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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12920 - 38TH STREET S.E.
BELLEVUE, WASHINGTON 98006
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(Address of principal executive offices) (Zip Code)
(425) 378-4000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 MARCH 1, 2002
----- --------------------------------------
Common Stock, par value $.000001 per share 269,738,185
This registrant meets the conditions set forth in General Instruction I
(1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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VOICESTREAM WIRELESS CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I
Item 1. Business
(Abbreviated pursuant to General Instruction I (2).) ...................................... 3
Item 2. Properties................................................................................. 17
Item 3. Legal Proceedings.......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders
(Omitted pursuant to General Instruction I (2).) .......................................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(Omitted pursuant to General Instruction I (2).)........................................... 17
Item 6. Selected Consolidated Financial Data
(Omitted pursuant to General Instruction I (2).) .......................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Abbreviated pursuant to General Instruction I (2).)....................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................. 26
Item 8. Financial Statements and Supplementary Data................................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 27
PART III
(Omitted pursuant to General Instruction I (2).):
Item 10. Directors and Executive Officers of the Registrant......................................... 27
Item 11. Executive Compensation..................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 27
Item 13. Certain Relationships and Related Transactions............................................. 27
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.......................... 27
2
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 regionally; 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.
Unless the context requires otherwise, "VoiceStream," "we," "our" and "us"
include us and our predecessors and subsidiaries.
PART I
ITEM 1. BUSINESS
INTRODUCTION
VoiceStream Wireless Corporation ("VoiceStream" or "we") provides personal
communications services ("PCS") primarily in urban markets in the United States
using the Global System for Mobile Communications, or GSM, technology. We are
one of the six largest, nationwide, PCS service providers, currently operating
in 20 of the top 25 markets and 37 of the top 50 markets in the United States.
We are a wholly-owned subsidiary of T-Mobile International AG ("T-Mobile").
T-Mobile is a wholly-owned subsidiary of Deutsche Telekom AG ("Deutsche
Telekom"), and is the holding company for Deutsche Telekom's principal GSM
wireless operations in Europe and the United States.
We are a member of the North American GSM Alliance LLC ("North American
GSM Alliance"), a group of United States and Canadian digital wireless PCS
carriers. The North American GSM Alliance helps provide seamless GSM wireless
communications for their members in North America and internationally. The North
American GSM Alliance also sponsors working standards groups for GSM North
America, which is a regional body of the GSM Association. The members of the GSM
Association provide digital GSM wireless services to over 600 million customers
across five continents. GSM systems account for more than two-thirds of the
worldwide digital wireless telephone market. We have international roaming
agreements with 187 of the major GSM operators worldwide, providing service in
84 countries, and we anticipate that we will enter into roaming agreements with
operators in additional countries to increase world coverage and convenience for
our customers.
3
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 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
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.
On May 31, 2001, Deutsche Telekom acquired 100% of the common shares of
VoiceStream. The merger qualified as a tax-free reorganization. Upon
consummation of the merger and the transfer by Deutsche Telekom of all of its
VoiceStream common shares to T-Mobile (referred to herein as "the T-Mobile
merger"), VoiceStream common shares were deregistered and delisted from NASDAQ
and are no longer publicly traded.
Prior to May 3, 1999, VS Washington was an 80.1% owned subsidiary of
Western Wireless Corporation ("Western Wireless"). The remaining 19.9% was owned
by Hutchison Telecommunications PCS (USA) Limited, a subsidiary of Hutchison
Whampoa Limited, a Hong Kong company. On May 3, 1999, VS Washington was formally
separated in a spin-off transaction from Western Wireless' other operations.
Powertel, Inc. ("Powertel"), another subsidiary of T-Mobile, provides PCS
service primarily in the southeastern United States under the VoiceStream brand
name. Powertel also advertises, supports and bills for its services under the
VoiceStream brand name. Powertel's wireless network is also fully integrated
with our network such that, from a customer's perspective, its services are
indistinguishable from ours. We do not compete with Powertel in the markets it
serves nor does Powertel compete in our markets. Following the T-Mobile Merger,
Powertel's employees became employees of VoiceStream and we charge Powertel for
the compensation and benefit costs of our employees working exclusively on
Powertel business. We perform certain administrative and other functions on
behalf of Powertel where cost or operating efficiencies can be achieved through
centralization of those functions and allocate a portion of our costs of
providing these services to Powertel.
Strategy
Our business strategy continues to be focused on capturing an increasing
share of the growing United States market for wireless services in order to
become one of the leading United States providers of such services over the
long term and a key part of T-Mobile's international network. To accomplish
this we will:
- - Establish the T-Mobile brand in the United States: In 2002 we will focus
on building equity in the T-Mobile brand. During the year, we intend to
launch new services and markets using the T-Mobile brand and by the end of
the year plan to complete the consolidation of our wireless operations and
marketing efforts under the T-Mobile brand name.
- - Penetrate the rapidly growing, broad consumer market segment: We will seek
to further penetrate the consumer segment of the market by striving to
provide the best value in wireless services with more minutes, more
features and more services than other wireless providers in the markets we
serve. We will continue to market such features and services under the
"Get More" message. This marketing message is currently conveyed, in part,
by company spokesperson, actress Jamie Lee Curtis.
- - Establish a leadership position in the mobile data market: In 2001 we
launched our General Packet Radio Service ("GPRS"), high-speed wireless
data services across our entire network, providing our customers with
wireless Internet access and the ability to use multimedia applications.
We will build on the technical advantages of GSM/GPRS, the timing
advantage of our nationwide launch and increase adoption of this service
over the next year by: (1) delivering a range of unique, improved devices
including phones, Palm and Windows-based PDAs and data cards, (2)
providing enhanced content and functionality that is relevant to the
consumer and business mobile consumer, and (3) effectively reaching
targeted market segments through our extensive and diverse distribution
network.
4
Additionally, we acquired the wireless broadband communications
assets of MobileStar Network Corporation in January 2002. We will begin
commercially marketing these services under the T-Mobile brand by the end
of 2002 as a complement to our nationwide GSM/GPRS service.
- - Build high quality networks with nationwide coverage: We will continue to
build out our GSM/GPRS network to increase capacity and enhance call
quality within and around the urban markets we currently serve. Our
network, including that of Powertel and non-consolidated affiliates in
which we hold minority interests, covers over 54% of the United States
population. In addition, we will seek to expand the coverage of our
network through the entry into additional markets to capitalize on our
nationwide license footprint.
- - Increase our spectrum holdings: We have assembled a nationwide PCS license
footprint covering over 96% of the United States population, including
Powertel licenses and licenses controlled and held by non-consolidated
affiliates in which we hold minority interests. We will continue to seek
opportunities to acquire additional PCS licenses, systems and/or
operators, which are additive to our current footprint or increase our
spectrum capacity.
- - Expanded distribution network: We will continue to expand the existing
extensive and diverse distribution network for selling our services and
products as we enter new markets and expand our presence in existing
markets. This distribution network features a mix of company-owned stores,
exclusive and non-exclusive dealers, national retailers, on-line retailers
(including VoiceStream's on-line store), value-added resellers, and a
direct sales force targeting general business and national and strategic
accounts.
- - Achieve cost efficiencies through centralization and size: We will
continue to centralize key business functions as we complete the
integration of the operations of T-Mobile's United States affiliates. Such
functions include marketing and customer care as well as administrative
functions such as accounting and human resources in order to achieve
greater economies of scale. We expect that our size and relationship with
Deutsche Telekom will enable us to negotiate more favorable pricing and
financing terms for the purchase of services, handsets and network
equipment.
- - Balance customer growth and operating cash flow: We will strive to balance
our rate of subscriber growth with improvements in EBITDA and operating
cash flow in order to operate and grow the business over the long term.
Marketing, sales and customer service
Our sales and marketing strategy is to increase our market penetration
through continued growth for voice, data and messaging services in both new and
existing markets. In addition, we target a customer base that we believe is
likely to generate high monthly service revenues, while attempting to achieve a
low cost of adding new customers.
- - Marketing: As a result of our merger with T-Mobile, we are leveraging the
success of our "Get More" marketing strategy in the United States to
introduce "Global Wireless by T-Mobile" as part of the VoiceStream brand
logo. We plan to phase out the VoiceStream brand name over the next year,
forming a cohesive international wireless brand using the T-Mobile name.
We believe the continued use of our "Get More" strategy, combined with the
introduction and use of the global T-Mobile brand, will positively affect
our subscriber growth.
Our marketing efforts are focused primarily on the consumer market.
We will expand these efforts to also target business and enterprise
consumers with the introduction of new wireless data devices designed to
take advantage of our high-speed wireless data network offerings. We
market the "Get More" philosophy to both consumers and businesses by
emphasizing that customers get more value for their money from our
competitive pricing, enhanced features, functionality and applications,
and by promoting the benefits of integrated voice, data and messaging
services.
5
- - Sales: We sell our products and services through an extensive and
balanced distribution network featuring company-owned stores, exclusive
and non-exclusive dealers, national retailers, on-line retailers
(including VoiceStream's on-line store), value-added resellers, and
through a direct sales force targeting general business and national and
strategic accounts.
We believe that our local sales offices and retail stores provide
the physical presence in local markets necessary to position VoiceStream
as a quality local service provider, and give us greater control over both
our costs and the sales process. Our training programs provide our sales
employees with an understanding of our systems, products and services so
that they, in turn, can provide information to prospective customers.
Sales commissions generally are linked to subscriber revenue, type of
service, activation levels and subscriber retention.
We are both a retail and wholesale distributor of handsets and other
wireless data devices, and we maintain inventories of these items.
Although customers are generally responsible for purchasing or otherwise
obtaining their own handsets or wireless data devices, we sell handsets
and other wireless data devices below cost to respond to competition for
new subscribers. We expect these handset subsidies to remain common
industry practice for the foreseeable future.
- - Customer service: Quality customer service is a significant element of our
operating philosophy. We are committed to attracting and retaining
customers by providing customer service that consistently exceeds the norm
for wireless service providers. We maintain a customer service and
technical assistance system with a well-trained staff to handle both
routine and complex questions as they arise, 24 hours a day, 7 days a
week. Customers can also manage their accounts on-line, adding features to
their service, viewing and paying their bills through our web site.
We continuously monitor customer churn (the rate of subscriber
attrition) as a key indicator of customer satisfaction. We manage our
churn rate through a program implemented by our sales force and customer
service personnel that is intended to enhance customer loyalty and
increase add-on sales and customer referrals. The program allows the sales
staff to check customer satisfaction, as well as to offer additional
calling features, such as voicemail, call waiting and call forwarding to
achieve customer satisfaction. We also have an in-depth customer
relationship marketing program that reaches customers at many points
during their life-cycle, rewarding them for their loyalty as a VoiceStream
customer.
- - Intellectual property: We hold federal trademark registrations for the
marks "VoiceStream," "VoiceStream Wireless and Design" (the VoiceStream
logo), "Get More From Life," "Get More Plus," "The Get More Promise,"
"Familytime" and "MyVoiceStream.com". We have pending applications to
register our other trademarks and service marks with the United States
Patent and Trademark Office. Deutsche Telekom holds federal trademark
registrations for the mark "T-Mobile" and numerous other trademarks and
service marks.
Products and services
We provide a variety of wireless products and services designed to match a
range of needs for business and personal use. As part of our Get More value
offering, we include an array of features with every service plan. These
features include built-in paging, voicemail, message alert, caller ID, call
waiting, call hold and conference calling. Additionally, a hands-free device is
included with every VoiceStream handset we package for sale. Through our PCS
systems and GSM network, we offer several distinct services, features, and
benefits including:
- - Data Services: We offer a range of mobile data services aimed at both the
general and business consumer at prices consistent with VoiceStream's "Get
More" promise. These services are continually enhanced with greater and
more refined content and increased functionality, applications and
integration options. We will continue to bring a range of new wireless
devices to market including handsets, Palm and Windows-based personal
digital assistants ("PDAs") and data cards that will allow customers to
take advantage of our high speed wireless data network.
6
- - iStream: We were the first United States carrier to launch high-speed
wireless data services across our entire network. Our high-speed data
service, called iStream, is based on GPRS technology -- an extension of
GSM -- and provides consumers with an `always-on' connection to the
Internet at speeds up to 56 kilobytes per second. The need to log on or
dial up to a data session is eliminated, and customers pay for the amount
of data sent and received, not the length of their session. iStream has
many uses and benefits. Customers can access corporate and personal
e-mail, contacts and calendar using ViAir's WirelessInbox(TM) Solution.
Customers can download content such as movie times, traffic, weather and
more to their wireless data devices and can use enabled phones as a modem
to access the Internet and securely access their corporate Intranets via
their laptop computers or PDAs.
- - Ping Pong(TM): This two-way e-mail service gives customers the ability to
send and receive text messages and e-mail to and from their wireless data
devices. Customers can filter, forward and reply to home or office e-mails
via their wireless data devices.
- - MyVoiceStream.com Personal Portal -- We offer wireless Internet services
through a personal portal called MyVoiceStream.com. The portal was built
to fully integrate Internet functionality with wireless service in a
manner that complements both technologies and provides a superior customer
experience. Services offered through MyVoiceStream.com include but are not
limited to:
- AOL Instant Messenger(TM) Service -- Via MyVoiceStream.com,
customers can sign up for AOL Instant Messenger(TM) and create
Buddy Lists(R). With this service customers can see when their
buddies are on-line, and have text conversations in real time via
their handsets or wireless data devices.
- Alerts -- Customers can choose from a broad array of Internet
news and information services to be delivered to their handsets
or wireless data devices. Message alerts can include stock
prices, sports scores, daily horoscopes, weather and other news
services. Customers personally select what information they want
and schedule delivery when they want.
- Ring tones -- Customers can choose from a large variety of
personal ring tones to be downloaded to their handset. Custom
faceplates and accessories are also available, allowing
personalization of VoiceStream service that can be seen and
heard.
- On-line account management -- Customers can manage their
VoiceStream account via the Internet. They can update their phone
directory, view and pay their bill online and add features and
services to their account.
- - Prepaid wireless: Our prepaid wireless service requires advance payment
for airtime in specific dollar denominations. Once the available airtime
is consumed, the customer must "replenish" or prepay for additional
airtime in order to continue using our service.
- - Roaming: Our customers are able to roam throughout the United States and
internationally, either on other GSM-based PCS systems or through the use
of certain dual-mode handsets that can be used on 800 MHz analog cellular
systems. GSM communications technology is the dominant world standard for
digital wireless communications, which allows VoiceStream customers to
enjoy one-handset, one-number worldwide service using a dual-mode or
tri-band handset (900/1800/1900 MHz frequencies). As part of T-Mobile,
VoiceStream customers with this type of handset are able to roam while in
Europe and other parts of the world at a uniform cost per minute. We have
international roaming agreements with more than 185 of the major operators
worldwide, providing service in over 87 countries. We plan to continue to
further expand our international coverage through new roaming agreements
with international GSM providers.
7
- - Wireless Broadband: Through the acquisition of the assets of MobileStar on
January 22, 2002, we have entered into the wireless broadband
communications business, this service allows customers to access the
Internet and their corporate Intranet remotely, using WiFi enabled laptops
or PDA's, in public locations such as hotels, airports, restaurants,
conference centers and coffeehouses. VoiceStream will expand the existing
802.11 WLAN network and commercially market these services under the
T-Mobile brand by the end of 2002 as a complement to our nationwide
GSM/GPRS service.
- - Smart Card: We provide a "Smart Card" with every VoiceStream handset and
wireless data device. Each Smart Card is a microchip programmed with the
customer's billing information and a specified service package, as well as
the customer's contact list and other preferences. This allows customers
to obtain PCS connectivity automatically using a variety of terminal
devices simply by inserting their Smart Card microchip into compatible PCS
devices.
- - Call security and privacy: The VoiceStream Smart Card, in association with
GSM technology, provides increased security against fraud and
eavesdropping by encoding every voice and data transmission. Each time a
VoiceStream phone is turned on, information on the VoiceStream Smart Card
is checked to ensure that it is a genuine subscription card. A Personal
Identification Number ("PIN") can be stored on the Smart Card to prevent
the use of stolen or lost cards or phones. In addition, each transmission
is sent using a random code, making eavesdropping and over-the-air theft
of phone and identification numbers extremely difficult. Only VoiceStream
switches can read the encoded information, and therefore attempts to break
into the system are more likely to be detected and eliminated.
- - Over-the-air activation and over-the-air customer profile management: We
are able to transmit changes in the customer's feature package, including
mobile number assignment and personal directory numbers, directly to the
customer's handset or wireless data device.
- - Handsets and wireless data devices: We do not manufacture the handsets or
wireless data devices used in our operations. The high degree of
compatibility among different manufacturers' handsets and wireless data
devices allows us to operate without being dependent upon any single
source of such devices. We purchase handsets and wireless data devices
primarily from major vendors including Motorola Inc., Samsung Electronics
Co., Ltd. and Nokia Mobile Phones, Inc. A growing number of new vendors
also manufacture specialized mobile data transmission devices including
Palm and Windows-based PDAs, laptop data cards and other devices. These
new devices will complement our high-speed wireless data services and will
be introduced throughout the next year, as quantities are available.
Markets and systems
We currently own 344 PCS licenses covering over 237.9 million people.
Together with Powertel, and through joint ventures in which we and Powertel have
non-controlling ownership interests, we hold additional spectrum in 71 license
areas covering 27.2 million people for a combined total of 265.1 million people,
or 96% of the United States population. We also have a pending acquisition of a
non-controlling interest in a new corporation that will control several PCS and
cellular licenses in Puerto Rico. In exchange for this equity interest, we will
contribute two PCS licenses, namely San Juan, PR (which we currently own) and
Mayaguez, PR (over which we anticipate acquiring control during the second half
of 2002), covering 3.9 million people. Additionally, we, together with the joint
ventures noted above, have pending acquisitions of nine additional licenses
covering 0.6 million people.
We are one of the six largest, nationwide, PCS service providers,
currently operating in 20 of the top 25 markets and 37 of the top 50 markets in
the United States. Through our ownership of licenses as noted above, we have a
covered population of 133.5 million people. Together with Powertel, and through
joint ventures in which we and Powertel have non-controlling ownership
interests, we have an additional covered population of 18.8 million people for a
total covered population of 152.3 million people, or 54% of the United States
population.
8
Joint ventures and other entities in which we hold interests
We have entered into joint venture agreements and made other equity
investments in operating companies primarily to obtain coverage for our
customers in geographic areas where we ourselves could not otherwise obtain
licenses, to share the cost of building and operating wireless networks and to
promote the continued growth and expansion of GSM networks in North America.
Since these entities are often in the early stages of building and operating
wireless networks, they are generally expected to incur significant operating
losses for an extended period of time and have significant capital requirements
for the purchase of licenses and the build-out of the networks. The entities are
typically funded initially with investments by the partners, but in some cases
may also incur substantial third party debt to acquire licenses and build
networks. Where we do not control the ventures or other entities, we generally
use the equity method of accounting to reflect our interests in the results of
operations of the entities. Where control exists through voting rights or other
means, we consolidate the results of operations with our own.
Cingular Joint Venture (GSM Facility)
On November 1, 2001, pursuant to formation and contribution agreements, we
entered into a joint venture with Cingular Wireless LLC ("Cingular") to share
certain GSM network infrastructures in two major markets. Under the terms of the
agreement, VoiceStream contributed its network assets in the New York Basic
Trading Area ("BTA") and Cingular contributed its network assets in the Los
Angeles and San Francisco Major Trading Areas ("MTAs") that cover most of
California and parts of Nevada. VoiceStream and Cingular did not contribute
licenses to the joint venture. Both VoiceStream and Cingular will independently
market services under their respective brand names and bill and support their
own customers in each of the markets. Network assets necessary for each party to
perform proprietary customer-related functions were not contributed to the joint
venture. The venture may be terminated under certain circumstances including
mutual agreement of the parties. In the event the joint venture is terminated,
under certain circumstances, the parties may have the right to exchange certain
licenses with the other member.
We account for the joint venture using the equity method. The joint
venture will operate and continue to expand the network infrastructure in the
two markets. Network operating costs incurred by the joint venture will be
recovered from the partners based on the minutes of usage by the customers of
each member in the respective markets. The joint venture will generate losses
generally equal to the depreciation charges on network assets. Network capital
costs will be shared by the members based on expected usage and will be funded
through future capital contributions. Under the terms of the agreement, Cingular
is required to fund the first $450.0 million of VoiceStream's share of future
capital costs.
The joint venture will enable us to enter the California market earlier
and more cost effectively than would otherwise be possible. We expect to launch
our services and begin adding customers in the California markets by mid 2002,
provided the networks in both markets meet certain technical standards. Until we
launch the market, VoiceStream's services in California will be limited to
roaming for VoiceStream customers traveling from other VoiceStream markets. The
pre-launch services provided by Cingular in New York will be similarly limited.
9
Designated Entities
The Federal Communication Commission ("FCC"), which regulates the sale and
use of radio spectrum by which PCS service is provided in the United States, has
granted a narrow category of entities ("Designated Entities") the exclusive
right to bid for and own "closed" C and F Block licenses for the initial
five-year period following the award of the licenses. VoiceStream does not
qualify as a Designated Entity, and so in order to continue expanding service to
VoiceStream customers, we currently hold non-controlling ownership interests in
two companies that qualify as Designated Entities, Cook Inlet/VS GSM IV PCS
Holdings, LLC ("CIVS IV") and Cook Inlet/VS GSM V PCS Holdings, LLC ("CIVS V").
These two companies (hereafter referred to as the "CIRI Designated Entities")
are controlled by Cook Inlet Region, Inc. ("CIRI"). Through wholesale reseller
and other contractual arrangements, VoiceStream customers can obtain service in
territories covered by the C and F Block licenses that are owned and operated by
the CIRI Designated Entities. Our partners in these entities have the right to
put their ownership interests in these entities, to VoiceStream in exchange for
cash and Deutsche Telekom stock. Subsequent to December 31, 2001, CIRI has
submitted their put exercise notice to VoiceStream for the conversion of their
ownership interest in CIVS IV. The exchange is pending approval by the FCC and
is expected to close by the end of the second quarter, 2002.
Other entities in which we hold interests
We hold non-controlling interests in the following entities that provide
PCS service using GSM technology: Iowa Wireless Services, L.P.; NPI-Omnipoint
Wireless, LLC; Wireless Alliance, L.L.C.; D&E/Omnipoint Wireless Joint Venture,
L.P. ("D&E"); and Microcell Telecommunications, Inc. ("Microcell"), a publicly
traded Canadian wireless service provider. We have entered into an agreement to
acquire the controlling interest in D&E, subject to FCC approval, which is
expected to close by the end of the first quarter of 2002. We do not expect
these entities to generate income from their operations in the foreseeable
future due to the high level of capital expenditures and high costs associated
with expansion and operation of their networks.
THE WIRELESS COMMUNICATIONS INDUSTRY
Overview
Since its introduction in 1983, wireless service in the United States has
grown dramatically. The Cellular Telecommunications & Internet Association
reports that there were 118 million wireless subscribers in the United States as
of June 30, 2001. This represents a nationwide penetration rate of wireless
services of more than 40%. The wireless communications industry generally
includes one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular, PCS and enhanced specialized
mobile radio ("SMR") networks. Wireless communications systems use a variety of
radio frequencies to transmit voice and data signals, which are licensed in
distinct radio frequency blocks.
PCS uses digital technology, which converts voice or data signals into a
stream of digits that are compressed before transmission. A single radio channel
may carry multiple simultaneous signal transmissions, enhancing capacity and
allowing digital-based wireless carriers to offer new and enhanced wireless
services. Such services include robust data transmission features, which allow
"mobile office" applications such as facsimile, e-mail, wireless connections to
computer/data networks, Internet capabilities and improved conversation privacy.
Packet-switched digital technology, which underlies GPRS, further provides for
substantially higher data transmission rates and continuous connectivity to data
networks.
As further discussed below, PCS competes directly with existing cellular
telephone and data services, paging and SMR services. Cellular service initially
used only analog-based technology, however, some carriers now provide both
digital-based voice and wireless data services utilizing the cellular frequency
band. Analog cellular providers generally offer a more limited number of voice
features and do not offer the robust data transmission features available with
digital technologies. PCS is increasingly competing with wired local
communications services as PCS costs decline and the quality and range of
services increases.
10
Operation of wireless communications systems
Wireless communications system service areas, whether cellular or PCS, are
divided into multiple "cells." In both cellular and PCS systems, each cell
contains a transmitter, a receiver and signaling equipment (collectively
referred to as the "cell site"). The cell site is connected by microwave or
landline telephone lines to a switch that uses computers to control the
operation of the wireless communications system for the entire service area. The
signal strength of a transmission between a handset or wireless data device and
a cell site declines as the handset or wireless data device moves away from that
cell site. The system coordinates all aspects of call transmission to and from
handsets and wireless data devices and ensures the "hand off" of calls to other
cell sites, which prevents calls from being dropped as customers travel between
coverage areas of individual cell sites. Wireless communications providers also
establish interconnection agreements with local exchange carriers ("LECs") and
interexchange carriers.
Wireless system operators often enter into "roaming" agreements by which
the operators will provide service to customers of other wireless service
providers with compatible wireless systems who are temporarily located in or
traveling through their service areas and where the customer's provider does not
have service. Although PCS and cellular systems utilize similar technologies and
hardware, they generally operate on different frequencies and use different
technical and network standards. Dual-mode handsets, however, make it possible
for users of one type of system to "roam" on a different type of system outside
of their service area.
PCS systems operate under one of three principal digital signal
transmission technologies, or standards, that have been deployed by various
operators and vendors: GSM, Time Division Multiple Access ("TDMA"), or Code
Division Multiple Access ("CDMA").
GSM is the most widely used wireless technology in the world, serving over
600 million customers. It offers an open system architecture, is supported by a
variety of vendors and allows GSM operators to achieve cost economies in
infrastructure and mobile terminal equipment. GSM provides the benefit of a
single phone number and transparent services on a global roaming basis. GSM also
has high capacity, high voice quality and utilizes industry-leading encryption
and authentication technology that provides customers with a high level of
subscription and conversation privacy. GSM has always supported wireless data
and currently supports high-speed wireless packet-based data transmission. This
allows GSM operators to provide customers with enhanced Internet and mobile data
services.
CDMA has been widely deployed in North America and parts of Asia. It has
easier interoperability with North American analog cellular systems than GSM. It
uses a closed architecture, and is dependent upon intellectual property rights
owned by a few manufacturers, that increases the cost of network equipment,
handsets and wireless data devices. It has limited global deployment, thus
limiting the customer's ability to use services based upon CDMA technology
outside of the United States.
GSM and TDMA are both based upon time-division of spectrum and are
currently incompatible with each other and with CDMA. Accordingly, a customer on
a system that utilizes GSM technology is currently unable to use a GSM handset
or wireless data device when traveling in an area not served by GSM-based PCS
operators, unless the subscriber carries a dual-mode handset or wireless data
device. Such handsets and wireless data devices are expected to be commercially
available in late 2002. Under a Memorandum of Understanding between GSM
operators in the United States and Canada and the association of TDMA operators
in the United States and Canada, there are plans to promote the interoperability
of GSM and TDMA standards.
Competition
We operate in highly competitive markets. Competition for customers among
wireless licensees is principally based upon the selection of services and
features offered, the technical quality of the wireless systems, customer
service, system coverage, capacity and price. The FCC's allocation of spectrum
currently provides for at least six PCS licenses in each geographic area that
may be held by a minimum of three separate PCS licensees, and two cellular
licensees in each market. There is currently a spectrum cap that limits the
amount of spectrum that a licensee can hold in any one market to 55MHz. This cap
will be removed on December 31, 2002, which may lead to further consolidation of
PCS service providers.
11
Our principal competitors are the national PCS and cellular providers in
our markets, many of which have been operational for a number of years. Earlier
market entry by these competitors often provided them the opportunity to gain
greater coverage within individual markets and larger customer bases. Most of
these competitors provide services in a large number of markets, enabling them
to offer no or low cost roaming and toll calls. Many of our competitors in the
national market provide services comparable to our PCS services and have the
advantages of greater geographical coverage and more customers. These
competitors include Verizon Wireless, Inc.; Cingular; AT&T Wireless Services,
Inc. ("AT&T Wireless"); Sprint Spectrum L.P. ("Sprint PCS"); and Nextel
Communications, Inc. We also compete with local or regional PCS providers,
paging, dispatch, cellular, wireless service resellers and landline telephone
service providers. We also face increased competition from entities providing
similar services using other currently operational technologies or developing
new technologies for use in the future.
GSM technology, which has not historically been widely deployed by North
American wireless operators, is based on a different network protocol than other
North American standards. Thus, our customers may not be able to roam
conveniently or at all on other PCS or cellular systems while traveling in areas
of North America outside our service areas. Our principal PCS competitors
generally use standards other than GSM. For example, Sprint PCS uses the CDMA
standard, and AT&T Wireless and Cingular use the TDMA standard. However, AT&T
Wireless and Cingular have begun overlaying their TDMA networks with GSM
networks and have recently announced a proposed joint venture to further expand
their GSM networks. We expect that the expansion of the GSM networks by these
competitors will make it possible for our customers to have expanded roaming
capabilities.
The FCC generally requires all cellular and PCS licensees to provide
service to resellers. A reseller of wireless service buys blocks of telephone
numbers and capacity from licensed wireless carriers and then resells those
services to its own customers. Thus, a reseller is both a customer of a wireless
licensee's services and also a competitor of that licensee. Several small
resellers currently operate in competition with us. The obligation of PCS
licensees to provide service to resellers terminates on November 24, 2002.
Additional competition to our PCS services may come from Wireless
Communications Services ("WCS"), which can provide fixed or mobile
telecommunications service, SMR service, and local multipoint distribution
service ("LMDS"). We currently hold nine WCS licenses and numerous LMDS licenses
and will compete in that market. SMR dispatch system operators have constructed
digital mobile communications systems on existing SMR frequencies in many cities
throughout the United States, including some of the markets in which we operate.
We cannot foresee how technological progress or economic incentives will affect
competition for these new services or from the auction of new spectrum for
competitive wireless services. In all instances, the FCC reserves the right to
amend or repeal its service regulations and auction schedules.
12
GOVERNMENTAL REGULATION
Our telecommunications systems and operations are regulated by the FCC
pursuant to the Communications Act of 1934 (the "Communications Act") and the
Telecommunications Act of 1996 (the "Telecommunications Act") (collectively, the
"Acts").
The FCC allocates licenses for radio frequency spectrum through
competitive bidding, or auctions. The FCC generally allows all qualified
applicants to bid on PCS licenses, with the exception of certain PCS licenses
that are reserved for Designated Entities. The FCC has divided the United States
into separate PCS geographic markets, with six or more PCS licenses on separate
frequencies in each market. Licensees are generally allowed to divide their
licenses further, either spectrally ("disaggregation"), or geographically
("partitioning"), or both, in private transactions after an auction, subject to
certain restrictions. PCS licensees are also subject to other FCC rules and
various recent industry developments that may affect our business operations as
follows:
- - FCC wireless spectrum cap: A single person or entity (or related group)
currently can hold an attributable interest in PCS, cellular and SMR
licenses totaling no more than 55 MHz in all markets where there is a
significant overlap in a particular geographic area. The FCC raised the
restriction from 45 MHz in urban markets to 55 MHz for all markets during
2001, and the entire restriction will expire on December 31, 2002.
- - Renewal and construction requirements of PCS licenses: PCS licenses have a
ten-year term, after which they must be renewed with the FCC. The renewal
generally will be granted to a PCS licensee that has: (1) provided
substantial service during its past license term and (2) substantially
complied with applicable FCC rules and policies and the Acts. The FCC also
mandates that PCS licensees construct facilities that provide adequate
service to a certain percentage of the population of their licensed
service areas within five, and in some cases, ten years of the initial
license grant. Failure to meet these construction deadlines may result in
forfeiture of the license.
- - Compliance with antenna structure and other technical requirements: PCS
systems are subject to certain Federal Aviation Administration regulations
with respect to location, lighting and construction of transmitter towers
and antennas and are subject to regulation under the National
Environmental Policy Act and environmental regulations of the FCC. The FCC
also mandates various technical parameters, and state or local zoning and
land use regulations also apply to wireless systems.
- - Transfers and assignments of PCS licenses: Subject to certain exceptions,
the FCC's approval must be obtained prior to assigning or transferring
control of a PCS license. Any acquisition or sale of licenses may also
require prior review by the Federal Trade Commission and the Department of
Justice if the transaction is over a certain size, as well as state or
local regulatory authorities having competent jurisdiction.
FCC rules restrict the voluntary assignment or transfer of control
of Designated Entity licenses. During the first five years of the license
term, assignments or transfers affecting control are permitted only to
assignees or transferees that meet the FCC's Designated Entity eligibility
criteria for holding such licenses. However, a licensee may assign or
transfer control of a Designated Entity license to a non-Designated Entity
within the five year restricted period if it has satisfied the first
construction benchmark for the license. Upon transfer or assignment of a
Designated Entity license to a non-Designated Entity during the initial
license term, any installment payment plans are accelerated, and during
the first five years of the initial license term, all or a portion of any
bidding credits received by the Designated Entity must be forfeited. The
FCC has authority to conduct random audits to ensure that licensees are in
compliance with the FCC's Designated Entity eligibility rules, and any
violations could result in license revocations, forfeitures or fines.
13
- - Relocation of microwave incumbents: The spectrum acquired by a PCS
licensee may be encumbered by the fixed microwave systems of existing
licensees. In order for the PCS licensees to operate their PCS systems,
they may need to relocate these incumbent microwave licensees to other
spectrum. The FCC has adopted transition and cost sharing plans to
facilitate the relocation of incumbents and to ensure that subsequent PCS
licensees that benefit from the earlier relocation by another carrier
share the cost of the relocation. The transition and cost sharing plans
expire on April 4, 2005, after which any remaining incumbents in the PCS
spectrum band will be responsible for their own relocation costs.
- - Foreign ownership: The Communications Act limits direct foreign ownership
in a FCC license to 20 percent. The Communications Act also mandates that
no more than 25 percent of a FCC licensee's capital stock may be
indirectly owned or voted by non-United States citizens or their
representatives, by a foreign government, or by a foreign corporation,
absent a FCC finding that a higher level of foreign ownership is not
inconsistent with the public interest. Indirect ownership in excess of 25
percent by persons or entities from countries that are signatories to the
World Trade Basic Telecom Organization Agreement are presumed to be in the
public interest. However, the FCC has the right to attach additional
conditions to a grant of authority, and, in the exceptional case in which
an application poses a very high risk to competition, to deny an
application. In connection with the T-Mobile merger, the FCC authorized
VoiceStream to have 100 percent indirect foreign ownership.
- - Enhanced 911: The FCC has established timetables for making emergency 911
services available by cellular, PCS, and other mobile service providers,
including enhanced 911 ("E911") services that provide the caller's
telephone number, location and other useful information. This requirement
extends to callers with speech or hearing disabilities; however, digital
wireless service providers need not be capable of transmitting 911 calls
from text type ("TTY") devices until June 30, 2002.
PCS is a type of commercial mobile radio service ("CMRS"). The FCC
requires CMRS carriers to adopt either a handset-based or network-based
approach for identifying the location of an E911 caller. CMRS carriers
have an ongoing obligation to comply with various accuracy standards and
implementation deadlines imposed by the FCC. In September 2000, the FCC
granted VoiceStream a limited waiver of such accuracy standards.
VoiceStream, by this waiver, is permitted to deploy a "hybrid" location
solution called Enhanced Observed Time Difference of Arrival ("EOTD"),
which combines both network-based and handset-based technologies, subject
to certain conditions. Pursuant to the waiver, VoiceStream must meet
various on-going deployment benchmarks by specific dates and must have a
95 percent penetration of location capable handsets among its subscribers
by the end of 2005. VoiceStream is currently seeking approval from the FCC
for a limited modification of those interim deployment benchmark dates.
- - Local Exchange Carriers/CMRS interconnection: FCC rules require LECs to
provide CMRS carriers interconnection within a reasonable time after it is
requested, unless such interconnection is not technically feasible or not
economically reasonable. Interconnection allows the completion of calls
between wireless and wireline phones. CMRS providers are entitled to
reciprocal compensation arrangements with LECs, in which CMRS providers
can collect the same charges for terminating wireline-to-wireless traffic
on their systems that the LECs charge for terminating wireless-to-wireline
calls, and prohibits LECs from charging CMRS providers for terminating
LEC-originated traffic. There is an on-going FCC rulemaking proceeding to
reexamine all of its currently regulated forms of intercarrier
compensation, including the existing reciprocal compensation mechanism for
LEC-CMRS interconnection, which may result in substantial modification of
the FCC's interconnection rules, and may materially affect our business.
The impact of such modifications cannot be determined until the FCC issues
its decision in this proceeding.
- - Universal service: The goal of universal service is to ensure the
provision of basic and enhanced telecommunications services to all areas
in the United States, including high-cost and low-income areas. Wireless
service providers are eligible to receive universal service subsidies, but
also are required to contribute to both federal and state universal
service funds. For the fourth quarter of 2001, the FCC's universal service
contribution factor amounted to 6.9 percent of interstate and
international telecommunications revenues. Many states are also developing
state universal service fund programs to which CMRS carriers are required
to contribute.
14
- - Wireless local number portability: CMRS carriers must provide wireless
local number portability ("LNP"), which enables customers to migrate their
landline and cellular telephone numbers to a PCS carrier and from a PCS
carrier to another service provider. CMRS carriers are required to
implement LNP in the top 100 Metropolitan Statistical Areas by November
24, 2002. The FCC is currently considering a petition filed by another
carrier that seeks permanent forbearance for CMRS carriers from LNP.
- - CALEA: The Communications Assistance for Law Enforcement Act ("CALEA")
requires telecommunications carriers to ensure that their facilities are
technically capable of assisting law enforcement officials' use of
wiretaps and like devices to intercept or isolate customer communications.
Although all CMRS carriers must comply with CALEA, the FCC has temporarily
suspended some of its CALEA related rules because of a decision by the
Court of Appeals for the District of Columbia questioning the adequacy of
those rules.
- - CMRS automatic roaming: The FCC is currently considering whether it should
adopt "automatic" roaming rules for CMRS carriers and phase out the
current "manual" roaming requirement. Manual roaming requires the customer
to take additional action to establish a contractual relationship with a
host carrier to carry a call that is placed outside the customer's home
area. Most wireless carriers have already entered into voluntary automatic
roaming agreements with other carriers so that their customers do not have
to take such additional steps. The FCC has not yet issued a decision on
this matter.
- - Health effects of wireless handsets, wireless data devices and cell sites:
Media reports have suggested that radio frequency emissions from handsets,
wireless data devices and cell sites may raise various health concerns,
including cancer, and may interfere with various electronic medical
devices, including hearing aids and pacemakers. Research and studies are
ongoing. Whether or not such research or studies conclude there is a link
between radio frequency emissions and health, these concerns over radio
frequency emissions may discourage the use of handsets and wireless data
devices and may result in significant restrictions on the location and
operation of cell sites, all of which could have a material adverse effect
on VoiceStream's results of operations. VoiceStream is also subject to
current, and potential future, litigation relating to these health
concerns. Several class action lawsuits have been filed against
VoiceStream, several other wireless service operators and several wireless
phone manufacturers, asserting product liability, breach of warranty and
other claims relating to radio frequency transmissions to and from
handsets and wireless data devices. The complaints seek substantial
monetary damages as well as injunctive relief. The defense of these
lawsuits may divert our management's attention, and we may be required to
pay significant awards or settlements, and may incur significant expenses
in defending these lawsuits.
VoiceStream may be subject to potential litigation relating to the
use of handsets and wireless data devices while driving. Some studies have
indicated that using these devices while driving may impair drivers'
attention. Litigation relating to accidents, deaths or serious bodily
injuries allegedly incurred as a result of use of these devices by a
driver could result in significant monetary damages awards and adverse
publicity.
Legislation regarding the use of handsets and wireless data devices
while driving may adversely affect us. Legislation has been proposed in
the United States Congress and many state and local legislative bodies to
restrict or prohibit the use of wireless phones while driving motor
vehicles. To date, the State of New York and a small number of localities
in the United States have passed such laws, and similar laws have been
enacted in other countries. These laws, or if passed, other laws
prohibiting or restricting the use of wireless phones while driving, could
reduce sales, usage and revenues, any or all of which could have a
material adverse effect on our operations.
15
- - Regulation on the state and local level: Although the Acts generally
preempt state and local governments from regulating the entry of, or the
rates charged by, wireless carriers, some state public service commissions
have taken action to regulate other aspects of wireless operations,
including customer billing, termination of service arrangements,
advertising, the filing of "informational" tariffs and certification of
operations. At the local level, wireless facilities typically are also
subject to zoning and land use regulation, and may be subject to fees for
use of public rights-of-way.
- - NextWave litigation: On January 26, 2001, upon completion of the FCC's
Auction 35 bid process, we were the high bidder on 19 PCS licenses with
bids totaling $482.7 million. Additionally, CIVS V, a Designated Entity in
which we hold a non-controlling ownership interest, was the high bidder on
22 PCS licenses with bids totaling $506.4 million. Certain of these
licenses have been granted. 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 PCS Limited
Partnership, both of which had declared bankruptcy. 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, have prevented the grant of these
licenses to the high bidders. The FCC, Nextwave and major auction
participants had been pursuing a settlement that would result in a grant
of these licenses to the high bidders; however, the settlement discussions
have been suspended, and the status of any settlement and when or if the
Auction 35 high bidders will receive the remaining licenses are uncertain.
- - Leasing of spectrum: The FCC initiated a proceeding in late 2000 examining
whether it should allow the leasing of spectrum to third parties either on
a temporary or long-term basis to ease the current spectrum shortage faced
by many carriers. The FCC's proposal would allow certain wireless
licensees to enter into a variety of arrangements with third parties
without the FCC's prior approval for assigning or transferring control of
a license. The FCC has not yet issued a decision on this matter.
EMPLOYEES AND LABOR RELATIONS
We consider our labor relations to be good. None of our employees are
covered by collective bargaining agreements.
As of January 31, 2002, we had a total of 17,796 employees working in the
following areas:
NUMBER OF
CATEGORY EMPLOYEES
-------- ------------
Sales and marketing ................................... 4,582
Engineering and network operations .................... 2,139
General and administration ............................ 688
Headquarters and customer service ..................... 10,387
------------
17,796
============
This includes former employees of Powertel which became VoiceStream
employees in 2001. Of these employees, 2,242 perform services exclusively
for Powertel, and their compensation and benefit costs are being charged
directly to Powertel.
16
ITEM 2. PROPERTIES
We operate 540 retail stores, including 110 Powertel stores, all of which
are leased. The leases expire between February 2002 and February 2012.
We operate 15,453 microwave, cell and switching equipment sites, including
2,235 Powertel sites. The majority of our sites are leased for an initial
five-year period, with renewal options for up to five additional five-year
periods.
Our corporate headquarters consists of leased office space in three
buildings in Bellevue, Washington, occupying 344,435 combined square feet. The
leases expire between May 2005 and October 2010.
We maintain 12 customer service centers occupying over 425,000 combined
square feet in leased premises located in the following cities, one of which is
maintained by Powertel:
Albuquerque, NM Bethlehem, PA
Bellingham, WA Fort Lauderdale, FL
Salem, OR Lenexa, KS
Wichita, KS Tampa, FL
Colorado Springs, CO Thorton, CO
Nashville, TN Jacksonville, FL
The leases expire between February 2004 and January 2017.
We lease or own 63 sales and administrative offices and five locations for
inventory storage and distribution, including 11 offices and inventory storage
and distribution locations owned or leased by Powertel. The leases expire
between February 2002 and January 2010.
ITEM 3. LEGAL PROCEEDINGS
Except as referenced in the next sentence, there are no material, pending
legal proceedings to which we or our affiliates is a party or of which any of
our or their property is subject which, if adversely decided, would have a
material adverse effect on our financial position, results of operations or cash
flows. For discussion of certain legal proceedings relating to FCC license
grants, see "Item 1. Business -- Governmental Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(Omitted pursuant to General Instruction I (2).)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(Omitted pursuant to General Instruction I (2).)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Omitted pursuant to General Instruction I (2).)
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Abbreviated pursuant to General Instruction I (2). As a result, all
comparisons presented are full year 2001 to full year 2000 results unless
otherwise indicated.)
The following discussion and analysis is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our
financial statements requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses, and assets and liabilities
during the periods reported. Estimates are used when accounting for certain
items such as unbilled revenues, allowance for doubtful accounts, sales and
marketing programs and incentives, employee compensation programs, depreciation
and amortization periods, taxes, inventory values, and valuations of investments
and intangible assets. We base our estimates on historical experience, where
applicable, and other assumptions that we believe are reasonable under the
circumstances. Actual results may differ from our estimates due to changing
conditions or the validity of our assumptions.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize service revenues based upon minutes of use
processed and contracted fees, net of credits and adjustments for service
discounts. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We base
our estimates on the aging of our accounts receivable balances and our
historical write-off experience, net of recoveries. If the financial condition
of our customers were to deteriorate, actual write-offs may be higher than
expected. We record accruals associated with sales and marketing promotions and
incentives. These accruals are based primarily on historical take-rates of
similar promotions or offers. When recording depreciation expense associated
with our wireless communications equipment, we use estimated useful lives. As a
result of changes in technology and industry conditions, we periodically
evaluate the useful lives of our wireless communications equipment. These
evaluations could result in a change in useful lives in future periods. We hold
non-controlling investments in several entities for which we apply the equity or
cost method of accounting. We record impairments associated with these
investments when we determine that the market value of the investment is below
our net book value and the decline is deemed to be other than temporary.
Volatility in market prices of these investments, or poor operating performance
of these entities could result in the future values of these investments
declining below our carrying value.
OVERVIEW
We provide PCS services using GSM technology primarily in urban markets in
the United States through the ownership and operation of PCS licenses and
through contractual relationships with entities in which we have non-controlling
ownership interests that own and operate similar licenses. Certain centralized
costs are incurred by VoiceStream and are allocated to Powertel, a subsidiary of
T-Mobile. Such allocations include the costs of customer service operations,
accounting and other administrative functions. These costs are allocated to the
respective operational units in a manner that reflects the relative time and
associated costs devoted to each of the operational units.
The following discussion highlights the key events in the periods covered
by these financial statements:
On February 25, 2000, pursuant to a reorganization agreement approved by
the shareholders of VS Washington and 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. On December 14, 2000,
we acquired controlling interests in VS PCS, VS GSM, VS GSM II and VS GSM III.
On February 14, 2001, we acquired the remaining minority interests in VS PCS and
VS GSM. The operations of these entities are included in our results of
operations subsequent to the closing date of the respective acquisitions.
18
On May 31, 2001, Deutsche Telekom acquired 100% of the common shares of
VoiceStream in a transaction that qualified as a tax-free reorganization.
Following the closing of the merger, Deutsche Telekom transferred all of its
VoiceStream shares to T-Mobile (referred to herein as the "T-Mobile merger").
T-Mobile is a wholly-owned subsidiary of Deutsche Telekom and is the holding
company for Deutsche Telekom's principal GSM wireless operations in Europe and
the United States.
The T-Mobile merger was accounted for as a purchase business combination
and resulted in adjustment of the basis of our assets, liabilities and
shareholders' 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 year ended December 31,
2001 are presented as two distinct periods, the five months prior to the merger,
and the period from June 1, 2001 to December 31, 2001, subsequent to the merger.
The following discussion and analysis refers to the results and activities for
the year ended December 31, 2001. Where necessary, we have provided explanations
to improve comparability between the pre-merger and post-merger activity.
For further discussion of our business, see Item 1.
Operating markets
We commenced operations in 1996 in various markets in the western United
States and have expanded operations through the addition of numerous new markets
in subsequent years. Through the Omnipoint, Aerial and CIRI Designated Entity
acquisitions, we have added operational markets at varying stages of maturity
and have converted the former Omnipoint and Aerial markets to the VoiceStream
brand and otherwise integrated the operations of the acquired businesses. Due to
these factors, revenues and expenses recognized during any period may not be
comparable to other periods and may not be representative of future operations.
19
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The following table sets forth certain financial data as it relates to our
operations (dollars in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2001 (1) 2000 CHANGE % CHANGE
------------ ------------ ------------ ------------
Revenues:
Subscriber revenues ............... $ 2,346,471 $ 1,172,748 $ 1,173,723 100.1%
Prepaid revenues .................. 404,109 237,079 167,030 70.5%
Roamer revenues ................... 175,229 110,245 64,984 58.9%
Equipment sales ................... 386,559 281,130 105,429 37.5%
Affiliate and other revenues ...... 66,933 133,871 (66,938) (50.0%)
------------ ------------ ------------ ------------
Total revenues ................. 3,379,301 1,935,073 1,444,228 74.6%
------------ ------------ ------------ ------------
Operating expenses:
Cost of service ................... 757,705 526,493 231,212 43.9%
Cost of equipment sales ........... 739,337 513,955 225,382 43.9%
General and administrative ........ 1,137,408 689,994 447,414 64.8%
Sales and marketing ............... 1,242,012 796,272 445,740 56.0%
Depreciation and amortization ..... 2,091,345 810,827 1,280,518 157.9%
Stock-based compensation .......... 12,080 51,029 (38,949) (76.3%)
------------ ------------ ------------ ------------
Total operating expenses ....... 5,979,887 3,388,570 2,591,317 76.5%
------------ ------------ ------------ ------------
Operating Loss ...................... (2,600,586) (1,453,497) (1,147,089) 78.9%
Other income (expense) .............. (600,947) (628,357) 27,410 (4.4%)
Income tax benefit .................. 587,831 -- 587,831 100.0%
------------ ------------ ------------ ------------
Net loss ............................ $ (2,613,702) $ (2,081,854) $ (531,848) 25.5%
============ ============ ============ ============
Adjusted EBITDA ..................... $ (497,161) $ (591,641) $ 94,480 (16.0%)
============ ============ ============ ============
Cash flows provided by (used in):
Operating activities .............. $ (895,154) $ (1,214,426) $ 319,272 (26.3%)
============ ============ ============ ============
Investing activities .............. $ (1,065,734) $ (4,073,661) $ 3,007,927 (73.8%)
============ ============ ============ ============
Financing activities .............. $ 805,992 $ 6,207,550 $ (5,401,558) (87.0%)
============ ============ ============ ============
Other Data:
Licensed population ................. 237,894,000 230,803,000 7,091,000 3.07%
Covered population .................. 133,500,000 107,601,000 25,899,000 24.07%
Subscribers/Users:
Post pay subscribers ................ 4,557,900 2,908,000 1,649,900 56.7%
Prepaid users ....................... 1,261,100 971,000 290,100 29.9%
- -----------
(1) Reflects the combination of results for the five months ended May 31, 2001
and the seven months ended December 31, 2001.
REVENUES
The overall $1.4 billion (92%) increase in service revenues (subscriber,
prepaid and roamer revenues) to $2.9 billion in 2001 is due primarily to
internal growth in both existing VoiceStream markets and the markets obtained
through 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. The increase is also due to the launch of several new markets
in the central United States, including Chicago, in 2001.
20
Post pay service revenues increased $1.2 billion (100.1%) to $2.3 billion
in 2001. The increase is primarily the result of growth in our post pay
subscriber base from 2,908,000 at December 31, 2000 to 4,557,900 at December 31,
2001. This net increase of 1,649,900 subscribers in 2001, due almost entirely to
internal growth, compares to 2,062,300 subscribers added during 2000, of which
757,000 were from the acquisitions noted above. The high rate of post pay
subscriber growth is attributable primarily to our competitive rate plan
offerings and the success of our advertising campaigns.
Prepaid service revenues increased $167.0 million (70.5%) to $404.1
million in 2001. Our prepaid customers grew to 1,261,100 at December 31, 2001
from 971,000 at December 31, 2000. There were 290,100 prepaid customers added
net during 2001, none of which were from acquisitions, compared to 961,300 net
additions during 2000, of which 714,200 were from acquisitions. The lower rate
of growth in prepaid customers reflects our business strategy that emphasizes
post pay subscriber growth.
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
subscriber growth throughout all of our markets. As a result of our merger with
T-Mobile, we are leveraging the success of our "Get More" marketing strategy in
the United States to introduce "Global Wireless by T-Mobile" as part of the
VoiceStream brand logo. We plan to phase out the VoiceStream brand name by the
end of 2002, forming a cohesive international wireless brand using the T-Mobile
name. We believe the continued use of our "Get More" strategy, combined with the
introduction and use of the global T-Mobile brand, will positively affect our
subscriber growth.
Total service revenue per average customer ("ARPU") was $50.17 in 2001, as
compared to $49.30 in 2000. The increase in ARPU in 2001, as compared to 2000,
is largely due to the increase in the proportion of post pay subscribers in the
customer base from 75.0% at December 31, 2000 to 78.3% at December 31, 2001.
Post pay ARPU increased from $49.53 in 2000 to $52.23 in 2001 as a result of
certain high ARPU eastern markets representing a higher proportion of revenues
and subscribers in 2001, while prepaid ARPU decreased from $33.12 in 2000 to
$30.17 in 2001 due to additional competition in the prepaid market.
Roamer revenues increased $65.0 million (58.9%) to $175.2 million in 2001.
The increase is primarily due to the expansion of our network and new market
launches which expanded our coverage area in 2001, relative to 2000.
Equipment sales increased $105.4 million (37.5%) to $386.6 million in
2001. The increase is primarily due to subscriber growth in 2001, partially
offset by lower revenue per unit as a result of competitive pricing primarily
during the third and fourth quarters of 2001.
Affiliate and other revenues decreased $66.9 million (50.0%) to $66.9
million in 2001. This revenue is primarily related to technical service
agreements and reciprocal wholesale 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 hold an interest in only one such unconsolidated entity
during 2001, as compared to four during most of 2000, prior to our acquisition
of the controlling interests in December 2000.
21
OPERATING EXPENSES
Cost of service expenses represent network operating expenses incurred in
operational markets including the cost of interconnection with LEC facilities,
direct cell site costs (property taxes, insurance, site lease, utilities, and
repair and maintenance expenses), third party roaming costs and long distance
toll costs. The increase of $231.2 million (43.9%) to $757.7 million in 2001, is
primarily due to the geographic expansion of our network and increases in
network capacity to service our growing customer base. Cost of service as a
percentage of service revenues decreased to 25.9% in 2001 from 34.6% in 2000,
primarily due to a decrease in fees related to the technical service agreements
and reciprocal wholesale agreements, as discussed above, with certain
unconsolidated CIRI Designated Entities. Excluding these fees, cost of service
as a percentage of service revenues was 24.5% and 25.6% in 2001 and 2000,
respectively, reflecting efficiencies gained from the growing subscriber base.
While cost of service expenses are expected to increase due to continuing growth
in our subscriber base, we expect cost of service as a percentage of service
revenues to generally trend downward as more subscribers are added in newly
launched markets and greater economies of scale are realized.
Cost of equipment sales increased $225.4 million (43.9%) to $739.3 million
in 2001 primarily due to the increase in the number of handsets and wireless
data devices sold. The volume increase correlates with the growth in our
customer base. Although customers generally are responsible for purchasing or
otherwise obtaining their own handsets or wireless data devices, we sell this
equipment below cost to respond to competition for new customers. We expect
these subsidies to remain common industry practice for the foreseeable future.
General and administrative expenses increased $447.4 million (64.8%) to
$1.1 billion in 2001. On a per average customer per month basis, general and
administrative expenses decreased to $19.50 in 2001 from $22.38 in 2000. The
decrease in 2001 is primarily attributable to improved economies of scale
realized in our administrative functions following the integration of Omnipoint
and Aerial and reductions in the costs associated with integrating the acquired
companies. While general and administrative expenses are expected to increase
due to continuing growth in customers, we expect the cost per customer to
continue trending downward as greater economies of scale are realized.
Sales and marketing costs increased $445.7 million (56.0%) to $1.2 billion
in 2001. This increase is attributable to greater sales commissions and other
compensation costs associated with our continued subscriber growth, together
with additional advertising and other promotional expenses to launch new
markets, including Chicago, which is our largest market launch to date. Sales
and marketing costs per customer added, commonly referred to as Cost per Gross
Add ("CPGA"), which includes the loss on equipment sales, totaled $344 in 2001,
as compared to $370 in 2000. CPGA has been on a downward trend since 1998 with
the current year decline reflecting the economies of marketing on a national
scale. The current year decline also reflects the absence in 2001 of significant
brand conversion costs related to the companies acquired in 2000. Sales and
marketing cost per net customer added, including the loss on equipment sales,
was $833 in 2001, as compared to $660 in 2000. The increase in 2001 is largely
due to higher customer turnover, especially with respect to our prepaid
customers.
Depreciation and amortization expense increased $1.3 billion (157.9%) to
$2.1 billion in 2001. This increase is primarily due to amortization expense
related to the fair value adjustments related to the T-Mobile merger, which
increased the recorded value of our intangible assets, including licenses,
goodwill, tradename and subscriber list on June 1, 2001. 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 upward due to our
increasing asset base arising from acquisitions and capital expenditures related
to the on-going expansion of our wireless network.
22
Stock-based compensation expense decreased $38.9 million (76.3%) to $12.1
million in 2001. The 2000 expense included $35.4 million for restricted stock
granted to certain executive officers of VoiceStream at the time the Deutsche
Telekom merger agreement was signed. These restricted stock grants were
contingent on the achievement of certain corporate performance goals and were
fully earned and expensed in 2000. In 2001, a non-cash accrual for stock-based
compensation of $44.6 million was established to record the fair value of
unvested stock options assumed in the T-Mobile merger. Compensation related to
these options is being amortized over the remaining vesting period. As of
December 31, 2001, $35.9 million of deferred compensation remains unamortized.
ADJUSTED EBITDA
Adjusted EBITDA represents operating loss before depreciation,
amortization and non-cash stock-based compensation. We believe Adjusted EBITDA
provides meaningful additional information on our operating results, 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 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 $94.5 million (16.0%) to $497.2 million in
2001. The Adjusted EBITDA loss for 2001 includes $73.2 million in retention and
bonus expenses related to the T-Mobile merger. Adjusted EBITDA loss as a
percentage of revenue fell to 14.7% in 2001 including the merger related
retention and bonus expenses, and 12.5% excluding those expenses, compared to
30.6% in 2000. The decrease in Adjusted EBITDA loss in 2001 is due to several
factors including economies of scale, reduced costs associated with the
integration of acquired companies and the earnings leverage achieved as the
number of new customers added becomes proportionately smaller relative to the
greater size of our customer base. This last factor results in sales and
marketing costs growing at a lower rate than revenues, reducing the Adjusted
EBITDA loss.
The following table reconciles our Adjusted EBITDA loss as discussed
above, to our net loss (dollars in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000
------------ ------------
Adjusted EBITDA loss................. $ (497,161) $ (591,641)
Depreciation and amortization...... (2,091,345) (810,827)
Stock-based compensation........... (12,080) (51,029)
Other income (expense)............. (600,947) (628,357)
Income tax benefit................. 587,831 --
------------ ------------
Net loss............................. $ (2,613,702) $ (2,081,854)
============ ============
OTHER INCOME (EXPENSE) AND NET OPERATING LOSS CARRYFORWARDS
Interest and financing expense, net of capitalized interest, decreased
$28.6 million (6.0%) to $449.0 million in 2001, primarily due to a decrease in
the average interest rate of our debt in the second half of 2001, as we replaced
third party debt with notes payable to Deutsche Telekom bearing interest at
lower rates. The weighted average effective interest rate, before capitalized
interest, was 7.9% in 2001, as compared to 10.4% in 2000.
23
Included in other income (expense) in 2001 is $120.4 million of costs to
complete the T-Mobile merger. Also included in other income (expense) is equity
in net losses of unconsolidated affiliates, which decreased $126.0 million
(54.0%) to $107.5 million in 2001. Equity in net losses of unconsolidated
affiliates decreased because we have an interest in only one unconsolidated CIRI
Designated Entity in 2001, as compared to four during 2000, partially offset by
an increase in losses related to our investment in Microcell during 2001.
We had approximately $8 billion of net operating loss carryforwards
("NOLs") at December 31, 2001, which expire between 2008 and 2021. As a result
of the T-Mobile merger, our FCC licenses were recorded at fair value giving rise
to a deferred tax liability of $4.2 billion. An income tax benefit of $587.8
million has been recorded in 2001 due to the net deferred tax liability
position. Prior to the T-Mobile merger, management believed that available
objective evidence created sufficient uncertainty regarding the realization of
the net deferred tax assets. Accordingly, a valuation allowance had been
provided for our net deferred tax assets through May 31, 2001. Our ability to
utilize the NOLs in any given year may be limited by certain events, including a
significant change in ownership interest.
NET LOSS
Our net loss increased $531.8 million (25.5%) to $2.6 billion in 2001. The
increase in 2001 is due to increases in the recorded cost basis of our goodwill,
licenses and other intangible assets and the related amortization expenses
associated with the T-Mobile merger, together with the costs of completing the
merger. These expense increases are partially offset by a $587.8 million income
tax benefit related to the differences between the financial statement and tax
bases of our assets following the T-Mobile merger. The net loss in 2000 was
driven primarily by the cost of high customer growth as well as the costs
associated with the Omnipoint and Aerial mergers and the launch of our "Get
More" marketing strategy in those markets.
CAPITAL EXPENDITURES
Capital expenditures increased $51.2 million (3.6%) to $1.5 billion in
2001 primarily for the continued build-out of our wireless network, including
the Chicago market, which was launched on May 1, 2001. We expect to make
significant additional capital expenditures in 2002, directly and through
joint ventures in which we hold interests, for license purchases, coverage and
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 our future funding requirements will be provided by
our parent company T-Mobile, Deutsche Telekom or its affiliates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("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 after December 31, 2001. 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. We expect the impact on 2002
net loss associated with the discontinuation of goodwill amortization to be a
pre-tax reduction of the loss of $1.1 billion. We have not completed our initial
assessment of goodwill impairment. Upon adoption of this standard, any resulting
impairment charges recorded may have a material impact on our results of
operations. In connection with the upcoming implementation of SFAS No. 142,
discussions are currently underway among a number of the major United States
wireless carriers and the SEC regarding whether FCC wireless spectrum licenses
represent indefinite lived assets subject to the provisions of SFAS No. 142.
While there are some indications that treating licenses as indefinite lived
assets may be appropriate, a number of related issues are being explored
including how testing for impairment would be conducted. The outcome of these
discussions is uncertain at this time as is the potential impact on our future
results of operations.
24
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement provides accounting and reporting
standards for recognizing the cost associated with obligations related to 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 to be capitalized as part of the carrying amount of the
long-lived asset and expensed using a systematic and rational method over the
asset's 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. Based on our initial assessment, we do not expect the adoption
of this statement to have a significant impact on our financial condition or
results of operations.
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 No.
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 of
goodwill is not included in the scope of SFAS No. 144 and will be treated in
accordance with SFAS No. 142. Under SFAS No. 144, long-lived assets are measured
at the lower of carrying amount or fair value less cost to sell. We are required
to adopt this statement no later than January 1, 2002. Based on our current
assessment, we do not expect the adoption of this statement to have a
significant impact on our financial condition or results of operations.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our discussion below provides information about our market sensitive
financial instruments and constitutes "forward looking statements", which
involve risks and uncertainties. Actual results could differ materially from
those projected in the forward looking statements.
All of our third-party long-term debt is fixed rate, and therefore we are
not affected by fluctuations in interest rates relative to this debt. We are,
however, subject to gains or losses resulting from changes in the fair value
of the fixed rate debt if we redeem debt before the maturity date. We have
approximately $1.7 billion of fixed rate debt with a weighted average interest
rate of 10.9%. We do not enter into derivative instrument transactions for
trading or speculative purposes. At December 31, 2001, we have $4.1 billion
in variable rate long-term debt payable to affiliates. A ten percent increase
in interest rates would cause approximately a $411.0 million increase in our
annual interest expense related to the affiliated debt.
The table below presents principal cash flows and the related average
interest rates by expected maturity dates for certain financial instruments
sensitive to interest rate fluctuations that we held at December 31, 2001
(dollars in thousands).
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
--------- --------- --------- --------- --------- ---------- --------- ---------
LIABILITIES
Long-term debt fixed rate.... $-- $-- $-- $-- $-- $1,736,037 $1,736,037 $1,823,243
Avg. interest rate........... -- -- -- -- -- 10.9% -- --
Long-term debt payable to
affiliate variable rate...... $-- $-- $-- $-- $-- $4,110,393 $4,110,393 NA
Avg. interest rate........... -- -- -- -- -- 6.4% -- --
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages F-1
through F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item regarding a change in accountants is
included in a Current Report on Form 8-K dated August 31, 2001.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(Omitted pursuant to General Instruction I (2).)
ITEM 11. EXECUTIVE COMPENSATION
(Omitted pursuant to General Instruction I (2).)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Omitted pursuant to General Instruction I (2).)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Omitted pursuant to General Instruction I (2).)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) Financial Statements and Financial Statement Schedules
The financial statements and schedule listed in the Index to
Consolidated Financial Statements on page F-1, which is incorporated
herein by reference, are filed as part of this Form 10-K.
(2) Exhibits
The following documents are filed as part of this report:
- --------------------------------------------------------------------------------
Exhibit
Numbers Description
- --------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Bega,
Inc. (became Amended and Restated Certificate of Incorporation
of VoiceStream as a result of the T-Mobile merger)
(incorporated herein by reference to Exhibit 3.1 of
VoiceStream Wireless Corporation's Form 10-Q filed for the
quarter ended June 30, 2001).
- --------------------------------------------------------------------------------
3.2 Amended and Restated Bylaws of Bega, Inc. (became Amended and
Restated Bylaws of VoiceStream as a result of the T-Mobile
merger) (incorporated herein by reference to Exhibit 3.2 of
VoiceStream Wireless Corporation's Form 10-Q filed for the
quarter ended June 30, 2001).
- --------------------------------------------------------------------------------
4.1 Certificate of Designation for the VoiceStream Convertible
Voting Preferred Stock (incorporated herein by reference to
Exhibit 4.1 to VoiceStream Wireless Corporation's Current
Report on Form 8-K (File No. 000-29667), dated October 11,
2000).
- --------------------------------------------------------------------------------
4.2 Indenture dated as of November 9, 1999 between VoiceStream
Wireless Corporation and Harris Trust, as Trustee, relating to
the 10 and 3/8% Senior Discount Notes Due 2009 of VoiceStream
Wireless Corporation.
- --------------------------------------------------------------------------------
4.3 Indenture dated as of November 9, 1999 between VoiceStream
Wireless Corporation and Harris Trust, as Trustee, relating to
the 11 and 7/8% Senior Discount Notes Due 2009 of VoiceStream
Wireless Corporation.
- --------------------------------------------------------------------------------
4.4 Form of Indenture between VoiceStream Wireless Corporation and
HSBC Bank USA, as Trustee, relating to the 11 and 1/2 % Senior
Notes Due 2009 of VoiceStream Wireless Corporation (incorporated
herein by reference to Exhibit 4.1 to Registration Statement on
Form S-4, File No. 333-34438, filed on April 10, 2000).
- --------------------------------------------------------------------------------
(B) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter ended
December 31, 2001.
27
PAGE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VOICESTREAM WIRELESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
----
Reports of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000......................... F-5
Consolidated Statements of Operations for the period from January 1, 2001
through May 31, 2001, the period from June 1, 2001 through December 31, 2001
and the years ended December 31, 2000 and 1999. ................................. F-6
Consolidated Statements of Shareholders' Equity for the period from January 1,
2001 through May 31, 2001, the period from June 1, 2001 through December 31,
2001 and the years ended December 31, 2000 and 1999...... ....................... F-7
Consolidated Statements of Cash Flows for the period from January 1, 2001
through May 31, 2001, the period from June 1, 2001 through December 31, 2001
and the years ended December 31, 2000 and 1999................................... F-8
Notes to Consolidated Financial Statements........................................... F-9
Financial Statement Schedule II - Valuation and Qualifying Accounts.................. F-28
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Voicestream Wireless Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Voicestream Wireless Corporation and its subsidiaries (the
"Company") at December 31, 2001, and the results of their operations, cash flows
and stockholders' equity for the period from June 1, 2001 through December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America. In addition, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. The financial
statements of Voicestream Wireless Corporation for the years ended December 31,
2000 and 1999 were audited by other independent accountants whose report dated
February 7, 2001 expressed an unqualified opinion on those statements.
As discussed in Note 2, effective May 31, 2001, the Company was acquired
and adopted a new basis of accounting whereby all assets and liabilities were
adjusted to their estimated fair values. Accordingly, the consolidated financial
statements for periods prior to May 31, 2001 are not comparable to consolidated
financial statements presented on or subsequent to May 31, 2001.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
January 18, 2002
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Voicestream Wireless Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the results of
operations, cash flows and stockholders' equity of Voicestream Wireless
Corporation and its subsidiaries (the "Company") for the period from January 1,
2001 through May 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. In addition, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. The financial
statements of Voicestream Wireless Corporation for the years ended December 31,
2000 and 1999 were audited by other independent accountants whose report dated
February 7, 2001 expressed an unqualified opinion on those statements.
As discussed in Note 2, effective May 31, 2001, the Company was acquired
and adopted a new basis of accounting whereby all assets and liabilities were
adjusted to their estimated fair values. Accordingly, the consolidated financial
statements for periods prior to May 31, 2001 are not comparable to consolidated
financial statements presented on or subsequent to May 31, 2001.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
January 18, 2002
F-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VoiceStream Wireless Corporation:
We have audited the accompanying consolidated balance sheet of VoiceStream
Wireless Corporation (a Delaware corporation) and subsidiaries as of December
31, 2000 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We 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 VoiceStream Wireless
Corporation and subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
February 7, 2001
F-4
VOICESTREAM WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
AS OF DECEMBER 31,
-------------------------------
2001 | 2000
------------- | -------------
|
ASSETS |
|
Current assets: |
Cash and cash equivalents ............................................... $ -- | $ 1,154,896
Short-term investments .................................................. -- | 1,175,636
Accounts receivable, net of allowance for doubtful accounts |
of $119,794 and $100,600, respectively .............................. 602,767 | 469,475
Inventory ............................................................... 153,432 | 340,284
FCC license deposits and other current assets ........................... 308,528 | 223,634
------------- | -------------
Total current assets .............................................. 1,064,727 | 3,363,925
|
Property and equipment, net of accumulated depreciation of |
$384,372 and $740,956, respectively ..................................... 3,390,103 | 3,467,550
Goodwill, net of accumulated amortization of $488,529 and |
$348,575, respectively .................................................. 16,265,790 | 9,075,605
Licensing costs and other intangible assets, net of accumulated |
amortization of $632,400 and $118,923, respectively ..................... 19,487,269 | 3,827,317
Investments in and advances to unconsolidated affiliates ..................... 994,976 | 498,869
Other assets and investments ................................................. 37,055 | 44,477
------------- | -------------
$ 41,239,920 | $ 20,277,743
============= | =============
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
Current liabilities: |
Accounts payable ........................................................ $ 198,530 | $ 150,632
Accrued liabilities ..................................................... 647,590 | 404,621
Deferred revenue ........................................................ 75,996 | 60,272
Construction accounts payable ........................................... 348,600 | 207,462
Current portion of long-term debt ....................................... -- | 32,113