<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 JUNE 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)
3650 131ST AVENUE S.E.,
BELLEVUE, WASHINGTON 98006
---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(425) 653-4600
--------------------------------------------------------------------------------
(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 JUNE 30, 2000
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of June 30, 2000, and December 31, 1999 3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2000, and June 30, 1999 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000, and June 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
-2-
<PAGE> 3
OMNIPOINT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, | December 31,
2000 | 1999
----------- | -----------
(Unaudited) |
ASSETS |
<S> <C> | <C>
Current assets: |
Cash and cash equivalents $ 4,412 | $ 347,557
Accounts receivable, net of allowance for doubtful accounts |
of $12,701 and $14,798, respectively 87,511 | 66,590
Inventory 57,060 | 39,144
Prepaid expenses and other current assets 13,690 | 47,079
----------- | -----------
Total current assets 162,673 | 500,370
|
Property and equipment, net of accumulated depreciation |
of $29,498 and $316,560, respectively 578,178 | 1,089,572
Licensing costs and other intangible assets, net of accumulated |
amortization of $9,810 and $72,885, respectively 979,596 | 731,082
Goodwill, net of accumulated amortization of $68,763 |
and $0, respectively 3,844,786 |
Investments in and advances to unconsolidated affiliates 684,793 | 6,608
Other assets and investments 43,221 |
----------- | -----------
$ 6,293,247 | $ 2,327,632
=========== | ===========
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
Current liabilities: |
Accounts payable $ 4,846 | $ 66,972
Accrued liabilities 120,369 | 173,260
Deferred revenue 37,782 | 15,686
Construction accounts payable 63,645 | 1,821
Payable to affiliate 283,077 |
Current portion of long-term debt 94,520 | 164,556
----------- | -----------
Total current liabilities 604,239 | 422,295
|
Long-term debt 2,586,652 | 2,864,159
|
Shareholders' equity: |
7% Cumulative convertible preferred stock, par value $1,000 per share, |
10,000,000 shares authorized; 317,760 and 325,000 shares issued |
and outstanding, respectively 302,416 | 297,109
Series A non-voting convertible preferred stock, par value $0.01 per |
share, 12,500 shares authorized, issued and 300,000 | 300,000
outstanding |
Common stock, no par value, and paid in capital 2,755,862 | 315,920
Deferred compensation | (13,978)
Deficit (255,922) | (1,857,873)
----------- | -----------
Total shareholders' equity 3,102,356 | (958,822)
----------- | -----------
$ 6,293,247 | $ 2,327,632
=========== | ===========
</TABLE>
See accompanying notes to consolidated financial statements
-3-
<PAGE> 4
OMNIPOINT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
| January 1,
Three months ended June 30, February 25, | 2000 through Six months
------------------------------------ 2000 through | February 24, ended June 30,
2000 | 1999 June 30, 2000 | 2000 1999
------------- | --------------- ------------- | -------------- -------------
<S> <C> | <C> <C> | <C> <C>
Revenues: | |
Subscriber revenues $ 57,879 | $ 36,999 $ 78,793 | $ 42,458 $ 71,487
Prepaid revenues 62,393 | 28,892 86,690 | 44,781 44,768
Roamer revenues 15,937 | 6,156 20,075 | 9,629 10,625
Equipment sales 25,910 | 14,030 32,248 | 12,029 26,838
Affiliate and other revenues 4,979 | 256 5,669 | 246 2,266
--------- | --------- --------- | --------- ---------
Total revenues 167,098 | 86,333 223,475 | 109,143 155,984
--------- | --------- --------- | --------- ---------
| |
Operating expenses: | |
Cost of service 48,193 | 33,774 60,306 | 31,066 69,493
Cost of equipment sales 53,806 | 38,363 69,172 | 32,512 77,505
Cost of engineering, research and | |
development 2,293 | 324 2,872 | 2,266 1,857
General and administrative 40,835 | 42,963 60,112 | 51,100 73,252
Sales and marketing 50,503 | 38,230 64,917 | 38,283 74,486
Depreciation and amortization 81,868 | 47,605 108,788 | 38,603 93,467
Stock based compensation | 883 | 1,576
--------- | --------- --------- | --------- ---------
Total operating expenses 277,498 | 202,142 366,167 | 193,830 391,636
--------- | --------- --------- | --------- ---------
| |
Operating loss (110,400) | (115,809) (142,692) | (84,687) (235,652)
--------- | --------- --------- | --------- ---------
| |
Other income (expense): | |
Interest and financing expense (77,507) | (64,902) (100,355) | (58,421) (126,490)
Equity in net loss of | |
unconsolidated affiliates (23,206) | (421) (24,876) | (3,006)
Interest income and other, net 14,486 | 2,304 12,001 | 1,805 4,824
--------- | --------- --------- | --------- ---------
Total other income (expense) (86,227) | (63,019) (113,230) | (56,616) (124,672)
--------- | --------- --------- | --------- ---------
| |
Net loss (196,627) | (178,828) (255,922) | (141,303) (360,324)
Accretion of 7% cumulative convertible | |
preferred stock (5,190) | (5,230) (6,933) | (3,487) (10,459)
--------- | --------- --------- | --------- ---------
Net loss attributable to common | |
shareholders $(201,817) | $(184,058) $(262,855) | $(144,790) $(370,783)
========= | ========= ========= | ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE> 5
OMNIPOINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
February 25, | January 1,
2000 through | 2000 through Six months
June 30, | February 24, ended June 30,
2000 | 2000 1999
------------ | ------------ ----------
<S> <C> | <C> <C>
Operating activities: |
Net loss $(255,922) | $(141,303) $(360,324)
Adjustments to reconcile net loss to net cash |
used in operating activities: |
Depreciation and amortization 108,788 | 38,603 93,467
Allowance for bad debts (10,546) | (4,103) (3,288)
Interest accretion (154) | (154)
Equity in net loss of unconsolidated affiliates 24,876 | 3,006
Sales of trading securities, net | 17,793
Other, net | 11,754 6,548
Changes in operating assets and liabilities: |
Accounts receivable (21,944) | (10,847) (15,411)
Inventory (41,104) | (5,684) 3,112
Prepaid expenses and other current |
assets 8,942 | 2,390 (6,136)
Accounts payable and accrued |
liabilities 38,503 | (117,528) 65,436
----------- | --------- ---------
Net cash used in operating activities (148,561) | (226,718) (195,951)
----------- | --------- ---------
|
Investing activities: |
Purchases of property and equipment (98,417) | (40,341) (75,428)
Purchases of FCC Licenses | (14,086)
Investments in and advances to unconsolidated |
affiliates 8,792 | (1,291)
FCC Deposit | (6,197)
Other (3,067) | (13,569)
----------- | --------- ---------
Net cash used in investing activities (92,692) | (41,632) (109,280)
----------- | --------- ---------
Financing activities: |
Net proceeds from issuance of common stock |
and preferred stock | 3,599 204,201
Long-term debt borrowings 2,030,000 | 10,917 166,312
Long-term debt repayments (1,777,312) | (12,072) (61,100)
Deferred financing costs (57,254) | (4,142)
Net receipts from (payments) to affiliate (23,313) |
----------- | --------- ---------
|
Net cash provided by financing activities 172,121 | 2,444 305,271
----------- | --------- ---------
|
Change in cash and cash equivalents (69,132) | (265,906) 40
|
Cash and cash equivalents, beginning of period 73,544 | 347,557 194,732
----------- | --------- ---------
|
|
Cash and cash equivalents, end of period $ 4,412 | $81,651 $194,772
=========== | ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-5-
<PAGE> 6
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL:
The Omnipoint Corporation ("Omnipoint" or "we") provides wireless
communications services 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 wireless communications services in urban markets in the United States
using GSM.
On July 24, 2000, VoiceStream announced a definitive merger agreement (the
"Agreement") with Deutsche Telekom AG, a German telecommunications provider.
Pursuant to the 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 share of VoiceStream common stock, subject to
certain adjustments. VoiceStream shareholders are able to elect either an
all-stock or all-cash option, subject to the proration terms of the Agreement.
In connection with the merger, Deutsche Telekom will assume all of our
outstanding debt, currently totalling $5.2 billion. Deutsche Telekom will make
a $5.0 billion investment in VoiceStream, which is expected to occur during the
third quarter of 2000 in exchange for preferred stock convertible into common
stock at a price of $160 per share. Deutsche Telekom's investment is not
contingent upon the closing of the merger. 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. 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 the opinion of management, 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.
Omnipoint considers all highly liquid debt instruments purchased with an
original maturity at time of purchase of three months or less to be cash
equivalents.
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.
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 (see Note 3):
<TABLE>
<CAPTION>
<S> <C>
(in thousands)
Contribution of net assets to joint ventures $ 150,000
Working capital adjustment $ (45,000)
Property, plant and equipment adjustment $ (363,000)
Licenses and other intangibles (excluding goodwill) $ 539,000
Long-term liabilities $ 1,800
Other assets $ (16,000)
Goodwill $ 3,943,000
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 merger date.
Some allocations are based on valuations which are currently being finalized.
Management does not believe that the final purchase price allocation will
produce materially different results than those reflected above.
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.
Loss per share
Omnipoint no longer presents loss per share information as all of
Omnipoint's common stock is owned by VoiceStream.
-6-
<PAGE> 7
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current presentation.
Supplemental cash flow disclosure
Cash paid for interest (net of amounts capitalized) was $74.5 million for
the six months ended June 30, 2000 and $129.4 million for the same period in
1999.
Recently issued accounting pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." It
requires the recognition of all derivatives as either assets or liabilities and
the measurement of those instruments at fair value. The implementation of SFAS
No. 133 is not expected to have a material impact on our financial position or
results of operations. SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133",
issued in August 1999, postpones for one year the mandatory effective date for
adoption of SFAS No. 133 to January 1, 2001.
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 end 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. Omnipoint is in the process of evaluating
the impact of adoption of this bulletin.
In March 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. We
believe that our practices are in conformity with this guidance, therefore
Interpretation No. 44 has no impact on our financial statements.
3. MERGER WITH VOICESTREAM:
On February 25, 2000, we completed the merger with VoiceStream. The merger
was accounted for using the purchase method of accounting. Pursuant to the
agreement, 0.825 of a share of VoiceStream common stock plus $8.00 in cash was
exchanged for every share of outstanding Omnipoint common stock. There was a
cash or share election option available to shareholders of Omnipoint subject to
proration.
Under the Designated Entity rules set forth by the FCC, VoiceStream can not
own Omnipoint's C and F Block licenses. As a result, immediately prior to the
VoiceStream merger, the C and F Block licenses and operations, assets and
liabilities associated with these licenses and operations 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 the result of the purchase accounting performed
for the merger. 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"), qualify as a Designated Entity.
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.
-7-
<PAGE> 8
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. As part of this transaction, Cook Inlet has certain rights,
but not the obligation, to exchange its joint venture interests into a total of
3,750,000 shares of VoiceStream common stock for a 30 day period beginning after
the FCC regulatory holding period has expired (currently five years after the
issuance date of the licenses held by CIVS II and III). For CIVS II, this date
is in the second quarter of 2002, and for CIVS III in the fourth quarter of
2004. These 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.
As mentioned above, each of the joint venture agreements included rights
whereby Cook Inlet has the ability to exchange its investment in the joint
ventures for a fixed number of VoiceStream shares. The fair value of the
exchange rights of $28.0 million has been recorded as an increase to investment
in and advances to unconsolidated affiliates and additional paid in capital. The
fair value is being amortized over the life of these exchange rights. Total
amortization expense recorded for these exchange rights recognized for the three
and six months ended June 30, 2000 was $2.9 million and $3.9 million,
respectively.
Unaudited pro forma operating results, assuming the merger with VoiceStream
occurred on January 1 of the respective years:
<TABLE>
<CAPTION>
(in thousands) JUNE 30, JUNE 30,
2000 1999
--------- ----------
<S> <C> <C>
Total revenues $ 320,000 $ 135,000
Net loss $(420,000) $(420,000)
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
(in thousands) June 30, December 31,
2000 1999
---------- -----------
<S> <C> <C>
Buildings and improvements $ 22,357 $ 30,444
Wireless communications systems 334,370 1,182,420
Furniture and equipment 52,675 90,022
----------- -----------
409,402 1,302,886
Less accumulated depreciation (29,498) (316,560)
----------- -----------
379,904 986,326
Construction in progress 198,274 103,246
----------- -----------
$ 578,178 $ 1,089,572
=========== ===========
</TABLE>
Depreciation expense was $26.0 million and $43.1 million for the three
months ended June 30, 2000 and 1999, respectively, and was $62.4 million and
$82.2 million for the six months ended June 30, 2000 and 1999, respectively.
-8-
<PAGE> 9
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(in thousands) 2000 1999
----------- -----------
<S> <C> <C>
New credit facility
Revolver $ 130,000
Term loan 1,900,000
11 5/8% Senior Notes and Series A Senior Notes 449,654 $ 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 94,520 334,971
----------- -----------
2,676,839 3,028,673
Less current portion of long-term debt (94,520) (164,556)
Add unamortized discount and premium, net 4,333 42
----------- -----------
$ 2,586,652 $ 2,864,159
=========== ===========
</TABLE>
On February 25, 2000, immediately following the completion of the
VoiceStream merger, VoiceStream 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, we used the proceeds of draws
on the new credit facility 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, 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 October 31, 2000. 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 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, 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, of
VoiceStream.
The $1.0 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 tranche, which must
be drawn before October 31, 2000 may be subject to adjustment at any time
before disbursement of the funds.
The new credit facility contains affirmative and negative covenants,
with which VoiceStream and Omnipoint 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 of VoiceStream and assets of VoiceStream and Omnipoint and certain of
their subsidiaries. As of June 30, 2000, we were in compliance with respect to
these affirmative and negative covenants.
Late in the second quarter of 2000, Omnipoint exchanged $142.8 million
of 14% Senior Notes for $149.7 million of intercompany borrowings from
VoiceStream with an interest rate of 10 3/8%, and exchanged $102.3 million of
11 1/2% Senior Notes for a like amount of intercompany borrowings also bearing
interest at 11 1/2%. In August 2000, Omnipoint exchanged $193.5 million of its
11.625% Series A Senior Notes and $249.3 million of the 11.625% Series A Senior
Notes due 2006 for $476.1 million of intercompany borrowings from VoiceStream
bearing an interest rate of 10 3/8%. Subsequent to these exchanges, $6.8
million of the Omnipoint 11.625% Senior Notes and Series A Senior Notes and
$102.7 million of the Omnipoint 11 1/2% Senior Notes remain outstanding. The
differences in the total value of debt recorded initially as part of the merger
and the transactions discussed above were treated as adjustments to the total
purchase price of Omnipoint and are reflected as additional goodwill recorded.
-9-
<PAGE> 10
OMNIPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The aggregate amounts of principal maturities of Omnipoint's long-term
debt at June 30, 2000, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Twelve months ended June 30, 2001 $ 94,520
Remainder of 2001 -
Year ended December 31,
2002 -
2003 100,000
2004 145,000
Thereafter 2,337,319
----------
$2,676,839
==========
</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 and Washington, DC.
7. SALE OF OMNIPOINT TECHNOLOGIES INC.:
On June 27, 2000 we sold a wholly-owned subsidiary, Omnipoint
Technologies ("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 Omnipoint 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 historically.
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 and six months ended June 30, 2000, we earned revenues of $4.8
million and incurred expenses of $6.1 million related to these agreements.
-10-
<PAGE> 11
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.
Statements contained or incorporated by reference herein that are 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 Omnipoint's consolidated financial statements and notes thereto
and other financial information included herein 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 wireless 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 July 24, 2000, VoiceStream announced a definitive merger agreement (the
"Agreement") with Deutsche Telekom AG, a German telecommunications provider.
Pursuant to the 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 share of VoiceStream common stock, subject to
certain adjustments. VoiceStream shareholders are able to elect either an
all-stock or all-cash option, subject to the proration terms of the Agreement.
In connection with the merger, Deutsche Telekom will assume all of our
outstanding debt, currently totalling $5.2 billion. Deutsche Telekom will make
a $5.0 billion investment in VoiceStream, which is expected to occur during the
third quarter of 2000 in exchange for preferred stock convertible into common
stock at a price of $160 per share. Deutsche Telekom's investment is not
contingent upon the closing of the merger. 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. The merger is expected to be completed in the first half of 2001.
On February 25, 2000, the effective date of the merger, each outstanding
share of Omnipoint common stock was exchanged for 0.825 of a share of
VoiceStream common stock 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 six months ended June 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 June 30, 2000, following the merger. In the following discussion
and analysis, references to results and activities for the six months ended June
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.
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RESULTS OF OPERATIONS
Under the Designated Entity rules set forth by the FCC, VoiceStream could
not own or operate Omnipoint's C and F Block licenses. As a result, immediately
prior to the Omnipoint merger, the C and F Block licenses and operations, assets
and liabilities associated with these licenses and operations (primarily
Philadelphia, Atlantic City and certain non-operating licenses) were transferred
to two new joint venture entities controlled by Cook Inlet. We have 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 the result of the purchase accounting performed for the merger. Both CIVS II
and CIVS III qualify as Designated Entities.
We had approximately 909,900 customers as of June 30, 2000, of which 305,200
were monthly subscribers and 604,700 were prepaid customers.
Revenues:
Service revenues (subscriber, prepaid and roamer revenues) for the three
months ended June 30, 2000 were $136.2 million, as compared to revenues of $72.0
million for the three months ended June 30, 1999, an increase of $64.2 million,
or 89.1%. Service revenues for the six months ended June 30, 2000 were $282.4
million, as compared to service revenues of $126.9 million for the six months
ended June 30, 1999, an increase of $155.5 million, or 122.6%. These increases
were the result of the increases in our customer base during these periods.
Equipment revenues for the three months ended June 30, 2000 were $25.9
million, as compared to revenues of $14.0 million for June 30, 1999, an increase
of $11.9 million, or 84.7%. For the six months ended June 30, 2000, equipment
revenues were $44.3 million, as compared to revenues of $26.8 million for June
30, 1999, an increase of $17.4 million, or 65.0%. These increases are
attributable to our increase in handset sales.
Operating expenses:
Total cost of service for the quarter ended June 30, 2000, was $48.2
million, as compared to $33.8 million for the quarter ended June 30, 1999, an
increase of $14.4 million, or 42.7%. Cost of service for the six months June 30,
2000, was $91.4 million, as compared to $69.5 million for the same period in
1999, an increase of $21.9 million, or 31.5%. The increase in these periods is
the result of the additional costs associated with supporting a larger customer
base.
Cost of handset and accessories revenues for the quarter ended June 30, 2000
were $53.8 million, as compared to $38.4 million for the quarter ended June 30,
1999, an increase of $15.4 million, or 40.3%. Cost of handset and accessories
revenues for the six months ended June 30, 2000 were $101.7 million, as compared
to $77.5 million for the six months ended June 30, 1999, an increase of $24.2
million, or 31.2%. These increases are the result of our increased handset sales
during the current year.
Sales and marketing costs for the second quarter of 2000 were $50.5 million,
as compared to $38.2 million for the second quarter of 1999, an increase of
$12.3 million, or 32.1%. Sales and marketing costs increased $28.7 million or
38.5% to $103.2 million for the six months ended June 30, 2000 from $74.5
million for the same period of 1999. The increases in the current year are due
to the initial rollout of VoiceStream's Get More marketing strategy in
Omnipoint markets.
General and administrative costs for the second quarter of 2000 were $40.8
million, as compared to $43.0 million for the second quarter of 1999, a decrease
of $2.1 million, or 5.0%. Year to date general and administration costs of
$111.2 million increased $38.0 million or 51.8% from 73.2 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 second quarter of 2000 were
$81.9 million, as compared to $47.6 million for the second quarter of 1999, an
increase of approximately $34.3 million, or 72.0%. Depreciation and amortization
expenses for the six months ended June 30, 2000 were $147.4 million, as compared
to $93.5 million for the six months ended June 30, 1999, an increase of
approximately $53.9 million, or 57.7%. 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.
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Other Expenses and Income:
Interest expense for the second quarter of 2000 was $77.5 million, as
compared to $64.9 million for the second quarter of 1999, an increase of $12.6
million, or 19.4%. Year to date interest expense for 2000 was $158.8 million, as
compared to $126.5 million for year to date 1999, an increase of $32.3 million,
or 25.5%. The increase in the current year period is due to the increase in
long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities resulted from the our operations and
expenses related to its core PCS networks and interest expense on its various
borrowings. We incurred increased network operating costs due to the
growth in the number of subscribers and the related network usage.
Cash used in investing activities related primarily to the purchase of fixed
assets of $98.4 million and the expansion of our wireless network.
The cash provided from financing activities consists primarily of net
proceeds of $2.0 billion related to borrowings under the new credit facility of
which $1.8 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.
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.
On February 25, 2000, immediately following the completion of the
VoiceStream merger, VoiceStream 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, VoiceStream used the proceeds of draws
on the new credit facility 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 October 31, 2000. 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 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, 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, of
VoiceStream.
The $1.0 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 tranche, which must
be drawn before October 31, 2000 may be subject to adjustment at any time
before disbursement of the funds.
The new credit facility contains affirmative and negative covenants, with
which VoiceStream and Omnipoint 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 Omnipoint and certain of its subsidiaries. As of June 30, 2000, we
and VoiceStream was in compliance with respect to these affirmative and negative
covenants.
Late in the second quarter of 2000, Omnipoint exchanged $142.8 million
of 14% Senior Notes for $149.7 million of intercompany borrowings from
VoiceStream with an interest rate of 10 3/8%, and exchanged $102.3 million of
11 1/2% Senior Notes for a like amount of intercompany borrowings also bearing
interest at 11 1/2%. In August 2000, Omnipoint exchanged $193.5 million of its
11.625% Series A Senior Notes and $249.3 million of the 11.625% Series A Senior
Notes due 2006 for $476.1 million of intercompany borrowings from VoiceStream
bearing an interest rate of 10 3/8%. Subsequent to these exchanges, $6.8
million of the Omnipoint 11.625% Senior Notes and Series A Senior Notes and
$102.7 million of the Omnipoint 11 1/2% Senior Notes remain outstanding. The
difference in the total value of debt recorded initially as part of the merger
and the transactions discussed above were treated as adjustments to the total
purchase price of Omnipoint and are reflected as additional goodwill recorded.
In July 1997, and subsequently amended in June 1999 and thereafter,
Omnipoint, through its then wholly-owned subsidiary 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 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 reflected on CIVS II 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. A portion of the term loan proceeds was used
to repay the Philadelphia Holdings credit facility. 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.
Recently issued accounting pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." It
requires the recognition of all derivatives as either assets or liabilities and
the measurement of those instruments at fair value. The implementation of SFAS
No. 133 is not expected to have a material impact on our financial position or
results of operations. SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133",
issued in August 1999, postpones for one year the mandatory effective date for
adoption of SFAS No. 133 to January 1, 2001.
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 end 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. Omnipoint is in the process of evaluating
the impact of adoption of this bulletin.
In March 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. We
believe that our practices are in conformity with this guidance, therefore
Interpretation No. 44 has no impact on our financial statements.
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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/ PATRICIA L. MILLER
----------------------------------------- ------------------------------
Cregg Baumbaugh Patricia L. Miller
Executive V.P. - Finance/ Corporate Vice President, Controller and
Development (Principal Financial Officer) Principal Accounting Officer
Dated: August 16, 2000
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