1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 22, 2001
VOICESTREAM WIRELESS CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 000-29667 91-1983600
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
12920 SE 38th Street, Bellevue, Washington 98006
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (425) 378-4000
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(Former Name or Former Address, if Changed Since Last Report)
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Item 7. Financial Statements and Exhibits
Powertel, Inc. has filed its Annual Report on Form 10-K for the year ended
December 31, 2000. Because the Registrant is a party to an agreement with
Powertel, we are filing Powertel's financial statements as of and for the years
ended December 31, 2000, 1999 and 1998, for informational purposes.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Powertel, Inc.:
We have audited the accompanying consolidated balance sheets of
Powertel, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999 and the related consolidated statements of operations, changes in
stockholders' (deficit) equity, and cash flows for each of the three years ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Powertel, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 31, 2001
3
POWERTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
-------------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................. $ 168,563 $ 371,396
Restricted cash for payment of interest (Note 2) ...................................... -- 16,223
Accounts receivable, net of allowance for doubtful accounts of
$5,368 and $6,544 in 2000 and 1999, respectively .................................... 63,175 38,088
Inventories (Note 2) .................................................................. 35,362 21,250
Prepaid expenses and other ............................................................ 26,188 17,790
----------- -----------
293,288 464,747
----------- -----------
PROPERTY AND EQUIPMENT, AT COST (Note 2):
Land .................................................................................. 986 932
Buildings and towers .................................................................. 271,500 241,617
Equipment ............................................................................. 539,483 433,264
Furniture and fixtures ................................................................ 12,630 11,259
Assets under construction ............................................................. 56,008 34,841
----------- -----------
880,607 721,913
Less: accumulated depreciation ..................................................... (253,321) (160,803)
----------- -----------
627,286 561,110
----------- -----------
OTHER ASSETS (Note 2):
Licenses, net of accumulated amortization of $37,154 and $26,950 at
December 31, 2000 and 1999, respectively ............................................ 389,004 400,587
Deferred charges, investments and other, net of accumulated amortization
of $10,663 and $8,206 at December 31, 2000 and 1999, respectively ................... 49,432 20,408
----------- -----------
438,436 420,995
----------- -----------
Total assets ...................................................................... $ 1,359,010 $ 1,446,852
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable - trade .............................................................. $ 45,476 $ 26,261
Current portion of long-term obligations (Note 6) ..................................... 33,023 12,946
Accrued construction costs ............................................................ 30,151 18,479
Accrued other ......................................................................... 27,859 20,612
Unearned revenue ...................................................................... 22,887 13,114
Accrued taxes other than income ....................................................... 7,302 12,601
Accrued interest ...................................................................... 2,782 2,781
----------- -----------
169,480 106,794
----------- -----------
LONG-TERM OBLIGATIONS (Note 6):
12% Senior Discount Notes due February 2006 ........................................... 349,539 310,076
12% Senior Discount Notes due May 2006 ................................................ 346,415 308,308
11.125% Senior Notes due June 2007 .................................................... 300,000 300,000
Long-term portion of Credit Facility .................................................. 219,107 252,107
Deferred gain on sale-leaseback (Note 5) .............................................. 74,499 83,331
Other ................................................................................. 8,777 3,874
----------- -----------
1,298,337 1,257,696
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COMMITMENTS AND CONTINGENCIES (Note 10)
CUMULATIVE CONVERTIBLE, REDEEMABLE PREFERRED STOCK ....................................... 152,219 152,219
----------- -----------
STOCKHOLDERS' DEFICIT:
Preferred Stock (Note 7) .............................................................. 3 3
Common Stock: $.01 par value; 100,000,000 shares authorized,
31,525,638 and 29,933,269 issued and outstanding in 2000
and 1999, respectively .............................................................. 315 299
Paid-in capital ....................................................................... 525,100 494,936
Accumulated deficit ................................................................... (785,161) (563,190)
Deferred compensation ................................................................. (703) (1,410)
Treasury stock, at cost - 56,438 and 55,352 shares at December 31, 2000
and 1999, respectively .............................................................. (580) (495)
----------- -----------
(261,026) (69,857)
----------- -----------
Total liabilities and stockholders' deficit ....................................... $ 1,359,010 $ 1,446,852
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
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POWERTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES AND SALES (Note 2):
Postpaid revenues ................................................. $ 246,513 $ 183,145 $ 137,286
Prepaid revenues .................................................. 164,833 55,752 2,579
Roaming revenues .................................................. 13,815 8,799 10,244
Other revenues .................................................... 13,063 7,854 5,695
---------- ---------- ----------
Total service revenues .......................................... 438,224 255,550 155,804
Equipment sales ................................................... 25,956 29,360 23,161
---------- ---------- ----------
Total revenues and sales ...................................... 464,180 284,910 178,965
---------- ---------- ----------
OPERATING EXPENSES:
Cost of services .................................................. 103,593 60,682 46,306
Cost of equipment sales ........................................... 108,301 73,526 79,144
Operations ........................................................ 70,803 64,269 56,522
Selling and marketing ............................................. 127,390 99,012 63,936
General and administrative ........................................ 47,562 44,184 37,639
Depreciation ...................................................... 92,518 78,968 57,938
Amortization ...................................................... 10,204 10,212 9,716
---------- ---------- ----------
Total operating expenses ...................................... 560,371 430,853 351,201
---------- ---------- ----------
OPERATING LOSS ....................................................... (96,191) (145,943) (172,236)
---------- ---------- ----------
OTHER EXPENSE (INCOME):
Interest expense, net ............................................. 117,191 108,183 93,656
Gain on sale of assets ............................................ -- (129,172) --
Miscellaneous income .............................................. (1,161) (288) (62)
---------- ---------- ----------
Total other expense (income) .................................. 116,030 (21,277) 93,594
---------- ---------- ----------
LOSS BEFORE INCOME TAXES ............................................. (212,221) (124,666) (265,830)
INCOME TAX PROVISION ................................................. -- -- --
---------- ---------- ----------
NET LOSS ............................................................. (212,221) (124,666) (265,830)
DIVIDENDS ON CUMULATIVE CONVERTIBLE, REDEEMABLE PREFERRED STOCK ...... (9,750) (9,750) (5,010)
---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ......................... $ (221,971) $ (134,416) $ (270,840)
========== ========== ==========
PER SHARE DATA (Note 2):
BASIC AND DILUTED LOSS PER COMMON SHARE ........................... $ (7.26) $ (4.75) $ (10.02)
========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ................................... 30,575 28,270 27,019
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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POWERTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
TOTAL
CONVERTIBLE STOCKHOLDERS'
COMMON PREFERRED PAID-IN ACCUMULATED DEFERRED TREASURY (DEFICIT)
STOCK STOCK CAPITAL DEFICIT COMPENSATION STOCK EQUITY
------ ----------- ---------- ----------- ------------ -------- -------------
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1997 ............. $ 270 $ 4 $ 477,109 $ (157,934) $ (1,288) $ (345) $ 317,816
Stock options exercised ................ 1 -- 195 -- -- -- 196
6.5% stock dividend on cumulative
convertible, redeemable
preferred stock (Note 7) ............ 2 -- 2,571 -- -- -- 2,573
Amortization of deferred
compensation ........................ -- -- -- -- 586 -- 586
Net loss attributable to common
stockholders ........................ -- -- -- (270,840) -- -- (270,840)
----- ---- ---------- ---------- -------- ------ ---------
BALANCE, DECEMBER 31, 1998 ............. 273 4 479,875 (428,774) (702) (345) 50,331
Stock options and warrants exercised ... 3 -- 3,971 -- -- -- 3,974
Issuance of restricted common
stock (Note 8) ...................... -- -- 1,362 -- (1,362) -- --
Conversion of Series C Convertible
Preferred Stock (Note 7) ............ 18 (1) (17) -- -- -- --
6.5% stock dividend on cumulative
convertible, redeemable preferred
stock (Note 7) ...................... 5 -- 9,745 -- -- -- 9,750
Purchase of treasury shares ............ -- -- -- -- -- (150) (150)
Amortization of deferred
compensation ........................ -- -- -- -- 654 -- 654
Net loss attributable to common
stockholders ........................ -- -- -- (134,416) -- -- (134,416)
----- ---- ---------- ---------- -------- ------ ---------
BALANCE, DECEMBER 31, 1999 ............. 299 3 494,936 (563,190) (1,410) (495) (69,857)
Stock options and warrants exercised ... 15 -- 20,415 -- -- -- 20,430
6.5% stock dividend on cumulative
convertible redeemable preferred
stock (Note 7) ...................... 1 -- 9,749 -- -- -- 9,750
Purchase of treasury shares ............ -- -- -- -- -- (85) (85)
Amortization of deferred
compensation ....................... -- -- -- -- 707 -- 707
Net loss attributable to common
stockholders ........................ -- -- -- (221,971) -- -- (221,971)
----- ---- ---------- ---------- -------- ------ ---------
BALANCE, DECEMBER 31, 2000 ............. $ 315 $ 3 $ 525,100 $ (785,161) $ (703) $ (580) $(261,026)
===== ==== ========== ========== ======== ====== =========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
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POWERTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss .......................................................... $ (212,221) $ (124,666) $ (265,830)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................... 102,722 89,180 67,654
Bond accretion .................................................. 77,570 68,922 59,204
Other, net ...................................................... (5,668) (1,878) 3,041
Gain on sale of subsidiary, net ................................. -- (79,312) --
Realized gain on sale-leaseback, net ............................ -- (49,860) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable .................... (25,087) (13,004) 5,823
Increase in inventories ....................................... (14,112) (879) (16,708)
Increase in prepaid expenses and other assets ................. (13,324) (7,163) (3,159)
Increase (decrease) in accounts payable, accrued expenses
and other liabilities ....................................... 35,863 12,520 (15,843)
---------- ---------- ----------
Net cash used in operating activities ..................... (54,257) (106,140) (165,818)
---------- ---------- ----------
CASH FLOWS (USED IN) PROVIDED FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (158,694) (130,816) (207,292)
Investment in Eliska .............................................. (26,555) -- --
Liquidation of short-term investments ............................. 16,223 31,495 29,367
Increase (decrease) in accrued construction costs ................. 11,672 672 (5,285)
Microwave relocation .............................................. 1,379 (2,801) (862)
Proceeds from sale-leaseback ...................................... -- 274,617 --
Proceeds from sale of subsidiary .................................. -- 89,339 --
---------- ---------- ----------
Net cash (used in) provided from investing activities ..... (155,975) 262,506 (184,072)
---------- ---------- ----------
CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants .............. 20,430 3,824 196
(Repayments of) borrowings under Credit Facility .................. (12,893) 6,468 78,571
Proceeds from sale of cumulative convertible, redeemable preferred
stock, net ...................................................... -- -- 149,782
Other, net ........................................................ (138) (49) (826)
---------- ---------- ----------
Net cash provided from financing activities ............... 7,399 10,243 227,723
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................. (202,833) 166,609 (122,167)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....................... 371,396 204,787 326,954
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................. $ 168,563 $ 371,396 $ 204,787
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized ................ $ 57,367 $ 55,675 $ 52,913
Net book value of assets sold under sale-leaseback ................ -- 136,437 --
Net book value of assets sold in subsidiary disposition ........... -- 10,027 --
Noncash investing and financing activities:
Dividends on cumulative convertible, redeemable preferred stock
paid in stock ................................................. 9,750 9,750 2,573
Total capitalized interest ...................................... -- -- 1,900
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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POWERTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND NATURE OF BUSINESS
Powertel, Inc. (the "Company") was incorporated in Delaware in April
1991 under the name Intercel, Inc. In June 1997, the Company changed its name to
Powertel, Inc. The Company currently provides digital wireless personal
communication services ("PCS") in the southeastern United States using the
Global System for Mobile Communications ("GSM") technology. Prior to April 30,
1999, the Company also provided cellular telephone services in contiguous
portions of eastern Alabama and western Georgia under the name "Intercel" (Note
5).
On August 26, 2000, the Company entered into separate definitive merger
agreements with each of Deutsche Telekom AG ("Deutsche Telekom") and VoiceStream
Wireless Corporation ("VoiceStream"). Previously, on July 23, 2000, Deutsche
Telekom and VoiceStream entered into an agreement that provides for the merger
of their two companies. If the merger between Deutsche Telekom and VoiceStream
closes, then the Company will merge with a subsidiary of Deutsche Telekom in
accordance with the terms of the Company's merger agreement with Deutsche
Telekom, and the Company's merger agreement with VoiceStream will terminate.
However, if the merger agreement between Deutsche Telekom and VoiceStream is
terminated, then the Company's merger agreement with Deutsche Telekom will also
terminate, and the Company will merge with a subsidiary of VoiceStream in
accordance with the terms of the Company's merger agreement with VoiceStream
(Note 3).
The Company holds PCS licenses encompassing a territory of
approximately 246,000 contiguous square miles with a population of approximately
25 million people, including the Major Trading Areas ("MTAs") of Atlanta,
Georgia; Jacksonville, Florida; Memphis, Tennessee/Jackson, Mississippi; and
Birmingham, Alabama and 13 Basic Trading Areas ("BTAs") in Kentucky and
Tennessee. It holds 30 MHz of spectrum licensed for PCS in each of the MTA
markets and 20 MHz of spectrum licensed for PCS in all of the BTA markets except
for the Knoxville, Tennessee BTA, where the Company holds a license for 10 MHz
of spectrum. The Company first introduced its PCS services in October 1996 in
Jacksonville, Florida and Montgomery, Alabama and has launched its PCS services
in a total of 34 markets in the Southeast. Effective February 1, 2001, the
Company also offers its PCS services through a joint venture, Eliska Wireless
Ventures I, Inc. ("Eliska Ventures"), in six BTAs serving the Gulf Coast of
Alabama, Florida and Mississippi (Note 4).
While there are numerous wireless telephone systems operating in the
United States and other countries, the wireless telecommunications industry has
only limited operating history. Achieving profitable PCS operations requires the
Company to successfully compete with other wireless providers in all of its
markets. In addition, successful PCS operations require the development of
products that are at least as commercially effective as the Company's wireless
competitors. Any failure to anticipate and respond to changes in technology and
subscriber desires could have an adverse effect on the Company's PCS business.
Since inception, the Company has incurred operating losses while
developing its PCS system and building its PCS subscriber base. The Company
continues to require significant amounts of capital to fund the operation and
expansion of its business in future periods. However, due to the pending mergers
and other factors, management is unable to predict the exact amount of
expenditures that the Company will need to make in the future. If management
determines that the Company needs to raise additional capital, the Company may
attempt to raise this capital through public debt or equity financings or
private placements, vendor financings or other means. However, both the Deutsche
Telekom/Powertel merger agreement and the VoiceStream/Powertel merger agreement
contain covenants that limit the Company's ability to raise capital prior to the
completion of the applicable merger without the consent of Deutsche Telekom or
VoiceStream, respectively. If additional financing is needed but not available,
management will have to alter its current operating plans.
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2. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are prepared on the accrual basis
of accounting and include the accounts of the Company and all majority-owned
subsidiaries. All significant intercompany balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Source of Supplies
The Company relies on local telephone companies and other companies to
provide certain telecommunications services. Although management feels
alternative telecommunications facilities could be found in a timely manner, any
disruption of these services could adversely affect operating results.
The Company currently obtains its inventory and equipment, which are
important components of its operations, primarily from four sources. Some of the
Company's suppliers have limited resources and production capacity. If the
suppliers are unable to meet the Company's needs as it expands its network
infrastructure and sells services and equipment, then delays and increased costs
in the expansion of the Company's network infrastructure or losses of potential
subscribers could result, which would adversely affect operating results.
Presentation
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
Restricted Cash for Payment of Interest
Restricted cash consists of certain U.S. government securities with
varying maturities which were purchased and pledged, for the benefit of the
holders of the 11.125% Senior Notes due June 2007, to provide for the payment of
the first six scheduled interest payments on such Notes (Note 6).
Credit Risk
The Company's accounts receivable subject the Company to credit risk.
The Company extends credit to certain of its subscribers based upon an
evaluation of the subscriber's financial condition and credit history and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts based upon the expected collectibility of subscribers'
accounts receivable. The Company bills certain services to subscribers in
advance and has the ability to terminate access on delinquent accounts.
Additionally, a majority of the Company's subscribers utilize prepaid service.
Management believes these factors, as well as the large and geographically
diverse number of subscribers comprising the subscriber base, mitigate the risk
of loss and the concentration of credit risk.
The carrying amount of the Company's receivables approximates their
fair value.
9
Inventories
The Company maintains inventories for resale of wireless handsets and
accessory parts (i.e., antennae, batteries, cable, etc.). Inventories are valued
at the lower of average cost (which approximates first-in, first-out) or market
and are recorded net of a reserve for obsolescence of $1.3 million and $1.5
million at December 31, 2000 and 1999, respectively.
Property and Equipment
Property and equipment are recorded at cost, including certain
engineering costs. The Company records depreciation using the straight-line
method over the estimated useful lives of the assets, which are 10 to 15 years
for towers, buildings and improvements and 3 to 10 years for equipment,
furniture and fixtures. The Company's policy is to remove the cost and
accumulated depreciation of retirements from the accounts and recognize the
related gain or loss upon the disposition of assets. Such gains and losses were
not material for any period presented, except as described in Note 5.
Assets Under Construction
Expenditures to construct the Company's PCS system are recorded as
assets under construction until the assets are placed in service. When the
assets are placed in service, they are transferred to the appropriate property
and equipment category and depreciated.
The Company capitalized interest incurred on borrowings related to
assets under construction during the initial buildout of the PCS system. Of the
cumulative aggregate capitalized interest of $50.3 million, $9.9 was attributed
to property, plant and equipment at December 31, 2000.
Licenses
Licenses consist of costs incurred to acquire PCS licenses, including
capitalized interest of $40.4 million and certain microwave relocation costs.
Licenses are stated at cost less accumulated amortization and are being
amortized using the straight-line method over 40 years.
Deferred Charges, Investments and Other
Deferred charges consist primarily of financing costs related to the
offerings of the Company's senior notes and senior discount notes (Note 6) and
are being amortized over the 10-year lives of the related notes. Investments and
other consist primarily of a loan to Eliska Ventures to fund its pre-closing
deposit in connection with the formation of Eliska Ventures (Note 4).
Impairment of Long-Lived Assets
The Company periodically reviews the values assigned to long-lived
assets, such as property and equipment, licenses, and deferred charges and
other, to determine whether any impairments are other than temporary. Management
reviews the undiscounted projected cash flows related to such assets and
compares them to the carrying values of the assets to determine if any
impairment has occurred. If an asset is deemed to be impaired, the Company
records the difference between the projected cash flows on a discounted basis or
the fair market value (whichever is more appropriate) and the carrying value as
an asset impairment charge in the period incurred. There were no such
impairments in the periods presented. Management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective in 1996, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") (Note 8) for all options granted
subsequent to January 1, 1995.
10
Revenue Recognition
The Company earns revenues by providing PCS service to both local
subscribers and subscribers of other PCS carriers traveling ("roaming") through
the Company's service area, as well as from sales of PCS equipment.
Postpaid service revenues consist of base monthly service fees
("access"), airtime revenue and long-distance revenues ("toll revenues").
Generally, access fees are billed one month in advance, but recognized when
earned, while airtime and toll revenues are recognized when service is provided.
The Company introduced a prepaid PCS service alternative in September
1998. Prepaid PCS service revenues are collected in advance, but recognized as
service is provided.
Roaming revenues consist of the airtime and toll fees charged to the
subscribers of other PCS carriers for use of the Company's PCS network while
traveling in the Company's service area. Roaming revenues are recognized when
service is rendered. In connection with the issuance of Emerging Issues Task
Force 99-19, "Reporting Revenue Gross as a Principal and Net as Agent" ("EITF
99-19"), the Company reviewed its presentation for roaming charges incurred by
its customers in other carriers' markets and determined that these revenues and
related costs should be presented gross in the statement of operations as
opposed to net as done previously. Accordingly, all roaming costs are presented
gross for all periods presented.
Other revenues consist of activation fees, optional enhanced service
features and interconnection fees charged to local exchange carriers for
connections to the PCS network and are recognized when earned. Effective January
1, 2000, the Company adopted the provisions of the SEC's Staff Accounting
Bulletin number 101, "Revenue Recognition in Financial Statements," which
require activation fees to be deferred and recognized over the expected lives of
the subscribers. Additionally, costs equal to such revenues are also being
deferred.
Equipment sales are recognized upon delivery of the equipment to the
subscriber.
Advertising
The Company expenses advertising as incurred.
Interest Expense, Net
Interest expense, net is comprised of the following (in millions):
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
---------- ----------- -----------
Interest income............................. $ (21.4) $ (18.9) $ (19.5)
Interest expense............................ 138.6 127.1 115.1
Capitalized interest........................ -- -- (1.9)
---------- ----------- -----------
Interest expense, net................. $ 117.2 $ 108.2 $ 93.7
========== =========== ===========
Loss Per Common Share
Basic loss per share (EPS) was computed by dividing net loss
available to common stockholders by the weighted average number of shares of
common stock outstanding during the year. Diluted EPS is the same as basic EPS
for all periods presented as all common stock equivalents would have an
antidilutive effect.
Recent Accounting Pronouncements
In May 2000, the Emerging Issues Task Force issued EITF 00-14,
"Accounting for Certain Sales Incentives" ("EITF 00-14"), which addresses the
recognition, measurement and classification for certain sales incentives offered
by a vendor without charge to customers in a single exchange transaction. The
Company will adopt EITF 00-14 in April 2001. Had the Company adopted EITF 00-14
for the periods presented, prepaid revenue and cost of services for 2000 and
1999 would have been reduced by $18.4 million and $5.4 million, respectively.
11
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (that is, January 1,
2001 for companies with calendar-year fiscal years). SFAS 133 establishes
accounting and reporting standards for derivative instruments and transactions
involving hedge accounting. The Company does not anticipate that this statement
will have a material impact on its financial statements.
3. PROPOSED MERGERS
Acquisition of the Company by Deutsche Telekom
On August 26, 2000, the Company entered into a definitive merger
agreement with Deutsche Telekom, as amended and restated on February 8, 2001 and
from time to time (the "Deutsche Telekom/Powertel merger agreement"). If the
proposed merger of the Company with a subsidiary of Deutsche Telekom, as
contemplated by the Deutsche Telekom/Powertel merger agreement (the "Deutsche
Telekom/Powertel merger"), is completed, the Company will become a wholly-owned
subsidiary of Deutsche Telekom, and each share of its common stock will be
converted into the right to receive 2.6353 Deutsche Telekom ordinary shares,
subject to adjustment. Each share of the Company's Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock will be converted into
the right to receive 121.9294 Deutsche Telekom ordinary shares, subject to
adjustment. Each share of the Company's Series D Convertible Preferred Stock
will be converted into the right to receive 93.0106 Deutsche Telekom ordinary
shares, subject to adjustment. Each share of the Company's Series E 6.5%
Cumulative Convertible Preferred Stock and Series F 6.5% Cumulative Convertible
Preferred Stock will be converted into the right to receive, subject to
adjustment: (i) 179.5979 Deutsche Telekom ordinary shares; plus (ii) 2.6353
Deutsche Telekom ordinary shares multiplied by the number of shares of the
Company's common stock representing accrued or declared but unpaid dividends on
such share of preferred stock.
The Deutsche Telekom/Powertel merger agreement allows the Company to
declare and pay a stock dividend of 0.0075 of a share of the Company's common
stock for each share of the Company's common stock outstanding. The Company
intends to pay this dividend on April 6, 2001 to common stockholders of record
on March 23, 2001. As a result of this dividend, the exchange ratios of the
Company's preferred stock and other convertible securities will adjust
proportionately to reflect the payment of this dividend. This stock dividend and
the adjustments to the conversion terms of the Company's convertible securities
will have the effect of increasing by 0.75% the number of shares owned by the
Company's stockholders, and, accordingly, the aggregate amount of Deutsche
Telekom shares to be received by the Company's stockholders in the Deutsche
Telekom/Powertel merger.
On March 13, 2001 at a special meeting of the Company's stockholders,
the Company's stockholders approved and adopted the Deutsche Telekom/Powertel
merger agreement. The completion of the Deutsche Telekom/Powertel merger is
subject to regulatory approvals and the satisfaction of several additional
closing conditions, including the completion of the merger between Deutsche
Telekom and VoiceStream. The Deutsche Telekom/Powertel merger agreement also
provides that, regardless of the satisfaction of the closing conditions, the
Deutsche Telekom/Powertel merger will not close prior to May 31, 2001.
Acquisition of the Company by VoiceStream
On August 26, 2000, the Company also entered into a definitive
agreement and plan of reorganization with VoiceStream, as amended and restated
as of February 8, 2001 and from time to time (the "VoiceStream/Powertel merger
agreement"). If the proposed merger of the Company with a subsidiary of
VoiceStream, as contemplated by the VoiceStream/Powertel merger agreement (the
"VoiceStream/Powertel merger"), is completed, the Company will become a
wholly-owned subsidiary of VoiceStream, and the Company's common stock will be
converted into the right to receive a "conversion number" of shares of
VoiceStream common stock determined as follows:
12
- 0.75 if the VoiceStream Average Closing Price (as defined below)
is $113.33 or below;
- 0.65 if the VoiceStream Average Closing Price is $130.77 or
above; and
- if the VoiceStream Average Closing Price is greater than $113.33
and less than $130.77, the quotient determined by dividing $85.00
by the VoiceStream Average Closing Price.
The "VoiceStream Average Closing Price" means the volume weighted average
closing price (based on the Nasdaq National Market System composite volume
published by the Wall Street Journal) of the VoiceStream common stock as
publicly reported for the Nasdaq as of 4:00 p.m. Eastern Time for ten trading
days randomly selected by lot out of the last 20 trading days ending five
trading days prior to the closing date of the VoiceStream/Powertel merger.
The VoiceStream/Powertel merger agreement allows the Company and
VoiceStream to pay a dividend of 0.0075 of a common share on outstanding shares
of the Company's common stock and VoiceStream common stock, respectively. The
Company and VoiceStream intend to pay this dividend on April 6, 2001 to their
respective common stockholders of record on March 23, 2001. As a result of these
common stock dividends, the conversion number and price ranges referenced above
will be adjusted so that the issuance of these dividends will not affect the
aggregate merger consideration to be received by the Company's stockholders in
the VoiceStream/Powertel merger.
On March 13, 2001 at special meetings of the Company's stockholders
and VoiceStream's stockholders, the Company's stockholders and VoiceStream's
stockholders approved and adopted the VoiceStream/Powertel merger agreement. The
completion of the VoiceStream/Powertel merger is subject to regulatory approvals
and the satisfaction of several additional closing conditions, including the
termination of the merger agreement between Deutsche Telekom and VoiceStream. If
the merger agreement between Deutsche Telekom and VoiceStream terminates, the
VoiceStream/Powertel merger agreement would remain in effect, and the Company
would proceed to close the VoiceStream/Powertel merger in accordance with the
terms of the VoiceStream/Powertel merger agreement.
4. FORMATION OF JOINT VENTURE
On January 31, 2001, pursuant to a stock purchase agreement dated May
30, 2000 with EWV Holding Company, Inc. ("EWV Holding"), the parent of Eliska
Ventures, the Company purchased 12,475 shares of the Series A Preferred Stock of
EWV Holding for $125 million. In addition, Sonera Holding B.V. ("Sonera B.V."),
a wholly-owned subsidiary of Sonera Corporation, invested $75 million, and
Eliska Wireless Investors I, L.P. ("Eliska Investors") invested $50 million, in
EWV Holding. In connection with the formation of EWV Holding and its
subsidiaries and pursuant to a stock purchase agreement dated May 30, 2000,
Sonera B.V. also purchased $125 million of the Company's common stock for $71.80
per share. As a result of these transactions, the Company has a 49.9% equity
interest and a 24.95% voting interest in EWV Holding, Sonera B.V. has a 30.1%
equity interest and a 15.05% voting interest, and Eliska Investors has a 20%
equity interest and 60% voting interest.
Concurrently, Eliska Ventures acquired substantially all of the
assets, business and operations of, and certain related liabilities of, DigiPH
Holding Company, Inc., DigiPH Communication, Inc., and DiGiPH PCS, Inc.,
including the assignment of the FCC licenses held by DiGiPH PCS (the "Asset
Acquisition"), for approximately $375 million, subject to certain adjustments.
DiGiPH PCS previously owned licenses to provide PCS services in eight BTAs
comprising contiguous portions of the Gulf Coast of Alabama, Florida and
Mississippi. In connection with the Asset Acquisition, the Company entered into
a service agreement with Eliska Ventures for management, technical and
consulting services. Pursuant to this agreement, the Company assists Eliska
Ventures in marketing its services under the Powertel brand name, expanding
distribution channels and increasing network coverage in the market areas
covered by the FCC licenses acquired by Eliska Ventures. During the year ended
December 31, 2000, a subsidiary of the Company loaned Eliska Ventures $26.6
million to fund its pre-closing deposit and certain other expenses in connection
with the Asset Acquisition. Eliska Ventures paid this loan in full at the
closing of the Asset Acquisition.
In connection with the formation of EWV Holding, the Company entered
into put agreements with both Sonera B.V. and Eliska Investors. According to the
put agreement with Sonera B.V., between October 1, 2001 and June 30, 2002,
Sonera B.V. may sell all of its interest in EWV Holding to the Company in
exchange for 1,044,568 shares of the Company's common stock. At any time, the
Company has a right of first offer on Sonera B.V.'s stock in EWV Holding in the
event Sonera B.V. desires to sell such stock to a third party. According to the
put agreement
13
with Eliska Investors, between October 1, 2001 and October 30, 2001, Eliska
Investors may sell its initial $1 million interest in EWV Holding to the Company
in exchange for 13,928 shares of the Company's common stock or $1.5 million in
cash. In such an event, the remaining ownership interest of Eliska Investors in
EWV Holding would be cancelled, subject to the receipt of regulatory approvals.
In addition, if Eliska Investors has fully satisfied its obligations under its
promissory note to EWV Holding, between July 2, 2003 and July 31, 2003, Eliska
Investors may exchange all of its interest in EWV Holding for the Company's
common stock at the existing fair market value. At any time, the Company has a
right of first refusal with respect to Eliska Investors' interest in EWV Holding
in the event that Eliska Investors desires to sell its stock to a third party.
The Company will include the results of Eliska Ventures in its
consolidated financial statements subsequent to January 31, 2001. The following
unaudited pro forma condensed consolidated statements of operations (in
millions, except per share data) assume the Asset Acquisition occurred at the
beginning of each period presented. In the opinion of management, all
adjustments necessary to present fairly such unaudited pro forma condensed
statements of operations have been made.
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues and sales.................................. $ 507.3 $ 323.3 $ 188.5
Net loss before dividends........................... (229.4) (145.1) (285.3)
Basic and diluted loss per common share............. $ (7.50) $ (5.13) $ (10.56)
5. ASSET DISPOSITIONS
Tower Assets Sale-Leaseback
On June 2, 1999, pursuant to an Asset Purchase Agreement dated March
15, 1999, the Company sold to CCP Inc. ("Crown Castle"), a wholly-owned
subsidiary of Crown Castle International Corp., 619 of its wireless transmission
towers, related assets and certain liabilities for $261.5 million. On December
2, 1999, pursuant to an Asset Purchase Agreement dated September 27, 1999, the
Company sold to Crown Castle an additional 31 towers for $13.1 million. In
connection with these sales, the Company entered into master lease agreements
with Crown Castle to lease space on the towers for a monthly rent of $1,800 per
tower for an initial lease term of ten years, with three five-year renewal
periods at the option of the Company. The transactions were recorded as a
sale-leaseback. Accordingly, $88.3 million of the total gain on the sale of
$138.2 million was deferred and will be amortized over the initial lease term of
ten years as a reduction of cost of services. The unamortized portion of the
deferred gain is recorded as a long-term obligation in the accompanying
consolidated balance sheets.
In connection with these transactions, the Company also entered into
a build-to-suit construction contract with Crown Castle (Note 10).
Cellular Operations
On April 30, 1999, pursuant to an Asset Purchase Agreement dated
January 5, 1999, the Company and certain of its wholly-owned subsidiaries sold
to Public Service Cellular, Inc. ("PSC") substantially all of the assets and FCC
Licenses of the Company relating to its cellular telephone operations in eastern
Alabama and western Georgia for $89.3 million. The transaction constituted the
sale of all of the Company's cellular telephone operations and resulted in a
$79.3 million gain to the Company. At closing, PSC paid the Company $83.1
million in cash (including reimbursement for certain capital expenditures of
$0.3 million) and paid $6.2 million into escrow. On November 1, 1999,
substantially all of the $6.2 million was released from escrow to the Company.
14
The following unaudited pro forma condensed consolidated statements
of operations (in millions, except per share data) assume the sale occurred at
the beginning of each period presented. In the opinion of management, all
adjustments necessary to present fairly such unaudited pro forma condensed
statements of operations have been made.
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998
-------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues and sales....................................... $ 277.9 $ 159.4
Net loss (excluding gain on sale)........................ (207.6) (273.9)
Basic and diluted loss per common share.................. $ (7.68) $ (10.33)
6. LONG-TERM OBLIGATIONS
During 1997, the Company issued $300 million principal amount of
11.125% Senior Notes due June 2007 (the "June Notes"). The June Notes may be
redeemed at any time on or after June 1, 2002, at the option of the Company, at
105.5626% of their principal amount, plus accrued interest, declining to 100% of
their principal amount, plus accrued interest, on and after June 1, 2004.
Interest on the June Notes is payable semiannually in cash on June 1 and
December 1 of each year.
The Company initially used $89.6 million of the proceeds from the
June Notes to purchase and pledge, for the benefit of the holders of the June
Notes, certain U.S. government securities to provide for the payment of the
first six scheduled interest payments on the June Notes. This commitment to pay
the first six scheduled interest payments from restricted cash was satisfied
during the year ended December 31, 2000. At December 31, 2000, the Company had
no restricted cash on the accompanying consolidated balance sheets (Note 2).
During 1996, the Company issued $360 million principal amount at
maturity of the Company's 12% Senior Discount Notes due May 2006 (the "May
Notes") and $357 million aggregate principal amount at maturity of the Company's
12% Senior Discount Notes due February 2006 (the "February Notes", and with the
June Notes and the May Notes, the "Notes"). The May Notes may be redeemed at any
time on or after May 1, 2001, at the option of the Company, at 106% of their
principal amount at maturity, plus accrued interest, declining to 100% of their
principal amount at maturity, plus accrued interest, on and after May 1, 2003.
The May Notes will fully accrete to face value on May 1, 2001, at which time
they will bear interest, payable in cash, at a rate of 12% per annum on May 1
and November 1 of each year, commencing November 1, 2001.
The February Notes may be redeemed at any time on or after February
1, 2001, at the option of the Company, at 106% of their principal amount at
maturity, plus accrued interest, declining to 100% of their principal amount at
maturity, plus accrued interest on and after February 1, 2003. The February
Notes fully accreted to face value on February 1, 2001, and are now bearing
interest, payable in cash, at a rate of 12% per annum on February 1 and August 1
of each year, commencing August 1, 2001.
Unamortized original issue discount on the May Notes and February
Notes is being amortized using effective interest rates of 12% and 12.35%,
respectively. For the years ended December 31, 2000, 1999 and 1998, total
accretion of the original issue discount was $77.6 million, $68.9 million and
$61.1 million, respectively, of which $1.9 million was capitalized in 1998.
These amounts were included in interest expense in the accompanying consolidated
statements of operations.
The Company maintains a $265 million credit facility (the "Credit
Facility"), which funded the purchase of PCS network equipment and services for
the initial buildout pursuant to the terms of the related Ericsson Equipment
Purchase Agreement (Note 10). As of December 31, 1999, the Company had borrowed
the maximum available under the Credit Facility. The aggregate amount of the
advances made in each of the calendar years 1996 through 1999 will be repaid in
twenty equal quarterly installments beginning during the first calendar quarter
to occur three years after the end of the calendar year in which the advances
were originally made, with the last installment in an amount necessary to repay
in full the remaining outstanding balance. During March 2000, the Company began
repaying the Credit Facility.
15
The interest rate under the Credit Facility is based on the
applicable Eurodollar Rate plus 3% (9.6875% at December 31, 2000) but can be
converted to a fluctuating interest rate per annum based on the higher of
Citibank N.A.'s base rate or .5% above the Federal Funds Rate, plus 1%, at the
discretion of the lender. Interest on the unpaid principal amount of each
advance is payable in arrears on the last day of each calendar quarter.
The Credit Facility is secured by all the equipment purchased with
the proceeds therefrom, subject to the terms of the Ericsson Equipment Purchase
Agreement, as well as a pledge of the stock of the Company's subsidiaries that
hold the PCS licenses.
Scheduled maturities of long-term obligations are as follows (in
millions):
2001 $ 33.0
2002 53.0
2003 53.0
2004 53.0
2005 40.1
Thereafter 1,016.0
---------
Total $ 1,248.1
=========
The indentures relating to the Notes (the "Indentures") and the Credit
Facility contain certain restrictive covenants which significantly limit or
prohibit, among other things, the ability of the Company to incur additional
indebtedness, make prepayments of certain indebtedness, pay dividends, make
investments, engage in transactions with stockholders and affiliates, issue
capital stock, create liens, sell assets and engage in mergers and
consolidations. The Credit Facility also requires the Company to maintain
certain financial ratios. If the Company fails to comply with these restrictive
covenants or maintain such ratios, the Company's obligation to repay all, or
significant portions of, the Notes and the Credit Facility may be accelerated.
The limitations in the Indentures are subject to certain qualifications and
exceptions, which, in particular, allow the Company and its subsidiaries to
incur additional indebtedness in certain circumstances.
At December 31, 2000, the Company was in compliance with all
covenants and financial ratios under the Indentures and the Credit Facility or
had received appropriate waivers.
7. PREFERRED STOCK
The Preferred Stock reflected in the accompanying consolidated
balance sheets is as follows:
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
Preferred stock, $.01 par value, 1,000,000 shares authorized:
Series E Cumulative Convertible, Redeemable Preferred, 50,000 shares
issued and outstanding at December 31, 2000 and 1999 .................. $ 76,109 $ 76,109
Series F Cumulative Convertible, Redeemable Preferred, 50,000 shares
issued and outstanding at December 31, 2000 and 1999 .................. 76,110 76,110
--------- ---------
Total cumulative convertible, redeemable preferred stock ......... $ 152,219 $ 152,219
========= =========
Series A Convertible Preferred, 100,000 shares issued and
outstanding in 2000 and 1999 .......................................... $ 1 $ 1
Series B Convertible Preferred, 100,000 shares issued and
outstanding in 2000 and 1999 .......................................... 1 1
Series D Convertible Preferred, 50,000 shares issued and
outstanding in 2000 and 1999 .......................................... 1 1
--------- ---------
Total preferred stock in stockholders' equity .................... $ 3 $ 3
========= =========
16
On September 22, 1999, The Huff Alternative Income Fund, L.P., which
originally purchased 50,000 shares of Series C Convertible Preferred Stock (the
"Series C Preferred") from the Company on June 5, 1997, converted all of the
Series C Preferred shares into 1,764,706 shares of common stock.
On September 15, 1999, Sonera Ltd. purchased 100,000 shares of
non-voting Series A Convertible Preferred Stock (the "Series A Preferred") from
Ericsson Inc., which originally purchased the Series A Preferred from the
Company on June 29, 1996. The Series A Preferred is currently convertible, at
the option of the holder, at a rate of 46.27 shares of common stock per share of
preferred stock, subject to adjustment. The Series A Preferred is redeemable, at
the option of the Company, in whole or in part, on a pro rata basis, at a
redemption price of $750 per share plus declared and unpaid dividends, anytime
subsequent to June 28, 2001. The Series A Preferred has a liquidation preference
of $750 per share plus declared and unpaid dividends in the event of a
liquidation, dissolution or winding up of the Company.
During 1998, the Company issued 50,000 shares of non-voting Series E
6.5% Cumulative Convertible, Redeemable Preferred Stock (the "Series E
Preferred") to SCANA Communications Holdings, Inc. ("SCANA Communications"), a
wholly-owned subsidiary of SCANA Corporation, for $75 million. Concurrently, the
Company also issued 50,000 shares of non-voting Series F 6.5% Cumulative
Convertible, Redeemable Preferred Stock (the "Series F Preferred") to ITC
Wireless, Inc., a wholly-owned subsidiary of ITC Holding Company, Inc., for $75
million. The Series E Preferred and Series F Preferred become convertible on
June 22, 2003, at the option of the holder, at a rate of 68.15 shares of common
stock per share of preferred stock, subject to adjustment. Each is redeemable at
the option of the Company, in whole or in part, on a pro rata basis, at a
redemption price of $1,500 per share plus accrued and unpaid dividends, anytime
subsequent to June 22, 2003, but no later than June 1, 2010. Each has a
liquidation preference over the common stock of $1,500 per share, subject to
adjustment, plus accrued and unpaid dividends in the event of a liquidation,
dissolution or winding up of the Company.
Due to the mandatory redemption feature included in the Series E
Preferred and Series F Preferred, the Series E Preferred and Series F Preferred
have been classified in the mezzanine of the accompanying consolidated balance
sheets at redemption value, net of issuance costs.
The 6.5% annual dividend on each of the Series E Preferred and Series
F Preferred is payable quarterly in common stock or, under certain
circumstances, cash. The Company intends to pay such quarterly dividend in
common stock for the foreseeable future.
During 1997, the Company issued 50,000 shares of non-voting Series D
Convertible Preferred Stock (the "Series D Preferred") to SCANA Communications
for $22.5 million. The Series D Preferred becomes convertible on March 14, 2002,
at the option of the holder, at a rate of 35.29 shares of common stock per share
of preferred stock, subject to adjustment. The Series D Preferred is redeemable,
at the option of the Company, in whole or in part, on a pro rata basis, at a
redemption price of $450 per share plus declared and unpaid dividends, anytime
subsequent to June 5, 2002. The Series D Preferred has a liquidation preference
of $450 per share plus declared and unpaid dividends in the event of a
liquidation, dissolution or winding up of the Company.
During 1996, the Company issued 100,000 shares of non-voting Series B
Convertible Preferred Stock (the "Series B Preferred") to SCANA Communications
for $75 million. The Series B Preferred becomes convertible on March 14, 2002,
at the option of the holder, at a rate of 46.27 shares of common stock per share
of preferred stock, subject to adjustment. The Series B Preferred is redeemable,
at the option of the Company, in whole or in part, on a pro rata basis, at a
redemption price of $750 per share plus declared and unpaid dividends, anytime
subsequent to June 28, 2001. The Series B Preferred has a liquidation preference
of $750 per share plus declared and unpaid dividends in the event of a
liquidation, dissolution or winding up of the Company.
The Company's certificate of incorporation authorizes the Board of
Directors to issue, from time to time and without further stockholder action,
one or more series of preferred stock and to fix the relative rights and
preferences of the shares, including voting powers, dividend rights, liquidation
preferences, redemption rights, and conversion privileges.
17
8. STOCK-BASED COMPENSATION PLANS
Stock Options
Under the Powertel, Inc. 2000 Stock Option Plan, as amended (the
"Stock Plan"), 3.5 million shares of common stock are reserved for issuance upon
exercise of options. At December 31, 2000, 61,960 shares were subject to options
outstanding under the Stock Plan. All of the Company's employees, officers,
directors, consultants and advisors are eligible to receive options, restricted
stock awards, or other awards under the Stock Plan. Options granted under the
Stock Plan can qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986 or can be non-qualified stock options. For
employees, consultants and advisors, as applicable, management recommends to the
Compensation/Stock Option Committee the number of options or awards to grant
based on management's analysis of the individual's performance and level of
responsibility. For nonemployee directors, the Stock Plan provides that options
to purchase 10,000 shares of common stock (at an exercise price equal to the
fair market value of the common stock on the date of grant) are granted
automatically to nonemployee directors upon their initial election or
appointment to the Board.
Under the Company's 1991 Employee Stock Option Plan (the "1991 Option
Plan"), 1,845,572 shares were subject to options outstanding on December 31,
2000. The Board of Directors has determined not to issue any additional options
under the 1991 Option Plan, and the 1991 Option Plan expires in 2001. Options
previously granted under the 1991 Option Plan are intended to qualify as
incentive stock options.
Under the Company's Nonemployee Stock Option Plan (the "Nonemployee
Plan"), 79,100 shares were subject to options outstanding on December 31, 2000.
The Board of Directors has determined not to issue any additional options under
the Nonemployee Plan, and the Nonemployee Plan expires in 2001.
Options granted under the Stock Plan, the 1991 Option Plan and
Nonemployee Plan generally become exercisable as to 50% of the shares on the
second anniversary of the date of grant, an additional 25% on the third
anniversary and the remaining 25% on the fourth anniversary. No option may be
exercised more than ten years after the date of grant. Options generally are
exercisable at a price established by the Compensation/Stock Option Committee
equal to at least 100% of the fair market value of the common stock on the date
of grant, except that the exercise price with respect to options granted to an
individual who owns more than 10% of the combined voting power of all classes of
stock of the Company must be at least 110% of the fair market value of the
common stock on the date of grant. The full exercise price for shares being
purchased must be paid at the time of exercise in cash or, if permitted by the
particular option agreement, in whole or in part by delivery of shares of common
stock having a fair market value (on the delivery date) of not less than the
exercise price.
The Company accounts for its stock-based compensation related to the
Stock Plan, the 1991 Option Plan and Nonemployee Plan under APB 25. Accordingly,
no compensation expense has been recognized, as all options have been granted
with an exercise price equal to the fair value of the Company's common stock on
the date of grant. For SFAS 123 pro forma purposes, the fair value of each
option grant has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following assumptions:
2000 1999 1998
---- ---- ----
Risk-free interest rate............................ 6.61% 5.31% 4.65%
Expected dividend yield............................ -- -- --
Expected lives..................................... 6.0 Yrs. 6.0 Yrs. 8.2 Yrs.
Expected volatility................................ 57% 54% 50%
18
Using these assumptions, the fair value of the stock options granted
in 2000, 1999 and 1998 is $36.6 million, $9.7 million and $6.7 million,
respectively, which would be amortized as compensation expense over the vesting
period of the options. Had compensation cost been determined consistent with the
provisions of SFAS 123, the Company's net loss and pro forma net loss per common
share for 2000, 1999 and 1998 would have been as follows (in millions, except
per share amounts):
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
------- ------- -------
Net loss:
As reported ................... $(222.0) $(134.4) $(270.8)
Pro forma ..................... (233.3) (141.5) (274.6)
Net loss per common share:
As reported ................... $ (7.26) $ (4.75) $(10.02)
Pro forma ..................... (7.63) (5.00) (10.12)
Because SFAS 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that expected in future years.
Under the Company's 1995 Employee Restricted Stock Plan (the
"Restricted Stock Plan"), 163,800 shares had been awarded through December 31,
2000. The Board of Directors has determined not to issue any additional awards
under the Restricted Stock Plan. These restricted stock awards vest in three
equal installments on the first, second and third anniversaries of the date of
grant. The compensation associated with the restricted grants (i.e., the
difference between the market price of the Company's common stock on the date of
grant and the exercise price) is being amortized ratably over the three-year
vesting period. Such compensation expense totaled $0.7 million, $0.7 million and
$0.6 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Any unamortized deferred compensation is reflected as a reduction to
stockholders' (deficit) equity in the accompanying consolidated balance sheets.
The Restricted Stock Plan is administered by the Compensation/Stock Option
Committee of the Board of Directors.
A summary of the combined status of all stock option plans at
December 31, 2000, 1999 and 1998 is presented in the following table:
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
--------- ----------------
Outstanding at December 31, 1997 2,370,278 $13.39
Granted..................................... 541,192 17.71
Forfeited................................... (293,401) 16.80
Exercised................................... (28,119) 10.98
---------
Outstanding at December 31, 1998 2,589,950 13.93
Granted..................................... 691,701 24.41
Forfeited................................... (189,341) 17.66
Exercised................................... (305,139) 13.24
---------
Outstanding at December 31, 1999 2,787,171 16.36
Granted..................................... 639,483 94.09
Forfeited................................... (196,562) 50.20
Exercised................................... (1,243,460) 13.00
---------
Outstanding at December 31, 2000............... 1,986,632 40.17
=========
19
The following table summarizes the exercise price range, weighted
average exercise price and weighted average remaining contractual life for the
options outstanding as of December 31, 2000:
WEIGHTED WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE AVERAGE REMAINING
OUTSTANDING RANGE EXERCISE PRICE CONTRACTUAL LIFE
- ----------- -------------- -------------- ----------------
5,000 $ 3.33-3.33 $ 3.33 0.3 Years
50,961 6.00-8.25 7.77 2.7 Years
350,898 9.25-13.88 12.29 6.1 Years
799,495 13.94-20.88 15.86 7.2 Years
119,396 21.00-31.25 23.21 7.1 Years
36,000 32.75-44.19 38.40 8.6 Years
59,400 50.19-75.00 65.97 9.1 Years
565,482 75.69-100.50 96.06 9.2 Years
- --------- -------------- -------------- ----------------
1,986,632 $ 3.33-100.50 $ 40.17 7.5 Years
Total stock options exercisable at December 31, 2000 were 525,671 at
a weighted average exercise price of $14.77.
Stock Warrants
As of December 31, 2000, the Company had outstanding approximately
1.0 million warrants to purchase its common stock. Each warrant entitles the
holder to purchase 1.0705 shares of common stock at $16.95 per share (as
adjusted for the June 1996 issuance of the Series A Preferred and Series B
Preferred). The warrants may be exercised at any time prior to February 1, 2006.
9. INCOME TAXES
The reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
------- ------- -------
Statutory federal income tax rate ................... (35)% (35)% (35)%
Increase (decrease) in income tax rate
resulting from:
State income taxes, net of federal benefit .... (6) (6) (6)
Valuation allowance ........................... 41 41 41
------- ------- -------
Effective income tax rate ........................... 0% 0% 0%
======= ======= =======
The significant components of the Company's net deferred tax asset
are as follows (in millions):
DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Deferred Tax Assets:
Net operating loss carryforwards ................... $ 220.9 $ 140.0 $ 136.5
Start up costs capitalized ......................... 11.9 17.2 19.7
Bond accretion capitalized ......................... 104.0 71.8 46.3
Deferred gain ...................................... 30.6 34.9 --
Other .............................................. 9.1 10.5 8.4
-------- -------- --------
376.5 274.4 210.9
-------- -------- --------
Deferred Tax Liabilities:
Depreciation ....................................... (46.2) (34.0) (25.6)
Other .............................................. (2.4) (2.0) (1.5)
-------- -------- --------
(48.6) (36.0) (27.1)
-------- -------- --------
Net deferred tax asset before valuation allowance ..... 327.9 238.4 183.8
Valuation allowance ................................... (327.9) (237.1) (182.5)
-------- -------- --------
Net deferred tax asset ................................ 0.0 1.3 1.3
Less: current portion ................................. 0.0 1.3 1.3
-------- -------- --------
Net deferred tax asset -- non-current portion ......... $ -- $ -- $ --
======== ======== ========
20
At December 31, 2000, the Company had available net operating loss
carryforwards for regular tax purposes of approximately $524 million, which will
expire at various dates between 2005 and 2020, and alternative minimum tax
credit carryforwards of $0.2 million, which have no expiration. The utilization
of a portion of these carryforwards is subject to limitations under the Internal
Revenue Code of 1986. Since management is currently unable to determine whether
it is more likely than not that some portion of the net deferred tax asset will
be realized, a valuation allowance of $327.9 million has been provided in the
accompanying consolidated financial statements. The valuation allowance
increased $90.8 million and $54.6 million in 2000 and 1999, respectively.
10. COMMITMENTS AND CONTINGENCIES
Leases
Lease expense relates to the lease of office and warehouse space,
land for cell sites, cell sites, dedicated lines and trunk access facilities,
computer equipment, and billboards and includes leases with affiliates (Note
11). Rents charged to expense were approximately $34.7 million, $29.1 million,
and $20.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
At December 31, 2000, future minimum lease payments under
noncancelable operating leases with initial remaining terms of more than one
year are as follows (in millions):
2001 $ 34.6
2002 30.3
2003 24.6
2004 17.5
2005 13.1
Thereafter 27.0
--------
$ 147.1
========
Construction Contract
On September 27, 1999, the Company entered into a build-to-suit
construction contract (Note 5) with Crown Castle that granted Crown Castle a
right of first refusal to build, acquire and lease back to the Company at $1,800
per month up to 40 tower sites to be constructed prior to December 31, 2000. As
of December 31, 2000, the Company had leased 18 towers under this contract.
Equipment Purchase Commitments
In 1996, the Company entered into a five-year equipment purchase
agreement and related vendor financing agreement (Note 6) with Ericsson Inc. for
the purchase of certain network equipment and services required for the initial
buildout and operation of the Company's PCS system. Under the terms of the
agreement and subsequent amendments, the Company committed to purchase certain
PCS network equipment and services for specific markets and utilize Ericsson as
the exclusive provider of certain PCS network equipment until December 31, 2001
for all of its markets. The Company's grant of exclusivity is conditioned upon
Ericsson's ability to provide sufficient quantities of PCS network equipment to
meet the Company's needs in the PCS markets, provide commercial service for each
PCS market by pre-defined dates, and continue to provide "state of the art"
equipment. The Company's cumulative total purchases under the agreement were
approximately $407 million at December 31, 2000.
Litigation
The Company is subject to litigation related to matters arising in
the normal course of business. As of December 31, 2000 management is not aware
of any asserted or pending material litigation or claims against the Company
that would have a material impact.
21
11. TRANSACTIONS WITH AFFILIATES
The Company leases certain telephone lines and administrative
facilities and purchases local, long-distance and other telecommunication
services through its former parent, ITC Holding Company, Inc., and certain of
its other subsidiaries and related parties. The total expense recorded by the
Company for these services was approximately $19.7 million, $10.7 million and
$10.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company purchases certain equipment, inventory and services
related to the buildout and operation of its PCS business from preferred
stockholders and certain of their subsidiaries. The Company's total purchases
for equipment, inventory and services from these related parties were $0.1
million, $75.5 million, and $138.3 million for the years ended December 31,
2000, 1999 and 1998, respectively.
12. BUSINESS SEGMENT DATA
Effective with the year ended December 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which requires the
Company to report financial and descriptive information about its reportable
operating segments. SFAS 131 requires the reporting of a measure of segment
profit or loss, certain specific revenue and expense items and segment assets,
as well as a reconciliation of total segment revenues, total segment profit or
loss, total segment assets and other amounts disclosed for segments to
corresponding amounts in the Company's general purpose financial statements.
The Company classifies its operations into two business segments: PCS
and cellular. Certain corporate administrative expenses have been allocated to
the segments based upon the nature of the expense. Intersegment revenues are not
material. Summarized financial information by business segment is as follows (in
millions):
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ----------------------------- -----------------------------
CELLULAR
PCS CELLULAR TOTALS PCS(A) (B) TOTALS PCS CELLULAR TOTALS
----------- -------- -------- -------- --------- -------- -------- -------- --------
Revenues and sales ............ $ 464.2 $ -- $ 464.2 $ 277.9 $ 7.0 $ 284.9 $ 159.4 $ 19.6 $ 179.0
Depreciation and amortization.. 102.7 -- 102.7 88.7 0.5 89.2 65.8 1.9 67.7
Operating (loss) income ....... (96.2) -- (96.2) (149.5) 3.6 (145.9) (180.3) 8.1 (172.2)
Interest expense, net ......... 117.2 -- 117.2 108.2 -- 108.2 93.7 -- 93.7
Net (loss) income ............. (212.2) -- (212.2) (207.6) 82.9 (124.7) (273.9) 8.1 (265.8)
Total assets .................. 1,359.0 -- 1,359.0 1,446.9 -- 1,446.9 1,368.0 15.0 1,383.0
Capital expenditures .......... 158.7 -- 158.7 130.5 .3 130.8 205.0 2.3 207.3
- --------
(a) Includes realized gain on sale of tower assets of $49.9 million.
(b) Includes gain on sale of subsidiary of $79.3 million.
22
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
2000 QUARTERS:
Revenues and sales (a) .................................... $ 100.1 $ 114.3 $ 119.1 $ 130.7
Operating loss ............................................ (23.3) (16.3) (22.2) (34.4)
Net loss attributable to common stockholders .............. (52.9) (47.2) (54.7) (67.2)
Basic and diluted loss per common share ................... $ (1.74) $ (1.52) $ (1.74) $ (2.14)
1999 QUARTERS:
Revenues and sales (a) .................................... $ 62.8 $ 64.4 $ 73.0 $ 84.7
Operating loss ............................................ (33.6) (36.9) (30.8) (44.6)
Net (loss) income attributable to common stockholders ..... (63.8) 60.6 (58.9) (72.3)
Basic (loss) earnings per common share .................... $ (2.33) $ 2.19 $ (2.10) $ (2.43)
Diluted (loss) earnings per common share .................. (2.33) 1.22 (2.10) (2.43)
1998 QUARTERS:
Revenues and sales (a) .................................... $ 36.4 $ 41.6 $ 46.2 $ 54.8
Operating loss ............................................ (36.0) (34.2) (41.1) (60.9)
Net loss attributable to common stockholders .............. (57.7) (57.8) (66.7) (88.6)
Basic and diluted loss per common share ................... $ (2.14) $ (2.15) $ (2.47) $ (3.26)
- ----------------
(a) Revenues and sales have been restated for all quarters presented to
reflect the Company's adoption of SAB 101 and EITF 99-19 as discussed
in Note 2.
23
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 hereunto duly authorized.
VOICESTREAM WIRELESS CORPORATION
--------------------------------
(Registrant)
Date March 22, 2001 By /s/ Alan R. Bender
------------------------ -------------------------------------
(Signature)
Alan R. Bender, Executive Vice President
24
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ----------- --------
23.1 Consent of Arthur Andersen LLP Filed herewith.