-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VrQX0qv7hz8WBV9U6tGZAN4ovFYzkDp1pq6FtdMc8pwSbWjVrpGeTuokllbfquoC v8d7wYnFy6Fhny4zdDQUFQ== 0000891020-99-000664.txt : 19990414 0000891020-99-000664.hdr.sgml : 19990414 ACCESSION NUMBER: 0000891020-99-000664 CONFORMED SUBMISSION TYPE: DEFM14C PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN WIRELESS CORP CENTRAL INDEX KEY: 0000930738 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 911638901 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEFM14C SEC ACT: SEC FILE NUMBER: 000-28160 FILM NUMBER: 99592856 BUSINESS ADDRESS: STREET 1: 3650 131 ST AVENUE SE STREET 2: SUITE 400 CITY: BELLEVUE STATE: WA ZIP: 98006 BUSINESS PHONE: 4255868700 MAIL ADDRESS: STREET 1: 2001 NW SAMMAMISH RD CITY: ISSAQUAH STATE: WA ZIP: 98027 DEFM14C 1 DEFINITIVE INFORMATION STATEMENT 1 SCHEDULE 14C INFORMATION Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934 Check the appropriate box: / / Preliminary Information Statement / / Confidential, for Use of the Commission /X/ Definitive Information Statement Only (as permitted by Rule 14c-5(d)(2))
Western Wireless Corporation ---------------------------------------------------------------------- (Name of Registrant As Specified in Charter) Payment of Filing Fee (Check the appropriate box): / / No fee required. /X/ Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11. (1) Title of each class of securities to which transaction applies: Class A Common Stock, no par value ---------------------------------------------------------------------- Class B Common Stock, no par value ---------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: 76,531,259 ---------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): $4.05 -- this amount is based on the book par value per share of VoiceStream Common Stock at December 31, 1998 and on an estimated 95,541,623 shares of VoiceStream Common Stock issuable in the Spin-off described herein ---------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: $386,630,000 ---------------------------------------------------------------------- (5) Total fee paid: $77,326 ---------------------------------------------------------------------- /X/ Fee paid previously with preliminary materials / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ---------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ---------------------------------------------------------------------- (3) Filing Party: ---------------------------------------------------------------------- (4) Date Filed: ---------------------------------------------------------------------- 2 Western Wireless Logo VoiceStream Logo (80.1% SUBSIDIARY OF WESTERN WIRELESS CORPORATION) INFORMATION STATEMENT SPIN-OFF OF VOICESTREAM WIRELESS CORPORATION We are sending this Information Statement to you and all other holders of Western Wireless common stock in connection with the "spin-off" of our 80.1% subsidiary, VoiceStream Wireless Corporation. As part of the spin-off, we will distribute to you one share of VoiceStream common stock for each share of Western Wireless common stock (Class A or Class B) that you own at the time of the spin-off. We expect the spin-off to occur at 12:01 a.m. on May 3, 1999. After the spin-off, VoiceStream will be a separate company, no longer owned in any way by Western Wireless. Should you have any questions regarding this Information Statement or the spin-off, please contact the Investor Relations Department, Western Wireless Corporation, 3650 131st Avenue S.E., Bellevue, Washington, 98006, at telephone number (425) 586-8700. In reviewing this Information Statement, you should note the following: - We are not asking you for a proxy, and we request that you do not send us a proxy. - In assessing the impact of the spin-off on you, as a Western Wireless shareholder, you should review the matters set forth under the caption "Risk Factors" beginning on page 4. - Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved our spin-off of VoiceStream. The Securities and Exchange Commission has not passed upon the fairness or merits of the spin-off of VoiceStream or upon the accuracy or adequacy of the information contained in this Information Statement. Please note that the Board of Directors of Western Wireless has unanimously approved the spin-off, as it believes that the spin-off is in the best interests of Western Wireless and its shareholders. You will not need to pay any consideration or surrender or exchange your Western Wireless common stock in order to receive your VoiceStream common stock. After the spin-off distribution, the VoiceStream common stock will be traded on the Nasdaq Stock Market under the symbol VSTR. The date of this Information Statement is April 12, 1999. We mailed this Information Statement to Western Wireless shareholders on or about April 12, 1999. 3 TABLE OF CONTENTS
PAGE ---- SUMMARY..................................................... 1 RISK FACTORS................................................ 4 THE SPIN-OFF OF VOICESTREAM WIRELESS CORPORATION............ 10 BUSINESSES OF WESTERN WIRELESS AND VOICESTREAM AFTER THE SPIN-OFF.................................................. 22 SELECTED VOICESTREAM CONSOLIDATED FINANCIAL DATA............ 40 HISTORICAL PER SHARE DATA................................... 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VOICESTREAM.................. 42 DESCRIPTION OF WESTERN WIRELESS AND VOICESTREAM CAPITAL STOCK..................................................... 50 VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............. 54 DOCUMENTS INCORPORATED BY REFERENCE......................... 59 ADDITIONAL INFORMATION...................................... 59 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
4 SUMMARY The following summary answers certain questions you may have with respect to Western Wireless' spin-off of VoiceStream and highlights selected information from this Information Statement that is important to you. We encourage you to read this entire Information Statement. Q: WHAT WILL HAPPEN IN THE SPIN-OFF? A: In the spin-off, Western Wireless will distribute to its shareholders its 80.1% interest in VoiceStream by distributing one share of VoiceStream common stock for each share of Western Wireless common stock (both Class A and Class B) owned by a shareholder. After the spin-off, VoiceStream will be a separate company, no longer owned in any way by Western Wireless. Q: WHAT IS VOICESTREAM WIRELESS CORPORATION? A: VoiceStream was formed by Western Wireless in 1994 to participate in Federal Communications Commission ("FCC") auctions of personal communications services ("PCS") licenses, and to construct PCS systems in the areas covered by the licenses acquired in the auctions. VoiceStream was a wholly owned subsidiary of Western Wireless until February 1998 when a subsidiary of Hutchison Whampoa Limited, a Hong Kong-based company, invested $248.4 million to purchase a 19.9% interest in VoiceStream. Presently, Western Wireless operates VoiceStream as a separate business. VoiceStream provides PCS services in urban markets in its licensed areas in the United States using its VoiceStream(R) brand name. VoiceStream maintains its own centralized management, back office functions and sales force and operates its own call center. Q: WHY ARE WE UNDERTAKING THE SPIN-OFF? A: Western Wireless and VoiceStream operate under different brand names in distinct segments of the wireless industry, having differences in their markets and capital requirements and requiring different business plans. Your Board of Directors believes that separating VoiceStream's urban-focused digital PCS business from Western Wireless' rural-focused cellular business will allow each company to more readily expand its business, as well as pursue strategies and focus on objectives appropriate to its business. For a more detailed discussion of our reasons for the spin-off, see p. 10. Please note that neither Western Wireless' business nor VoiceStream's business will substantially change as a result of the spin-off. Q: WHAT ARE THE PRINCIPAL DIFFERENCES BETWEEN WESTERN WIRELESS' CELLULAR BUSINESS AND VOICESTREAM'S PCS BUSINESS? A: Western Wireless' cellular business, which generally deploys analog technology, is operated in rural areas under the Cellular One(R) brand name pursuant to cellular licenses issued by the FCC to operate on a portion of the radio spectrum from 824 to 899 MHz. In contrast, VoiceStream's PCS business, which exclusively deploys digital technology, is operated in urban areas under the VoiceStream brand name pursuant to PCS licenses issued by the FCC to operate on a portion of the radio spectrum from 1850 to 1990 MHz. Although the basic service offerings of Western Wireless and VoiceStream are similar, VoiceStream's PCS services include features that are not generally available through Western Wireless' analog cellular services, such as data transmission to and from computers, advanced paging services and facsimile services. Q: WHAT WILL I RECEIVE IN THE SPIN-OFF? A: We are making a pro rata distribution to all holders of Class A and Class B Western Wireless common stock. Accordingly, for every one share of Western Wireless common stock (Class A or Class B) you own on the effective date of the spin-off, you will receive one share of VoiceStream common stock. Shortly after we complete the spin-off, holders of record will receive VoiceStream stock certificates which represent ownership in VoiceStream. 1 5 Q: DO I HAVE TO PAY FEDERAL INCOME TAXES ON THE RECEIPT OF VOICESTREAM COMMON STOCK? A: You will not pay any federal income taxes on receipt of your VoiceStream common stock. We have received from the Internal Revenue Service (the "IRS") a ruling that the spin-off will be tax-free to Western Wireless shareholders for U.S. federal income tax purposes. Q: WHERE WILL VOICESTREAM COMMON STOCK BE TRADED? A: VoiceStream common stock will be traded on the Nasdaq Stock Market. The symbol for VoiceStream common stock will be "VSTR." Western Wireless common stock will continue to be traded on the Nasdaq Stock Market under the symbol "WWCA." Q: WHEN WILL THE SPIN-OFF OCCUR? A: We intend to complete the spin-off on May 3, 1999, but it could be delayed. Q: WHAT WILL WESTERN WIRELESS' BUSINESS BE AFTER THE SPIN-OFF? A: Western Wireless will continue to own and operate rural cellular phone systems in 17 western states. As of December 31, 1998, Western Wireless had over 660,000 cellular subscribers under the Cellular One(R) brand name. Western Wireless will also continue to provide paging services in selected United States markets and to participate in numerous international telecommunications operations through joint ventures. Western Wireless is a Washington corporation. Its principal executive offices are located at 3650 131st Avenue S.E., Bellevue, Washington 98006, and its telephone number is (425) 586-8700. Q: WHAT WILL VOICESTREAM'S BUSINESS BE AFTER THE SPIN-OFF? A: VoiceStream will be a separate public company continuing to hold PCS licenses in the United States covering approximately 62.6 million persons. As of December 31, 1998, VoiceStream had 322,400 PCS subscribers. VoiceStream will continue to provide PCS services in urban markets within its licensed areas. VoiceStream's Operations VoiceStream currently provides PCS services under the VoiceStream brand name in 11 urban markets -- Denver, Seattle/Tacoma, Phoenix/Tucson, Portland, Salt Lake City, Des Moines, Oklahoma City, Honolulu, El Paso, Albuquerque and Boise -- and is currently constructing systems in San Antonio and Austin. In addition, VoiceStream holds interests in joint ventures that provide service in Spokane, Tulsa, Wichita and certain markets in Iowa and will provide service in southern Texas. All of these markets, including those operated by joint ventures, utilize the internationally-proven Global System for Mobile Communications ("GSM") technology. GSM is the world's most widely used digital wireless standard, with systems operating in approximately 130 countries, serving over 120 million subscribers. VoiceStream is a Washington corporation. Its principal executive offices are located at 3650 131st Avenue S.E., Bellevue, Washington 98006, and its telephone number is (425) 653-4600. VoiceStream's Operating Strategy VoiceStream operates PCS systems in urban markets in the United States. VoiceStream believes that PCS is the optimum technology for more densely populated urban areas where cellular systems are generally more expensive to maintain and face potential capacity constraints. VoiceStream's operating strategy is to: - construct and operate high quality systems with extensive coverage in urban areas; - expand operations through increased subscriber growth and usage; - utilize centralized management and back office functions to improve operating efficiencies and generate greater economies of scale; and 2 6 - acquire additional PCS licenses in urban markets. VoiceStream is implementing its strategy by: - expanding its present systems and building new systems; - offering a targeted range of products to complement today's business and personal lifestyles at competitive prices; - continually upgrading the quality of its network; - establishing brand recognition through a strong sales and marketing program; and - providing a superior level of customer service. Q: WILL VOICESTREAM COMPETE WITH WESTERN WIRELESS AFTER THE SPIN-OFF? A: For a period of three years following the spin-off, Western Wireless and VoiceStream will be prohibited, except in certain limited designated areas where the companies presently compete, from competing with each other under a Spectrum Allocation and Non-Competition Agreement. After three years, the two companies will be free to compete with each other. The Spectrum Allocation and Non-Competition Agreement will terminate upon a change in control of either of Western Wireless or VoiceStream. Change in control includes (a) any transaction which results in any person owning more than 50% of the voting power of either Western Wireless or VoiceStream, (b) any person having the right (whether by agreement, proxies, ownership of shares or otherwise) to elect a majority of the Board of Directors of either Western Wireless or VoiceStream, and (c) there ceasing to be any person serving on the Board of Directors of both of Western Wireless or VoiceStream at the same time. 3 7 RISK FACTORS In assessing the impact of the spin-off on you, as a Western Wireless shareholder, you should be aware of the following risks relating to the spin-off and VoiceStream's operations: VOICESTREAM WILL NO LONGER BE ABLE TO RELY ON WESTERN WIRELESS FOR, OR WHEN SECURING, ADDITIONAL CAPITAL AND COULD BE FORCED TO CURTAIL SERVICES Although Western Wireless and VoiceStream have historically operated as separate entities, as a subsidiary of Western Wireless, VoiceStream had secured favorable intercompany loans from Western Wireless and had also relied upon the assets and cash flows of Western Wireless in securing loans from third-parties. After the spin-off, VoiceStream will not be able to secure inter-company loans from Western Wireless, nor will it be able to rely on its affiliation with Western Wireless or Western Wireless' assets and cash flow in securing loans from others. As discussed below, VoiceStream will need additional capital to finance continued growth, fund operations, provide for working capital and service debt. If adequate funds are not available from its existing capital resources, VoiceStream may be required to curtail its service operations or to obtain additional funds on terms less favorable than those contained in its current arrangements. WITHOUT SIGNIFICANT ADDITIONAL CAPITAL, VOICESTREAM WILL NOT BE ABLE TO GROW During 1999, VoiceStream anticipates spending more than $300 million for the continued development of its existing PCS systems. VoiceStream will utilize cash on hand and available credit facilities; however, substantial additional funds will be required in 1999 and beyond to finance the continued build-out of its markets, fund operations and provide for working capital and service debt. VoiceStream continues to consider and expects to pursue additional sources of funding. Raising such additional funds will require VoiceStream or its subsidiaries to issue additional debt or equity, and VoiceStream cannot guarantee that such funds will be available on satisfactory terms or in adequate amounts to accomplish its objectives. VoiceStream presently carries a significant level of debt and anticipates that it will incur additional debt and continue to carry a significant level of debt for an indefinite period of time. VoiceStream anticipates that this additional debt, like its existing debt, will have certain restrictions that significantly limit or prohibit, among other things, the ability of VoiceStream to incur debt, make prepayments of debt, pay dividends, make investments and sell assets. SIGNIFICANT COMPETITION IN THE MARKETPLACE MAY HINDER VOICESTREAM'S GROWTH Competition for wireless subscribers is based principally on the services and features offered, system quality, customer service, system coverage, system capacity, and price. VoiceStream competes with providers of PCS, cellular and other wireless services. Under current FCC rules, up to seven PCS licensees and two cellular licensees may operate in each geographic area. Competition in VoiceStream's markets is intense. VoiceStream's principal wireless services competitors include AirTouch Cellular Communications, Inc. ("AirTouch"), AT&T Wireless Services, Inc. ("AT&T Wireless"), Bell Atlantic Mobile ("Bell Atlantic"), GTE Mobilnet, Inc. ("GTE Mobilnet"), Sprint PCS L.P. ("Sprint PCS") and U.S. West Wireless LLC ("US West"). Many of these competitors have substantially greater financial, technical, marketing, sales and distribution resources than VoiceStream has, and several operate in multiple segments of the industry. Several of VoiceStream's competitors, through joint ventures and affiliation arrangements, operate or plan to operate nationwide wireless systems throughout the continental United States. VoiceStream also competes with paging, dispatch and conventional mobile telephone companies, resellers, and landline telephone service providers. In addition, Specialized Mobile Radio ("SMR") licensees, including Nextel Communications, Inc. ("NEXTEL"), operate digital mobile communications systems using existing SMR frequencies in many cities throughout the United States, including some of VoiceStream's markets. These systems, referred to as Enhanced Specialized Mobile Radio ("ESMR"), compete with VoiceStream's systems. Given rapid advances in the wireless communications industry, there 4 8 is no assurance that new technologies will not evolve that will compete with VoiceStream's products and services. LACK OF A CURRENT PUBLIC MARKET FOR VOICESTREAM COMMON STOCK MAKES THE FUTURE PERFORMANCE OF VOICESTREAM COMMON STOCK DIFFICULT TO PREDICT There is no current public market for VoiceStream common stock, and we cannot make any assurance as to the prices at which VoiceStream common stock will trade after the spin-off. Until VoiceStream common stock is distributed and an orderly market develops, the price at which VoiceStream common stock trades may fluctuate significantly. VoiceStream common stock will be traded on the Nasdaq Stock Market under the symbol VSTR. THE COMBINED TRADING PRICE OF WESTERN WIRELESS AND VOICESTREAM COMMON STOCK AFTER THE SPIN-OFF IS UNCERTAIN As a result of the spin-off, you will own shares of Western Wireless and VoiceStream common stock, both of which will be listed and traded on the Nasdaq Stock Market. The combined trading price of the Western Wireless and VoiceStream common stock may be greater than, less than or equal to the trading price of Western Wireless common stock immediately prior to the spin-off. VOICESTREAM HAS A LIMITED OPERATING HISTORY WITH OPERATING LOSSES AND NEGATIVE CASH FLOW AND MAY NOT BECOME PROFITABLE VoiceStream sustained operating losses of approximately $204.6 million in 1998, $196.9 million in 1997 and $81.8 million in 1996. At December 31, 1998, VoiceStream had an accumulated deficit of $608.2 million and equity (net of the accumulated deficit) of $386.6 million. VoiceStream expects to incur significant operating losses and to generate negative cash flow from operating activities during the next several years while it develops and constructs its systems and builds a subscriber base. VoiceStream cannot assure you that it will achieve or sustain profitability or positive cash flow from operating activities in the future or that it will generate sufficient cash flow to service its current or future debt requirements. LACK OF NATIONAL GSM COVERAGE MAY HINDER VOICESTREAM'S GROWTH FCC technical standards for analog cellular systems assure nationwide compatibility between all cellular carriers and handsets. There is, however, no required nationwide technology standard for PCS operations. Accordingly, each PCS licensee is free to select among several competing, currently incompatible technologies. VoiceStream uses the GSM technical standard in its markets. In order for VoiceStream's subscribers to roam in other markets, either at least one PCS licensee in the other market must use the GSM standard, or subscribers must use dual-mode handsets compatible with a cellular system in the other market. Dual-mode handsets are more expensive than single-mode handsets. The comparatively higher cost, or the potential lack of consumer acceptance of such handsets, may prevent VoiceStream from retaining current subscribers or attracting new subscribers. VoiceStream and other PCS licensees who use GSM systems own licenses covering markets which represent over 90% of the U.S. population, as contrasted with PCS licensees who use other technology standards and own licenses that cover substantially all of the U.S. population. VoiceStream cannot assure you that PCS licensees who use GSM systems will successfully build out their markets, that those who currently utilize GSM will continue to use GSM, or that available licenses will be awarded to licensees who will build GSM systems. Accordingly, GSM systems may cover less of the U.S. population than competing standards. VoiceStream's principal PCS competitors use standards other than GSM. As a result, VoiceStream's subscribers may not be able to conveniently use PCS services while roaming in areas outside its markets. US West and Sprint PCS use PCS systems based on the Code Division Multiple Access ("CDMA") standard. AT&T Wireless and Southwestern Bell Wireless ("Southwestern Bell") use PCS systems based on the Time Division Multiple Access ("TDMA") standard. CDMA providers, including competitors in 5 9 several of VoiceStream's markets, own licenses covering approximately 100% of the U.S. population. TDMA providers own licenses covering over 96% of the U.S. population. Certain major metropolitan areas (including Chicago and Dallas) may not be served by GSM providers unless licenses covering those areas are awarded to a GSM provider in certain upcoming FCC reauctions. There may also be delays in deploying GSM systems in other markets due to the financial constraints of certain GSM service providers. Accordingly, VoiceStream may have difficulty establishing a subscriber base and competing successfully with providers offering a larger coverage foot print or more extensive roaming capabilities. VOICESTREAM IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, ANY CHANGE IN WHICH COULD AFFECT ITS BUILD-OUT PLAN OR FINANCIAL PERFORMANCE The licensing, construction, operation, acquisition and sale of wireless systems is regulated by the FCC. Changes in the regulation of such activities, including the issuance of new licenses, could adversely effect VoiceStream's operations. All PCS licenses are granted for a 10-year period. At the end of such period the licensee must apply for renewal. Licenses may be revoked by the FCC at any time for cause. All 30 MHz PCS licenses must be substantially built out within ten years after grant of the license. VoiceStream cannot assure you that its licenses will be renewed. VoiceStream must obtain a number of authorizations and permits from, and are subject to regulation by, certain federal, state and local governments. Certain operating costs are also affected by governmental actions that are beyond VoiceStream's control. VoiceStream cannot assure you that it will be able to obtain and retain all necessary governmental authorizations and permits. VoiceStream's failure to do so could negatively affect its existing operations and delay or prohibit proposed operations. The wireless communications industry is also subject to continually evolving regulation regarding issues such as the effect of wireless communications equipment on medical equipment and devices, cancer, and the interference between types of wireless systems. VoiceStream may be required to modify its business plans or operations as new regulations arise. VoiceStream cannot assure you that it will be able to do so in a cost effective manner, if at all. VOICESTREAM'S LOSS OF ANY MEMBER OF ITS MANAGEMENT TEAM COULD AFFECT ITS FINANCIAL PERFORMANCE VoiceStream is dependent on the services of current management, including Mr. John W. Stanton as Chairman of the Board and Chief Executive Officer. Mr. Stanton will also continue to serve in such roles for Western Wireless. Losing the services of Mr. Stanton or other members of management could have a significant negative effect on its business. Qualified replacements may be difficult or impossible to find or retain. An event of default under VoiceStream's credit facility will occur if Mr. Stanton (or a suitable replacement) is not the Chairman of VoiceStream's Board of Directors. THE IRS RULING COULD BE INVALID IF CERTAIN REPRESENTATIONS ARE INCORRECT On January 28, 1999, Western Wireless received from the IRS a ruling to the effect that the spin-off would qualify as a tax-free distribution to Western Wireless and its shareholders under the Internal Revenue Code of 1986 (the "Code"). The ruling is subject to certain factual representations made by Western Wireless to the IRS. If such factual representations are incorrect in a material respect, the ruling could become invalid. Western Wireless is not aware of any facts that would cause the representations to be incorrect. If the spin-off were not to qualify as a tax-free distribution, the fair market value of the shares of VoiceStream received by a Western Wireless shareholder would be taxable to such shareholder for federal income tax purposes as follows: - as a dividend, to the extent paid out of Western Wireless' current and accumulated earnings and profits allocable to such shareholder; 6 10 - thereafter, as a non-taxable return of capital, to the extent of such shareholder's tax basis in its Western Wireless shares; and - thereafter, as capital gain (assuming such shareholder's Western Wireless Common Stock is held as a capital asset). In addition, Western Wireless would recognize a capital gain equal to the difference (if any) between the fair market value of the shares of VoiceStream distributed and Western Wireless' basis in such shares. Furthermore, under certain circumstances, Western Wireless may be required to recognize gain in connection with the spin-off as a result of future actions of Western Wireless or VoiceStream, or as a result of certain changes in ownership of Western Wireless' or VoiceStream's stock. Pursuant to a Tax Sharing Agreement entered into between Western Wireless and VoiceStream, Western Wireless and VoiceStream will each be solely responsible for the tax on any such gain arising from its own actions or a change in the ownership of its stock, and will equally share responsibility for the tax on any such gain where each of them has taken an action, or there has been a change in the ownership of each, giving rise to the tax. Such tax responsibility may discourage certain transactions involving an actual or potential change of control of VoiceStream, including transactions in which VoiceStream shareholders might receive a premium for their shares over the then-prevailing market price. VOICESTREAM MUST RECEIVE DISTRIBUTIONS FROM ITS SUBSIDIARIES IN ORDER TO SERVICE ITS DEBT VoiceStream is a holding company as all of its assets and operations are held by or conducted through subsidiaries. Accordingly, VoiceStream relies on dividends from its subsidiaries to service any debt which it may incur. The payment of dividends by VoiceStream's subsidiaries and their repayment of loans and advances are subject to statutory, contractual and other restrictions. Such payments and repayments are also dependent upon the earnings of such subsidiaries and are subject to various business considerations. VoiceStream's inability to service its debt may have an adverse effect on the value of its common stock. RADIO FREQUENCY EMISSIONS, GSM TECHNOLOGY AND USE OF MOBILE TELEPHONES MAY POSE HEALTH OR SAFETY CONCERNS Media reports have suggested that certain radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Concerns over radio frequency emissions may discourage the use of wireless handsets, which would adversely affect VoiceStream's business. The first phase of a university study funded by the wireless industry found that digital technologies cause interference with hearing aids in certain instances. In addition, an industry group has announced that it is gathering information on possible interference by PCS standards with medical devices. The findings of studies like these could have an adverse effect on the wireless industry, VoiceStream's business, or the use of GSM technology. Such findings could lead to governmental regulations that may have an adverse effect on VoiceStream's business. Several states have proposed or enacted legislation which would prohibit the use and/or possession of a mobile telephone while driving an automobile. If such legislation is adopted in a substantial number of states and strictly enforced, it may have an adverse effect on VoiceStream's business. CERTAIN LITIGATION COULD IMPOSE ADVERSE CONDITIONS UPON VOICESTREAM'S PCS LICENSES All of the PCS licenses originally auctioned by the FCC, except certain licenses returned to the FCC, have been awarded by the FCC. Licensees are permitted to construct their PCS systems and begin operations. FCC Orders granting PCS licenses are final and non-appealable; however, a legal challenge to the validity of portions of the FCC auction is before the FCC. In the event such challenge is successful, PCS licensees could lose their licenses or have conditions imposed on them which could negatively affect VoiceStream's business. 7 11 A TAKE-OVER OF VOICESTREAM MAY BE DIFFICULT, IRRESPECTIVE OF WHETHER IT IS BENEFICIAL TO VOICESTREAM SHAREHOLDERS VoiceStream anticipates that certain principal shareholders of VoiceStream, including certain officers and directors of VoiceStream, will beneficially own 56,446,418 shares of outstanding VoiceStream common stock, which will represent approximately 60% of the outstanding shares of the VoiceStream common stock. Such shareholders will also be parties to a Voting Agreement. VoiceStream anticipates that the Voting Agreement will provide that these shareholders will agree to vote their shares for each other's designees, subject to certain ownership requirements, and that they will be able to control the election of the entire Board of Directors. This anticipated voting control and certain provisions of Washington law affecting acquisitions and business combinations applicable to VoiceStream may discourage certain transactions involving an actual or potential change of control of VoiceStream, including transactions in which VoiceStream shareholders might receive a premium for their shares over the then-prevailing market price. Such voting control and provisions of Washington law may also have a depressive effect on the market price for VoiceStream common stock. VOICESTREAM'S OPERATIONS MAY BE HARMED IF VOICESTREAM'S OR ITS VENDORS' COMPUTER PROGRAMS DO NOT FUNCTION PROPERLY IN THE YEAR 2000 VoiceStream, like most owners of computer software, will be required to modify significant portions of its software so that it will function properly in the year 2000. Any of VoiceStream's, or its vendors', computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. VoiceStream is currently remediating its critical systems to address the year 2000 issue. Critical systems are those whose failure poses a risk of disruption to VoiceStream's ability to provide wireless services, to collect revenues, to meet safety standards, or to comply with legal requirements. VoiceStream expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the year 2000. VoiceStream cannot assure you that the remediation of its critical systems will be complete by the year 2000. Much of VoiceStream's technology, including technology associated with its critical systems, is purchased from third parties. VoiceStream is dependent on those third parties to assess the impact of the year 2000 issue on the technology and services they supply and to take any necessary corrective action. VoiceStream's plan includes obtaining letters from all third parties to determine whether they have accurately assessed the problem and taken corrective action. VoiceStream cannot assure you that these third parties will have taken the necessary corrective action prior to the year 2000. TO EXPAND, VOICESTREAM MUST RELY ON JOINT VENTURES THAT IT DOES NOT CONTROL Because of the scarcity of available PCS licenses covering U.S. urban markets, VoiceStream is in large part required to rely on joint ventures that it does not control in order to expand. There can be no assurance that VoiceStream will be able to find acceptable joint venture partners, and, due to the lack of control, there can be no assurance that any such joint venture will operate in a manner that increases the value of VoiceStream's business. THIS INFORMATION STATEMENT INCLUDES FORWARD-LOOKING STATEMENTS AND WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS This Information Statement contains statements that are not based on historical fact, including the words "believes," "anticipates," "intends," "expects" and similar words. These statements 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 8 12 may cause the actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include: - general economic and business conditions, both nationally and in the regions in which VoiceStream operates; - technology changes; - competition; - changes in business strategy or development plans; - VoiceStream's potentially high level of debt; - 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; - VoiceStream's ability and the ability of its third-party suppliers to take corrective action in a timely manner with respect to the Year 2000 issue; and - other factors referenced in this Information Statement, including without limitation under the captions "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations of VoiceStream" and "Businesses of Western Wireless and VoiceStream after the Spin-off." GIVEN THESE UNCERTAINTIES, WE CAUTION PROSPECTIVE INVESTORS NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. VoiceStream disclaims any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments. 9 13 THE SPIN-OFF OF VOICESTREAM WIRELESS CORPORATION GENERAL Western Wireless Corporation ("Western Wireless") intends to "spin-off" its 80.1% interest in its subsidiary, VoiceStream Wireless Corporation (collectively, with its subsidiaries, "VoiceStream"). In the spin-off transaction (the "Spin-off"), Western Wireless will distribute to its shareholders one share of common stock, no par value, of VoiceStream (the "VoiceStream Common Stock") for each share of Class A common stock, no par value, of Western Wireless (the "Class A Common Stock") and Class B common stock, no par value, of Western Wireless (the "Class B Common Stock") owned by each shareholder (Class A Common Stock and Class B Common Stock are referred to collectively as the "Western Wireless Common Stock"). After the Spin-off, VoiceStream will be a separate company, no longer owned in any way by Western Wireless, although there will be some overlapping management. See "-- Management of VoiceStream Following the Spin-off." CONDITIONS TO THE SPIN-OFF The Spin-off is conditioned upon the satisfaction of certain conditions necessary to consummate the Spin-off. In particular, the VoiceStream Common Stock to be issued in the Spin-off must be listed on the Nasdaq Stock Market prior to the Spin-off. Additionally, Western Wireless and VoiceStream must furnish to the other all documents and certificates, including assignments and conveyances, necessary to consummate the Spin-off. Western Wireless does not believe that any material regulatory approvals will be required in connection with the Spin-off. Consent of holders of a majority in principal amount of each of Western Wireless' 10 1/2% Senior Subordinated Notes Due 2006 (the "2006 Notes") and 10 1/2% Senior Subordinated Notes Due 2007 (the "2007 Notes") is required to consummate the Spin-off. Western Wireless has obtained preliminary indications from beneficial owners of a majority in principal amount of both the 2006 Notes and the 2007 Notes that such Owners will so consent. The Western Wireless Board of Directors has the right to cancel or defer the Spin-off, in its sole discretion, even if the conditions to the Spin-off are met. MANNER OF EFFECTING THE SPIN-OFF Following the Spin-off, each shareholder of record on the date of the Spin-off (the "Effective Date") will receive a VoiceStream stock certificate which represents the VoiceStream Common Stock owned by such shareholder. It is expected that May 3, 1999 will be the Effective Date. Shareholders that hold through brokerage and "street name" accounts should expect to receive an account statement from their brokerage firm reflecting the number of shares of VoiceStream Common Stock received by such shareholder in the Spin-off. Following the Spin-off, shareholders who hold through brokerage accounts may request physical certificates for their shares of VoiceStream Common Stock. Western Wireless will be required to notify the FCC of full details of the Spin-off within 30 days after the Effective Date. No holder of Western Wireless Common Stock will be required to pay any cash or other consideration for shares of VoiceStream Common Stock received in the Spin-off or to surrender or exchange shares of Western Wireless Common Stock in order to receive shares of VoiceStream Common Stock. REASONS FOR THE SPIN-OFF Western Wireless and VoiceStream operate under different brand names in distinct segments of the wireless industry, having differences in their markets and capital requirements and requiring different business plans. Both companies believe that separating VoiceStream's urban-focused digital PCS business from Western Wireless' rural-focused cellular business will allow both companies to more readily expand 10 14 their respective businesses, as well as pursue strategies and focus on objectives appropriate to their business. In connection with its determination to effect the Spin-off, Western Wireless considered certain factors that weighed against the Spin-off. These included, among others (i) as one entity the combined geographic area covered by VoiceStream's PCS systems and Western Wireless' cellular systems would be substantially greater than the geographic area covered by either of VoiceStream or Western Wireless as separate entities, and (ii) there would be certain administrative and other cost savings. Western Wireless determined that these factors were outweighed by the fact that the Spin-off was necessary in order to permit VoiceStream to expand its operations. While it is imperative for VoiceStream to expand its operations in order to remain competitive, because of the nature and character of the holders of PCS licenses, there are few licenses available for purchase in urban areas. However, one significant opportunity for VoiceStream to expand its PCS operations is to acquire interests in PCS licenses that are reserved for use by a small business or a specified minority group (a "Designated Entity"). In order to do this, Western Wireless and VoiceStream must enter into joint ventures with Designated Entities to make such acquisitions (since neither Western Wireless nor VoiceStream is itself a Designated Entity). In the past, some joint ventures have offered the respective Designated Entity the opportunity to make an equity investment in Western Wireless or VoiceStream. However, recently, Western Wireless and VoiceStream have encountered situations where the Designated Entity, desiring an investment in PCS rather than cellular services, requested publicly traded equity in VoiceStream provided that VoiceStream is not controlled by Western Wireless. Because VoiceStream needs these Designated Entities to expand its PCS business, it wishes to accommodate them. The Spin-off will provide an avenue for such accommodation. In addition, as a result of a series of auctions of wireless licenses by the FCC since 1994, the number of wireless service providers has grown from two wireless providers employing cellular technologies to as many as ten wireless providers, employing cellular, PCS and other technologies. The result has been the introduction of substantial new competition into the marketplace, including several companies that are attempting to develop national wireless telephone networks based on consistent national technology standards. In the face of strong downward pressure on calling rates resulting from this new competition, Western Wireless and VoiceStream must each expand using consistent technology in order to maintain and improve their cost structures and compete on a cost-effective basis with the national service providers. For Western Wireless, the Spin-off eliminates the operating losses associated with VoiceStream's significant investment in building out new systems, and positions Western Wireless as a wireless company in a mature segment of the industry with meaningful net operating income. Additionally, rather than using its positive net operating income to develop and expand VoiceStream's business, Western Wireless will be in a position to take advantage of cellular acquisition opportunities and to fund the international expansion plans of its subsidiary Western Wireless International Corporation. RELATIONSHIP BETWEEN VOICESTREAM AND WESTERN WIRELESS PRIOR TO THE SPIN-OFF Although Western Wireless and VoiceStream have historically operated as separate companies, prior to the acquisition in February 1998 by Hutchison Telecommunications PCS (USA) Limited ("Hutchison USA") of a 19.9% interest in VoiceStream (the "Hutchison Investment"), VoiceStream was a wholly-owned subsidiary of Western Wireless. As a wholly-owned subsidiary, VoiceStream had secured favorable intercompany loans from Western Wireless, which loans bore interest on the long-term advances ranging between 8% and 11.1%. VoiceStream also relied upon the assets and cash flow of Western Wireless in securing loans from third parties, and VoiceStream and Western Wireless shared services of officers, employees and others. The salaries and benefits of such persons and other centralized general and administrative costs and assets were allocated between Western Wireless and VoiceStream in a manner which reflected the relative time devoted to each of the operational units. In connection with the Hutchison Investment Western Wireless converted to equity a portion of the loans Western Wireless had made to VoiceStream, which together with its other capital investments in 11 15 VoiceStream equalled $750 million at the closing of the Hutchison Investment. VoiceStream also repaid to Western Wireless $105.4 million of indebtedness owed by VoiceStream to Western Wireless. In addition, VoiceStream and Western Wireless agreed that neither of them would have any liability regarding indebtedness of the other and VoiceStream and Western Wireless entered into their own credit arrangements with a separate syndicate of banks. Finally, VoiceStream entered into agreements with Western Wireless which, among other things, formalized the allocation of overhead costs and expenses, cash management and the tax sharing arrangements between Western Wireless and VoiceStream, as well as roaming arrangements on each other's systems. All of these agreements, except the tax sharing agreement, terminate on the Effective Date. At the time of the Hutchison Investment, Western Wireless and Hutchison USA entered into a shareholders agreement, which provides, among other things, for the following: (i) Hutchison USA has the right to designate two directors to a ten person VoiceStream Board of Directors with such number of directors being subject to increase or decrease depending upon increases or decreases in Hutchison USA's percentage ownership of VoiceStream; (ii) each of Western Wireless and Hutchison USA have certain rights of first offer or first refusal in the event the other proposes to sell its stock in VoiceStream under specified circumstances; (iii) Hutchison USA has certain tag along rights to sell its shares, and is subject to certain drag along obligations to sell its shares, if Western Wireless proposes to sell its stock in VoiceStream; (iv) each of Western Wireless and Hutchison USA have certain preemptive rights in connection with issuances by VoiceStream of equity securities; (v) Hutchison USA's consent would be required with respect to an initial public offering of VoiceStream stock during the 18 month period immediately following the purchase by Hutchison USA of the VoiceStream shares; (vi) Hutchison USA will have certain approval rights with respect to VoiceStream entering into employment contracts with certain members of senior management of Western Wireless and certain other transactions with affiliates; and (vii) Hutchison USA has certain demand and piggyback registration rights for its shares of VoiceStream Common Stock. In addition, Hutchison USA has the right to require a public sale of Hutchison USA's equity interest in VoiceStream or, in certain cases, to sell Hutchison USA's equity interest in VoiceStream to Western Wireless, if VoiceStream takes any of the following actions without Hutchison USA's consent: (a) any incurrence of indebtedness in excess of $10 million in a single instance or $25 million in the aggregate in a fiscal year, other than pursuant to financing arrangements in effect at the date of the closing of the Hutchison Investment or as previously approved by Hutchison USA; (b) adoption of any annual capital expenditures budget, annual operating plan and budget or any material amendment to either thereof; (c) any acquisition of a PCS system or wireless telecommunications business (or interest therein) in a transaction or auction involving an aggregate acquisition cost in excess of $100 million; and (d) any disposition of a PCS system or wireless telecommunications business (or interest therein) in a transaction involving an aggregate sales price in excess of $50 million. The shareholders agreement also sets forth the events which will trigger a termination of some or all of the foregoing rights and obligations, which events include a public sale of VoiceStream Common Stock or a spin-off resulting in a public float of at least 15% of the outstanding VoiceStream Common Stock, certain transfers by Hutchison USA of the VoiceStream Common Stock, dilution of Hutchison USA's ownership interest in VoiceStream below certain specified levels and certain mergers and other transactions. The only rights of Hutchison USA under such shareholder's agreement which survive the Spin-off are its preemptive rights, its demand and piggyback registration rights, and Hutchison USA's rights to transfer 12 16 its right to designate directors and demand and piggy back registration rights to persons who acquire from Hutchison USA 50% or more of the shares of VoiceStream Common Stock purchased by Hutchison USA in the Hutchison Investment. In November 1997, an affiliate of Hutchison USA acquired 3,888,888 shares of Western Wireless Class A Common Stock for a purchase price of approximately $19 per share (approximately $74 million). Effective upon the Spin-off, Hutchison USA and certain other principal shareholders of VoiceStream will enter into an agreement whereby such shareholders agree to vote for each other's designees to the VoiceStream Board of Directors. See "Voting Securities and Principal Holders Thereof -- VoiceStream Voting Agreement." AGREEMENT AND PLAN OF DISTRIBUTION; RELATIONSHIP BETWEEN WESTERN WIRELESS AND VOICESTREAM AFTER THE SPIN-OFF VoiceStream and Western Wireless have entered into an Agreement and Plan of Distribution (the "Distribution Agreement") which, in general, outlines the anticipated relationship between the two companies after the Spin-off. The following sets forth a summary of the material terms and provisions of the Distribution Agreement. ESTABLISHMENT OF VOICESTREAM BENEFIT AND COMPENSATION PLANS VoiceStream 401(k) Plan The Distribution Agreement contemplates that VoiceStream will establish a defined contribution 401(k) plan (the "VoiceStream 401(k) Plan") substantially similar to Western Wireless' 401(k) plan presently in effect. The VoiceStream 401(k) Plan will give participants credit for service as Western Wireless employees. After the Spin-off and the establishment of the VoiceStream 401(k) Plan, the account balances of participants in the VoiceStream 401(k) Plan will be transferred from Western Wireless' 401(k) plan to the VoiceStream 401(k) Plan. VoiceStream Stock Option Plan VoiceStream will establish a stock option plan (the "VoiceStream Stock Option Plan") substantially similar to Western Wireless' stock option plan presently in effect. As part of the Spin-off and pursuant to the Distribution Agreement, VoiceStream will issue new options and Western Wireless will amend its existing options in order to maintain for Western Wireless option holders the value of their existing stock options. Vested Western Wireless Options Individuals who hold vested options to purchase Western Wireless Common Stock ("Vested Western Wireless Options") will receive an equal number of vested options to purchase VoiceStream Common Stock ("Vested VoiceStream Options") which will be governed by the VoiceStream Stock Option Plan. The original exercise price of the Vested Western Wireless Options will then be allocated between the Vested Western Wireless Options and the Vested VoiceStream Options. This allocation will be pro rata, based upon the respective average daily last trade price of each of the Western Wireless Common Stock and the VoiceStream Common Stock during a period (the "Averaging Period") of ten trading days beginning the fifth trading day after the Effective Date. For example, if the original exercise price of an individual's Vested Western Wireless Options was $20.00, and during the Averaging Period the average daily last trade price of the Western Wireless Common Stock was $15.00 and the average daily last trade price of the VoiceStream Common Stock was $10.00 (a total for both of $25.00), then for Western Wireless the respective percentage of the total price for both would be 60% (15/25) and for VoiceStream the respective percentage of the total price for both would be 40% (10/25) and the exercise price for the Vested Western Wireless Options would be $20.00 x 60%, or $12.00, and the exercise price for the Vested VoiceStream Options would be $20.00 x 40%, or $8.00. 13 17 Unvested Western Wireless Options Western Wireless Employees. Each individual who continues as a Western Wireless employee after the Spin-off and who holds options to purchase Western Wireless Common Stock that are not vested ("Unvested Western Wireless Options"), will surrender their Unvested Western Wireless Options and in replacement thereof will be granted by Western Wireless new unvested options to purchase a number of shares of Western Wireless Common Stock ("New Unvested Western Wireless Options"). The number of shares subject to the New Unvested Western Wireless Options shall be determined by multiplying the number of shares represented by the Unvested Western Wireless Options by a fraction, the numerator of which is the sum of the average daily last trade prices of both Western Wireless Common Stock and VoiceStream Common Stock during the Averaging Period, and the denominator of which is the average of the daily last trade prices of Western Wireless Common Stock during the Averaging Period. The new exercise price shall be determined by multiplying the exercise price for the Unvested Western Wireless Options by a fraction, the numerator of which is the average of the daily last trade prices of Western Wireless Common Stock during the Averaging Period, and the denominator of which is the sum of the average daily last trade prices of both Western Wireless Common Stock and VoiceStream Common Stock during the Averaging Period. For example, if the number of shares subject to the Unvested Western Wireless Options was 100 at an exercise price of $20.00, and during the Averaging Period the average daily last trade price of the Western Wireless Common Stock was $16.00 and the average daily last trade price of the VoiceStream Common Stock was $12.00, the number of shares subject to the New Unvested Western Wireless Options would be 175 (100 shares x $28.00/$16.00), and the exercise price for the New Unvested Western Wireless Options would be $11.43 ($20.00 x $16.00/$28.00). In addition, the vesting period and expiration date of the New Unvested Western Wireless Options will be the same as the Unvested Western Wireless Options. VoiceStream Employees. Each individual who becomes a VoiceStream employee at the time of the Spin-off and who holds Unvested Western Wireless Options, will surrender their Unvested Western Wireless Options and in replacement thereof will be granted by VoiceStream unvested options to purchase a number of shares of VoiceStream Common Stock ("Unvested VoiceStream Options"). The number of shares subject to the Unvested VoiceStream Options shall be determined by multiplying the number of shares represented by the Unvested Western Wireless Options by a fraction, the numerator of which is the sum of the average daily last trade prices of both Western Wireless Common Stock and VoiceStream Common Stock during the Averaging Period, and the denominator of which is the average of the daily last trade prices of VoiceStream Common Stock during the Averaging Period. The new exercise price shall be determined by multiplying the exercise price for the Unvested Western Wireless Options by a fraction, the numerator of which is the average of the daily last trade prices of VoiceStream Common Stock during the Averaging Period, and the denominator of which is the sum of the average daily last trade prices of both Western Wireless Common Stock and VoiceStream Common Stock during the Averaging Period. For example, if the number of shares subject to the Unvested Western Wireless Options was 100 at an exercise price of $20, and during the Averaging Period the average daily last trade price of the Western Wireless Common Stock was $16.00 and the average daily last trade price of the VoiceStream Common Stock was $12.00, the number of shares subject to the Unvested VoiceStream Options would be 233 (100 shares x $28.00/$12.00), and the exercise price for the Unvested VoiceStream Options would be $8.57 ($20.00 x $12.00/$28.00). In addition, the vesting period and expiration date of the Unvested VoiceStream Options will be the same as the Unvested Western Wireless Options. Three executive officers (Messrs. Stanton, Guthrie and Bender) will be executive officers of Western Wireless and VoiceStream after the Spin-off. Their Unvested Western Wireless Options will be divided ratably between New Unvested Western Wireless Options and Unvested VoiceStream Options consistent with the above. VoiceStream Restricted Stock Plan VoiceStream will establish a restricted stock plan (the "VoiceStream Restricted Stock Plan") substantially similar to Western Wireless' restricted stock option plan presently in effect. All individuals 14 18 who hold restricted Western Wireless Common Stock on the Effective Date, will receive an equal number of restricted shares of VoiceStream Common Stock in the Spin-off, which shall be governed by the VoiceStream Restricted Stock Plan. VoiceStream Stock Purchase Plan VoiceStream will establish an employee stock purchase plan substantially similar to Western Wireless's employee stock purchase plan presently in effect. VoiceStream will fund this plan with VoiceStream Common Stock. ADMINISTRATIVE SERVICES Western Wireless and VoiceStream expect to provide their own administrative services after the Spin-off. However, for a period of up to twelve months after the Spin-off, Western Wireless and VoiceStream will generally make their employees available to each other as necessary to support the activities of each party in areas including, without limitation, accounting, tax and legal advice and services and human resources. The party rendering these services will be entitled to receive from the other, upon the presentation of invoices therefor, payment for its reasonable costs and expenses incurred in providing such services. PAYMENT OF INSURANCE CLAIMS Western Wireless currently maintains insurance policies that provide coverage for each of Western Wireless' business and VoiceStream's business. Certain of these policies are "claims made" policies and these must be in place both at the time of occurrence of the insured loss and at the time a resulting claim is made. In order to ensure continuity of coverage of these "claims made" policies, Western Wireless will purchase so-called "run-off" coverage for a minimum time of 3 years following the Spin-off. The responsibility for the premiums associated with the "run-off" policies shall be shared equally by Western Wireless and VoiceStream. Western Wireless and VoiceStream are aware there are and may be a number of occurrences before the Effective Date involving the activities of VoiceStream's business for which claims have been or may be made ("Incurred Claims"), and are aware that additional Incurred Claims involving the activities of VoiceStream's business may come to light which will result in insurance claims under either "claims made" or "claims accrued" policies covering the combined businesses. Western Wireless will promptly notify VoiceStream of any such Incurred Claims asserted against Western Wireless relating in whole or in part to VoiceStream's business. VoiceStream will promptly notify Western Wireless of any Incurred Claims asserted against VoiceStream or the VoiceStream Subsidiaries which VoiceStream reasonably believes are covered by such policies covering the combined businesses. VoiceStream will have the responsibility of administering, defending and settling all such Incurred Claims which relate solely to VoiceStream's business. VoiceStream and Western Wireless will jointly and cooperatively administer, defend and settle all such Incurred Claims that relate to both of VoiceStream's and Western Wireless' businesses. Any self-insured portion of Incurred Claims and the costs of defending such Incurred Claims shall be borne by VoiceStream in proportion to the extent to which the Incurred Claim relates to VoiceStream's business. In connection with Incurred Claims covered by insurance, Western Wireless will promptly transfer to VoiceStream any funds proportionally due to VoiceStream that are received by Western Wireless in connection with the settlement of Incurred Claims. Except for the "run-off" policies described above, Western Wireless and VoiceStream will each obtain insurance policies relating to its respective business. INDEMNIFICATION Pursuant to the Distribution Agreement, VoiceStream will continue to remain liable for all liabilities and obligations of VoiceStream and will also assume any Western Wireless' liabilities, obligations, lawsuits 15 19 and administrative investigations relating to or arising from VoiceStream's domestic PCS business and urban LMDS business (collectively, the "VoiceStream Liabilities"). Western Wireless will continue to be liable for all the liabilities, obligations, lawsuits and administrative investigations relating to or arising from all business of Western Wireless other than VoiceStream's domestic PCS business and urban LMDS business (collectively, the "Western Wireless Liabilities"). VoiceStream and Western Wireless will each be responsible for its own "Distribution Liabilities" (defined as expenses, costs, liabilities or investment tax credit recapture, directly related to the Spin-off) which are incurred or accrued prior to the Spin-off. Western Wireless and VoiceStream will share in the same percentage as their respective market capitalizations determined during the Averaging Period (i) any Distribution Liabilities incurred or accrued after the Spin-off, and (ii) any liabilities which are not specifically assumed by either party and are neither VoiceStream Liabilities nor Western Wireless Liabilities. VoiceStream will indemnify Western Wireless and its officers, directors, employees, agents and affiliates from and against any and all losses, liabilities, claims, damages, costs and expenses arising out of or related in any manner to the VoiceStream Liabilities and any and all liabilities of Western Wireless pursuant to any obligations of Western Wireless to the extent the same have been specifically assumed by VoiceStream in writing. Western Wireless will indemnify VoiceStream similarly. USE OF THE "VOICESTREAM" AND "WESTERN WIRELESS" NAMES Western Wireless will discontinue and cause each of its remaining subsidiaries to discontinue all use of the name "VoiceStream." VoiceStream will discontinue and will cause each of its subsidiaries to discontinue all use of the names "Western Wireless" and "Cellular One." Additionally, each company will remove the other's name from its name and business as well as from the name and business of each such subsidiary as promptly as is reasonably practicable. SPECTRUM ALLOCATION, NON-COMPETITION AND ROAMING Prior to the Effective Date, Western Wireless and VoiceStream will enter into a Spectrum Allocation and Non-Competition Agreement whereby for a period of three years after the Effective Date (i) Western Wireless agrees not to pursue any PCS opportunity unless it first presents such opportunity to VoiceStream and VoiceStream determines not to pursue, or discontinues the pursuit of, such opportunity; (ii) Western Wireless agrees that if it acquires businesses or assets which include both cellular and PCS assets, it will offer VoiceStream the opportunity to buy the PCS assets so acquired at the allocable portion of the purchase price paid for such assets; (iii) VoiceStream agrees not to pursue any cellular opportunity unless it first presents such opportunity to Western Wireless and Western Wireless determines not to pursue, or discontinues the pursuit of, such opportunity; (iv) VoiceStream agrees that if it acquires businesses or assets which include both cellular and PCS assets, it will offer Western Wireless the opportunity to buy the cellular assets so acquired at the allocable portion of the purchase price paid for such assets; (v) Western Wireless and VoiceStream agree that with respect to any wireless telephone opportunity that is neither cellular nor PCS, they will share such opportunity on an equal basis, unless they agree to another arrangement; (vi) Western Wireless agrees that it will not provide or resell wireless telephony services in any portion of the geographic area in which VoiceStream provides wireless telephony services, except in any geographic area in which Western Wireless provides those services on the Effective Date or as otherwise mutually agreed to; (vii) VoiceStream agrees that it will not provide or resell wireless telephony services in any portion of the geographic area in which Western Wireless provides wireless telephony services, except in any geographic area in which VoiceStream provides those services on the Effective Date or as otherwise mutually agreed to; and (viii) Western Wireless and VoiceStream agree not to solicit each other's employees. Pursuant to a Roaming Agreement, each of VoiceStream and Western Wireless will continue, for a period of five years after the Effective Date (unless extended by mutual agreement of Western Wireless and VoiceStream), to permit the other's customers to roam on its systems. Each of the Spectrum Allocation and Non-Competition Agreement and the Roaming Agreement will terminate upon a change in control of either of Western Wireless or VoiceStream. Change in control includes (a) any transaction which results in any person owning more than 50% of the voting power of 16 20 either Western Wireless or VoiceStream, (b) any person having the right (whether by agreement, proxies, ownership of shares or otherwise) to elect a majority of the Board of Directors of either Western Wireless or VoiceStream, and (c) there ceasing to be any person serving on the Board of Directors of both of Western Wireless or VoiceStream at the same time. OTHER PROVISIONS The Distribution Agreement also includes provisions relating to: (i) sharing of occupancy expenses; (ii) allocating liability with respect to pending litigation and other potentially significant obligations; and (iii) responsibilities with respect to tax audits and computation of tax adjustments. TAX SHARING AGREEMENT Western Wireless and VoiceStream are parties to a Tax Sharing Agreement which, among other things, provides for payments between Western Wireless and VoiceStream in respect of the net tax operating losses generated by one company and its affiliates which are used to offset taxable income generated by the other company and its affiliates. Pursuant to this agreement, it is anticipated that VoiceStream will make a payment not to exceed $20,000,000 to Western Wireless in respect of VoiceStream's net operating losses generated prior to 1997. The actual amount of such payment will be determined in part by Western Wireless' operating results through the Effective Date. In addition, pursuant to the Tax Sharing Agreement, Western Wireless has agreed to be solely responsible for any taxes imposed on it under Section 355(e) of the Code as a result of (i) any violation of the representations made by it to the IRS related to the Spin-off, (ii) certain actions taken by it following the Spin-off, or (iii) changes in its stock ownership. Similarly, VoiceStream has agreed to be solely responsible for any taxes imposed on Western Wireless under Section 355(e) of the Code as a result of (i) any violation following the Spin-off of the representations made concerning it to the IRS related to the Spin-off, (ii) certain actions taken by it following the Spin-off, or (iii) changes in its stock ownership. Western Wireless and VoiceStream have agreed to be equally responsible for any taxes imposed on Western Wireless under Section 355(e) of the Code where each of them has taken an action, or there has been a change in the stock ownership of each, giving rise to such tax. In addition, Western Wireless and VoiceStream each has agreed that if it claims a deduction under the Code with respect to the issuance of stock by the other party pursuant to the exercise of an employee stock option, it will compensate the other party for such deduction. Section 355(e) of the Code is discussed under the heading "Material Federal Income Tax Consequences of the Spin-off." 17 21 MANAGEMENT OF VOICESTREAM FOLLOWING THE SPIN-OFF After the Spin-off, the following officers and directors shall serve VoiceStream:
NAME POSITION ---- -------- John W. Stanton.............................. Chairman, Director and Chief Executive Officer Robert R. Stapleton.......................... President and Director Donald Guthrie............................... Vice Chairman and Director Cregg B. Baumbaugh........................... Executive Vice President -- Finance, Strategy and Development Alan R. Bender............................... Executive Vice President, General Counsel and Secretary Robert P. Dotson............................. Senior Vice President -- Marketing Timothy R. Wong.............................. Senior Vice President -- Engineering Patricia L. Miller........................... Vice President, Controller and Principal Accounting Officer John L. Bunce, Jr. .......................... Director Mitchell R. Cohen............................ Director Daniel J. Evans.............................. Director Canning Fok.................................. Director Jonathan M. Nelson........................... Director Terence M. O'Toole........................... Director Hans R. Snook................................ Director
After the Spin-off, Messrs. Bunce, Cohen, Evans, Nelson, O'Toole and Stanton will also be directors of Western Wireless. In addition, Mr. Stanton, and for a transition period following the Spin-off, Messrs. Guthrie and Bender will serve as executive officers of both Western Wireless and VoiceStream pursuant to their existing employment agreements with Western Wireless. The compensation arrangements for Messrs. Stanton, Guthrie and Bender will be funded by both Western Wireless and VoiceStream on mutually agreeable terms. Effective upon the Spin-off, certain principal shareholders of VoiceStream will enter into an agreement whereby such shareholders agree to vote for each other's designees to the VoiceStream Board of Directors. See "Voting Securities and Principal Holders Thereof -- VoiceStream Voting Agreement." BOARD AND SHAREHOLDER APPROVAL; APPRAISAL RIGHTS The Western Wireless Board of Directors has unanimously approved the Spin-off after careful consideration. Western Wireless will not hold a meeting or solicit proxies for the Spin-off, as no approval of the Western Wireless shareholders is required under Washington law. Additionally, under Washington law, Western Wireless shareholders have no right to an appraisal of the value of their shares in connection with the Spin-off. OUTSIDE CONSULTANTS Neither Western Wireless nor VoiceStream has engaged a consultant or other outside party to prepare a report, opinion or appraisal with respect to the Spin-off. ACCOUNTING TREATMENT As part of the Spin-off, Western Wireless will restate its consolidated financial statements to reflect VoiceStream as a discontinued operation. MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF The following discussion summarizes the material U.S. federal income tax consequences of the Spin-off that affect Western Wireless and its shareholders. This discussion is based on current provisions of 18 22 the Code, existing and proposed Treasury Regulations thereunder and current administrative rulings and court decisions, all of which are subject to change. The following discussion summarizes the material U.S. federal income tax issues raised by the Spin-off and does not reflect either the special circumstances that may be relevant to a particular shareholder or the effect of the Spin-off under the tax laws of any state, local or foreign jurisdiction. On January 28, 1999, Western Wireless received a ruling from the IRS to the following effect: - Western Wireless shareholders will not recognize any income, gain or loss as a result of the Spin-off under Section 355 of the Code. - The tax basis of the Western Wireless Common Stock and the VoiceStream Common Stock held by a shareholder after the Spin-off will be the same as the aggregate tax basis of the Western Wireless Common Stock held by such shareholder before the Spin-off, allocated between the Western Wireless Common Stock and the VoiceStream Common Stock in accordance with the fair market value of such shares. - The holding period for each share of VoiceStream Common Stock received in the Spin-off by a Western Wireless shareholder will include the period during which such holder held the share of Western Wireless Common Stock with respect to which the VoiceStream Common Stock was distributed, provided that such share of Western Wireless Common Stock is held as a capital asset by such shareholder on the Effective Date. - No gain or loss will be recognized by Western Wireless upon the Spin-off. The ruling is subject to certain factual representations made by Western Wireless to the IRS. If such factual representations are incorrect in a material respect, the ruling could become invalid. Western Wireless is not aware of any facts which would cause the representations to be incorrect. In addition, notwithstanding the IRS ruling, in the event that Western Wireless distributes shares of VoiceStream Common Stock in the Spin-off to foreign persons, Western Wireless may be required to recognize gain (but not loss) in respect of the stock distributed to such shareholder. At this time, Western Wireless anticipates that the gain, if any, required to be recognized as a result of such a distribution would be substantially offset by the net operating loss carryovers of Western Wireless. If the Spin-off were not to qualify as a tax-free distribution, the fair market value of the shares of VoiceStream Common Stock received by a Western Wireless shareholder would be taxable to the shareholder as follows: (i) as a dividend, to the extent paid out of Western Wireless' current and accumulated earnings and profits allocable to such shareholder, (ii) thereafter, as a non-taxable return of capital to the extent of such shareholder's tax basis in its Western Wireless shares, and (iii) thereafter, as capital gain (assuming such shareholder's Western Wireless Common Stock is held as a capital asset). The tax basis of the shares of Western Wireless held by Western Wireless shareholders after the Spin-off would be reduced by the portion of the distribution, if any, which was treated as a non-taxable return of capital and the tax basis of the shares of VoiceStream would be equal to their fair market value on the Effective Date. In addition, Western Wireless would recognize a capital gain equal to the difference (if any) between the fair market value of the shares of VoiceStream distributed and Western Wireless' basis in such shares. Current Treasury Regulations require each holder of Western Wireless Common Stock who receives shares of VoiceStream Common Stock pursuant to the Spin-off to attach to his or her U.S. federal income tax return for the year in which the Spin-off occurs a statement setting forth such data as may be appropriate in order to show the applicability of Section 355 to the Spin-off. Shareholders may detach the statement below under "IRS Code Section 355 Statement" for such purpose. Section 355(e) of the Code generally provides that a distribution by a corporation of the stock of a subsidiary corporation which is otherwise tax-free will be taxable to the distributing corporation (but not to its shareholders) under certain circumstances. This provision applies to any distribution that is part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or 19 23 indirectly, stock representing a 50 percent or greater interest (by vote or value) in either such corporation (a "50% Ownership Shift"). Any 50% Ownership Shift that occurs within the four-year period beginning two years before the distribution will be presumed to be pursuant to such a plan or series of related transactions. However, the presumption may be rebutted by a showing that the distribution and the 50% Ownership Shift are not part of a plan or series of related transactions. Among the factual representations made by Western Wireless to the IRS in connection with the ruling received from the IRS is that the Spin-off is not part of such a plan or series of related transactions. If Western Wireless or VoiceStream were to undergo a 50% Ownership Shift, particularly as the result of events occurring within two years after the Effective Date, there can be no assurance that the IRS would not assert that the Spin-off and such 50% ownership shift occurred pursuant to a plan or series of related transactions and therefore that the Spin-off is taxable under Section 355(e) of the Code. If the Spin-off were taxable under Section 355(e) of the Code, Western Wireless would recognize capital gain equal to the difference between the fair market value of the stock of VoiceStream and Western Wireless' adjusted tax basis in such stock (to the extent not otherwise recognized). The amount of such gain and the resulting tax liability would depend on the fair market value of the VoiceStream Common Stock at the time of the Spin-off and could be material. VoiceStream and Western Wireless have entered into an agreement which allocates responsibility for any Western Wireless tax liability in the event the Spin-off does not qualify under Section 355 of the Code (including by reason of the application of Section 355(e) of the Code). THE SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO RECEIVED THEIR SHARES OF WESTERN WIRELESS THROUGH THE EXERCISE OF AN EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE. ALL SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE SPIN-OFF TO THEM, INCLUDING THE APPLICABILITY OF STATE, LOCAL AND FOREIGN TAX LAWS. 20 24 IRS CODE SECTION 355 STATEMENT (DETACH OR COPY AND ATTACH TO 1999 U.S. TAX RETURN) The undersigned, a shareholder owning shares of Western Wireless Corporation during the 1999 calendar year, received a distribution of stock in a controlled corporation pursuant to Section 355. The names and addresses of the corporations involved are Western Wireless Corporation, 3650 131st Avenue S.E., Bellevue, Washington, 98006 ("Parent"), and VoiceStream Wireless Corporation, 3650 131st Avenue S.E., Bellevue, Washington, 98006 ("VoiceStream"). No stock or securities in Parent was surrendered by the undersigned. By letter agreement dated January 28, 1999, the IRS ruled that the distribution of shares of VoiceStream by Parent was a non-taxable Section 355 corporate transaction. -------------------------------------- Shareholder (name and signature) 21 25 BUSINESSES OF WESTERN WIRELESS AND VOICESTREAM AFTER THE SPIN-OFF After the Spin-off, Western Wireless and VoiceStream will operate as separate businesses. Western Wireless will continue to operate domestic cellular services, paging and competitive local exchange services in select U.S. markets and international telecommunications operations through joint ventures. VoiceStream will continue to operate its PCS business in urban areas in the United States. BACKGROUND THE WIRELESS COMMUNICATIONS INDUSTRY Overview Wireless communications systems use a variety of radio frequencies to transmit voice and data. Broadly defined, the wireless communications industry includes one-way radio applications, such as paging or beeper services, and two-way radio applications, such as cellular, PCS and ESMR networks. Each such application is licensed in a distinct radio frequency block. Since its introduction in 1983, wireless service has grown dramatically. As of June 30, 1998, according to the Cellular Telecommunications Industry Association ("CTIA") there were over 60.8 million wireless subscribers in the United States, representing a penetration rate of 22.4%. In the wireless communications industry, there are two principal frequency bands licensed by the FCC for transmitting two way voice and data signals, "cellular" and "PCS." Cellular systems are generated at 824 to 899 MHz and can be either analog or digital. Although all cellular systems provide analog capabilities, digital technology has been introduced by most carriers in urban markets. Analog technology has several limitations, including lack of privacy and limited capacity. Digital systems convert voice or data signals into a stream of digits that is compressed before transmission, enabling a single radio channel to carry multiple simultaneous signal transmissions. This enhanced capacity, along with improvements in digital signaling, allows digital-based wireless technologies to offer new and enhanced services, such as greater call privacy, and robust data transmission features, such as "mobile office" applications (including facsimile, electronic mail and wireless connections to computer/data networks, including the Internet). See "-- Operation of Wireless Communications Systems." PCS is a term commonly used in the United States to describe a portion of radio spectrum from 1850 to 1990 MHz. PCS spectrum was auctioned by the FCC in six frequency blocks (A-F) beginning with the A and B Blocks in late 1994 and 1995. In late 1995 and in 1996 the C Block was auctioned and the FCC concluded simultaneous auctions of the D, E and F Blocks in 1997. In 1999, the FCC intends to reauction portions of the C, D, E and F Blocks returned to the FCC. This portion of radio spectrum is to be used by PCS licensees to provide wireless communications services. PCS competes directly with existing cellular telephone, paging and specialized mobile radio services. PCS also includes features that are not generally offered by analog cellular providers, such as data transmissions to and from computers, advanced paging services and facsimile services. In addition, wireless providers may eventually offer mass market wireless local loop applications in competition with wired local communications services. See "-- Governmental Regulation" for a discussion of the FCC auction process and allocation of wireless licenses. Operation of Wireless Communications Systems Wireless communications system service areas, whether cellular or PCS, are divided into multiple cells. Due to the frequencies in which they operate, a single cell in a cellular system generally transmits over a wider radius than a comparable PCS cell. In both cellular and PCS systems, each cell contains a transmitter, a receiver and signaling equipment (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 system controls the transfer of calls from cell to cell as a subscriber's handset travels, coordinates calls to and from handsets, allocates calls among the cells within the system and connects calls to the local landline telephone system or to a long distance 22 26 telephone carrier. Wireless communications providers establish interconnection agreements with local exchange carriers and interexchange carriers, thereby integrating their system with the existing landline communications system. Because the signal strength of a transmission between a handset and a Cell Site declines as the handset moves away from the Cell Site, the switching office and the Cell Site monitor the signal strength of calls in progress. When the signal strength of a call declines to a predetermined level, the switching office may "hand off" the call to another Cell Site where the signal strength is stronger. If a handset leaves the service area of a cellular or PCS system, the call is disconnected unless there is a technical connection with the adjacent system. Wireless system operators normally agree to provide service to subscribers from other compatible wireless systems who are temporarily located in or traveling through their service areas in a practice called "roaming." Agreements among system operators provide that the carrier that normally provides services to the roaming subscriber pays the serving carrier at rates prescribed by the serving carrier. Analog cellular handsets are functionally compatible with cellular systems in all markets within the United States. As a result, analog cellular handsets may be used wherever a subscriber is located, as long as a cellular system is operational in the area and necessary roaming arrangements exist. Although PCS and cellular systems utilize similar technologies and hardware, they operate on different frequencies and use different technical and network standards. Dual mode phones, 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 for use in PCS systems: GSM, TDMA or CDMA. GSM is the most widely used digital wireless standard in the world serving over 120 million subscribers in approximately 130 countries. A benefit associated with GSM technology is its use of an open system architecture that allows operators to purchase network equipment from a variety of vendors that share standard interfaces for operation. See "Risk Factors -- Lack of National GSM Coverage May Hinder VoiceStream's Growth." GSM and TDMA are both based upon time-division of spectrum and are currently incompatible with each other and with CDMA. Accordingly, a subscriber of a system that utilizes GSM technology is currently unable to use a GSM handset when traveling in an area not served by GSM-based PCS operators, unless the subscriber carries a dual-mode handset that permits the subscriber to use the analog cellular system in that area. 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. The TDMA-based PCS standard offers the same features and services offered by the time division-based digital cellular standard currently in use by certain cellular operators in the United States, including AT&T Wireless and Southwestern Bell. Both the CDMA- and TDMA-based PCS standards use a closed system architecture that will limit PCS operators' choices of equipment vendors. The CDMA standard is the most widely adopted digital standard in the United States. CDMA-based PCS systems offer the same features and services offered by CDMA-based cellular systems. THE BUSINESS OF WESTERN WIRELESS Western Wireless operates high quality cellular systems in 17 western states, serving over 660,000 cellular subscribers under the Cellular One(R) brand name. To support its rapidly growing subscriber base, Western Wireless operates and maintains extensive centralized management, back office functions and a call center in the state of Washington. Western Wireless also operates paging systems in eight western states serving 35,900 paging customers at December 31, 1998. Through international joint ventures, Western Wireless has interests in (and in certain cases manages) wireless licenses in certain foreign countries, including Ghana, Iceland, Haiti, Croatia and the Republics of Latvia and Georgia. In addition, Western Wireless has interests in entities which have made wireless 23 27 license applications in certain other foreign countries. A joint venture which Western Wireless controls has been notified by the Irish Government that it is the preferred applicant for a DCS-1800/GSM 900 mobile communication license in Ireland. The license has not yet been issued, as the determination by the Irish Government is subject to a pending proceeding. For additional information with respect to Western Wireless' business and operations, please see the documents incorporated herein by reference. See "Documents Incorporated by Reference" and "Additional Information." THE BUSINESS OF VOICESTREAM GENERAL VoiceStream provides PCS services under the VoiceStream brand name in 11 urban markets -- Denver, Seattle/Tacoma, Phoenix/Tucson, Portland, Salt Lake City, Des Moines, Oklahoma City, Honolulu, El Paso, Albuquerque and Boise -- and is currently constructing systems in San Antonio and Austin. VoiceStream holds 107 broadband PCS licenses covering approximately 62.6 million persons. VoiceStream has experienced rapid growth of its operations since commencement in February 1996. VoiceStream's subscribers have grown to 322,400 at December 31, 1998, and revenues have grown to $168.0 million for the year ended December 31, 1998. VoiceStream believes these results reflect the strong demand for wireless services in its markets, the success of its marketing strategy and its management capabilities. VoiceStream believes its PCS service offerings are more extensive than those generally offered by cellular systems in VoiceStream's markets. Service offerings include all of the services typically provided by cellular systems, as well as paging, caller identification, text messaging, smart cards, voice mail, over-the-air activation and over-the-air subscriber profile management. VoiceStream's goal is to achieve significant market penetration by aggressively marketing competitively priced services under its proprietary VoiceStream brand name, offering enhanced services not generally provided by cellular operators and providing superior customer service. In addition, VoiceStream is well-positioned to be a low-cost provider of PCS services by utilizing centralized management, marketing, billing and customer service functions, and by focusing on efficient customer acquisition and retention. VoiceStream selected GSM as the digital standard for its PCS systems because it believes GSM has significant advantages over the other competing digital standards. These advantages include the widest array of features, and an open system architecture that provides cost advantages in choosing from a variety of equipment options and providers, which result from the experience of years of proven operability in Europe and Asia. GSM is the leading digital wireless standard in the world, with over 120 million customers in 130 countries. VoiceStream has entered into roaming agreements with substantially all of the licensees that have deployed the GSM standard in North America. Such agreements will allow VoiceStream's subscribers to roam in these carriers' PCS markets, and vice versa, when such systems are operational. VoiceStream also has approximately 90 reciprocal roaming agreements with a variety of international carriers who have chosen to deploy the GSM standard. In addition, VoiceStream has entered into roaming agreements with several cellular carriers, including Western Wireless. STRATEGY VoiceStream's principal focus is on the operation of PCS systems in urban markets in the United States. VoiceStream believes that PCS is the optimum technology for more densely populated urban areas where cellular systems are generally more expensive to deploy and face potential capacity constraints. VoiceStream's operating strategy is to: (i) construct and operate high quality systems with extensive coverage in urban areas; (ii) expand operations through increased subscriber growth and usage; (iii) utilize 24 28 centralized management and back office functions to improve operating efficiencies and generate greater economies of scale; and (iv) acquire additional PCS licenses in urban markets. VoiceStream is implementing its strategy by: (i) expanding its present systems and building new systems; (ii) offering a targeted range of products to complement today's business and personal lifestyles at competitive prices; (iii) continually upgrading the quality of its network; (iv) establishing brand recognition through a strong sales and marketing program; and (v) providing a superior level of customer service. FORMATION VoiceStream was formed in 1994 as "Western PCS Corporation" to participate on behalf of Western Wireless and its shareholders in FCC auctions of various PCS licenses. It was a wholly owned subsidiary of Western Wireless until the Hutchison Investment. VOICESTREAM EMPLOYEES AND LABOR RELATIONS VoiceStream considers its labor relations to be good and, to VoiceStream's knowledge, none of its employees is covered by a collective bargaining agreement. As of December 31, 1998, VoiceStream employed a total of approximately 1,834 people in the following areas:
NUMBER OF CATEGORY EMPLOYEES -------- --------- Sales and marketing......................................... 771 Engineering................................................. 269 General and administration, including customer service...... 794
MARKETS AND SYSTEMS VoiceStream owns 107 broadband PCS licenses, seven of which are for Major Trading Area ("MTA") license areas and 100 of which are for Basic Trading Area ("BTA") license areas, covering a total of approximately 62.6 million persons. See "-- Governmental Regulation, Licensing of PCS Systems." MTA and BTA are terms used by the FCC to define licensed market areas and are based on the Rand McNally 1992 Commercial Atlas & Marketing Guide, 123rd Edition, at pages 38 - 39 ("BTA/MTA Map"). Rand McNally organizes the 50 states and the District of Columbia into 47 MTAs and 487 BTAs. The BTA/MTA Map is available for public inspection at the Office of Engineering and Technology's Technical Information Center, 2000 M Street, NW, Washington, DC 20554. VoiceStream obtained its licenses as follows: (i) six MTA licenses in the FCC's A Block auction in 1995; (ii) one MTA license from another carrier in 1996; (iii) 92 BTA licenses in the FCC's D and E Block auctions in 1997; and (iv) eight BTA licenses from another carrier in October 1997. Cook Inlet Western Wireless PV/SS PCS, LP ("Cook Inlet PCS"), in which VoiceStream owns a 49.9% limited partnership interest, owns 18 PCS BTA licenses that were acquired in the FCC's C and F Block auctions. Cook Inlet PCS provides service in the Spokane, Tulsa, Phoenix/Tucson and Seattle/Tacoma markets. VoiceStream has also formed another joint venture with some of the same Cook Inlet PCS partners to participate in the FCC's reauction of C and F Block licenses. Through other joint ventures in which VoiceStream has an interest, PCS service is available in the Wichita market and certain markets in Iowa, and is anticipated to be available in certain markets in southern Texas in 1999. All of these operational markets use the internationally-proven GSM technology. 25 29 Unless the context otherwise requires, when used herein, with respect to a licensed area, "persons" and "population" are interchangeable and refer to the aggregate number of persons located in such licensed area. Persons and population data are estimated for 1999 based upon 1998 estimates by Equifax Marketing Decision Systems, Inc. ("Equifax") adjusted by VoiceStream by applying Equifax's growth factors from 1997 to 1998.
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ----- --------- DENVER Casper-Gillette........................................... 140,000 B 30 MHz Cheyenne.................................................. 109,000 B 30 MHz Colorado Springs.......................................... 513,000 B 30 MHz Denver.................................................... 2,478,000 B 30 MHz Fort Collins.............................................. 231,000 B 30 MHz Grand Junction............................................ 233,000 B 30 MHz Greeley................................................... 160,000 B 30 MHz Pueblo.................................................... 299,000 B 30 MHz Rapid City................................................ 194,000 B 30 MHz Riverton.................................................. 49,000 B 30 MHz Rock Springs.............................................. 59,000 B 30 MHz Scottsbluff............................................... 101,000 B 30 MHz ---------- 4,566,000 SEATTLE Olympia-Centralia......................................... 327,000 E 10 MHz Seattle-Tacoma............................................ 3,090,000 E 10 MHz ---------- 3,417,000 PHOENIX Flagstaff................................................. 119,000 D 10 MHz Nogales................................................... 40,000 D 10 MHz Phoenix................................................... 3,191,000 D 10 MHz Prescott.................................................. 153,000 D 10 MHz Sierra Vista-Douglas...................................... 114,000 D 10 MHz Tucson.................................................... 807,000 D 10 MHz Yuma...................................................... 126,000 D 10 MHz ---------- 4,550,000 PORTLAND Bend...................................................... 141,000 A 30 MHz Coos Bay-North Bend....................................... 84,000 A 30 MHz Eugene-Springfield........................................ 312,000 A 30 MHz Klamath Falls............................................. 81,000 A 30 MHz Longview.................................................. 96,000 A 30 MHz Medford-Grants Pass....................................... 249,000 A 30 MHz Portland.................................................. 2,041,000 A 30 MHz Roseburg.................................................. 103,000 A 30 MHz Salem-Albany.............................................. 514,000 A 30 MHz ---------- 3,621,000
26 30
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ----- --------- SALT LAKE CITY Logan..................................................... 101,000 A 30 MHz Provo-Orem................................................ 358,000 A 30 MHz Salt Lake City............................................ 1,554,000 A 30 MHz St. George................................................ 129,000 A, E 40 MHz Boise-Nampa............................................... 538,000 A 30 MHz Idaho Falls............................................... 211,000 A 30 MHz Pocatello................................................. 102,000 A 30 MHz Twin Falls................................................ 158,000 A 30 MHz ---------- 3,151,000 EL PASO-ALBUQUERQUE Albuquerque............................................... 792,000 A 30 MHz Carlsbad.................................................. 54,000 A 30 MHz Farmington-Durango........................................ 194,000 A 30 MHz Gallup.................................................... 141,000 A 30 MHz Las Cruces................................................ 240,000 A 30 MHz Roswell................................................... 79,000 A 30 MHz Santa Fe.................................................. 204,000 A 30 MHz El Paso................................................... 772,000 A 30 MHz ---------- 2,476,000 OKLAHOMA CITY Ada....................................................... 54,000 A 30 MHz Ardmore................................................... 88,000 A 30 MHz Enid...................................................... 85,000 A, E 40 MHz Lawton-Duncan............................................. 173,000 A 30 MHz McAlester................................................. 53,000 A 30 MHz Oklahoma City............................................. 1,391,000 A, E 40 MHz Ponca City................................................ 46,000 A, E 40 MHz Stillwater................................................ 76,000 A, E 40 MHz ---------- 1,966,000 DES MOINES-QUAD CITIES Burlington................................................ 137,000 A 10 MHz Cedar Rapids.............................................. 280,000 A 10 MHz Clinton-Sterling.......................................... 146,000 A 10 MHz Davenport-Moline.......................................... 427,000 A 10 MHz Des Moines(1)............................................. 776,000 A 10/30 MHz Dubuque................................................... 177,000 A 10 MHz Fort Dodge................................................ 126,000 A 10 MHz Iowa City................................................. 122,000 A 10 MHz Marshalltown.............................................. 56,000 A 10 MHz Mason City................................................ 116,000 A 10 MHz Ottumwa................................................... 123,000 A 10 MHz Sioux City................................................ 341,000 A 10 MHz Waterloo-Cedar Falls...................................... 259,000 A 10 MHz ---------- 3,086,000 HONOLULU Hilo...................................................... 142,000 A 30 MHz Honolulu.................................................. 866,000 A 30 MHz Kahului-Wailuku-Lahaina................................... 123,000 A 30 MHz Lihue..................................................... 57,000 A 30 MHz ---------- 1,188,000
27 31
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ----- --------- SAN ANTONIO San Antonio............................................... 1,805,000 D 10 MHz DALLAS-FORT WORTH Abilene................................................... 256,000 D 10 MHz Amarillo.................................................. 407,000 D 10 MHz Austin.................................................... 1,188,000 D 10 MHz Big Spring................................................ 35,000 D 10 MHz Brownwood................................................. 62,000 D 10 MHz Clovis.................................................... 80,000 E 10 MHz Hobbs..................................................... 56,000 D 10 MHz Lubbock................................................... 404,000 E 10 MHz Midland................................................... 122,000 D, E 20 MHz Odessa.................................................... 217,000 D, E 20 MHz Paris..................................................... 91,000 D 10 MHz San Angelo................................................ 165,000 D 10 MHz ---------- 3,083,000 ST. LOUIS Cape Girardeau............................................ 188,000 E 10 MHz Carbondale-Marion......................................... 218,000 E 10 MHz Columbia.................................................. 208,000 E 10 MHz Jefferson City............................................ 156,000 D 10 MHz Kirksville................................................ 56,000 E 10 MHz Mount Vernon.............................................. 122,000 D 10 MHz Poplar Bluff.............................................. 155,000 D 10 MHz Quincy-Hannibal........................................... 180,000 D 10 MHz Rolla..................................................... 93,000 D 10 MHz St. Louis................................................. 2,822,000 E 10 MHz West Plains............................................... 75,000 D 10 MHz ---------- 4,273,000 TULSA Coffeyville............................................... 61,000 D 10 MHz WICHITA Hutchinson................................................ 124,000 D 10 MHz Salina.................................................... 143,000 D 10 MHz Wichita................................................... 652,000 D 10 MHz ---------- 919,000 CHICAGO Jacksonville.............................................. 71,000 E 10 MHz CINCINNATI-DAYTON Dayton-Springfield........................................ 1,209,000 E 10 MHz
28 32
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ----- --------- CLEVELAND Ashtabula................................................. 102,000 E 10 MHz Canton-New Philadelphia................................... 526,000 E 10 MHz Cleveland-Akron........................................... 2,964,000 E 10 MHz East Liverpool-Salem...................................... 111,000 E 10 MHz Erie...................................................... 278,000 E 10 MHz Mansfield................................................. 226,000 E 10 MHz Meadville................................................. 89,000 E 10 MHz Sandusky.................................................. 140,000 E 10 MHz Sharon.................................................... 122,000 E 10 MHz Youngstown-Warren......................................... 480,000 E 10 MHz ---------- 5,038,000 KANSAS CITY Manhattan-Junction City................................... 110,000 D 10 MHz LITTLE ROCK Fayetteville-Springdale................................... 292,000 E 10 MHz Fort Smith................................................ 311,000 D 10 MHz Harrison.................................................. 87,000 D 10 MHz Hot Springs............................................... 132,000 D 10 MHz Jonesboro-Paragould....................................... 174,000 E 10 MHz Little Rock............................................... 920,000 D 10 MHz Pine Bluff................................................ 148,000 D 10 MHz Russellville.............................................. 93,000 E 10 MHz ---------- 2,157,000 MILWAUKEE Milwaukee................................................. 1,789,000 D 10 MHz MINNEAPOLIS-ST. PAUL Aberdeen.................................................. 87,000 D 10 MHz Bemidji................................................... 64,000 D 10 MHz Bismarck.................................................. 127,000 E 10 MHz Fargo..................................................... 307,000 E 10 MHz Grand Forks............................................... 208,000 D 10 MHz Huron..................................................... 54,000 D 10 MHz Mitchell.................................................. 84,000 D 10 MHz Sioux Falls............................................... 232,000 D 10 MHz Watertown................................................. 76,000 D 10 MHz Willmar-Marshall.......................................... 84,000 E 10 MHz Worthington............................................... 96,000 D 10 MHz ---------- 1,419,000 OMAHA Grand Island.............................................. 148,000 E 10 MHz Hastings.................................................. 72,000 E 10 MHz Lincoln................................................... 332,000 E 10 MHz McCook.................................................... 34,000 E 10 MHz Norfolk................................................... 112,000 E 10 MHz North Platte.............................................. 85,000 E 10 MHz ---------- 783,000
29 33
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ----- --------- RICHMOND-NORFOLK Danville.................................................. 168,000 E 10 MHz Lynchburg................................................. 161,000 E 10 MHz Martinsville.............................................. 90,000 E 10 MHz Norfolk-VA Beach.......................................... 1,763,000 E 10 MHz Richmond-Petersburg....................................... 1,202,000 E 10 MHz Staunton-Waynesburo....................................... 107,000 E 10 MHz ---------- 3,491,000 SAN FRANCISCO-SAN JOSE San Francisco............................................. 6,965,000 E 10 MHz SPOKANE-BILLINGS Billings.................................................. 307,000 E 10 MHz Bozeman................................................... 77,000 E 10 MHz Butte..................................................... 67,000 D 10 MHz Great Falls............................................... 164,000 E 10 MHz Helena.................................................... 67,000 D 10 MHz Kalispell................................................. 72,000 D 10 MHz Kennewick-Pasco........................................... 189,000 D 10 MHz Lewiston-Moscow........................................... 123,000 E 10 MHz Missoula.................................................. 164,000 D 10 MHz Walla Walla-Pendleton..................................... 169,000 D 10 MHz ---------- 1,399,000 ---------- VOICESTREAM TOTAL........................................... 62,593,000 ==========
- --------------- (1) VoiceStream contributed portions of the Des Moines MTA license to Iowa Wireless (defined below). As a result, VoiceStream owns 30 MHz of the license for certain counties within the Des Moines BTA but only 10 MHz for the remainder of the Des Moines BTA. Cook Inlet PCS Cook Inlet PCS is a Delaware limited partnership ultimately controlled by Cook Inlet Region, Inc., an Alaska Native Regional Corporation, which qualifies Cook Inlet PCS for additional benefits available to a small business under FCC rules. VoiceStream holds a 49.9% partnership interest in Cook Inlet PCS. Cook Inlet PCS began operations in the Tulsa market in June 1997, in the Phoenix/Tucson market in November 1998 and in the Seattle/Tacoma and Spokane markets in February 1999. Cook Inlet PCS has not yet finalized its construction plans for the other licenses it owns. For the Phoenix/Tucson and Seattle/ Tacoma markets, Cook Inlet PCS and VoiceStream have entered into agreements allowing system leasing, resale and roaming, enabling each of them to operate on the systems constructed for the markets. 30 34 Cook Inlet PCS owns FCC licenses to provide wireless communications services in the following 18 BTA license areas. See "-- Governmental Regulation, Licensing of PCS Systems."
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ----- ------ CINCINNATI-DAYTON Cincinnati................................................ 2,139,000 F 10 MHz DALLAS-FORT WORTH Temple-Killeen............................................ 354,000 F 10 MHz KANSAS CITY Pittsburg-Parsons......................................... 90,000 F 10 MHz PHOENIX Phoenix(1)................................................ 3,191,000 F 10 MHz Tucson(1)................................................. 807,000 F 10 MHz ---------- 3,998,000 SEATTLE Aberdeen.................................................. 91,000 C 15 MHz Bellingham................................................ 161,000 F 10 MHz Bremerton................................................. 242,000 C 15 MHz Port Angeles.............................................. 93,000 C 15 MHz Seattle-Tacoma(1)......................................... 3,090,000 F 10 MHz Wenatchee................................................. 211,000 C 15 MHz Yakima.................................................... 259,000 C 15 MHz ---------- 4,147,000 SPOKANE-BILLINGS Spokane................................................... 733,000 C 15 MHz Walla Walla-Pendleton(1).................................. 169,000 C 15 MHz ---------- 902,000 TULSA Bartlesville.............................................. 47,000 C 15 MHz Coffeyville(1)............................................ 61,000 C 15 MHz Muskogee.................................................. 159,000 C 15 MHz Tulsa..................................................... 910,000 C 15 MHz ---------- 1,177,000 ---------- COOK INLET PCS TOTAL........................................ 12,807,000 ==========
- --------------- (1) VoiceStream also owns 10 MHz E Block licenses for these BTAs. Iowa Wireless Iowa Wireless Services, L.P. ("Iowa Wireless") is a Delaware limited partnership ultimately controlled by Iowa Network Services, Inc., an Iowa corporation. VoiceStream has a 38% limited partnership interest in Iowa Wireless. Iowa Wireless began operations in certain markets in 1998. 31 35 Iowa Wireless owns FCC licenses to provide wireless communications services in the following 13 BTA license areas. See "--Governmental Regulation, Licensing of PCS Systems."
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ------ ------ DES MOINES-QUAD CITIES Burlington................................................ 137,000 A, D 30 MHz Cedar Rapids.............................................. 280,000 A 20 MHz Clinton-Sterling.......................................... 146,000 A, D 30 MHz Davenport-Moline.......................................... 427,000 A 20 MHz Des Moines................................................ 207,000 A 20 MHz Dubuque................................................... 177,000 A 20 MHz Fort Dodge................................................ 126,000 A 20 MHz Iowa City................................................. 122,000 A 20 MHz Marshalltown.............................................. 56,000 A, D 30 MHz Mason City................................................ 116,000 A, D 30 MHz Ottumwa................................................... 123,000 A 20 MHz Sioux City................................................ 341,000 A 20 MHz Waterloo-Cedar Falls...................................... 259,000 A 20 MHz --------- IOWA WIRELESS TOTAL......................................... 2,517,000 =========
Wichita PCS VoiceStream manages the Wichita market under the VoiceStream brand name for Omnipoint Corp. VoiceStream is reimbursed for the costs of managing this market. Omnipoint purchases VoiceStream's D Block service at wholesale in the Wichita, Hutchinson and Salina BTAs and resells VoiceStream service to its own customers. These operations are referred to as Wichita PCS. Wichita PCS provides wireless communications services using the following three FCC licenses.
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ------ ------ WICHITA Hutchinson................................................ 124,000 D 10 MHz Salina.................................................... 143,000 D 10 MHz Wichita................................................... 652,000 D 10 MHz --------- WICHITA PCS TOTAL........................................... 919,000 =========
STPCS STPCS Joint Venture, LLC ("STPCS") is a Delaware limited liability company ultimately controlled by STPCS Investment, LLC. VoiceStream has an 18% membership interest in STPCS. STPCS, through its wholly owned subsidiaries, owns seven FCC licenses to provide wireless communications services in the following six BTA markets. See "-- Governmental Regulation, Licensing of PCS Systems."
MTA/BTA LICENSE AREA POPULATION BLOCK MHZ -------------------- ---------- ----- ------ SAN ANTONIO Brownsville-Harlingen..................................... 353,000 D, F 20 MHz Corpus Christi............................................ 556,000 D 10 MHz Eagle Pass-Del Rio........................................ 120,000 F 10 MHz Laredo.................................................... 215,000 D 10 MHz McAllen................................................... 594,000 D 10 MHz --------- 1,838,000 HOUSTON Victoria.................................................. 164,000 F 10 MHz --------- STPCS TOTAL................................................. 2,002,000 =========
32 36 Cook Inlet/VoiceStream PCS LLC On February 12, 1999, VoiceStream formed a Delaware limited liability company, Cook Inlet/ VoiceStream PCS LLC. This LLC, like Cook Inlet PCS, is ultimately controlled by Cook Inlet Region, Inc., and is participating in FCC reauctions of C Block and F Block licenses. As part of that transaction, a subsidiary of Cook Inlet Region, Inc. has certain rights to exchange for shares of VoiceStream Common Stock. See "Description of Western Wireless and VoiceStream Capital Stock." PRODUCTS AND SERVICES VoiceStream provides a variety of wireless products and services designed to match a range of needs for business and personal use. VoiceStream currently offers several distinct services and features in its PCS systems, including: - Enhanced Features -- VoiceStream's systems offer caller identification, call hold, voice mail and numeric paging, as well as custom calling features such as call waiting, conference calling and call forwarding. - Messaging and Wireless Data Transmission -- Digital networks offer voice and data communications, including text messaging, through a single handset. VoiceStream believes that, as data transmission services develop, a number of uses for such services will emerge. - Call Security and Privacy -- Sophisticated encryption algorithms provide increased call security, encouraging users to make private, business and personal calls with significantly lower risk of eavesdropping than on analog-based systems. - Smart Card -- "Smart" cards, programmed with the user's billing information and a specified service package, allow subscribers to obtain PCS connectivity automatically, simply by inserting their smart cards into compatible PCS handsets. - Over-the-Air Activation and Over-the Air Subscriber Profile Management -- VoiceStream is able to transmit changes in the subscriber's feature package, including mobile number assignment and personal directory numbers, directly to the subscriber's handset. - Roaming -- Subscribers are able to roam throughout the United States, either on other GSM-based PCS systems operated by current licensees or by using dual-mode handsets that can be used on existing cellular systems. VoiceStream has entered into roaming agreements which allow its customers to roam on cellular systems. Dual-mode handsets allow roaming onto analog cellular systems. MARKETING, SALES AND CUSTOMER SERVICE VoiceStream's sales and marketing strategy is to generate continued subscriber growth and increased subscriber revenues. In addition, VoiceStream targets a customer base which it believes is likely to generate higher monthly service revenues, while attempting to achieve a low cost of adding new subscribers. VoiceStream markets its services under a proprietary brand name, and sells its products and services through a combination of direct and indirect distribution channels. - Marketing -- VoiceStream markets its PCS products and services under the proprietary VoiceStream brand name. VoiceStream's objective is to develop brand recognition of VoiceStream through substantial advertising and direct marketing in each of its PCS markets. In marketing its PCS services, VoiceStream emphasizes the enhanced features, privacy and competitive pricing of such services. VoiceStream concentrates its marketing efforts primarily on businesses and individuals "on-the-go," who benefit from integrated mobile voice, messaging and wireless data transmission capabilities, and enhanced features and services. - Sales -- VoiceStream sells its products and services through a combination of direct and indirect channels. VoiceStream operates 90 company-owned retail sales locations and utilizes a direct sales 33 37 force of over 680 persons. VoiceStream's training programs provide its sales employees with an in-depth understanding of VoiceStream's system, products and services so that they, in turn, can provide extensive information to prospective customers. Sales commissions generally are linked both to subscriber revenue and subscriber retention, as well as to activation levels. VoiceStream believes that its local sales offices provide the physical presence in local markets necessary to position VoiceStream as a quality local service provider, and give VoiceStream greater control over both its costs and the sales process. VoiceStream also utilizes indirect sales through an extensive network of national and local merchant and specialty retailers. VoiceStream intends to continue to use a combination of direct and indirect sales channels, with the mix depending on the retail needs of each particular market. In addition, VoiceStream acts as a retail distributor of handsets and maintains inventories of handsets. Although subscribers generally are responsible for purchasing or otherwise obtaining their own handsets, VoiceStream has historically sold handsets below cost to respond to competition and general industry practice and expects to continue to do so in the future. - Customer Service -- Customer service is a significant element of VoiceStream's operating philosophy. VoiceStream is committed to attracting and retaining subscribers by providing consistently superior customer service. In Albuquerque, New Mexico, VoiceStream maintains a highly sophisticated monitoring and control system, a staff of customer service personnel and a well-trained technical staff to handle both routine and complex questions as they arise, 24 hours a day, 365 days a year. VoiceStream implements credit check procedures at the time of sale and continuously monitors customer churn (the rate of subscriber attrition). VoiceStream believes that it helps manage its churn rate through an outreach program implemented through its sales force and customer service personnel. This program not only enhances subscriber loyalty, but also increases add-on sales and customer referrals. The outreach program allows the sales staff to check customer satisfaction, as well as to offer additional calling features, such as voice mail, call waiting and call forwarding. SUPPLIERS AND EQUIPMENT VENDORS VoiceStream does not manufacture any of the handsets or network equipment used in its operations. The high degree of compatibility among different manufacturers' models of handsets and network equipment allows VoiceStream to design, construct and operate its systems without being dependent upon any single source of such equipment. The handsets and network equipment used in VoiceStream's operations are available for purchase from multiple sources, and VoiceStream anticipates that such equipment will continue to be available in the foreseeable future. VoiceStream currently purchases handsets primarily from Motorola Inc., Ericsson Inc., Mitsubishi Wireless Communications, Inc. and Nokia Mobile Phones, Inc. (together with its affiliate, Nokia Telecommunications Inc., "Nokia"). VoiceStream currently purchases network equipment primarily from Northern Telecom Inc. and Nokia. COMPETITION Competition for subscribers among wireless licensees is based principally upon the services and features offered, the technical quality of the wireless systems, customer service, system coverage, capacity and price. Under current FCC rules, there may be up to seven PCS licensees in each geographic area in addition to the two cellular licensees. Also, SMR dispatch system operators have constructed digital mobile communications systems on existing SMR frequencies, referred to as ESMR, in many cities throughout the United States, including some of the markets in which VoiceStream operates. VoiceStream is a relatively new entrant in a highly competitive market. VoiceStream's principal competitors are the cellular service providers in its markets, many of which have been operational for a number of years, and national PCS providers, many of which offer no or low cost roaming and toll calls. Many of VoiceStream's competitors have significantly greater financial and technical resources than those 34 38 available to VoiceStream and provide comparable services in competition with VoiceStream's PCS systems. These competitors include AirTouch, AT&T Wireless, Bell Atlantic, GTE Mobilnet, Sprint PCS and US West. VoiceStream also competes with paging, dispatch and conventional mobile telephone companies, resellers and landline telephone service providers in its PCS markets. Potential users of wireless systems may, however, find their communications needs satisfied by other current and developing technologies. One or two-way paging or beeper services that feature voice messaging and data display as well as tone only service may be adequate for potential subscribers who do not need to speak to the caller. In the future, wireless service may also compete more directly with traditional landline telephone service providers. VoiceStream's principal PCS competitors use standards other than GSM. As a result, VoiceStream's subscribers may not be able to conveniently use PCS services while roaming in areas outside its markets. US West and Sprint PCS use the CDMA standard. AT&T Wireless and Southwestern Bell use the TDMA standard. The FCC requires all cellular and PCS licensees to provide service to "resellers." A reseller provides wireless service to customers but does not hold an FCC license or own facilities. The reseller buys blocks of wireless telephone numbers and capacity from a licensed carrier and resells service through its own distribution network to the public. 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 VoiceStream's systems. With respect to PCS licensees, the resale obligations terminate five years after the last group of initial licenses of currently allotted PCS spectrum is awarded. In the future, VoiceStream expects to face increased competition from entities providing similar services using other communications technologies. While some of these technologies and services are currently operational, others are being developed or may be developed in the future. VoiceStream recognizes that technological advances and changing regulations have led to rapid evolution of the wireless telecommunications industry. At the end of 1996, the FCC transferred 200 MHz of spectrum previously allocated to federal government use to the private sector. In April of 1997, the FCC auctioned 30 MHz of spectrum for Wireless Communications Services, which can provide fixed or mobile telecommunications service. In late 1997, the FCC also auctioned 10 MHz of spectrum for Specialized Mobile Radio service, another potential competitor with PCS and cellular service. Moreover, in 1998, the FCC auctioned more than 1000 MHz of spectrum for Local Multipoint Distribution Service ("LMDS"). VoiceStream acquired 16 licenses as a result of such auction. During 1998, the FCC auctioned 25 MHz of spectrum for the General Wireless Communications Service, plus additional spectrum in the 220 MHz and 39 MHz bands. VoiceStream cannot foresee how technological progress or economic incentive will affect competition from these new services. In all instances, the FCC reserves the right to amend or repeal its service regulations and auction schedule. INTELLECTUAL PROPERTY VoiceStream holds federal trademark registration of the marks "VoiceStream" and "VoiceStream and Design," and has registered or applied for various other trade and service marks with the United States Patent and Trademark Office. ORGANIZATION VoiceStream holds its FCC licenses and conducts all operations through a number of direct and indirect wholly-owned subsidiaries and through certain affiliates. Indirect wholly-owned subsidiaries of VoiceStream are the 49.9% limited partner of Cook Inlet PCS, the 38.0% limited partner of Iowa Wireless, the 18.0% member of STPCS, and the non-controlling member of Cook Inlet/VoiceStream LLC. In three BTAs, VoiceStream and Cook Inlet PCS each own a license for 10 MHz of PCS spectrum that are the subject of agreements allowing each of VoiceStream and Cook Inlet PCS to operate on the PCS systems built by VoiceStream in those BTAs. 35 39 GOVERNMENTAL REGULATION The FCC regulates the licensing, construction, operation, acquisition and sale of cellular and PCS systems in the United States pursuant to the Communications Act of 1934, as amended from time to time, and the rules, regulations and policies promulgated by the FCC thereunder (the "Communications Act"). LICENSING OF PCS SYSTEMS In order to increase competition in wireless communications, promote improved quality and service and make available the widest possible range of wireless services, federal legislation was enacted directing the FCC to allocate radio frequency spectrum for PCS by competitive bidding. A PCS system operates under a protected geographic service area license granted by the FCC for a particular market on one of six frequency blocks allocated for broadband PCS service. The FCC has divided the United States and its possessions and territories into PCS markets made up of 493 BTAs and 51 MTAs. Each MTA consists of at least two BTAs. As many as seven licensees will compete in each PCS service area. The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for licensed PCS services. The FCC divided the 120 MHz of spectrum into six individual blocks, each of which is allocated to serve either MTAs or BTAs. The spectrum allocation includes two 30 MHz blocks (A and B Blocks) licensed for each of the 51 MTAs, one 30 MHz block (C Block) (which has been split in some BTAs into two 15 MHz blocks) licensed for each of the 493 BTAs, and three 10 MHz blocks (D, E and F Blocks) licensed for each of the 493 BTAs. A PCS license will be awarded for each MTA or BTA in every block, for a total of more than 2,000 licenses. During 1997, the last of these auctions was completed; however, a reauction of certain C, D, E and F Block licenses is currently scheduled for 1999. Under the FCC's current rules specifying spectrum ownership limits affecting broadband PCS licensees, no entity may hold licenses for more than 45 MHz of PCS, cellular and SMR services regulated as Commercial Mobile Radio Service ("CMRS") where there is significant overlap in any geographic area (significant overlap will occur when at least ten percent of the population of the PCS licensed service area is within the Cellular Geographic Service Area ("CGSA") and/or SMR service area, as defined by the FCC). The FCC is currently reexamining these ownership limits. Western Wireless owns cellular licenses serving markets that are wholly or partially within the Denver MTA and the Oklahoma City MTA, resulting in Western Wireless exceeding the FCC's current 45 MHz CMRS cross ownership restriction described above. Western Wireless has filed waiver requests with the FCC with respect to both MTAs, both of which are pending, and has been allowed to delay compliance with the ownership restriction until the FCC rules on the waiver requests. In the event that this restriction is not waived or the rule itself revised, either VoiceStream or Western Wireless will be obligated to divest sufficient portions of their markets in the Denver and Oklahoma City MTA to come into compliance with the rules. VoiceStream does not believe such restriction or any actions Western Wireless or VoiceStream is required to take to comply therewith will have a material adverse effect on VoiceStream due to the relatively minor geographic overlap. All PCS licenses are granted for a ten year term, at the end of which they must be renewed. The FCC has adopted specific standards to apply to PCS renewals, under which the FCC will award a renewal expectancy to a PCS licensee that (i) has provided substantial service during its past license term and (ii) has substantially complied with applicable FCC rules and policies and the Communications Act. All 30 MHz PCS licensees, including VoiceStream, must construct facilities that offer coverage to one-third of the population of their service area within five years of their initial license grants and to two-thirds of the population within ten years. Licensees that fail to meet the coverage requirements may be subject to forfeiture of the license. FCC rules restrict the voluntary assignments or transfers of control of C and F Block 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 eligibility criteria for participation in the entrepreneur block auction at the time the application for assignment or transfer of control is filed, or if the proposed assignee or 36 40 transferee holds other licenses for C and F Blocks and, at the time of receipt of such licenses, met the same eligibility criteria. Any transfers or assignments during the entire ten year initial license term are subject to an unjust enrichment penalty of acceleration of any installment payment plans should the assignee or transferee not qualify for the same benefits. Any transfers or assignments during the first five years of the initial license term are subject to an unjust enrichment penalty of forfeiture of bidding credits. In the case of the C and F Blocks, the FCC will conduct random audits to ensure that licensees are in compliance with the FCC's eligibility rules. Violations of the Communications Act or the FCC's rules could result in license revocations, forfeitures or fines. For a period of up to ten years after the grant of a PCS license (subject to extension), a PCS licensee will share spectrum with existing licensees that operate certain fixed microwave systems within its license area. To secure a sufficient amount of unencumbered spectrum to operate its PCS systems efficiently and with adequate population coverage, VoiceStream will need to relocate many of these incumbent licensees. In an effort to balance the competing interests of existing microwave users and newly authorized PCS licensees, the FCC adopted (i) a transition plan to relocate such microwave operators to other spectrum blocks and (ii) a cost sharing plan so that if the relocation of an incumbent benefits more than one PCS licensee, the benefiting PCS licensees will share the cost of the relocation. Initially, this transition plan allowed most microwave users to operate in the PCS spectrum for a two-year voluntary negotiation period and an additional one-year mandatory negotiation period. The FCC has shortened the voluntary negotiation period by one year (without lengthening the mandatory negotiation period) for PCS licensees in the C, D, E and F Blocks. For public safety entities dedicating a majority of their system communications for police, fire or emergency medical services operations, the voluntary negotiation period is three years, with an additional two year mandatory negotiation period. Parties unable to reach agreement within these time periods may refer the matter to the FCC for resolution, but the incumbent microwave user is permitted to continue its operations until final FCC resolution of the matter. The transition and cost sharing plans expire on April 4, 2005, at which time remaining incumbents in the PCS spectrum will be responsible for their costs to relocate to alternate spectrum locations. Cellular and PCS systems are subject to certain Federal Aviation Administration regulations respecting the location, lighting and construction of transmitter towers and antennae and may be subject to regulation under the National Environmental Policy Act and the environmental regulations of the FCC. State or local zoning and land use regulations also apply to VoiceStream's activities. VoiceStream uses, among other facilities, common carrier point to point microwave facilities to connect cell sites and to link them to the main switching office. These facilities are separately licensed by the FCC and are subject to regulation as to technical parameters and service. VoiceStream has purchased its PCS licenses from private parties and the federal government. VoiceStream has used a combination of debt and equity financing to acquire such licenses. Some joint ventures in which VoiceStream holds an interest have utilized financing from the federal government to the extent available. TRANSFERS AND ASSIGNMENTS OF PCS LICENSES The Communications Act and FCC rules require the FCC's prior approval of the assignment or transfer of control of a license for a PCS system (proforma transfer of control does not require prior FCC approval). In addition, the FCC has established transfer disclosure requirements that require licensees who transfer control of or assign a PCS license within the first three years of their license term to file associated contracts for sale, option agreements, management agreements or other documents disclosing the total consideration that the licensee would receive in return for the transfer or assignment of its license. Non-controlling interests in an entity that holds a PCS license or PCS system generally may be bought or sold without FCC approval. Any acquisition or sale by VoiceStream of PCS interests may also require the prior approval of the Federal Trade Commission and the Department of Justice, if over a certain size, as well as state or local regulatory authorities having competent jurisdiction. 37 41 FOREIGN OWNERSHIP Under the Communications Act, no more than 25% of an FCC licensee's capital stock may be indirectly owned or voted by non-U.S. citizens or their representatives, by a foreign government, or by a foreign corporation, absent an FCC finding that a higher level of alien ownership is not inconsistent with the public interest. In November 1997, the FCC adopted new rules, effective in February 1998, in anticipation of implementation of the World Trade Organization Basic Telecom Agreement ("WTO Agreement"). Formerly, potential licensees had to demonstrate that their markets offered effective competitive opportunities in order to obtain authorization to exceed the 25% indirect foreign ownership threshold. Under the new rules, this showing now only applies to non-WTO members. Applicants from WTO Agreement signatories have an "open entry" standard: they are presumed to offer effective competitive opportunities. However, the FCC reserves 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 the application. The limitation on direct foreign ownership in an FCC licensee remains fixed at 20%, with no opportunity to increase the percentage, and is unaffected by the FCC's new rules. VoiceStream has applied for and received FCC approval for foreign ownership of up to 39.9%. As of the Effective Date, foreign ownership of VoiceStream is less than 30%. The WTO Agreement also obligates signatories to open their domestic telecommunications markets to foreign investment and foreign corporations. The WTO Agreement will increase investment and competition in the United States, potentially leading to lower prices, enhanced innovation and better service. At the same time, market access commitments from WTO Agreement signatories will provide U.S. service suppliers opportunities to expand abroad. TELECOMMUNICATIONS ACT OF 1996 AND OTHER RECENT INDUSTRY DEVELOPMENTS On February 8, 1996, the Telecommunications Act of 1996 (the "Telecommunications Act") was signed into law, substantially revising the regulation of communications. The goal of the Telecommunications Act is to enhance competition and remove barriers to market entry, while deregulating the communications industry to the greatest extent possible. To this end, local and long-distance communications providers will, for the first time, be able to compete in the other's market, and telephone and cable companies will likewise be able to compete in each other's markets. To facilitate the entry of new carriers into existing markets, the Telecommunications Act imposes certain interconnection requirements on incumbent carriers. Additionally, all telecommunications providers are required to make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service. VoiceStream cannot predict the outcome of the FCC's rulemaking proceedings to promulgate regulations to implement the new law or the effect of the new regulations on cellular service or PCS, and there can be no assurance that such regulations will not adversely affect VoiceStream's business or financial condition. The Telecommunications Act codifies the policy that non-regional Bell operating company CMRS providers will not be required to provide equal access to long distance carriers, and relieved such CMRS providers of their existing equal access obligations. The FCC, however, may require CMRS carriers to offer unblocked access (i.e., implemented by the subscriber's use of a carrier identification code or other mechanisms at the time of placing a call) to the long distance provider of a subscriber's choice. The FCC has terminated its inquiry into the imposition of equal access requirements on CMRS providers. On July 26, 1996, the FCC released a Report and Order establishing timetables for making emergency 911 services available by cellular, PCS and other mobile service providers, including "enhanced 911" services that provide the caller's telephone number, location and other useful information. Cellular and PCS providers must be able to process and transmit 911 calls (without call validation), including those from callers with speech or hearing disabilities. If a cost recovery mechanism is in place and a Public Service Answering Point ("PSAP") requests and is capable of processing the caller's telephone number and location information, cellular, PCS, and other mobile service providers must relay a caller's automatic number identification and Cell Site location, and by 2001 they must be able to identify the location of a 911 caller within 125 meters in 67% of all cases. State actions incompatible with the FCC rules are subject to preemption. On December 1, 1997, the FCC required wireless carriers to 38 42 transmit all 911 calls without regard to validation procedures intended to identify and intercept calls from non-subscribers. On August 1, 1996, the FCC released a Report and Order expanding the flexibility of cellular, PCS and other CMRS providers to provide fixed as well as mobile services. Such fixed services include, but need not be limited to, "wireless local loop" services, e.g., to apartment and office buildings, and wireless backup to PBXs and local area networks, to be used in the event of interruptions due to weather or other emergencies. The FCC has not yet decided how such fixed services should be regulated, but it has proposed a presumption that they be regulated as CMRS services. On August 8, 1996, the FCC released its order implementing the interconnection provisions of the Telecommunications Act. The FCC's decision is lengthy and complex and is subject to petitions for reconsideration and judicial review (as described below), and its precise impact is difficult to predict with certainty. However, the FCC's order concludes that CMRS providers are entitled to reciprocal compensation arrangements with local exchange carriers ("LECs") and prohibits LECs from charging CMRS providers for terminating LEC-originated traffic. Under the rules adopted by the FCC, states must set arbitrated rates for interconnection and access to unbundled elements based upon the LECs' long-run incremental costs, plus a reasonable share of forward-looking joint and common costs. In lieu of such cost-based rates, the FCC has established proxy rates to be used by states to set interim interconnection rates pending the establishment of cost-based rates. The FCC has also permitted states to impose "bill and keep" arrangements, under which CMRS providers would make no payments for LEC termination of calls where LECs and CMRS providers have symmetrical termination costs and roughly balanced traffic flows. However, the FCC has found no evidence that these conditions presently exist. The relationship of these charges to the payment of access charges and universal service contributions has not yet been resolved by the FCC. LECs and state regulators filed appeals of the interconnection order, which have been consolidated in the US Court of Appeals for the Eighth Circuit. The Court has vacated many of the rules adopted by the FCC, including those rules governing the pricing of interconnection services, but specifically affirmed the FCC rules governing interconnection with CMRS providers. In January 1998, the U.S. Supreme Court agreed to review the Eighth Circuit decision. In January 1999, the U.S. Supreme Court reversed many aspects of the Eighth Circuit's judgment holding that: (i) the FCC has general jurisdiction to implement the Telecommunications Act's local-competition provisions; (ii) the FCC's rules governing unbundled access are consistent with the Telecommunications Act, except for Rule 319, which gives requesting carriers blanket access to network elements; and (iii) the "pick and choose" rule is a reasonable interpretation of the Telecommunications Act. The FCC will now have to reexamine the list of unbundled network elements that incumbent local exchange carriers must offer to competitors. Furthermore, as a result of the Supreme Court's vacating and remanding the Eighth Circuit's ruling that the FCC lacked authority to set local pricing standards, the Eighth Circuit will have to decide whether the FCC's total-element long-run incremental cost methodology for setting interconnection and unbundled network element rates violates the Telecommunications Act. In its implementation of the Telecommunications Act, the FCC recently established new federal universal service rules, under which wireless service providers for the first time are eligible to receive universal service subsidies, but also are required to contribute to both federal and state universal service funds. For the first quarter of 1998, the FCC's universal service assessments amount to 0.72% of interstate and intrastate telecommunications revenues for schools, libraries and rural healthcare support mechanisms and an additional 3.19% of interstate telecommunications revenues for high cost and low income support mechanisms. Various parties have challenged the FCC's universal service rules, and the cases have been consolidated in the U.S. Court of Appeals for the Fifth Circuit. VoiceStream cannot predict the outcome of this proceeding. The FCC has adopted rules on telephone number portability which will enable subscribers to migrate their landline and cellular telephone numbers to a PCS carrier and from a PCS carrier to another service provider. Various parties have challenged the number portability requirements as they apply to CMRS providers. These challenges are still pending at the FCC and in the courts. VoiceStream can not predict the outcome of such challenges. In February 1999, the FCC extended the deadline for CMRS carriers to implement service provider local number portability until November 24, 2002. 39 43 SELECTED VOICESTREAM CONSOLIDATED FINANCIAL DATA The following table sets forth certain selected consolidated financial and operating data for VoiceStream as of and for each of the five years in the period ended December 31, 1998. Financial data as of and for each of the three years in the period ended December 31, 1998, were derived from VoiceStream's consolidated financial statements and notes thereto that have been audited by Arthur Andersen LLP, independent public accountants. All the data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of VoiceStream" and VoiceStream's consolidated financial statements and notes thereto.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- -------- (DOLLARS IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Subscriber revenues.......................... $ 123,966 $ 52,360 $ 7,794 Roamer revenues.............................. 3,506 227 Equipment revenues........................... 40,490 25,143 9,745 ----------- ----------- ----------- Total revenues........................ 167,962 77,730 17,539 ----------- ----------- ----------- Operating expenses: Cost of service.............................. 50,978 43,183 12,470 Cost of equipment sales...................... 77,071 53,469 20,789 General and Administrative................... 75,343 51,678 20,209 $ 3,069 Sales and marketing.......................... 85,447 59,466 31,505 339 Depreciation and amortization................ 83,767 66,875 14,395 269 ----------- ----------- ----------- Total operating expenses.............. 372,606 274,671 99,368 3,677 ----------- ----------- ----------- Operating loss................................. (204,644) (196,941) (81,829) (3,677) Other income (expense): Interest and financing expense............... (34,118) (57,558) (3,607) (40) Equity in net loss of unconsolidated affiliate.................................. (24,120) (9,327) (954) (11) Interest income and other.................... 8,616 11 40 -- ----------- ----------- ----------- ----------- Net loss.............................. $ (254,266) $ (263,815) $ (86,350) $ (3,728) =========== =========== =========== =========== CONSOLIDATED BALANCE SHEET DATA: Current assets................................. $ 59,398 $ 49,945 $ 59,515 $ 1,684 $ 10,000 Property and equipment, net.................... 619,280 420,638 318,473 34,914 220 Licensing cost and other intangible assets, net.......................................... 312,040 315,653 227,997 145,728 Other assets................................... 60,938 36,055 8,142 8,484 ----------- ----------- ----------- ----------- -------- Total assets.......................... $ 1,051,656 $ 822,291 $ 614,127 $ 193,810 $ 10,220 =========== =========== =========== =========== ======== Current liabilities............................ $ 125,026 $ 126,184 $ 155,769 $ 25,444 $ 10,158 Long-term debt................................. 540,000 300,000 143,000 13,000 Other long-term liabilities.................... 92,746 173,705 7,613 Shareholders' equity........................... 386,630 396,107 141,653 147,753 62 ----------- ----------- ----------- ----------- -------- Total liabilities and shareholders' equity.............................. $ 1,051,656 $ 822,291 $ 614,127 $ 193,810 $ 10,220 =========== =========== =========== =========== ======== OTHER DATA: Licensed population............................ 62,498,000 62,808,000 19,488,000 14,853,000 Covered population(1).......................... 16,121,000 11,412,000 6,133,000 Subscribers.................................... 322,400 128,600 35,500 EBITDA(2)...................................... $ (120,877) $ (130,066) $ (67,434) $ (3,408) CASH FLOWS PROVIDED BY (USED IN): Operating activities........................... $ (112,931) $ (198,129) $ (81,272) $ (4,115) $(10,200) Investing activities........................... $ (253,633) $ (370,202) $ (342,587) $ (145,632) $ (220) Financing activities........................... $ 374,284 $ 563,254 $ 429,250 $ 149,770 $ 10,000
- --------------- (1) Represents population that is covered by our consolidated systems. (2) EBITDA represents operating income (loss) before depreciation and amortization. Management believes EBITDA provides meaningful additional information on VoiceStream's operating results and on its ability to service its long-term debt and other fixed obligations and to fund VoiceStream's continuing growth. 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 EBITDA is considered to be an indicator of future profitability, especially in a capital-intensive industry such as wireless telecommunications. EBITDA should not be construed as an alternative to operating income (loss) as determined in accordance with United States generally accepted accounting principles ("GAAP"), as an alternate to cash flows from operating activities (as determined in accordance with GAAP), or as a measure of liquidity. Because EBITDA is not calculated in the same manner by all companies, VoiceStream's presentation may not be comparable to other similarly titled measures of other companies. 40 44 HISTORICAL PER SHARE DATA WESTERN WIRELESS CORPORATION (INCLUSIVE OF VOICESTREAM)
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ Book value per common share(1).............................. $ 1.23 $ 2.57 $ 5.08 Cash dividends declared per share........................... $ 0.00 $ 0.00 $ 0.00 Basic and diluted loss per common share(2).................. $(2.95) $(3.76) $(2.00)
VOICESTREAM WIRELESS CORPORATION
YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ Book value per common share(3).............................. $ 4.05 $ 5.24 $ 2.03 Cash dividends declared per share........................... $ 0.00 $ 0.00 $ 0.00 Pro forma basic and diluted loss per common share(4)........ $(2.75) $(3.49) $(1.32)
- --------------- (1) Book value per common share was calculated using the number of Western Wireless common shares outstanding at the respective period end. (2) Basic loss per common share was calculated using the weighted average number of Western Wireless common shares outstanding for the respective period. Due to the net loss incurred during the periods presented, all options outstanding are antidilutive, thus basic and diluted loss per common share are equal. (3) For 1998, book value per common share was calculated using the number of Western Wireless common shares outstanding at period end plus the split-adjusted number of VoiceStream common shares owned by Hutchison USA at period end. For 1997 and 1996, book value per common share was calculated using the number of Western Wireless common shares outstanding at the respective period end. (4) For 1998, pro forma basic loss per common share was calculated using the weighted average number of Western Wireless common shares outstanding for the period plus the split-adjusted weighted average number of VoiceStream common shares outstanding owned by Hutchison USA for the period. For 1997 and 1996, basic loss per common share was calculated using the weighted average number of Western Wireless common shares outstanding for the respective period. Due to the net loss incurred during the periods presented, all options outstanding are antidilutive, thus pro forma basic and diluted loss per common share are equal. 41 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VOICESTREAM The following is a discussion and analysis of the consolidated financial condition and results of operations of VoiceStream and should be read in conjunction with VoiceStream's consolidated financial statements and notes thereto and other financial information included herein. OVERVIEW VoiceStream is an 80.1% owned subsidiary of Western Wireless. The remaining 19.9% is indirectly owned by Hutchison. VoiceStream provides wireless communications services in urban markets in the United States through the ownership and operation of PCS licenses. VoiceStream had commenced commercial operations in ten markets under the VoiceStream brand name as of December 31, 1998 (an eleventh market commenced commercial operations in February 1999). Additionally, VoiceStream PCS services are offered in three markets in conjunction with joint ventures (a fourth market commenced commercial operations in February 1999). On February 8, 1999, Western Wireless announced its intention to separate VoiceStream from Western Wireless' other operations. Western Wireless has received a favorable ruling from the Internal Revenue Service for a tax free spin-off, and the approval by its board of directors to take the necessary steps to complete the Spin-off. Western Wireless will distribute all of its interest in VoiceStream to its shareholders upon the Spin-off. Although certain aspects of VoiceStream's operations have always been separate from Western Wireless' other operations and VoiceStream has been a separate legal entity since its inception, the Spin-off will establish VoiceStream as a stand-alone entity with objectives separate from those of Western Wireless. The Spin-off is subject to numerous conditions including, among others, the receipt of certain third-party approvals. There is no assurance that such conditions will be met to complete the Spin-off. In connection with the Spin-off, VoiceStream will issue a substantial number of stock options. See "Agreement and Plan of Distribution; Relationship Between Western Wireless and VoiceStream after the Spin-off." Issuance of such options may result in a non-cash charge to earnings during the second quarter of 1999, depending on the public trading price of the shares of VoiceStream and Western Wireless following the Spin-off. It is imperative for VoiceStream to expand its operations in order to remain competitive. Because of the nature and character of holders of PCS licenses, there are few licenses available for purchase in urban areas. However, one significant opportunity for VoiceStream to expand its PCS operations is to acquire interests in PCS licenses that are reserved for use by a Designated Entity. In order to do this, VoiceStream must enter into joint ventures with Designated Entities to make such acquisitions (since VoiceStream is not itself a Designated Entity). VoiceStream's revenues consist primarily of subscriber revenues (including access charges and usage charges), and equipment sales. The majority of VoiceStream's revenues are derived from subscriber revenues. VoiceStream had no revenues prior to February 1996. VoiceStream expects to continue to sell handsets below cost and regards these losses as a cost of building its subscriber base. As used herein, "service revenues" include subscriber and roamer revenues. Cost of service consists of the cost of providing wireless service to subscribers, primarily costs to access local exchange and long distance carrier facilities and to maintain the wireless network. General and administrative expenses include the costs associated with billing a subscriber and the administrative costs associated with maintaining subscribers, including customer service, accounting and other centralized functions. General and administrative expenses also include provisions for unbillable fraudulent roaming charges and subscriber bad debt. Sales and marketing costs include costs associated with acquiring a subscriber, including direct and indirect sales commissions, salaries, all costs of retail locations, advertising and promotional expenses. Sales and marketing costs do not include the revenue or costs of handset sales. However, when sales and marketing costs per net subscriber addition are discussed, the revenue and costs 42 46 from handset sales are included because such measure is commonly used in the wireless industry. Depreciation and amortization primarily includes depreciation expense associated with the property and equipment in service and amortization associated with its wireless licenses for operational markets. VoiceStream's financial statements include an allocation of certain centralized costs and assets that were incurred by Western Wireless and benefit all of its operations, including those of VoiceStream. These costs are allocated to the respective operational units in a manner which reflects management's judgement as to the nature of the activity causing those items to be incurred. VoiceStream was allocated costs of $33.3 million in 1998 and $29.1 million in 1997 and assets of $14.5 million in 1998 and $19.1 million in 1997. Management believes that the financial information presented fairly reflects the results of operations had VoiceStream been a stand alone entity. Therefore, no proforma presentation is provided. Management believes that allocations reflected in the financial statements are reasonable, however, the financial information included herein is not necessarily indicative of the financial position, results of operations or cash flows of VoiceStream in the future. As used herein, "EBITDA" represents operating loss before depreciation and amortization. Management believes EBITDA provides meaningful additional information on VoiceStream's operating results and on its ability to service its long-term debt and other fixed obligations and to fund VoiceStream's continuing growth. 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 EBITDA is considered to be an indicator of future profitability, especially in a capital-intensive industry such as wireless telecommunications. EBITDA should not be construed as an alternative to operating loss (as determined in accordance with GAAP), as an alternative to cash flows from operating activities (as determined in accordance with GAAP), or as a measure of liquidity. Because EBITDA is not calculated in the same manner by all companies, VoiceStream's presentation may not be comparable to other similarly titled measures of other companies. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 VoiceStream did not commence operations in any of its markets until February 1996. From that date through the end of 1996 VoiceStream launched service in six markets: Honolulu, Portland, Salt Lake City, Albuquerque, Oklahoma City and Des Moines. In 1997, VoiceStream launched service in El Paso, Boise and Denver. In 1998, VoiceStream launched service in Phoenix/Tucson. Due to the varying dates at which each of the markets became operational, the expenses and revenues incurred during any period may not be comparable to another period and may not be representative of future operations. Additionally, during each period being discussed a portion of the operating expenses was related to start-up costs incurred before the commencement of operations in each of the markets. Exclusive of depreciation and amortization expense, which was not material, approximately $7.7 million, $5.4 million and $17.0 million of start-up costs were incurred in 1998, 1997 and 1996 respectively. VoiceStream had 322,400 subscribers at December 31, 1998, a 150.7% increase during 1998. VoiceStream had 128,600 subscribers at December 31, 1997, a 262.3% increase during 1997. At December 31, 1996, VoiceStream had 35,500 subscribers. 43 47 The following table sets forth certain financial data as it relates to VoiceStream's operations:
YEAR ENDED DECEMBER 31, -------------------------------------------------------- % % 1998 CHANGE 1997 CHANGE 1996 --------- ------- --------- ------ --------- (DOLLARS IN THOUSANDS) Revenues: Subscriber revenues.......................... $ 123,966 136.8% $ 52,360 571.8% $ 7,794 Roamer revenues.............................. 3,506 1,444.4% 227 N.M. Equipment revenues........................... 40,490 61.0% 25,143 158.0% 9,745 --------- --------- --------- Total revenues........................ 167,962 77,730 17,539 Operating expenses: Cost of service.............................. 50,978 18.0% 43,183 246.3% 12,470 Cost of equipment sales...................... 77,071 44.1% 53,469 157.2% 20,789 General and administrative................... 75,343 45.8% 51,678 155.7% 20,209 Sales and marketing.......................... 85,447 43.7% 59,466 88.8% 31,505 Depreciation and amortization................ 83,767 25.3% 66,875 364.6% 14,395 --------- --------- --------- Total operating expenses.............. 372,606 274,671 99,368 Other income (expense)......................... (49,622) (25.8)% (66,874) 1379.2% (4,521) --------- --------- --------- Net loss....................................... $(254,266) (3.6)% $(263,815) 205.5% $ (86,350) ========= ========= ========= EBITDA......................................... $(120,877) (7.1)% $(130,066) 92.9% $ (67,434) ========= ========= ========= Cash flows provided by (used in): Operating activities......................... $(112,931) (43.0)% $(198,129) 143.8% $ (81,272) ========= ========= ========= Investing activities......................... $(253,633) (31.5)% $(370,202) 8.1% $(342,587) ========= ========= ========= Financing activities......................... $ 374,284 (33.5)% $ 563,254 31.2% $ 429,250 ========= ========= =========
REVENUES The increase in subscriber revenues is due to the increase in the number of subscribers. The increase in subscribers is due to the higher number of operational markets during each period and the relative maturity of VoiceStream's operations in these markets. Offsetting this increase is a decrease in the average monthly subscriber revenue per average subscriber ("ARPU"). ARPU was $45.81 for 1998 compared to $57.48 for 1997 and $62.85 for 1996. The decrease in ARPU is primarily due to the change in strategy in 1998, signified by the "Get More" advertising campaign. In this campaign, subscribers get more value from their wireless service through lower priced rated plans that include high minutes of use. Revenues from prepaid customers of $2.1 million are included in subscriber revenues for 1998. VoiceStream does not expect that ARPU will decline at the same rate in 1999 as it did in 1998. Roamer revenues are a result of VoiceStream's continuing effort to procure domestic and international roaming agreements with other carriers. VoiceStream expects roamer revenues to increase in 1999 due to increased wireless subscribers and VoiceStream's expanded coverage. Equipment sales increased as a result of more handsets sold. The increase in handsets sold is due to the number of operational markets during each period and the relative maturity of VoiceStream's operations in these markets. Offsetting this increase is a decrease in the average handset selling price, which is the result of lower handset costs and the competitive environment. VoiceStream anticipates continued growth in equipment sales as a result of increases in subscriber additions and the commencement of commercial operations in other markets. 44 48 OPERATING EXPENSES Cost of service expenses represent expenses incurred only by operational markets. The increase in cost of service is primarily attributable to the increased costs of maintaining the expanding wireless network as a result of new markets becoming operational. Cost of service as a percentage of service revenues declined to 40.0% in 1998 from 82.7% in 1997 and 160.0% in 1996 due to efficiencies gained from the growing subscriber base. While cost of service expenses are expected to grow in 1999 due to the growth in subscribers and operating markets, VoiceStream expects the cost of service as a percentage of service revenue to decline as greater economies of scale are realized. Cost of equipment sales increased each year primarily due to the increase in handsets sold, offset by a decrease in the average cost of handsets. VoiceStream expects this trend to continue in 1999. Although subscribers generally are responsible for purchasing or otherwise obtaining their own handsets, VoiceStream has historically sold handsets below cost to respond to competition and general industry practice and expects to continue to do so in the future. The increase in general and administrative expenses is primarily attributable to the increased costs associated with supporting a larger subscriber base. General and administrative costs per average subscriber were $27.84 for 1998 compared to $56.74 for 1997 and $135.81 for 1996. This decrease is largely the result of efficiencies gained from a larger subscriber base. While general and administrative expenses are expected to grow in 1999 due to the growth in subscribers and operating markets, VoiceStream expects the costs per average subscriber to decline as greater economies of scale are realized. The increase in sales and marketing costs each year is primarily due to the increase in subscribers added. Sales and marketing costs per net subscriber added, including the loss on equipment sales, was $630 for 1998 compared to $943 for 1997 and $1,200 for 1996. This decrease is largely the result of efficiencies gained from larger subscriber additions. Sales and marketing costs are expected to increase in 1999 due to the anticipated growth in subscriber additions. The increase in depreciation and amortization expenses is attributable to the continued expansion of the wireless systems. FCC licenses are not amortized until the related market is operational. These expenses will increase as new markets become operational. OTHER INCOME (EXPENSE); NET OPERATING LOSS CARRYFORWARDS Interest and financing expense, net of capitalized interest, decreased in 1998 from 1997 due to the equity contributions from Western Wireless in December 1997 and Hutchison USA in February 1998 (see "Liquidity and Capital Resources"). The equity contribution from Western Wireless was a conversion of debt that had previously incurred interest. The Hutchison Investment allowed VoiceStream to repay the remaining debt to Western Wireless and to forego additional borrowings until July 1998. The increase in interest and financing expense in 1997 from 1996 was due to the increase in long-term debt. Long-term debt was incurred primarily to fund the capital expenditures associated with the build-out of the wireless systems. Interest expense will increase in 1999 as a result of increased borrowings to fund the expansion of the wireless network. The weighted average interest rate, before the effect of capitalized interest, was 8.76% in 1998, 8.23% in 1997 and 8.12% in 1996. Interest income and other increased in 1998 from 1997 due to interest earned on the funds received in the Hutchison Investment. VoiceStream had $707 million of net operating loss ("NOL") carryforwards at December 31, 1998, which will expire between 2010 and 2018. After the Spin-off, these NOLs will remain with VoiceStream. 45 49 EBITDA From 1997 to 1998, the decrease in negative EBITDA is attributable to the increase in revenues and operating efficiencies gained from the growing subscriber base. VoiceStream expects a similar trend in EBITDA from 1998 to 1999 for its operational markets, however the commencement of operations in new markets will slow and could reverse this trend. Negative EBITDA increased in 1997 from 1996 due to the commencement of operations in three new markets. NET LOSS From 1997 to 1998, the decrease in net loss is attributable to the increase in revenues, operating efficiencies gained from growing the subscriber base and a decrease in other expense. VoiceStream expects a similar trend in net loss from 1998 to 1999 for its operational markets, however the commencement of operations in new markets will slow or could reverse this trend. Net loss increased in 1997 from 1996 due to the commencement of operations in new markets. LIQUIDITY AND CAPITAL RESOURCES VoiceStream, through a wholly-owned subsidiary, has a credit facility with a consortium of lenders (the "Credit Facility") consisting of $500 million in revolving credit and $500 million in term loans. As of December 31, 1998, $540 million was outstanding under the Credit Facility. The amount which VoiceStream can borrow under the Credit Facility is reduced beginning in 2001, the same year in which repayment of the Credit Facility begins. Debt under the Credit Facility matures on December 31, 2006, for the revolver and the delayed draw term loan, and June 30, 2007, for the other $250 million term loan. The borrowings under the Credit Facility bear interest at variable rates. Substantially all the assets of VoiceStream, other than certain PCS licenses acquired in the FCC's D and E Block auctions and certain other assets, are pledged as security for such debt. The terms of the Credit Facility restrict, among other things, the incurrence of indebtedness, the sale of assets, distribution of dividends or other distributions and loans. As of January 1, 1999, the amount available to borrow under the Credit Facility, which is restricted by certain financial covenants, was $277 million. The Hutchison Investment closed in February 1998. Approximately $135 million of the proceeds of the Hutchison Investment was used by VoiceStream for the build-out of its systems during 1998. The remainder of the proceeds was paid to Western Wireless as a repayment of loans made to VoiceStream. In 1999, VoiceStream anticipates spending approximately $150 million for the continued expansion of its operating markets and $150 million for the development and expansion of new markets (both amounts include VoiceStream's anticipated spending by Cook Inlet PCS (described below)). VoiceStream will use cash on hand and amounts available for borrowing under the Credit Facility for such purposes. In addition, further funds (which may be significant) will be required to finance the continued growth of its operations, including the build-out of its markets, provide for working capital and service debt. The build-out of additional systems by VoiceStream will require substantial additional funds. The capital cost of completing a project in any particular market, and overall, could vary materially from current estimates. If adequate funds are not available from its existing capital resources, VoiceStream may be required to curtail its service operations or to obtain additional funds. The terms of any additional funds may be less favorable than those contained in current arrangements. In addition to the aforementioned capital expenditures VoiceStream expects to make in 1999, VoiceStream has noncancellable lease agreements for various facilities, including cell-site locations, of approximately $25 million in 1999. The sources of funding for such expenditures will come from the same sources as discussed above. VoiceStream has reached an agreement in principle with one of its infrastructure equipment vendors whereby such vendor would purchase $400 million of VoiceStream's newly designated and issued 12% cumulative senior exchangeable preferred stock. See "Description of Western Wireless and VoiceStream Capital Stock -- VoiceStream Preferred Stock." During the first five years following issuance, dividends would be paid in cash or, at VoiceStream's option, in additional shares of exchangeable preferred stock having an aggregate liquidation preference equal to the amount of such dividends. After the fifth anniversary, all dividends would be 46 50 payable only in cash. In addition, VoiceStream would modify its existing PCS supply agreement with such vendor. The agreement in principle contemplates that the net proceeds of the sale of the exchangeable preferred stock would be used to finance capital expenditures, for working capital purposes and to finance permitted investments and acquisitions. Although VoiceStream is working diligently with the vendor to prepare formal contracts, there can be no assurance that formal contracts will be executed or that such funds will be available to VoiceStream. A wholly owned subsidiary of VoiceStream holds a 49.9% interest in Cook Inlet PCS. Cook Inlet PCS is subject to the FCC's build-out requirements and will require significant additional amounts to complete the build-out of its PCS systems and to meet the government debt service requirements on the C and F Block licenses. No principal payments on these licenses are due in 1999. The potential sources of such additional funding include vendor loans, loans or capital contributions by the partners of Cook Inlet PCS or other third party financing. To date, VoiceStream has funded the operations of Cook Inlet PCS through loans evidenced by promissory notes. At December 31, 1998, the wholly owned subsidiary of VoiceStream had advanced funds totaling $65.3 million to Cook Inlet PCS under such promissory notes. VoiceStream does not have any further commitments to fund Cook Inlet PCS. During the second quarter of 1998, Cook Inlet PCS participated in the C Block restructuring options provided by the FCC. The options chosen by Cook Inlet PCS had the effect of reducing its debt by $29.1 million. In January 1999, certain partners of Cook Inlet PCS, including VoiceStream, formed another joint venture, Cook Inlet/VoiceStream PCS LLC ("CIVS") (of which 49.9% is owned by VoiceStream and 50.1% is owned by Cook Inlet Region, Inc.) to participate in the FCC's reauction of C and F Block licenses in 1999. VoiceStream contributed $25 million in March 1999 to the deposit required by the FCC to participate in the reauction. CIVS has reached an agreement in principle with one of its infrastructure equipment vendors whereby such vendor would provide to CIVS a $725 million senior credit facility and a $100 million subordinated facility, and CIVS would agree to acquire certain equipment, software and services from such vendor. The agreement in principle contemplates that the net proceeds of the senior secured facility and the subordinated facility would be used to finance capital expenditures, for working capital and to finance permitted investments and acquisitions. The effectiveness of the senior secured facility and the subordinated facility will be conditioned upon CIVS acquiring licenses for BTA's covering at least 2 million persons. The amount available for borrowing pursuant to the senior credit facility and the subordinated facility will be based upon the aggregate number of persons covered by licenses for BTA's acquired by CIVS, with $825 million in the aggregate being available if CIVS acquires licenses for BTA's covering at least 15 million persons and such availability being ratably reduced if CIVS acquired licenses for BTA's covering fewer than 15 million persons. Although CIVS is working diligently with the vendor to prepare formal contracts, there can be no assurance that formal contracts will be executed or that such funds will be available to CIVS. After the Spin-off, the NOL carryforwards resulting from VoiceStream's cumulative tax losses will remain with VoiceStream. Pursuant to a tax sharing agreement entered into at the time of the Hutchison Investment, VoiceStream will pay Western Wireless in 1999 an amount representative of the tax benefit of NOLs generated while VoiceStream was a wholly-owned subsidiary of Western Wireless. This payment will not exceed $20 million, net of taxes. Net cash used in operating activities was $112.9 million in 1998. Adjustments to the $254.3 million net loss to reconcile to net cash used in operating activities included $83.8 million of depreciation and amortization, and $24.1 million of equity in the net loss of unconsolidated subsidiaries. Other adjustments included changes in operating assets and liabilities, including: (i) an increase of $20.9 million in accrued liabilities, the largest component of which is attributable to an increase in property taxes; and (ii) an increase of $13.7 million in accounts payable, due to the growth of the business. Net cash used in operating activities was $198.1 million in 1997 and $81.3 million in 1996. Net cash used in investing activities was $253.6 million in 1998. Investing activities consisted primarily of: (i) purchases of property and equipment of $206.5 million, largely related to the build-out of the wireless network; (ii) investments in and advances to unconsolidated affiliates of $34.3 million, 47 51 primarily attributable to advances to Cook Inlet PCS for working capital and purchases of property and equipment; and (iii) $12.9 million of additions to licensing costs and other intangible assets, primarily attributable to 16 Local Multipoint Distribution Service (LMDS) licenses acquired in an FCC auction. Net cash used in investing activities was $370.2 million in 1997 and $342.6 million 1996. Net cash provided by financing activities was $374.3 million in 1998. Financing activities consisted of: (i) net proceeds from the Hutchison Investment of $244.8 million, offset by the repayment of advances from Western Wireless of $105.4 million; and (ii) net borrowings on long-term debt of $240.0 million, offset by $5.1 million of financing fees. Net cash provided by financing activities was $563.3 million in 1997 and $429.3 million in 1996. In the ordinary course of business, VoiceStream continues to evaluate acquisitions, joint ventures and other potential business transactions. Any such transactions would be financed with the borrowings under the Credit Facility or through the issuance of additional debt or the sale of additional equity. There can be no assurance that such funds will be available to VoiceStream on acceptable or favorable terms. YEAR 2000 ISSUES VoiceStream, like most businesses, will be required to modify significant portions of its information technology ("IT") and non-IT systems so that they will function properly in the year 2000. Any of VoiceStream's, or its vendors', IT and non-IT systems that have date-sensitive software may recognize a date using "00" as the year 1900 rather than as the year 2000. VoiceStream's IT and non-IT systems that are being addressed include: its wireless networks; systems which interconnect its wireless networks with landline systems; systems which allow verification and billing of roaming traffic; internal communications and data processing systems; billing software and related elements; and systems of third-party suppliers, including those of financial institutions, payroll/benefits processors and credit bureaus. Much of VoiceStream's technology, including technology associated with its critical systems, is purchased from third parties. VoiceStream is dependent on those third parties to assess the impact of the year 2000 issue on the technology and services they supply and to take any necessary corrective action. VoiceStream cannot assure that these third parties will have taken the necessary corrective action prior to the year 2000. VoiceStream has adopted a remediation plan to become year 2000 compliant. This plan consists of four key phases: (1) inventory of all systems, (2) research, including obtaining information from third party suppliers to determine whether they have accurately assessed the problem and taken corrective action, (3) implementation and testing of remediation efforts, and (4) development of contingency plans. VoiceStream has completed the first two phases of its plan and is currently testing and remediating its critical systems and developing contingency plans to address the year 2000 issue. VoiceStream expects to substantially complete the third and fourth phases by the end of the third quarter of 1999. Critical systems are those whose failure poses a risk of disruption to VoiceStream's ability to provide wireless services, to collect revenues, to meet safety standards, or to comply with legal requirements. VoiceStream expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to complete the remediation of the systems for the year 2000. VoiceStream cannot assure that the remediation of its critical systems will be complete by the year 2000. While costs incurred to date to address the year 2000 issue have not been significant, VoiceStream expects to incur incremental expenses of not more than $5 million through the end of 1999 to implement its plan for its critical systems. In addition, VoiceStream has redeployed internal resources to address the problem. The majority of these expenses will be incurred in the first half of 1999. Additionally, VoiceStream will incur capitalized costs that represent ongoing investment in new systems and system upgrades, the timing of which is being accelerated to facilitate year 2000 compliance and which is not expected to have a material impact on VoiceStream's financial position or results of operations. This estimate assumes that third party suppliers have accurately assessed the compliance of their products and that they will successfully correct the issue in non-compliant products. Because of the complexity of correcting the year 2000 issue, actual costs may vary from this estimate. 48 52 Based on its current assessments and its remediation plan, which are based in part upon certain representations of third parties, VoiceStream expects that it will not experience a disruption of its operations as a result of the arrival of the year 2000. However, there can be no assurance that either VoiceStream or the third parties who have supplied technology used in VoiceStream's critical systems will be successful in taking corrective action in a timely manner. As part of its plan, VoiceStream has developed, and is continuing to develop, contingency plans for its critical systems, which include, among other things, identifying a core system of Cell Sites which are being designed to operate for extended periods for mobile to mobile service independent of external power supplies and landline telephone services. VoiceStream believes that these contingency plans will mitigate service disruption; however, VoiceStream cannot guarantee this. 49 53 DESCRIPTION OF WESTERN WIRELESS AND VOICESTREAM CAPITAL STOCK DESCRIPTION OF WESTERN WIRELESS CAPITAL STOCK The authorized capital stock of Western Wireless consists of 300,000,000 shares of Class A Common Stock and Class B Common Stock, no par value, and 50,000,000 shares of preferred stock, no par value (the "Western Wireless Preferred Stock"). As of April 1, 1999, there were 42,979,783 shares of Class A Common Stock outstanding, with 249 holders of record, and 33,551,476 shares of Class B Common Stock issued and outstanding, with 94 holders of record. The foregoing numbers do not include the number of stockholders whose shares are held of record by a broker or clearing agency, but do include each such broker or clearing agency as one record holder. As of April 1, 1999, Western Wireless had outstanding options to acquire 4,250,529 shares of its Class A Common Stock, which options had been granted under Western Wireless' management incentive stock option plan. In addition, as of the same date, a participant in a joint venture with a subsidiary of Western Wireless has the right to convert its joint venture interest into 321,334 shares of Western Wireless Class A Common Stock, and an officer of Western Wireless had the right to convert an interest in a Western Wireless affiliate into an indeterminate number of shares of Western Wireless Class A Common Stock. There are no other rights outstanding to acquire Western Wireless stock. Western Wireless has never declared a cash dividend with respect to its capital stock and does not anticipate paying any dividends on its capital stock in the foreseeable future. Western Wireless' debt facilities and indentures contain certain restrictions on Western Wireless' ability to declare and pay dividends on its capital stock. The declaration and payment of dividends by Western Wireless are subject to the discretion of Western Wireless' Board of Directors. Any determination as to the payment of dividends in the future will depend upon results of operations, capital requirements, restrictions in loan agreements, if any, and such other factors as Western Wireless' Board of Directors may deem relevant. WESTERN WIRELESS COMMON STOCK Other than with respect to voting rights, the Class A and Class B have identical rights. The Class A Common Stock has one vote per share and the Class B Common Stock has ten votes per share. Shares of Class B Common Stock generally convert automatically into shares of Class A Common Stock on a share-for-share basis immediately upon any transfer of the Class B Common Stock other than a transfer from an original holder of Class B Common Stock to certain affiliates of such holder. Holders of Western Wireless Common Stock have no cumulative voting rights and no preemptive, subscription or sinking fund rights. Subject to preferences that may be applicable to any then-outstanding Western Wireless Preferred Stock, holders of Western Wireless Common Stock will be entitled to receive ratably such dividends as may be declared by the Western Wireless Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of Western Wireless, holders of Western Wireless Common Stock will be entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then-outstanding Western Wireless Preferred Stock. Western Wireless' Articles of Incorporation permit the redemption of Western Wireless Common Stock from shareholders where necessary to protect Western Wireless' regulatory licenses. WESTERN WIRELESS PREFERRED STOCK Pursuant to its Articles of Incorporation, Western Wireless is authorized to issue 50,000,000 shares of Western Wireless Preferred Stock, which may be issued from time to time in one or more classes or series or both upon authorization by the Western Wireless Board of Directors. The Western Wireless Board of Directors, without further approval of the shareholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences and any other rights, preferences, privileges and restrictions applicable to each class or series of Western Wireless Preferred Stock. The issuance of Western Wireless Preferred Stock, while providing flexibility in connection with 50 54 possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Western Wireless Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of Western Wireless, discourage bids for Western Wireless Common Stock at a premium or otherwise adversely affect the market price of the Western Wireless Common Stock. Western Wireless has no current plans to issue any Western Wireless Preferred Stock. DESCRIPTION OF VOICESTREAM CAPITAL STOCK As of the Effective Date, the authorized capital stock of VoiceStream will consist of 300,000,000 shares of Common Stock, no par value (the "VoiceStream Common Stock") and 50,000,000 shares of preferred stock, no par value (the "VoiceStream Preferred Stock"). There is no VoiceStream Preferred Stock outstanding. As a result of a 7653.1259-for-1 stock split to be effected prior to the Effective Date in the form of a stock dividend, there will be 95,541,623 shares of VoiceStream Common Stock outstanding, with 2 holders of record, Western Wireless (80.1%) and Hutchison USA (19.9%). On the Effective Date, the 76,531,259 shares held by Western Wireless will be distributed to its shareholders. As of the Effective Date, VoiceStream will have issued options to acquire a number of shares of its Common Stock. The number of shares subject to options and the exercise price of options will not be known until after the Effective Date of the Spin-off, and will be determined pursuant to the terms of the Distribution Agreement. See "The Spin-off of VoiceStream Wireless Corporation -- Agreement and Plan of Distribution; Relationship Between Western Wireless and VoiceStream after the Spin-off, Establishment of VoiceStream Benefit and Compensation Plans." In addition, as of the Effective Date, participants in Cook Inlet PCS are parties to certain Exchange Rights Agreements and have the right to convert or exchange their joint venture interests into 535,718 shares of VoiceStream Common Stock, and participants in CIVS have rights to exchange membership interests into an indeterminant number of shares of VoiceStream Common Stock. There are no other rights outstanding to acquire VoiceStream stock. VoiceStream has never declared a cash dividend with respect to its capital stock and does not anticipate paying any dividends on its capital stock in the foreseeable future except with respect to the 12% Preferred Stock described below if and when issued. VoiceStream's debt facilities contain, and the agreements with respect to the 12% Preferred Stock, if and when issued, will contain, certain restrictions on VoiceStream's ability to declare and pay dividends on its capital stock. The declaration and payment of dividends by VoiceStream are subject to the discretion of VoiceStream's Board of Directors. Any determination as to the payment of dividends in the future will depend upon results of operations, capital requirements, restrictions in loan agreements or agreements issued in connection with the sale of VoiceStream's securities, if any, and such other factors as VoiceStream's Board of Directors may deem relevant. VOICESTREAM COMMON STOCK The VoiceStream Common Stock has one vote per share. Holders of VoiceStream Common Stock have no cumulative voting rights and no preemptive, subscription or sinking fund rights, except that Hutchison USA has a preemptive right that will survive the Spin-off entitling it to acquire a portion of any newly issued equity securities of VoiceStream on the same terms and conditions as such equity securities are being issued to other holders such that Hutchison USA shall be able to retain the same percentage ownership of VoiceStream as existed immediately prior to such issuance. The preemptive right does not apply to any issuances of equity securities in connection with a public sale of equity securities by VoiceStream; a conversion or exchange of outstanding securities; stock dividends; mergers, acquisitions or other reorganizations in which the then current shareholders of VoiceStream would continue to be the only shareholders of VoiceStream or which is effected to carry out an acquisition transaction; or issuances of equity to employees. Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock will be entitled to receive ratably such dividends as may be declared by the VoiceStream Board of Directors out of funds legally available therefor. In the event of a liquidation, 51 55 dissolution or winding up of VoiceStream, holders of VoiceStream Common Stock will be entitled to share ratably in all remaining assets after payment of liabilities and the liquidation preference of any then-outstanding VoiceStream Preferred Stock. VoiceStream's Articles of Incorporation permit the redemption of VoiceStream Common Stock from shareholders where necessary to protect VoiceStream's regulatory licenses. VOICESTREAM PREFERRED STOCK Pursuant to its Articles of Incorporation, VoiceStream will be authorized to issue 50,000,000 shares of VoiceStream Preferred Stock, which may be issued from time to time in one or more classes or series or both upon authorization by VoiceStream's Board of Directors. VoiceStream's Board of Directors, without further approval of the shareholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences and any other rights, preferences, privileges and restrictions applicable to each class or series of VoiceStream Preferred Stock. The issuance of VoiceStream Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of VoiceStream Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of VoiceStream, discourage bids for VoiceStream Common Stock at a premium or otherwise adversely affect the market price of the VoiceStream Common Stock. VoiceStream has reached an agreement in principle with one of its infrastructure equipment vendors whereby such vendor would purchase 400,000 shares of VoiceStream's newly designated and issued 12% cumulative senior exchangeable preferred stock (the "12% Preferred Stock") for an aggregate purchase price of $400 million. If issued on the terms currently contemplated, the 12% Preferred Stock would: (i) have a liquidation preference of $1,000 per share plus accumulated and unpaid dividends; (ii) accrue dividends payable quarterly at the rate of 12% per annum (payable, at the option of VoiceStream, in cash or additional shares of 12% Preferred Stock during the first five years after issuance); (iii) be subject to mandatory redemption on the twelfth anniversary of issuance; (iv) be subject to optional redemption at any time on or after the fifth anniversary of the date of issuance at a price of 106% (declining over time to 100%) of the liquidation preference plus accumulated and unpaid dividends (under certain circumstances up to 35% of the shares of the outstanding 12% Preferred Stock would be subject to redemption prior to the third anniversary of issuance for a price of 112% of the liquidation preference plus accumulated and unpaid dividends); (v) upon the occurrence of certain events (including, among others, default in the payment of dividends for six quarterly periods and the failure by VoiceStream to comply with the provisions of the 12% Preferred Stock), have the right to elect up to two members of VoiceStream's Board of Directors; (vi) restrict VoiceStream from, among other things, incurring indebtedness, sales of assets, distributing dividends or other distributions on stock junior to the 12% Preferred Stock; (vii) be required to be registered under the Securities Act of 1933, as amended, within a specified number of days after their issuance or the dividend rate would be increased by 50 basis points per quarter until registered up to a maximum of 2%; (viii) would be exchangeable at the option of VoiceStream for notes ("Exchange Notes") in an aggregate principal amount equal to the liquidation preference of the shares being exchanged plus accumulated and unpaid dividends (the Exchange Notes would bear interest at 12% per annum and would be subject to similar rights in favor of VoiceStream and impose similar restrictions on VoiceStream as the 12% Preferred Stock); and 52 56 (ix) require VoiceStream to offer to purchase all outstanding shares of 12% Preferred Stock at a price of 101% of the liquidation preference plus accumulated and unpaid dividends upon a change of control of VoiceStream. Although VoiceStream is working diligently with the vendor to prepare formal contracts, there can be no assurance that formal contracts will be executed or that such shares will be issued. ARTICLES OF INCORPORATION AND CERTAIN STATUTORY PROVISIONS AFFECTING ACQUISITIONS AND BUSINESS COMBINATIONS The Washington Business Act, Section 23B.19 of the Revised Code of Washington, prohibits a "target corporation," with certain exceptions, from engaging in certain "significant business transactions" (such as a merger or sale of assets) with an "acquiring person" who acquires more than 10% of the voting securities of the target corporation for a period of five years after such acquisition, unless the transaction is approved by a majority of the members of the target corporation's board of directors prior to the date of the transaction or unless the aggregate amount of the cash and the market value of non-cash consideration received by holders of outstanding shares of any class or series of stock of the target corporation is equal to certain minimum amounts. VoiceStream's Articles of Incorporation provide that it will be subject to such prohibitions and shall remain subject to such prohibitions even if they are repealed. Such prohibitions do not apply to any shareholders who beneficially own ten percent or more of VoiceStream's outstanding voting securities prior to the Spin-off. MARKET PRICE OF WESTERN WIRELESS COMMON STOCK The High/Low prices of Western Wireless' Class A Common Stock on February 5, 1999, the last trading date preceding announcement of the Spin-off, were 25 1/4 and 24 7/8, respectively. LISTING AND TRADING OF COMPANY COMMON STOCK AND VOICESTREAM COMMON STOCK After the Spin-off, both the Western Wireless Common Stock and the VoiceStream Common Stock will be listed and traded on the Nasdaq Stock Market. The combined trading prices of Western Wireless Common Stock and VoiceStream Common Stock may be greater than, less than or equal to the trading price of Western Wireless Common Stock immediately prior to the Spin-off. VoiceStream initially will have approximately 344 shareholders of record based upon the number of shareholders of record of Western Wireless as of April 1, 1999. The prices at which the VoiceStream Common Stock will trade will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for the VoiceStream Common Stock, investor perception of VoiceStream and the PCS industry, VoiceStream's dividend policy and general economic and market conditions. Shares of VoiceStream Common Stock distributed to Western Wireless' shareholders in the Spin-off will be freely transferable, except for securities received by persons who may be deemed to be "affiliates" of VoiceStream pursuant to the Securities Act. Persons who may be deemed to be "affiliates" of VoiceStream after the Spin-off generally include individuals or entities that control, are controlled by, or are under common control with, VoiceStream and may include certain officers and directors of VoiceStream as well as principal shareholders of VoiceStream. Persons who are affiliates of VoiceStream will be permitted to sell their shares of VoiceStream Common Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act. 53 57 VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF The following table sets forth certain information regarding beneficial ownership of Western Wireless Common Stock and VoiceStream Common Stock as of April 1, 1999, by (i) each person who is known by Western Wireless or VoiceStream to own beneficially 5% or more of (a) either class of the Western Wireless Common Stock, or (b) the VoiceStream Common Stock; (ii) each director of Western Wireless and VoiceStream; (iii) each Named Executive Officer of Western Wireless and VoiceStream; and (iv) all directors and officers of each company as a group. The table further sets forth certain information regarding the anticipated beneficial ownership of VoiceStream Common Stock by each of the foregoing persons as a result of the Spin-off. The beneficial ownership of Western Wireless Common Stock will not change as a result of the Spin-off. Unless otherwise indicated, all persons listed have sole voting power and investment power with respect to such shares, subject to community property laws, where applicable, and the information contained in the notes to the table.
PERCENT OF SHARES OF SHARES OF VOTING POWER SHARES OF WWC CLASS A WWC CLASS B OF WWC VOICESTREAM COMMON STOCK PERCENT COMMON STOCK PERCENT COMMON STOCK COMMON STOCK BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY NAME AND ADDRESS OWNED(1) OWNED OWNED(1) OWNED OWNED(1) OWNED(1) ---------------- ------------ ------------ ------------ ------------ ------------ ------------ Western Wireless Corporation 3650 131st Ave. SE Bellevue, WA 98006(2).................. 0 * 0 * 0 76,531,259 Hutchison Whampoa Limited 22nd Floor, Hutchison House 10 Harcourt Road Hong Kong(2)(6)(20).................... 3,888,888 9.05% 0 * 1.03% 19,010,364 Hellman & Friedman(3)(6)(12) One Maritime Plaza, 12th Floor San Francisco, CA 94111................ 500 * 12,298,997 36.66% 32.49% 0 The Goldman Sachs Group, L.P. and related investors(4)(6)(12) 85 Broad Street, 19th Floor New York, NY 10004..................... 250 * 9,799,029 29.21% 25.89% 0 Providence Media Partners L.P.(6)(12) c/o Providence Ventures, Inc. 900 Fleet Center 50 Kennedy Plaza Providence, RI 02903................... 250 * 3,338,768 9.95% 8.82% 0 Franklin Resources, Inc. 777 Mariners Island Blvd. P.O. Box 7777 San Mateo, CA 94403-7777............... 2,207,910 5.13% 0 * * 0 John W. Stanton(5)(6)(7)(14)(16) 3650 131st Ave. SE Bellevue, WA 98006..................... 347,612 * 6,207,799 18.50% 16.49% 0 Theresa E. Gillespie(5)(6)(7)(17) 3650 131st Ave SE Bellevue, WA 98006..................... 347,612 * 6,207,799 18.50% 16.49% 0 Robert R. Stapleton(7)(15)(18).......... 568,575 1.31% 10,187 * * 0 Donald Guthrie(7)(15)(16)............... 258,275 * 90,117 * * 0 Mikal J. Thomsen(7)(8)(17).............. 278,500 * 295,442 * * 0 Alan R. Bender(7)(16)................... 229,725 * 23,517 * * 0 Cregg B. Baumbaugh(7)(18)............... 226,625 * 18,290 * * 0 John L. Bunce, Jr.(9)(12)(14)........... 500 * 12,298,997 36.66% 32.49% 0 Mitchell R. Cohen(9)(12)(14)............ 500 * 12,298,997 36.66% 32.49% 0 Daniel J. Evans(7)(14).................. 2,750 * 0 * * 0 Jonathan M. Nelson(10)(12)(14).......... 6,250 * 3,338,768 9.95% 8.82% 0 Terence M. O'Toole(11)(12)(14).......... 250....... * 9,799,029 29.21% 25.89% 0 Canning Fok(13)(15)..................... 3,888,888 9.04% 0 * 1.03% 19,010,364 Hans R. Snook(13)(15)................... 3,888,888 9.04% 0 * 1.03% 19,010,364 All Western Wireless directors and executive officers as a group (11 persons)(7)(12)(19).................... 1,123,862 2.53% 31,881,185 95.02% 84.53% 0 All VoiceStream directors and executive officers as a group (15 persons)(7)(12)(19).................... 5,649,350 12.74% 31,786,704 94.74% 85.47% 19,010,364 SHARES OF VOICESTREAM PERCENT COMMON STOCK BENEFICIALLY PERCENT BENEFICIALLY OWNED BENEFICIALLY OWNED AFTER AFTER THE NAME AND ADDRESS OWNED SPIN-OFF(1) SPIN-OFF ---------------- ------------ ------------ ------------ Western Wireless Corporation 3650 131st Ave. SE Bellevue, WA 98006(2).................. 80.10% 0.0 * Hutchison Whampoa Limited 22nd Floor, Hutchison House 10 Harcourt Road Hong Kong(2)(6)(20).................... 19.90% 22,899,252 23.97% Hellman & Friedman(3)(6)(12) One Maritime Plaza, 12th Floor San Francisco, CA 94111................ * 12,299,497 12.87% The Goldman Sachs Group, L.P. and related investors(4)(6)(12) 85 Broad Street, 19th Floor New York, NY 10004..................... * 9,799,279 10.26% Providence Media Partners L.P.(6)(12) c/o Providence Ventures, Inc. 900 Fleet Center 50 Kennedy Plaza Providence, RI 02903................... * 3,339,018 3.49% Franklin Resources, Inc. 777 Mariners Island Blvd. P.O. Box 7777 San Mateo, CA 94403-7777............... * 2,207,910 2.31% John W. Stanton(5)(6)(7)(14)(16) 3650 131st Ave. SE Bellevue, WA 98006..................... * 6,555,411 6.85% Theresa E. Gillespie(5)(6)(7)(17) 3650 131st Ave SE Bellevue, WA 98006..................... * 6,555,411 6.85% Robert R. Stapleton(7)(15)(18).......... * 578,762 * Donald Guthrie(7)(15)(16)............... * 348,392 * Mikal J. Thomsen(7)(8)(17).............. * 573,942 * Alan R. Bender(7)(16)................... * 253,242 * Cregg B. Baumbaugh(7)(18)............... * 244,915 * John L. Bunce, Jr.(9)(12)(14)........... * 12,299,497 12.87% Mitchell R. Cohen(9)(12)(14)............ * 12,299,497 12.87% Daniel J. Evans(7)(14).................. * 2,750 * Jonathan M. Nelson(10)(12)(14).......... * 3,345,018 3.50% Terence M. O'Toole(11)(12)(14).......... * 9,799,279 10.26% Canning Fok(13)(15)..................... 19.90% 22,899,252 23.97% Hans R. Snook(13)(15)................... 19.90% 22,899,252 23.97% All Western Wireless directors and executive officers as a group (11 persons)(7)(12)(19).................... * 33,005,047 34.26% All VoiceStream directors and executive officers as a group (15 persons)(7)(12)(19).................... 19.90% 56,446,418 59.08%
54 58 NOTES TO BENEFICIAL OWNERSHIP TABLE - --------------- * Less than 1% of the outstanding shares of Common Stock. (1) Computed in accordance with Rule 13d-3(d)(1) of the Exchange Act. In order to allow a distribution of one share of VoiceStream Common Stock for each share of Western Wireless Common Stock outstanding at the time of the Spin-off, VoiceStream will effectuate a stock split of its shares immediately prior to the Spin-off. All VoiceStream Common Stock set forth in the table reflects the results of such stock split. (2) Parties or affiliates of parties to a shareholders agreement, which provides that the parties thereto will vote their shares of VoiceStream Common Stock in favor of the election of certain directors designated by each of Western Wireless and Hutchison, will have certain rights of first offer or first refusal, preemptive rights and registration rights and Hutchison will have certain approval rights with respect to Western Wireless employment contracts. The parties to this agreement anticipate that its provisions relevant to Hutchison's right to designate certain directors shall be incorporated into a voting agreement with respect to the VoiceStream Common Stock. With the exception of preemptive rights and registration rights in favor of Hutchison, this will be terminated effective with the Spin-off. See "-- VoiceStream Voting Agreement" below. (3) Consists of shares held by Hellman & Friedman Capital Partners II, L.P. ("HFCP"), H&F Orchard Partners, L.P. ("HFOP") and H&F International Partners, L.P. ("HFIP"), which are in turn beneficially owned by their respective general partners and Warren Hellman, individually and as a trustee of The Hellman Family Revocable Trust dated December 17, 1984 (the "Hellman Trust," and, with HFCP, HFOP and HFIP, the "Hellman Entities"). HFCP owns of record 11,108,169 shares of Western Wireless Class B Common Stock, HFOP owns of record 993,648 shares of Western Wireless Class B Common Stock and HFIP owns of record 197,180 shares of Western Wireless Class B Common Stock. HFCP, HFOP and HFIP are California limited partnerships, the sole general partners of which are entities indirectly controlled by the Hellman Trust. The principal business of each of such partnerships is to make strategic investments in a variety of special situations, including restructurings, recapitalizations and buyouts. Warren Hellman is a trustee of the Hellman Trust and is a citizen of the United States. Warren Hellman, individually and as a trustee of the trust, shares voting and investment power with respect to the shares of Western Wireless Class B Common Stock held by the Hellman Entities. The total number of shares of VoiceStream Common Stock held by the Hellman Entities after the spin-off will be identical to their current holdings of shares of Western Wireless Class A and Class B Common Stock. (4) Consists of (i) 8,986,738 shares of Western Wireless Class B Common Stock held of record by GS Capital Partners, L.P. ("GS Capital"), (ii) 470,401 shares of Western Wireless Class B Common Stock held of record by Stone Street Fund 1992, L.P. ("Stone Street"), (iii) 273,069 shares of Western Wireless Class B Common Stock held of record by Bridge Street Fund 1992, L.P. ("Bridge Street") and (iv) 68,821 shares of Western Wireless Class B Common Stock held of record by The Goldman Sachs Group, L.P. ("GS Group," and, with GS Capital, Stone Street and Bridge Street, the "Goldman Sachs Entities"). Each of GS Capital, Stone Street and Bridge Street is an investment limited partnership, the general partner, the managing general partner or the managing partner of which is an affiliate of GS Group. GS Group disclaims beneficial ownership of shares held by such investment partnerships to the extent partnership interests in such partnerships are held by persons other than GS Group and its affiliates. The total number of shares of VoiceStream Common Stock held by the Goldman Sachs Entities after the spin-off will be identical to their current holdings of shares of Western Wireless Class A and Class B Common Stock. (5) Mr. Stanton is a director and Named Executive Officer of both Western Wireless and VoiceStream. Ms. Gillespie is an executive officer of Western Wireless. Mr. Stanton and Ms. Gillespie are married. Includes (i) 1,686,069 shares of Western Wireless Class B Common Stock held of record by PN Cellular, Inc. ("PN Cellular"), which is substantially owned and controlled by Mr. Stanton and Ms. Gillespie, (ii) 1,274,520 shares of Western Wireless Class B Common Stock held of record by Stanton Communications Corporation ("SCC"), which is substantially owned and controlled by 55 59 Mr. Stanton and Ms. Gillespie, (iii) 105,000 shares of Western Wireless Class A Common Stock and 3,087,774 shares of Western Wireless Class B Common Stock held by Mr. Stanton and Ms. Gillespie, as tenants in common, (iv) 5,000 shares of Western Wireless Class A Common stock and 159,437 shares of Western Wireless Class B Common Stock held of record by The Stanton Family Trust; and (v) 90,000 shares and 15,000 shares of Western Wireless Class A Common Stock held of record by each of Mr. Stanton and Ms. Gillespie, respectively, pursuant to Western Wireless' 1997 Executive Restricted Stock Plan. Mr. Stanton and Ms. Gillespie share voting and investment power with respect to the shares jointly owned by them, as well as the shares held of record of PN Cellular, SCC and The Stanton Family Trust. Mr. Stanton, Ms. Gillespie, PN Cellular, SCC and The Stanton Family Trust are referred to collectively as the "Stanton Entities." The total number of shares of VoiceStream Common Stock held by the Stanton Entities after the Spin-off will be identical to their current holdings of shares of Western Wireless Class A and Class B Common Stock. (6) Parties or affiliates of parties to a voting agreement, which provides that the parties thereto will vote their shares of Western Wireless Common Stock in favor of the election as directors of Western Wireless the Chief Executive Officer of Western Wireless, one person designated by Stanton and Providence Media Partners L.P. ("Providence"), one person designated by Goldman, Sachs & Co. ("Goldman Sachs"), two persons designated by the Hellman Entities and one person selected by a majority of such designated persons, subject to the ownership requirements set forth therein. The parties, together with Hutchison, expect to enter into a similar agreement with respect to their shares of VoiceStream Common Stock. See "-- VoiceStream Voting Agreement" below. (7) Includes aggregate exercisable options, within 60 days of April 1, 1999, to purchase Western Wireless Class A Common Stock; does not include unexercisable options. May include stock jointly or separately owned with or by spouse. (8) Mr. Thomsen jointly holds voting and investment power with respect to all of such shares with Lynn C. Thomsen, his wife, except for shares issued or issuable upon the exercise of stock options. Includes 172,484 shares of Western Wireless Class B Common Stock beneficially owned by Mr. Thomsen through his ownership of approximately 10.2% of PN Cellular. Mr. Thomsen does not have voting control over such shares. The total number of shares of VoiceStream Common Stock held by Mr. Thomsen after the Spin-off will be identical to his current holdings of shares of Western Wireless Class A and Class B Common Stock. (9) Mr. Bunce and Mr. Cohen may each be deemed to be the owner of the 12,299,497 shares of Western Wireless and 12,299,497 shares of VoiceStream Common Stock owned by the Hellman Entities as they are officers of the corporate general partners of the Hellman Entities. Each of Mr. Bunce and Mr. Cohen disclaim beneficial ownership of shares held by the Hellman Entities to the extent interests in such entities are held by persons other than such individual. (10) Mr. Nelson may be deemed to be the owner of the 3,338,768 shares of Western Wireless and 3,338,768 shares of VoiceStream Common Stock owned by Providence, as he is a managing general partner of Providence Ventures, L.P., the general partner of the general partner of Providence. Mr. Nelson disclaims beneficial ownership of shares held by Providence to the extent interests in Providence are held by persons other than Mr. Nelson. (11) Mr. O'Toole, who is a managing director of Goldman Sachs, disclaims beneficial ownership of shares which may be deemed to be beneficially owned by GS Group, except to the extent of his pecuniary interest therein. (12) Includes aggregate exercisable options, within 60 days of April 1, 1999, to purchase Western Wireless Class A Common Stock; does not include unexercisable options. Options granted to Messrs. Bunce and Cohen are held for the benefit of HFCP; options granted to Mr. Nelson are held for the benefit of Providence; and options granted to Mr. O'Toole are held for the benefit of GS Group. (13) Messrs. Fok and Snook may each be deemed to be the owner of the 3,888,888 shares of Western Wireless Class A Common Stock and 19,010,364 shares of VoiceStream Common Stock owned by 56 60 the Hutchison Entities (as defined below), as Mr. Fok is the Group Managing Director of Hutchison and Mr. Snook is the Group Managing Director of an affiliate of Hutchison and a Director of a separate affiliate of Hutchison. Each of Mr. Fok and Mr. Snook disclaim beneficial ownership of Western Wireless and VoiceStream shares held by Hutchison to the extent interests in Hutchison are held by persons other than such individual. The total number of shares of VoiceStream Common Stock Messrs. Fok and Snook may each be deemed to be the owner of after the Spin-off will be identical to the current holdings of shares of Western Wireless Class A Common Stock owned by Hutchison and the holdings of shares of VoiceStream Common Stock owned by Hutchison. (14) Director of both Western Wireless and VoiceStream. (15) Director of VoiceStream only. (16) Named Executive Officer of both Western Wireless and VoiceStream. (17) Named Executive Officer of Western Wireless only. (18) Named Executive Officer of VoiceStream only. (19) In determining the aggregate number of shares owned by Western Wireless and VoiceStream directors and executive officers, only the maximum number of shares which such individuals may beneficially own or may be deemed to own at any given time have been included. (20) Consists of shares held by Hutchison Telecommunications Holdings (USA) Limited ("Hutchison Telecom") and Hutchison USA, subsidiaries of Hutchison (collectively, the "Hutchison Entities"). Hutchison Telecom currently owns of record 3,888,888 shares of Western Wireless Class A Common Stock and Hutchison USA currently owns of record 19,010,364 shares of VoiceStream Common Stock. The Hutchison Entities' principal business is property development and holdings; ports and related services; retail; manufacturing and other services; telecommunications; and energy, infrastructure, finance and investment. Following the VoiceStream stock split, Hutchison USA will own 19,010,364 shares of VoiceStream Common Stock. The total number of shares of VoiceStream Common Stock held by Hutchison Telecom after the Spin-off will be identical to its current holdings of shares of Western Wireless Class A Common Stock. VOICESTREAM VOTING AGREEMENT In connection with the Spin-off, the Hellman Entities, the Goldman Sachs Entities, the Stanton Entities, Providence and the Hutchison Entities, will enter into a voting agreement (the "VoiceStream Voting Agreement"), similar to the voting agreement with respect to Western Wireless. The VoiceStream Voting Agreement provides that the parties thereto shall vote their shares of VoiceStream Common Stock for the election of ten members designated as follows: (i) Mr. Stanton, so long as he is the Chief Executive Officer of VoiceStream or he beneficially owns 4,500,000 shares of Common Stock; (ii) so long as the Hellman Entities beneficially own at least (A) 9,800,000 shares of VoiceStream Common Stock, two persons designated by the Hellman Entities or (B) 4,500,000 shares of VoiceStream Common Stock, one person designated by the Hellman Entities; (iii) so long as the Hutchison Entities beneficially own at least (A) 9,800,000 shares of VoiceStream Common Stock, two persons designated by the Hutchison Entities or (B) 4,500,000 shares of VoiceStream Common Stock, one person designated by the Hutchison Entities; (iv) so long as the Goldman Sachs Entities beneficially own at least 4,500,000 shares of VoiceStream Common Stock, one person designated by Goldman Sachs; (v) so long as the Stanton Entities and Providence collectively beneficially own at least 4,500,000 shares of VoiceStream Common Stock, one person designated by majority vote of the Stanton Entities and Providence (such designee being in addition to Mr. Stanton if he is then serving 57 61 on the VoiceStream Board of Directors by reason of being the Chief Executive Officer of VoiceStream or the Stanton Entities' beneficial ownership of at least 4,500,000 shares of VoiceStream Common Stock). The Stanton Entities will agree that (x) so long as Mr. Stanton is serving as Chief Executive Officer or he beneficially owns at least 4,500,000 shares of VoiceStream Common Stock, (y) the Stanton Entities and Providence collectively beneficially own at least 4,500,000 shares of VoiceStream Common Stock, and (z) Providence beneficially owns at least 2,500,000 shares of VoiceStream Common Stock, the Stanton Entities shall vote their shares of VoiceStream Common Stock for one member of the VoiceStream Board of Directors designated by Providence; and (vi) three members of the VoiceStream Board of Directors selected by a majority of the persons selected as described above. In addition, the Hutchison Entities shall have the right to designate an additional director (and the Board shall in each case be expanded by one member to accommodate such new designee) when the Hutchison Entities' aggregate ownership of the VoiceStream Common Stock exceeds each of the following thresholds: 27.25%, 33.33%, 38.5%, 42.9%, 44.67% and 50%. The Goldman Sachs Entities are limited in their voting power pursuant to provisions of VoiceStream's Articles of Incorporation. 58 62 DOCUMENTS INCORPORATED BY REFERENCE The following documents filed with the Securities and Exchange Commission (the "SEC") by Western Wireless (SEC File No. 0-28160) are incorporated by reference in this Information Statement: 1. Western Wireless' Annual Report on Form 10-K for the year ended December 31, 1998. 2. Western Wireless' Proxy Statement dated May 21, 1998 and 1998 Annual Report. 3. Western Wireless' Current Reports on Form 8-K, filed February 8, 1999 and February 18, 1999. All documents filed by Western Wireless pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date of this Information Statement and prior to the completion of the Spin-off shall be deemed to be incorporated by reference into this Information Statement and to be a part hereof from the date of filing of such document. Any statement contained herein or in a document all or a portion of which is incorporated or deemed incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Information Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Information Statement. Western Wireless hereby undertakes to provide without charge to each person to whom this Information Statement has been delivered, upon the written or oral request of any such person, a copy of any and all of the foregoing documents incorporated herein by reference (other than exhibits to such documents which are not specifically incorporated by reference in such documents). Western Wireless shall deliver the requested information by first class mail or other equally prompt means within one business day of receipt of such request. Written or telephone requests should be directed to Investor Relations Department, Western Wireless Corporation, 3650 131st Avenue S.E., Bellevue, Washington, 98006, at telephone number (425) 586-8700. ADDITIONAL INFORMATION Western Wireless is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange Act, Western Wireless files reports, proxy statements and other information with the SEC. The reports, proxy statements and other information can be inspected and copied at the public reference facilities that the SEC maintains at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of these materials can be obtained at prescribed rates from the Public Reference Section of the SEC at the principal offices of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be accessed electronically by means of the SEC's home page on the Internet at http://www.sec.gov. Any statement contained herein shall be deemed to be modified or superseded for the purpose of this Information Statement to the extent that a subsequent statement contained herein modifies or supersedes that statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Information Statement. 59 63 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS VOICESTREAM WIRELESS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996.............. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... F-6 Notes to Consolidated Financial Statements.................. F-7 Schedule I -- Valuation and Qualifying Accounts............. F-18
F-1 64 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of VoiceStream Wireless Corporation: We have audited the accompanying consolidated balance sheets of VoiceStream Wireless Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and schedule referred to below 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 generally accepted auditing standards. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of consolidated financial statements is presented for purpose of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Seattle, Washington February 18, 1999 F-2 65 VOICESTREAM WIRELESS CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
AS OF DECEMBER 31, --------------------- 1998 1997 ---------- -------- Current assets: Cash and cash equivalents................................. $ 8,057 $ 337 Accounts receivable, net of allowance for doubtful accounts of $5,715 and $2,040, respectively............ 24,766 18,375 Inventory................................................. 20,182 22,716 Prepaid expenses and other current assets................. 6,393 8,517 ---------- -------- Total current assets.............................. 59,398 49,945 Property and equipment, net of accumulated depreciation of $151,408 and $73,878, respectively........................ 619,280 420,638 Licensing costs and other intangible assets, net of accumulated amortization of $13,799 and $7,454, respectively.............................................. 312,040 315,653 Investments in and advances to unconsolidated affiliates.... 60,938 36,055 ---------- -------- $1,051,656 $822,291 ========== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 16,172 $ 2,503 Accrued liabilities....................................... 45,566 24,625 Construction accounts payable............................. 58,217 6,310 Payable to Western Wireless............................... 5,071 92,746 ---------- -------- Total current liabilities......................... 125,026 126,184 ---------- -------- Long-term debt.............................................. 540,000 300,000 Commitments (Note 8) Shareholders' equity: Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding Common stock, par value of $0.001, and paid-in capital; 50,000 shares authorized; 12,484 and 10,000 Class A shares issued and outstanding, respectively............ 994,789 750,000 Deficit................................................... (608,159) (353,893) ---------- -------- Total shareholders' equity........................ 386,630 396,107 ---------- -------- $1,051,656 $822,291 ========== ========
See accompanying notes to consolidated financial statements. F-3 66 VOICESTREAM WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ----------- --------- -------- Revenues: Subscriber revenues................................... $ 123,966 $ 52,360 $ 7,794 Roamer revenues....................................... 3,506 227 Equipment sales....................................... 40,490 25,143 9,745 ----------- --------- -------- Total revenues................................ 167,962 77,730 17,539 ----------- --------- -------- Operating expenses: Cost of service....................................... 50,978 43,183 12,470 Cost of equipment sales............................... 77,071 53,469 20,789 General and administrative............................ 75,343 51,678 20,209 Sales and marketing................................... 85,447 59,466 31,505 Depreciation and amortization......................... 83,767 66,875 14,395 ----------- --------- -------- Total operating expenses...................... 372,606 274,671 99,368 ----------- --------- -------- Operating loss.......................................... (204,644) (196,941) (81,829) ----------- --------- -------- Other income (expense): Interest and financing expense, net................... (34,118) (57,558) (3,607) Equity in net loss of unconsolidated affiliates....... (24,120) (9,327) (954) Interest income and other............................. 8,616 11 40 ----------- --------- -------- Total other income (expense).................. (49,622) (66,874) (4,521) ----------- --------- -------- Net loss...................................... $ (254,266) $(263,815) $(86,350) =========== ========= ======== Pro forma basic and diluted loss per common share....... $ (2.75) =========== Weighted average common shares used in computing pro forma basic and diluted loss per common share......... 92,387,000 ===========
See accompanying notes to consolidated financial statements. F-4 67 VOICESTREAM WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK ----------------------------- PAR VALUE TOTAL AND PAID-IN SHAREHOLDERS' CLASS A SHARES CAPITAL DEFICIT EQUITY -------------- ----------- --------- ------------- Balance, January 1, 1996................... 10,000 $151,481 $ (3,728) $147,753 Additional capital contributions......... 80,250 80,250 Net loss................................. (86,350) (86,350) ------ -------- --------- -------- Balance, December 31, 1996................. 10,000 231,731 (90,078) 141,653 Additional capital contributions......... 518,269 518,269 Net loss................................. (263,815) (263,815) ------ -------- --------- -------- Balance, December 31, 1997................. 10,000 750,000 (353,893) 396,107 Issuance of common stock, net............ 2,484 244,789 244,789 Net loss................................. (254,266) (254,266) ------ -------- --------- -------- Balance, December 31, 1998................. 12,484 $994,789 $(608,159) $386,630 ====== ======== ========= ========
See accompanying notes to consolidated financial statements. F-5 68 VOICESTREAM WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Operating Activities: Net loss.............................................. $(254,266) $(263,815) $ (86,350) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................... 83,767 66,875 14,395 Equity in net loss of unconsolidated affiliates.... 24,120 9,327 954 Other, net......................................... 571 1,122 62 Changes in operating assets and liabilities, net of effects from consolidating acquired interests: Accounts receivable, net......................... (6,391) (12,969) (5,406) Inventory........................................ 2,534 (2,581) (20,135) Prepaid expenses and other current assets........ 2,124 (4,957) (1,899) Accounts payable................................. 13,669 (8,068) 9,419 Accrued liabilities.............................. 20,941 16,937 7,688 --------- --------- --------- Net cash used in operating activities.............. (112,931) (198,129) (81,272) --------- --------- --------- Investing activities: Purchase of property and equipment.................... (206,503) (264,432) (234,362) Additions to licensing costs and other intangible assets............................................. (12,871) (71,634) (84,113) Acquisition of wireless properties, net of cash acquired........................................... (4,645) Investments in and advances to unconsolidated affiliates, net.................................... (34,259) (37,240) (1,492) Deposit held by FCC................................... (23,500) Refund of deposit held by FCC......................... 7,749 Other................................................. 880 --------- --------- --------- Net cash used in investing activities.............. (253,633) (370,202) (342,587) --------- --------- --------- Financing activities: Proceeds from issuance of common stock, net........... 244,789 Additions to long-term debt........................... 540,000 157,000 130,000 Repayment of long term-debt........................... (300,000) Advances from (repayment to) Western Wireless, net.... (105,446) 406,254 219,000 Deferred financing fees............................... (5,059) Equity contributions from Western Wireless............ 80,250 --------- --------- --------- Net cash provided by financing activities.......... 374,284 563,254 429,250 --------- --------- --------- Change in cash and cash equivalents..................... 7,720 (5,077) 5,391 Cash and cash equivalents, beginning of year............ 337 5,414 23 --------- --------- --------- Cash and cash equivalents, end of year.................. $ 8,057 $ 337 $ 5,414 ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 69 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION VoiceStream Wireless Corporation ("VoiceStream") was formed in 1994 as "Western PCS Corporation". VoiceStream is an 80.1% owned subsidiary of Western Wireless Corporation ("Western Wireless"). The remaining 19.9% is indirectly owned by Hutchison Whampoa Limited, a Hong Kong company. VoiceStream provides wireless communications services in urban markets in the United States through the ownership and operation of personal communications services ("PCS") licenses. VoiceStream has commenced commercial operations in ten markets under the VoiceStream(R) brand name using the GSM technology. Additionally, VoiceStream PCS services are offered in three additional markets in conjunction with joint ventures. VoiceStream expects to incur significant operating losses and to generate negative cash flows from operating activities during the next several years while it expands its PCS systems and customer base. These losses are expected to be financed through borrowings or the issuance of new debt or additional equity. There can be no assurance that such funds will be available to VoiceStream on acceptable or favorable terms. On February 8, 1999, Western Wireless announced its intention to separate VoiceStream from Western Wireless' other operations (the "Spin-off"). Western Wireless has received a favorable ruling by the Internal Revenue Service for a tax free spin-off, and the approval by its board of directors to take the necessary steps to complete the Spin-off. Western Wireless will distribute all of its interest in VoiceStream to its shareholders upon the Spin-off. Although VoiceStream has been operated separately from Western Wireless' other operations and has been a separate legal entity since its inception, the Spin-off will establish VoiceStream as a stand-alone entity with objectives separate from those of Western Wireless. The Spin-off is subject to numerous conditions including, among others, the receipt of certain government and third party approvals. There is no assurance that such conditions will be met to complete the Spin-off. See further information on the relationship between VoiceStream and Western Wireless in footnote 15. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of VoiceStream, its wholly owned subsidiaries and its affiliate investments in which VoiceStream has a greater than 50% interest. All affiliate investments in which VoiceStream has between a 20% and 50% interest are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated. Cash and cash equivalents Cash and cash equivalents generally consist of cash and marketable securities that have original maturity dates not exceeding three months. Such investments are stated at cost, which approximates fair value. Revenue recognition Service revenues based on customer usage are recognized at the time the service is provided. Access and special feature service revenues are recognized when earned. Sales of equipment, primarily handsets, are recognized when the goods are delivered to the customer. Inventory Inventory consists primarily of handsets and accessories. Inventory is stated at the lower of cost or market, determined on a first-in, first-out basis. F-7 70 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property and equipment and depreciation Property and equipment are stated at cost. Depreciation commences once the assets have been placed in service and is computed using the straight-line method over the estimated useful lives of the assets which primarily range from three to twenty years. Licensing costs and other intangible assets and amortization Licensing costs primarily represent costs incurred to acquire PCS licenses issued by the FCC. Amortization begins with the commencement of service to customers and is computed using the straight-line method over 40 years. Other intangible assets consist primarily of deferred financing costs. Deferred financing costs are amortized using the effective interest method over the term of the loan. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of," VoiceStream periodically evaluates whether there has been any indication of impairment of its long-lived assets, including its licensing costs and other intangibles. As of December 31, 1998, there has been no indication of such impairment. Capitalized interest VoiceStream's PCS licenses and wireless communications systems represent qualified assets pursuant to SFAS No. 34, "Capitalization of Interest Cost." VoiceStream capitalized interest of $1.8 million in 1998 and $4.0 million in 1997. Income taxes Deferred tax assets and liabilities are recognized based on temporary differences between the financial statements and the tax bases of assets and liabilities using enacted tax rates expected to be in effect when they are realized. A valuation allowance against deferred tax assets is recorded, if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. For income tax purposes, VoiceStream's results have been included in the consolidated federal income tax return of Western Wireless. The provision/benefit for income taxes has been computed as if VoiceStream filed a separate federal income tax return using the tax rate applicable to Western Wireless on a consolidated basis. After the Spin-off, VoiceStream's results of operations will no longer be included in Western Wireless' consolidated tax return. Loss per common share Basic and diluted loss per common share is calculated using the weighted average number of common shares outstanding during the period. The number of shares outstanding is calculated based on the requirements of SFAS No. 128, "Earnings Per Share." Proforma net loss per share for 1998 is calculated using the weighted average number of Western Wireless common shares outstanding for the period plus the split-adjusted weighted average number of VoiceStream common shares outstanding owned by Hutchison for the period. Given the historical capital structure of VoiceStream as a subsidiary of Western Wireless and the changes therein to be effected by the Spin-off, historical loss per share amounts are not presented in the financial statements of VoiceStream as they are not considered to be meaningful. Fair value of financial instruments As required under the Credit Facility (as defined in Note 7), VoiceStream enters into interest rate swap and cap agreements to manage interest rate exposure pertaining to long-term debt. VoiceStream has only limited involvement with these financial instruments, and does not use them for trading purposes. In F-8 71 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) addition, VoiceStream has historically held derivative financial instruments to maturity and has never recognized a material gain or loss on disposal. It is VoiceStream's intent to hold existing financial instruments to maturity. Interest rate swaps are accounted for on an accrual basis, the income or expense of which is included in interest expense. Premiums paid to purchase interest rate cap agreements are classified as an asset and amortized to interest expense over the terms of the agreements. These transactions do not subject VoiceStream to risk of loss because gains and losses on these contracts are offset against losses and gains on the underlying liabilities. No collateral is held in relation to VoiceStream's financial instruments. The carrying value of VoiceStream's short-term financial instruments approximates fair value due to the short maturity of these instruments. The fair value of long-term debt is based on incremental borrowing rates currently available on loans with similar terms and maturities. Supplemental cash flow disclosure Cash paid for interest (net of amounts capitalized) was $26.8 million in 1998 and $17.8 million in 1997. Cash paid for interest in 1996 was offset entirely by amounts capitalized. Non-cash investing and financing activities were as follows (dollars in thousands):
FOR YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996(1) ------- -------- -------- Contribution of wireless licenses to joint ventures......... $14,744 Conversion of FCC deposit to wireless license............... $ 17,251 Conversion of payable to Western Wireless to equity (See Note 14).................................................. $518,269
- --------------- (1) There were no non-cash investing or financing activities in 1996. Estimates used in preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Reclassifications Certain amounts in prior year's financial statements have been reclassified to conform with the 1998 presentation. Recently issued accounting standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." It requires the recognition of all derivatives as either assets or liabilities and the measurement of those instruments at fair value. The required adoption period is effective for the issuance of VoiceStream's March 31, 2000, quarterly financial statements. The implementation of SFAS No. 133 is not expected to have a material impact on VoiceStream's financial position or results of operations. The American Institute of Certified Public Accountants recently issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." This SOP provides guidance on the financial reporting of start-up costs and organizational activities. It requires costs of start-up activities and F-9 72 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) organizational costs to be expensed as incurred. SOP 98-5 is not expected to materially affect the financial position or results of operations of the Company. The required adoption period is effective for the issuance of VoiceStream's December 31, 1999, financial statements. Stock-based compensation plans VoiceStream has not historically had stock-based compensation plans separate from Western Wireless. However, VoiceStream intends to adopt its own stock plans upon the Spin-off. VoiceStream will apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in measuring compensation costs for its stock options after the Spin-off. VoiceStream will disclose pro forma net income (loss) and net income (loss) per share as if compensation costs had been determined consistent with the SFAS No. 123, "Accounting for Stock-based Compensation". VoiceStream has no stock options outstanding as of December 31, 1998. 3. PROPERTY AND EQUIPMENT
DECEMBER 31, ----------------------- 1998 1997 ---------- --------- (DOLLARS IN THOUSANDS) Land, buildings, and improvements........................... $ 15,549 $ 11,168 Wireless communications systems............................. 459,710 391,269 Furniture and equipment..................................... 57,840 39,419 --------- -------- 533,099 441,856 Less accumulated depreciation............................... (151,408) (73,878) --------- -------- 381,691 367,978 Construction in progress.................................... 237,589 52,660 --------- -------- $ 619,280 $420,638 ========= ========
Depreciation expense was $77.6 million in 1998, $61.2 million in 1997 and $12.6 million in 1996. 4. LICENSING COSTS AND OTHER INTANGIBLE ASSETS
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Licensing costs............................................. $320,834 $322,606 Other intangible assets..................................... 5,005 501 -------- -------- 325,839 323,107 Accumulated amortization.................................... (13,799) (7,454) -------- -------- $312,040 $315,653 ======== ========
Amortization expense was $6.2 million in 1998, $5.7 million in 1997 and $1.8 million in 1996. 5. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES A subsidiary of VoiceStream holds a 49.9% interest in Cook Inlet Western Wireless PV/SS PCS, LP ("Cook Inlet PCS"). Cook Inlet PCS is subject to the FCC's build-out requirements and will require significant additional amounts to complete the build-out of its PCS systems and to meet the government debt service requirements on the C and F Block licenses. The potential sources of such additional funding include vendor loans, loans or capital contributions by the partners of Cook Inlet PCS or other third party financing. VoiceStream funded the operations of Cook Inlet PCS during 1998 and 1997 through loans F-10 73 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) evidenced by promissory notes which are due 180 days after the date of issuance. The weighted average interest rate was 15% for 1998 and 1997. All promissory notes that have come due were replaced with new promissory notes. The total investment in Cook Inlet PCS, including advances under such promissory notes, was $47.9 million at December 31, 1998, and $36.1 million at December 31, 1997. During the second quarter of 1998, Cook Inlet PCS, participated in the C Block restructuring options provided by the FCC. The FCC provided for various options, including: (1) to return to the FCC entire licenses purchased in the C Block auction and be relieved of 100% of the related debt ("Amnesty"); and (2) to return 15 MHz, from a total of 30 MHz, of the licenses purchased in the auction and be relieved of one half of the related debt ("Disaggregation"). Of the licenses purchased in the C Block auction, Cook Inlet PCS chose Amnesty for two BTA licenses and Disaggregation for 11 BTA licenses. This resulted in a reduction of Cook Inlet PCS's debt of $29.1 million and a gain of $3.9 million, due to the retroactive adjustment of interest due on the related debt, the effect of which reduced the equity losses picked up by VoiceStream for the second quarter. In September 1997, a wholly owned subsidiary of VoiceStream and a subsidiary of Iowa Network Services, Inc., formed a limited partnership to build and operate a PCS network under the VoiceStream brand name covering certain metropolitan areas in Iowa and the major interstate and state highways linking such areas. In 1998 VoiceStream contributed certain licenses that it purchased in the FCC's A and D Block auctions for approximately $12.3 million to the venture for an approximate 38% ownership interest. In July 1998, VoiceStream entered into an agreement to form a joint venture with STPCS Investment, LLC and Americall International, LLC that will operate certain PCS markets in south Texas under the VoiceStream brand name. VoiceStream contributed certain licenses that it purchased in the FCC's D Block auction for approximately $2.5 million to the venture for an approximate 18% ownership interest. 6. ACCRUED LIABILITIES
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Accrued payroll and benefits................................ $ 6,558 $ 1,504 Accrued advertising and marketing........................... 2,252 2,654 Accrued interest expense.................................... 2,823 797 Accrued property taxes...................................... 21,482 10,066 Accrued interconnect charges................................ 3,986 1,865 Other....................................................... 8,465 7,739 ------- ------- $45,566 $24,625 ======= =======
7. LONG-TERM DEBT
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Credit Facility: Revolver.................................................. $290,000 Term Loan................................................. 250,000 Vendor Facility............................................. $300,000 -------- -------- $540,000 $300,000 ======== ========
F-11 74 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In June 1998, a wholly owned subsidiary of VoiceStream (the "Borrower") entered into a $1 billion credit facility with a consortium of lenders (the "Credit Facility"). The Credit Facility consists of $500 million in revolving credit and $250 million in a delayed draw term loan (collectively the "Revolver"), and a term loan (the "Term Loan") for $250 million. Beginning September 2001, the amount available to borrow under the Revolver and the principal balance of the Term Loan are to be reduced by various percentages each year. The Revolver and the Term Loan are due in their entirety on December 31, 2006, and June 30, 2007, respectively. The Credit Facility also contains certain financial covenants, which, among other things, impose limitations on the amount of indebtedness, limit the amount of capital spending and impose limitations on acquisitions and investments. The repayment of the Credit Facility is secured by, among other things, the grant of a security interest in substantially all of the assets of the Borrower and its subsidiaries. Under the Credit Facility, interest is payable at an applicable margin in excess of a prevailing rate. The prevailing rate is based on the prime rate or LIBOR at the Borrower's option. The applicable margin on the Credit Facility is determined quarterly based on certain events and the leverage ratio of the Borrower. The weighted average interest rate on all of VoiceStream's debt, including the appropriate margin, was 8.76% in 1998 and 8.20% in 1997. As of December 31, 1998, all loans under the Credit Facility had been borrowed using the LIBOR option. The Credit Facility also provides for an annual fee ranging from 0.375% to 0.5% on the unused commitment, payable quarterly. The Credit Facility requires VoiceStream to enter into interest rate swap and cap agreements to manage the interest rate exposure pertaining to borrowings under the Credit Facility. VoiceStream had entered into interest rate caps and swaps with a total notional amount of $295 million at December 31, 1998. Generally these instruments have initial terms ranging from 1 to 4 years and effectively convert variable rate debt to fixed rate. The weighted average interest rate under these agreements was approximately 6.11% in 1998. The amount of unrealized gain or loss attributable to changing interest rates at December 31, 1998, was not material. Interest only payments are required through June 30, 2001. Commencing September 30, 2001, and at the end of each calendar quarter thereafter, VoiceStream is required to make payments on the principal amount outstanding under the Credit Facility in increasing quarterly installments. Immediately after entering into the Credit Facility, the Borrower paid off, in its entirety, the balance owed under the $300 million Vendor Facility. The aggregate amounts of principal maturities of VoiceStream's long-term debt at December 31, 1998, are as follows:
(DOLLARS IN THOUSANDS) Year ending December 31, 1999............................................ $ 0 2000............................................ 0 2001............................................ 17,000 2002............................................ 31,500 2003............................................ 46,000 Thereafter...................................... 445,500 -------- $540,000 ========
8. COMMITMENTS VoiceStream leases various facilities, cell site locations, rights-of-way and equipment under operating lease agreements. The leases expire at various dates through the year 2027. Some leases have options to F-12 75 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) renew for additional periods up to 25 years. Certain leases require VoiceStream to pay property taxes, insurance and normal maintenance costs. Significantly all of VoiceStream's leases have fixed minimum lease payments. VoiceStream has no significant capital lease liabilities. Future minimum payments required under operating leases and agreements that have initial or remaining noncancellable terms in excess of one year at December 31, 1998, are summarized below:
(DOLLARS IN THOUSANDS) ---------------------- Year ending December 31, 1999........................................... $ 24,495 2000........................................... 23,489 2001........................................... 19,271 2002........................................... 11,878 2003........................................... 7,935 Thereafter..................................... 14,466 -------- $101,534 ========
Aggregate rental expense for all operating leases was approximately $21.3 million in 1998, $18.0 million in 1997 and $7.7 million in 1996. In order to ensure adequate supply and availability of certain inventory requirements and service needs, VoiceStream has committed to purchase PCS equipment from various suppliers. The aggregate amount of these commitments total approximately $450 million. At December 31, 1998, VoiceStream has ordered approximately $338 million under all of these agreements, of which approximately $12 million is outstanding. VoiceStream and its affiliates have various other purchase commitments for materials, supplies and other items incident to the ordinary course of business which are neither significant individually nor in the aggregate. Such commitments are not at prices in excess of current market value. 9. INCOME TAXES Significant components of deferred income tax assets and liabilities, net of tax, are as follows:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.......................... $282,002 $165,850 Other temporary differences............................... 13,459 6,142 -------- -------- Total deferred tax assets......................... 295,461 171,992 Valuation allowance......................................... (243,049) (142,775) -------- -------- Deferred tax liabilities: Property and wireless licenses basis differences.......... (52,412) (29,217) -------- -------- $ 0 $ 0 ======== ========
VoiceStream had approximately $707 million of net operating loss ("NOL") carryforwards at December 31, 1998. The NOLs will expire between 2010 and 2018. The valuation allowance increased approximately $100 million in 1998, $105 million in 1997 and $37 million in 1996. F-13 76 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Management believes that available objective evidence creates sufficient uncertainty regarding the realization of the net deferred tax assets. Such factors include recurring operating losses resulting primarily from the development of VoiceStream's PCS business. Accordingly, a valuation allowance has been provided for the net deferred tax assets of VoiceStream. The difference between the statutory tax rate of approximately 40% (35% federal and 5% state, net of federal benefits) and the tax benefit of zero recorded by VoiceStream is primarily due to VoiceStream's full valuation allowance against its net deferred tax assets. VoiceStream's ability to utilize the NOLs in any given year may be limited by certain events, including a significant change in ownership interest. After the Spin-off, the NOL carryforwards resulting from VoiceStream's cumulative tax losses will remain with VoiceStream. Pursuant to a tax sharing agreement entered into at the time of the Hutchison Transaction (as defined in Note 14), VoiceStream will pay Western Wireless an amount representative of the tax benefit of NOLs generated while VoiceStream was a wholly-owned subsidiary of Western Wireless. This payment will not exceed $20 million, net of taxes. 10. STOCK-BASED COMPENSATION PLANS VoiceStream has no stock options outstanding, nor does it have an option plan in place as of December 31, 1998. After the Spin-off, VoiceStream intends to have its own stock option plans that are substantially similar to the plans that are currently administered by Western Wireless. In connection with the Spin-off, (1) Western Wireless option holders will receive one vested VoiceStream option and one vested Western Wireless option for each existing vested Western Wireless option at the Spin-off; and (2) Western Wireless option holders who become VoiceStream employees will receive for each unvested Western Wireless option at the Spin-off a number of unvested VoiceStream options. It is anticipated the unvested options will have materially the same vesting schedule and expiration dates as the original options issued by Western Wireless. Proforma disclosures required under SFAS 123 are not presented as the number of VoiceStream options as of the Spin-off is not yet ascertainable. 11. EMPLOYEE BENEFIT PLANS VoiceStream does not have any employee benefit plans of its own as of December 31, 1998, because all of the individuals performing services for VoiceStream are employees of Western Wireless. Accordingly these employees were covered under Western Wireless' benefit plans, including defined contribution (401K) plan. Upon the Spin-off, all individuals that perform services for VoiceStream will become employees of VoiceStream. VoiceStream will establish its own employee benefit plans, including a 401K plan. The 401K plan will be substantially similar to Western Wireless' plan presently in effect and will give participants credit for service as Western Wireless employees. 12. ACQUISITIONS AND CERTAIN TRANSACTIONS In March 1998, VoiceStream was granted 16 Local Multipoint Distribution Service (LMDS) licenses that it was the high bidder on in an FCC auction. VoiceStream paid approximately $8.7 million for these licenses. In October 1997, VoiceStream acquired from Triad Corporation, Triad Cellular L.P. and certain of their affiliates various D and E Block PCS licenses for an aggregate purchase price of approximately $4.6 million. This transaction was accounted for using the purchase method. F-14 77 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. SELECTED QUARTERLY INFORMATION Selected quarterly consolidated financial information for the years ended December 31, 1998 and 1997 is as follows (unaudited):
TOTAL QUARTER ENDED REVENUES OPERATING LOSS NET LOSS ------------- -------- -------------- -------- (DOLLARS IN THOUSANDS) March 31, 1998............................ $29,883 $(48,233) $(64,301) June 30, 1998............................. $36,508 $(50,412) $(56,794) September 30, 1998........................ $46,186 $(48,845) $(61,463) December 31, 1998......................... $55,385 $(57,154) $(71,708) March 31, 1997............................ $11,302 $(39,074) $(46,907) June 30, 1997............................. $18,870 $(53,621) $(67,884) September 30, 1997........................ $23,292 $(52,172) $(73,761) December 31, 1997......................... $24,266 $(52,074) $(75,263)
14. HUTCHISON TRANSACTION In February 1998, Hutchison Telecommunications Limited ("HTL") through a subsidiary of HTL (the "HTL Sub") purchased 19.9% of VoiceStream for an aggregate purchase price of $248.4 million ("the Hutchison Transaction"). Western Wireless amended certain outstanding financing agreements to which it is subject, and unless otherwise agreed to by HTL Sub and Western Wireless, neither Western Wireless nor VoiceStream shall have any liability regarding any indebtedness of the other. The HTL Sub designated two directors to a ten person Board of Directors who have approval rights over certain transactions of VoiceStream. In connection with this transaction, Western Wireless was required to invest $750 million of equity in VoiceStream. In the fourth quarter of 1997, approximately $518.3 million of the advances made by Western Wireless to VoiceStream were converted to equity to comply with this requirement. In addition, this agreement required that any additional investment made by Western Wireless over $750 million was to be reimbursed from the proceeds of HTL's investment in VoiceStream. This reimbursement occurred in February 1998 when the $248.4 million investment by HTL was received by VoiceStream. 15. RELATED PARTY TRANSACTIONS Prior to the first quarter of 1998, VoiceStream relied on advances from Western Wireless and borrowings under the Vendor Facility to fund its operations and capital expansion. VoiceStream received $406.3 million in advances from Western Wireless in 1997. As a result of the Hutchison Transaction and the Credit Facility, VoiceStream was able to repay $105.4 million to Western Wireless in 1998. Interest charges were incurred on the long-term portion of advances made to VoiceStream by Western Wireless prior to the Hutchinson Transaction. The interest rates charged on these advances ranged between 8.0% and 11.1%, and were based on the average interest rates incurred by Western Wireless on all of its outstanding debt during the period. VoiceStream's financial statements include an allocation of certain centralized general and administrative costs and assets that were incurred by Western Wireless and benefit all of its operations, including those of VoiceStream. Such centralized items include the costs of customer service and accounting as well as the assets to support these functions. These items are allocated to the respective operational units in a manner that reflects the relative time devoted to each of the operational units. VoiceStream was allocated costs of $33.3 million in 1998 and $29.1 million in 1997 and assets of F-15 78 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $14.5 million in 1998 and $19.1 million in 1997. Management believes that the financial information presented fairly reflects the results of operations had VoiceStream been a stand alone entity. Therefore, no proforma presentation is provided. Management believes that allocations reflected in the financial statements are reasonable, however, the financial information included herein is not necessarily indicative of the financial position, results of operations or cash flows of VoiceStream in the future. Subsequent to the Hutchison Transaction, as a subsidiary of Western Wireless, VoiceStream continued to utilize certain centralized functions of Western Wireless. This activity was reimbursed on a regular basis (less than 30 days). The payable to Western Wireless at December 31, 1998, represents those activities that had not yet been reimbursed as of that date. 16. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) The condensed financial information presented below represents the balance sheet, statement of operations and cash flows of VoiceStream as if the subsidiary that is restricted under the Credit Facility (footnote 7) was an unconsolidated entity. VoiceStream less this subsidiary is referred to as "Parent Company Only". VoiceStream's ownership in such subsidiary has been reflected in this condensed financial information as if the investment was accounted for using the equity method.
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) CONDENSED BALANCE SHEETS: Current assets............................................ $ 16 $ 290 Property and equipment, net of accumulated depreciation of $57.................................................... 2,398 Licensing costs and other intangible assets............... 74,200 66,033 Investments in and advances to affiliates................. 311,226 329,901 --------- --------- Total assets...................................... $ 387,840 $ 396,224 ========= ========= Current liabilities....................................... $ 1,210 $ 117 Common stock, par value of $0.001, and paid-in capital; 50,000 shares authorized; 12,484 and 10,000 Class A shares issued and outstanding, respectively............ 994,789 750,000 Deficit................................................... (608,159) (353,893) ========= ========= Total debt and shareholders' equity............... $ 387,840 $ 396,224 ========= =========
F-16 79 VOICESTREAM WIRELESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- CONDENSED STATEMENTS OF OPERATIONS: Operating expenses...................................... $ 354 --------- Operating loss.......................................... (354) Other income (expense).................................. Interest and financing expense, net..................... (540) $ (2,443) Equity in net loss of affiliates........................ (259,755) (261,372) $ (86,350) Other, net.............................................. 6,383 --------- --------- --------- Other income (expense).................................. (253,912) (263,815) (86,350) --------- --------- --------- Net loss................................................ $(254,266) $(263,815) $ (86,350) ========= ========= ========= CONDENSED STATEMENTS OF CASH FLOWS: Operating activities: Net loss.............................................. $(254,266) $(263,815) $ (86,350) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in net loss of affiliates................. 259,755 261,372 86,350 Other............................................ 294 (173) --------- --------- --------- Net cash provided by (used in) operating activities....................................... 5,783 (2,616) 0 --------- --------- --------- Investing activities: Purchase of property and equipment.................... (1,422) Additions to licensing costs and other intangible assets............................................. (8,744) (43,851) (585) Investments in and advances to affiliates............. (134,960) (362,891) (275,165) Acquisition of wireless properties.................... (4,645) (Payment) refund of FCC deposit....................... 7,749 (23,500) --------- --------- --------- Net cash used in investing activities................. (145,126) (403,638) (299,250) --------- --------- --------- Financing activities: Equity contributions.................................. 244,789 80,250 Advances from (repayment to) affiliate, net........... (105,446) 406,254 219,000 --------- --------- --------- Net cash provided by financing activities.......... 139,343 406,254 299,250 --------- --------- --------- Change in cash and cash equivalents..................... 0 0 0 Cash and cash equivalents, beginning of year............ 0 0 0 --------- --------- --------- Cash and cash equivalents, end of year.................. $ 0 $ 0 $ 0 ========= ========= =========
F-17 80 VOICESTREAM WIRELESS CORPORATION SCHEDULE I VALUATION AND QUALIFYING ACCOUNTS ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS (DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO COSTS DEDUCTIONS BALANCE AT END DESCRIPTION BEGINNING OF PERIOD AND EXPENSES (1) OF PERIOD ----------- ------------------- ---------------- ---------- -------------- Year ended December 31, 1998............. $2,040 $12,780 $(9,105) $5,715 ====== ======= ======= ====== Year ended December 31, 1997............. $ 747 $ 6,628 $(5,335) $2,040 ====== ======= ======= ====== Year ended December 31, 1996............. $ 0 $ 747 $ 0 $ 747 ====== ======= ======= ======
(1) Write-offs, net of bad debt recovery. F-18 81 PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY Western Wireless Corporation 3650 131st Avenue S.E. Bellevue, Washington 98006 LEGAL ADVISORS Preston Gates & Ellis LLP Friedman Kaplan & Seiler LLP 5000 Columbia Center 875 Third Avenue 70l Fifth Avenue New York, New York 10022 Seattle, Washington 98104 Jones Day Reavis & Pogue Gurman, Blask & Freedman Metropolitan Square 1400 Sixteenth Street NW 1450 G Street NW Suite 500 Washington, D.C. 20005 Washington, D.C. 10036
INDEPENDENT AUDITORS FOR THE COMPANY Arthur Andersen LLP 801 Second Avenue, Suite 800 Seattle, Washington 98104 TRANSFER AGENT ChaseMellon Shareholder Services, L.L.C. 520 Pike Street, Suite 1220 Seattle, WA 98101 -----END PRIVACY-ENHANCED MESSAGE-----