<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NUMBER: 0-27442
OMNIPOINT CORPORATION
THREE BETHESDA METRO CENTER, SUITE 400
BETHESDA, MD 20814
(301) 951-2500
DELAWARE 04-2969720
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class: on which Registered:
-------------------- ---------------------
<S> <C>
COMMON STOCK, PAR VALUE NASDAQ NATIONAL MARKET
$0.01 PER SHARE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Shares of common stock outstanding as of May 6, 1999 were 53,218,258.
<PAGE>
Form 10-Q
Omnipoint Corporation and Subsidiaries
Table of Contents
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets-
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations-
Three Months Ended March 31, 1999 and March 31, 1998 3
Condensed Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1999 and March 31, 1998 4
Condensed Consolidated Statements of Stockholders' Equity
(Deficit)-Three Months Ended March 31, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Part II. OTHER INFORMATION AND SIGNATURE 15
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 184,945 $ 194,732
Short term investments 30,724 43,571
Accounts receivable, net of allowances of $14,205 and $12,094 as of
March 31, 1999 and December 31, 1998, respectively 45,392 38,065
Inventory 22,792 29,729
Prepaid expenses and other current assets 29,320 22,057
------------ --------------
Total current assets 313,173 328,154
Fixed assets, at cost
Network infrastructure equipment in-service 948,144 907,649
Construction in progress 158,803 163,410
Other fixed assets 113,406 110,473
Accumulated depreciation (191,319) (150,357)
------------ --------------
Fixed assets, net 1,029,034 1,031,175
FCC licensing costs, net of accumulated amortization of $46,735 and
$42,824 as of March 31, 1999 and December 31, 1998, respectively 641,497 645,408
Deferred financing costs and other intangible assets, net of accumulated
amortization of $9,002 and $7,455 as of March 31, 1999 and
December 31, 1998, respectively 47,220 44,959
Investments in affiliates and joint ventures 921 3,506
FCC deposits 41,000 -
Other long term assets 12,607 13,402
------------ --------------
Total assets $2,085,452 $ 2,066,604
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 196,017 $ 182,941
Accrued interest payable 30,106 48,313
FCC license obligations 119,761 116,076
Loans payable under financing agreements 51,006 13,731
Deferred revenue and other current liabilities 9,437 8,393
------------ --------------
Total current liabilities 406,327 369,454
Loans payable under financing agreements 1,542,363 1,350,613
Senior notes 604,149 603,896
FCC license obligations 298,953 328,661
Commitments and contingencies
Stockholders' equity (deficit):
7% Cumulative Convertible Preferred Stock, $1,000 par value, 10,000,000 shares
authorized, 325,000 shares issued and outstanding as of March 31, 1999 and
December 31, 1998 281,420 276,191
Common stock, par value, $.01 per share; 200,000,000 shares
authorized, 53,145,155 and 53,082,360 shares issued and outstanding as of
March 31, 1999 and December 31, 1998, respectively 532 531
Additional paid-in capital 318,393 315,762
Accumulated deficit (1,352,716) (1,171,220)
Unearned compensation and notes receivable (13,969) (7,284)
------------- -------------
Total stockholders' equity (deficit) (766,340) (586,020)
------------- -------------
Total liabilities and stockholders' equity (deficit) $2,085,452 $ 2,066,604
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
------------- -----------
<S> <C> <C>
Revenues:
Service revenues, net $ 54,833 $ 28,217
Handset and accessories revenues, net 12,808 5,111
License fees and engineering services 2,010 740
------------ ------------
Total revenues 69,651 34,068
Operating costs and expenses:
Cost of service revenues and operations 35,885 23,383
Cost of handset and accessories revenue 39,142 29,073
Cost of engineering services 1,533 1,536
Research and development, net - 4,313
Sales, general and administrative 67,072 45,638
Depreciation and amortization 45,862 19,879
------------ ------------
Total operating costs and expenses 189,494 123,822
Loss from operations (119,843) (89,754)
Other income (expense):
Equity in losses of joint ventures (2,585) (2,023)
Interest income 2,323 1,591
Interest expense (61,588) (34,689)
Other income, net 197 90
------------- -----------
Net loss $(181,496) $(124,785)
Accretion of 7% Cumulative Convertible
Preferred Stock (5,229) -
------------- -----------
Net loss attributable to common
stockholders $(186,725) $(124,785)
============= ===========
Basic and diluted loss per common share:
Net loss per common share-basic and diluted $ (3.52) $ (2.38)
============= ===========
Weighted average common shares outstanding -
basic and diluted 53,121 52,384
============= ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(181,496) $ (124,785)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 45,862 19,879
Payment in kind interest on financing agreements 10,422 -
Accrued interest (18,207) (3,236)
Equity in losses on investments in joint ventures 2,585 2,023
Interest income associated with restricted cash - (541)
Sales of trading securities, net 12,847 11,750
Interest expense associated with amortization of discount, premium and
issuance costs 2,496 3,202
Other 769 548
Changes in operating accounts:
Accounts receivable, net (7,327) (8,611)
Prepaid expenses and other assets (6,467) (9,806)
Inventory 6,937 10,827
Accounts payable and accrued expenses 13,076 (1,600)
Deferred revenue and other liabilities 1,056 612
------------- -------------
Net cash used in operating activities (117,447) (99,738)
Cash flows used in investing activities:
Purchase of fixed assets (21,644) (190,124)
Capitalized interest on C and F Block licenses - (3,779)
Proceeds from held to maturity investments and restricted cash - 26,157
Investments in joint ventures - (5,495)
FCC deposit (6,500) -
------------- -------------
Net cash used in investing activities (28,144) (173,241)
Cash flows from financing activities:
Proceeds from issuance of common stock 405 460
Proceeds from vendor financing agreements 41,462 92,607
Payment of FCC licenses (27,543) -
Proceeds from interim credit facility - 25,000
Payment of deferred financing costs (628) (9,330)
Proceeds from permanent credit facility - 150,000
Payment on vendor financing agreement (855) -
Payment on permanent credit facility (1,875) -
Proceeds from OCI financing arrangement 124,850 -
Other (12) (16)
------------- -------------
Net cash provided by financing activities 135,804 258,721
Net (decrease) in cash and cash equivalents (9,787) (14,258)
Cash and cash equivalents at beginning of the period 194,732 63,581
------------- -------------
Cash and cash equivalents at end of period $ 184,945 $ 49,323
============= =============
Non-cash investing and financing activities:
FCC Deposit financed by institutional facility $ 34,500 $ -
Purchases of network fixed assets with vendor financing 17,341 -
Refinancing of interim credit facility - 350,000
Proceeds from financing agreement used to pay origination fee 3,180 -
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited, in thousands, except share data)
For The Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Unearned Total
Additional Compensation Stockholders'
Common Stock Paid-in Preferred Accumulated and Notes Equity
Shares Amount Capital Stock Deficit Receivable (Deficit)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 53,082,360 $ 531 $ 315,762 $ 276,191 $(1,171,220) $ (7,284) $ (586,020)
Exercise of stock options 19,556 -- 84 -- -- -- 84
Issuance of options in form
of advanced compensation -- -- 7,772 -- -- (7,772) --
Issuance of common stock for
employee 401(k) matching 43,239 1 321 -- -- -- 322
Accretion of 7% Cumulative
Convertible Preferred Stock -- -- (5,229) 5,229 -- -- --
Amortization of unearned
compensation -- -- -- -- -- 806 806
Cancellation of unearned
compensation -- -- (317) -- -- 316 (1)
Interest on employee notes
receivable -- -- -- -- -- (35) (35)
Net loss -- -- -- -- (181,496) -- (181,496)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1999 53,145,155 $ 532 $ 318,393 $ 281,420 $(1,352,716) $ (13,969) $ (766,340)
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The accompanying condensed consolidated financial statements of
Omnipoint Corporation and subsidiaries (the "Company" or "Omnipoint") have been
prepared by the Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). However, such information
includes all adjustments (including all normal recurring adjustments) which, in
the opinion of management, are considered necessary for a fair presentation of
the consolidated results for those periods. The results of operations for the
periods ended March 31, 1999 and March 31, 1998 are not necessarily indicative
of the results of operations that may be expected for the complete fiscal year.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the SEC.
The Company believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of March 31, 1999 and December
31, 1998, and the results of operations and cash flows for the three months
ended March 31, 1999 and March 31, 1998 and stockholders' equity (deficit) for
the three months ended March 31, 1999. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal or
short-term variations.
Certain prior period amounts have been reclassified to conform to
current presentation.
2. LOSS PER COMMON SHARE:
The Company computes basic and diluted earnings per share in accordance
with Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128").
Since the Company is in a loss position, both basic and diluted earnings per
share are the same amount. Options and warrants to purchase 9,279,989 and
7,415,490 shares of common stock outstanding as of March 31, 1999 and 1998,
respectively, have been excluded from the calculation of diluted net loss per
share as the effect of their inclusion would have been anti-dilutive. The
Company's 325,000 shares of preferred stock, convertible into 10,445,123 shares
of common stock have also been excluded from the calculation of diluted net loss
per share as the effect of their inclusion would have been anti-dilutive.
3. INVENTORY:
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
---------------- ----------------
<S> <C> <C>
GSM Handsets $ 17,234 $ 25,596
Accessories and SIM Cards 5,558 4,133
---------------- ----------------
$ 22,792 $ 29,729
================ ================
</TABLE>
4. FCC LICENSE RE-AUCTION:
In March 1999, the Company, through a wholly-owned subsidiary, made a
$41 million deposit with the FCC to participate in the FCC's Auction 22. This
deposit was partially financed by a transaction with a financial institution.
The auction commenced on March 23, 1999 and ended on April 15, 1999.
The Company was the high bidder on 34 PCS licenses at the conclusion of
the auction for licenses that covered a total of 18.9 million POPS at a cost of
$45.1 million, or $2.39 per POP.
6
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In May 1999, the Company made a payment of $9.0 million utilizing the
$41 million deposit with the FCC. The remaining amount of the deposit was
refunded to the Company and the financing was paid off in full.
5. FINANCING AGREEMENTS:
On March 30, 1999, the Company entered into an arrangement with Siemens
Information and Communications Networks, Inc. for financing of $200 million (the
"Siemens Arrangement"). The Siemens Arrangement includes $100 million of funding
on March 31, 1999 for general corporate purposes, and $100 million of financing
on equipment and services for expansion of the Company's wireless communications
network in New York and other markets pursuant to a separate credit agreement
("Siemens Credit Facility"). The principal amount on the Siemens Credit Facility
is payable in twenty consecutive equal quarterly installments beginning in 2003,
with the final payment due on March 31, 2008. Interest on the Siemens Credit
Facility is payable quarterly at varying interest rates at a base rate or LIBOR
plus a set margin, at the Company's election. The Siemens Credit Facility ranks
pari passu with the Institutional OCI Financing Agreements and is collateralized
by the same collateral serving the Institutional OCI Financing Agreements.
In addition, Nortel expanded its financing to the Company by up to $50
million, of which $25 million was funded on March 31, 1999 for general corporate
purposes. The Nortel and Siemens $125 million financing for general corporate
purposes was obtained by their new participation in the Institutional OCI
Financing Agreements.
6. SEGMENT INFORMATION:
In 1998, the Company adopted Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The prior year's quarterly segment information has been restated
to present the Company's two reportable segments, which are as follows:
. PCS Services - provides digital wireless services in several markets in the
U.S.
. PCS Technology - developer and supplier of wireless communication
technologies, products and engineering services
Segment data includes intersegment revenues, as well as a charge for
corporate headquarters costs to its PCS services segment. The Company
evaluates the performance of its segments and allocates resources to them based
on earnings before interest, taxes, depreciation, and amortization (EBITDA).
The Company is organized on the basis of products and services. The
Company's segments are strategic business units that offer different products
and services. The Company's PCS Services regions have been aggregated into the
PCS services segment.
The table below presents information about reported segments for the
Statement of Operations for the three months ended March 31, 1999 and 1998 and
for the Balance Sheet as of March 31, 1999 (unaudited) and December 31, 1998,
(in thousands):
<TABLE>
<CAPTION>
PCS Services PCS Technology Reconciling Items Consolidated Totals
<S> <C> <C> <C> <C>
1999
Revenues $ 67,641 $ 2,010 $ -- $ 69,651
EBITDA $ (71,072) $ 1,261 $ (4,170)(2) $ (73,981)
Total Assets $ 1,856,644 $ 7,683 $221,125 $ 2,085,452
1998
Revenues $ 33,328 $ 3,536 $ (2,796)(1) $ 34,068
EBITDA $ (57,957) $ (6,325) $ (5,593)(2) $ (69,875)
Total Assets $ 1,808,983 $ 5,168 $252,453 $ 2,066,604
</TABLE>
(1) Represents intersegment revenue
(2) Represents corporate expenses not allocated to the segments
7
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of total segment EBITDA to consolidated net loss for
the three months ended March 31, 1999 and 1998 is as follows (in thousands)
(unaudited):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Total EBITDA for reportable segments $ (73,981) $ (69,875)
Depreciation and amortization (45,862) (19,879)
Equity in losses of joint ventures (2,585) (2,023)
Interest income 2,323 1,591
Interest expense (61,588) (34,689)
Other income, net 197 90
Accretion of 7% Cumulative Convertible Preferred Stock (5,229) --
--------- ---------
Net loss attributable to common stockholders $(186,725) $(124,785)
========= =========
</TABLE>
Reconciling items from segment total assets to consolidated total
assets at March 31, 1999 (unaudited) and December 31, 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Corporate cash and short term investments $196,641 $232,187
Unallocated corporate assets 24,484 20,266
--------- ---------
Total $221,125 $252,453
========= =========
</TABLE>
8
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995. All
forward-looking statements involve known and unknown risks, uncertainties, and
other factors, many of which are not within the control of the Company, that may
cause actual transactions, results, performance or achievements to be materially
different from any future transactions, results, performance or achievements
expressed or implied by such forward-looking statements. While the Company
believes that the expectations reflected in these forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its performance
or other expectations will be attained. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
OVERVIEW
Omnipoint Corporation ("Omnipoint" or the "Company") is a leader in
commercializing personal communications services ("PCS") and developing PCS
technology.
The Company provides wireless PCS services and equipment based on the
Global System for Mobile Communications ("GSM") standard. According to wireless
industry sources, this standard has been implemented by over 300 carriers in
over 100 countries worldwide and is used by over 130 million subscribers. GSM
subscribers are estimated to account for over 40% of worldwide wireless
subscribers and over 50% of wireless subscribers outside the United States.
Omnipoint's licenses, including those won in the recently completed FCC
re-auction, cover approximately 100 million non-overlapping POPS in the United
States.
Since 1996, the Company has aggressively built out its licenses and
currently covers and markets to over 45 million POPS, including all major
markets in the northeastern United States from Boston to Delaware, southern
Florida from Palm Beach to Key West, and certain Midwest markets, which include
the greater Detroit, Indianapolis, and Wichita markets. The Company also
provides service in the Harrisburg, York, and Lancaster, Pennsylvania markets
through a joint venture with D&E Communications ("PCS One"). Omnipoint intends
to continue its aggressive build-out through both wholly-owned affiliates and
joint ventures. Additionally, the Company offers out of network roaming both in
over 3,500 North American cities (including Canada), through roaming agreements
with members of the North American GSM Alliance, and worldwide, through active
roaming agreements with 85 carriers in 48 countries.
PCS service offerings available from Omnipoint include voice
communications, caller ID, call forwarding, call waiting, voice activated
dialing, fax storage and retrieval, Internet access, short messaging, numeric
paging, and information services including, but not limited to, stock quotes,
news, weather and sports scores. Every activated handset has its own Internet
address and is capable of receiving and sending Internet e-mail up to 160
characters long.
The Company had approximately 478,000 subscribers at the end of March
1999, including approximately 12,000 proportionate subscribers from its joint
venture in Pennsylvania. A significant portion of the Company's subscribers are
users of the Company's prepaid service. The Company utilizes multiple
distribution channels through which its services are sold and intends to
continue this strategy as new markets are opened. The Company had increased its
number of distribution outlets during the quarter by 750 and had approximately
4,400 distribution outlets as of March 31, 1999.
The Company through its Omnipoint Technologies, Inc. ("OTI")
subsidiary, is also a leading developer and supplier of wireless communication
technologies, products and engineering services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Revenues:
Total consolidated revenues for the three months ended March 31, 1999
were $69.7 million, as compared to revenues of $34.1 million for March 31,
1998, an increase of $35.6 million, or 104.4%.
PCS Services
Net PCS Services revenues for the three months ended March 31, 1999
were $54.8 million, as compared to $28.2 million for March 31, 1998, an increase
of $26.6 million, or 94.3%. The increase in service revenues was due to the
increase in the number of subscribers related to increased penetration in the
Company's existing markets, as well as, expansion into New England, Florida,
Michigan, and Indiana, partially offset by a decrease in average revenue per
subscriber. As a result of the increase in the number of subscribers and
distribution outlets, handset and accessories revenues for the quarter ended
March 31, 1999 were $12.8 million, as compared to $5.1 million for the quarter
ended March 31, 1998, an increase of $7.7 million, or 150.6%. The larger
9
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-CONTINUED-
customer base resulted from the launches of the New England and Florida markets
in March 1998 and the Michigan and Indiana markets in December 1998, as well as
expansion of the Company's New York and Philadelphia markets.
PCS Technology
PCS Technology revenues were $2.0 million during the quarter ended
March 31, 1999, as compared to revenues of $0.7 million (excluding intersegment
sales) for the quarter ended March 31, 1998. The Company is a party to several
engineering contract services agreements which are expected to continue into
1999, but can be terminated under certain circumstances at either party's
option.
Cost of Sales:
Total costs of service revenue and operations, handset and accessory
sales and engineering services for the quarter ended March 31, 1999 were $76.6
million, as compared to $54.0 million for the quarter ended March 31, 1998, an
increase of $22.6 million, or 41.8%.
PCS Services
Cost of service revenues and operations were $35.9 million for the
quarter ended March 31, 1999, as compared to $23.4 million for the quarter ended
March 31, 1998, an increase of $12.5 million, or 53.5%. This includes costs of
service revenues of $25.7 million, which includes network site rentals,
intercarrier and interconnect costs, and other network operating expenses. As a
result of sales revenue increasing at a rate greater than cost, gross margin
doubled to 53.3% from 26.3% in the first quarter of 1998. The remaining cost of
operations of $10.2 million includes salaries, maintenance and other indirect
costs of operating the network. The key causes for the increase in cost of
service revenues were the increase in cell sites in operation from approximately
1,600 at March 1998 to approximately 3,000 at the end of the first quarter of
1999, expanded minutes of use, and significantly higher subscriber additions.
The Company's managed customer base grew approximately 278,000 subscribers to
466,000 subscribers, or approximately 150%. These increases resulted from the
Company offering commercial service in several additional markets, including
Boston, Miami, Connecticut, upstate New York, Michigan and Indiana.
Cost of handset and accessories revenues for the quarter ended March
31, 1999 were $39.1 million, as compared to $29.1 million for the quarter ended
March 31, 1998, an increase of $10.1 million, or 34.6%. Handsets and accessories
costs increased as a result of strong growth in customer additions as well as
distribution channel stocking related to the increase in distribution outlets
during the quarter.
PCS Technology
Engineering services total cost of sales were $1.5 million for both
quarters ended March 31, 1999 and 1998, respectively.
Direct Expenses:
Research and development expenses in the PCS Technology segment for the
first quarter of 1999 were fully reimbursed by third parties as compared to $4.3
million for the first quarter of 1998. The Company had completed its work on the
PCS Fixed Access System in 1998. In 1999, the Company has entered into several
joint developmental arrangements that fund portions of the Company's research
and development efforts.
10
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-CONTINUED-
General and administrative costs include costs such as legal fees,
patents, regulatory costs, auction and negotiation expenses, office rents and
incidentals, management information systems, accounting and finance, bad debt,
customer care and all payroll and benefits costs other than those classified as
research and development, those related to the cost of service, and those
related to selling.
Selling costs include all marketing, advertising, promotion,
telemarketing, market research, all indirect and direct distribution channels,
but excludes costs of handsets and accessories.
Sales, general and administrative costs for the first quarter of 1999
were $67.1 million, as compared to $45.6 million for the first quarter of 1998,
an increase of $21.4 million, or 47.0%. Of this increase, nearly $18 million was
related to selling costs which increased primarily due to the near doubling of
net managed subscriber additions over the same quarter in 1998, the nearly 150%
increase in ending managed subscribers from 188,000 to 466,000, and increased
selling and marketing headcount related expenses due to market launches in New
England, Florida, Michigan and Indiana. These markets were not operational for
the entire first quarter of 1998. Customer care expenses also increased as a
result of subscriber growth and expansion of the Company's customer care
facilities during the third quarter of 1998.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
was a loss of $74.0 million for the first quarter of 1999, a $24.0 million, or
24.6% improvement from the fourth quarter of 1998.
Other Expenses and Income:
Depreciation and amortization expenses for the first quarter of 1999
were $45.9 million, as compared to $19.9 million for the first quarter of 1998,
an increase of approximately $26.0 million, or 130.7%. The increase in
depreciation expense was related to network infrastructure equipment placed
into service as a result of the Company's continued expansion of coverage in
its existing markets as well as services launched in new markets during 1998.
The growth in amortization expense was primarily due to amortization of FCC
licenses associated with the markets placed into commercial service.
As a result of the revenues and operating costs and expenses discussed
above, the Company's loss from operations for the first quarter of 1999 was
$119.8 million, as compared to $89.8 million for the first quarter of 1998, an
increase of $30.1 million, or 33.5% but a $22.1 million decrease, or 15.6%
improvement from the fourth quarter of 1998.
Equity in losses from joint ventures for the first quarter of 1999 was
$2.6 million, as compared to $2.0 million in the first quarter of 1998. The
Company expects to incur additional losses as a result of its equity ownership
interest in the PCS One joint venture as it continues to build out its network
and expand its customer base in central Pennsylvania.
Interest income for the first quarter of 1999 was $2.3 million, as
compared to $1.6 million for the first quarter of 1998, an increase of $0.7
million, or 46.0%. The increase was due to increased investment holdings and
related interest thereon from the Company's financing activities.
Interest expense for the first quarter of 1999 was $61.6 million, as
compared to $34.7 million for the first quarter of 1998, an increase of $26.9
million, or 77.5%. The increase was due to the increased amounts outstanding
from loans payable under financing agreements and senior notes partially offset
by a reduction in FCC obligations.
Net loss after accretion of 7% Cumulative Convertible Preferred Stock
for the first quarter of 1999 was $186.7 million, as compared to $124.8 million
for the first quarter of 1998, an increase of $61.9 million, or 49.6%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and short-term investments of
$215.7 million as of March 31, 1999, compared to $238.3 million as of
December 31, 1998. Of this balance, cash and cash equivalents of $184.9
million decreased by $9.8 million from December 31, 1998. This decrease was
primarily due to $117.4 million of cash used for operating activities and $28.1
11
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million in investing activities, partially offset by $135.8 million provided by
financing activities. As of March 31, 1999, the Company had negative working
capital of approximately $93.2 million, an improvement of $71.4 million from the
same quarter's negative working capital of $164.6 million in the prior year. The
Company expects operating losses and working capital deficits to continue as the
Company continues to grow its PCS operations. The Company believes that access
to capital and financial flexibility is necessary to successfully implement its
strategy.
Operations of the Company for the quarter ended March 31, 1999 have
been principally financed through advances from various financing agreements and
payments from subscribers.
Cash used in operating activities resulted from the Company's
operations and expenses related to its core PCS networks as well as interest
expense on its various borrowings. The Company incurred increased network
operating costs due to the growth in the number of subscribers and the related
network usage.
Cash used in investing activities related to the purchase of fixed
assets of $21.6 million to support the Company's continuing expansion and the
FCC deposit of $41.0 million (of which $34.5 million was financed).
The cash provided from financing activities included the Siemens and
Nortel funding of their participation in the Institutional OCI Financing
Agreement of $125 million, and $41.5 million of proceeds from vendor financings
for working capital and purchases of network fixed assets. These amounts were
offset by principal repayments associated with the Company's related obligations
and financings.
Based on the current LIBOR rates, the Company's current total weighted
average cost of drawn debt is approximately 9.1%. The Company's average cost of
debt can be further reduced with the closing of a strategic equity investor
transaction. The Company paid $625,000 as additional interest related to
the $125 million Senior Notes issued in December 1998 on April 21, 1999. The
Company will incur an additional $625,000 in interest (which is included in the
9.1% weighted average cost of debt above) each month until a strategic
transaction is closed.
The Company anticipates that its future revenue growth will outpace the
percentage growth in operating costs and expenses (exclusive of depreciation and
amortization). In the first quarter of 1999, the number of subscribers grew by
approximately 100,000, which is expected to decrease the cash requirement that
would otherwise be used in operations during the rest of the year. The Company
plans to reduce customer acquisition cost per subscriber and improve its
economies of scale in its network operating costs. The Company also anticipates
decreasing its level of 1999 capital expenditures to below $250 million, almost
all of which will be financed through vendors. The Company has future purchase
commitments, which it plans to finance pursuant to available financing
agreements with related vendors .
12
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company also believes that access to capital during 1999 and future
periods is necessary to build out its networks. The Company continues to have
recurring operating losses, working capital deficiencies, and negative cash
flows from operating activities. The Company has available cumulative financing
and commitments of $300 million. While the Company is in the process of pursuing
equity financing, the Company, if necessary, may seek additional financing from
the remaining availability under the Institutional OCI Financing Agreement,
prior vendor commitments and arrangements, along with other incremental actions.
Other incremental actions, if necessary, may include the sale of non-core assets
(such as towers or licenses for markets which the Company has no plans to
build), inventory reduction and the timing of certain payments. Additionally,
certain of the Company's financing arrangements may be increased under certain
circumstances to provide additional working capital. Although the company does
not currently plan to do so, the Company also at its discretion, may gain access
to working capital through the issuance of its capital stock in lieu of cash
under certain existing finance agreements. The Company's future financing
requirements will depend on many factors, including the successful development
of products and services, the extent and timing of acceptance of the Company's
products and services in the market, requirements to maintain adequate
facilities, the progress of the Company's research and development efforts,
expansion of the Company's marketing and sales efforts, the Company's results of
operations and the status of competitive products and services. The Company
believes that it will require substantial amounts of additional capital over the
next several years and anticipates that this capital will be derived from a mix
of strategic partnering arrangements or public offerings and private placements
of debt or equity securities or both. There can be no assurance, however, that
the Company will obtain additional funding to fund its operations and capital
expenditures. To the extent that the buildout of the networks is faster than
expected, the costs are greater than anticipated or the Company takes advantage
of other opportunities, including those that may arise through current and
future FCC actions, the Company may require additional funding to implement its
business strategy.
The Company is currently in negotiations for additional financing. The
Company has participated in many discussions with, and has received proposals
from, potential equity investors. The Company is in the process of evaluating
proposals and believes that these opportunities, can provide significant
additional liquidity. However, there can be no assurance that such financing
will be obtained on favorable terms, or at all.
YEAR 2000 COMPLIANCE
Many of the world's computer systems (including those in
non-information technology equipment and systems) currently record years in a
two-digit format. If not addressed, such computer systems will be unable to
properly interpret dates beyond the year 1999, which could lead to business
disruptions in the U.S. and internationally (the "Y2K" issue). A number of the
Company's technology systems are affected by the Y2K issue. To ensure that the
Company will be Y2K compliant before the new millennium, the Company formed a
Y2K compliance team in the fourth quarter of 1997 and allocated corporate
resources to determine the extent of non-compliance with the Y2K issue and to
formulate a Y2K compliance plan. Since then, the Company has been reviewing its
embedded technology and infrastructure equipment, as well as non-embedded
technology equipment to identify those that contain two-digit year codes, and is
in the process of upgrading its infrastructure and corporate facilities to
achieve Y2K compliance. In addition, the Company is actively working with its
suppliers to assess their compliance and remediation efforts and the Company's
exposure to them. The Company is proceeding on schedule to be Y2K compliant in
all of its critical systems by the third quarter of 1999, with additional system
testing to continue thereafter.
The Company is focusing on three major areas of concern for the Y2K
issue: embedded technology and infrastructure equipment, non-embedded technology
equipment and third party suppliers. The Y2K compliance team created
a five stage process for becoming Y2K compliant. The five process stages are (1)
compiling a complete inventory of all date sensitive technology equipment; (2)
prioritizing systems affected based on estimated time to compliance, as well as
vendor and maintenance schedules; (3) performing modification to affected
systems; (4) completing testing of modified systems; and (5) implementing
modified systems. The Company has generally completed the inventory and
assessment of its date sensitive technology equipment, and is in various stages
of modifying and testing a number of the systems.
Embedded Technology and Infrastructure Equipment. The embedded
technology and infrastructure equipment area of concern consists primarily of
the hardware portion of the switching platforms and network surveillance
equipment. Much of this equipment, specifically the switching platforms, is
purchased from third party vendors and have maintenance contracts. The
maintenance contracts include regular software and hardware upgrades that should
automatically bring the equipment into Y2K compliance. The Company is dependent
on those third parties to assess the impact of the Y2K problem on the technology
they have supplied and to take any necessary corrective action. All corrective
action taken by these third parties is covered under maintenance contracts and
would be part of regularly scheduled maintenance. The Company is monitoring the
progress of these third parties and selectively conducting tests to determine
whether they have accurately assessed the problem and taken corrective action.
All embedded technology systems and infrastructure equipment are scheduled to be
Y2K compliant by September 30, 1999. In addition, in order to protect against
the acquisition of additional non-compliant products, the Company now requires
suppliers to warrant that products sold or licensed to the Company are Y2K
compliant.
13
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-CONTINUED-
Non-embedded Technology Equipment. Non-embedded technology systems
include predominately applications software and interfacing software. Much of
this equipment has previously been upgraded to Y2K compliance through software
upgrades and the purchase of new systems. The Company has prioritized the
systems that are not Y2K compliant and is in the process of upgrading or
replacing non-compliant systems. All business-critical non-embedded technology
systems are scheduled to be Y2K compliant by September 30, 1999.
Third Party Suppliers. The Company has prioritized its critical
suppliers and communicated with them in order to obtain their plans and progress
in addressing the Y2K issue. Detailed evaluations of the most critical third
party suppliers is complete. The Company has plans to implement and test all
critical third party Y2K items by September 30, 1999.
Risk and Contingency Plan. There are many risks associated with the Y2K
issue, including the possibility of a failure of the Company's signal, computer,
and non-information technology systems. Such failures could have a material
adverse effect upon the Company and may cause systems malfunctions, signal loss,
incorrect or incomplete transaction processing, the inability to reconcile
accounting books and records, and the inability of the Company to manage its
business. In addition, even if the Company successfully becomes Y2K compliant,
it can be materially and adversely affected by failures of third parties to
become Y2K compliant. The failure of third parties with which the Company has
financial or operational relationships such as network maintenance contractors,
roaming partners, handset and accessory providers, financial institutions,
payroll contractors, regulatory agencies and utility companies, to become Y2K
compliant in a timely manner could result in material adverse effects on the
Company's results of operations.
The Company is currently working diligently to make all of its
business-critical systems Y2K compliant by September 30, 1999, with additional
testing to continue thereafter. However, there can be no assurance that the
Company will be successful in taking corrective action in a timely manner. The
Company has started to develop contingency plans with regard to its key
technology systems, although there can be no assurance that these contingency
plans will successfully avoid a service disruption. The Company is documenting
Y2K contingency plans as part of its Y2K risk mitigation efforts.
Costs. Total costs incurred to date specifically associated with
becoming Y2K compliant have been less than $1 million. The total specific costs
of becoming Y2K compliant are estimated to be approximately $2.8 million. Non-
specific costs associated with becoming Y2K compliant, such as maintenance
contracts that automatically upgrade certain technology components within a
larger upgrade which have not been included in this estimate are approximately
$10.6 million. These costs are considered by the Company to be a normal expense.
The portion of these costs that relate specifically to Y2K compliance will be
included in the Y2K estimates if they can be separately identified.
The Company's expectations about future costs and timely completion of
its Y2K modifications are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. Factors that
could influence the amount of future costs and the effective timing of
remediation efforts include the success of the Company in identifying embedded
technology and infrastructure equipment as well as non-embedded equipment that
contain two-digit year codes, the nature and amount of programming and testing
required to upgrade or replace each of the affected systems and equipment, the
nature and amount of testing, verification, the rate and magnitude of related
labor costs, and the success of the Company's suppliers in addressing the Y2K
issue.
14
<PAGE>
Part II -- Other Information
ITEM 1: LEGAL PROCEEDINGS
The Company is from time to time the subject of, or involved in,
judicial proceedings. Management believes that any liability or loss
resulting from such matters will not have a material adverse effect
on the financial position or results of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibits
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
----------
15
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNIPOINT CORPORATION
Date: May 17, 1999
/s/ Harry Plonskier
-------------------------------------
Treasurer and Chief Accounting Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT OF OMNIPOINT CORPORATION AS OF AND FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 184,945
<SECURITIES> 30,724
<RECEIVABLES> 59,597
<ALLOWANCES> 14,205
<INVENTORY> 22,792
<CURRENT-ASSETS> 313,173
<PP&E> 1,220,353
<DEPRECIATION> (191,319)
<TOTAL-ASSETS> 2,085,452
<CURRENT-LIABILITIES> 406,327
<BONDS> 604,149
0
281,420
<COMMON> 532
<OTHER-SE> (1,048,292)
<TOTAL-LIABILITY-AND-EQUITY> 2,085,452
<SALES> 69,651
<TOTAL-REVENUES> 69,651
<CGS> 76,560
<TOTAL-COSTS> 76,560
<OTHER-EXPENSES> 112,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (61,588)
<INCOME-PRETAX> (186,725)
<INCOME-TAX> 0
<INCOME-CONTINUING> (186,725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (186,725)
<EPS-PRIMARY> (3.52)
<EPS-DILUTED> (3.52)
</TABLE>
