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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 0-27442
OMNIPOINT CORPORATION
Three Bethesda Metro Center, Suite 400
Bethesda, MD 20814
(301) 951-2500
Delaware 04-2969720
(IRS employer
(State or other jurisdiction of identification No.)
incorporation or organization)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on which
---------------- Registered:
----------------
NASDAQ National Market
Common Stock, par value $0.01 per
share
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 [_]
Documents incorporated by reference: Specified portions of the Definitive
Proxy Statement to be filed with the Commission pursuant to Regulation 14A in
connection with the 1999 Annual Meeting are incorporated herein by reference
into Part III of this Report. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 1998.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 25, 1999 was approximately $444,316,305.
Shares of common stock outstanding as of March 25, 1999 were 53,142,747.
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OMNIPOINT CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
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Item 1. Business....................................................... 1
Overview....................................................... 1
Industry Background............................................ 3
Business....................................................... 4
PCS Markets.................................................... 6
Strategy....................................................... 6
Competition.................................................... 7
Regulatory Environment......................................... 8
Patents and Other Intellectual Property Rights................. 11
Employees...................................................... 12
Item 2. Properties..................................................... 12
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters........................................................ 13
Item 6. Selected Consolidated Financial Data........................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risks.... 24
Item 8. Financial Statements and Supplementary Data.................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 24
PART III
Item 10. Directors and Executive Officers of the Company................ 24
Item 11. Executive Compensation......................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 24
Item 13. Certain Relationships and Related Transactions................. 24
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K....................................................... 24
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FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY
REVIEW THE RISKS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO
TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY
REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN 1999. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES
NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING
STATEMENTS OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
PART I
ITEM 1. BUSINESS
OVERVIEW
Omnipoint Corporation ("Omnipoint" or the "Company") is a leader in
commercializing personal communications services ("PCS") and developing PCS
technology. The Company, through its wholly-owned subsidiary Omnipoint
Holdings, Inc. and its 95.6% owned subsidiary Omnipoint Communications, Inc.
("OCI") (collectively "OCS"), markets wireless communications services to
approximately 46 million people ("POPS") at December 31, 1998. This represents
an approximately threefold increase from the 16 million POPS to whom the
Company marketed services at the end of 1997. POPS are based on the Paul Kagan
Associates 1995 PCS Atlas and Databook estimate of the 1995 population of a
particular Major Trading Area ("MTA") or Basic Trading Area ("BTA") of the
total United States. The Company, through its wholly owned subsidiary
Omnipoint Technologies, Inc. ("OTI"), is a leading developer and supplier of
wireless communication technologies, products and engineering services.
Omnipoint was incorporated in Delaware in June 1987, to design, develop,
manufacture and market wireless digital communications products and services.
From inception in 1987 to 1992, Omnipoint developed several working prototypes
for various wireless voice, data and other digital communication transmission
projects. Omnipoint's success in developing its proprietary technology for the
first digital PCS system at 1.9 GHz during 1991 and 1992 was instrumental in
the Federal Communications Commission ("FCC") awarding Omnipoint one of three
Pioneer's Preference in 1993. The Pioneer's Preference license provides for
the right to provide PCS services to more than 27 million POPS in the New York
MTA. In 1996 and 1997, Omnipoint acquired additional licenses that allow the
Company to build and provide PCS services to over 69 million additional POPS,
for a total of approximately 95 million POPS.
Omnipoint has agreements with Northern Telecom, Ltd. ("Nortel"), Ericsson,
Inc. ("Ericsson") and Siemens Corporation ("Siemens") involving (i) the
purchase and sale of infrastructure equipment and handsets for Omnipoint's PCS
networks and (ii) licensing, OEM arrangements, or development arrangements
related to technology developed by OTI. In North America, Omnipoint has
separate arrangements with each of Aerial Communications, Inc. ("Aerial"),
Sprint Spectrum ("Sprint Spectrum", formerly known as American Personal
Communications, Inc.), BellSouth Personal Communications, Inc. ("BellSouth"),
Conestoga Wireless Company, NPI Wireless, Pacific Bell Mobile Services, Inc.
("PacBell"), Powertel, Inc. ("Powertel"), Microcell, and Western Wireless
Corporation ("Western Wireless"), to provide subscribers with roaming
capabilities. These arrangements are with companies whose licenses, together
with Omnipoint's licenses, cover 90% of the U.S. population. Omnipoint has
also signed international roaming agreements with 105 Global System for Mobile
Communications ("GSM") service providers in 53 countries.
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Omnipoint is in discussions with other equipment vendors and service
providers regarding additional relationships.
PCS Services Overview
Omnipoint has licenses to provide PCS services in areas covering
approximately 95 million POPS, of which approximately 60% are located in a
contiguous region of the Northeast U.S. from Maine to Virginia. At December
31, 1998, the Company offered PCS services in the major metropolitan areas
within the New York MTA, metropolitan areas in the Eastern United States
including Philadelphia, Atlantic City, Boston, Providence, Fort Lauderdale,
West Palm Beach, Miami, and Detroit and Indianapolis in the Midwest. The
Company has also commenced operations in a joint venture, which offers
services in several Pennsylvania markets including Harrisburg, York, Lancaster
and Reading, and a joint operating arrangement, which offers service in
Wichita, KS. Based on POPS, Omnipoint is the fourth largest PCS licensee in
the U.S., and its licenses cover six of the top twelve and nine of the top
twenty cities in the U.S. In total, Omnipoint has licenses for 23 of the top
50 BTAs. The New York MTA is the largest MTA in the U.S. with approximately 27
million POPS. As of December 31, 1998, Omnipoint had approximately 378,000
active subscribers, including approximately 8,000 subscribers representing the
Company's proportionate share of subscribers from the joint venture.
In December 1994, the FCC awarded the Company a 30 MHz A Block license for
the New York MTA for $347.5 million. Through the combination of the A Block
license and one of the New York BTA D Block licenses, Omnipoint is the only 40
MHz license holder in New York.
In September 1996, the FCC issued Omnipoint eighteen 30 MHz Entrepreneurs C
Block licenses covering approximately 13.3 million POPS. The Company made two
down-payments for the licenses, for a total of $50.9 million. In June 1998,
the Company returned fourteen of these licenses and reduced the frequency on
the remaining four licenses to 15 MHz. As a result of these elections, the
Company reduced its debt owed to the FCC by $282.1 million, reduced the value
of its license holdings by $296.0 million.
In January 1997, the Company successfully bid on 109 10 MHz D, E and F Block
licenses, expanding its footprint by over 61 million POPS. Total consideration
of $106.9 million for the 59 D and E Block licenses was paid in full. The
Company financed, through the FCC, $59.4 million of the $74.2 million purchase
price for the 50 F Block licenses.
In June 1998, the Company acquired the rights to nine BTA Licenses from ACC
Wireless, L.P. representing 5.0 million POPS for $13.0 million (the "ACC
Transaction"). The acquired licenses included six licenses within the Boston
MTA covering 3.8 million POPS (of which two licenses covering 0.8 million POPS
were in BTAs for which the Company elected to return its C Block licenses).
PCS Technology
By December 31, 1998, OTI had completed delivery and installation of its IS-
661 Wireless Local Loop system to the New York MTA. Upon completing the
deployment of its proprietary wireless PCS technology in 1998, OTI moved the
focus of most of its resources and expertise to the development, integration,
and delivery of other advanced wireless products. These activities/products
are based on technologies, such as GSM, wireless packet data, General Packet
Radio Service ("GPRS"), mobile location positioning, telemetry/wireless meter
reading and wireless Internet access.
The development and marketing of many of these products is being done in
conjunction with key strategic partners who are dominant or key players in the
GSM equipment world market. The target markets for these future products focus
on the North American and International GSM service areas and the volume
opportunities that this large market offers. The products are also being
designed to leverage the GSM economies of scale, using off the shelf
components available at low cost.
One of the key products planned for launch in 1999 is based on GSM short
message service and can provide support for wireless meter reading, telemetry,
and credit card verification. This product offers GSM operators a way to
increase revenues by opening untapped market opportunities during daily
periods of low network demand.
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The product is targeted at the utility industry and will allow for optimizing
power networks during a time when de-regulation is creating new competition in
a rapidly diversifying market.
The FCC has mandated that wireless operators provide locator services for
emergency purposes by 2001. OTI products that provide positioning information
for GSM networks will be at the core of GSM-based PCS systems that will
provide location services. Partnering with key GSM network manufacturers via
OEM relationships will allow OTI to broadly distribute products in this area.
Location based services is a business that is predicted to generate
significant revenue opportunities over the next five years in North America
alone.
Bridging the knowledge developed from IS-661, GSM, and packet data, OTI is
on the forefront of developing products that will provide wireless Internet
capabilities for today's GSM systems in both wide area and campus
applications. OTI is developing products to directly address the expanding
wireless Internet market, and is pursuing partnerships with key strategic
manufacturers that will allow the marketing of such products to growing GSM
markets throughout the world.
INDUSTRY BACKGROUND
Since 1983, the demand for wireless telecommunications services has grown
dramatically as cellular, paging and other emerging wireless communications
services have become widely available and increasingly affordable.
Technological advances and changes in both telecommunications regulations and
consumer preferences have driven this growth in wireless services. Mobile
cellular telephone service has been one of the fastest growing market segments
within the telecommunications industry. According to cellular industry
analysts' estimates, the number of cellular, PCS, and Specialized Mobile Radio
("SMR") users in the U.S. grew from 340 thousand at the end of 1985 to
approximately 67.3 million by the end of 1998. According to such estimates,
there are now over 300 million mobile wireless service users worldwide. Most
industry analysts forecast that U.S. mobile wireless service users will be
more than double by 2005.
Personal Communications Services
PCS is defined by the FCC as "a family of mobile and portable radio
communications services for individuals and businesses that may be integrated
with a variety of competing networks." PCS is widely identified as the next
generation of wireless voice and data communications. PCS is designed to offer
customers a broad range of individualized digital wireless communications
services including landline telephone-quality voice communication for mobile,
office, or home use, as well as advanced features such as paging, fax storage
and retrieval, Internet access, e-mail and text messaging and news services.
PCS offers subscribers two basic services: (i) mobile service; and (ii) fixed
wireless replacement of local telephone services. With mobile service, a
subscriber carries a single, lightweight, long-battery-life telephone that
will accommodate any incoming or outgoing call almost anywhere in the country,
once buildout is completed.
PCS differs from existing cellular and SMR in three basic ways: frequency,
spectrum and geographic division. PCS networks operate in a higher frequency
band (1850-1990 MHz) compared to the cellular and SMR frequency (800-900 MHz).
The higher frequency band for PCS networks requires a greater number of total
cell sites to cover the same geographic area as existing cellular networks.
However, depending on the technology utilized, PCS service is ultimately less
expensive in certain geographic areas because of the lower cost and improved
capacity of the infrastructure equipment relative to cellular networks. In
addition, PCS is designed to provide improved voice quality and privacy. PCS
is comprised of 30 MHz, 15 MHz and 10 MHz spectrum blocks, or combinations
thereof, versus 25 MHz spectrum blocks for cellular networks. As a result of
the improved capacity of the infrastructure and comparatively large allocation
of spectrum, PCS has more capacity for new wireless services such as data and
video transmission.
Currently, cellular communication is the closest comparable service to PCS
available. Although analog cellular is the most widely deployed two-way
wireless service available in the U.S. today, it has several
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limitations including inconsistent service quality, lack of privacy, limited
capacity and, currently, the inability to transfer data without a modem. Most
current cellular services transmit voice and data signals over analog-based
systems, which use one continuous electronic signal that varies in amplitude
or frequency over a single radio channel. Digital systems such as PCS, on the
other hand, convert voice or data signals into a stream of digits and
typically use voice compression and other techniques to allow a single radio
channel to carry multiple simultaneous signal transmissions. Digital
technologies offer new services, improved system flexibility, greater
efficiency and increased capacity. Internet access, data transmission, call
forwarding, call waiting, fax storage and retrieval and paging capability are
among the enhanced services provided by PCS.
In order to gain early market penetration and compensate for initially
limited network footprints, PCS operators typically have been aggressive in
terms of pricing their service. This pricing strategy reflects the abundance
of network capacity provided by their recently commercialized digital
networks. Moreover, several PCS providers have attracted subscribers by not
requiring subscribers to sign minimum service contracts, offering lower per
minute incoming rates, prepayment service and bundled minutes. PCS providers
have also aggressively promoted the differentiating characteristics between
digital and analog service including security, call quality and other enhanced
features.
PCS Technology
Although there are as many as seven versions of digital PCS technologies
competing for the domestic market, only three are commonly considered to be
viable alternatives for fully mobile communication services. The three digital
technologies include GSM, Code Division Multiple Access ("CDMA"), and U.S.
Time Division Multiple Access ("TDMA"). GSM and TDMA are both "time division-
based" standards but are different from each other and CDMA.
GSM is the leading digital wireless technology in the world, with
approximately 300 networks being built or operating in over 129 countries,
including all of Western Europe and China. According to industry estimates,
GSM networks served approximately 150 million subscribers worldwide as of
March 1999, and are adding 5 million subscribers per month. In North America
there are currently over 3 million GSM subscribers, with GSM systems launched
in over 2,600 North American cities and towns. An important benefit associated
with GSM technology is its use of an open system architecture that will allow
operators to purchase network equipment from a variety of vendors that share
standard interfaces for operation. This open architecture provides PCS
operators with significant purchasing leverage with vendors and flexibility in
provisioning of features, products and services. GSM technology is provided by
many worldwide suppliers, including Ericsson, Nortel, Siemens, Nokia and
Motorola among others.
One competing standard, IS-95 CDMA, is a CDMA standard proposed as an
upgrade for existing U.S. analog cellular service to digital service. Qualcomm
is the primary proponent of IS-95 CDMA for PCS service. IS-95 has also
received support from Motorola, Lucent Technologies and Nortel. IS-95's PCS
service supporters include Sprint PCS and PCS PrimeCo, L.P. (Bell Atlantic
Mobile, AirTouch Communications Inc. consortium), both of which have deployed
a modified version of this technology at 1.9 GHz.
The other main competing standard, IS-136 TDMA, is the TDMA standard that
several cellular carriers are implementing as they upgrade to digital service.
Primary network suppliers are Lucent Technologies, Ericsson and Hughes. AT&T
Wireless, SBC Communications, Inc. ("SBC") and parts of Bell South's cellular
network are the primary 800 MHz service supporters. AT&T Wireless and SBC have
deployed systems based on IS-136-TDMA at 1.9 GHz. IS-136 TDMA, like GSM, faces
no major technological hurdles in upbanding to 1.9 GHz PCS.
BUSINESS
Service Business
Omnipoint's PCS service business provides mobile and fixed communications
service in its markets. Omnipoint's wireless service provides private, secure
and enhanced voice, high-speed data, paging services and other capabilities
for both the home and office environment and outdoor mobile coverage with
basic features
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including voice mail, call forwarding and call waiting, and enhanced features
such as Internet access, voice-activated dialing, fax storage and retrieval
and information services such as news, weather reports and stock market
quotes.
Omnipoint utilizes GSM technology, the most widely used wireless protocol in
the world. In North America, extensive roaming arrangements under the GSM
Alliance have been signed with operators whose licenses, along with
Omnipoint's licenses, cover over 90% of U.S. POPS. GSM offers Omnipoint's
customers, through its roaming agreements, the most extensive level of
worldwide roaming capabilities.
Omnipoint launched the first commercial PCS service in the New York City
area in early 1997. Since that time, the Company has launched service in the
major metropolitan areas of Philadelphia, Boston, Miami, Hartford, as well as
Detroit and Indianapolis, among others. The Company has also commenced
operations in a joint venture, which offers services in several Pennsylvania
markets including Harrisburg, York, Lancaster and Reading and a joint
operating agreement which offers service in Wichita, KS. Omnipoint will
continue to build out these networks and plans to build and operate PCS
networks in the areas covered by additional BTA licenses surrounding these
service areas and are focusing initially on the most densely populated areas
and major commuting corridors. During 1996, Omnipoint successfully tested a
pilot system in Manhattan comprised of a limited number of Omnipoint IS-661
based stations. In 1998, Omnipoint successfully completed the deployment of
the first commercial versions of the integrated IS-661/GSM system for wireless
local loop services in the New York MTA. As of December 1998, Omnipoint
covered nearly 10 million POPs in the New York MTA with its proprietary
technology base stations integrated into its GSM network. The Company believes
that its deployment of the IS-661/GSM system in the New York MTA has fulfilled
its requirements under the Pioneer's Preference License.
Technology Business
Manufacturers of PCS equipment compete in a high-growth, cost-competitive
market in which they must offer compact, cost-effective solutions. Due to
evolving industry standards and the rapid introduction of new services, the
success of PCS equipment manufacturers will also depend on their ability to
bring new products to market quickly, to choose and develop the appropriate
distribution channels, and to form partnerships with other leaders in the
market.
In order to capitalize on the growth in the market for GSM products and
services Omnipoint, through its subsidiary OTI, has focused its current
development and marketing efforts on various GSM core technology platforms and
applications, as well as next-generation wireless technologies. The Company
has developed products and capabilities in data (including specific
applications such as telemetry, remote monitoring, and control systems),
positioning and locations service, and wireless internet. The Company is
actively working with major GSM equipment manufacturers to establish the
appropriate partnerships and channels to bring these technologies to the
market in the most cost-efficient manner.
The widespread acceptance of the GSM standard has created an extremely cost
competitive market for GSM chip sets and core functionality. By leveraging the
standard GSM cost curve with an applications focus, OTI is able to bring to
market products complementary to the standard GSM mobile network equipment. An
example of this leverage is the Redhawk(TM) 2000 Series data terminal module.
This is a compact GSM-based data terminal that connects to telemetry
interfaces, enabling two-way low cost communication and control. This product
is designed to provide a low-cost standards-based solution that can be built
or customized to meet a customer's unique needs, within the confines of a
public network.
With mobile GSM subscribers increasing world-wide, other complementary
opportunities are emerging. OTI is developing equipment to provide value-added
subscriber services, such as location services, as an adjunct to current PCS-
1900 networks. Partnering with Ericsson and others, OTI is developing location
technologies for GSM-based systems. The initial focus of the development is to
bring products to market for PCS-1900 systems in North America in time to meet
the year 2001 FCC mandate for E-911, and to increase operator revenues by
enabling enhanced location based services such as location-specific traffic
report, concierge services, and promotional messages.
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OTI is also leveraging the knowledge gained from its efforts related to IS-
661, GSM, and wireless data to develop products which will bridge the gap
between traditional wireless mobile networks and the internet packet world.
These products will be targeted to new applications both in campus
environments and in applications such as wireless local loop.
PCS MARKETS
Omnipoint currently operates its PCS services business within six regions of
the United States--New York, Philadelphia, Boston, Miami, Detroit and
Indianapolis. In addition, the Company is involved in a joint venture with D &
E Communications to jointly operate certain markets in Eastern Pennsylvania
with each of the respective company's FCC licenses. Also, the Company is
involved in a joint operating arrangement with Western Wireless to offer
service in the Wichita, KS region. As of December 1998, the Company had over
2,800 cell sites on the air in its markets and marketed services to
approximately 46 million POPS, as compared with 16 million POPS at the end of
1997.
Omnipoint's individual markets cover large areas with attractive demographic
characteristics including growing populations, high population densities,
favorable commuting patterns, high household incomes and favorable business
climates. Including New York, six of Omnipoint's initial core markets are
among the twelve most densely populated markets in the U.S., and four of these
markets are located contiguously in the Northeast United States. Because the
average population density of these markets is over ten times greater than the
national average of 75 POPS per square mile, relatively lower capital costs
per POP are required in each of these respective service areas. This is one
factor that provides Omnipoint with a lower average buildout cost per POP than
most other PCS companies.
As an example, the New York MTA is a particularly attractive wireless market
due to its size, density and demographics. The New York MTA is the country's
largest telecommunications market and has a disproportionately high share of
all voice and data traffic relative to its population, particularly with
respect to international calls placed to or from the U.S. The New York MTA is
the largest in the U.S., with approximately 27 million POPS or approximately
10.2% of the U.S. population, and is comprised of 20 BTAs, including New York,
NY (which includes northern New Jersey, Westchester and Long Island);
Hartford, CT; Albany, NY; New Haven, CT; and Syracuse, NY. The New York MTA,
for example, has a high share of households with annual incomes of over
$50,000, 41.8% as compared with the national average of 31.0%.
STRATEGY
Corporate Strategy
Omnipoint's strategy for its PCS service business is to become a leading
provider of wireless services in its markets. Omnipoint commenced operation of
the first commercial PCS service in the New York City area in early 1997.
Omnipoint will continue to operate and build out its licenses, focusing
initially on the most densely populated portions and on major commuting
corridors. Omnipoint believes that existing cellular systems in the most
densely populated areas, provide inadequate long-term capacity and that
service during peak hours for current cellular users is poor, with the
anticipated growth in wireless demand adding to this problem.
Omnipoint's strategy for OTI is to select the appropriate commercial
opportunities, based on its development expertise, and to introduce new
architectures for targeted applications, in conjunction with carefully
selected distribution channels and development partners.
PCS Services Marketing Strategy
Omnipoint's marketing objective is to stimulate demand for PCS voice and
data services and attract subscribers by providing superior service and
reliability at attractive prices. Omnipoint plans to continue to generate
demand by introducing a better alternative to cellular service. Omnipoint
intends to concentrate its PCS marketing efforts on the following key customer
segments: (i) large, communications-intensive corporate accounts, currently
using or considering cellular or private radio systems, that would value the
improved quality and security and would benefit from Omnipoint's enhanced
products and services; (ii) high-mobility customers
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using or considering cellular telephones who would benefit from fewer dropped
or blocked calls; (iii) low-mobility customers attracted to PCS as a more
convenient alternative to their landline telephones, particularly those who
have multiple telephone lines to their home or business and who have a need
for high speed data transmission, and (iv) prepaid service where customers pay
for metered service in advance, for consumers who desire the convenience and
mobility of wireless, but wish to avoid the obligation of monthly bills, thus
finding it attractive to control their expenditures through prior purchase of
service in predetermined amounts.
In marketing its service, Omnipoint believes it offers competitively priced
services that emphasize voice clarity, reliability and a low probability of
blocked calls, encryption, international calling and roaming, internet e-mail,
and information services. Omnipoint's service includes certain basic features
such as call waiting, call forwarding, caller I.D., voice mail and paging, and
enhanced features such as voice-activated dialing, news and weather reports
and stock market quotes as part of its product offerings. Omnipoint is the
only provider in its markets of true encryption services which improves call
security and should encourage users to make confidential professional and
personal calls that they would be unwilling to make on cellular telephones. In
addition, the convenience of a single telephone number for mobile, home and
office use available to the customer throughout the GSM service area and the
use of easy-to-use, menu-driven subscriber functions should enhance the usage
of Omnipoint's services. Omnipoint also offers an attractive prepaid calling
plan and has established a significant subscriber base among budget-conscious
individuals and those traditionally uncomfortable with billing and collection
processes.
Omnipoint's strategy is to pursue multiple distribution channels through
which to market its services, generally on a non-exclusive basis. Omnipoint's
PCS products are sold off the shelf. Omnipoint's extensive distribution
includes more than 3,200 locations, local and national. In the New York
metropolitan area, for example, customers can obtain Omnipoint telephones at
retail outlets, including a wide range of authorized Omnipoint retailers such
as Staples, Circuit City (in the NY and Connecticut metro areas), Tops, J&R
Computer World, selected locations of Office Depot and Sears Brand Central.
Omnipoint's PCS products can also be obtained from Omnipoint owned and
operated stores in its markets as well as by calling toll-free (1-888-BUY-
OMNI) to Omnipoint's Telemarketing Centers to have a PCS phone mailed at no
delivery charge.
Technology Development Strategy
Omnipoint Technologies, Inc.'s strategy is to leverage its core strengths in
wireless communication systems design and integration, within the context of a
broader standards-based wireless market. OTI will be in the product design,
development, and marketing business and will work together with the
appropriately chosen partners to manufacture and distribute these products to
markets worldwide. OTI plans to continue to be in the lead in developing
wireless products in the next generation of technologies including messaging,
GPRS, Enhanced Data rate for GSM Evaluation ("EDGE"), wireless Internet
Protocol ("IP"), and Wide-band CDMA ("WCDMA").
In developing its products, OTI believes that it offers a combination of
system engineering expertise, product and project management competence, and
experience in developing and delivering complete GSM-based systems and sub-
systems, which allows OTI product designers to utilize rapidly core
technologies combined with proprietary know-how to create cost competitive
products in a rapid time to market lifecycle. By focusing on the development
and relying on strategic partners for manufacturing, distribution and product
fulfillment, OTI believes that it can be at the forefront of developing and
delivering advanced wireless products to the market worldwide.
COMPETITION
PCS Service Competition
The success of Omnipoint's PCS services business will depend upon its
ability to compete with the two cellular operators, at least two other PCS
licensees and potential future wireless communications providers in each of
its markets. For example, Bell Atlantic Mobile ("Bell Atlantic") and AT&T
Wireless, Inc. ("AT&T
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Wireless") currently provide cellular services in the New York Metropolitan
Statistical Area (MSA) and surrounding areas. Sprint PCS was the winner of the
B Block New York MTA PCS license. NextWave was the successful bidder in the
Entrepreneurs' Band auction for the New York BTA PCS license but has not yet
begun commercial operation and is currently being reorganized in bankruptcy.
Omnipoint's other networks will face similar PCS and cellular competition
including competition in certain BTAs from AT&T Wireless, Sprint PCS, Cellular
One, Comcast, PCS PrimeCo, L.P. and Nextel, among others. Omnipoint believes
that Enhanced Specialized Mobile Radio ("ESMR") will have a limited
competitive impact against PCS for the mass consumer market largely because
technical limitations and limited bandwidth have caused the ESMR operators to
target primarily vertical market niches such as dispatch services. In the
future, PCS could potentially compete more directly with traditional landline
telephone service providers and other technologies including mobile satellite
systems.
PCS equipment technology competition
Competition in the wireless telecommunications equipment industry is
intense. The industry consists of major domestic and international companies,
including those companies currently providing equipment to cellular and PCS
providers, most of which have substantially greater financial, technical,
marketing, sales, manufacturing, distribution and other resources than those
of Omnipoint. Omnipoint, through its subsidiary OTI, will compete with these
other companies primarily by selling equipment that provides enhanced features
at a lower cost, and leverages expertise in specific product areas.
REGULATORY ENVIRONMENT
The FCC regulates the licensing, construction, operation and acquisition of
wireless telecommunications systems in the U.S. pursuant to the Communications
Act of 1934, as amended (the "Communications Act"), and the rules, regulations
and policies promulgated by the FCC thereunder. Under the Communications Act,
the FCC is authorized, among other things, to allocate, grant, rescind and
deny licenses for PCS frequencies, establish regulations governing the
interconnection of PCS systems with wireline and other wireless carriers,
grant or deny license renewals and applications for transfer of control or
assignment of PCS licenses, establish other regulations governing the
operations of PCS and other telecommunications carriers and impose fines and
forfeitures for any violations of FCC regulations.
PCS Licensing
The FCC established PCS service areas in the U.S. based upon Rand McNally's
market definition of 51 MTAs comprised of 493 smaller BTAs. In June 1994, the
FCC finalized the allocations of the 1.85 to 1.99 GHz bands for broadband PCS
services. The Commission distinguished the licenses along four dimensions,
including (i) the amount of RF spectrum-30 MHz, 15 MHz and 10 MHz, (ii) the
size of geographic area-MTA versus BTA, (iii) the eligibility to hold the
license and participate in the specific auction for each type of license, and
(iv) the timing of the auctions regarding each of the above categories.
The FCC decided that two 30 MHz licenses, designated as Blocks A and B,
would be allocated geographically by MTAs (these include the A Block licenses
granted to the three Pioneers in their respective MTAs). The 30 MHz MTA
auction ended in March 1995, and the FCC granted those licenses in June 1995.
Four licenses designated as Blocks C, D, E and F were allocated by BTAs. The C
and F Block licenses were allocated 30 MHz and 10 MHz of spectrum,
respectively, and reserved for "Entrepreneurs." Eligibility to bid for and
hold licenses in the C and F Blocks was limited to entities that, together
with their affiliates and certain investors, had gross revenues of less than
$125 million in each of the two years preceding the auction and total assets
of less than $500 million. Eligible bidders in the Entrepreneurs' Band were
given certain bidding credits and successful bidders were given favorable
installment payment terms. The most favorable bidding credits and installment
payment options were available only to C Block applicants that qualified as
small businesses, and to F Block applicants that qualified as very small
businesses. Generally, for the initial auctions, a small business is an entity
that has average annual gross revenues of not more than $40 million for the
preceding three relevant years while a very small business is an entity that
has average annual gross revenues of not more than $15 million for the
preceding three relevant years.
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The Entrepreneurs' Band auction for the C Block licenses ended in May 1996.
The auction for the D, E and F Block licenses ended on January 14, 1997. The
remaining 20 MHz of the 140 MHz of PCS spectrum in the 1910-1930 MHz band
available was allocated for unlicensed PCS applications such as wireless PBX
adjuncts, LANs and home cordless telephones. All PCS licenses were granted for
a 10-year period, at the end of which they must be renewed. Licenses may be
revoked at any time for cause.
In 1997 and 1998, the FCC issued orders changing the auction debt payment
terms available to C Block licensees, and offered various options for reducing
the licensees' debt by returning all or portions of their spectrum. In June
1998, Omnipoint elected to "amnesty" fourteen of its C Block licenses. Amnesty
offered the Company the opportunity to avoid debt on fourteen of its C Block
licenses with the right to re-acquire those licenses in the C, D, E and F
reauction ("Auction 22") which commenced on March 23, 1999. Omnipoint elected
to disaggregate four of its eighteen C Block licenses, for the Philadelphia,
PA and contiguous markets, and return 15 MHz of the 30 MHz license and reduce
approximately one-half of the debt associated with those licenses. Omnipoint
has been accepted by the FCC to participate in the C Block reauction in
Auction 22. No installment financing terms are offered to any bidder on
Auction 22. For a period of two years, Omnipoint will not be eligible to bid
on or hold licenses for the C Block spectrum it returned under the
disaggregation option.
Omnipoint's New York MTA and other networks operate in the spectrum now
partially occupied by private and common carrier fixed microwave users. Many
of these microwave incumbents provide services that may interfere with or
receive interference from the operation of PCS networks and, as a result, have
been relocated by Omnipoint while others still have to be negotiated or
relocated. In an effort to balance the competing interests of existing
microwave users and newly authorized PCS licensees, the FCC adopted a
transition plan to relocate such microwave operators to other spectrum blocks.
Whenever Omnipoint displaces a microwave incumbent, Omnipoint must pay at
least the microwave incumbent's relocation expenses, and may be required to
take actions necessary to put the microwave incumbent's new facility into
operation. Omnipoint may also be required to reimburse other entities for the
relocation by such entities of microwave incumbents that Omnipoint would have
displaced. Omnipoint continues to make it a goal to implement a frequency plan
that will minimize to the extent possible the number of existing microwave
users that need to be relocated.
Pioneer's Preference Program
Omnipoint is one of only three recipients of a broadband PCS Pioneer's
Preference License. Under the terms of the FCC's Pioneer's Preference program
and pursuant to an FCC order, Omnipoint was awarded a preference to apply for
a license not subject to competing applications to provide service in the New
York MTA. Omnipoint received the New York MTA License consisting of 30 MHz of
PCS spectrum (1850 to 1865 MHz and 1930 to 1945 MHz) in December 1994. The
final terms of the Pioneer's Preference awards are contained in the General
Agreement of Trade and Tariff ("GATT") legislation.
Pursuant to the terms of the GATT legislation, each of the Pioneers is
required to pay for its license a sum equal to 85% of the product of (i) the
average per POP price paid in the auctions for the licenses in the top 20 MTAs
based on population, not including the three MTAs in which only one 30 MHz
license was to be auctioned due to the Pioneer's Preference (i.e., the average
is based on the per POP prices for 40 licenses), times (ii) the number of 1990
POPS in each of the Pioneer's MTAs. Based on the final round of the A and B
Block auctions, Omnipoint's license cost was $347.5 million or approximately
$12.90 per 1996 POP for the New York MTA License.
The GATT legislation prohibits the FCC from reconsidering its December 1993
Report and Order granting final preference awards to the three Pioneers. The
legislation mandated that the decision was not subject to further
administrative or judicial review. GATT also provided that the FCC establish,
by order, the interest rate and the timing of principal and interest payments.
On March 8, 1996, the FCC adopted such an order, the terms and conditions of
which are as follows: (i) a five-year payment period with interest accruing at
7.75% from the order adoption date with the first payments due on April 8 and
April 30, 1996 and subsequent quarterly payments
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due on April 30, July 31, October 31 and January 31, (ii) interest only
payments for the first two years, and (iii) principal and interest payments
for the remaining three years.
Conditions on Licenses
The FCC has placed certain conditions on Omnipoint's New York MTA License.
Some of these conditions will also apply to Omnipoint's Entrepreneurs' Band
licenses. The conditions include the requirement that Omnipoint construct
network facilities that offer coverage to at least one-third of the population
in the particular MTA or C Block BTA service area within five years of the
grant of the license (the "Five-Year Buildout Requirement"), to at least two-
thirds of the population within ten years and to one-quarter of the population
of D, E, and F Block BTA service areas within ten years (the "Ten-Year
Buildout Requirement"), as well as assignment and change of control
restrictions. Violations of any of these conditions could result in license
revocations, forfeitures or fines. The Company has already met the Five-Year
Buildout Requirement and the Ten-Year Buildout Requirement in the New York MTA
and many of its major markets. Omnipoint believes it can meet the tests for
its other markets as applicable.
The Pioneer's Preference PCS licenses contain a provision prohibiting an
assignment of the license or a transfer of control of the licensee until the
earlier of three years after the license grant (i.e., not before December
1997) or the date on which Omnipoint has provided coverage for one-third of
the license area's population. In addition, the Communications Act requires
the FCC's prior approval of the assignment or transfer of control of a PCS
license. Furthermore, the FCC has established transfer disclosure requirements
that require licensees who transfer control of or assign a PCS license within
the first three years to file associated contracts for sale, option
agreements, management agreements or other documents disclosing the total
consideration that the applicant 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 prior FCC
approval.
The Entrepreneurs' Band licensees are prohibited from voluntarily assigning
or transferring control of their licenses for five years after grant date
except to assignees or transferees that satisfy the financial criteria
established for the Entrepreneurs' Band. Any transfers or assignments during
the five years after initial license grant are subject to unjust enrichment
penalties including the forfeiture of any bidding credits; and during the
initial ten years, the acceleration of any installment payment plans if the
assignee or transferee does not qualify for the same benefits. In addition,
licensees must maintain their Entrepreneurs' Band eligibility for five years
from the date of initial license grant. In that regard, however, increased
gross revenues, increased total assets from non-attributable equity
investments, debt financing, and revenue from operations, business development
or expanded service are not considered by the FCC. In addition, to maintain
all of the benefits of its Designated Entity Status, Omnipoint must meet
certain stock ownership and voting stock requirement and meet certain other
criteria. The FCC has announced that it may conduct audits to ensure
compliance with all license conditions.
The New York MTA License contains a condition that requires Omnipoint to
construct a PCS system that "substantially uses" the design and technology
upon which the Pioneer's Preference award was based. The condition expires
upon the system providing coverage for one-third of the population of the MTA.
The FCC has never specifically defined the phrase "substantial use." In
January 1996, Wireless Communications Council ("WCC"), a trade association
with only one disclosed member, who is a proponent of IS-95 CDMA technology,
filed a petition with the FCC seeking clarification of the phrase. In August
1996, the FCC denied the petition noting that it was premature because
Omnipoint's compliance with the five-year buildout condition should not be
evaluated until December 1999, and compliance with the condition would involve
consideration of several complex factors. Although there can be no assurance
as to whether or how the FCC will in the future construe the phrase
"substantial use", Omnipoint believes that its implementation of the
Omnipoint/GSM System to build out the New York MTA network has satisfied the
"substantial use" condition. None of Omnipoint's other licenses (as well as
none of the Entrepreneurs' Band licenses) contain a similar condition.
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Citizenship Requirements
No more than 20% of any subsidiary of Omnipoint that holds a FCC license may
be owned directly by non-U.S. citizens or their representatives. Foreign
ownership of up to 25% is permitted in Omnipoint and its subsidiaries that
have a direct or indirect ownership interest in an FCC licensee; however, upon
request, the FCC has the discretion to allow a licensee to exceed the 25%
benchmark if so doing is in the public interest. Due to changes brought on the
World Trade Organizations agreements, the FCC's rules generally allow
companies from all countries that are signatories of the WTO (and are in
compliance) to indirectly own up to 100% of U.S. telecommunications FCC
licensees. Any such foreign investments are still subject to a review by the
FCC, but the presumption is that investments made by WTO members' companies
will be approved. Omnipoint has no knowledge of any present foreign ownership
in violation of the Communications Act.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (the "Telecom Act") is the first
comprehensive legislation changing telecommunications regulation in over 60
years. In general, its goal is to remove the statutory, regulatory and court-
ordered barriers that historically prohibited new entrants into many segments
of the telecommunications industry. The primarily goal of the Telecom Act is
to allow LECs, long distance carriers, cable companies, broadcasters and
others to compete directly. The Telecom Act attempts to create opportunities
for competition within the local loop, while allowing monopoly LECs eventually
to enter the long distance market. It requires the BOCs and other incumbent
LECs to permit competitors to interconnect with their local loop networks
through unbundled network elements, resale and co-location. The Telecom Act
will affect the business of Omnipoint because of the likely creation of more
opportunities to compete in both the local exchange and long distance markets
for the same or similar types of services that Omnipoint plans to offer as
well as the specific treatment of commercial mobile radio service operators
such as Omnipoint. However, Omnipoint cannot predict the exact nature and
extent of this competition.
The Telecom Act provides for interconnection rights between
telecommunications companies such as Omnipoint and incumbent LECs. On August
1, 1996, the FCC adopted rules implementing the interconnection provisions of
the Telecom Act that provide for unbundled interconnection at the incumbent
LEC's long run incremental costs plus a reasonable share of forward-looking
joint and common costs ("total element long run incremental cost") and for
resale of incumbent LEC retail services at substantial discounts off of retail
rates (with a default range of 17-25%). The Court of Appeals in 1997 ruled
against the FCC with respect to wireline interconnection issues, but upheld
the FCC on wireless interconnection and the FCC is evaluating its options on
how to proceed. In a recent U.S. Supreme Court decision, the FCC's
interconnection decision was largely upheld.
The FCC has also conducted and, in some cases, has ongoing rulemaking
proceedings on a number of issues affecting Omnipoint and the wireless
industry generally, such as: an overhaul of the system of access charges paid
by long-distance carriers to incumbent LECs; reform of universal service
funding mechanisms to, which PCS licensees such as Omnipoint must pay and
reform to permit wireless carriers to receive universal service support;
establishment of enhanced 911 obligations for wireless carriers such as
Omnipoint; telephone number portability rules pursuant to which subscribers
will be able to migrate their landline and cellular telephone numbers to a PCS
carrier, or from a PCS carrier to another service provider; customer
proprietary network information rules to ensure customer privacy; and
investigation of wireless "calling party pays" issues.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
As of December 31, 1998, Omnipoint has received 57 U.S. patents on its
technology, has ten U.S. patent applications which have been allowed, and has
53 U.S. and 120 foreign patent applications pending. The issued patents will
expire between 2008 and 2017. Omnipoint will continue to file patent
applications as engineering
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developments occur. The policy of Omnipoint is to apply for patents or other
appropriate or statutory protection when it develops valuable new or improved
technology. Omnipoint believes, however, that the successful development of
its technology generally depends more upon the experience, technical know-how
and creative ability of its personnel rather than on ownership of patents.
In addition to its patents, as of December 31, 1998, Omnipoint has twelve
U.S. and 78 foreign registered trademarks, fourteen U.S. and 72 foreign
trademark applications pending, and two U.S. and eight foreign Intent-To-Use
trademark applications pending.
The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, there can be no assurance
that patent applications filed by Omnipoint will result in patents being
issued or that its patents, and any patents that may be issued to it in the
future, will afford protection against competitors with similar technology;
nor can there be any assurance that patents issued to Omnipoint will not be
infringed upon or designed around by others or that others will not obtain
patents that Omnipoint would need to license or design around. If the courts
uphold existing or future patents containing broad claims, the holders of such
patents might be in a position to require companies to obtain licenses. There
can be no assurances that licenses that might be required for Omnipoint's
products would be available on reasonable terms, if at all. To the extent that
licenses are unavailable, or are not available on acceptable terms, no
assurance can be made that the failure to obtain a license would not adversely
impact Omnipoint.
In addition to seeking patent protection, Omnipoint relies on trade secrets
to protect its proprietary rights. Omnipoint attempts to protect its trade
secrets and other proprietary information through agreements with customers
and suppliers, non-disclosure and non-competition agreements with employees
and consultants and other security measures. Although Omnipoint intends to
protect its rights vigorously, there can be no assurance that these measures
will be successful.
EMPLOYEES
As of March 1999, Omnipoint had a total of 1,947 employees, including 508 in
engineering and manufacturing, 441 in sales, marketing and product management
and 998 in customer support/care, administration and finance. Omnipoint's
future success will depend in significant part on the continued service of its
key technical, sales and senior management personnel. Competition for such
personnel is intense and there can be no assurance that Omnipoint can retain
its key managerial, sales and technical employees, or that it can attract,
assimilate or retain other highly qualified technical, sales and managerial
personnel in the future. None of Omnipoint's employees is represented by a
labor union. Omnipoint has not experienced any work stoppages and considers
its relations with its employees to be good.
ITEM 2. PROPERTIES
Omnipoint's principal corporate administrative office is located in leased
space in Bethesda, Maryland occupying 20,064 square feet. The principal
administrative office of the PCS services business is located in a 31,616
square foot facility in Cedar Knolls, New Jersey. In addition, the Company has
leased 58,333 square feet in Bethlehem, Pennsylvania and 82,854 square feet in
Fort Lauderdale, Florida to accommodate its customer care support centers. The
principal office of OTI is in a 68,512 square foot facility in Colorado
Springs, Colorado.
The Maryland, New Jersey and Colorado leases will expire in March 2004,
December 2003 and July 2000, respectively. The Pennsylvania and Florida leases
will expire in October 2009 and June 2013, respectively.
In addition, Omnipoint has rented a number of regional administrative
offices, retail stores, switching facilities, and warehouses, as well as base
station sites in various locations.
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ITEM 3.LEGAL PROCEEDINGS.
Omnipoint is not currently aware of any pending or threatened litigation
that could have a material adverse effect on Omnipoint's financial condition,
results of operations or cash flows.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock of Omnipoint is traded on the NASDAQ National Market under
the symbol "OMPT." The following table sets forth, for the periods indicated,
the range of high and low sales price for the Common Stock as reported on the
NASDAQ National Market.
<TABLE>
<CAPTION>
Fiscal 1998 High Low
----------- -------- --------
<S> <C> <C>
First Quarter.......................................... 29 3/4 20 7/8
Second Quarter......................................... 30 18 1/2
Third Quarter.......................................... 25 3/8 6 13/16
Fourth Quarter......................................... 13 4 5/8
<CAPTION>
Fiscal 1997 High Low
----------- -------- --------
<S> <C> <C>
First Quarter.......................................... 27 7/8 9
Second Quarter......................................... 16 7/8 6 7/8
Third Quarter.......................................... 23 15/16 14
Fourth Quarter......................................... 25 17 7/8
</TABLE>
On March 25, 1999, the last reported sale price of the Common Stock was
$11.9375 per share. As of March 25, 1999, the Company had approximately 1,150
shareholders.
The Company has never paid or declared any cash dividends on its Common
Stock and does not expect to pay cash dividends in the foreseeable future.
Further, the Company's various financing agreements prohibit the Company from
paying dividends of any kind on the Common Stock. The various financing
agreements (as defined below) also contain a restriction on OCI's, Omnipoint
MB Holding's, OPCS Philadelphia Holding's, and Omnipoint Midwest Holding's
ability to declare and pay dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K. The selected
consolidated financial data have been derived from the Company's consolidated
financial statements for the five most recent fiscal years ended December 31,
1998 which have been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ----------
In Thousands
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenues............... $ 3,000 $ -- $ 531 $ 51,950 $ 172,536
Total cost of
revenues............. -- -- 3,230 108,335 228,419
Sales, general and
administrative....... 6,290 12,619 47,140 105,375 255,242
Research and
development.......... 7,071 14,345 34,575 23,932 16,639
Depreciation and
amortization......... 1,125 11,038 15,587 52,644 129,043
Loss from operations... (11,433) (38,002) (100,401) (238,336) (456,807)
Interest income
(expense), net....... (1,156) 232 (26,529) (76,189) (175,832)
Loss before
extraordinary items... (9,330) (37,770) (126,930) (314,419) (652,667)
Net loss attributable
to common
stockholders(1)(2).... (9,330) (37,770) (126,930) (321,010) (677,727)
Basic and diluted loss
per common
share(3)(4):
Loss before
extraordinary
item(5).............. -- -- (2.74) (6.10) (12.66)
Net loss per common
share-basic and
diluted(5) .......... -- -- (2.74) (6.23) (12.87)
Balance sheet data:
Working capital
(deficit)............. 3,095 (1,410) 246,315 (92,165) (41,300)
Total assets(6)........ 360,946 474,990 1,419,472 1,779,589 2,066,604
FCC license
obligations(6)........ 347,518 347,518 709,853 758,590 444,737
Other long-term debt... 1,688 48,349 477,503 991,852 1,954,509
Preferred stock........ 15,902 44,127 -- -- 276,191
Total stockholders'
equity (deficit)(7)... (7,416) (30,548) 133,774 (181,906) (586,020)
</TABLE>
- --------
(1) The Company recorded an extraordinary loss on the return of certain C
Block licenses of $11.1 million.
(2) The Company recorded an extraordinary loss on the early extinguishment of
debt of $6.6 million.
(3) Basic loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Diluted
loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding plus other dilutive
securities. As the Company is in a loss position, basic and diluted
earnings per common share are the same amount. Diluted earnings per common
share has not been adjusted for the impact of the Cumulative Convertible
Preferred Stock for 1998, the redeemable preferred stock in 1995 and 1994,
and for the stock options and warrants for 1994 through 1998, as they are
anti-dilutive.
(4) Because the Company had its initial public offering of common stock in
1996, basic and diluted earnings per common share are not included for
1995 and 1994.
(5) Basic and diluted loss per common share is shown net of the accretion of
the 7% Cumulative Convertible Preferred Stock in 1998.
(6) During the second quarter of 1998, the Company returned fourteen C Block
licenses and disaggregated 15MHz of four remaining C Block licenses. As a
result, the Company recognized a book reduction in FCC license obligations
of $242.3 million and a reduction of assets of $296 million.
(7) Included in stockholders' equity (deficit) is the issuance of 325,000
shares of Cumulative Convertible Preferred Stock in the second quarter of
1998. Net proceeds from the issuance totaled $252.2 million.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this 10-K contain forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from the results discussed in forward-looking statements.
OVERVIEW
At December 31, 1997, the Company offered PCS services in New York and had
just commenced operations in Philadelphia and Atlantic City. One year later,
the Company had built and launched services in over 20 additional cities,
including Boston, Providence, Miami, West Palm Beach, Fort Lauderdale,
Detroit, Indianapolis, Albany, Syracuse and Hartford. The Company has also
commenced operations in a joint venture, which offers services in several
Pennsylvania markets including Harrisburg, York, Lancaster and Reading, and a
joint operating agreement which offers service in Wichita, KS. The Company,
through OTI, is also a leading developer and supplier of wireless
communication technologies, products and engineering services.
The Company was the first PCS operator in the country to offer prepaid
services, reseller services, international calling and roaming and enhanced
wireless services such as real time stock quotes and wireless Internet access.
The Company marketed to approximately 46 million POPS at December 31, 1998.
Highlights of the Company's financial operations are as follows:
.December 1998: $125 million of Senior Notes
.December 1998: Detroit and Indianapolis market launches
.September 1998: Purchase of Urban Wireless' customer base
.July 1998: $160 million credit facility with Bank of America International
.June 1998: Connecticut and upstate New York market launches
. June 1998: Return of C Block licenses resulting in reduction of $337
million of FCC debt and accrued interest
.May 1998: $325 million from preferred stock issuance
.March 1998: Boston and Miami market launches
.February 1998: Refinancing of $516 million interim credit facility with a
$750 million credit facility
.January 1998: $400 million credit facility for the Midwest markets
.December 1997: $516 million interim credit facility
.September 1997: Philadelphia and Atlantic City market launches
.August 1997: $202.5 million credit facility for the Boston and Miami
markets
.July 1997: $120 million credit facility for the Philadelphia and Dover
markets
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenues:
Revenues for 1998 were $172.5 million, as compared to revenues of $52.0
million for 1997, an increase of $120.5 million, or 231.7%.
PCS Services
Service revenues for 1998 were $141.1 million, as compared to $30.8 million
for 1997, an increase of $110.3 million, or 358.1%. The increase in service
revenues is due to the continued increase in the number of subscribers
partially offset by a decrease in subscriber usage. As a result of the
increase in the number of subscribers, handset and accessories revenues for
1998 were $26.6 million, as compared to $11.6 million for 1997, an increase of
$15.0 million, or 129.3%. The larger customer base resulted from commercial
operations in the metropolitan areas of New York, Miami, Boston, Providence,
Philadelphia, and several other Pennsylvania markets. The New York and
Philadelphia metropolitan area coverages continue to expand, along with other
less
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populated Pennsylvania markets. The Boston and Miami metropolitan areas began
service in March 1998 while the Detroit and Indianapolis markets launched in
December 1998. Revenues for 1997 were generated almost exclusively from the
New York metropolitan area. A significant portion of the Company's customer
base is prepay customers.
PCS Technology
OTI had revenues of $4.8 million related to engineering services in 1998, as
compared to revenues of $9.6 million related to engineering services and
license fees in 1997. OTI is 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, handset and accessory sales and engineering
services for 1998 were $228.4 million, as compared to $108.3 million for 1997,
an increase of approximately $120.1 million, or 110.9%.
PCS Services
Cost of service revenues were $124.2 million for 1998, as compared to $45.4
million for 1997, an increase of $78.8 million, or 174%. Included in the cost
of service revenues for 1998 was approximately $9.6 million of costs
associated primarily with international fraud committed during the first six
months of 1998. The Company believes that the sources of this fraud have
largely been suppressed and steps have been taken with foreign carriers to
limit future exposure to such fraud. Excluding these fraud charges, the key
causes for the increase in cost of service revenues are the increase in cell
sites in operation from 927 at December 31, 1997 to over 2,800 at December 31,
1998, expanded minutes of use, and significantly higher subscriber additions.
The Company's managed customer base grew by nearly 230,000 subscribers to
370,000 subscribers during 1998, or approximately 164%. These increases result
from the Company offering commercial service in several additional markets in
1998, including the Boston and Miami markets launched at the end of the first
quarter of 1998, the Connecticut and upstate New York markets launched in June
1998 and the Detroit and Indianapolis markets launched in December 1998.
Cost of handset and accessories revenues for 1998 were $100.1 million, as
compared to $61.9 million for 1997, an increase of approximately $38.2
million, or 61.7%, as compared to a 164% increase in subscribers. Handset and
accessories costs increased as a result of strong growth in customer additions
during the year, partially offset by a decrease in unit costs compared to
1997.
PCS Technology
Engineering services total cost of sales were $4.2 million, as compared to
$1.1 million for 1997, an increase of $3.1 million, or 281.8%. The increases
are the results of the Company's additional engineering service revenues in
1998.
Direct Expenses:
Research and development expenses in the Company's technology subsidiary for
1998 were $16.6 million, as compared to $23.9 million for 1997, a decrease of
$7.3 million, or 30.5%. The Company's technology subsidiary has completed its
work on the PCS Fixed Access System, resulting in reduced expense.
Additionally, the Company has entered into several joint development
arrangements that fund portions of the Company's research and development
efforts.
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 benefit costs other than those classified as
research and development,
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those related to 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 the costs of
handsets and accessories. Sales, general and administrative costs for 1998
were $255.3 million, as compared to $105.4 million for 1997, an increase of
approximately $149.9 million, or 142.2%. The increase is primarily driven by
(i) a 164% increase in the customer base in 1998; (ii) increase in the number
of distribution outlets by 255.6% and (iii) an increase in the number of
employees by 36.8%. As a result of the increases in subscribers and employees,
advertising and marketing, consulting, payroll and indirect acquisition costs
increased substantially in 1998. Customer acquisition costs per subscriber
additions continued to decline during 1998 and were under $500 for the year.
Bad debt expense as a percentage of total revenues increased in 1998, as
compared to 1997. During the second and third quarters of 1998, the Company
undertook a significant effort to write off accounts receivable balances and
adjust its allowance for doubtful accounts. The provision for doubtful
accounts as a percentage of revenue improved substantially in the fourth
quarter. The Company took actions during the third and fourth quarter to
address bad debt issues going forward including installation of a customer
profiling system, implementation of an improved credit scoring system,
implementation of barring procedures that limit customers from making calls to
certain foreign countries without additional credit approvals, and an increase
in its monitoring of subscriber activity. As a result of the rapid increase in
subscribers and the pioneering of prepaid services, the Company outsourced
certain functions, particularly in customer care support and billing. The
Company opened a second customer care center in the third quarter of 1998, and
also introduced a new Intelligent Network ("IN") platform to better serve the
needs of prepaid customers.
Other Expenses and Income:
Depreciation and amortization expenses for 1998 were $129.0 million, as
compared to $52.6 million for 1997, an increase of approximately $76.4
million, or 145.3%. The increase in depreciation expense is 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 the commencement of amortization of the FCC licenses
associated with the markets placed into commercial service during the year.
As a result of the changes in revenues and operating costs and expenses
discussed above, the Company's loss from operations for 1998 was $456.8
million, as compared to $238.3 million for 1997, an increase of approximately
$218.5 million, or 91.7%.
Equity in losses from joint ventures for 1998 was $11.9 million, as compared
to zero in 1997. 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 1998 was $11.4 million, as compared to $12.9 million for
1997, a decrease of $1.5 million, or 11.6%. The decrease was due to the use of
cash and cash equivalents to pay for network equipment purchases and operating
expenses for new and existing markets in 1998, partially offset by interest
from the proceeds of the May 1998 preferred stock offering.
Interest expense for 1998 was $187.2 million, as compared to $89.1 million
for 1997, an increase of $98.1 million, or 110.1%. The increase was due to
increased amounts outstanding from loans payable under financing agreements
and the senior notes, partially offset by capitalized interest and a reduction
in FCC obligations. The Company's capitalized interest for 1998 was $10.3
million, as compared to $54.6 million for 1997, a decrease of $44.3 million,
or 81.1%.
Loss before extraordinary item for 1998 was $652.7 million, as compared to
$314.4 million for 1997, an increase of approximately $338.3 million, or
107.6%. This increase was primarily due to a general increase in operating
expenses, an increase in net other expenses associated with a 164% increase in
the customer base, a nearly tripling of the number of marketed POPS, and
expansion of commercial operations in existing and new markets, partially
offset by higher revenues.
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In June 1998, the Company recognized an extraordinary loss of $11.1 million
from the return of certain C Block licenses. The Company returned fourteen
licenses and disaggregated four others. In 1997, the Company recognized an
extraordinary loss of $6.6 million from early extinguishment of debt.
In May 1998, the Company issued $325.0 million of 7% Cumulative Convertible
Preferred Stock. The Company received net proceeds of $252.2 million, net of
the $62.8 million deposit. During 1998, the Company recorded $13.9 million of
accretion related to the Preferred Stock.
Net loss after extraordinary item and accretion of 7% Cumulative Convertible
Preferred Stock for 1998 was $677.7 million, as compared to $321.0 million for
1997, an increase of approximately $356.7 million, or 111.1%.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues:
PCS Services
Revenues for the year ended December 31, 1997 were $52.0 million, as
compared to $531,000, for the year ended December 31, 1996, an increase of
$51.5 million. Revenues for 1997 consisted primarily of service revenue and
handset sales associated with the launch of commercial service of the New York
MTA PCS network in February 1997, and the Philadelphia PCS network in
September 1997. Revenues for 1996 included service revenue and handset sales
since the November 1996 soft launch of the New York MTA PCS network.
PCS Technology
OTI had revenues of $8.5 million related to license fees and $1.1 million
related to engineering services in 1997 compared to zero in 1996.
Cost of Sales:
PCS Services
Cost of service revenues and handset sales for 1997 were $107.3 million, as
compared to $3.2 million in 1996 an increase of $104.1 million. This increase
primarily relates to the nearly full year of operations of the New York PCS
network in 1997 versus one month of 1996. Included in 1997 was $8.0 million of
inventory write-downs to reflect lower net replacement cost of handset
inventory, handset subsidies and other costs of operations for launched
networks.
PCS Technology
Engineering total cost of sales in OTI was $1.1 million in 1997, as compared
to zero in 1996. The increase was primarily due to the contract engineering
services begun in 1997.
Direct Expenses:
Research and development expenses for 1997 were $23.9 million, as compared
to $35.0 million for 1996, a decrease of $11.1 million, or 31.7%. In 1996, PCS
network operations expenses of $27.4 million were included in research and
development expenses prior to the launch of commercial service of the New York
MTA PCS network. In 1997, the operations expenses of the PCS network of
approximately $36.3 million were included in cost of service revenue and
handset sales. In 1996, research and development expenses included $4.8
million for project management and other costs associated with the buildout of
the IS-661 Pilot system. In 1997, the Company's research and development
expenses increased approximately $17.0 million associated with continued
development of the IS661 PCS Fixed Access System ("PFAS") programs.
Sales, general and administrative expenses for 1997 were $105.4 million, as
compared to $47.1 million for 1996, an increase of approximately $58.3
million, or 123.8%. Of this increase, $26.4 million was from payroll
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and payroll related expenses associated with increases in headcount resulting
from the expansion of the Company's operations. The remaining increase
consisted primarily of $15.2 million in marketing, $4.4 million in consulting
fees, $5.0 million of rent and utilities, $3.7 million of travel and related
expenses and $2.8 million of other professional fees associated with the
Company's continued expansion of its PCS networks. The Company expects that
such expenses will continue to increase in 1998 as the Company continues to
expand its operations.
Other Expenses and Income:
Depreciation and amortization expenses for 1997 were $52.6 million, as
compared to $15.6 million for 1996, an increase of $37.0 million, or 237.2%.
The increase in 1997 was principally due to the commencement of depreciation
on the network infrastructure equipment placed into commercial service.
Interest income for 1997 was $12.9 million as compared to $10.7 million for
1996, an increase of approximately $2.2 million, or 20.6%.
Interest expense for 1997 was $89.1 million as compared to $37.2 million for
1996, an increase of $51.9 million or 139.5%. The increase was primarily due
to $40.6 million of interest expense incurred in 1997 for the 11 5/8% Senior
and Series A Senior Notes due 2006 (the "1996 Senior Notes") and $14.1 million
of interest on the Company's PCS licenses, net of amount capitalized and $14.1
million related to the loan payable under financing agreements. The Company
capitalized interest of $36.6 million relating to the PCS licenses and $18.0
million relating to construction in progress during 1997.
On December 29, 1997, the Company entered into a $516.0 million interim
credit facility which was used to pay off all amounts outstanding under the
Nortel and Ericsson provided New York credit facilities. Associated with this
extinguishment of debt, the Company wrote off $6.6 million of deferred
financing costs associated with the Nortel and Ericsson provided New York
credit facilities, which has been reflected as an extraordinary loss.
Net loss for 1997 was $321.0 million, as compared to $126.9 million for
1996, an increase of $194.1 million, or 153%. This increase was primarily due
to increased operating expenses related to the Company's expansion of PCS
operations in 1997, as well as an increase of $49.6 million in net interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and short-term investments of
$238.3 million as of December 31, 1998 which increased $159.7 million from
December 31, 1997. Of this balance, cash and cash equivalents of $194.7
million increased by $131.2 million from December 31, 1997. The increase was
primarily due to advances of $926.2 million from financing activities,
partially offset by $463.8 million of cash used in operating activities and
$331.2 million used in investing activities. As of December 31, 1998, the
Company had negative working capital of approximately $41.3 million, which
decreased $50.9 million from the prior year's negative working capital of
$92.2 million. 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.
The cash provided from financing activities included $239.1 million from
various financing agreements net of non-cash borrowings to pay suppliers, net
proceeds of $252.2 million from the issuance of 7% Cumulative Convertible
Preferred Stock ("Preferred Stock"), cash proceeds of $425.0 million from the
Institutional OCI Financing Agreements and proceeds of $125 million from the
issuance of 14% Senior Notes ("14% Senior Notes"). These amounts were offset
by principal repayments associated with the Company's related obligations.
Additionally, in 1998, the Company used $52.3 million of proceeds from its
escrow deposit account to pay interest on the 1996 Senior Notes.
Cash used in operating activities resulted from the Company's operations and
expenses related to the continued buildout of its core PCS networks as well as
interest expense on its various borrowings. The Company incurred increased
network operating costs due to growth in the number of subscribers and the
related network
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usage. Cash used in operating activities in 1998 increased $296.9 million
principally due to ongoing operations as well as the significant expansion of
its subscriber base in its existing and new markets which included the launch
of the Miami and Boston markets in March and the Connecticut and upstate New
York markets in June. Operations of the Company for 1998 have been principally
financed through advances from various financing agreements, proceeds from the
issuance of Preferred Stock and payments from subscribers.
Cash used in investing activities related to the purchase of fixed assets of
$371.6 million to support the Company's continuing expansion. Cash used for
capital expenditures was partially offset by proceeds from the sale of short
term investments of $52.3 million.
Based on current LIBOR rates, the Company's current total weighted average
cost of drawn debt, including the recent $125 million of 14% Senior Notes, is
approximately 9.2%; the incremental $250 million in vendor financing
agreements ($150 million for general working capital purposes arranged by
Siemens and Nortel on March 31, 1999, and $100 million for buildout of the
Companys' networks) will have a weighted average interest rate of 8.45%; and
the available $264 million in prior vendor financing commitments has a
weighted average interest rate of 8.05%. The Company's average cost of debt
can be further reduced with the closing of a strategic equity investor
transaction. If such a transaction is not closed by April 21, 1999, the
Company will incur an additional $625,000 in interest each month until a
transaction is closed.
The Company anticipates that its future revenue growth will outpace the
percentage growth in operating costs and expenses. In 1998, the number of
subscribers grew by approximately 230,000, which is expected to decrease the
cash used in operations in 1999. 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
capital expenditures to below $250 million in 1999, 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 the
related vendor.
The Company continues to have recurring operating losses, working capital
deficiencies, and negative cash flows from operating activities. The Company
has obtained cumulative financing and commitments of $3.7 billion, of which
$1.3 billion was arranged in 1998. While the Company is currently in the
process of pursuing equity financing, the Company believes that the December
1998 sale of the 14% Senior Notes, the $125 million for general working
capital purposes funded by Siemens and Nortel on March 31, 1999, the remaining
availability under the Institutional OCI financing Agreements and the prior
vendor commitments and arrangements available for working capital, along with
other incremental actions, if necessary, will be sufficient to fund operating
losses and working capital necessary for the operation of the Company's PCS
networks through the end of 1999. 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 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 believes that cash and cash
equivalents on hand, anticipated revenues, vendor financing and the foregoing
actions will be adequate to fund its operations through the end of 1999.
The Company also believes that access to capital in 1999 and future periods
is necessary to build out its networks. Subsequent to December 31, 1998, the
Company signed definitive agreements for incremental financing commitments
from vendors of $100 million in addition to the existing vendor commitments
that were available as of December 31, 1998. As a result, over $322 million of
vendor financing will be available for expansion of the Company's networks and
related costs.
The Company's future financing requirements will depend upon 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
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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
these 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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company believes that its future operating results over both the short
and long term will be subject to annual and quarterly fluctuations due to
several factors, some of which are outside the control of the Company. These
factors include the cost of buildout of the networks (including any
unanticipated costs associated therewith), fluctuating market demand for the
Company's equipment and services, establishment of a market for PCS, pricing,
competitive services, the timing of significant orders for its equipment,
delays in the introduction of the Company's equipment, competitive equipment
introductions, changes in the regulatory environment, the cost and
availability of equipment components and general economic conditions.
The Company's success in the implementation and operation of its networks is
subject to certain factors beyond the Company's control. These factors
include, without limitation, changes in the general and local economic
conditions, availability of equipment, changes in communication service rates
charged by others, changes in the supply and demand for PCS and the commercial
viability of PCS systems as a result of competition from wireline and wireless
operators in the same geographic region, changes in the federal and state
regulatory schemes affecting the operation of PCS systems (including the
enactment of new statutes and the promulgation of changes in the
interpretation or enforcement of existing or new rules and regulations) and
changes in technology that have the potential of rendering obsolete the
Omnipoint/GSM system as well as other systems planned for deployment. In
addition, the extent of the potential demand for PCS in the Company's markets
cannot be estimated with any degree of certainty. There can be no assurance
that one or more of these factors will not have an adverse effect on the
Company's financial conditions and results of operations.
The Company recognizes that it must ensure that its products and operations
will not be adversely impacted by year 2000 software failures (the "Year 2000"
issue) which can arise in time-sensitive software applications which utilize a
field of two digits to define an applicable year. In such applications, a date
using "00" as the year may be recognized as the year 1900 rather than the year
2000. In general, the Company expects to resolve Year 2000 issues through
planned replacement or upgrades. The Company is in the process of assessing
the impact of the Year 2000 on the Company's operations and is working with
the appropriate application vendors and consultants to formulate and implement
the most cost-effective approach to the Year 2000 issue. There can be no
assurance that there will not be interruptions of operations or other
limitations of system functionality or that the Company will not incur
significant costs to avoid such interruptions or limitations.
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
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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 compliance. 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, vendor and maintenance schedule; (3) performing modification of
affected systems; (4) completing testing of modified systems; and (5)
performing implementation of 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 has a yearly 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 these 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.
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. Except for one system, 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 about their plans and progress in addressing the
Y2K issue. Detailed evaluations of the most critical third parties is
complete. The Company has plans to implement and test all critical third party
Y2K items by September 30, 1999. One of the systems involving the Company's
point-of-sale activities is scheduled to be Y2K complaint by September 30,
1999, with testing expected to continue thereafter.
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 for 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.
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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 intends to document Y2K
contingency plans during 1999 as part of its Y2K risk mitigation efforts.
Costs. Total costs incurred to date specifically associated with becoming
Y2K compliant are over $500,000. The total estimated specific costs of
becoming Y2K compliant is 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 have not been included in this estimate are approximately $10.6
million. These costs are considered by the Company to be a normal recurring
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
SFAS 130 requires the reporting of comprehensive income (loss) in addition to
net income (loss) from operations. Comprehensive income is a more inclusive
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of
net loss. The adoption of SFAS 130 had no impact on the Company's net loss or
stockholders' deficit. As of December 31, 1998, there were no differences
between the Company's net loss, as reported, and comprehensive loss.
In March 1998, Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued which provides guidance on applying generally accepted accounting
principles in addressing whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for all
transactions entered into in fiscal years beginning after December 15, 1998,
however earlier adoption is encouraged. The Company adopted the guidelines of
SOP 98-1 as of January 1, 1998, and the impact of such adoption was not
material to results of operations or cash flows for the year ended December
31, 1998.
In April 1998, Statement of Position 98-5, "Reporting on the Costs of Start-
Up Activities" ("SOP 98-5"), was issued to provide guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-
5 is effective for fiscal years beginning after December 15, 1998, and earlier
adoption is encouraged. The Company adopted the guidelines of SOP98-5 as of
January 1, 1998 and the impact of such adoption was not material to results of
operations or cash flows for the year ended December 31, 1998.
In 1998, Omnipoint Corporation adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information." SFAS 131 supersedes SFAS 14, "Financial Reporting
for Segments of a Business Enterprise", replacing the "industry segment"
approach with the "management" approach. The management approach designates
the internal organization that is used by management for making operating
decisions and assessing performance as the source of the
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Company's reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS 131 did not affect results of operations or financial position but did
affect the disclosure of segment information.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. SFAS 133 is effective for fiscal years beginning after June 15, 1999.
The Company will adopt the new standard by January 1, 2000. Management
believes this statement will not impact the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report; see
Item 14 of Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by Item 10 is hereby incorporated by reference from
the Proxy Statement of Omnipoint Corporation.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by reference from
the Proxy Statement of Omnipoint Corporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference from
the Proxy Statement of Omnipoint Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference from
the Proxy Statement of Omnipoint Corporation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
(a)Documents filed as part of the report:
(1) Report of Independent Accountants................................. 38
Consolidated Balance Sheets at December 31, 1998 and 1997........... 39
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996............................................ 40
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1998, 1997 and 1996....................... 41
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996............................................ 42
Notes to Consolidated Financial Statements.......................... 43
(2) Financial Statement Schedule...................................... S-1
(3) Exhibits
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
--------------- -----------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2@@@ Amended and Restated Bylaws of the Registrant.
4.2 See Exhibit 3.1.
10.1@ Registrant's Amended and Restated 1990 Stock Option Plan.
10.2@ Form of Incentive Stock Option Agreement under
Registrant's 1990 Stock Option Plan.
10.3@ Form of Stock Option Agreement under Registrant's 1990
Stock Option Plan for non-qualified options.
10.4@ Form of Stock Option Agreement outside scope of
Registrant's 1990 Stock Option Plan for non-qualified
options.
10.5@ Warrant Certificate, dated August 2, 1991, by and between
the Registrant and Allen & Company Incorporated.
10.6@ Warrant Certificate, dated August 2, 1991, by and between
the Registrant and Allen & Company Incorporated.
10.7@ Letter agreement, dated June 29, 1995, by and between the
Registrant and Allen & Company Incorporated (relating to
Exhibit 10.6).
10.8 [Intentionally left blank.]
10.9@ Common Stock Purchase Warrant issued March 10, 1995,
granted to Madison Dearborn Capital Partners, L.P.
10.10@ Common Stock Purchase Warrant issued March 10, 1995,
granted to Madison Dearborn Capital Partners, L.P.
10.11@ Employment Agreement, effective October 1, 1995, by and
between the Registrant, Omnipoint Communications Inc. and
George F. Schmitt.
10.12@ Promissory Note, dated October 1, 1995, by George F.
Schmitt.
10.13@ Stock Restriction Agreement, dated October 1, 1995, by and
between the Registrant and George F. Schmitt.
10.14@ Employment Agreement, dated April 17, 1995, by and between
the Registrant and Bradley E. Sparks.
10.15@ Promissory Note, dated April 17, 1995, by Bradley E.
Sparks.
10.16@ Stock Restriction Agreement, dated April 17, 1995, by and
between the Registrant and Bradley E. Sparks.
10.17*** Employment Agreement, dated November 3, 1996, by and
between the Registrant and Kjell S. Andersson.
10.18*** Promissory Note, dated February 24, 1997, by Kjell S.
Andersson.
10.19*** Stock Restriction Agreement, dated February 24, 1997, by
and between the Registrant and Kjell S. Andersson.
10.20@ Series B Convertible Preferred Stock Purchase Agreement,
dated August 9, 1993, by and among the Registrant and
Madison Dearborn.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
--------------- -----------
<C> <S>
10.21@ Amendment No. 1 to Series B Convertible Preferred Stock
Purchase Agreement, dated June 29, 1995, by and between
the Registrant and Madison Dearborn Capital Partners,
L.P.
10.22@ Series C Convertible Preferred Stock Purchase Agreement,
dated June 29, 1995, by and among the Registrant and the
other parties named therein.
10.23@ Amended and Restated Registration Rights Agreement,
dated June 29, 1995, by and among the Registrant and the
parties named therein.
10.24@ First Amended and Restated Voting Agreement, dated June
29, 1995, by and among the Registrant and the other
parties named therein.
10.25@ OEM Supply Agreement for Omnipoint PCS (Personal
Communication Systems) Products, dated September 22,
1994, by and between the Registrant and Northern Telecom
Inc.
10.26@ Manufacturing License and Escrow Agreement for Personal
Communication Service Products, dated February 28, 1995,
by and between the Registrant and Northern Telecom Inc.
10.27@ Collaborative Development Agreement, dated March 1,
1995, by and between the Registrant and Northern Telecom
Inc.
10.28@ Reciprocal OEM Agreement Memorandum of Understanding,
dated March 30, 1995, by and between the Registrant and
Northern Telecom Inc.
10.29@ Supply Agreement, dated September 22, 1994, by and
between Omnipoint Communications Inc. and Northern
Telecom Inc.
10.30@ Amendment No. 1 to Supply Agreement, dated July 21,
1995, by and between Omnipoint Communications Inc. and
Northern Telecom Inc.
10.31 [Intentionally left blank.]
10.32***+++ Amended and Restated Loan Agreement, dated August 7,
1996, by and between Omnipoint Communications Inc. and
Northern Telecom Inc.
10.33***+++ Loan Agreement, dated August 7, 1996, by and between
Omnipoint Communications Inc. and Ericsson Inc., as
amended.
10.34@ Memorandum of Understanding, dated April 21, 1995, by
and between the Registrant and Pacific Bell Mobile
Services.
10.35@ Note and Warrant Purchase Agreement dated November 22,
1995, between the Registrant and the purchasers named
therein.
10.36@ Senior Note Due 2000 issued by the Registrant on
November 22, 1995 to the holder identified therein.
10.37@ Senior Note Due 2000 issued by the Registrant on
November 22, 1995 to the holder identified therein.
10.38@+ Memorandum of Understanding, dated November 22, 1995, by
and between the Registrant and Ericsson Inc.
10.39@ Letter Agreement, dated January 24, 1996, by and between
the Registrant and Ericsson Inc.
10.40@ Letter of Intent, dated October 26, 1995, by and between
the Registrant and BellSouth Personal Communications,
Inc.
10.41@ Contract for Sale of Real Estate, dated August 30, 1995,
by and between F&R Bari Realty, Ltd., Inc. and Omnipoint
Communications Inc.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
--------------- -----------
<C> <S>
10.42@ Lease Agreement, dated October 15, 1995, by and between
the Registrant and Baetis Properties, Inc.
10.43**++ Acquisition Agreement for Ericsson CMS 40 Personal
Communications Systems (PCS) Infrastructure Equipment,
dated as of April 16, 1996, by and between Ericsson Inc.
and Omnipoint Communications.
10.44**++ Acquisition Supply and License Agreement for Omnipoint
Personal Communications Systems (PCS) Infrastructure
Equipment, dated as of April 16, 1996, by and between
Ericsson Inc. and the Registrant.
10.45**++ Agreement for Purchase and Sale of Ericsson Inc. Masko
Terminal Units, dated as of April 16, 1996, by and
between Ericsson, Inc. and Omnipoint Communications Inc.
10.46**++ Memorandum of Understanding, dated April 2, 1996, by and
between Orbitel Mobile Communications Inc. and the
Registrant.
10.47@@ Letter of Intent, dated November 20, 1995, by and
between the Registrant and Western Wireless Corporation.
10.48@@ Letter of Intent, dated February 26, 1996, by and
between Omnipoint Communications Inc. and American
Portable Telecom, Inc.
10.49@@ Letter of Intent, dated March 22, 1996, by and between
Omnipoint Communications Inc. and American Personal
Communications.
10.50@@ Letter of Intent, dated May 13, 1996, by and between the
Registrant and InterCel, Inc.
10.51@@ License Agreement, dated March 22, 1996, by and between
the Registrant and Bender & Company, Inc.
10.52@@ Second License Agreement, dated April 17, 1996, by and
between Registrant and Bender & Company, Inc.
10.53@@ Lease Agreement, dated March 1, 1996, by and between
Omniset Corporation and Roots Stone Limited Partnership.
10.54*** Agreement dated as of February 24, 1997 between the
Registrant and Kjell S. Andersson, amending Employment
Agreement dated November 3, 1996.
10.55#! Loan Agreement by and among Omnipoint MB Holdings, Inc.,
Ericsson Inc. and certain other lenders named therein,
dated July 25, 1997.
10.56##!! Loan Agreement by and among OPCS Philadelphia Holdings,
Inc., Ericsson Inc. and certain other lenders named
therein, dated July 25, 1997.
10.57##!! Loan Agreement by and among Omnipoint Midwest Holdings,
LLC, Northern Telecom Inc. and certain other lenders
named therein, dated January 30, 1998.
10.58##!! Loan Agreement by and among Omnipoint Corporation,
Omnipoint Communications Inc., DLJ Capital Funding Inc.
and certain other lenders named therein, dated February
17, 1998.
10.59##!! Note Purchase Agreement by and among Omnipoint
Corporation, Omnipoint Communications Inc., IBJ Schroder
Bank & Trust Company and certain other purchasers named
therein, dated February 17, 1998.
10.60 Purchase Agreement by and among the Company, Donaldson,
Lufkin & Jenrette Securities Corporation, BancAmerica
Robertson Stephens, Bear, Stearns & Co. Inc. and Smith
Barney Inc., dated May 1, 1998. (Incorporated herein by
reference to the Company's Quarterly Report on Form 10-
Q, filed May 15, 1998.)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
--------------- -----------
<C> <S>
10.61 Deposit Agreement by and among the Company, Marine
Midland Bank, and the holders from time to time of the
Depositary Shares, dated May 6, 1998. (Incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q, filed May 15, 1998.)
10.62 Deposit Account Agreement by and between the Company and
The First National Bank of Maryland, dated May 6, 1998.
(Incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q, filed May 15, 1998.)
10.63 Loan agreement, dated June 25, 1998, by and between
Omnipoint MB Holdings, L.L.C. and Bank of America
National Trust and Savings Association. (Incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q, filed August 14, 1998. Portions of this
Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to Rule 24b-2 under
the Exchange Act of 1934.)
10.64 Amended and restated loan agreement, dated June 25,
1998, by and between Omnipoint MB Holdings, L.L.C. and
Ericsson Inc. (Incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q, filed August
14, 1998. Portions of this Exhibit were omitted and
filed separately with the Secretary of the Commission
pursuant to Rule 24b-2 under the Exchange Act of 1934.)
10.65 Capital Contribution Agreement dated September 18, 1998,
by and between Omnipoint Corporation and D&E
Communications, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q, filed
November 17, 1998.)
10.66 Note Purchase Agreement by and among Omnipoint
Corporation, IBJ Schroder Bank & Trust Company, as
paying agent, and certain initial purchasers named
therein, dated December 21, 1998. (Incorporated herein
by reference to the Company's Current Report on Form 8-
K, filed December 29, 1998.)
10.67 Form of 14% Senior Note. (Incorporated herein by
reference to the Company's Current Report on Form 8-K,
filed December 29, 1998.)
</TABLE>
<TABLE>
<S> <C>
21.1@ Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (included in signature pages).
27 Financial Data Schedule.
</TABLE>
- --------
@ Incorporated herein by reference to the Company's Registration Statement
on Form S-1, No. 33-98360.
@@ Incorporated herein by reference to the Company's Registration Statement
on Form S-1, No. 33-03739.
@@@ Incorporated herein by reference to the Company's Registration Statement
on Form S-4, No. 333-19895.
* Incorporated herein by reference to Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
** Incorporated herein by reference to the Company's Current Report on Form
8-K, filed May 3, 1996.
*** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
# Incorporated herein by reference to the Company's Current Report on Form
8-K, filed August 28, 1997.
## Incorporated herein by reference to the Company's Current Report on Form
8-K, filed March 26, 1998.
+ Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Act, which
application was granted by the Commission.
++ Portions of this Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 24b-2 under the Exchange Act
of 1934, filed May 3,1996.
+++ Portions of this Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 24b-2 under the Exchange Act
of 1934, filed March 31,1997.
! Portions of this Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 24b-2 under the Exchange Act
of 1934, filed August 28,1997.
!! Portions of the Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 24b-2 under the Exchange Act
of 1934, filed March 26, 1998.
28
<PAGE>
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated December 21, 1998, was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on
December 29, 1998.
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULE
The consolidated financial statement schedule required by this Item is
listed under Item 14(a)(2).
Omnipoint will furnish, without charge, to a shareholder upon request a copy
of the annual report to shareholders and the proxy statement, portions of
which are incorporated herein by reference thereto. Omnipoint will furnish any
other exhibit at cost.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Bethesda, Maryland, on 2nd of April, 1999.
OMNIPOINT CORPORATION
/s/ Douglas G. Smith
By: _________________________________
Douglas G. Smith
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf
of the Company in the capacities and on the date indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Douglas G. Smith and Edwin M. Martin, Jr., and each
of them acting alone, his true and lawful attorney-in-fact, with full power of
substitution, for him in any and all capacities, to execute and cause to be
filed with the Securities and Exchange Commission any and all amendments and
post-effective amendments to this Report, with exhibits thereto and other
documents in connection therewith, and hereby ratifies and confirms all that
said attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Douglas G. Smith President, Chief Executive April 2, 1999
______________________________________ Officer, Chairman of the
Douglas G. Smith Board and Director
(Principal Executive
Officer)
/s/ George F. Schmitt Executive Vice President April 2, 1999
______________________________________ and Director; President
George F. Schmitt of Omnipoint
Communications Inc.
/s/ Harry Plonskier Chief Accounting Officer April 2, 1999
______________________________________ (Principal Financial and
Harry Plonskier Accounting Officer)
/s/ James J. Ross Director and Vice Chairman April 2, 1999
______________________________________ of the Board
James J. Ross
/s/ Evelyn Goldfine Director April 2, 1999
______________________________________
Evelyn Goldfine
/s/ Richard L. Fields Director April 2, 1999
______________________________________
Richard L. Fields
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul J. Finnegan Director April 2, 1999
______________________________________
Paul J. Finnegan
/s/ James N. Perry, Jr. Director April 2, 1999
______________________________________
James N. Perry, Jr.
/s/ Arjun Gupta Director April 2, 1999
______________________________________
Arjun Gupta
</TABLE>
31
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ 33
Consolidated Balance Sheets at December 31, 1998 and 1997................ 34
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996..................................................... 35
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1997 and 1996.................................. 36
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996..................................................... 37
Notes to Consolidated Financial Statements............................... 38
</TABLE>
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Omnipoint Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Omnipoint Corporation and its subsidiaries at 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. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 31, 1999
33
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 194,732 $ 63,581
Short term investments.............................. 43,571 15,009
Escrow deposit...................................... -- 51,230
Accounts receivable, net of allowances of $12,094
and $5,746 as of December 31, 1998 and 1997,
respectively....................................... 38,065 20,079
Inventory........................................... 29,729 39,962
Prepaid expenses and other current assets........... 22,057 8,554
----------- ----------
Total current assets.............................. 328,154 198,415
Fixed assets, at cost
Network infrastructure equipment in-service......... 907,649 270,236
Construction in progress............................ 163,410 274,582
Other fixed assets.................................. 110,473 86,560
Accumulated depreciation............................ (150,357) (46,388)
----------- ----------
Fixed assets, net..................................... 1,031,175 584,990
FCC licensing costs, net of accumulated amortization
of $42,824 and $28,854 as of December 31, 1998 and
1997, respectively................................... 645,408 938,533
Deferred financing costs and other intangible assets,
net of accumulated amortization of $7,455 and $2,814
as of December 31, 1998 and 1997, respectively....... 44,959 27,534
Investments in affiliates and joint ventures.......... 3,506 23,180
Other long-term assets................................ 13,402 6,937
----------- ----------
Total assets.......................................... $ 2,066,604 $1,779,589
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $ 121,171 $ 124,112
Accrued expenses.................................... 61,770 26,023
Accrued interest payable............................ 48,313 57,791
FCC license obligations............................. 116,076 79,527
Loans payable under financing agreement............. 13,731 --
Deferred revenue and other current liabilities...... 8,393 3,127
----------- ----------
Total current liabilities......................... 369,454 290,580
FCC license obligations............................... 328,661 679,063
Loans payable under financing agreements.............. 1,350,613 513,766
Senior notes.......................................... 603,896 478,086
Commitments and contingencies (Notes 8, 10, 11, and
13)
Stockholders' equity (deficit):
7% Cumulative Convertible Preferred Stock, $1,000
par value, 10,000,000 and 5,000,000 authorized,
325,000 and no shares issued and outstanding, as of
December 31, 1998 and 1997, respectively........... 276,191 --
Common stock, par value, $.01 per share; 200,000,000
and 75,000,000 shares authorized, 53,082,360 and
52,270,879 shares issued and outstanding, as of
December 31, 1998 and 1997, respectively........... 531 523
Additional paid-in capital.......................... 315,762 334,231
Accumulated deficit................................. (1,171,220) (507,438)
Unearned compensation............................... (5,111) (7,136)
Notes receivable.................................... (2,173) (2,086)
----------- ----------
Total stockholders' equity (deficit).............. (586,020) (181,906)
----------- ----------
Total liabilities and stockholders' equity (deficit).. $ 2,066,604 $1,779,589
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Service revenues, net....................... $ 141,136 $ 30,766 $ 269
Handset and accessories revenues, net....... 26,616 11,611 262
License fees and engineering services....... 4,784 9,573 --
--------- --------- ---------
Total revenues............................. 172,536 51,950 531
Operating costs and expenses:
Cost of service revenues.................... 124,177 45,367 3,230
Cost of handset and accessories revenues.... 100,074 61,895 --
Cost of engineering services................ 4,168 1,073 --
Research and development.................... 16,639 23,932 34,975
Sales, general, and administrative.......... 255,242 105,375 47,140
Depreciation and amortization............... 129,043 52,644 15,587
--------- --------- ---------
Total operating costs and expenses......... 629,343 290,286 100,932
Loss from operations........................ (456,807) (238,336) (100,401)
Other income (expense):
Equity in losses of joint ventures.......... (11,879) -- --
Interest income............................. 11,355 12,872 10,697
Interest expense............................ (187,187) (89,061) (37,226)
Other income (expense)...................... (8,149) 106 --
--------- --------- ---------
Loss before extraordinary item............... (652,667) (314,419) (126,930)
Extraordinary loss on early extinguishment of
debt........................................ -- (6,591) --
Extraordinary loss on return of C-Block li-
censes...................................... (11,115) -- --
--------- --------- ---------
Net loss..................................... (663,782) (321,010) (126,930)
Accretion of 7% Cumulative Convertible Pre-
ferred Stock................................ (13,945) -- --
--------- --------- ---------
Net loss attributable to common stockhold-
ers......................................... $(677,727) $(321,010) $(126,930)
========= ========= =========
Basic and diluted loss per common share:
Loss per common share before extraordinary
item........................................ $ (12.66) $ (6.10) $ (2.74)
========= ========= =========
Loss per common share on extraordinary item.. (.21) (.13) --
--------- --------- ---------
Net loss per common share-basic and dilut-
ed......................................... $ (12.87) $ (6.23) $ (2.74)
========= ========= =========
Weighted average common shares outstanding--
basic and diluted........................... 52,640 51,554 46,253
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
------------------ Paid-in Preferred Accumulated Unearned Notes Equity
Shares Amount Capital Stock Deficit Compensation Receivable (Deficit)
---------- ------ ---------- --------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 24,658,618 $247 $ 29,860 $ -- $ (59,498) $ (23) $(1,134) $ (30,548)
Dividends accrued on
Series B and Series C
preferred stock........ -- -- (273) -- -- -- -- (273)
Shares issued with
initial public
offering, net.......... 8,050,000 80 118,357 -- -- -- -- 118,437
Shares issued with
secondary public
offering, net.......... 4,500,000 45 110,643 -- -- -- -- 110,688
Conversion of
subordinated debt...... 1,562,500 16 16,234 -- -- -- -- 16,250
Conversion of Series A,
B, and C preferred
stock.................. 10,605,591 106 44,597 -- -- -- -- 44,703
Exercise of stock
options................ 995,592 10 729 -- -- -- -- 739
Exercise of warrants.... 596,999 6 (3) -- -- -- -- 3
Issuance of options
below fair market
value.................. -- -- 9,628 -- -- (9,628) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 768 -- 768
Interest on employee
notes receivable....... -- -- -- -- -- -- (138) (138)
Forgiveness of employee
notes receivable....... -- -- -- -- -- -- 75 75
Net loss................ -- -- -- -- (126,930) -- -- (126,930)
---------- ---- -------- -------- ----------- ------- ------- ---------
Balance, December 31,
1996................... 50,969,300 510 329,772 -- (186,428) (8,883) (1,197) 133,774
---------- ---- -------- -------- ----------- ------- ------- ---------
Exercise of stock
options................ 530,970 5 1,035 -- -- -- -- 1,040
Exercise of warrants.... 613,385 6 (4) -- -- -- -- 2
Sale of common stock
under Employee Stock
Purchase Plan.......... 112,224 1 1,705 -- -- -- -- 1,706
Restricted stock
returned upon
termination............ (15,000) -- (150) -- -- -- 150 --
Issuance of restricted
stock in exchange for
employee note
receivable............. 60,000 1 1,086 -- -- -- (1,087) --
Issuance of options in
the form of advanced
compensation........... -- -- 1,154 -- -- (1,154) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 2,534 -- 2,534
Cancellation of unearned
compensation........... -- -- (367) -- -- 367 -- --
Interest on employee
notes receivable....... -- -- -- -- -- -- (138) (138)
Forgiveness of employee
notes receivable....... -- -- -- -- -- -- 186 186
Net loss................ -- -- -- -- (321,010) -- -- (321,010)
---------- ---- -------- -------- ----------- ------- ------- ---------
Balance, December 31,
1997................... 52,270,879 523 334,231 -- (507,438) (7,136) (2,086) (181,906)
---------- ---- -------- -------- ----------- ------- ------- ---------
Exercise of stock
options................ 485,413 5 1,476 -- -- -- -- 1,481
Sale of common stock
under Employee Stock
Purchase Plan.......... 87,522 1 1,196 -- -- -- -- 1,197
Issuance of options in
form of advanced
compensation........... -- -- 1,828 -- -- (1,828) -- --
Issuance of common stock
for employee 401(k)
matching............... 25,792 -- 660 -- -- -- -- 660
Issuance of common stock
for prepaid interest on
investor notes......... 212,754 2 1,873 -- -- -- -- 1,875
Issuance of Convertible
Preferred Stock........ -- -- (10,024) 262,245 -- -- -- 252,221
Accretion of Convertible
Preferred Stock........ -- -- (13,946) 13,946 -- -- -- --
Amortization of unearned
compensation........... -- -- -- -- -- 2,403 -- 2,403
Cancellation of unearned
compensation........... -- -- (1,494) -- -- 1,450 -- (44)
Interest on employee
notes receivable....... -- -- -- -- -- -- (144) (144)
Return of restricted
stock.................. -- -- (38) -- -- -- 38 --
Forgiveness of employee
notes receivable....... -- -- -- -- -- -- 19 19
Net loss................ -- -- -- -- (663,782) -- -- (663,782)
---------- ---- -------- -------- ----------- ------- ------- ---------
Balance, December 31,
1998................... 53,082,360 $531 $315,762 $276,191 $(1,171,220) $(5,111) $(2,173) $(586,020)
---------- ---- -------- -------- ----------- ------- ------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss.................................... $(663,782) $(321,010) $(126,930)
Extraordinary item--loss on return of C
block licenses............................. 11,115 -- --
Extraordinary item--loss on early
extinguishment of debt..................... -- 6,591 --
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............... 129,042 52,644 15,587
Provision for doubtful accounts............. 33,230 8,059 --
Loss on disposal of fixed assets ........... 7,346 -- --
Acquisition of reseller customer base....... 4,232 -- --
Inventory write down to replacement cost.... -- 8,049 10,114
Accrued interest............................ 30,380 45,719 11,684
Payment in kind interest on financing
agreements................................. 14,084 11,860 --
Equity in losses on investments in joint
ventures................................... 11,879 -- --
Interest income associated with restricted
cash....................................... (1,084) (3,683) (1,401)
Interest expense associated with
amortization of discount, premium and
issuance costs............................. 10,381 10,135 4,557
Purchases of trading securities, net........ (28,562) (2,809) (12,200)
Other....................................... 2,232 2,582 1,245
Changes in operating accounts:
Accounts receivable......................... (55,448) (26,828) --
Prepaid expenses and other assets........... (17,242) (14,743) (997)
Inventory................................... 10,233 (10,520) (46,294)
Accounts payable and accrued expenses....... 32,806 63,923 80,127
Deferred revenue and other current
liabilities................................ 5,287 3,059 --
--------- --------- ---------
Net cash used in operating activities........ (463,871) (166,972) (64,508)
--------- --------- ---------
Cash flows used in investing activities:
Deposit for FCC auctions.................... -- -- (60,000)
Purchase of fixed assets.................... (371,554) (320,962) (170,931)
Proceeds from disposal of fixed assets...... 197
Purchase of FCC licenses.................... (13,000) (121,964) (50,913)
Refund of FCC deposit....................... -- 60,000 40,000
Capitalized interest on C and F Block
licenses................................... (6,515) (54,394) (14,019)
Purchase of investment securities available
for sale................................... (5,000) (7,901) (48,627)
Proceeds from sales of investment securities
available for sale......................... 5,000 86,962 14,000
Proceeds from held to maturity investments
and restricted cash........................ 52,314 (2,078) --
Investments in joint ventures............... 7,333 -- --
--------- --------- ---------
Net cash used in investing activities........ (331,225) (360,337) (290,490)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from initial public stock offering,
net........................................ -- -- 118,437
Proceeds from secondary public stock
offering, net.............................. -- -- 110,687
Payment of series A, B and C preferred stock
dividends.................................. -- -- (1,536)
Proceeds from bank credit agreement......... -- -- 60,000
Payments on bank credit agreement........... -- -- (96,500)
Issuance of Senior Notes, net............... -- -- 187,784
Issuance of Series A Senior Notes, net...... -- -- 164,766
Issuance of Cumulative Convertible Preferred
Stock, net................................. 252,221 -- --
Issuance of Investor Notes, net............. 125,000 -- --
Proceeds from issuance of common stock...... 5,212 2,742 742
Proceeds from vendor financing agreements... 239,122 364,259 43,270
Payments on FCC licenses.................... (79,527) -- --
Payment of deferred financing costs......... (20,652) (3,917) --
Proceeds from permanent credit facility..... 400,000 -- --
Payment on permanent credit facility........ (5,625) -- --
Proceeds from interim facility.............. 25,000 320,135 --
Payments on vendor financing agreements..... (14,484) (307,353) (75,178)
Other....................................... (20) (5) (229)
--------- --------- ---------
Net cash provided by financing activities.... 926,247 375,861 512,243
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 131,151 (151,448) 157,245
Cash and cash equivalents at beginning of
year........................................ 63,581 215,029 57,784
--------- --------- ---------
Cash and cash equivalents at end of year..... $ 194,732 $ 63,581 $ 215,029
========= ========= =========
</TABLE>
(See Note 18 for supplemental cash flow information.)
See Notes to Consolidated Financial Statements.
37
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
Omnipoint was incorporated in Delaware in June 1987, to design, develop,
manufacture and market wireless digital communications products and services.
From inception in 1987 to 1992, Omnipoint developed several working prototypes
for various wireless voice, data and other digital communication transmission
projects. Omnipoint's success in developing its proprietary technology for the
first digital personal communications services "PCS" system at 1.9 GHz during
1991 and 1992 was instrumental in the Federal Communications Commission
("FCC") awarding Omnipoint one of three Pioneer's Preferences in 1993.
Omnipoint has acquired licenses that allow the Company to build and provide
PCS services to over 95 million POPS.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Consolidated losses attributable to minority interest
holders in excess of their respective share of the subsidiary's net equity are
not eliminated in consolidation. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Nature of Operations
Omnipoint has licenses to provide PCS services in areas covering
approximately 95 million POPS, of which approximately 60% are located in a
contiguous region of the Northeast U.S. from Maine to Virginia. At December
31, 1998, the Company offered PCS services in the major metropolitan areas
within the New York MTA, metropolitan areas in the Eastern United States
including Philadelphia, Atlantic City, Boston, Providence, Fort Lauderdale,
West Palm Beach, Miami, and Detroit and Indianapolis in the Midwest. The
Company has also commenced operations in a joint venture, which offers
services in several Pennsylvania markets including Harrisburg, York, Lancaster
and Reading, and a joint operating arrangement, which offers service in
Wichita, KS.
In September 1996, the FCC issued Omnipoint eighteen 30 MHz Entrepreneurs C
Block licenses covering approximately 13.3 million POPS. The Company made two
down-payments for the licenses, for a total of $50.9 million. In June 1998,
the Company returned fourteen of these licenses and reduced the frequency on
the remaining four licenses to 15 MHz. As a result of these elections, the
Company reduced its debt owed to the FCC by $282.1 million, reduced the value
of its license holdings by $296.0 million and recorded an extraordinary loss
of $11.1 million.
In January 1997, the Company successfully bid on 109 10 MHz D, E and F Block
licenses, expanding its footprint by over 61 million POPS. Total consideration
of $106.9 million for the 59 D and E Block licenses was paid in full. The
Company financed, through the FCC, $59.4 million of the $74.2 million purchase
price for the 50 F Block licenses.
38
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Company acquired the rights to nine BTA Licenses from ACC
Wireless, L.P. representing 5.0 million POPS for $13.0 million (the "ACC
Transaction"). The acquired licenses included six licenses within the Boston
MTA covering 3.8 million POPS (of which two licenses covering 0.8 million POPS
were in BTAs for which the Company elected to return its C Block licenses).
PCS Technology
By December 31, 1998, OTI had completed delivery of its IS-661 system to the
New York MTA. Upon completing the deployment of its proprietary wireless PCS
technology in 1998, OTI moved the focus of most of its resources and expertise
to the development, integration, and delivery of other advanced wireless
products. These activities/products are based on technologies, such as GSM,
wireless packet data, General Packet Radio Service ("GPRS"), mobile location
positioning, telemetry/wireless meter reading and wireless Internet access.
Use of estimates in the 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 expense during the
reporting period. Actual results could differ from those estimates.
Current vulnerability due to certain concentrations and financing
arrangements
The Company substantially relies upon its relationship with three of its
primary vendors, Nortel, Ericsson, Inc. ("Ericsson") and Siemens. The Company
has entered into a series of equipment supply agreements, collaborative
development agreements, and vendor financing agreements with Nortel, Ericsson,
and Siemens.
The Company believes that access to capital and financial flexibility is
necessary to successfully implement its strategy. The Company continues to
have recurring operating losses, working capital deficiencies, and negative
cash flows from operating activities. The Company has obtained cumulative
financing and commitments of $3.7 billion, of which $1.3 billion was arranged
in 1998. While the Company is currently in the process of pursuing equity
financing, the Company believes that the $125 million for general working
capital purposes funded by Siemens and Nortel on March 31, 1999 as described
in Note 21, the remaining availability under financing agreements, senior
notes, and vendor commitments and arrangements available for working capital
as described in Note 8, along with other incremental actions, if necessary,
will be sufficient to fund operating losses and working capital necessary for
the operation of the Company's PCS networks through the end of 1999. 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 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 believes that cash
and cash equivalents on hand, anticipated revenues, vendor financing and the
foregoing actions will be adequate to fund its operations through the end of
1999.
The Company also believes that access to capital in 1999 and future periods
is necessary to build out its networks. Subsequent to December 31, 1998, the
Company signed definitive agreements for incremental financing commitments
from vendors of $100 million in addition to the existing vendor commitments
that were available as of December 31, 1998, see Note 21. As a result, over
$322 million of vendor financing will be available for expansion of the
Company's networks and related costs.
The Company's future financing requirements will depend upon 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
39
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
these 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.
Dependence upon key employees
The Company is highly dependent upon the technical and management skills of
its key employees. The Company's growth may cause a significant strain on its
management, operational, and financial resources. The Company's ability to
manage its growth effectively will require it to continue to implement and
improve its operational and financial systems. The Company's success also
depends in large part on a limited number of key technical, marketing, and
sales employees and on the Company's ability to continue to attract and retain
additional highly talented personnel. Competition for qualified personnel in
the PCS equipment and service industries is intense.
Uncertainty of protection of patents and proprietary rights
The Company's technology business relies on a combination of patents,
trademarks, and nondisclosure and development agreements in order to establish
and protect its proprietary rights. The Company has filed and intends to
continue to file applications as appropriate for patents covering its
technology and products. There can be no assurance that additional patents
will be issued or that existing patents together with any future patents will
be sufficiently broad to protect the Company's technology. There can also be
no assurance that any current or future confidentiality agreements and other
methods on which the Company relies to protect its trade secrets and
proprietary information will be adequate.
Loss per common share
Net loss per common share is present for both basic earnings per common
share ("Basic EPS") and diluted common earnings per share ("Diluted EPS").
Basic EPS is based upon the weighted average number of common shares
outstanding during the period. Diluted EPS is based upon the weighted average
number of common and common equivalent shares outstanding during the period.
Common stock equivalent shares are included in the diluted EPS calculation
where the effect of their inclusion is dilutive. Common stock equivalent
shares result from the assumed exercise of outstanding stock options and
warrants, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method.
Cash and cash equivalents
Cash and cash equivalents are stated at cost which approximates market. The
Company considers all highly liquid debt instruments purchased with an
original maturity at time of purchase of three months or less to be cash
equivalents.
Investments
Short-term investments consist primarily of money market notes, commercial
paper and corporate fixed income bonds with original maturities of less than
twelve months.
40
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," debt
securities that the Company has both the positive intent and ability to hold
to maturity are carried at amortized cost. Debt securities that the Company
does not have the positive intent and ability to hold to maturity and all
marketable equity securities are classified as either available-for-sale or
trading and are carried at fair value. Unrealized holding gains and losses on
securities classified as available-for-sale are carried as a separate
component of stockholders' equity. Unrealized holdings gains and losses on
securities classified as trading are reported as earnings. The fair value of
investments is determined based on quoted market prices. The Company
determines the appropriate classification of marketable securities at the time
of purchase and evaluates such designation at each balance sheet date. The
costs of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization, interest income,
realized gains and losses and declines in value judged to be other than
temporary are included in interest and other income.
At December 31, 1998, $33.3 million of trading securities and $10.3 million
of held-to maturity securities were included in short-term investments, at
December 31, 1997, $15 million of trading securities were included in short-
term investments. The contractual maturities of the held-to maturity
securities as of December 31, 1998 is no more than three months. The Company
uses the specific identification method to compute its realized gains and
losses. Unrealized gain and unrealized losses on held to maturity securities
were not material as of December 31, 1998 and 1997.
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and trade
receivables. The Company maintains its cash and cash equivalents with various
high credit-quality financial institutions and limits the amount of credit
exposure with any institution. Concentrations of credit risk with respect to
trade receivables are limited due to the significant number of customers
comprising the Company's customer base. The Company also maintains reserves
for potential credit losses.
Joint ventures
The Company has entered into a joint venture relationship with a third party
to jointly operate PCS networks in certain license areas. The investment in
joint ventures represents capital contributions of license costs and fixed
assets offset by the license obligations and equity in losses of the joint
venture. All of the Company's joint venture properties are fully operational.
These investments are being accounted for using the equity method of
accounting.
Inventory
Inventory is recorded at the lower of cost or market on the basis of average
cost or replacement value. Inventory consists of handsets, accessories and SIM
cards for sale to subscribers as well as raw materials and other items used in
development of the Company's technology.
Fixed assets and depreciation
Fixed assets are recorded at cost. For construction in progress and in-
service network infrastructure equipment, costs include capitalized interest,
rent, labor and other capitalizable costs. Major replacements and improvements
are capitalized while general repairs and maintenance are charged to expense
as incurred.
Depreciation is computed using the straight-line method over the estimated
useful life of the asset commencing from the time they are placed into
service. Upon retirement or sales, the cost of the asset disposed of and the
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is credited or charged to income.
Licensing costs, deferred financing and other intangible assets
FCC licenses are amortized using the straight-line method over a period of
40 years. Deferred financing costs include amounts related to obtaining
proceeds under debt, credit facilities and financing agreements. These costs
are amortized over the life of the related debt agreement, generally one to
ten years.
41
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other intangible assets include an asset recorded in connection with shares
of the Company's Common Stock issued in exchange for a previously granted
option to purchase from the Company shares of common stock of OCI. This asset
is being amortized using the straight-line method over a 40 year period. Other
intangible assets also includes costs incurred for the rights to certain
information and technologies. These costs are being amortized over their
estimated useful lives of 5 to 10 years.
Periodically management assesses, based on undiscounted cash flows, if there
has been a permanent impairment in the carrying value of its long-lived assets
and, if so, the amount of any such impairment by comparing anticipated
discounted future operating income resulting from intangible assets with the
carrying value of the related asset. In performing this analysis, management
considers such factors as current results, trends and prospects, in addition
to other economic factors.
Preferred stock
The Company has 5,000,000 shares and 10,000,000 shares of preferred stock
authorized as of December 31, 1997 and 1998, respectively. Other than the
325,000 shares of 7% Cumulative Convertible Preferred Stock that are
outstanding, the Board of Directors has the authority to issue additional
shares and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without further vote or
action by the stockholders.
Revenue recognition
Usage and access charges are recorded as revenue based on the amount of
communications services rendered. Communications services are measured by
subscriber usage and fees less collectablity allowances and discounts. Prepaid
revenues are deferred until earned. Revenues from the sale of handsets and
related accessories are recognized upon shipment or point-of-sale.
Revenues from license fees or equipment sales and related support services
are recognized when hardware or software has been delivered, and future
obligations are no longer significant. Engineering service revenues are
recognized when services are performed in accordance with the contractual
terms, and there are no material future uncertainties or obligations.
Research and development
Expenditures for research and development are charged to operations as
incurred. Research and development expenses include costs for both new product
development and ongoing efforts to improve existing technologies. Internally
developed software costs are immaterial.
Advertising costs
The Company expenses production costs of print, radio and television
advertisements and other advertising costs as such costs are incurred.
Advertising expenses included in sales, general and administrative were $44.2
million, $19.8 million and $3.5 million in 1998, 1997, and 1996, respectively.
Income taxes
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases
for financial reporting purposes, including the recognition of future tax
benefits, such as net operating loss carry forward to the extent that
realization of such benefits are more likely than not.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
42
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
SFAS 130 requires the reporting of comprehensive income (loss) in addition to
net income (loss) from operations. Comprehensive income is a more inclusive
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of
net loss. The adoption of SFAS 130 had no impact on the Company's net loss or
stockholders' deficit. As of December 31, 1998, there were no differences
between the Company's net loss, as reported, and comprehensive loss.
In March 1998, Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued which provides guidance on applying generally accepted accounting
principles in addressing whether and under what conditions the costs of
internal-use software should be capitalized. SOP 98-1 is effective for all
transactions entered into in fiscal years beginning after December 15, 1998,
however earlier adoption is encouraged. The Company adopted the guidelines of
SOP 98-1 as of January 1, 1998, and the impact of such adoption was not
material to results of operations or cash flows for the year ended December
31, 1998.
In April 1998, Statement of Position 98-5, "Reporting on the Costs of Start-
Up Activities" ("SOP 98-5"), was issued to provide guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-
5 is effective for fiscal years beginning after December 15, 1998, and earlier
adoption. The Company adopted the guidelines of 98-5 as of January 1, 1998,
and the impact of such adoption was not material to results of operations or
cash flows for the year ended December 31, 1998
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS 131 also requires
disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position but did affect the disclosure of segment information.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. The
Company will adopt the new standard by January 1, 2000. Management believes
this statement will not impact the Company's financial statements.
2. LOSS PER COMMON SHARE
The Company computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
("SFAS 128") which the Company adopted as of December 31, 1997. Basic EPS are
computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding. Diluted EPS are computed
by dividing net income available to common shareholders by the weighted
average number of common shares outstanding plus other dilutive securities.
Options and warrants to purchase 9,270,821, 8,970,811 and 7,220,454 shares of
common stock during the years ended December 31, 1998, 1997 and 1996 were
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 as the effect of their inclusion would have
been anti-dilutive.
43
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the number of common shares used for the calculation of
dilutive earnings per common share for the years ended December 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Weighted average number of common shares outstanding... 52,640 51,554 46,253
Assuming distribution of common shares granted under
stock option plan less shares assumed purchased at
average market price.................................. -- -- --
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at average
market price.......................................... -- -- --
Assuming conversion of convertible preferred stock..... -- -- --
------ ------ ------
Common shares used for the calculation of diluted
earnings per share.................................... 52,640 51,554 46,253
====== ====== ======
</TABLE>
3. PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other assets consist of the following at December 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Prepaid cell site rent...................................... $ 7,933 $ 3,481
Vendor Co-op Receivable .................................... 6,485 1,136
Miscellaneous receivables................................... 3,686 514
Deposits.................................................... 1,534 1,858
Other....................................................... 2,419 1,565
------- -------
$22,057 $ 8,554
======= =======
4. INVENTORY:
Inventory consists of the following at December 31, 1998 and 1997 (in
thousands):
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................... $ -- $ 810
GSM Handsets................................................ 25,596 33,254
Accessories & SIM cards..................................... 4,133 5,898
------- -------
$29,729 $39,962
======= =======
</TABLE>
5. FIXED ASSETS:
Fixed assets, including equipment under capital leases, consist of the
following at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Depreciable
Lives 1998 1997
------------- ----------- --------
<S> <C> <C> <C>
Building and building improvements.... 3 to 10 years $ 29,736 $ 16,985
Machinery, office and computer
equipment............................ 3 to 5 years 80,079 69,085
Network infrastructure equipment...... 7 years 907,649 270,236
Vehicles.............................. 3 years 658 490
----------- --------
1,018,122 356,796
Less: accumulated depreciation........ (150,357) (46,388)
----------- --------
867,765 310,408
Construction in progress.............. 163,410 274,582
----------- --------
$ 1,031,175 $584,990
=========== ========
</TABLE>
44
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $108.8 million, $39.9 million, and $5.9 million, respectively. Network
infrastructure construction in progress consists primarily of network
infrastructure equipment that has not been placed into service; accordingly no
depreciation has been recorded.
Interest costs capitalized in connection with the Company's construction and
development of its network infrastructure totaled approximately $10.3 million,
$18.0 million and $2.9 million in 1998, 1997 and 1996, respectively.
6. CUMULATIVE CONVERTIBLE PREFERRED STOCK:
In May 1998, the Company completed a $325 million private placement of
6,500,000 depositary shares (the "Depositary Shares"), each representing 1/20
of a share of 7% Cumulative Convertible Preferred Stock (the "Offering" or
"Preferred Stock"). Each Depositary Share has a liquidation preference of $50,
equivalent to $1,000 per share of Preferred Stock. Net proceeds to the Company
totaled approximately $252.2 million net of offering costs and the deposit of
$62.8 million into a deposit account.
Simultaneously with the closing of the Offering, the purchasers of the
Depositary Shares deposited approximately $62.8 million of the gross proceeds
into a restricted deposit account (the "Deposit Account"). The holder of each
Depositary Share is entitled to a quarterly payment from the Deposit Account
in an amount equal to $0.875 per Depositary Share. The quarterly payments
(paid on February, May, August, and November of each year) commence August
1998 and continue until May 2001 (the "Deposit Expiration Date"). The Company,
at its option, may instruct the deposit agent to disburse the quarterly
payment in the form of cash or shares of the Company's common stock. The
number of shares of common stock to be paid is calculated by dividing the
quarterly payment amount by 95% of the market value of the common stock as of
the date notice is given by the Company to the deposit agent. Additionally,
the Company, at its option, may elect to defer delivery of the quarterly
payment until the next quarterly payment date or any subsequent quarterly
payment date. However, the payment cannot be delayed beyond the Deposit
Expiration Date. As of the Deposit Expiration Date, all remaining funds in the
Deposit Account will be delivered to holders of the Depositary Shares in the
form of common stock or cash. In the event of a quarterly payment made in the
form of common stock at or prior to the Deposit Expiration Date, the deposit
agent will reimburse the Company for the value of the quarterly payment in
cash from the Deposit Account. In August and November, the deposit agent
disbursed quarterly cash payments in total of $11.1 million to holders of the
Depositary Shares drawn against the Deposit Account.
Holders of the Depositary Shares are entitled to receive cumulative annual
dividends of 7% of the liquidation preference per Depositary Share. The
dividends are payable quarterly in arrears, when and if declared by the Board
of Directors, commencing August 2001. Cumulative annual dividends begin to
accrue on the Depositary Shares beginning May 2001. If the Company elects
early termination of the Deposit Account, dividends will begin to accrue
immediately preceding the date of the early termination.
Each Depositary Share may be converted at any time at the option of the
holder into 1.6069 shares of common stock. The Depositary Shares may not be
redeemed prior to May 2001. On or after May 2001, the Depositary Shares may be
redeemed, in whole or in part, at the option of the Company, in cash or common
stock or a combination thereof, plus all accrued and unpaid dividends to the
redemption date. The redemption price is $52 in 2001, declining to $50 in 2005
and thereafter.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK CONVERTED AT IPO:
In 1991, the Company authorized 3,000,000 shares of Redeemable Convertible
Preferred Stock. During 1991, the Company sold 666,667 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") for gross proceeds of
$1,500,000.
45
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1993, the Company authorized an additional 1,000,000 shares of Redeemable
Convertible Preferred Stock. In August 1993, the Company sold 1,500,000 shares
of Series B Convertible Preferred Stock ("Series B Preferred Stock") for net
proceeds of $15,000,000.
The Company authorized an additional 1,750,000 shares of Redeemable
Convertible Preferred Stock in 1995. During 1995, the Company sold 1,866,338
shares of Series C Convertible Preferred Stock ("Series C Preferred Stock")
resulting in gross proceeds of $27,995,070, including 666,667 shares issued in
satisfaction of a $10,000,000 outstanding balance under a line of credit loan
agreement.
In January 1996, concurrent with the closing of the initial public offering
of the Company's common stock, the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock were converted into 1,666,667,
4,273,082 and 4,665,842 shares of common stock, respectively. Additionally,
$1,536,218 of accrued dividends on Series B Preferred Stock and Series C
Preferred Stock were paid in cash.
8. DEBT:
Debt consists of FCC license obligations related to the acquisition of
license rights, Loans payable under Financing Agreements secured by collateral
in specific markets, and senior notes. The following debt was outstanding at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
FCC License Obligations
New York MTA license
obligation................. $ 267,991 $ 347,518
C Block license
obligations................ 133,675 370,443
F Block license
obligations................ 43,071 40,629
Less current portion of
FCC License obligations.. (116,076) (79,527)
---------- ----------
Total FCC License
obligations............ $ 328,661 $ 679,063
---------- ----------
Loans Payable Under
Financing Agreements
New York financing
agreements................. $ 744,375 $ 325,000
Miami Boston vendor
financing agreement........ 217,648 128,000
Miami Boston BankAmerica
Facility................... 110,877 --
Philadelphia vendor
financing agreement........ 122,812 60,766
Midwest vendor financing
agreement.................. 154,952 --
Handset financing facility
agreement.................. 13,680 --
Less: current portion of
financing agreements..... (13,731) --
---------- ----------
Total loans payable
under financing
agreements............. $1,350,613 $ 513,766
---------- ----------
Senior Notes
14% Senior Notes due
December 2003.............. $ 125,000 $ --
11 5/8% Senior Notes due
August 2006................ 250,000 250,000
11 5/8% Series A Notes due
August 2006................ 207,696 208,289
12% Institutional Notes due
November 2000.............. 21,200 19,797
---------- ----------
Total Senior Notes........ $ 603,896 $ 478,086
---------- ----------
Total Long-Term Portion
of Debt................ $2,283,170 $1,670,915
========== ==========
</TABLE>
The following is a summary of the Company's various loan agreements:
FCC LICENSE OBLIGATIONS
FCC License obligations were incurred for the A, C and F Block Licenses that
were obtained in the FCC auctions. The amounts are due to the FCC in
installment payments. The Loans are generally secured by their respective
Licenses held by the Company's license subsidiaries.
46
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New York MTA License Obligation
In December 1993, OCI was awarded one of three Pioneer's Preferences for a
MTA license. In December 1994, the FCC awarded the Company the New York MTA A
Block license. The license obligation for the A Block license was determined
by multiplying the average per population price (based on the 1990 population)
paid by the winning MTA auction bidders of the top 23 MTAs by 85%. This
derived number of $13.158 is multiplied by the 1990 New York MTA population of
26,411,597 to arrive at the total obligation of $347.5 million.
Pursuant to a March 1996 FCC Order, interest on the Pioneer's obligations
accrues at 7.75% and is payable quarterly for the first two years beginning
April 1996. Beginning April 1998, installment payments of principal and
interest are payable quarterly with a final payment January 2001.
C Block License Obligations
In May 1996, Omnipoint PCS Entrepreneurs ("OPCSE"), an indirect wholly-owned
subsidiary of the Company, bid successfully for eighteen C Block BTA licenses
with an aggregate license obligation of $509.1 million (net of the 25% small
business discount). These licenses were granted in September 1996 which
required quarterly interest payments beginning in December 1997 and principal
payments from December 2002 to 2006. The payment terms included interest at 7%
per annum. OPCSE made a 10% down payment of $50.9 million, including a $40
million deposit used to participate in the auction, to the FCC for these
licenses.
The Company would pay interest only until December 2002 at 7% per annum and
would pay the remaining principal balance of $458.2 million and remaining
interest in quarterly payments during the period 2002 through 2006. Interest
incurred for such licenses was capitalized during the buildout phase and
amortization of such licenses will begin with the commencement of commercial
service. The Company discontinued capitalizing interest on these licenses in
1997 because all of its C Blocks licenses commenced commercial operations.
The FCC issued a reconsideration order (the "Order") which went into effect
April 1998, allowing companies holding C Block licenses several options to
restructure their license holdings and associated obligations. The Company
elected under the amnesty option of the Order to return fourteen Basic Trading
Area ("BTA") licenses. The Company also elected to forgo the respective 10
percent deposits on these licenses in return for the option to re-bid on the
licenses. Thus with respect to the returned licenses, the Company recognized a
reduction of $110.5 million in debt and $13.4 million in accrued interest. The
net book value of the fully returned licenses was $139.1 million.
The Company also elected a second option, the disaggregation option, to
return half the spectrum on four BTAs covering the Philadelphia, Pa., Reading,
Pa., Dover, De., and Atlantic City, N.J. markets. Under the disaggregation
option, the Company retains 15 MHz in each of the four BTAs while returning 15
MHz. The disaggregation extinguished 50 percent of the outstanding debt on the
licenses and prohibits the Company from owning or re-bidding on the licenses
for two years from the date of the re-auction. As a result of the
disaggregation, the Company recognized a reduction of $131.8 million in debt,
and $26.4 million in accrued interest. The net book value of the disaggregated
50% of the licenses was $156.9 million.
Based on the Company's estimates of its borrowing costs at the time of
issuance, the Company used an interest rate of 11% to discount the C Block
license obligation. Accordingly, the licenses are recorded at a net present
value of $154.6 million as of December 31, 1998. The remaining amount of the
four C Block obligations is $133.7 million.
47
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F Block License Obligations
In January 1997, the FCC completed its auction of licenses to provide
broadband PCS on the D, E and F Blocks in the 2 GHz band. Omnipoint PCS
Entrepreneurs Two ("OPCSE 2") successfully bid upon 50 F block licenses. The
Company provided deposits on the F Block licenses of $14.9 million and
obtained financing from the FCC in the amount of $59.4 million at a rate of
6.25% per annum. Interest only payments are due quarterly through April 1999.
Beginning July 1999, the Company will pay principal and interest in quarterly
payments through September 2007. Interest incurred for such licenses has been
capitalized only when the licenses are being actively constructed, and
amortization of such licenses began with the commencement of commercial
service. As of December 31, 1998 and 1997, $7.2 million and $3.7 million of
interest has been capitalized to the F Block license costs.
Based on the Company's estimates of its borrowing costs at the time of
issuance, the Company used an interest rate of 15.5% and 11.9% to discount the
F Block license obligations. Accordingly, the licenses are recorded at a net
present value of $43.1 million. The remaining amount of the F Block obligation
is $59.4 million.
LOANS PAYABLE UNDER FINANCING AGREEMENTS
New York Financing Agreements
In July 1995, Omnipoint Communications Inc. ("OCI"), an indirect 95.6% owned
subsidiary of the Company, entered into a $382.5 million credit facility with
Nortel, as amended and restated in August 1996 ("NT OCI Financing Agreement")
to finance purchases and installations of telecommunications equipment,
engineering services, certain related construction costs, third-party
equipment and other expenses. In August 1996, OCI entered into a financing
agreement with Ericsson ("Ericsson OCI Credit Facility") to provide financing
to OCI for up to $132 million to finance purchases of equipment and services
for the New York MTA market.
Proceeds of $325 million from a $516 million Interim Credit Facility
("Interim Credit Facility"), arranged with DLJ Capital Funding Inc. ("DLJ")
and certain other financial institutions, were used to repay all amounts
outstanding under the NT OCI Financing Agreement and the Ericsson OCI Credit
Facility (collectively the "Vendor OCI Financing Agreements") as well as $4.9
million of the $8.8 million of origination fees incurred at the closing of the
Interim Credit Facility. In connection with the repayment of the Vendor OCI
Financing Agreements, the Company recognized an extraordinary loss of $6.6
million from the write-off of origination costs related to the Vendor OCI
Financing Agreements.
In February 1998, OCI refinanced the entire $516 million Interim Credit
Facility with a $750 million credit facility with DLJ and certain other
financial institutions (the "Permanent Credit Facility" or collectively with
the Interim Credit Facility, (the "Institutional OCI Financing Agreements")
pursuant to (a) a $595 million credit facility agreement and (b) a $155
million note purchase agreement. The $595 million credit facility agreement
may be increased by up to $250 million under certain circumstances. In
February 1998, OCI borrowed $450 million (of which $295 million was funded
under the credit facility agreement and $155 million was funded under the note
purchase agreement). A portion of the proceeds, approximately $351.6 million,
was used to fully repay outstanding borrowings, including accrued interest on
the Interim Credit Facility. In March and April 1998, OCI borrowed the balance
of $300 million under the credit facility. In 1998, certain holders, at their
option, converted $61.4 million of the notes purchased under the note purchase
agreement into a portion of the credit facility.
48
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of the Institutional OCI Financing Agreements, OCI and the
Company are subject to certain financial and operational covenants, including
restrictions on the Company's ability to pay dividends, levels of
indebtedness, and certain other financial maintenance requirements. The
Institutional OCI Financing Agreements are collateralized by substantially all
of the assets of OCI and its license subsidiary, including a pledge of all
capital stock and such license subsidiary, as well as 95.6% of the capital
stock of OCI. The obligations of OCI under the Institutional OCI Financing
Agreements are supported by guarantees from Omnipoint Holdings, Inc.,
Omnipoint Investments Two, Inc. and Omnipoint PCS, Inc., each a direct,
wholly-owned subsidiary of the Company, and collateralized by substantially
all of their respective assets. The principal amount of the Institutional OCI
Financing Agreements is payable in installments, which began June 1998, with a
final payment due February 2006. Interest on such amount is payable quarterly
in arrears or at the end of an applicable interest period as provided in the
Institutional OCI Financing Agreements.
Miami Boston Vendor Financing Agreement
In June 1997, Omnipoint MB Holdings, LLC ("OMB"), an indirect, wholly-owned
subsidiary of the Company, entered into a credit facility agreement with
Ericsson, and certain other lenders, as amended to provide financing of up to
$352.5 million, for the purpose of financing the buildout of networks in the
Boston and Miami markets (the "Ericsson MB Facility"). The Ericsson MB
Facility finances purchases and installations of telecommunications equipment,
engineering services, certain related construction costs, third-party
equipment and other expenses and up to $100 million for the unrestricted use
of OMB, including making a loan to the Company which was funded to OMB at the
closing. The remaining availability of $150 million was subject to the
execution and delivery of a guarantee from a certain governmental agency on or
before June 30, 1998. The $100 million plus accreted interest may be prepaid
or repaid in whole or in part by the issuance of the Company's common stock
under certain conditions, solely at the Company's option.
The Ericsson MB Facility, as amended in June 1998, in connection with the
BankAmerica Facility, provides availability of up to $217.5 million plus
accreted interest. Contemporaneously with the closing of the Miami Boston
BankAmerica Facility in June 1998, the Ericsson MB Facility was amended and
restated to, among other things, eliminate the $150 million portion that was
replaced by the Miami Boston BankAmerica Facility and grant Ericsson a five-
year exclusive right to supply network equipment for the Boston and Miami
markets.
The principal amount of $109.6 million outstanding as of December 31, 1998
of the Miami Boston Vendor Financing Agreement is payable in twenty
consecutive quarterly installments beginning in 2001, with the final payment
due on August 4, 2006. Interest on such amount is payable quarterly in arrears
(of which portions of the loan proceeds are available to finance such interest
payments). The $100 million portion funded at closing, which has no required
principal amortization, matures on August 4, 2007. Interest on such portion is
payable semi-annually at a fixed rate of interest (which interest may be
accreted until August 4, 2003). Interest on the remainder of the Ericsson MB
Facility is payable at varying interest rates at a base or LIBOR rate plus a
set margin, at the Company's election. As of December 31, 1998 and 1997, OMB
had $108.1 million and $100 million, respectively, outstanding under this
portion of the facility which was loaned and due from the Company.
Under the terms of the Ericsson MB Facility, OMB is subject to certain
financial and operational covenants, including restrictions on OMB's ability
to pay dividends, level of indebtedness, and certain other financial
maintenance requirements. Additionally, the Ericsson MB Facility provides
that, among other events, the failure of any OMB subsidiaries to pay amounts
due to the FCC shall constitute an event of default. The Ericsson MB Facility
is collateralized by substantially all of the assets of OMB and any of its
license and operating subsidiaries, including a pledge of all capital stock of
each such license and operating subsidiary, as well as all capital stock of
OMB owned by its parent, OPCS Two, LLC.
49
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Miami Boston BankAmerica Facility
In June 1998, OMB entered into a $160 million credit facility agreement with
Bank of America International Limited (the "BankAmerica Facility"). Proceeds
from the BankAmerica Facility are available to finance equipment purchases
from Ericsson for the Miami and Boston markets. Interest on such amount is
payable quarterly in arrears or at the end of each applicable interest period
as provided in the BankAmerica Facility. Principal amortization on the
facility begins no earlier than January 2000 with a final maturity due no
earlier than July 2004. During 1998, OMB borrowed $110.9 million from the
BankAmerica Facility. EXPORTKREDITNAMNDEN ("EKN"), the Swedish Export Credit
Guaranty Board, guarantees a portion of the outstanding balance of the
BankAmerica Facility.
Under terms of the BankAmerica Facility, OMB is subject to certain financial
and operational covenants, including but not limited to restrictions on the
ability to pay dividends and level of indebtedness. The BankAmerica Facility
ranks pari passu with the Ericsson MB Facility and is collateralized by
substantially all the assets of OMB and each of the license and operating
subsidiaries for the Boston and Miami markets, including a pledge of all
capital stock of each such license and operating subsidiaries as well as
capital stock of OMB.
Philadelphia Vendor Financing Agreement
In July, 1997, and as amended, OPCS Philadelphia Holdings, LLC
("Philadelphia Holdings") an indirect wholly-owned subsidiary of the Company,
entered into a credit facility agreement with Ericsson to provide financing to
Philadelphia Holdings for up to $126 million for the purpose of financing the
buildout of networks in the Philadelphia and Dover markets (the "Ericsson
Philadelphia Facility"). Under the terms of the Ericsson Philadelphia
Facility, Philadelphia Holdings is subject to certain financial and
operational covenants, including restrictions on Philadelphia Holdings'
ability to pay dividends, level of indebtedness, and certain other financial
maintenance requirements. Additionally, the Ericsson Philadelphia Facility
provides that among other events, the failure of the company to pay amounts
due to the FCC shall constitute an event of default. The Ericsson Philadelphia
Facility is collateralized by substantially all of the assets of Philadelphia
Holdings and all of its license and operating subsidiaries, including a pledge
of all capital stock of each such license and operating subsidiary, as well as
all the capital stock of Philadelphia Holdings owned by its parent, OPCS, LLC.
The principal amount of the Ericsson Philadelphia Facility is payable in
twenty consecutive quarterly installments beginning in 2001, with a final
payment due on December 31, 2005. Interest on the outstanding principal is
generally payable quarterly in arrears with regard to base rate loans and at
the end of the applicable interest period with regard to LIBOR loans (of which
a portion of the loan proceeds are available to finance such interest
payments). Amounts borrowed and repaid are not available for reborrowing.
Interest on the Philadelphia Facility is payable at varying interest rates at
a base rate or LIBOR plus a margin, at Philadelphia Holdings' election.
Midwest Vendor Financing Agreement
In January 1998 and as amended, Omnipoint Midwest Holdings LLC ("OMWH"), an
indirect, wholly-owned subsidiary of the Company, entered into a credit
facility agreement (the "Midwest Facility") with Nortel to provide financing
to OMWH for up to $360 million for the purpose of financing the buildout of
networks in certain Midwest markets including Detroit, Indianapolis, and
certain other designated markets. The Midwest Facility provides that up to
$100 million is available to OMWH for general corporate and working capital
purposes, of which up to $85 million can be for an inter-company loan to the
Company. The Company at its sole option can repay or prepay the $85 million
portion of the loan in either cash or the Company's common stock under certain
conditions.
50
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of the Midwest Facility, OMWH is subject to certain
financial and operational covenants, including but not limited to restrictions
on OMWH's ability to pay dividends and level of indebtedness. The Midwest
Facility is collateralized by substantially all the assets of OMWH and its
license and operating subsidiaries for the Midwest and certain other
designated markets, including a pledge of all capital stock of each such
license and operating subsidiaries, as well as all capital stock of OMWH owned
by an indirect, wholly-owned subsidiary of the Company, Omnipoint PCS
Entrepreneurs Two, LLC ("OPCS Two, LLC").
The $85 million portion of the Midwest Facility which has no required
amortization, matures in March 2008. Interest on such portion is payable semi-
annually (which interest may be accreted until March 2004). The remaining
portion of the Midwest Facility which is available to finance equipment
purchases from Nortel and certain eligible third party expenses and is payable
in installments beginning in 2002, with a final payment due December 2006.
Interest on such amount is payable quarterly with regard to base rate loans
and at the end of an applicable interest period with regard to LIBOR rate
loans. The Midwest Facility was provided in conjunction with the amendment to
the Nortel Supply Agreement, wherein OMWH, together with other affiliates of
the Company, agreed to purchase up to $210 million of equipment and services
from Nortel over a four-year period and to purchase GSM PCS network equipment
exclusively from Nortel in the Midwest markets.
Handset Financing Facility Agreement
Effective July, 1998, Omnipoint Communications Services LLC, ("OCS") an
indirect, wholly-owned subsidiary of the Company, entered into a credit
facility agreement with Deutsche Bank for up to $15 million to provide
financing for a portion of the purchase price of handsets purchased for sale
by OCS from Siemens Business Communications Systems, Inc. (the "Handset
Financing Facility"). Interest on amounts borrowed are payable quarterly in
arrears at varying interest rates based on LIBOR or a base rate plus a set
margin. Interest may be paid with loan proceeds through June 1999. Principal
is payable in sixteen quarterly installments commencing March 1999 with a
final maturity date of December 31, 2002. The loan is subject to unused
commitment fees and other fees related to borrowings. The Handset Financing
Facility is collateralized by the inventory of Siemens handsets and is
guaranteed by the Company. Under terms of the Handset Financing Facility, OCS
is subject to certain operational covenants.
SENIOR NOTES
Senior Notes are direct obligations of the Company. Since the Company
conducts a substantial amount of its business through subsidiaries, the Senior
Notes are effectively subordinated to all existing and future indebtedness and
other liabilities and commitments of the Company's subsidiaries.
14% Senior Notes Due December 2003
On December 21, 1998, (the "Closing") the Company entered into a Note
Purchase Agreement, pursuant to which it issued and sold $125 million of
senior notes at a fixed rate of 14% per annum (the "Base Interest") to private
investors ("14% Senior Notes"). An additional $75 million of the 14% Senior
Notes are available for issuance. The 14% Senior Notes were issued at par and
mature December 21, 2003. Interest on the 14% Senior Notes is payable semi-
annually in arrears in June and December commencing in June 1999 and may be
paid in cash or in additional notes at the Company's option.
51
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At Closing, the Company paid additional interest in the form of 212,754
shares of the Company's Common Stock at $8.813 per share (equivalent to a
nominal dollar amount equal to 1.5% of the principal amount of the 14% Senior
Notes.) If the Company has not closed a Strategic Equity Issuance (as defined
in the Note Purchase Agreement) by April 21, 1999, the 14% Senior Notes will
bear additional interest equal to $625,000 per month, payable at the option of
the Company in cash or capital stock of the Company (valued at the average
market price per share of such shares of common stock over the five trading
days prior to the payment) for each month until a Strategic Equity Issuance
occurs.
The additional interest, if any, is subject to increase if a Strategic
Equity Issuance is not closed within the first 18 months after the Closing.
The 14% Senior Notes are subject to redemption at any time, at the option of
the Company, subject to applicable prepayment premium. Until December 15,
1999, the 14% Base Interest on the 14% Senior notes will be payable only in
kind. After December 15, 1999, and for the rest of the term of the 14% Senior
notes, the 14% Base Interest on the 14% Senior notes will be payable at the
option of the Company either in cash or in kind.
The covenants under the 14% Senior Notes are substantially identical to
those covenants contained in the Company's existing 11 5/8% Senior Notes due
2006. The Company will use the net proceeds of the sale of the 14% Senior
notes for working capital and for general corporate purposes.
Additionally, the terms of the notes subject the Company to certain
covenants which, among other things, restrict the ability of the Company and
certain of its subsidiaries to incur additional indebtedness, pay dividends or
make distributions in respect of its capital stock or make certain restricted
payments; create liens; or merge or sell all or substantially all of its
assets. The Company may redeem the 14% Senior Notes, in whole or in part, at
any time subject to redemption prices declining over time from 108% to 100%,
plus accrued and unpaid interest and liquidated damages as defined in the
indenture, if any, to the date of redemption.
The redemption premium will be reduced following a qualified vendor
financing of one or more credit facilities after the closing date aggregating
$200 million or more.
The 14% Senior Notes are senior unsecured obligations of the Company ranking
pari passu in right of payment with the Company's existing 11 5/8% Senior
Notes due 2006 and Series A Senior Notes due 2006.
11 5/8% Senior Notes Due August 2006
In August 1996, the Company issued $250 million of senior notes bearing
interest at 11 5/8% ("11 5/8% Senior Notes"). The 11 5/8% Senior Notes were
issued at par and mature November 2006. The Company received net proceeds of
$241.6 million, net of offering expenses. Concurrent with the issuance, the
Company placed $53.3 million of the net proceeds in escrow to pay interest
through August 1998. Interest on the 11 5/8% Senior Notes are payable semi-
annually in February and August commencing February 1997. Interest accrued as
of December 31, 1998 and 1997 was $10.9 million on both dates. Under the terms
of the notes the Company is subject to certain covenants which, among other
things, restrict the ability of the Company and certain of its subsidiaries to
incur additional indebtedness, pay dividends or make distributions in respect
of its capital stock or make certain restricted payments; create liens; or
merge or sell all or substantially all of its assets. On or after August 15,
2001, the Company may redeem the 11 5/8% Senior Notes, in whole or in part, at
redemption prices declining over time from 105.81% to 100%, plus accrued and
unpaid interest and liquidated damages as defined in the indenture, if any, to
the date of redemption.
52
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, at any time prior to August 15, 1999, the Company may redeem up
to one-third of the 11 5/8% Senior Notes originally outstanding at a
redemption price of 111.625% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, to the date of redemption,
with the net proceeds of one or more public equity offerings or sales of
certain capital stock of the Company to one or more strategic equity investors
as defined in the indenture; provided that after any such redemption at least
two-thirds of the original aggregate principal amount of the 11 5/8% Senior
Notes remains outstanding. Upon the occurrence of a change of control, the
Company will be required to offer to repurchase the outstanding 11 5/8% Senior
Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest and liquidated damages, if any, to the date of purchase.
The 11 5/8% Senior Notes are senior unsecured obligations of the Company
ranking pari passu in right of payment with all existing and future senior
indebtedness of the Company and will rank senior to all existing and future
subordinated indebtedness of the Company.
11 5/8% Series A Senior Notes
In December 1996, the Company issued $200 million of 11 5/8% Series A senior
notes ("Series A Notes"). The 11 5/8% Series A Notes were issued at a premium
of $9 million and mature November 2006. The Company received net proceeds of
$202.4 million, net of offering expenses. Concurrent with the issuance, the
Company placed $37.4 million of the net proceeds in escrow to pay interest
through August 1998. Interest on the 11 5/8% Senior Notes will be payable
semi-annually in February and August commencing February 1997. The premium is
included in the value of the 11 5/8% Series A Notes and is being amortized
over the life of the notes resulting in $592,703, $597,548, and $68,749 of
amortization offsetting interest expense for the years ended December 31,
1998, 1997, and 1996, respectively.
The 11 5/8% Series A Notes are governed by the same indenture as the Senior
Notes. Interest accrued was $8.7 million on December 31, 1998 and 1997.
12% Institutional Notes
In November 1995, the Company issued to two institutional investors both
warrants to purchase an aggregate of 625,000 shares of Common Stock at $.004
per share and two five year term notes ("12% Institutional Notes") in the
aggregate principal amount of $25.0 million. The Company is subject to certain
restrictions and requirements regarding the issuance of indebtedness senior or
pari passu to the 12% Institutional Notes. Under the terms of the notes, the
Company is subject to certain covenants which, among other things, restrict
the ability of the Company and certain of its subsidiaries to incur additional
indebtedness; pay dividends or make distributions in respect of its capital
stock or make certain restricted payments; create liens; or merge or sell all
or substantially all of its assets. The Company may prepay the 12%
Institutional Notes at any time. The 12% Institutional Notes mature November
22, 2000. Interest is payable semi-annually at 6% for the period November 22,
1995 to November 22, 1996, and 12% thereafter. Interest accrued as of December
31, 1998 and 1997 was $250,000 on both dates. Associated with the valuation of
the warrants, the Company recorded the debt at a discount and increased
additional paid-in-capital $8,747,500. The discount is being amortized over
the five year life of the notes and resulted in $1.4 million, $1.2 million and
$2.4 million of amortization included in interest expense at December 31,
1998, 1997 and 1996, respectively.
Total interest expense associated with the senior notes, financing
agreements, FCC license obligations, and capital lease obligations, net of
capitalized interest amounts, as of December 31, 1998, 1997 and 1996 was
$187.2 million, $89.1 million and $37.2 million, respectively.
53
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum principal payments of the
Company's long-term debt at nominal values including license obligations, as
of December 31, 1998, (in millions):
<TABLE>
<CAPTION>
Loans
Payable
Under
FCC License Financing
Obligations Agreements Senior Notes Total Debt
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
1999............................. $ 116.1 $ 13.7 $ -- $ 129.8
2000............................. 128.6 10.9 25.0 164.5
2001............................. 38.6 59.2 -- 97.8
2002............................. 15.7 84.3 -- 100.0
2003............................. 44.2 89.7 125.0 258.9
Thereafter....................... 145.6 1,106.5 450.0 1,702.1
------- -------- ------ --------
$ 488.8 $1,364.3 $600.0 $2,453.1
Less: Current Portion............ (116.1) (13.7) -- (129.8)
------- -------- ------ --------
Total Long-Term Debt............. $ 372.7 $1,350.6 $600.0 $2,323.3
======= ======== ====== ========
</TABLE>
9. LICENSING COSTS:
The Company has 114 FCC licenses. The Company currently holds one 30 MHz A
block license, four 15 MHz C Block licenses, twenty 10 MHz D Block licenses,
39 10 MHz E Block licenses and 50 10 MHz F Block licenses.
Licensing costs of $347.5 million for the New York MTA License granted by
the FCC in December 1994 was recorded at its nominal value. Among other
conditions, the New York MTA License requires that the Company construct a 30
MHz system in the New York MTA that offers coverage to at least one-third of
the population of the New York MTA within five years of the license grant date
and at least two-thirds of the population within 10 years. The New York MTA
license also contains a condition that requires the Company to construct a PCS
system that "substantially uses" the design and technology upon which the
Pioneer's Preference Award was based. The condition expires upon the system
providing coverage for one-third of the population of the New York MTA and
does not apply to any other of the Company's licenses.
The New York MTA license expires in December 2004; however, FCC rules
provide for renewal expectancy provisions. The Company expects to exercise the
renewal provisions, and accordingly the New York MTA License is being
amortized using the straight-line method over a period of 40 years.
Licensing costs also include the C, D, E, and F Block licenses acquired from
the FCC. The licenses are accounted for in accordance with the industry
practices that accounts for the licenses as a fixed asset. The licenses which
had favorable rate government financing are recorded at their net present
value. Interest on these licenses is capitalized during the build out period.
Amortization of these licenses begins when the network is placed into
commercial service.
Based on the Company's estimates of its borrowing costs for debt similar at
the time the Company used an 11% discount rate to determine the net present
value of the C block licenses. As of December 31, 1998 and 1997, the Company
held four and eighteen C Block licenses at a net present value of $134 million
and $411 million, respectively. Interest incurred for such licenses has been
capitalized during the buildout phase and amortization of such license costs
begins with the commencement of service to customers over a period of 40
years. The C Block licenses are subject to buildout requirements substantially
equivalent to the New York MTA A block license buildout requirements.
The FCC issued a reconsideration order (the "Order") which went into effect
April 1998, allowing companies holding C Block licenses several options to
restructure their license holdings and associated
54
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
obligations. The Company elected under the amnesty option of the Order to
return 14 Basic Trading Area ("BTA") licenses. The Company also elected to
forgo the respective 10 percent deposits on these licenses in return for the
option to re-bid on the licenses. The net book value of the fully returned
licenses was $139.1 million.
The Company also elected a second option, the disaggregation option, to
return half the spectrum on four BTAs covering the Philadelphia, Pa., Reading,
Pa., Dover, De., and Atlantic City, N.J. markets. Under the disaggregation
option, the Company retains 15 MHz in each of the four BTAs while returning 15
MHz. The disaggregation extinguishes 50 percent of the outstanding debt on the
licenses and prohibits the Company from owning or re-bidding on the licenses
for two years from the date of the re-auction. The net book value of the
disaggregated 50% of the licenses was $156.9 million. As a result of the
amnesty and disaggregation elections, the Company recognized an extraordinary
loss of $11.1 million in the second quarter of 1998.
In January 1997, the FCC completed its auction of licenses to provide
broadband PCS on the D, E and F Blocks in the 2 GHz band. Each D, E and F
Block license authorizes service on 10 MHz of spectrum in one of 493 BTAs.
OPCS Two bid successfully for 109 D, E and F Block licenses with an aggregate
license fee of $181.4 million (net of the 25% small business discount for F
Block licenses). The FCC granted 93 of the D, E and F Block licenses to the
Company on April 28, 1997, and the remaining 16 licenses in June 27, 1997.
Winning bid amounts of $106.9 million for the 59 D and E license were paid in
full. The Company provided deposits on the F Block licenses of $14.9 million
and obtained financing from the FCC in the amount of $59.4 million. The D, E
and F Block license areas require that the Company construct a PCS system in
the BTA license areas that offers coverage to at least one-quarter of the
population within five years of the license grant date. Interest incurred for
such licenses was capitalized during the buildout phase and amortization of
such license costs began with the commencement of service to customers over a
period of 40 years.
During 1997, the Company made its first payment of $28.8 million utilizing
the $60 million deposit with the FCC that was made in August 1996 to
participate in the D, E and F Block auction; the remaining $31.2 million of
such deposit was refunded to the Company.
10. AGREEMENTS WITH SUPPLIERS:
NORTEL AGREEMENTS
Supply Agreements
Nortel and the Company have signed a series of ("OEM") equipment and supply
agreements (collectively the "OEM Supply Agreements"), as well as a vendor
financing agreement. The OEM Supply Agreements provide for the terms under
which Nortel would make payments to the Company if Nortel were to purchase
core electronics (primarily radio and digital cards for base stations) and
software from the Company. No equipment, hardware or software sales were made
to Nortel under OEM Agreement during 1998, 1997 and 1996.
During 1994, OCI entered into an agreement to purchase $100 million of
equipment and services (increased in 1996 to $250 million) over the next five
years with Nortel. In December 1997, the supply agreement was amended to
increase the purchase commitment for an incremental $210 million of qualified
purchases. Under the terms of the agreement, if the Company fails to meet its
purchase obligations of equipment and services, it may be subject to a
termination charge of 10% of the unmet portion of the commitment.
Manufacturing License Agreement
In February 1995, the Company entered into an agreement with Nortel (the
"Manufacturing License Agreement") in conjunction with the OEM Supply
Agreements, which was subsequently amended on August 4,
55
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997. Under the terms of the Manufacturing License Agreement, the Company will
give Nortel an option to receive the non-exclusive worldwide right to use,
modify, manufacture, or have manufactured products supplied by the Company
under the OEM Supply Agreement, subject to certain terms and restrictions.
Collaborative Development Agreement
In March 1995, the Company entered into a five-year agreement (the
"Collaborative Development Agreement") with Nortel to collaborate with Nortel
on their mutual planning and development activities for PCS products. Under
the terms of the Collaborative Development Agreement, Nortel and the Company
have agreed to commit resources to joint projects. The Collaborative
Development Agreement may be renewed for successive one-year periods, and is
subject to earlier termination by mutual agreement of the parties or by either
party upon written notice to the other party thirty days prior to the end of
the initial term or a renewal term.
ERICSSON AGREEMENTS
Supply and Licensing Agreements
On April 16, 1996, Ericsson and the Company entered into definitive
agreements governing (i) the purchase of GSM handsets, (ii) the sale by
Ericsson of IS-661 and GSM infrastructure equipment manufactured by the
Company, and (iii) cooperation on marketing, standards and technical
activities. Each of these agreements has a term of five years. The Company has
also entered into two vendor financing agreements with Ericsson for the
buildout of the Miami and Boston markets, as well as the Philadelphia and
Dover markets. As part of the vendor financing agreements, the Company is
obligated to purchase a minimum of $257.5 million of infrastructure equipment,
software, engineering, installation and testing services.
Under the terms of the licensing and supply agreements, Ericsson paid
license fees to the Company of $0 and $8.5 million in 1998 and 1997,
respectively.
11. JOINT VENTURES:
In November 1997, the Company and D&E Communications, Inc. ("D&E"), through
their respective wholly-owned subsidiaries, formed a limited partnership, PCS
One. Both parties hold a 50% interest in this joint venture which operates a
PCS communication system in the Lancaster, Harrisburg, York and Reading,
Pennsylvania BTAs. The joint venture will operate for an initial period of ten
years, with provisions for subsequent renewals. The Company recorded $9
million as its share of the PCS One loss for the year ended December 31, 1998.
After recording the equity in losses of the joint venture, the investment in
joint venture was $3 million as of December 31, 1998. PCS One entered into a
financing agreement with Nortel for up to $40 million to finance the buildout.
As of December 31, 1998, PCS One had borrowed $26.6 million under the vendor
financing facility. The Company and D&E have a joint and several obligation to
contribute funds not to exceed the lesser of $50 million or the balance on the
financing agreement in the event of any default on the agreement by PCS One.
Since the Company and D&E have already jointly contributed $23.6 million to
PCS One, which is less than the current draw on the facility, the maximum
remaining obligation was $3.0 million as of December 31, 1998. If current
ownership percentages of the joint venture are maintained, the Company's
anticipated future contribution to meet this obligation would be less than $14
million.
12. ACQUISITIONS:
The Company purchased the outstanding customer base of Urban Wireless Inc.
in a non-cash transaction for $4.2 million. The Company forgave approximately
$3.7 million in net accounts receivable due from Urban Wireless and issued a
credit in the amount of $.5 million in exchange for the customer base of
approximately 20,500 subscribers.
56
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various leases for its offices, facilities and
for equipment used in the development of its products. The leases are
typically three to five years in length and payable on a monthly basis. The
Company has various capital lease commitments of approximately $47,188 payable
as of December 31, 1998. Future minimum rentals under noncancelable operating
leases as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Year Leases
---- ---------
<S> <C>
1999............................................................ $ 7,002
2000............................................................ 6,804
2001............................................................ 6,433
2002............................................................ 5,689
2003............................................................ 2,575
Thereafter...................................................... 11,303
-------
$39,806
=======
</TABLE>
Total rental expense for the years ended December 31, 1998, 1997, and 1996
was approximately $42.3 million, $18.4 million and $3.1 million, respectively.
In July 1996, the Company, through its subsidiary, OCI, signed a five year
agreement with a provider for billing and customer-care services for which the
Company will be provided with software products and services to support its
billing and customer-service requirements. The Company has committed a minimum
amount of $14.1 million in processing fees over the first five years of the
agreement, which may be satisfied by the Company and/or its affiliates.
The Company, is in various stages of negotiation for handsets, accessories
and services from various suppliers. These new contracts could require minimum
purchase commitments from the Company. Management believes that the Company
will fulfill these commitments in the normal course of business.
14. WARRANTS, STOCK OPTIONS, AND EMPLOYEE BENEFIT PLANS:
Warrants
During 1991, the Company granted a warrant to purchase 915,000 shares of
common stock at an exercise price of $.008 per share, a price below market
value, exercisable for a period of 10 years in exchange for investment banking
services over five years. The Company also issued a warrant to purchase
750,000 shares of Common Stock originally exercisable for a period of five
years from the date of issuance. The warrants are exercisable for a price of
$1.00 per share for the first 250,000 shares exercised, $1.10 per share for
the next 250,000 shares exercised and $1.20 per share for the remaining
250,000 shares exercised. Subsequent to December 31, 1994, the Company and the
warrant holder agreed that the warrant holder could loan to the Company an
amount equal to the aggregate exercise price of the warrant on or before the
original expiration date. In such event the expiration date of the warrant
would be extended for an additional five years. The Company issued 229,168 of
which 50,000 have a strike price of $0.004 and the remainder have a strike
price of $6.00 to the holder of the Credit Loan Agreement. These warrants
expire on March 10, 2002.
In connection with the senior notes and Convertible Subordinated Notes
issued during 1995, the Company granted to the holders of the notes warrants
to purchase 1,250,000 shares of common stock at an exercise price
57
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $.004 per share, exercisable for a period of five years from the date of
issuance. In connection with the warrants, the Company recorded a discount on
the notes and an increase to paid-in capital of $17.5 million. During 1998,
1997 and 1996, approximately 0, 513,000, and 597,000 respectively were
exercised with an exercise price of between $0.004 and $1.00.
Stock Options
The 1990 stock option plan authorizes the grant of options exercisable for a
maximum of 6,250,000 of common stock to key employees, consultants, officers
and directors of the Company. Options under the plan expire 10 years from the
date of the grant for incentive stock options and 10 years plus 30 days for
nonstatutory options. Options granted vest ratably over five years.
The Company issued options to certain employees with exercise prices in
excess of fair market value that do not begin to vest until the first or
second anniversary of the option grant and then follow the normal five-year
vesting schedule.
The 1996 employee stock purchase plan authorizes the issuance of a maximum
of 200,000 shares of common stock through payroll deductions to employees of
the Company. Employees of the Company, who are scheduled to work 20 or more
hours per week and are employed as of the first day of each offering period,
will be eligible to participate in the purchase plan. Except for the initial
offering which consisted of a six-month period from July 1, 1996 through
December 31, 1996, each offering under the purchase plan will be for the 12-
month calendar year (the "Offering Period"). Each Offering Period other than
the initial Offering Period will consist of two six-month purchase periods
commencing on the first business day on or after January 1 or July 1 of each
year (each, a "Purchase Period"). As of December 31, 1998, the Company has
issued the maximum number of shares available under this plan. The Company
plans to make additional shares available, after receiving the appropriate
authorization from its shareholders.
Participating employees may contribute from 1% to 10% of compensation
through payroll deductions. On the last business day of each Purchase Period
(the "Exercise Date"), the employee's payroll deductions will be used to
purchase shares of the Company's common stock for the employee. The price of
the shares purchased will be the lower of (i) 85% of the stock's closing price
on the commencement date of the Offering Period or (ii) 85% of the stock's
closing price on the Exercise Date. The maximum aggregate purchases which an
employee will be able to make in a single calendar year is $25,000, based on
the fair market value of such common stock determined at the commencement date
of the Offering Period.
The 1997 omnibus stock plan authorizes the grant of stock options, stock
appreciation rights, restricted or unrestricted stock awards, phantom stock,
performance awards or any combination thereof. The plan provides for the
issuance of 2,500,000 shares of Common Stock to key employees, consultants,
officers and directors of the Company. Options under the plan expire 10 years
from the date of the grant and vest ratably over five years. Payments to
satisfy obligations due for stock appreciation rights, restricted or
unrestricted stock awards, phantom stock, and performance awards may be made
by delivering Common Stock or cash, or any combination of common stock and
cash, as determined by the plan administrator.
In May 1998, the Company amended its 1997 Omnibus Stock Plan to authorize an
additional 2,500,000 shares for issuance under the plan.
The Company has three stock-based compensation plans, which are described
above. SFAS 123 requires that companies either recognize compensation expense
for grants of stock, stock options, and other equity instruments based on fair
value, or provide pro forma disclosure of net income and earnings per share in
the notes to the financial statements. The Company adopted the disclosure
provisions of SFAS 123 and has applied APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans other than options issued under
fair market value. Had compensation
58
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates as calculated in accordance with SFAS No.
123, the Company's net loss and earnings per share for the years ended
December 31, 1998, 1997 and 1996 would have been reduced to the pro forma
amounts indicated below (in thousands except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Loss Per Loss Per Loss Per
Net Common Net Common Net Common
Loss Share Loss Share Loss Share
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
As Reported..... $(677,727) $(12.87) $(321,010) $(6.23) $(126,930) $(2.74)
Pro forma....... $(685,418) $(13.02) $(328,005) $(6.36) $(128,585) $(2.77)
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ending 1998, 1997 and 1996, respectively: an
expected life of six years, expected volatility of 62.00%, 50.00%, and 49.55%,
a risk-free interest rate of 4.5%, 6.1% and 6.3%, and, a dividend yield of
zero, respectively.
The effects of applying SFAS 123 for the purpose of providing pro forma
disclosure may not be indicative of the effects on reported net loss and net
loss per share for future years, as the pro forma disclosures include the
effects of only those awards granted after January 1, 1995. The fair value of
the employee stock purchase plan is estimated on the date of purchase using
the Black-Scholes option pricing model utilizing the following weighted
average assumptions; an expected life of six months, expected volatility of
62%, a dividend yield of zero and a risk-free interest rate of 4.3%. Included
in the pro forma net loss and earnings above, the amount of compensation
expense, net of income taxes related to the employee stock purchase plan is
approximately $492,166, and $585,000 for 1998 and 1997, respectively.
A summary of the status of the Company's stock option plans as of December
31, 1998, 1997 and 1996 and changes during the years ending on those dates is
presented in the following chart:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Price per Price per Price per
Shares Share Shares Share Shares Share
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year
January 1,............. 7,040,041 $14.75 4,676,299 $ 8.84 4,598,408 $ 4.63
Granted
At fair value......... 656,903 24.94 403,226 18.43 721,322 27.96
At greater than fair
value................ 865,850 23.95 3,454,513 23.58 -- --
At less than fair val-
ue................... 110,680 6.30 121,447 3.18 384,745 2.79
Exercised............... (487,913) 3.03 (530,970) 1.94 (995,592) 0.74
Canceled................ (945,510) 21.50 (1,084,474) 16.38 (32,584) 15.22
--------- ------ ---------- ------ --------- ------
Options outstanding at
December 31,........... 7,240,051 $16.53 7,040,041 $14.75 4,676,299 $ 8.84
========= ====== ========== ====== ========= ======
Options exercisable at
December 31,........... 2,316,209 $ 6.41 2,099,136 $ 3.54 2,124,625 $17.14
========= ====== ========== ====== ========= ======
Options available for
future grant at
December 31,........... 2,990,932 1,178,855 1,573,701
========= ========== =========
Weighted average fair
value of options
granted during the
year................... $ 19.14 $ 11.21 $ 17.14
========= ========== =========
</TABLE>
59
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Outstanding
-------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 - $16.00 3,495,054 5.86 $ 7.29 2,091,182 $ 4.72
$16.06 - $25.75 953,096 8.13 20.96 144,469 19.89
$26.00 - $50.00 2,791,901 8.97 26.61 80,558 26.00
--------------- --------- ---- ------ --------- ------
$0.001 - $50.00 7,240,051 7.35 $16.52 2,316,209 $ 6.41
=============== ========= ==== ====== ========= ======
</TABLE>
On May 29, 1997, the Board of Directors approved a Stock Option Exchange
offering for employees granted stock options between January 26, 1996 and May
28, 1997. Exchanged options were granted as incentive stock options at the
price of $16.00 or fair market value on the date of exchange. Non-qualified
options were issued to employees who exchanged options at a price of $16.00
when the fair market value of the stock exceeded $16.00. The Company exchanged
812,298 options on May 29, 1997 at prices between $16.00 and $16.63.
In July 1998, the Company implemented a stock option plan for its
subsidiary, OTI. This plan provides that up to 20% of OTI's future stock
issuances will be available for distribution to OTI's employees. OTI granted
2,625,610 options at the price of $2.00, as determined by the Board of
Directors to be the fair market value as of the date of Grant. These options
vest over five years and do not cancel upon termination of employment. The
options are exercisable when a liquidity event as defined in the OTI Stock
Option Agreement occurs.
Employee Benefit Plans
The Company has a defined contribution plan under section 401(k) of the
Internal Revenue Code covering substantially all of its employees. The 401(k)
plan allows employees to make contributions up to a specified percentage of
their compensation. On January 1, 1998, the Company began a program of
providing a discretionary match of employee contributions up to a certain
limit to be changed by the Board of Directors from time to time. The
participants contribution may be made in shares of the Company's common stock
or, if determined by the Company, in cash. Participants vest in the Company's
matching contribution based on years of service as defined by the plan. The
Company recorded $1.4 million for 401k matching for the year ended December
31, 1998.
15. INCOME TAXES:
At December 31, 1998, the Company had net operating loss carry forwards of
approximately $1,456 million to be used to offset future taxable income; these
carry forwards expire during the years through 2018. Approximately $2.7
million of these net operating losses were related to stock option exercises,
the tax benefit of which, when ultimately realized, would be reflected as
component of equity. Under the Tax Reform Act of 1986, the amount of and
benefits from net operating losses that can be carried forward may be impaired
or limited in certain circumstances.
60
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities as of December 31, 1998 and 1997 are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory.......................................... $ 746 $ 26,867
Compensation related............................... 5,065 1,292
Deferred revenue................................... -- --
Start up costs..................................... 12,416 4,931
Reserves........................................... 11,995 2,550
Other.............................................. 72 --
Net operating loss carry forwards.................. 582,210 218,299
Valuation allowance................................ (483,185) (216,659)
Deferred tax liabilities:
FCC license........................................ (30,247) (19,639)
Fixed assets....................................... (99,072) (17,641)
--------- ---------
Net deferred tax assets.............................. $ -- $ --
========= =========
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has placed a valuation allowance against its otherwise
recognizable net deferred tax assets.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been determined
by the Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
1998 1997
--------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Loans payable under financing agree-
ments.............................. $1,356,844 $1,356,844 $513,766 $513,766
Senior Notes........................ 21,200 22,027 19,797 26,216
New York MTA License Obligation..... 154,746 154,576 347,518 347,518
C and F Block Licenses Obligations.. 176,746 164,664 411,072 486,647
11 5/8% Senior and Series A Notes
Due 2006........................... 457,696 309,832 458,289 479,558
14% Senior Notes.................... 125,000 125,000 -- --
</TABLE>
Cash and Cash Equivalents, Prepaid Expenses and Other Assets, Accounts
Payable, Accrued Expenses, and Short-Term Debt
The carrying amounts of these items are a reasonable estimate of their fair
value.
Loans Payable Under Financing Agreements
The carrying amounts of these obligations approximate fair value. The
obligation's interest rates are periodically adjusted to current market rates.
61
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Institutional Notes, Senior Notes and Series A Notes
The fair value of the Corporation's senior notes payable is estimated based
on the quoted market prices for the same or similar issues.
New York MTA License Obligation
The fair value of this obligation is based on the prevailing terms the
United States Government offers other Pioneer's Preference license holders.
The terms and conditions for this obligation are set by the Federal
Communications Commission based on authority granted by the Congress of the
United States of America.
C & F Block License Obligations
The fair value of these obligations are based on the Company's estimate of
borrowing costs for debt similar to that issued by the U.S. Government,
without consideration of any charges that may result upon full implementation
of the Entrepreneurs Band Reconsideration Order.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998 and 1997. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since those dates, and current
estimates of fair value may differ significantly from the amounts presented
herein.
17. LITIGATION
The Company is subject to legal proceedings, administrative proceedings and
claims of various types in the ordinary course of its business. While the
Company cannot estimate the ultimate settlement, if any of these proceedings,
it does not believe that any such legal proceedings will have a material
adverse effect on the Company, its liquidity, financial position or results of
operations.
18. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash paid for interest.............................. $ 89,038 $ 74,385 $ 23,125
Cash paid for taxes................................. -- -- --
Non-cash investing and financing activities:
Liability incurred for acquisition of the
license.......................................... -- 39,234 360,442
Common stock issued upon conversion of
subordinated note................................ -- -- 16,250
Issuance of Series B preferred stock in payment of
Series B dividend................................ -- -- 576
Proceeds from financing agreement used to pay
origination fee.................................. 1,500 4,875 150
Network infrastructure equipment and capitalized
interest financed by Financing Agreements........ 190,980 131,860 --
Return of C Block licenses........................ 296,017 -- --
Disaggregation and amnesty of C Block license
obligations...................................... 242,318 -- --
Pilot system equipment funded by financing
agreement........................................ -- -- 1,321
Issuance of options at below fair market value.... -- -- 9,628
Conversion of preferred stock in connection with
the initial public offering...................... -- -- 44,703
Refinancing of interim credit facility............ 350,000 -- --
Payment of prepaid interest with shares of common
stock 1,875 -- --
</TABLE>
62
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. SEGMENT INFORMATION
In 1998, the Company adopted FAS 131. The prior year's segment information
has been restated to present Omnipoint's two reportable segments, which are as
follows:
.PCS Services--provides digital wireless services in several markets in the
U.S.
.PCS Technology--designs and develops products to provide digital wireless
services.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." 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).
63
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 years
ending December 31:
<TABLE>
<CAPTION>
PCS Services PCS Technology Reconciling Items(3) Consolidated Totals
------------ -------------- -------------------- -------------------
(in thousands)
<S> <C> <C> <C> <C>
1998
- ----
Revenues $ 167,753 $ 7,741 $ (2,958) (1) $ 172,536
EBITDA $ (282,528) $(24,085) $(21,151) (2) $ (327,764)
Total Assets $1,808,983 $ 5,168 $252,453 $2,066,604
1997
- ----
Revenues $ 42,377 $ 9,573 $ -- (1) $ 51,950
EBITDA $ (145,924) $(26,451) $(13,317) (2) $ (185,692)
Total Assets $1,617,007 $ 13,208 $149,374 $1,779,589
1996
- ----
Revenues $ 531 $ 4,300 $ (4,300) (1) $ 531
EBITDA $ (48,941) $(28,880) $ (6,993) (2) $ (84,814)
Total Assets $1,076,974 $ 14,196 $328,303 $1,419,473
</TABLE>
(1) Represents intersegment revenue
(2) Represents corporate expenses not allocated to the segments
(3) A reconciliation of total segment EBITDA to net loss for the years ended
December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Total EBITDA for reportable segments......... $(327,764) $(185,692) $ (84,814)
Depreciation and amortization................ (129,043) (52,644) (15,587)
Equity in loss of joint ventures............. (11,879) -- --
Interest income.............................. 11,355 12,872 10,697
Interest expense............................. (187,187) (89,061) (37,226)
Other........................................ (8,149) 106 --
Extraordinary loss on return of C Block...... (11,115) -- --
Extraordinary loss on early extinguishment of
debt........................................ -- (6,591) --
Accretion of 7% Cumulative Convertible
Preferred Stocks............................ (13,945) -- --
--------- --------- ---------
Net loss attributable to common
stockholders................................ $(677,727) $(321,010) $(126,930)
========= ========= =========
</TABLE>
64
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of segment total assets to consolidated total assets for the
years ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash and short term investments maintained at Cor-
porate headquarters.............................. $232,188 $ 78,043 $257,937
Escrow deposits................................... -- 51,230 91,982
Unallocated Corporate assets...................... 20,265 20,101 37,404
Intercompany eliminations......................... -- -- (59,020)
-------- -------- --------
Total............................................. $252,453 $149,374 $328,303
======== ======== ========
</TABLE>
Specified items related to segment assets as of December 31:
<TABLE>
<CAPTION>
PCS Services PCS Technology Reconciling Items Consolidated Totals
------------ -------------- ----------------- -------------------
(in thousands)
<S> <C> <C> <C> <C>
1998
Investment in Equity-
Method Subsidiaries.... $ 6,940 $ -- $ -- $ 6,940
Fixed Asset Expenditures
....................... 560,864 $1,050 630 (4) 562,544
1997
Investment in Equity-
Method Subsidiaries.... $23,180 $ -- $ -- $23,180
Fixed Asset
Expenditures........... 435,167 2,027 1,555 (4) 438,749
1996
Investment in Equity-
Method Subsidiaries.... $ -- $ -- $ -- $ --
Fixed Asset
Expenditures........... 164,116 6,886 204 (4) 171,206
</TABLE>
(4) Represents expenditures for fixed assets at Corporate headquarters.
65
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. QUARTERLY FINANCIAL INFORMATION (unaudited):
The following table provides quarterly data for the fiscal years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
----------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues....................... $ 34,068 $ 42,189 $ 42,155 $ 54,124
Operating expenses:
Cost of service revenues..... 23,383 36,835 29,372 34,587
Cost of handset and
accessories revenues........ 29,073 23,314 17,015 30,672
Cost of engineering
services.................... 1,536 825 457 1,350
Research and development..... 4,313 5,084 4,327 2,915
Sales, general, and
administrative.............. 45,638 57,056 69,868 82,680
Depreciation and
amortization................ 19,879 31,636 33,654 43,874
--------- --------- --------- ---------
Total operating costs and
expenses.................... 123,822 154,750 154,693 196,078
Loss from operations......... (89,754) (112,561) (112,538) (141,954)
Other income (expense):
Equity in losses of joint
ventures.................... (2,023) (2,175) (2,349) (5,332)
Interest income.............. 1,591 5,623 2,113 2,028
Interest expense............. (34,689) (57,543) (44,428) (50,527)
Other income (expense)....... 90 (2,580) 170 (5,829)
--------- --------- --------- ---------
Loss before extraordinary
item...................... (124,785) (169,236) (157,032) (201,614)
Extraordinary loss on return of
C Block licenses.............. -- (11,115) -- --
--------- --------- --------- ---------
Net Loss................... $(124,785) $(180,351) $(157,032) $(201,614)
Accretion of 7% Cumulative
Convertible Preferred Stock... -- (3,486) (5,230) (5,229)
--------- --------- --------- ---------
Net loss attributable to
common stockholders....... $(124,785) $(183,837) $(162,262) $(206,843)
========= ========= ========= =========
Loss per common share before
extraordinary item............ $ (2.38) $ (3.29) $ (3.08) $ (3.91)
Loss per common share on
extraordinary item............ -- (0.21) -- --
--------- --------- --------- ---------
Net loss per common share--
basic and diluted............. $ (2.38) $ (3.50) $ (3.08) $ (3.91)
========= ========= ========= =========
Weighted average number of
common shares outstanding..... 52,384 52,580 52,747 52,845
========= ========= ========= =========
</TABLE>
66
<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1997
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues......................... $ 7,587 $ 6,863 $ 13,829 $ 23,671
Operating expenses:
Cost of service revenues....... 6,419 8,056 13,109 17,783
Cost of handset and accessories
revenues...................... 7,519 9,794 16,751 27,831
Cost of engineering services... -- -- -- 1,073
Research and development....... 6,634 5,237 5,983 6,078
Sales, general, and
administrative................ 15,025 24,555 26,922 38,873
Depreciation and amortization.. 10,419 12,650 12,245 17,330
-------- -------- -------- ---------
Total operating costs and
expenses...................... 46,016 60,292 75,010 108,968
Loss from operations........... (38,429) (53,429) (61,181) (85,297)
Other income (expense)
Interest income................ 4,657 3,945 2,157 2,113
Interest expense............... (18,595) (18,862) (22,145) (29,459)
Other income (expense)......... 4 40 8 54
-------- -------- -------- ---------
Loss before extraordinary item... (52,363) (68,306) (81,161) (112,589)
-------- -------- -------- ---------
Extraordinary loss............... -- -- -- (6,591)
Net loss....................... $(52,363) $(68,306) $(81,161) $(119,180)
-------- -------- -------- ---------
Basic and diluted loss per common
share:
Loss per common share before
extraordinary item.............. $ (1.02) $ (1.33) $ (1.57) $ (2.17)
Loss per common share on
extraordinary item.............. -- -- -- (0.13)
-------- -------- -------- ---------
Net loss per common share--basic
and diluted..................... $ (1.02) $ (1.33) $ (1.57) $ (2.30)
-------- -------- -------- ---------
Weighted average number of common
shares outstanding.............. 51,278 51,457 51,587 51,932
======== ======== ======== =========
</TABLE>
Earning per share data have been restated for all periods to reflect the
adoption of SFAS 128 as of December 31, 1997.
21. SUBSEQUENT EVENTS:
FCC Deposit:
In March 1999, the Company, through its subsidiary OPCS Three, LLC made a
$41 million deposit with the FCC to participate in the FCC's Auction 22,
partially financed by a transaction with a financial institution.
Financing Agreements
On March 30, 1999, the Company completed a definitive agreement with Siemens
Information and Communications Networks, Inc. for financing of $200 million
(the "Siemens' Agreement"). The Siemens' Agreement includes $100 million of
funding for general corporate purposes which was funded on March 31, 1999 and
$100 million of financing of equipment and services for expansion of the
Company's wireless communications network in New York and other markets.
In addition, Nortel expanded its financing by up to $50 million of which $25
million was funded on March 31, 1999 for general corporate purposes for the
Company. The Nortel and Siemens' $125 million in provided working capital
financings were obtained by their new participation in the Institutional OCI
Financing Agreements.
67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Omnipoint Corporation:
Our audits of the consolidated financial statements referred to in our
report dated March 31, 1999 included in this Form 10-K also included an audit
of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 31, 1999
68
<PAGE>
SCHEDULE I
OMNIPOINT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Additions
Balance at charged to Deductions Balance at
beginning costs and from end of
of period expenses reserves period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Period ended December 31, 1996:
Reserve for doubtful accounts..... -- -- -- --
Period ended December 31, 1997:
Reserve for doubtful accounts..... $ 0 $ 8,059 $ (2,313) $ 5,746
Period ended December 31, 1998:
Reserve for doubtful accounts..... $5,746 $33,230 $(26,882) $12,094
</TABLE>
69
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Omnipoint Corporation on Form S-1 (File Nos. 33-98360 and 33-03739), Form
S-4 (File Nos. 333-19895 and 333-13961), Form S-3 (File No. 333-58155) and
Form S-8 (File Nos. 333-30681, 333-07345 and 333-03945) of our reports dated
March 31, 1999, on our audits of the consolidated financial statements and
financial statement schedule of Omnipoint Corporation as of December 31, 1998
and 1997, and for each of the three years in the period ended December 31,
1998, which reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 5, 1999
<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 TWELVE
MONTHS ENDED DECEMBER 31, 1997 AND FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997
<CASH> 63,581 84,913
<SECURITIES> 15,009 22,052
<RECEIVABLES> 25,825 13,111
<ALLOWANCES> (5,746) (1,938)
<INVENTORY> 39,962 19,607
<CURRENT-ASSETS> 198,415 195,511
<PP&E> 631,876 522,029
<DEPRECIATION> (46,886) (35,300)
<TOTAL-ASSETS> 1,779,589 1,652,579
<CURRENT-LIABILITIES> 290,580 249,089
<BONDS> 478,086 477,915
0 0
0 0
<COMMON> 523 516
<OTHER-SE> (182,429) (65,018)
<TOTAL-LIABILITY-AND-EQUITY> 1,779,589 1,652,570
<SALES> 43,450 23,778
<TOTAL-REVENUES> 51,950 28,278
<CGS> 108,335 0
<TOTAL-COSTS> 108,335 0
<OTHER-EXPENSES> 181,951 181,318
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 89,061 59,549
<INCOME-PRETAX> (314,419) (201,830)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (314,419) (201,830)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (6,591) 0
<CHANGES> 0 0
<NET-INCOME> (321,010) (201,830)
<EPS-PRIMARY> (6.23) (3.92)
<EPS-DILUTED> (6.23) (3.92)
</TABLE>
<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 NINE
MONTHS ENDED SEPTEMBER 30, 1998, FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 DEC-31-1998
<CASH> 194,732 148,309
<SECURITIES> 43,571 267
<RECEIVABLES> 51,500 47,001
<ALLOWANCES> 13,435 11,826
<INVENTORY> 29,729 34,652
<CURRENT-ASSETS> 328,154 239,576
<PP&E> 1,181,532 1,078,779
<DEPRECIATION> (150,357) (117,003)
<TOTAL-ASSETS> 2,066,604 1,931,521
<CURRENT-LIABILITIES> 369,454 337,437
<BONDS> 6,013,896 478,689
0 0
276,191 270,462
<COMMON> 531 528
<OTHER-SE> (586,551) (387,749)
<TOTAL-LIABILITY-AND-EQUITY> 2,066,604 1,931,521
<SALES> 167,752 195,161
<TOTAL-REVENUES> 172,536 118,412
<CGS> 228,419 160,216
<TOTAL-COSTS> 228,419 160,216
<OTHER-EXPENSES> 400,924 273,048
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 187,187 136,660
<INCOME-PRETAX> (657,667) (451,052)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (657,667) (451,052)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (11,115) (11,115)
<CHANGES> 0 0
<NET-INCOME> (663,782) (470,883)
<EPS-PRIMARY> (12.87) (8.96)
<EPS-DILUTED> (12.87) (8.96)
</TABLE>
<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 SIX
MONTHS ENDED JUNE 30, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 MAR-31-1997
<CASH> 124,844 198,370
<SECURITIES> 27,635 44,112
<RECEIVABLES> 6,194 6,583
<ALLOWANCES> (622) (46)
<INVENTORY> 22,878 33,728
<CURRENT-ASSETS> 239,850 335,717
<PP&E> 397,740 273,183
<DEPRECIATION> (25,655) (15,547)
<TOTAL-ASSETS> 1,532,167 1,434,272
<CURRENT-LIABILITIES> 215,258 103,265
<BONDS> 477,752 477,606
0 0
0 0
<COMMON> 516 513
<OTHER-SE> 15,218 82,178
<TOTAL-LIABILITY-AND-EQUITY> 1,532,167 1,434,272
<SALES> 9,949 3,087
<TOTAL-REVENUES> 14,449 7,587
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 106,308 46,016
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 37,457 18,595
<INCOME-PRETAX> (120,669) (52,363)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (120,669) (52,363)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (120,669) (52,363)
<EPS-PRIMARY> (2.35) (1.02)
<EPS-DILUTED> (2.35) (1.02)
</TABLE>
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-01-1996
<CASH> 127,222,563
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,611,251
<CURRENT-ASSETS> 174,133,391
<PP&E> 24,771,534
<DEPRECIATION> (3,558,770)
<TOTAL-ASSETS> 543,905,397
<CURRENT-LIABILITIES> 24,527,700
<BONDS> 17,022,109
0
0
<COMMON> 450,090
<OTHER-SE> 132,276,055
<TOTAL-LIABILITY-AND-EQUITY> 543,905,397
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,431,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,470,902
<INCOME-PRETAX> (15,902,550)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,902,550)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,902,550)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
