<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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
(Exact name of registrant as specified in its charter)
DELAWARE 04-2969720
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12920 - 38TH STREET S.E.,
BELLEVUE, WASHINGTON 98006
(Address of principal executive offices) (Zip Code)
(425) 378-4000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
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 [ ] No [X ]
<PAGE> 2
OMNIPOINT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of September 30, 2000, and December 31, 1999.................................................. 2
Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2000, and September 30, 1999................... 3
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000, and September 30, 1999............................. 4
Notes to Consolidated Financial Statements....................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................... 13
PART II - OTHER INFORMATION................................................................................... 19
ITEM 1. LEGAL PROCEEDINGS................................................................................ 19
ITEM 2. CHANGES IN SECURITIES............................................................................ 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 19
ITEM 5. OTHER INFORMATION................................................................................ 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 19
</TABLE>
<PAGE> 3
OMNIPOINT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, | December 31,
2000 | 1999
------------- | ------------
(Unaudited) |
<S> <C> | <C>
|
|
ASSETS |
|
Current assets: |
Cash and cash equivalents $ 88,133 | $ 347,557
Accounts receivable, net of allowance for doubtful accounts |
of $14,757 and $14,798, respectively 72,419 | 66,590
Inventory 839 | 39,144
Prepaid expenses and other current assets 12,897 | 47,079
----------- | -----------
Total current assets 174,288 | 500,370
|
Property and equipment, net of accumulated depreciation |
of $55,466 and $316,560, respectively 647,001 | 1,089,572
Licensing costs and other intangible assets, net of accumulated |
amortization of $13,300 and $72,885, respectively 919,448 | 731,082
Goodwill, net of accumulated amortization of $114,931 |
and $0, respectively 3,831,309 |
Investments in and advances to unconsolidated affiliates 746,711 | 6,608
Other assets and investments 35,467 |
----------- | -----------
$ 6,354,224 | $ 2,327,632
=========== | ===========
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
Current liabilities: |
Accounts payable $ 12,338 | $ 66,972
Accrued liabilities 148,867 | 173,260
Deferred revenue 34,762 | 15,686
Construction accounts payable 67,225 | 1,821
Payable to affiliate 315,886 |
Current portion of long-term debt 63,616 | 164,556
----------- | -----------
Total current liabilities 642,694 | 422,295
|
Long-term debt 2,137,189 | 2,864,159
|
Commitments |
|
Shareholders' equity: |
7% Cumulative convertible preferred stock, par value $1,000 per |
share, 10,000,000 shares authorized; 317,715 and 325,000 |
shares issued and outstanding, respectively 307,446 | 297,109
Series A non-voting convertible preferred stock, par value $0.01 per share, |
12,500 shares authorized, issued and outstanding 300,000 | 300,000
Common stock, no par value, and paid in capital 3,498,905 | 315,920
Deferred compensation | (13,978)
Accumulated other comprehensive loss (7,754) |
Deficit (524,256) | (1,857,873)
----------- | -----------
Total shareholders' equity 3,574,341 | (958,822)
----------- | -----------
$ 6,354,224 | $ 2,327,632
=========== | ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 4
OMNIPOINT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended |
September 30, February 25, | January 1, Nine months
-------------------------- 2000 through | 2000 through ended
2000 | 1999 September 30, | February 24, September 30,
| 2000 | 2000 1999
--------- | --------- ------------- | ------------- -------------
<S> <C> | <C> <C> | <C> <C>
Revenues: | |
Subscriber revenues $ 64,192 | $ 41,768 $ 142,985 | $ 42,458 $ 113,255
Prepaid revenues 61,928 | 42,584 148,618 | 44,781 87,352
Roamer revenues 18,939 | 8,510 39,014 | 9,629 19,135
Equipment sales 37,012 | 13,757 69,260 | 12,029 40,595
Affiliate and other revenues 6,703 | 255 12,372 | 246 2,521
--------- | --------- --------- | --------- ---------
Total revenues 188,774 | 106,874 412,249 | 109,143 262,858
--------- | --------- --------- | --------- ---------
| |
Operating expenses: | |
Cost of service 48,391 | 34,388 108,697 | 31,066 103,881
Cost of equipment sales 69,766 | 36,781 138,938 | 32,512 114,286
Cost of engineering and R&D | 1,806 2,872 | 2,266 3,663
General and administrative 64,398 | 47,404 124,510 | 51,100 120,656
Sales and marketing 114,643 | 39,936 179,560 | 38,283 114,422
Depreciation and amortization 77,846 | 49,893 186,634 | 38,603 143,360
Stock-based compensation | 3,902 | 5,478
--------- | --------- --------- | --------- ---------
Total operating expenses 375,044 | 214,110 741,211 | 193,830 605,746
--------- | --------- --------- | --------- ---------
Operating loss (186,270) | (107,236) (328,962) | (84,687) (342,888)
--------- | --------- --------- | --------- ---------
| |
Other income (expense): | |
Interest and financing expense (70,568) | (66,149) (170,923) | (58,421) (192,639)
Equity in net loss of | |
unconsolidated affiliates (28,167) | (1,712) (53,043) | (4,718)
Gain on sale of subsidiary stock | 37,120 | 37,120
Interest income and other, net 16,671 | 3,735 28,672 | 1,805 8,559
--------- | --------- --------- | --------- ---------
Total other income (expense) (82,064) | (27,006) (195,294) | (56,616) (151,678)
--------- | --------- --------- | --------- ---------
Net loss (268,334) | (134,242) (524,256) | (141,303) (494,566)
| |
Accretion of 7% cumulative convertible | |
preferred stock (5,073) | (5,229) (12,006) | (3,487) (15,688)
--------- | --------- --------- | --------- ---------
Net loss attributable to common shareholders (273,407) | (139,471) (536,262) | (144,790) (510,254)
| |
Other comprehensive losses (7,754) | (7,754) |
--------- | --------- --------- | --------- ---------
Comprehensive loss attributable to common | |
shareholders $(281,161) | $(139,471) $(544,016) | $(144,790) $(510,254)
========= | ========= ========= | ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 5
OMNIPOINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
February 25, | January 1, Nine months
2000 through | 2000 through ended
September 30, | February 24, September 30,
2000 | 2000 1999
------------- | --------------- -------------
<S> <C> | <C> <C>
Operating activities: |
Net loss $ (524,256) | $ (141,303) $ (494,566)
Adjustments to reconcile net loss to net cash |
used in operating activities: |
Gain on sale of subsidiary stock | (37,120)
Depreciation and amortization 186,634 | 38,603 143,360
Allowance for bad debts (8,490) | (4,103) (7,755)
Interest accretion (202) | 20,617
Equity in net losses of unconsolidated affiliates 53,043 | 3,006
Purchase of trading securities, net | (74,319)
Other, net 333 | 386 8,808
Changes in operating assets and liabilities, net of |
effects of VoiceStream purchase price allocation: |
Accounts receivable (8,908) | (10,847) (18,293)
Inventory 15,389 | 2,390 (19,864)
Prepaid expenses and other current assets 9,735 | 5,684 7,390
Accounts payable and accrued liabilities 70,914 | (87,788) 54,896
----------- | ----------- -----------
Net cash used in operating activities (205,808) | (196,978) (413,840)
----------- | ----------- -----------
|
Investing activities: |
Purchases of property and equipment (185,391) | (40,341) (98,844)
Purchases of FCC Licenses | (14,086)
Proceeds from sale of subsidiaries stock, net | 52,092
Investments in and advances to unconsolidated affiliates (82,356) | (1,291) 461
FCC Deposit | (6,197)
Other (3,067) | (10,027)
----------- | ----------- -----------
Net cash used in investing activities (270,814) | (41,632) (76,601)
----------- | ----------- -----------
|
Financing activities: |
Net proceeds from issuance of common and preferred stock | 3,599 255,527
Long-term debt borrowings 2,360,000 | 10,917 390,687
Long-term debt repayments (2,076,992) | (12,072) (8,257)
Deferred financing costs (177) | (7,110)
Payment of FCC Licenses (61,219) | (29,740) (83,836)
Capital contributions 272,200 |
Net payments to affiliates (2,601) |
----------- | ----------- -----------
Net cash provided by (used in) financing activities 491,211 | (27,296) 547,011
----------- | ----------- -----------
|
Change in cash and cash equivalents 14,589 | (265,906) 56,570
|
Cash and cash equivalents, beginning of period 73,544 | 347,557 194,732
----------- | ----------- -----------
Cash and cash equivalents, end of period $ 88,133 | $ 81,651 $ 251,302
=========== | =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 6
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Omnipoint Corporation ("Omnipoint" or "we") provides personal communication
services ("PCS") in urban markets in the United States using the Global System
for Mobile Communications, or GSM, technology. On February 25, 2000, Omnipoint
completed a merger with VoiceStream Wireless Corporation ("VoiceStream") and is
now a subsidiary of VoiceStream. VoiceStream also provides personal
communications services in urban markets in the United States using GSM.
On August 28, 2000, VoiceStream announced a definitive merger agreement with
Powertel, Inc. a GSM provider based in West Point, Georgia servicing the
Southeastern United States (the "Powertel Agreement"). Pursuant to the Powertel
Agreement, holders of Powertel common and preferred stock will receive
VoiceStream common shares at a conversion ratio ranging from .65, if the average
closing price of VoiceStream common stock is $130.77 or above, to .75, if the
average closing price of VoiceStream common stock is $113.33 or below. Between
these two prices the ratio adjusts to yield $85 in VoiceStream common stock for
each Powertel common share equivalent. The merger is subject to the customary
closing conditions, including approval by VoiceStream's and Powertel's
shareholders and legal and regulatory approvals.
On July 24, 2000, VoiceStream announced a definitive merger agreement with
Deutsche Telekom AG, a German telecommunications provider (the "Deutsche Telekom
Agreement"). Pursuant to the Deutsche Telekom Agreement, which was approved by
the Boards of Directors of both companies, each VoiceStream shareholder will
receive 3.2 Deutsche Telekom shares and $30 in cash for each VoiceStream common
share, subject to certain adjustments. VoiceStream shareholders are able to
elect either an all-share or all-cash option, subject to the proration terms of
the Deutsche Telekom Agreement. In connection with the merger, Deutsche Telekom
will assume all of VoiceStream's outstanding debt, currently totaling $5.1
billion. The merger is expected to qualify as a tax-free reorganization for
VoiceStream shareholders receiving Deutsche Telekom stock. The merger is subject
to the customary closing conditions, including approval by VoiceStream's
shareholders and legal and regulatory approvals and is expected to be completed
in the first half of 2001.
On September 5, 2000, Deutsche Telekom made a $5.0 billion investment in
VoiceStream in exchange for preferred stock convertible into common stock at a
price of $160 per share. Deutsche Telekom's $5.0 billion investment is
independent of the merger.
To facilitate the combination of the three companies, Deutsche Telekom and
Powertel have entered into a separate definitive agreement for Deutsche Telekom
to acquire Powertel and for the Powertel shareholders to receive 2.6353 Deutsche
Telekom shares for each Powertel common share, subject to certain
adjustments. The Deutsche Telekom/Powertel merger is expected to close
immediately after the Deutsche Telekom/VoiceStream merger closes. The
VoiceStream/Powertel merger will not close if the Deutsche Telekom/VoiceStream
merger is consummated. Thus, Powertel shareholders will receive Deutsche Telekom
shares unless the merger between VoiceStream and Deutsche Telekom is terminated.
The merger is expected to be completed in the first half of 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim consolidated financial statements and the
financial information included herein are unaudited, but reflect all adjustments
which are, in our opinion, necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented. All
such adjustments are of a normal, recurring nature. Results of operations for
interim periods presented herein are not necessarily indicative of results of
operations for the entire year.
Cash and cash equivalents
Cash and cash equivalents are stated at cost, which approximates market.
We consider all highly liquid debt instruments purchased with an
original maturity at time of purchase of three months or less to be cash
equivalents.
5
<PAGE> 7
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Intangible assets and amortization
Goodwill consists of the excess of the purchase price over the fair value
of assets in the merger with VoiceStream (see Note 3), and is being amortized
over a useful life of 20 years. Licensing costs are amortized over a useful life
of 40 years.
Revenue recognition
Service revenues based on customer usage are recognized at the time the
service is provided. Access and special feature service revenue are recognized
when earned. Sales of equipment, primarily handsets, are recognized upon
delivery to the customer. Prepaid coupon sales are deferred until service is
provided.
Supplemental cash flow disclosure
Cash paid for interest (net of amounts capitalized) was $125.8 million for
the nine months ended September 30, 2000 and $199.7 million for the same period
in 1999.
Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform to the 2000 presentation.
Purchase accounting adjustments
As a result of the VoiceStream merger and the push-down purchase accounting
that resulted, we recorded several non-cash adjustments including the following
(dollars in thousands) (see Note 3):
<TABLE>
<S> <C>
Contribution of net assets to joint ventures $ 261,800
Working capital adjustment $ (47,100)
Property, plant and equipment adjustment $ (363,000)
Licenses and other intangibles (excluding goodwill) $ 549,000
Long-term liabilities $ (35,300)
Other assets $ 10,400
Goodwill $ 3,946,200
Common stock $ 2,439,000
Deficit $ 1,858,000
</TABLE>
The above adjustments reflect the estimated fair value of assets and
liabilities acquired by VoiceStream. The adjustment to working capital includes
certain reserves recorded for assets estimated to be uncollectable, estimated
inventory obsolescence and estimated liabilities incurred prior to the merger
date. Some allocations are based on valuations which are currently being
finalized. We do not believe that the final purchase price allocation will
produce materially different results than those reflected above.
In connection with the VoiceStream merger and use of the purchase method to
account for the merger, the assets, liabilities and shareholders' equity of
Omnipoint have been adjusted, where necessary, to reflect the estimated fair
market value of such assets and liabilities and the VoiceStream common stock and
other consideration issued in the merger. As a result, our balance sheets,
results of operations and statements of cash flows are not comparable for
periods before and after the merger. Therefore, the consolidated statements of
operations and cash flows for the nine months ended September 30, 2000, are
presented as two distinct periods in the accompanying statements, the period
from January 1, 2000 to February 24, 2000, prior to the merger and the period
from February 25, 2000, to September 30, 2000, following the merger.
Loss per share
Omnipoint no longer presents loss per share information as all of
Omnipoint's common stock is owned by VoiceStream.
6
<PAGE> 8
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes to the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the consolidated
statements of operations, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that are subject to
hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB No. 133 - an
Amendment to FASB Statement No. 133", the effective date of SFAS No. 133 has
been deferred until fiscal years beginning after January 15, 2000. SFAS 133
cannot be applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at our election, before January 1, 1999).
We have not yet quantified the impact of adopting SFAS 133 on our financial
statements and have not determined the timing or method of adoption of SFAS
133. However, the statement could increase volatility in earnings and other
comprehensive income.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial
Statements." This bulletin is effective for the quarter ended December 31,
2000, with retroactive adoption to January 1, 2000. This bulletin establishes
more clearly defined revenue recognition criteria than previously existing
accounting pronouncements, and specifically addresses revenue recognition
requirements for non-refundable fees, such as activation fees collected by a
company upon entering into a contractual arrangement with a customer, such as an
arrangement to provide telecommunication services. We do not anticipate that
adoption of this bulletin will have a material impact on our financial
statements.
In July 2000, the FASB released Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25", which provides clarification of APB No. 25 for certain issues
such as the determination of an employee, the criteria for determining whether a
plan qualifies as a noncompensatory plan and the accounting consequences of
various modifications to the terms of a previously fixed stock option or award.
Our practices are in conformity with this guidance.
3. MERGER WITH VOICESTREAM
On February 25, 2000, we completed the merger with VoiceStream. The merger
was accounted for using the purchase method. Pursuant to the merger agreement,
0.825 of a share of VoiceStream common stock plus $8.00 in cash were exchanged
for each outstanding Omnipoint common share. In conjunction with the merger
agreement, VoiceStream committed to invest a total of $150.0 million in
Omnipoint, of which $102.5 million was invested in Omnipoint preferred stock
upon signing of the merger agreement in June 1999. The remaining $47.5 million
was invested in Omnipoint preferred stock on October 1, 1999.
7
<PAGE> 9
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. MERGER WITH VOICESTREAM - CONTINUED
In connection with the Omnipoint merger agreement, Hutchison, a subsidiary
of Hutchison Whampoa Limited, a Hong Kong Company, made an investment of $957.0
million into the combined company for common and redeemable convertible
preferred securities. Hutchison invested $102.5 million directly in Omnipoint
preferred stock subsequent to finalizing the merger agreement in June 1999 and
invested an additional $47.5 million in Omnipoint preferred stock in October
1999. The remaining $807.0 million was invested in VoiceStream upon the closing
of the merger. Upon completion of the merger, Hutchison exchanged its $150.0
million investment in Omnipoint preferred stock for VoiceStream common stock at
$29 per share. Additionally, Sonera invested $500.0 million in VoiceStream at
the closing of the Omnipoint merger, purchasing VoiceStream common shares at $57
per share.
In connection with its authority to regulate the sale and use of radio wave
spectrum used to provide PCS service in the United States, the FCC adopted rules
that granted a narrow category of entities ("Designated Entities") the exclusive
right to bid for and own C and F block licenses for the initial five year period
following award of the licenses. VoiceStream does not qualify as a Designated
Entity. Immediately prior to our merger with VoiceStream, the C and F Block
licenses, assets and liabilities associated with these licenses and operations
we held were transferred to two new joint venture entities controlled by Cook
Inlet Region, Inc. ("Cook Inlet"). Omnipoint accounted for this transfer of
non-monetary assets as an investment at VoiceStream's historical cost, which
equates to the fair value of these assets and liabilities as determined in the
purchase price allocation performed for the mergers with VoiceStream. Each of
these joint venture entities, Cook Inlet/VoiceStream GSM II PCS, LLC ("CIVS II")
and Cook Inlet/VoiceStream GSM III PCS, LLC ("CIVS III"), qualified as a
Designated Entity.
Cook Inlet has contributed a total of $75 million in cash to these joint
venture entities for its 50.1% ownership and exchange rights. Omnipoint
contributed a combination of non-cash assets and liabilities for its 49.9%
ownership. Cook Inlet holds the majority of voting power in each of these joint
venture entities. The total investment in CIVS II and III, including advances
under promissory notes, was $641.9 million and $55.0 million, respectively, as
of September 30, 2000. Upon entering into these joint ventures, Cook Inlet was
granted exchange rights whereby Cook Inlet has certain rights, but not the
obligation, to exchange their joint venture interests for approximately 3.8
million shares of VoiceStream common stock for a 30 day period beginning after
the FCC regulatory holding period has expired. For CIVS II, this date is in the
second quarter of 2002, and for CIVS III in the fourth quarter of 2004. The
rights are conditioned upon the FCC's Designated Entity rules and VoiceStream's
legal ability to own the C and F Block licenses at the time of the exchange
under such rules.
The initial fair value of these exchange rights totaled $28.0 million and was
recorded as an increase to investments in and advances to unconsolidated
affiliates and additional paid-in capital. The exchange rights are being
amortized over the remaining FCC restricted holding periods for the respective
licenses. For the three and nine months ended September 30, 2000, $2.9 million
and $6.8 million, respectively, in amortization expense was recognized for these
rights.
8
<PAGE> 10
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. MERGER WITH VOICESTREAM - CONTINUED
In August, 2000, through a subsection of the Department of Defense
Appropriations Act of 2001, the Designated Entity rules were amended such that,
effective upon the date of enactment, Cook Inlet could transfer or assign its C
and F Block licenses to non-designated entities without penalty. Cook Inlet has
subsequently indicated its intention to exercise its exchange rights in the
joint ventures and has filed applications with the FCC for approval for the
transfer of control of its wireless licenses to VoiceStream. Upon exercise of
these exchange rights we will record goodwill which will result in additional
amortization expense. We expect the exercise of the exchange rights to occur in
the fourth quarter of 2000.
Omnipoint and the Cook Inlet joint ventures have entered into reciprocal
technical service agreements which allow each to utilize airtime on the other's
spectrum, and/or utilize wireless system infrastructure, in certain agreed upon
markets. The agreements are structured such that each performs as a reseller for
the other and related fees are charged and paid between the parties.
Unaudited pro forma operating results for the nine month periods, assuming
the merger with VoiceStream occurred on January 1 of the respective years are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Total revenues $ 509,000 $ 228,000
Net loss $ (688,000) $ (599,000)
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
(Dollars in thousands)
Buildings and improvements $ 23,895 $ 30,444
Wireless communications systems 432,273 1,182,420
Furniture and equipment 62,971 90,022
----------- ------------
519,139 1,302,886
Less accumulated depreciation (55,466) (316,560)
----------- ------------
463,673 986,326
Construction in progress 183,328 103,246
----------- ------------
$ 647,001 $ 1,089,572
=========== ============
</TABLE>
Depreciation expense was $25.9 million and $46.6 million for the three
months ended September 30, 2000 and 1999, respectively, and was $88.5 million
and $128.8 million for the nine months ended September 30, 2000 and 1999,
respectively.
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
New credit facility
Vendor facility $ 130,000
Term Loans 1,900,000
11 5/8% Senior Notes and Series A Senior Notes 6,832 $ 450,000
14% Senior Notes 142,800
11 1/2% Senior Notes 102,665 205,000
12% Institutional Notes 25,000
Vendor financing agreements 1,870,902
FCC license obligations 63,616 334,971
----------- -----------
2,203,113 3,028,673
Less current portion of long-term debt (63,616) (164,556)
Unamortized discount and premium, net (2,308) 42
----------- -----------
$ 2,137,189 $ 2,864,159
=========== ===========
</TABLE>
9
<PAGE> 11
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LONG-TERM DEBT - CONTINUED
On February 25, 2000, immediately following the completion of the
VoiceStream merger, VoiceStream and Omnipoint (the "borrowers") entered into
a new credit facility with a consortium of lenders. Pursuant to the new credit
facility, the lenders have made available revolving credit loans and term loans
in an aggregate principal amount totaling $3.25 billion. The revolving credit
portion of the new credit facility is a $1.35 billion reducing revolving credit.
Under the terms of the new credit facility, a subsidiary of Omnipoint is
designated as a borrower subject to the same terms and conditions as
VoiceStream. Immediately following the completion of the VoiceStream merger,
proceeds of draws on the new credit facility were used to repay certain of our
long-term debt.
The new credit facility permits up to $1.5 billion of additional
indebtedness, including up to $1 billion for a vendor facility, which would
become part of the new credit facility, by amendment, subject to the same
covenants and secured by the same collateral. On April 28, 2000, the borrowers
entered into a vendor facility with an infrastructure equipment vendor and a
bank that provides up to $1 billion in senior credit facilities and VoiceStream
has agreed to acquire certain equipment, software and services from the vendor.
The vendor facility has a maturity of 9.25 years and is available in multiple
draws, including $500 million that was drawn on April 28, 2000, $250 million
that was drawn in July 2000, and $250 million that can be drawn by June 30,
2001. Net proceeds of the vendor facilities will be used for the same purposes
as other proceeds under the new credit facility.
The availability of the revolving credit portion of the new credit facility
declines over the period commencing three years after the closing date through
the eighth anniversary of the closing date in the following percentages: 10% in
year four, 15% in year five, 20% in year six, 20% in year seven and 35% in year
eight. The term loan portion of the new credit facility is comprised of a $900
million Tranche A and a $1 billion Tranche B. Tranche A is required to be
amortized at the same rate that the availability under the revolving credit
portion of the new credit facility reduces with a final maturity on the eighth
anniversary of the closing date. Tranche B is required to be amortized in the
following amounts during the period commencing three years after the closing
date through the ninth anniversary: $10 million in each of years four through
eight and the remaining balance in year nine.
Borrowings under Tranche A bear interest, at the borrower's option, at an
annual rate of interest equal to either (1) the greater of (a) the prime rate,
or (b) the Federal Funds rate plus 1/2%, or (2) a Eurodollar rate, in each
instance plus an applicable margin. Such applicable margin will range to a
maximum of 1.50%, in the case of loans based on the prime rate or Federal Funds
rate, and to a maximum of 2.75%, in the case of loans based on a Eurodollar
rate, in each case based upon certain factors including the ratio of total
indebtedness to operating cash flow, as defined in the new credit facility.
The $1 billion Tranche B and the vendor facility tranches bear interest, at
VoiceStream's option, at an annual rate of interest equal to either (1) the
greater of (a) the prime rate, or (b) the Federal Funds rate plus 1/2%, or (2) a
Eurodollar rate, plus an applicable margin. Such applicable margin is a fixed
percentage of 1.75%, in the case of loans based on the prime rate or Federal
Funds rate, and 3.0% in the case of loans based on a Eurodollar rate. The
applicable margin on the final $250 million vendor facility tranche, which can
be drawn by June 30, 2001, may be subject to adjustment at any time before
disbursement of the funds.
The credit facility requires the borrowers to enter into interest rate
hedging agreements to manage the interest rate exposure pertaining to borrowings
under the credit facility. The borrowers had entered into interest rate caps,
collars and swaps with a total notional amount of $325.0 million at September
30, 2000. Generally these instruments have initial terms ranging from six months
to four years and effectively convert variable rate debt to fixed rate. The
amount of unrealized gain or loss attributable to changing interest rates at
September 30, 2000 was not material.
The new credit facility contains affirmative and negative covenants, with
which the borrowers must comply, including financial covenants, and provides for
various events of default. The repayment of the loans is secured by, among other
things, the grant of a security interest in the capital stock and assets of the
borrowers and certain of their subsidiaries. As of September 30, 2000, we were
in compliance with respect to these affirmative and negative covenants.
10
<PAGE> 12
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LONG-TERM DEBT - CONTINUED
During the second and third quarters of 2000, certain holders of Omnipoint's
outstanding senior notes elected to exchange their notes for senior notes
offered by VoiceStream. This exchange resulted in a non-cash capital
contribution of $436.0 million by VoiceStream, a $245.1 million inter-company
payable to VoiceStream, and a $46.7 million adjustment to goodwill. The goodwill
recorded is the difference between the total value of debt exchanged, and the
fair value of debt assumed in the Omnipoint merger and is treated as an
adjustment to the total purchase price of Omnipoint.
Included in interest expense as of September 30, 2000 is $7.9 million of
accrued interest due on the inter-company payable to VoiceStream related to the
second quarter debt exchanges. Interest was accrued at 14% on the $142.8 million
debt exchanged and 11 1/2% on the $102.3 million debt exchanged, representative
of the interest rates available to Omnipoint.
The following table summarizes the Omnipoint debt exchanged (dollars in
millions):
<TABLE>
<CAPTION>
Omnipoint debt exchanged
---------------------------------------------------------------
Balance Rate Description Due
---------------------------------------------------------------
<S> <C> <C> <C>
(Second quarter 2000 exchanges)
$142.8 14% Senior Notes 2003
$102.3 11 1/2% Senior Notes 2009
(Third quarter 2000 exchanges)
$193.5 11 5/8% Senior Notes 2006
$242.5 11 5/8% Series A Senior Notes 2006
</TABLE>
The aggregate amounts of principal maturities of Omnipoint's long-term debt
at September 30, 2000, are as follows (dollars in thousands):
<TABLE>
<S> <C>
Twelve months ended September 30, 2001 $ 63,616
Remainder of 2001
Year ended December 31,
2002
2003 100,000
2004 145,000
Thereafter 1,894,497
-------------
$ 2,203,113
=============
</TABLE>
6. EAST/WEST MERGER
Immediately prior to the merger with VoiceStream, we acquired East/West
Communications, Inc. which provided five 10 MHz PCS licenses including two in
the major markets of Los Angeles, CA and Washington, DC.
7. SALE OF OMNIPOINT TECHNOLOGIES, INC.
On June 27, 2000, we sold a wholly-owned subsidiary, Omnipoint
Technologies, Inc. ("OTI"), to Xircom, Inc. ("Xircom"). Pursuant to the terms of
the sales agreement, we exchanged all of the outstanding common shares of OTI
for approximately 1.2 million common shares of Xircom. The sale was accounted
for as a tax-free reorganization and we did not recognize any gain or loss on
the transaction. The Xircom shares received were valued at approximately $40.4
million, representing the market price per share at the time of the sale, after
discounting for trading restrictions. The operations of OTI were immaterial to
the consolidated operations of Omnipoint.
Included in other comprehensive loss for the three months ended September 30,
2000, is a mark to market adjustment of $7.8 million to recognize the unrealized
loss on the Xircom shares held as of September 30, 2000.
11
<PAGE> 13
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. RELATED PARTY TRANSACTIONS
Omnipoint and the Cook Inlet joint ventures have entered into reciprocal
technical services agreements which allow each to utilize airtime on the other's
spectrum, and/or utilize wireless system infrastructure, in certain agreed upon
markets. The agreements are structured such that each performs as a reseller for
the other and related fees are charged and paid between the parties. During the
three months ended September 30, 2000, we earned revenues of $6.3 million and
incurred expenses of $8.4 million related to these agreements. For the nine
months ended September 30, 2000, we earned revenues of $11.2 million and
incurred expenses of $14.5 million related to these agreements.
Omnipoint's financial statements include an allocation of certain
centralized costs that were incurred by VoiceStream and benefit all of its
operations, including those of Omnipoint. Such allocations include the costs of
customer service operations and accounting. These items are allocated to the
respective operational units in a manner that reflects the relative time devoted
to each of the operational units. Omnipoint was allocated costs of $9.4 million
for the three months ended September 30, 2000, and $13.9 million for the period
February 25, 2000 to September 30, 2000.
In the third quarter of 2000, VoiceStream changed its method of recording
certain centrally incurred costs within its consolidated group. As a result of
this change, Omnipoint's balance sheet no longer includes inventory held at the
distribution centers and payroll related assets and liabilities. The effect of
transferring these items from Omnipoint to VoiceStream resulted in a net change
to the payable to affiliate balance.
During the quarter, Omnipoint received capital contributions of $748.0
million from VoiceStream consisting of a non-cash contribution of $475.8 million
which was primarily used to fund the exchange of Omnipoint's 11 5/8% Senior
Notes for VoiceStream 10 3/8% Senior Notes, and a cash contribution of $272.2
million used for general corporate purposes (see note 5).
9. SUBSEQUENT EVENTS
License trades between AT&T Wireless and Omnipoint Holdings, LLC
On July 21, 2000, an Omnipoint subsidiary, Omnipoint Holdings, Inc.
("OHI"), entered into an agreement with AT&T Wireless PCS, LLC ("AT&T") for the
exchange of certain D and E Block 10 MHz licenses held by OHI in Detroit and St.
Louis for certain A Block 10 MHz licenses held by AT&T in Phoenix and Puerto
Rico. The population covered by the AT&T licenses is approximately 7.2 million,
as compared to 8.7 million for the licenses traded by OHI. AT&T has agreed to
pay OHI $11.7 million as additional consideration for the additional covered
population of the licenses received from OHI. The parties have filed
applications with the FCC requesting approval of the exchange.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
LITIGATION REFORM ACT OF 1995.
Information contained or incorporated by reference herein that is not based on
historical fact, including without limitation, statements containing the words
"believes," "may," "will," "estimate," "continue," "anticipates," "intends,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, events or developments to be
materially different from any future results, events or developments expressed
or implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions, both nationally
and in the regions in which Omnipoint Corporation ("Omnipoint") operates;
technology changes; competition; changes in business strategy or development
plans; the high leverage of Omnipoint; the ability to attract and retain
qualified personnel; existing governmental regulations and changes in, or the
failure to comply with, governmental regulations; liability and other claims
asserted against Omnipoint; and other factors referenced in Omnipoint's filings
with the Securities and Exchange Commission. GIVEN THESE UNCERTAINTIES, READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.
Omnipoint disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future results, events or developments.
The following is a discussion and analysis of the consolidated financial
condition and results of operations of Omnipoint and should be read in
conjunction with our consolidated financial statements and notes thereto and
other financial information included herein as well as our Form 10-Q for the
quarter ended March 31 and June 30, 2000, and in Omnipoint's Form 10-K for the
year ended December 31, 1999. Due to the phase of the business cycle of
Omnipoint's personal communications services ("PCS") operations, Omnipoint's
operating results for prior periods may not be indicative of future performance.
Additionally, our operating results may not be comparable to those of prior
periods due to our merger with VoiceStream and changes in business rules and
practices implemented as a result of our merger with VoiceStream.
OVERVIEW
We provide personal communication services in the United States through the
ownership and operation of PCS licenses and through our minority interests in
joint ventures that own and operate similar licenses. We employ Global System
for Mobile Communications ("GSM") technology, which is the most widely used
wireless technology in the world. We currently operate in the New York, Mid
Atlantic, New England, south Florida and the Midwest markets.
On August 28, 2000, VoiceStream announced a definitive merger agreement with
Powertel, Inc. a GSM provider based in West Point, Georgia servicing the
Southeastern United States. Pursuant to the Powertel Agreement, holders of
Powertel common and preferred stock will receive VoiceStream common shares at a
conversion ratio ranging from .65, if the average closing price of VoiceStream
common stock is $130.77 or above, and .75 if the average closing price of
VoiceStream common stock is $113.33 or below. Between these two prices the ratio
adjusts to yield $85 in VoiceStream common stock for each share of Powertel
common stock equivalent. The merger is subject to the customary closing
conditions, including approval by VoiceStream's and Powertel's shareholders and
legal and regulatory approvals.
On July 24, 2000, VoiceStream announced a definitive merger agreement with
Deutsche Telekom AG, a German telecommunications provider. Pursuant to the
Deutsche Telekom Agreement, which was approved by the Boards of Directors of
both companies, each VoiceStream shareholder will receive 3.2 Deutsche Telekom
shares and $30 in cash for each VoiceStream common share, subject to certain
adjustments. VoiceStream shareholders are able to elect either an all-share or
all-cash option, subject to the proration terms of the Deutsche Telekom
Agreement. In connection with the merger, Deutsche Telekom will assume all of
VoiceStream's outstanding debt, currently totaling $5.1 billion. The merger is
subject to the customary closing conditions, including approval by VoiceStream's
shareholders and legal and regulatory approvals. The merger is expected to be
completed in the first half of 2001. The merger is expected to qualify as a
tax-free reorganization for VoiceStream shareholders receiving Deutsche Telekom
stock.
13
<PAGE> 15
On September 5, 2000, Deutsche Telekom made a $5.0 billion investment in
VoiceStream in exchange for preferred stock convertible into common stock at a
price of $160 per share. Deutsche Telekom's $5.0 billion investment is
independent of the merger.
To facilitate the combination of the three companies, Deutsche Telekom and
Powertel have entered into a separate definitive agreement for Deutsche Telekom
to acquire Powertel and for the Powertel shareholders to receive 2.6353 Deutsche
Telekom shares for each Powertel common share, subject to certain adjustments.
The Deutsche Telekom/Powertel merger is expected to close immediately after the
Deutsche Telekom/VoiceStream merger closes. The VoiceStream/Powertel merger will
not close if the Deutsche Telekom/VoiceStream merger is consummated. Thus,
Powertel shareholders will receive Deutsche Telekom shares unless the merger
between VoiceStream and Deutsche Telekom is terminated. The merger is expected
to be completed in the first half of 2001.
On February 25, 2000, the effective date of our merger with VoiceStream,
each outstanding Omnipoint common share was exchanged for 0.825 of a VoiceStream
common share plus $8.00 in cash, and we became a subsidiary of VoiceStream.
Immediately prior to the merger with VoiceStream, we acquired East/West
Communications, Inc. which provided five 10 MHz PCS licenses including two in
the major markets of Los Angeles and Washington, DC.
In connection with the VoiceStream merger and use of the purchase method to
account for the merger, the assets, liabilities and shareholders' equity of
Omnipoint have been adjusted, where necessary, to reflect the estimated fair
market value of such assets and liabilities and the VoiceStream common stock and
other consideration issued in the merger. As a result, our balance sheets,
results of operations and statements of cash flows are not comparable for
periods before and after the merger. Therefore, the consolidated statements of
operations and cash flows for the nine months ended September 30, 2000, are
presented as two distinct periods in the accompanying statements, the period
from January 1, 2000 to February 24, 2000, prior to the merger and the period
from February 25, 2000, to September 30, 2000, following the merger. In the
following discussion and analysis, references to results and activities for the
nine months ended September 30, 2000, combine the two periods and explanations
have been provided where the merger-related accounting changes have materially
affected the comparability of the periods.
In addition to purchase price adjustments related to the merger, results
prior to February 25, 2000 are not comparable with subsequent periods due to the
transfer of Omnipoints C and F Block licenses, assets and liabilities associated
with these licenses and operations (primarily Philadelphia, Atlantic City and
certain non-operating licenses) to two new joint venture entities controlled by
Cook Inlet (see note 3). Subsequent to February 24, 2000, these operations were
accounted for using the equity method.
RESULTS OF OPERATIONS
We had approximately 1,165,100 customers as of September 30, 2000, of
which 511,000 were monthly subscribers and 654,100 were prepaid customers.
REVENUES
Service revenues (subscriber, prepaid and roamer revenues) for the three
months ended September 30, 2000 were $145.1 million, as compared to revenues of
$92.9 million for the three months ended September 30, 1999, an increase of
$52.2 million, or 56.2%. Service revenues for the nine months ended September
30, 2000 were $427.5 million, as compared to service revenues of $219.7 million
for the nine months ended September 30, 1999, an increase of $207.7 million, or
94.5%. These increases were the result of the increases in our customer base
during these periods.
Equipment revenues for the three months ended September 30, 2000 were $37.0
million, as compared to revenues of $13.8 million for September 30, 1999, an
increase of $23.3 million, or 169.0%. For the nine months ended September 30,
2000, equipment revenues were $81.3 million, as compared to revenues of $40.6
million for the nine months ended September 30, 1999, an increase of $40.7
million, or 100.2%. These increases are attributable to an increase in handset
sales.
14
<PAGE> 16
OPERATING EXPENSES
Total cost of service for the quarter ended September 30, 2000, was $48.4
million, as compared to $34.4 million for the quarter ended September 30, 1999,
an increase of $14.0 million, or 40.7%. Cost of service for the nine months
ended September 30, 2000, was $139.8 million, as compared to $103.9 million for
the same period in 1999, an increase of $35.9 million, or 34.5%. The increase in
these periods is the result of the additional costs associated with supporting a
larger customer base.
Cost of equipment sales for the quarter ended September 30, 2000 were $69.8
million, as compared to $36.8 million for the quarter ended September 30, 1999,
an increase of $33.0 million, or 89.7%. Cost of equipment sales for the nine
months ended September 30, 2000 were $171.5 million, as compared to $114.3
million for the nine months ended September 30, 1999, an increase of $57.2
million, or 50.0%. The increase in these periods is a result of our increased
handset sales during the current year.
Sales and marketing costs for the third quarter of 2000 were $114.6
million, as compared to $39.9 million for the third quarter in 1999, an increase
of $74.7 million, or 187.1%. Sales and marketing costs increased $103.4 million
or 90.4% to $217.8 million for the nine months ended September 30, 2000 from
$114.4 million for the same period of 1999. The increases are due to the initial
rollout of VoiceStream's Get More marketing strategy in Omnipoint markets.
General and administrative costs for the third quarter of 2000 were $64.4
million, as compared to $47.4 million for the third quarter of 1999, an increase
of $17.0 million, or 35.8%. Year to date general and administrative costs of
$175.6 million increased $55.0 million or 45.5% from $120.7 million in the
comparable period of 1999. These increases are due to a combination of charges
related to the merger with VoiceStream and increased costs associated with
supporting a larger customer base.
Depreciation and amortization expenses for the third quarter were $77.8
million, as compared to $49.9 million for the third quarter of 1999, an increase
of approximately $28.0 million, or 56.0%. Depreciation and amortization expenses
for the nine months ended September 30, 2000 were $225.2 million, as compared to
$143.4 million for the nine months ended September 30, 1999, an increase of
approximately $81.9 million, or 57.1%. The increase in the current year is
largely due to the increase in intangibles, including goodwill, due to the
purchase price allocation associated with the VoiceStream merger.
OTHER EXPENSES AND INCOME
Interest expense for the third quarter of 2000 was $70.6 million, as
compared to $66.1 million for the third quarter of 1999, an increase of $4.4
million, or 6.7%. Year to date 2000 interest expense was $229.3 million, as
compared to $192.6 million for the year to date 1999, an increase of $36.7
million, or 19.1%. The increase in the current year to date period is due to the
increase in long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $402.8 million for the nine
months ended September 30, 2000. Adjustments to the $665.6 million net loss to
reconcile to net cash used in operating activities included $225.2 million of
depreciation and amortization expense and $53.0 million in equity in net losses
of unconsolidated affiliates. Net cash used in operating activities was $413.8
million for the nine months ended September 30, 1999.
Net cash used in investing activities was $312.4 million for the nine
months ended September 30, 2000. Investing activities consist primarily of fixed
asset purchases of $225.7 million related to the expansion of our wireless
network and $83.6 million of additions to investments in and advances to
unconsolidated affiliates. Net cash used in investing activities was $76.6
million for the nine months ended September 30, 1999.
Net cash provided by financing activities was $463.9 million for the nine
months ended September 30, 2000. Financing activities consist primarily of net
proceeds of $2.4 billion related to borrowings under the new credit facility of
which $2.1 billion was used to refinance existing debt, the repayment of certain
long-term debt and the costs associated with the securing of the new credit
facility. Net cash provided by financing activities was $547.0 million for the
nine months ended September 30, 1999.
15
<PAGE> 17
During the third quarter of 2000, VoiceStream received $5.0 billion in
proceeds from the sale of convertible preferred stock to Deutsche Telekom, $100
million of which was used to pay down our draws under the revolving credit
portion of the new credit facility. The remainder of the proceeds from this
investment will be used to fund expenditures to expand the VoiceStream and
Omnipoint wireless networks, to fund the acquisition of additional spectrum and
operating losses.
On February 25, 2000, immediately following the completion of the
VoiceStream merger, VoiceStream and Omnipoint ("the borrowers") entered into a
new credit facility with a consortium of lenders. Pursuant to the new credit
facility, the lenders have made available revolving credit loans and term loans
in an aggregate principal amount totaling $3.25 billion. The revolving credit
portion of the new credit facility is a $1.35 billion reducing revolving credit.
Under the terms of the new credit facility, a subsidiary of Omnipoint is
designated as a borrower subject to the same terms and conditions as
VoiceStream. Immediately following the completion of the VoiceStream merger,
proceeds of draws on the new credit facility were used to repay certain
long-term debt of Omnipoint.
The new credit facility permits up to $1.5 billion of additional
indebtedness, including up to $1 billion for a vendor facility, which would
become part of the new credit facility, by amendment, subject to the same
covenants and secured by the same collateral. On April 28, 2000, we entered into
a vendor facility with an infrastructure equipment vendor and a bank that
provides up to $1 billion in senior credit facilities and VoiceStream has agreed
to acquire certain equipment, software and services from the vendor. The vendor
facility has a maturity of 9.25 years and is available in multiple draws,
including $500 million that was drawn on April 28, 2000, $250 million that was
drawn in July 2000, and $250 million that can be drawn by June 30, 2001. Net
proceeds of the vendor facilities will be used for the same purposes as other
proceeds under the new credit facility.
The availability of the revolving credit portion of the new credit facility
declines over the period commencing three years after the closing date through
the eighth anniversary of the closing date in the following percentages: 10% in
year four, 15% in year five, 20% in year six, 20% in year seven and 35% in year
eight. The term loan portion of the new credit facility is comprised of a $900
million Tranche A and a $1 billion Tranche B. Tranche A is required to be
amortized at the same rate that the availability under the revolving credit
portion of the new credit facility reduces with a final maturity on the eighth
anniversary of the closing date. Tranche B is required to be amortized in the
following amounts during the period commencing three years after the closing
date through the ninth anniversary: $10 million in each of years four through
eight and the remaining balance in year nine.
Borrowings under Tranche A bear interest, at the borrowers option, at an
annual rate of interest equal to either (1) the greater of (a) the prime rate,
or (b) the Federal Funds rate plus 1/2%, or (2) a Eurodollar rate, in each
instance plus an applicable margin. Such applicable margin will range to a
maximum of 1.50% in the case of loans based on the prime rate or Federal Funds
rate, and to a maximum of 2.75% in the case of loans based on a Eurodollar rate,
in each case based upon certain factors including the ratio of total
indebtedness to operating cash flow, as defined in the new credit facility.
The $1 billion Tranche B and the vendor facility bear interest, at
VoiceStream's option, at an annual rate of interest equal to either (1) the
greater of (a) the prime rate, or (b) the Federal Funds rate plus 1/2%, or (2)
a Eurodollar rate, plus an applicable margin. Such applicable margin is a fixed
percentage of 1.75% in the case of loans based on the prime rate or Federal
Funds rate, and 3.0% in the case of loans based on a Eurodollar rate. The
applicable margin on the final $250 million vendor facility tranches, which must
be drawn before June 30, 2001 may be subject to adjustment at any time before
disbursement of the funds.
16
<PAGE> 18
The new credit facility contains affirmative and negative covenants, with
which the borrowers must comply, including financial covenants, and provides for
various events of default. The repayment of the loans is secured by, among other
things, the grant of a security interest in the capital stock and assets of the
borrowers and certain of their subsidiaries. As of September 30, 2000, we were
in compliance with respect to these affirmative and negative covenants.
During the second and third quarters of 2000, certain holders of
Omnipoint's outstanding senior notes elected to exchange their notes for senior
notes offered by VoiceStream. This exchange resulted in a non-cash capital
contribution of $436.0 million by VoiceStream, a $245.1 million inter-company
payable to VoiceStream, and a $46.7 million adjustment to goodwill. The goodwill
recorded is the difference between the total value of debt exchanged, and the
fair value of debt assumed in the Omnipoint merger and is treated as an
adjustment to the total purchase price of Omnipoint.
Included in interest expense as of September 30, 2000 is $7.9 million of
accrued interest due on the inter-company payable to VoiceStream related to the
second quarter debt exchanges. Interest was accrued at 14% on the $142.8 million
debt exchanged and 11 1/2% on the $102.3 million debt exchanged, representative
of the interest rates available to Omnipoint.
The following table summarizes the Omnipoint debt exchanged (dollars in
millions):
<TABLE>
<CAPTION>
Omnipoint debt exchanged
--------------------------------------------------------------------------
Balance Rate Description Due
----------- ------- ---------------------- -----
<S> <C> <C> <C>
(Second quarter 2000 exchanges)
$142.8 14% Senior Notes 2003
$102.3 11 1/2% Senior Notes 2009
(Third quarter 2000 exchanges)
$193.5 11 5/8% Senior Notes 2006
$242.5 11 5/8% Series A Senior Notes 2006
</TABLE>
Following the completion of these exchanges, $6.8 million of the Omnipoint
11 5/8% Senior Notes and Series A Senior Notes and $102.7 million of the
Omnipoint 11 1/2% Senior Notes remain outstanding.
During the quarter, Omnipoint received capital contributions of $748.0
million from VoiceStream consisting of a non-cash contribution of $475.8 million
which was primarily used to fund the exchange of Omnipoint's 11 5/8% Senior
Notes for VoiceStream 10 3/8% Senior Notes, and a cash contribution of $272.2
million used for general corporate purposes.
As a result of the merger, we are now a subsidiary of VoiceStream. We are,
in part, dependant on VoiceStream for future funding for operations, capital
activity and debt service. We believe that we will require substantial amounts
of additional capital over the next several years and anticipate that much of
this capital will be contributed or loaned by our parent, VoiceStream, or
obtained from other financing arrangements. A subsidiary of Omnipoint is
a co-borrower under VoiceStream's new credit facility, which will provide a
source of debt financing. There can be no assurance, however, that the merged
company will obtain additional funding for our operations and capital
expenditures. To the extent that the build-out of the networks is faster than
expected, the costs are greater than anticipated, or we take advantage of other
opportunities, including those that may arise through current and future FCC
actions, we may require additional funding to implement our business strategy.
In July 1997, and subsequently amended in June 1999 and thereafter,
Omnipoint, through its then wholly-owned subsidiary OPCS Philadelphia Holdings
LLC ("Philadelphia Holdings"), (subsequently transferred to CIVS II on February
25, 2000) entered into a credit facility agreement with a telecommunications
equipment manufacturer to provide financing to Philadelphia Holdings up to $150
million for the purpose of financing the build out of networks in the
Philadelphia and Dover markets. On May 4, 2000, Cook Inlet/VoiceStream GSM II,
LLC ("CIVS II"), through Philadelphia Operating Company ("Philadelphia
Operating"), a wholly-owned subsidiary of Philadelphia Holdings, entered into an
agreement to refinance a $350 million facility with the same lender ("New CIVS
Credit Facility") for the purpose of financing the continued build out of
networks and the operations of the Philadelphia, Atlantic City and Dover
markets. Under the terms of the New CIVS Credit Facility, Philadelphia Operating
is subject to certain financial and operational covenants, including
restrictions on levels of indebtedness, minimum annualized revenues and cash
flows and certain other financial maintenance requirements. Additionally, the
New CIVS Credit Facility provides that, among other events, failure to pay
amounts due to the FCC shall constitute an event of default. The New CIVS Credit
Facility is collateralized by substantially all of the assets of Philadelphia
Operating and its license subsidiaries, including a pledge of all capital stock
of each license subsidiary.
The New CIVS Credit Facility consists of a revolving credit facility of up
to $150 million and a $200 million term loan. The term loan was drawn at the
closing of the VoiceStream merger. The principal amount of the New CIVS Credit
Facility is payable in quarterly installments beginning in 2004, with a final
payment for the revolving portion of the facility due on March 31, 2008 and the
final payment for the term loan due on March 31, 2009. Interest on the New CIVS
Credit Facility is payable at varying interest rates at a base rate or LIBOR
plus, in each case, a set margin and commitment fee based on Philadelphia
Operating's revolver utilization rate.
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Recently issued accounting pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the consolidated statements of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that are subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133 - on Amendment to
FASB Statement No. 133", the effective date of SFAS No. 133 has been deferred
until fiscal years beginning after January 15, 2000. SFAS 133 cannot be applied
retroactively. SFAS 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1998 (and, at our
election, before January 1, 1999).
We have not yet quantified the impact of adopting SFAS 133 on our
financial statements and have not determined the timing or method of adoption
of SFAS 133. However, the statement could increase volatility in earnings and
other comprehensive income.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial
Statements." This bulletin is effective for the quarter ending December 31,
2000, with retroactive adoption to January 1, 2000. This bulletin establishes
more clearly defined revenue recognition criteria than previously existing
accounting pronouncements, and specifically addresses revenue recognition
requirements for non-refundable fees, such as activation fees collected by a
company upon entering into a contractual arrangement with a customer, such as an
arrangement to provide telecommunication services. We do not anticipate that
adoption of this bulletin will have a material impact on our financial
statements.
In July 2000, the FASB released Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB No.
25", which provides clarification of APB Opinion No. 25 for certain issues such
as the determination of an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan and the accounting consequences of various
modifications to the terms of a previously fixed stock option or award. Our
practices are in conformity with this guidance.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material, pending legal proceedings to which Omnipoint or any
of its subsidiaries or affiliates is a party or of which any of their property
is subject which, if adversely decided, would have a material adverse effect on
Omnipoint.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Omnipoint Corporation
By /s/ Cregg Baumbaugh By /s/ Allyn Hebner
----------------------------------------- ------------------------------
Cregg Baumbaugh Allyn P. Hebner
Executive V.P. - Finance/ Corporate Vice President and Controller
Development (Principal Financial Officer) (Principal Accounting Officer)
Dated: November 20, 2000
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