----------- | ----------- ----------- | ----------- -----------
Total operating expenses ................. 1,695,924 | 1,074,053 2,252,279 | 2,048,505 2,172,018
----------- | ----------- ----------- | ----------- -----------
Operating loss ........................................ (825,149) | (507,438) (1,102,780) | (777,937) (890,703)
----------- | ----------- ----------- | ----------- -----------
Other income (expense): | |
Interest and financing expense .................... (95,502) | (141,580) (134,935) | (224,471) (343,679)
Equity in net losses of unconsolidated | |
affiliates ..................................... (8,678) | (49,133) (13,467) | (63,477) (96,380)
Interest income and other, net .................... 7,892 | 45,899 9,683 | 35,968 67,889
T-Mobile merger related costs ..................... (971) | -- (1,448) | (118,885) --
Accretion of preferred stock of consolidated | |
subsidiary ..................................... -- | (5,073) -- | (4,699) (12,006)
----------- | ----------- ----------- | ----------- -----------
Total other income (expense) ............. (97,259) | (149,887) (140,167) | (375,564) (384,176)
----------- | ----------- ----------- | ----------- -----------
Net loss before income taxes .......................... (922,408) | (657,325) (1,242,947) | (1,153,501) (1,274,879)
| |
Income tax benefit .................................... 289,015 | -- 390,271 | -- --
----------- | ----------- ----------- | ----------- -----------
Net loss .............................................. (633,393) | (657,325) (852,676) | (1,153,501) (1,274,879)
| |
2.5% junior preferred stock dividends ................. -- | (3,992) -- | -- (10,330)
----------- | ----------- ----------- | ----------- -----------
Net loss attributable to common shareholders .......... (633,393) | (661,317) (852,676) | (1,153,501) (1,285,209)
| |
Other comprehensive income (loss): | |
| |
Foreign currency translation adjustment ........... 1,582 | (4,064) 1,582 | (8,013) (4,064)
Equity in net unrealized income on investment | |
in securities held by unconsolidated | |
affiliate ...................................... 146 | (18,975) 146 | 21,727 (18,975)
Net unrealized income (loss) on available-for- | |
sale securities ................................ (162) | (7,754) (162) | 15,333 (7,754)
----------- | ----------- ----------- | ----------- -----------
Total other comprehensive income (loss) .. 1,566 | (30,793) 1,566 | 29,047 (30,793)
----------- | ----------- ----------- | ----------- -----------
Comprehensive loss .................................... $ (631,827) | $ (692,110) $ (851,110) | $(1,124,454) $(1,316,002)
=========== | =========== =========== | =========== ===========
See accompanying notes to consolidated financial statements.
3
VOICESTREAM WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
June 1, 2001 | January 1, 2001 Nine months
through | through ended
September 30, | May 31, September 30,
2001 | 2001 2000
------------- | --------------- -------------
|
Operating activities: |
Net loss ..................................................... $ (852,676) | $(1,153,501) $(1,274,879)
Adjustments to reconcile net loss to net cash used in |
operating activities: |
Depreciation and amortization .......................... 900,988 | 559,409 541,197
Income tax benefit ..................................... (390,271) | -- --
Amortization of debt discount and premium .............. 969 | 22,783 35,013
Equity in net losses of unconsolidated affiliates ...... 13,467 | 63,477 96,380
Stock-based compensation ............................... 4,950 | 3,416 30,729
Allowance for bad debts ................................ (1,809) | 1,776 11,631
Other, net ............................................. 1,576 | (25,119) 13,024
Changes in operating assets and liabilities, net of |
effects of purchase accounting: |
Accounts receivable ............................. (66,558) | (6,264) (140,914)
Inventory ....................................... 103,751 | 107,957 (148,986)
Other current assets ............................ 10,361 | 1,766 (25,016)
Accounts payable ................................ 37,832 | (52,429) 135,415
Accrued liabilities ............................. 36,827 | 56,797 171,656
----------- | ----------- -----------
Net cash used in operating activities ..................... (200,593) | (419,932) (554,750)
----------- | ----------- -----------
Investing activities: |
Purchases of property and equipment .......................... (449,107) | (809,983) (915,608)
Acquisitions of wireless properties, net of cash acquired .... (253,228) | (299,292) (469,366)
Sales of short-term investments, net ......................... -- | 1,175,636 --
Investments in and advances to affiliates, net ............... 1,597 | (37,193) (411,770)
Refund of deposit held by FCC ................................ -- | 49,589 --
Other ........................................................ 6,139 | 26,863 (3,743)
----------- | ----------- -----------
Net cash provided by (used in) investing activities ....... (694,599) | 105,620 (1,800,487)
----------- | ----------- -----------
Financing activities: |
Net proceeds from issuance of common and preferred stock ..... -- | 43,468 6,347,133
Long-term debt borrowings .................................... -- | -- 3,540,000
Long-term debt repayments .................................... (3,329,582) | (32,113) (3,591,669)
Long-term debt borrowings from parent company ................ 3,453,550 | -- --
Other ........................................................ -- | 27,470 --
Cash entitlements on conversion of preferred stock of |
consolidated subsidiary ................................... -- | (81,711) --
Deferred financing costs ..................................... -- | -- (68,142)
----------- | ----------- -----------
Net cash provided by (used in) financing activities ....... 123,968 | (42,886) 6,227,322
----------- | ----------- -----------
Change in cash and cash equivalents ............................. (771,224) | (357,198) 3,872,085
Cash and cash equivalents, beginning of period .................. 797,698 | 1,154,896 235,433
----------- | ----------- -----------
Cash and cash equivalents, end of period ........................ $ 26,474 | $ 797,698 $ 4,107,518
=========== | =========== ===========
See accompanying notes to consolidated financial statements.
4
VOICESTREAM WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization
VoiceStream Wireless Corporation ("VoiceStream" or "we") provides personal
communication services ("PCS") in urban markets in the United States using the
Global System for Mobile Communications, or GSM, technology. VoiceStream was
incorporated in June 1999 as a Delaware corporation to act as the parent company
for business combinations involving our predecessor, now named VS Washington
Corporation ("VS Washington").
On May 31, 2001, Deutsche Telekom AG ("Deutsche Telekom") acquired 100% of
the common shares of VoiceStream. The merger qualified as a tax-free
reorganization. VoiceStream shareholders received for each VoiceStream common
share either 3.6693 shares of Deutsche Telekom stock and $15.7262 in cash,
3.6683 shares of Deutsche Telekom stock and $15.9062 in cash or 3.7647 shares of
Deutsche Telekom stock. Deutsche Telekom transferred all of its VoiceStream
shares to T-Mobile International AG ("T-Mobile"). T-Mobile is a wholly owned
subsidiary of Deutsche Telekom and is the holding company for Deutsche Telekom's
GSM wireless operations primarily in Europe and the United States. Upon
consummation of the merger and the transfer by Deutsche Telekom of all of its
VoiceStream common shares to T-Mobile (hereafter referred to as "the T-Mobile
merger"), VoiceStream common shares were deregistered and delisted from NASDAQ
and are no longer publicly traded.
On February 25, 2000, pursuant to a reorganization agreement approved by the
shareholders of VS Washington and Omnipoint Corporation ("Omnipoint"),
VoiceStream, as a holding company, became the parent of VS Washington and of
Omnipoint. On May 4, 2000, VoiceStream completed the acquisition by merger of
Aerial Communications, Inc. ("Aerial"). On December 14, 2000, we acquired
controlling interests in the following entities in exchange for approximately
7.9 million VoiceStream common shares and $51 million in cash: VoiceStream PV/SS
PCS, L.P. ("VS PCS"); VoiceStream GSM I, LLC ("VS GSM"); VoiceStream GSM II
Holdings, LLC ("VS GSM II"); and VoiceStream GSM III Holdings, LLC ("VS GSM
III"). On February 14, 2001 we acquired the remaining minority interests in VS
PCS and VS GSM in exchange for approximately 4.3 million VoiceStream common
shares.
2. Summary of Significant Accounting Policies
Consolidation and Financial Statement Presentation
The unaudited consolidated financial statements of VoiceStream and its
consolidated subsidiaries include the accounts of all majority and
minority-owned subsidiaries that are controlled by VoiceStream. Affiliates that
are 20 percent to 50 percent owned are generally accounted for using the equity
method. Intercompany accounts and transactions have been eliminated in
consolidation. The unaudited consolidated financial statements of VoiceStream
for the three and nine months ended September 30, 2001 and 2000 reflect all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods. Such adjustments include those of a normal, recurring
nature and those related to the T-Mobile merger as described below. The
operating results for the interim periods presented herein are not necessarily
indicative of results of operations for the entire year. Reference should be
made to the consolidated financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2000.
The T-Mobile merger was accounted for as a purchase business combination and
resulted in an adjustment of the basis of our assets, liabilities and
shareholder's equity to reflect fair value on the closing date of the merger. As
a result of this new basis, our consolidated balance sheets, results of
operations and cash flows for periods subsequent to May 31, 2001, the closing
date of the merger, are not comparable to periods prior to the merger. The
consolidated financial statements of VoiceStream for the nine months ended
September 30, 2001 are presented as two distinct periods, the five months prior
to the merger, and the period from June 1, 2001 to September 30, 2001,
subsequent to the merger.
5
VOICESTREAM WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Loss per Common Share
VoiceStream no longer presents loss per share information as VoiceStream's
common shares are not publicly traded.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires companies to cease amortizing
goodwill and other intangible assets with indefinite lives that existed at June
30, 2001. The amortization of existing goodwill will cease on December 31, 2001.
Any goodwill and other intangible assets with indefinite lives resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. The
test for goodwill impairment under the new standard will begin in the first
quarter of 2002, and could have an adverse non-cash effect on our future results
of operations if an impairment occurs.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the
retirement of tangible long-lived assets. Under this statement, legal
obligations associated with the retirement of long-lived assets are to be
recognized at their fair value in the period in which they are incurred if a
reasonable estimate of fair value can be made. The fair value of the asset
retirement costs is capitalized as part of the carrying amount of the long-lived
asset and expensed using a systematic and rational method over the assets'
useful life. Any subsequent changes to the fair value of the liability will be
expensed. We will be required to adopt this statement no later than January 1,
2003. We are currently assessing the impact of this statement on our results of
operations, financial position and cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for fiscal
years beginning after December 15, 2001. This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and replaces the provisions of APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of Segments of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of segments of a business. SFAS 144
retains the fundamental provisions of SFAS No. 121 for the recognition and
measurement of the impairment of long-lived assets to be held and used and the
measurement of long-lived assets to be disposed of by sale. Impairment on
goodwill is not included in the scope of SFAS No. 144 and will be treated in
accordance with the accounting standards established in SFAS No. 142, "Goodwill
and Other Intangible Assets." Under SFAS No. 144, long-lived assets are measured
at the lower of carrying amount or fair value less cost to sell. We will be
required to adopt this statement no later than January 1, 2002. We are currently
assessing the impact of this statement on our results of operations, financial
position and cash flows.
Reclassifications
Certain of the comparative figures in the prior period financial statements
have been reclassified to conform to the current period presentation.
6
VOICESTREAM WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
3. Business Combinations and Other Transactions
T-Mobile Merger
As a result of the T-Mobile merger, we adjusted the basis of our assets,
liabilities and shareholder's equity to reflect the purchase allocations
recorded by T-Mobile (see Note 2). These non-cash adjustments, which have not
been finalized and may be subject to change, resulted in the following balance
sheet allocations as of May 31, 2001, the acquisition date (dollars in
thousands):
ASSETS
Other current assets $ (16,878)
Licenses and other intangibles (excluding goodwill) 15,953,562
Goodwill 6,970,764
Other long-term assets (24,786)
------------
$ 22,882,662
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Other current liabilities $ 24,528
Long-term debt 438,573
Deferred tax liability 4,643,704
Common stock and additional paid-in capital 13,326,758
Deferred compensation (38,686)
Accumulated other comprehensive loss 16,191
Deficit 4,471,594
------------
$ 22,882,662
============
Effective June 1, 2001, we changed the amortization period for licenses from
40 to 20 years.
Other Acquisitions and License Exchanges
The following acquisitions and license exchanges either closed during the
nine months ended September 30, 2001 or were pending as of September 30, 2001.
Cingular Joint Venture
On November 1, 2001, we entered into a joint venture with Cingular Wireless
LLC ("Cingular") that will allow the companies to share urban GSM network
infrastructures in the New York Basic Trading Area ("BTA"), and the Los Angeles
and San Francisco Major Trading Areas ("MTAs"). We will each continue to hold
and control our respective licenses and certain equipment in those markets, and
independently market our services and utilize our own brand names, sales,
marketing, billing and customer care operations. We expect our services in the
Los Angeles and San Francisco MTAs to be fully launched by mid 2002.
Verizon (Trustee)
On June 14, 2001, we purchased licenses and operating assets located
primarily in Cincinnati and Dayton, OH (both 20 MHz of B Block spectrum) for
approximately $200 million from the Department of Justice-appointed Trustee
overseeing the operation and divestiture of the former GTE Cincinnati-Dayton PCS
properties.
Cingular License Exchange
On May 11, 2001, we completed the exchange of licenses covering
approximately 35 million people with Cingular. Cingular acquired from
VoiceStream 10 MHz of spectrum in the New York, NY MTA, as well as 10 MHz in
each of the St. Louis, MO and Detroit, MI BTAs. VoiceStream acquired from
Cingular 10 MHz of spectrum in the Los Angeles and San Francisco MTAs, that
cover most of California and Nevada. No gain or loss was recognized from this
transaction.
7
VOICESTREAM WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
AT&T Wireless
On March 29, 2001, we exchanged certain D and E Block 10 MHz licenses held
by us in Detroit, MI, Flint, MI, Poplar Bluff, MO, Rolla, MO, Mt.
Vernon-Centralia, IL, St. Louis, MO and Albany, NY for portions of certain A
Block 10 MHz licenses held by AT&T Wireless PCS, LLC ("AT&T") in Phoenix, AZ,
Bloomington, IL, Little Rock, AR and Puerto Rico and $11.7 million in cash. The
licenses were recorded at $200.5 million and a gain of $11.7 million was
recorded in other income for the three months ended March 31, 2001. Neither
party assumed any liabilities related to the exchanged licenses.
Pocket Communications and Leap Wireless
On February 12, 2001, Cook Inlet/VS GSM IV PCS Holdings, LLC ("CIVS IV"), a
designated entity in which we hold a non-controlling interest, purchased 12 C
Block licenses in Las Vegas, NV, New Orleans, LA, Houma-Thibodaux, LA, Omaha,
NE, Sandusky, OH, Adrian, MI, Battle Creek, MI, Grand Rapids, MI, Jackson, MI,
Muskegon, MI, Toledo, OH and Pittsburg-Parsons, KS from Pocket Communications
for $195 million. In a separate agreement, 8 of these licenses were sold to Leap
Wireless, Inc. for $51 million in cash and 348,878 shares of Leap Wireless
common stock on April 5, 2001. The common shares were subsequently sold in April
2001, resulting in our recording a gain of $2.3 million.
FCC Auction 35
On January 26, 2001, upon completion of the FCC Auction 35 bid process, we
were the high bidder on 19 PCS licenses with bids totaling $482.7 million.
Additionally, Cook Inlet/VS GSM V PCS Holdings LLC, ("CIVS V"), a designated
entity in which we hold a non-controlling interest, was the high bidder on 22
PCS licenses with high bids totaling $506.4 million. The FCC announced on July
27, 2001 that it was prepared to grant seven of the 19 PCS licenses for which
VoiceStream was the high bidder, and one of the 22 PCS licenses for which CIVS V
was the high bidder. On August 10, 2001, VoiceStream and CIVS V paid the
balances owed on the eight licenses of $7.4 million to the FCC and were granted
the licenses.
The ungranted licenses for which we and CIVS V were the high bidders were
originally held either by NextWave Communications, Inc. ("NextWave") or Urban
Communicators, both of which declared bankruptcy. The FCC has not granted these
remaining licenses due to pending administrative and judicial challenges related
to the auction process, including a decision issued by the United States Court
of Appeals for the District of Columbia Circuit on June 22, 2001. The court held
that the FCC had erroneously cancelled licenses previously acquired by NextWave
in earlier auctions, when NextWave, upon declaring bankruptcy, failed to make
installment payments for those licenses. On August 31, 2001, the Wireless
Telecommunications Bureau of the FCC released a Public Notice announcing that
NextWave's licenses returned to active status, although the Public Notice was
qualified by a recognition that ongoing regulatory proceedings before the FCC
could affect the status of the NextWave licenses. Further, the FCC as well as
certain Auction 35 winning bidders filed petitions with the United States
Supreme Court seeking review of the Court of Appeals' decision, which are still
pending. VoiceStream and CIVS V are part of a coalition attempting to negotiate
a settlement by which the subject licenses would be granted to the Auction 35
high bidders. It is uncertain, however, whether a settlement will be finalized
or whether the remaining Auction 35 licenses will be granted to the high
bidders.
STPCS
On January 22, 2001, we purchased the assets of STPCS Joint Venture, LLC
("STPCS"). Through its operating company, SOL Communications Inc., STPCS held
licenses and assets in South Texas. Pursuant to the terms of the agreement, we
purchased STPCS's licenses and related assets for $297 million in cash. In
addition, STPCS's F block licenses and certain related assets were purchased by
CIVS IV for $9 million.
8
VOICESTREAM WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Unaudited Pro Forma Operating Results
The following are the unaudited pro forma operating results, assuming that
VoiceStream's business combinations occurred on January 1 of each of the
respective years (dollars in thousands):
For the nine months ended September 30,
---------------------------------------
2001 2000
----------- -----------
Total revenues .................................... $ 2,420,000 $ 1,641,900
Net loss .......................................... $(2,084,000) $(1,845,300)
4. Long-Term Debt
The carrying values of our long-term debt were adjusted to fair value at May
31, 2001 (see Note 2) resulting in a premium of $426 million. The premium will
be amortized to interest expense over the remaining terms of the related debt.
September 30, December 31,
(dollars in thousands) 2001 2000
------------- ------------
Credit facilities:
Term loans ......................................... $ -- $ 2,425,000
Vendor facility .................................... -- 750,000
Revolvers .......................................... -- 150,000
Senior Notes:
10 3/8% Senior Notes, due in 2009 .................. 1,727,904 1,727,904
11 7/8% Senior Discount Notes, due in 2009 ......... 720,000 720,000
11 5/8% Senior Notes, due in 2006 .................. -- 4,582
11 1/2% Senior Notes, due in 2009 .................. 205,000 205,000
FCC license obligations ............................... -- 32,113
----------- -----------
2,652,904 6,014,599
Unamortized premium and (discount), net ............... 176,590 (262,600)
Current portion of long-term debt ..................... -- (32,113)
----------- -----------
$ 2,829,494 $ 5,719,886
=========== ===========
Long-term notes payable to affiliates ................. $ 3,453,550 $ --
=========== ===========
During the quarter ended September 30, 2001, we repaid all outstanding
borrowings under our credit facilities and cancelled the related lending
agreements. We also repaid the $4.6 million 11 5/8% Senior Notes due in 2006.
These repayments were funded by $3.5 billion in borrowings from Deutsche
Telekom. The notes relating to these borrowings, which are due in 2010, bear
interest at 4.85% through December 15, 2001 and thereafter will bear interest at
the six-month LIBOR rate plus 0.95%.
Maturities
All of our long-term debt and long-term notes payable to affiliates mature
after 2005.
9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Litigation Reform Act of 1995.
Information contained or incorporated by reference herein that is not
based on historical fact, including without limitation, statements
containing the words "believes," "may," "will," "estimate," "continue,"
"anticipates," "intends," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, events or developments to be materially different from any future
results, events or developments expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions, both nationally and in the regions in
which VoiceStream operates; technology changes; competition; changes in
business strategy or development plans; the high leverage of VoiceStream;
the ability to attract and retain qualified personnel; existing governmental
regulations and changes in, or the failure to comply with, governmental
regulations; liability and other claims asserted against VoiceStream; and
other factors referenced in VoiceStream's filings with the Securities and
Exchange Commission. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. VoiceStream
disclaims any obligation to update any such factors or to publicly announce
the result of any revisions to any of the forward-looking statements
contained herein to reflect future results, events or developments.
The following is a discussion and analysis of the consolidated financial
condition and results of operations of VoiceStream and should be read in
conjunction with our consolidated financial statements and notes thereto and
other financial information included herein and in our Form 10-K for the
year ended December 31, 2000. Due to the stage of development of our PCS
operations and the significance of recent mergers, including the change of
control due to the T-Mobile merger, and other transactions, our operating
results for prior periods may not be indicative of future performance.
Unless the context requires otherwise, "VoiceStream", "we", "our" and
"us" include us and our predecessors and subsidiaries.
Overview
We provide PCS service in urban markets in the United States through the
ownership and operation of PCS licenses and through our minority interests
in entities that own and operate similar licenses. The following chronology
highlights the key events in the periods covered by these financial
statements:
- On February 25, 2000, we merged with Omnipoint, a PCS service provider
in urban markets, including New York, NY, Detroit, MI, Boston, MA,
Philadelphia, PA, Miami, FL, and Indianapolis, IN. Our reported results
of operations began including Omnipoint's results in March 2000. On May
4, 2000, we merged with Aerial, a PCS service provider in urban markets
including Columbus, OH, Houston, TX, Kansas City, MO, Minneapolis, MN,
Pittsburgh, PA, and Tampa-St. Petersburg, FL. Our reported results of
operations began including Aerial's results in May 2000.
- In connection with its authority to regulate the sale and use of radio
wave spectrum used to provide PCS service in the United States, the FCC
adopted rules that granted a narrow category of entities ("Designated
Entities") the exclusive right to bid for and own C and F Block licenses
for the initial five year period following award of the licenses. Those
limitations, however, have been revised by the FCC, and a limited portion
of the spectrum previously reserved only for Designated Entities has been
opened to non-Designated Entities. VoiceStream does not qualify as a
Designated Entity but has owned or currently owns non-controlling
interests in a number of Designated Entities controlled by Cook Inlet
Region, Inc. (collectively the "CIRI Designated Entities"). In December
2000 and February 2001, our partners in VS PCS, VS GSM, VS GSM II, and VS
GSM III elected to exercise their respective exchange rights, whereby
they exchanged their interests in these entities for VoiceStream common
shares. Subsequent to the acquisition dates our consolidated operating
results include the results of VS PCS, VS GSM, VS GSM II and VS GSM III.
10
- On May 31, 2001, Deutsche Telekom acquired 100% of the common shares of
VoiceStream. The merger qualified as a tax-free reorganization.
VoiceStream shareholders received for each VoiceStream common share
either 3.6693 shares of Deutsche Telekom stock and $15.7262 in cash,
3.6683 shares of Deutsche Telekom stock and $15.9062 in cash or 3.7647
shares of Deutsche Telekom stock. Deutsche Telekom transferred all of
its VoiceStream shares to T-Mobile. T-Mobile is a wholly owned
subsidiary of Deutsche Telekom and is the holding company for Deutsche
Telekom's GSM wireless operations primarily in Europe and the United
States. Upon consummation of the merger and the transfer by Deutsche
Telekom of all of its VoiceStream common shares to T-Mobile (hereafter
referred to as the "T-Mobile merger"), VoiceStream common shares were
deregistered and delisted from NASDAQ and are no longer publicly traded.
The T-Mobile merger was accounted for as a purchase business combination
and resulted in an adjustment of the basis of our assets, liabilities and
shareholder's equity to reflect fair value on the closing date of the
merger. As a result of this new basis, our consolidated balance sheets,
results of operations and cash flows for periods subsequent to May 31, 2001,
the closing date of the merger, are not comparable to periods prior to the
merger. The consolidated financial statements of VoiceStream for the nine
months ended September 30, 2001 are presented as two distinct periods, the
five months prior to the merger, and the period from June 1, 2001 to
September 30, 2001, subsequent to the merger. The following discussion and
analysis refers to the results and activities for the three and nine months
ended September 30, 2001. Where necessary, we have provided explanations to
improve comparability between the pre-merger and post-merger activity.
Operating Markets
During 2001, we launched service in Chicago, Milwaukee, St. Louis and
Cincinnati. We will be providing roaming capabilities in the fourth quarter
of 2001, ahead of the market launch in the Los Angeles and San Francisco
MTA's that will start in late 2001 and culminate in mid 2002. Due to the
varying dates at which each of the markets became operational or were
acquired, the revenues and expenses recognized during any period may not be
comparable to another period and may not be representative of future
operating markets.
11
Results of Operations for the Three and Nine Months Ended September 30, 2001
and 2000
The following table sets forth certain financial data as it relates to
our operations:
Three months ended September 30, Nine months ended September 30,
-------------------------------------- --------------------------------------
2001 2000 CHANGE 2001 2000 CHANGE
----------- ----------- ------ ----------- ----------- ------
Revenues:
Subscriber revenues ................... $ 624,832 $ 336,247 85.8% $ 1,676,723 $ 780,708 114.8%
Prepaid revenues ...................... 100,347 69,617 44.1% 294,003 162,253 81.2%
Roamer revenues ....................... 42,817 35,844 19.5% 132,795 74,174 79.0%
Equipment sales ....................... 82,840 87,357 (5.2)% 267,440 177,113 51.0%
Affiliate and other revenues .......... 19,939 37,550 (46.9)% 49,106 87,067 (43.6)%
----------- ----------- ----------- -----------
Total revenues ............... 870,775 566,615 53.7% 2,420,067 1,281,315 88.9%
----------- ----------- ----------- -----------
Operating expenses:
Cost of service ....................... 213,002 149,490 42.5% 570,449 337,336 69.1%
Cost of equipment sales ............... 188,383 154,507 21.9% 516,173 317,174 62.7%
General and administrative ............ 305,306 216,760 40.8% 866,622 443,576 95.4%
Sales and marketing ................... 310,093 271,809 14.1% 878,777 502,006 75.1%
Depreciation and amortization ......... 675,184 260,293 159.4% 1,460,397 541,197 169.8%
Stock-based compensation .............. 3,956 21,194 (81.3)% 8,366 30,729 (72.8)%
----------- ----------- ----------- -----------
Total operating expenses ..... 1,695,924 1,074,053 57.9% 4,300,784 2,172,018 98.0%
----------- ----------- ----------- -----------
Operating loss ........................... (825,149) (507,438) 62.6% (1,880,717) (890,703) 111.1%
Other income (expense): .................. (97,259) (149,887) (35.1)% (515,731) (384,176) 34.2%
Income tax benefit ....................... 289,015 -- 100.0% 390,271 -- 100.0%
----------- ----------- ----------- -----------
Net Loss ................................. $ (633,393) $ (657,325) (3.6)% $(2,006,177) $(1,274,879) 57.4%
=========== =========== =========== ===========
Adjusted EBITDA .......................... $ (146,009) $ (225,951) (35.4)% $ (411,954) $ (318,777) 29.2%
=========== =========== =========== ===========
Cash flows provided by (used in):
Operating activities .................. $ (104,290) $ (323,457) (67.8%) $ (620,525) $ (554,750) 11.9%
Investing activities .................. $ (375,139) $ (494,879) (24.2%) $ (588,979) $(1,800,487) (67.3%)
Financing activities .................. $ 448,968 $ 4,854,376 (90.8%) $ 81,082 $ 6,227,322 (98.7%)
Revenues
The overall increase in service revenues (subscriber, prepaid and roamer
revenues) for the three and nine months ended September 30, 2001 as compared
to the same periods in 2000 is primarily due to the acquisitions of
Omnipoint on February 25, 2000, Aerial on May 4, 2000, and controlling
interests in four of the CIRI Designated Entities on December 14, 2000.
Service revenues have also grown due to the expansion of our wireless
network in the existing and acquired markets and the launch of our services
in new markets.
Post pay service revenues increased $288.6 million, or 85.8%, for the
three months ended September 30, 2001 and $896.0 million, or 114.8%, for the
nine months ended September 30, 2001, as compared to the same periods in
2000. The increases are primarily the result of our continued post pay
subscriber growth. Our post pay subscribers grew to 4,012,800 at September
30, 2001, from 2,319,700 at September 30, 2000. There were 345,800 and
1,104,800 net post pay subscribers added during the three and nine months
ended September 30, 2001, respectively, as compared to 438,700 and 1,474,000
for the same periods in 2000. The post pay subscriber growth is attributable
primarily to our new rate plans and advertising campaigns.
Prepaid service revenues increased $30.7 million, or 44.1%, for the three
months ended September 30, 2001, and $131.8 million, or 81.2%, for the nine
months ended September 30, 2001, as compared to the same periods in 2000.
Our prepaid customers grew to 1,142,000 at September 30, 2001, from 748,200
at September 30, 2000. There were 38,100 and 171,000 net prepaid subscribers
added during the three and nine months ended September 30, 2001,
respectively, as compared to 62,500 and 170,100 for the same periods in
2000. There were also 568,400 net prepaid subscribers added through
acquisitions for the nine months ended September 30, 2000. The decline in
the rate of prepaid subscriber growth is attributable to our new marketing
strategy which emphasizes post pay subscriber growth through post pay
promotions and rate plans as discussed below.
We believe our "Get More" marketing strategy, including our advertising
campaign featuring Jamie Lee Curtis and the associated pricing strategy that
was initiated in the second quarter of 1998, has contributed to the rapid
customer growth throughout all of our markets. As a result of our merger
with T-Mobile, in the fourth quarter of 2001 we will begin to leverage our
"Get More" marketing strategy by building equity in the T-Mobile brand name
in the U.S. through the use of "Global Wireless by T-Mobile" as a unifying
element of the VoiceStream brand logo. We believe the success of our "Get
More" strategy, combined with the use of the global T-Mobile name, will
continue to positively affect our subscriber growth.
12
Total service revenue per average customer ("ARPU") was $51.58 and
$52.26 for the three months ended September 30, 2001 and 2000, respectively,
and $51.63 and $57.61 for the nine months ended September 30, 2001 and 2000,
respectively. The decrease in ARPU for the nine months ended September 30,
2001 as compared to the same period in 2000 reflects the addition of new
customers through the acquisition of Omnipoint and Aerial in 2000 and
converting these customers to the VoiceStream price plans which provide
more minutes and features at a lower cost to the customer.
Roamer revenues increased to $42.8 million and $132.8 million for the
three and nine months ended September 30, 2001, respectively, from $35.8
million and $74.2 million for the same periods in 2000. The increase is
primarily due to our expanded coverage area in 2001 as compared to 2000.
Equipment revenues decreased 5.2% for the three months ended September
30, 2001 as compared to the same period in 2000. The decrease is primarily
due to lower revenue per handset as a result of competitive pricing during
the quarter. Equipment revenues increased 51.0% for the nine months ended
September 30, 2001 as compared to the same period in 2000 primarily due to
volume increases which are correlated to the growth in our customer base.
Affiliate and other revenues decreased 46.9% and 43.6% in the three and
nine months ended September 30, 2001, respectively, as compared to the same
periods in 2000. This revenue is related to technical services agreements
and reciprocal resale agreements with unconsolidated CIRI Designated
Entities. The parties to these agreements are able to utilize air-time on
each other's spectrum, and/or utilize wireless network infrastructure, in
certain agreed upon markets. Each party acts as a reseller for the other
with related fees charged and paid between the parties. Affiliate revenues
decreased in 2001 because we have an interest in only one such entity during
2001 as compared to four in 2000.
Operating Expenses
Cost of service expense represents network operating expenses incurred
in operational markets. The increases in the three and nine months ended
September 30, 2001 of $63.5 million and $233.1 million, respectively, as
compared to the same periods in 2000, are primarily due to the growth in our
customer base. Cost of service expense as a percentage of service revenue
decreased to 27.7 % and 27.1 % for the three and nine months ended September
30, 2001, respectively, from 33.8% and 33.2% for the same periods in 2000.
Cost of service expense also includes fees related to the technical services
agreements and reciprocal resale agreements with certain unconsolidated CIRI
Designated Entities. Excluding the technical services and reciprocal resale
agreements described above, cost of service as a percentage of service
revenue were 26.3% and 26.0% for the three and nine months September 30,
2001 as compared to 25.3% and 24.4% for the same periods in 2000. The
increase in 2001 as compared to 2000 is due to the launch of the Chicago,
Milwaukee and St. Louis markets in the second quarter of 2001. While cost of
service expense is expected to increase due to continuing growth in our
customer base, we expect cost of service as a percentage of service revenue
to generally trend downward as more subscribers are added to the newly
launched markets and as greater economies of scale are realized.
Cost of equipment sales increased for both the three and nine months
ended September 30, 2001 as compared to the same periods in 2000, primarily
due to the increase in the number of handsets sold. The volume increase is
correlated to the growth in our customer base. Although subscribers
generally are responsible for purchasing or otherwise obtaining their own
handsets, we sell handsets below cost to respond to competition for new
subscribers. We expect handset subsidies to remain common industry practice
for the foreseeable future.
General and administrative costs per average customer per month was
$20.51 and $21.27 for the three and nine months ended September 30, 2001,
respectively, as compared to $25.65 and $24.96 for the same periods in 2000.
The decrease is primarily attributable to improved economies of scale
realized in our administrative functions following the integration of
Omnipoint and Aerial. While general and administrative expenses are expected
to increase due to continuing growth in subscribers, we expect the cost per
customer to continue to trend downward as greater economies of scale are
realized.
13
The increase in sales and marketing costs is associated with the
continued subscriber growth in VoiceStream's markets. Sales and marketing
costs per gross customer added, including loss on equipment sales, totaled
$366 and $351 for the three and nine months ended September 30, 2001,
respectively, as compared to $388 and $368 for the same periods in 2000.
Sales and marketing cost per net customer added, including loss on equipment
sales, totaled $1,082 and $902 for the three and nine months ended September
30, 2001, respectively, as compared to $675 and $646 for the same periods in
2000. The increase in 2001 is largely due to higher customer turnover
especially with respect to prepaid customers.
Depreciation and amortization expense increased by approximately $118.1
million per month starting in June 2001 primarily due to fair value
adjustments to the cost of our intangible assets, including licenses,
goodwill, tradename and subscriber list relating to purchase accounting for
the T-Mobile merger. Amortization expense also increased due to the change
in the amortization period of licenses from 40 years, prior to the T-Mobile
merger, to 20 years subsequent to the merger. Depreciation and amortization
charges are also trending upwards due to our increasing asset base arising
from acquisitions and the on-going expansion of our wireless network.
Stock-based compensation expense was $4.0 million and $8.4 million for
the three and nine months ended September 30, 2001, respectively. In 2001, a
non-cash accrual for stock-based compensation of $44.6 million was
established to record the fair value of stock options as a result of the
T-Mobile merger. The deferred compensation is being amortized over the
vesting period of the related stock options. As of September 30, 2001,
approximately $39.6 million remains unamortized.
Adjusted EBITDA
Adjusted EBITDA represents operating loss before interest, taxes,
depreciation, amortization and non-cash stock-based compensation. We believe
Adjusted EBITDA provides meaningful additional information on our operating
results and on our ability to service our long-term debt and other fixed
obligations, and to fund our continued growth. Adjusted EBITDA is considered
by many financial analysts to be a meaningful indicator of an entity's
ability to meet its future financial obligations, and growth in Adjusted
EBITDA is considered to be an indicator of future profitability, especially
in a capital-intensive industry such as wireless telecommunications.
Adjusted EBITDA should not be construed as an alternative to operating
income (loss) as determined in accordance with United States generally
accepted accounting principles ("GAAP"), as an alternate to cash flows from
operating activities (as determined in accordance with GAAP), or as a
measure of liquidity. Because Adjusted EBITDA is not calculated in the same
manner by all companies, our presentation may not be comparable to other
similarly titled measures reported by other companies.
Adjusted EBITDA loss decreased to $146.0 million for the three months
ended September 30, 2001 as compared to $226.0 million in the same period in
2000 due primarily to lower customer growth in the third quarter of 2001 and
a corresponding smaller increase in sales and marketing expense, offset by
$27.6 million in bonus expenses related to the T-Mobile merger. Adjusted
EBITDA loss increased to $412.0 million, including $67.2 million in bonus
expenses related to the T-Mobile merger, for the nine months ended September
30, 2001 as compared to adjusted EBITDA loss of $318.8 million for the same
period in 2000. This increase was primarily due to the acquisitions of
Omnipoint and Aerial during 2000 and the inclusion of their results for a
portion of the nine months ended September 30, 2000 while the operating
results for these entities were included for the entire nine months ended
September 30, 2001.
Other Income (Expense)
Interest and financing expense, net of capitalized interest, decreased
to $95.5 million for the three months ended September 30, 2001 as compared
to $141.6 million for the same period in 2000, primarily due to a decrease
in the average interest rate of our debt in the third quarter of 2001 as we
replaced third party debt with notes payable to Deutsche Telekom which have
lower interest rates. Interest and financing expense, net of capitalized
interest, increased to $359.4 million for the nine months ended September
30, 2001 as compared to $343.7 million for the same period in 2000,
primarily due to higher average debt balances. The weighted average
effective interest rate before capitalized interest was 6.5% and 8.7% for
the three and nine months ended September 30, 2001, respectively, as
compared to 10.3% and 10.4% for the same periods in 2000.
14
Also included in other income and expenses is $1.0 million and $120.3
million in expenses related to the T-Mobile merger for the three and nine
months ended September 30, 2001, respectively. Equity in net losses of
unconsolidated affiliates totaled $8.7 million and $76.9 million for the
three and nine months ended September 30, 2001, respectively, as compared to
$49.1 million and $96.4 million for the same periods in 2000.
Net Loss
Our net loss was $633.4 million and $2.0 billion for the three and nine
months ended September 30, 2001, respectively, as compared to $657.3 million
and $1.3 billion for the same periods in 2000. The increase in 2001 is
primarily due to the increases to the cost basis of our assets and the
related amortization charges associated with the T-Mobile merger. These
expenses are offset by $289.0 million and $390.3 million in income tax
benefits for the three and nine months ended September 30, 2001,
respectively. The incremental costs of continued high customer growth, the
related expenditures necessary to support this growth and the costs
associated with integrating our acquisitions were also significant.
Liquidity and Capital Resources
Mergers, Acquisitions, Investments and Capital Expenditures
Cingular Joint Venture
On November 1, 2001, we entered into a joint venture with Cingular that
will allow the companies to share urban GSM network infrastructures in the
New York BTA, and the Los Angeles and San Francisco MTAs. We will each
continue to hold and control our respective licenses and certain equipment
in those markets, and independently market our services and utilize our own
brand names, sales, marketing, billing and customer care operations. We
expect our services in the Los Angeles and San Francisco MTAs to be fully
launched by mid 2002.
Verizon (Trustee)
On June 14, 2001, we purchased licenses and operating assets located
primarily in Cincinnati and Dayton, OH (both 20 MHz of B Block spectrum) for
approximately $200 million from the Department of Justice-appointed Trustee
overseeing the operation and divestiture of the former GTE Cincinnati-Dayton
PCS properties.
Cingular License Exchange
On May 11, 2001, we completed the exchange of licenses covering
approximately 35 million people with Cingular. Cingular acquired from
VoiceStream 10 MHz of spectrum in the New York, NY MTA, as well as 10 MHz in
each of the St. Louis, MO and Detroit, MI BTAs. VoiceStream acquired from
Cingular 10 MHz of spectrum in the Los Angeles and San Francisco MTAs, that
cover most of California and Nevada. No gain or loss was recognized from
this transaction.
AT&T Wireless
On March 29, 2001, we exchanged certain D and E Block 10 MHz licenses
held by us in Detroit, MI, Flint, MI, Poplar Bluff, MO, Rolla, MO, Mt.
Vernon-Centralia, IL, St. Louis, MO and Albany, NY for portions of certain A
Block 10 MHz licenses held by AT&T in Phoenix, AZ, Bloomington, IL, Little
Rock, AR and Puerto Rico and $11.7 million in cash. The licenses were
recorded at $200.5 million and a gain of $11.7 million was recorded in other
income for the three months ended March 31, 2001. Neither party assumed any
liabilities related to the exchanged licenses.
15
Pocket Communications and Leap Wireless
On February 12, 2001, CIVS IV, purchased 12 C Block licenses in Las
Vegas, NV, New Orleans, LA, Houma-Thibodaux, LA, Omaha, NE, Sandusky, OH,
Adrian, MI, Battle Creek, MI, Grand Rapids, MI, Jackson, MI, Muskegon, MI,
Toledo, OH and Pittsburg-Parsons, KS from Pocket Communications for $195
million. In a separate agreement, 8 of these licenses were sold to Leap
Wireless, Inc. for $51 million in cash and 348,878 shares of Leap Wireless
common stock on April 5, 2001. The common shares were subsequently sold in
April 2001, resulting in our recording a gain of $2.3 million.
FCC Auction 35
On January 26, 2001, upon completion of the FCC Auction 35 bid process,
we were the high bidder on 19 PCS licenses with bids totaling $482.7
million. Additionally, CIVS V was the high bidder on 22 PCS licenses with
high bids totaling $506.4 million. The FCC announced on July 27, 2001 that
it was prepared to grant seven of the 19 PCS licenses for which VoiceStream
was the high bidder, and one of the 22 PCS licenses for which CIVS V was the
high bidder. On August 10, 2001, VoiceStream and CIVS V paid the balances
owed on the eight licenses of $7.4 million to the FCC and were granted the
licenses.
The ungranted licenses for which we and CIVS V were the high bidders
were originally held either by NextWave or Urban Communicators, both of
which declared bankruptcy. The FCC has not granted these remaining licenses
due to pending administrative and judicial challenges related to the auction
process, including a decision issued by the United States Court of Appeals
for the District of Columbia Circuit on June 22, 2001. The court held that
the FCC had erroneously cancelled licenses previously acquired by NextWave
in earlier auctions, when NextWave, upon declaring bankruptcy, failed to
make installment payments for those licenses. On August 31, 2001, the
Wireless Telecommunications Bureau of the FCC released a Public Notice
announcing that NextWave's licenses returned to active status, although the
Public Notice was qualified by a recognition that ongoing regulatory
proceedings before the FCC could affect the status of the NextWave licenses.
Further, the FCC as well as certain Auction 35 winning bidders filed
petitions with the United States Supreme Court seeking review of the Court
of Appeals' decision, which are still pending. VoiceStream and CIVS V are
part of a coalition attempting to negotiate a settlement by which the
subject licenses would be granted to the Auction 35 high bidders. It is
uncertain, however, whether a settlement will be finalized or whether the
remaining Auction 35 licenses will be granted to the high bidders.
STPCS
On January 22, 2001, we purchased the assets of STPCS. Through its
operating company, SOL Communications Inc., STPCS held licenses and assets
in South Texas. Pursuant to the terms of the agreement, we purchased STPCS's
licenses and related assets for $297 million in cash. In addition, STPCS's F
block licenses and certain related assets were purchased by CIVS IV for $9
million.
Capital Expenditures
Capital expenditures totaled $325.8 million and $1.3 billion for the
three and nine months ended September 30, 2001, respectively, primarily for
the continuing build out of our wireless network including the Chicago
market, which was launched on May 1, 2001. We expect to incur significant
additional capital expenditures through 2001, directly and through CIVS IV
and CIVS V for license purchases, capacity expansion of operating markets
and the development and expansion of new markets. Actual capital
expenditures could vary considerably depending on opportunities that arise
over the course of the year and on funding availability. We expect that
future funding of our on-going cash requirements will be provided by
Deutsche Telekom or its affiliates.
16
Financing Activities
In the second and third quarters of 2001, we repaid all outstanding
borrowings, totaling approximately $3.3 billion, under our credit facilities
and cancelled the related lending agreements. We also repaid the $4.6
million 11 5/8% Senior Notes due in 2006. These repayments were funded by
$3.5 billion in borrowings from Deutsche Telekom. The notes relating to
these borrowings, which are due in 2010, bear interest at 4.85% through
December 15, 2001 and thereafter will bear interest at the six-month LIBOR
rate plus 0.95%.
We expect continued use of cash in operating activities due to operating
losses and increased working capital requirements together with continuing
investments in network infrastructure and FCC licenses to grow and support
our customer base. The cost of completing the build-out in any particular
market, the magnitude of operating losses, debt service requirements and the
funding requirements of license or operating business acquisitions could
vary significantly from current estimates. We plan to use cash on hand and
further borrowings from Deutsche Telekom or its affiliates to fund these
activities and expenditures. In the past we have received borrowings from
Deutsche Telekom. If such financing is not fully available we may be
required to curtail our rate of growth or our service operations.
In order to ensure adequate supply and availability of certain
infrastructure equipment and services, VoiceStream has committed to purchase
PCS equipment from various suppliers. These commitments total approximately
$3.8 billion as of September 30, 2001. At September 30, 2001, VoiceStream
has ordered approximately $1.5 billion under these agreements, of which
approximately $93.0 million has not been delivered.
VoiceStream and its affiliates have various other purchase commitments
for materials, supplies and other items incidental to the ordinary course of
business that are neither significant individually nor in the aggregate.
Such commitments are not at prices in excess of current market value.
Cash Flow Information
Net cash used in operating activities was $104.3 million and $620.5
million for the three and nine months ended September 30, 2001,
respectively. Adjustments to the nine month $2.0 billion net loss to
reconcile net cash used in operating activities included $1.5 billion of
non-cash depreciation and amortization expenses related to network
infrastructure, FCC licenses and goodwill. The T-Mobile merger resulted in
an increase of $22.9 billion in the carrying value of our assets, most of
which is related to licenses and goodwill. We recorded a $390.3 million
non-cash income tax benefit based on our operating loss for the period, and
$76.9 million of non-cash equity in net losses of unconsolidated affiliates.
Other adjustments included changes in operating assets and liabilities,
including: (i) an increase of $72.8 million in accounts receivable due to
the growth in revenues; (ii) a decrease of $211.7 million in inventory, due
primarily to reduced handset purchases during the nine month period; (iii)
an increase of $93.6 million in accrued liabilities due primarily to the
timing of interest payments on long term debt and increased tax liabilities
related to the growth in revenues and property. Net cash used in operating
activities was $323.5 million and $554.8 million for the three and nine
months ended September 30, 2000, respectively.
Net cash used in investing activities was $375.1 million and $589.0
million for the three and nine months ended September 30, 2001,
respectively. Investing activities for the nine months ended September 30,
2001 consisted primarily of investments in property and equipment, of which
$1.3 billion were capital expenditures and $552.5 million were licenses
acquired through acquisitions. These activities were funded in part through
the conversion of $1.2 billion of short-term investments into cash. Net cash
used in investing activities was $494.9 million and $1.8 billion for the
three and nine months ended September 30, 2000, respectively.
Net cash provided by financing activities was $449.0 million and $81.1
million for the three and nine months ended September 30, 2001,
respectively. Financing activities for the nine months ended September 30,
2001 consisted primarily of: (i) repayment of $3.3 billion of loans
outstanding under credit facilities; (ii) repayment of $32.1 million of FCC
debt; (iii) payment of $81.7 million in cash entitlements on conversions of
preferred stock of a consolidated subsidiary and; (iv) proceeds of $3.5
billion from long-term debt borrowings from Deutsche Telekom. Net cash
provided by financing activities was $4.9 billion and $6.2 billion for the
three and nine months ended September 30, 2000, respectively.
17
Recently Issued Accounting Standards
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires companies to cease amortizing
goodwill and other intangible assets with indefinite lives that existed at
June 30, 2001. The amortization of existing goodwill will cease on December
31, 2001. Any goodwill and other intangible assets with indefinite lives
resulting from acquisitions completed after June 30, 2001 will not be
amortized. SFAS No. 142 also establishes a new method of testing goodwill
for impairment on an annual basis or on an interim basis if an event occurs
or circumstances change that would reduce the fair value of a reporting unit
below its carrying value. The test for goodwill impairment under the new
standard will begin in the first quarter of 2002, and could have an adverse
non-cash effect on our future results of operations if an impairment occurs.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement provides accounting and reporting
standards for recognizing obligations related to asset retirement costs
associated with the retirement of tangible long-lived assets. Under this
statement, legal obligations associated with the retirement of long-lived
assets are to be recognized at their fair value in the period in which they
are incurred if a reasonable estimate of fair value can be made. The fair
value of the asset retirement costs is capitalized as part of the carrying
amount of the long-lived asset and expensed using a systematic and rational
method over the assets' useful life. Any subsequent changes to the fair
value of the liability will be expensed. We will be required to adopt this
statement no later than January 1, 2003. We are currently assessing the
impact of this statement on our results of operations, financial position
and cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for fiscal
years beginning after December 15, 2001. This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" and replaces the provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of Segments of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of
segments of a business. SFAS 144 retains the fundamental provisions of SFAS
No. 121 for the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Impairment on goodwill is not included in the scope of
SFAS No. 144 and will be treated in accordance with the accounting standards
established in SFAS No. 142, "Goodwill and Other Intangible Assets." Under
SFAS No. 144, long-lived assets are measured at the lower of carrying amount
or fair value less cost to sell. The statement applies to all long-lived
assets We will be required to adopt this statement no later than January 1,
2002. We are currently assessing the impact of this statement on our results
of operations, financial position and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Sensitive Financial Instrument Risk Management
During the nine months ended September 30, 2001, there were no material
events that have occurred that would require a change to the qualitative or
quantitative disclosures about market risks presented in our Annual Report
on Form 10-K for the year ended December 31, 2000.
18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Except as referenced in our Form 10-K for the year ended December 31,
2000, there are no material, pending legal proceedings to which we or any
of our subsidiaries or affiliates is a party or of which any of their
property is subject which, if adversely decided, would have a material
adverse effect on their financial position, results of operations or cash
flows.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K:
VoiceStream filed a Current Report on Form 8-K dated August 31, 2001, in
which VoiceStream reported under Item 4 that on August 29, 2001, VoiceStream
engaged PricewaterhouseCoopers LLP as its new independent accountant,
replacing Arthur Andersen LLP.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VoiceStream Wireless Corporation
By /s/ BRIAN W. KIRKPATRICK By /s/ ALLYN P. HEBNER
----------------------------------- --------------------------------
Brian W. Kirkpatrick Allyn P. Hebner
Executive Vice President, Vice President and Controller
Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
Dated: November 14, 2001
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