<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(Amendment #1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER: 0-27442
OMNIPOINT CORPORATION
THREE BETHESDA METRO CENTER, SUITE 400
BETHESDA, MD 20814
(301) 951-2500
DELAWARE 04-2969720
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class: on which Registered:
-------------------- --------------------
COMMON STOCK, PAR VALUE NASDAQ NATIONAL MARKET
$0.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Shares of common stock outstanding as of November 9, 1999 were 53,938,288.
<PAGE>
Form 10-Q
Omnipoint Corporation and Subsidiaries
Table of Contents
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and
September 30, 1998 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and September 30, 1998 4
Condensed Consolidated Statements of Stockholders' Equity (Deficit) -
Nine Months Ended September 30, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Part II. OTHER INFORMATION AND SIGNATURE 18
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 251,302 $ 194,732
Short term investments 117,889 43,571
Accounts receivable, net of allowances of $19,849 and $12,094 as of
September 30, 1999 and December 31, 1998, respectively 64,089 38,065
Inventory 49,593 29,729
Prepaid expenses and other current assets 15,540 22,057
------------------------------
Total current assets 498,413 328,154
Fixed assets, at cost
Network infrastructure equipment in-service 1,048,786 907,649
Construction in progress 187,096 163,410
Other fixed assets 115,444 110,473
Accumulated depreciation (269,251) (150,357)
------------------------------
Fixed assets, net 1,082,075 1,031,175
FCC licensing costs, net of accumulated amortization of $54,752 and
$42,824 as of September 30, 1999 and December 31, 1998, respectively 647,105 645,408
Deferred financing costs and other intangible assets, net of accumulated amortization
of $12,128 and $7,455 as of September 30, 1999 and December 31, 1998, respectively 51,106 44,959
Investments in affiliates and joint ventures 999 3,506
FCC deposits 6,197 --
Other long term assets 26,492 13,402
------------------------------
Total assets $ 2,312,387 $ 2,066,604
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 228,776 $ 182,941
Accrued interest payable 34,919 48,313
FCC license obligations 126,152 116,076
Loans payable under financing agreements 15,420 13,731
Deferred revenue and other current liabilities 13,428 8,393
------------------------------
Total current liabilities 418,695 369,454
Deferred revenue and other credits 6,549 --
Loans payable under financing agreements 1,658,928 1,350,613
Senior notes 812,934 603,896
FCC license obligations 237,837 328,661
Commitments and contingencies
Stockholders' equity (deficit):
7% Cumulative Convertible Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized, 325,000 shares issued and outstanding
as of September 30, 1999 and December 31, 1998 291,880 276,191
Series A Non-Voting Convertible Preferred Stock, par value $0.01 per share; 12,500
shares authorized, 10,521 shares issued and outstanding as of September 30, 1999 252,504 --
Common stock, par value, $0.01 per share; 200,000,000 shares authorized,
53,758,507 and 53,082,360 shares issued and outstanding as of
September 30, 1999 and December 31, 1998, respectively 537 531
Additional paid-in capital 310,816 315,762
Accumulated deficit (1,665,786) (1,171,220)
Unearned compensation and notes receivable (12,507) (7,284)
------------------------------
Total stockholders' equity (deficit) (822,556) (586,020)
------------------------------
Total liabilities and stockholders' equity (deficit) $ 2,312,387 $ 2,066,604
==============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues:
Service revenues, net $ 95,847 $ 35,043 $ 226,061 $ 98,042
Handset and accessories revenues, net 13,757 6,409 40,595 17,119
License fees and engineering services 255 703 2,521 3,251
------------- ------------- ------------ --------------
Total revenues 109,859 42,155 269,177 118,412
Operating costs and expenses:
Cost of service revenues and operations 37,885 29,372 110,712 89,589
Cost of handset and accessories revenues 36,781 17,012 114,286 69,401
Cost of engineering services 145 460 1,831 2,818
Research and development, net 1,848 4,327 2,019 13,724
Sales, general and administrative 90,543 69,868 239,857 172,563
Depreciation and amortization 49,894 33,654 143,360 85,169
------------- ------------- ------------ --------------
Total operating costs and expenses 217,096 154,693 612,065 433,264
Loss from operations (107,237) (112,538) (342,888) (314,852)
Other income (expense):
Equity in losses of joint ventures (1,711) (2,350) (4,718) (6,547)
Interest income 3,429 2,113 7,848 9,327
Interest expense (66,149) (44,428) (192,639) (136,660)
Gain on sale of subsidiary stock 37,120 -- 37,120 --
Other income (expense), net 306 170 711 (2,320)
------------- ------------- ------------ --------------
Loss before extraordinary item (134,242) (157,033) (494,566) (451,052)
Extraordinary loss on return of C Block licenses -- -- -- (11,115)
------------- ------------- ------------ --------------
Net loss $(134,242) $(157,033) $(494,566) $(462,167)
Accretion of 7% Cumulative Convertible Preferred Stock (5,230) (5,230) (15,688) (8,716)
------------- ------------- ------------ --------------
Net loss attributable to common stockholders $(139,472) $(162,263) $(510,254) $(470,883)
============= ============= ============ ==============
Basic and diluted loss per common share:
Loss per common share before extraordinary item $ (2.60) $ (3.08) $ (9.57) $ (8.75)
Loss per common share on extraordinary item -- -- -- (0.21)
------------- ------------- ------------ --------------
Net loss per common share - basic and diluted $ (2.60) $ (3.08) $ (9.57) $ (8.96)
============= ============= ============ ==============
Weighted average common shares outstanding - basic and diluted 53,590 52,747 53,308 52,571
============= ============= ============ ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(494,566) $(462,167)
Extraordinary loss on return of C Block licenses -- 11,115
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of subsidiary stock (37,120) --
Depreciation and amortization 143,360 85,169
Accrued interest and payment of in kind interest on financing agreements 20,617 (4,559)
Losses on investments in joint ventures 3,006 6,547
Interest income associated with restricted cash -- (1,084)
(Purchases)/Sales of trading securities, net (74,319) 14,742
Interest expense associated with amortization of discount, premium and issuance
costs 6,305 --
Other 2,503 1,655
Changes in operating accounts:
Accounts receivable, net (26,048) (15,096)
Prepaid expenses and other assets 7,390 (15,889)
Inventory (19,864) 5,310
Accounts payable and accrued expenses 47,011 29,444
Deferred revenue and other liabilities 7,885 2,317
------------- ------------
Net cash used in operating activities (413,840) (342,496)
Cash flows used in investing activities:
Purchase of fixed assets (98,844) (326,410)
Purchase of FCC licenses (14,086) (13,000)
Return of FCC licenses -- 31,094
Capitalized interest on C and F Block licenses -- (6,285)
Proceeds from held to maturity investments and restricted cash -- 52,314
Investment in joint ventures 461 (9,497)
Deferred revenue and other credits 3,976 --
Proceeds from sale and advances of subsidiaries stock 52,092 --
Other long term assets (13,967) --
FCC deposit (6,197) --
------------- ------------
Net cash used in investing activities (76,565) (271,784)
Cash flows from financing activities:
Proceeds from issuance of 7% Convertible Preferred Stock, net -- 252,222
Proceeds from issuance of Series A Non-Voting Convertible Preferred Stock, net 248,510 --
Proceeds from issuance of common stock 7,017 2,977
Proceeds from vendor financing agreements 41,462 109,534
Payment of vendor financing agreements (2,632) (14,484)
Payment on FCC licenses obligation (83,836) (52,508)
Payment of deferred financing costs (7,110) (19,937)
Proceeds from OCI financing arrangements 149,850 425,000
Payments on OCI financing arrangements (5,625) (3,750)
Proceeds from issuance of 11 1/2% Senior Notes, net 199,375 --
Other (36) (46)
------------- ------------
Net cash provided by financing activities 546,975 699,008
Net increase in cash and cash equivalents 56,570 84,728
Cash and cash equivalents at beginning of the period 194,732 63,581
------------- ------------
Cash and cash equivalents at end of period $251,302 $148,309
============= ============
Non-cash investing and financing activities:
Purchases of Urban Wireless' customer base $ -- $ 4,232
Purchases of network fixed assets with vendor financing 90,374 121,016
Refinancing of interim credit facility -- 350,000
Proceeds from financing agreement used to pay origination fee 3,710 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For The Nine Months Ended September 30, 1999
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
7% Cumulative Series A Unearned Total
Additional Convertible Non-Voting Compensation Stockholders'
Common Stock Paid-In Preferred Preferred Accumulated and Notes Equity
Shares Amount Capital Stock Stock Deficit Receivable (Deficit)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 53,082,360 $531 $315,762 $276,191 $ -- $(1,171,220) $ (7,284) $(586,020)
Exercise of stock options 450,771 4 4,603 -- -- -- -- 4,607
Sale of common stock under
Employee Stock
Purchase Plan 102,099 1 867 -- -- -- -- 868
Issuance of options in
form of advanced
compensation -- -- 9,921 -- -- -- (9,921) --
Issuance of common stock
for employee 401(k)
matching 123,277 1 1,540 -- -- -- -- 1,541
Issuance of Series A
Non-Voting Preferred Stock -- -- (3,994) -- 252,504 -- -- 248,510
Accretion of 7% Cumulative
Convertible Preferred Stock -- -- (15,688) 15,688 -- -- -- --
Amortization of unearned
compensation -- -- -- -- -- -- 2,753 2,753
Cancellation of unearned
compensation -- -- (2,195) -- -- -- 2,051 (144)
Interest on employee notes
receivable -- -- -- -- -- -- (106) (106)
Net loss -- -- -- -- -- (494,566) -- (494,566)
-------------------------------------------------------------------------------------------------------
Balance,
September 30, 1999 53,758,507 $537 $310,816 $291,880 $252,504 $(1,665,786) $(12,507) $(822,556)
=======================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The accompanying condensed consolidated financial statements of Omnipoint
Corporation and subsidiaries (the "Company" or "Omnipoint") have been prepared
by the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). However, such information
includes all adjustments (including all normal recurring adjustments) which, in
the opinion of management, are considered necessary for a fair presentation of
the consolidated results for those periods. The results of operations for the
periods ended September 30, 1999 and September 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the complete
fiscal year. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the SEC. The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of September 30, 1999 and
December 31, 1998, and the results of operations for the three and nine months
ended and cash flows for the nine months ended September 30, 1999 and September
30, 1998, and stockholders' equity (deficit) for the nine months ended September
30, 1999. Interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal or short-term variations.
Certain prior period amounts have been reclassified to conform to current
presentation.
2. MERGER:
On June 23, 1999, the Company, VoiceStream Wireless Corporation, a
Washington corporation ("VoiceStream") and VoiceStream Wireless Holding
Corporation, a Delaware corporation ("VHC"), entered into an Agreement and Plan
of Reorganization (the "Reorganization Agreement"). Pursuant to the
Reorganization Agreement, the Company will be merged with and into a newly
formed, wholly owned subsidiary of VHC (the "Merger"). At the effective time of
the Merger, each outstanding share of Omnipoint common stock will be exchanged
for the right to receive 0.825 shares of VoiceStream Common Stock plus $8.00 in
cash. There will be a cash or stock election option available to the Company's
shareholders subject to proration. The Merger is subject to shareholder
approval as well as federal, state and other regulatory approvals.
In connection with the execution of the Reorganization Agreement, the
Company entered into an agreement (the "Purchase Agreement") with VoiceStream
and Hutchison Telecommunications PCS (USA) Limited, a British Virgin Islands
company ("Hutchison") on June 23, 1999. The Purchase Agreement provided for the
sale to VoiceStream and Hutchison of a total of $300 million of the Company's
Series A Non-Voting Convertible Preferred Stock (the "Non-Voting Preferred
Stock"). On June 24, 1999, the Company sold 4,271 shares of its Non-Voting
Preferred Stock to each of VoiceStream and Hutchison for an aggregate purchase
price of approximately $205 million. The Purchase Agreement provided for the
remaining $95 million to be invested by VoiceStream and Hutchison in exchange
for additional shares of the Company's Non-Voting Preferred Stock. The Company
received the remaining portion of this investment from Hutchison and VoiceStream
on September 30, 1999 and October 1, 1999, respectively. Each investor purchased
an additional 1,979 shares of the Non-Voting Preferred Stock for an aggregate
purchase price of approximately $95 million, which is convertible at the option
of these investors into shares of Omnipoint common stock at a price of $24.00
per share.
3. LOSS PER COMMON SHARE:
The Company computes basic and diluted earnings per share in accordance
with Financial Accounting Standard No. 128, "Earnings per Share," ("SFAS 128").
Since the Company is in a loss position, both basic and diluted earnings per
share are the same amount. Options and warrants to purchase 9,893,355 and
9,279,989 shares of common stock outstanding as of September 30, 1999 and 1998,
respectively, have been excluded from the calculation of diluted net loss per
share as the effect of their inclusion would have been anti-dilutive. The
Company's 325,000 shares of 7% Cumulative Convertible Preferred Stock
(convertible into 10,445,123 shares of common stock) and Series A Non-Voting
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<PAGE>
Preferred Stock (convertible into 10,521,000 shares of common stock) have also
been excluded from the calculation of diluted net loss per share as the effect
of their inclusion would have been anti-dilutive.
4. INVENTORY:
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
GSM Handsets $43,692 $25,596
Accessories and SIM Cards 5,901 4,133
------- -------
$49,593 $29,729
======= =======
</TABLE>
5. FCC LICENSE RE-AUCTION:
In March 1999, the Company, through a wholly owned subsidiary, made a $41
million deposit with the FCC to participate in the FCC's Auction 22. This
deposit was partially financed by a transaction with a financial institution.
The auction commenced on March 23, 1999 and ended on April 15, 1999. At the
conclusion of the auction, the Company was the high bidder on 34 PCS licenses
that covered a total of 18.9 million POPs at a cost of $45.1 million, or $2.39
per POP.
In May 1999, the Company made a payment of $9.0 million utilizing the $41
million deposit with the FCC. The remaining amount of the deposit was refunded
to the Company and the financing was paid off in full. In June 1999, the
Company made a payment of $11.3 million for 23 licenses. The deposit for the
remaining 11 licenses of $6.2 million is reflected as FCC deposits at September
30, 1999 pending their issuance. In October 1999, the Company paid the $24.8
million balance due for the remaining 11 licenses, and the licenses were issued.
6. JOINT VENTURE INTERESTS:
On August 3, 1999, Omnipoint Technologies, Inc. ("OTI") and the Siemens
Information and Communication Networks Group ("Siemens") announced the formation
of a joint venture to develop wireless IP-based solutions to integrate mobile
radio and Internet technology. In anticipation of this transaction, OTI
contributed the assets and liabilities of its Wireless IP Networks division into
a wholly owned subsidiary, Omnipoint Technologies III, Inc. ("OTI3"). On August
2, 1999, Siemens and OTI executed a Stock Purchase Agreement, whereby Siemens
purchased a majority interest of the outstanding stock of OTI3 for $40.5
million. In connection with the joint venture and sale of stock, Siemens
extended a demand loan to OTI in the amount of $4.5 million, collateralized by
the remaining shares in OTI3 owned by OTI. Omnipoint recorded a gain of $37.1
million related to this transaction.
7. SENIOR NOTE OFFERING:
On September 23, 1999, Omnipoint Corporation ("Omnipoint") completed the
private placement of $205 million in aggregate principal amount of its 11 1/2%
Senior Notes due 2009 (the "11 1/2% Senior Notes"). The 11 1/2% Senior Notes
were issued at par. Omnipoint received net proceeds of $197.85 million, net of
offering expenses, which it intends to use for the buildout and operation of its
PCS networks and for the acquisition of licenses, systems, networks and network
operators. The 11 1/2% Senior Notes were sold under Rule 144A of the Securities
Act of 1933, as amended and Regulation S promulgated thereunder. The 11 1/2%
Senior Notes have not been registered under the Act and may not be offered or
sold in the United States absent registration or an applicable exemption from
the registration requirements thereunder. Interest on the Notes will be payable
semi-annually on March 15 and September 15 of each year, commencing March 15,
2000. On or after September 15, 2004, Omnipoint may redeem the 11 1/2% Senior
Notes, in whole or in part, at redemption prices declining over time from
105.75% to 100%, plus accrued and unpaid interest and liquidated damages as
defined in the Indenture, if any, to the date of redemption. In addition, at
any time prior to September 15, 2002, Omnipoint may redeem up to 35% of the 11
1/2% Senior Notes originally outstanding at a redemption price of 111.50% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the date of redemption, with the net proceeds of certain
equity offerings as defined in the Indenture. Upon the occurrence of a change
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<PAGE>
of control, other than the Merger, Omnipoint may be required to offer to
repurchase the outstanding 11 1/2% Senior Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the date of purchase.
8. FINANCING AGREEMENTS:
On March 30, 1999, the Company entered into an arrangement with Siemens for
financing of up to $200 million (the "Siemens Arrangement"). The Siemens
Arrangement includes $100 million that was funded on March 31, 1999 for general
corporate purposes, and $100 million of financing on equipment and services for
expansion of the Company's wireless communications network in New York and other
markets pursuant to a separate credit agreement ("Siemens Credit Facility"). The
principal amount on the Siemens Credit Facility is payable in twenty consecutive
equal quarterly installments beginning in 2003, with the final payment due on
March 31, 2008. Interest on the Siemens Credit Facility is payable quarterly at
varying interest rates at a base rate or LIBOR plus a set margin, at the
Company's election. The Siemens Credit Facility ranks pari passu with the
Institutional OCI Financing Agreements and is collateralized by the same
collateral serving the Institutional OCI Financing Agreements. At September 30,
1999, $25.7 million was outstanding on the Siemens Credit Facility.
In addition, Nortel Networks, Inc., formerly known as Northern Telecom,
Inc., ("Nortel") expanded its financing to the Company by up to $50 million, of
which $25 million was funded on March 31, 1999 and $25 million was funded on
August 12, 1999 for general corporate purposes.
The Nortel and Siemens $150 million financing for general corporate
purposes was obtained by their participation in the Institutional OCI Financing
Agreements.
On July 16, 1999, Omnipoint Communications Inc. ("OCI"), entered into a
credit facility with Nortel, under which Nortel agreed to provide up to $100
million for financing purchases of equipment and services from Nortel for
expansion of OCI's wireless communications network in New York and other
markets. On August 4, 1999, an initial $25 million of this credit facility was
funded. This credit facility ranks pari passu with the Institutional OCI
Financing Agreements and the Siemens Vendor Credit Facility.
9. SERIES A NON-VOTING CONVERTIBLE PREFERRED STOCK:
On June 24, 1999, the Company issued Series A Non-Voting Convertible
Preferred Stock, par value $.01 per share, for gross proceeds of $205 million.
Hutchison and VoiceStream together purchased an additional 3,958 shares of the
Non-Voting Preferred Stock on September 30, 1999 and October 1, 1999,
respectively, for an aggregate purchase price of $95 million. The Company
authorized 12,500 shares of which 10,521 shares are issued and outstanding as of
September 30, 1999. All or any portion of the outstanding shares of Series A
Non-Voting Convertible Preferred Stock may be converted at any time into common
stock at the option of VoiceStream or Hutchison at a conversion price of $24.00
per common share, subject to adjustment as defined in the agreement. The
Liquidation Preference of this preferred stock is $24,000 per preferred share,
which represents the issuance price at June 24, 1999.
10. SEGMENT INFORMATION:
In 1998, the Company adopted Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). The prior year's quarterly segment information has been restated to
present the Company's two reportable segments, which are as follows:
PCS Services-provides digital wireless services in several markets in the
United States
PCS Technology-developer and supplier of wireless communication
technologies, products and engineering services
Segment data includes intersegment revenues, as well as a partial charge
for corporate headquarters costs to its PCS services segment. The Company
evaluates the performance of its segments and allocates resources to them based
on earnings before interest, taxes, depreciation and amortization (EBITDA).
However, most of the corporate headquarters costs including, but not limited to,
costs related to strategic partnering, legal, accounting, consulting, human
resources, auction-related etc., have not been allocated to the segments.
-8-
<PAGE>
The Company is organized on the basis of products and services. The
Company's segments are strategic business units that offer different products
and services. The Company's PCS Services regions have been aggregated into the
PCS services segment.
The table below presents information about reported segments for the
Statements of Operations for the three and nine months ended September 30, 1999
and 1998, and for the Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998, (in thousands):
<TABLE>
<CAPTION>
PCS Services PCS Technology Reconciling Items Consolidated Totals
--------------- ---------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1999
Three months:
---------------
Revenues $ 109,604 $ 255 $ -- $ 109,859
EBITDA (3) $ (46,020) $ (6,244) $ (5,079) (2) $ (57,343)
Nine months:
---------------
Revenues $ 266,656 $ 2,521 $ -- $ 269,177
EBITDA (3) $ (176,518) $ (6,481) $(16,529) (2) $ (199,528)
Total Assets $1,916,394 $ 7,389 $388,604 $2,312,387
1998
Three months:
---------------
Revenues $ 41,452 $ 703 $ -- $ 42,155
EBITDA (3) $ (68,529) $ (6,241) $ (4,114) (2) $ (78,884)
Nine months:
---------------
Revenues $ 115,161 $ 6,209 $ (2,958) (1) $ 118,412
EBITDA (3) $ (195,175) $(18,433) $(16,075) (2) $ (229,683)
Total Assets $1,808,983 $ 5,168 $252,453 $2,066,604
</TABLE>
(1) Represents intersegment revenue
(2) Represents corporate expenses (including legal, regulatory, accounting,
information services, human resource management, financing, investment
banking, strategic partnering related activities and FCC auction related
costs) not allocated to the segments
(3) EBITDA represents operating loss before depreciation and amortization.
Management believes EBITDA provides meaningful additional information on
Omnipoint's operating results and on its ability to service its long-term
debt and other fixed obligations and to fund Omnipoint's continuing growth.
EBITDA is considered by many financial analysts to be a meaningful
indicator of an entity's ability to meet its future financial obligations,
and growth in EBITDA is considered to be an indicator of future
profitability, especially in a capital-intensive industry such as wireless
telecommunications. EBITDA should not be construed as an alternative to
operating income (loss) as determined in accordance with GAAP, as an
alternative to cash flows from operating activities (as determined in
accordance with GAAP), or as a measure of liquidity. Because EBITDA is not
calculated in the same manner by all companies, Omnipoint's presentation
may not be comparable to other similarly titled measures of other
companies.
A reconciliation of total segment EBITDA to consolidated net loss for the
three and nine months ended September 30, 1999 and 1998 is as follows
(unaudited, in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------------------- ------------------------
<S> <C> <C> <C> <C>
Total EBITDA for reportable segments $ (57,343) $ (78,884) $(199,528) $(229,683)
Depreciation and amortization (49,894) (33,654) (143,360) (85,169)
Equity in losses of joint ventures (1,711) (2,350) (4,718) (6,547)
Interest income 3,429 2,113 7,848 9,327
Interest expense (66,149) (44,428) (192,639) (136,660)
Gain on sale of subsidiary stock 37,120 - 37,120 -
Other income (expense), net 306 170 711 (2,320)
Extraordinary loss on return of C Block licenses - - - (11,115)
Accretion of 7% Cumulative Convertible Preferred Stock (5,230) (5,230) (15,688) (8,716)
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $(139,472) $(162,263) $(510,254) $(470,883)
========== ========== ========== ==========
Cash flow provided by (used in):
Operating activities $(237,719) $ (57,464) $(413,840) $(342,496)
Investing activities $ 32,689 $ 22,388 $ (76,565) $(271,784)
Financing activities $ 241,730 $ (52,315) $ 546,975 $ 699,008
</TABLE>
-9-
<PAGE>
Reconciling items from segment total assets to consolidated total assets at
September 30, 1999 (unaudited) and December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
_______________ ____________
<S> <C> <C>
Corporate cash and short term investments $ 356,596 $ 232,187
Unallocated corporate assets 32,008 20,266
--------- ---------
Total reconciling items $ 388,604 $ 252,453
========= =========
</TABLE>
11. SUBSEQUENT EVENTS:
On October 22, 1999, the Company entered into an Agreement and Plan of
Merger with East/West Communications, Inc., a Delaware corporation ("EWCM"),
pursuant to which, among other things, EWCM will merge with and into Omnipoint,
which will be the surviving corporation in the merger. EWCM holds five licenses
covering a total of approximately 22.2 million POPs (population equivalents),
consisting primarily of Los Angeles and Washington, D.C. with a combined 20.6
million POPs, as well as Sarasota, Fla., Reno, Nev., and Santa Barbara, Calif.
which make up the remaining 1.6 million POPs. The Company invested $3 million in
EWCM in exchange for 300,000 shares of EWCM common stock. In addition, the
Company simultaneously agreed to purchase all outstanding EWCM common shares at
the closing of the proposed acquisition in exchange for new Series E Omnipoint
preferred stock, equivalent to a fixed 1.775 million shares of Omnipoint common
stock. Based on the October 21, 1999 closing price of $71.00 per share of
Omnipoint common stock, the acquisition is valued at approximately $118 million,
or $5.32 per POP. The Company also will assume approximately $15 million in FCC
debt and will redeem approximately $8 million in EWCM preferred stock, for a
combined total acquisition cost of approximately $6.50 per POP.
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<PAGE>
OMNIPOINT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995. All
forward-looking statements involve known and unknown risks, uncertainties, and
other factors, many of which are not within the control of the Company, that may
cause actual transactions, results, performance or achievements to be materially
different from any future transactions, results, performance or achievements
expressed or implied by such forward-looking statements. While the Company
believes that the expectations reflected in these forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its performance
or other expectations will be attained. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
OVERVIEW
Omnipoint Corporation ("Omnipoint" or the "Company") is a leader in
commercializing personal communications services ("PCS") and developing PCS
technology.
The Company provides wireless PCS services and equipment based on the
Global System for Mobile Communications ("GSM") standard. According to wireless
industry sources, this standard has been implemented by carriers in over 140
countries worldwide and is used by over 200 million subscribers. GSM subscribers
are estimated to account for approximately 50% of worldwide wireless subscribers
and approximately 60% of wireless subscribers outside the United States.
Omnipoint's licenses, including those won in the recently completed FCC re-
auction, cover approximately 100 million non-overlapping POPs in the United
States.
Since 1996, the Company has aggressively built out its licenses and
currently covers and markets to over 46 million POPs, including all major
markets in the northeastern United States from Boston to Delaware, as well as
southern Florida from Palm Beach to Key West, and certain Midwest markets, which
include the greater Detroit, Indianapolis, and Wichita markets. Omnipoint also
provides service in the Harrisburg, York, and Lancaster, Pennsylvania markets
through a joint venture with D&E Communications ("PCS One"). Omnipoint intends
to continue its aggressive buildout through both wholly owned affiliates and
joint ventures. Additionally, the Company offers out of network roaming both in
over 3,600 North American cities (including Canada), through roaming agreements
with members of the North American GSM Alliance, and worldwide, through active
roaming agreements with 100 carriers in 53 countries. PCS service offerings
available from Omnipoint include voice communications, caller ID, call
forwarding, call waiting, voice activated dialing, fax storage and retrieval,
Internet access, short messaging, numeric paging, and information services
including, but not limited to, stock quotes, news, weather and sports scores.
Every activated handset has its own Internet address and is capable of receiving
and sending Internet e-mail up to 160 characters in length.
Omnipoint had approximately 698,000 subscribers as of September 1999,
including approximately 17,000 proportionate subscribers from its joint venture
in Pennsylvania. A significant portion of these subscribers use the Company's
prepaid service. Omnipoint utilizes multiple distribution channels through which
its services are sold and intends to continue this strategy as new markets are
opened. Omnipoint had over 5,000 distribution outlets as of September 30, 1999.
Through the Company's OTI subsidiary, it is also a developer and supplier
of wireless communication technologies, products and engineering services. OTI's
business divisions include the PCS Infrastructure Products division, which
develops base station equipment for wireless E911 and other location-based
services for GSM infrastructure providers, and the Wireless Solutions Division,
which provides GSM-based solutions such as the Redhawk GSM data terminal unit
and the Eagle OEM module which are used to integrate GSM solutions directly into
wireless applications such as telematics and telemetry. OTI is also working on
next-generation wireless products and systems including GPRS (General Packet
Radio Systems) wireless packet systems.
-11-
<PAGE>
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1999 Compared with Three and Nine
Months Ended September 30, 1998.
Revenues:
Revenues for the three months ended September 30, 1999 were $109.9 million,
as compared to revenues of $42.2 million for September 30, 1998, an increase of
$67.7 million, or 160.6%. Revenues for the nine months ended September 30, 1999
increased $150.8 million, or 127.3% to $269.2 million compared to revenues of
$118.4 million for the nine months ended September 30, 1998.
PCS Services
Net PCS services revenues for the three months ended September 30, 1999
were $95.8 million, as compared to $35.0 million for the three months ended
September 30, 1998, an increase of $60.8 million, or 173.5%. Year-to-date net
PCS services revenues increased by $128.0 million or 130.6% to $226.1 million
compared to service revenues of $98.0 million for the nine months ended
September 30, 1998. The increase in service revenues was due to the increase in
the number of subscribers related to increased penetration in the Company's
existing markets, as well as expansion into Michigan and Indiana, coupled with
an increase in average revenue per subscriber during the third quarter. As a
result of the increase in the number of subscribers and distribution outlets,
handset and accessories revenues for the quarter ended September 30, 1999 were
$13.8 million, as compared to $6.4 million for the quarter ended September 30,
1998, an increase of $7.4 million, or 114.7%. Handset and accessories revenues
for the nine months ended September 30, 1999 were $40.6 million, as compared to
$17.1 million, an increase of $23.5 million, or 137.1% from the nine months
ended September 30, 1998. The larger customer base resulted from the launches
of the Michigan and Indiana markets in December 1998, as well as expansion of
the Company's New York, Philadelphia, New England and Florida markets.
PCS Technology
PCS Technology revenues were $0.3 million during the quarter ended
September 30, 1999, as compared to revenues of $0.7 million for the quarter
ended September 30, 1998. PCS Technology revenues for the nine months ended
September 30, 1999 were $2.5 million compared to $3.3 million over the same
period in 1998. The Company is a party to several engineering contract services
agreements which are expected to continue into 1999, but can be terminated under
certain circumstances at either party's option.
Cost of Sales:
Total cost of service revenues and operations, handset and accessories
revenues and engineering services for the quarter ended September 30, 1999 were
$74.8 million, as compared to $46.8 million for the quarter ended September 30,
1998, an increase of $28.0 million, or 59.7%. Year-to-date cost of service
revenues and operations, handset and accessories revenues and engineering
services were $226.8 million, as compared to $161.8 million for the nine months
ended September 30, 1998, an increase of $65.0 million, or 40.2%.
PCS Services
Cost of service revenues and operations were $37.9 million for the quarter
ended September 30, 1999, as compared to $29.4 million for the quarter ended
September 30, 1998, and $110.7 million for the nine months ended September 30,
1999 as compared to $89.6 million for the nine months ended September 30, 1998.
This includes cost of service revenues of $28.0 million for the third quarter
and $80.3 million year-to-date, which includes network site rentals,
intercarrier and interconnect costs, and other network operating expenses. As a
result of service revenues increasing at a rate greater than cost of service
revenues and operations, third quarter gross margin improved to 60.5% from 51.0%
in the second quarter of 1999. The remaining cost of operations of $9.9 million
includes salaries, maintenance and other indirect costs of operating the
network. During the third quarter, the Company's managed customer base grew by
approximately 101,000 subscribers to a managed subscriber base of approximately
681,000, or an increase of approximately 17.4%.
Cost of handset and accessories revenues for the quarter ended September
30, 1999 were $36.8 million, as compared to $17.0 million for the quarter ended
September 30, 1998, an increase of $19.8 million, or 116.2%. Cost of handset and
accessories revenues for the nine months ended September 30, 1999 were $114.3
million, as compared to $69.4 million for the nine months ended September 30,
1998, an increase of $44.9 million, or 64.7%. Handsets and accessories costs
-12-
<PAGE>
increased as a result of strong growth in customer additions as well as
distribution channel stocking related to an increase in distribution outlets
during the quarter.
PCS Technology
Engineering services total cost of sales were $0.1 million and $0.5 million
for the quarters ended September 30, 1999 and 1998, respectively. Year-to-date
engineering services total cost of sales were $1.8 million in 1999 and $4.4
million in 1998, a decrease of $2.6 million, or 58.8%.
Direct Expenses:
Research and development expenses in the PCS Technology segment for the
first three quarters of 1999 were $2.0 million as compared to $13.3 million for
the same period in 1998. In 1999, the Company has entered into several joint
developmental arrangements that fund portions of the Company's research and
development efforts.
General and administrative costs include costs such as legal fees, patents,
regulatory costs, merger related costs, auction and negotiation expenses, office
rents and incidentals, management information systems, accounting and finance,
bad debt, customer care and all payroll and benefits costs other than those
classified as research and development, those related to the cost of service,
and those related to selling. Approximately $4 million of such costs during the
third quarter were related to the sale of a majority interest in a joint venture
and to the Merger.
Selling costs include all marketing, advertising, promotion, telemarketing,
market research, and all indirect and direct distribution channels, but excludes
costs of handsets and accessories.
Sales, general and administrative costs for the third quarter of 1999 were
$90.5 million, as compared to $69.9 million for the third quarter of 1998, an
increase of $20.7 million, or 29.6%, and were $239.9 million for the nine months
ended September 30, 1999 as compared to $172.6 million for the nine months ended
September 30, 1998, an increase of $67.3 million or 39.0%. This increase was
primarily driven by increases in operating costs, customer care expenses and
selling costs due to the increase in customers. Customer care expenses increased
as a result of the 151.2% increase in ending managed subscribers from 271,000 in
September 1998 to 681,000 in September 1999. The increased selling costs were
due to a greater than 80% increase in the number of net subscriber additions in
the third quarter 1999 over the same quarter in 1998, and increased sales and
marketing headcount related expenses due to market launches in December 1998 in
Michigan and Indiana.
EBITDA
EBITDA represents operating loss before depreciation and amortization.
Management believes EBITDA provides meaningful additional information on
Omnipoint's operating results and on its ability to service its long-term debt
and other fixed obligations and to fund Omnipoint's continuing growth. EBITDA is
considered by many financial analysts to be a meaningful indicator of an
entity's ability to meet its future financial obligations, and growth in EBITDA
is considered to be an indicator of future profitability, especially in a
capital-intensive industry such as wireless telecommunications. EBITDA should
not be construed as an alternative to operating income (loss) as determined in
accordance with GAAP, as an alternative to cash flows from operating activities
(as determined in accordance with GAAP), or as a measure of liquidity. Because
EBITDA is not calculated in the same manner by all companies, Omnipoint's
presentation may not be comparable to other similarly titled measures of other
companies.
Earnings before interest, taxes, depreciation and amortization (EBITDA) was
a loss of $57.3 million for the third quarter of 1999, a $10.9 million, or 15.9%
improvement from the second quarter of 1999, and a $21.5 million, or 27.3%
improvement from the third quarter of 1998. Approximately $46.0 million of the
third quarter of 1999 EBITDA loss was attributable to the Company's PCS
services, which is a $13.4 million, or 22.6% improvement over the second quarter
of 1999 and a $22.5 million, or 32.8% improvement over the third quarter of
1998. The EBITDA loss for the nine months ended September 30, 1999 was $199.5
million, or a 13.1% improvement from the EBITDA loss of $229.7 million for the
nine months ended September 30, 1998.
Other Expenses and Income:
Depreciation and amortization expenses for the third quarter of 1999 were
$49.9 million, as compared to $33.7 million for the third quarter of 1998, an
increase of approximately $16.2 million, or 48.3% and $143.4 million for the
nine months ended September 30, 1999 as compared to $85.2 million for the nine
months ended September 30, 1998, an increase of approximately $58.2 million, or
68.3%. The increase in depreciation expense was related to network
infrastructure equipment placed into service as a result of the Company's
continued expansion of coverage in its existing markets as well as services
launched in new markets during 1998. The growth in amortization expense was
primarily due to amortization of FCC licenses associated with the markets placed
into commercial service.
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<PAGE>
As a result of the revenues and operating costs and expenses discussed
above, the Company's loss from operations for the third quarter of 1999 was
$107.2 million, as compared to $112.5 million for the third quarter of 1998,an
improvement of $5.3 million, or 4.7%, and an $8.6 million decrease, or 7.4%
improvement from the second quarter of 1999. The loss from operations for the
nine months ended September 30, 1999 was $342.9 million, as compared to $314.9
million for the nine months ended September 30, 1998, an increase of $28.0
million, or 8.9%. This increased loss was primarily due to costs associated with
the addition of 311,000 net new managed subscribers during the nine months ended
September 30, 1999 (versus 129,000 net additions for the nine months ended
September 30, 1998) coupled with $58.2 million of increased depreciation and
amortization expenses related to expansions of the Company's networks.
Equity in losses from joint ventures for the third quarter of 1999 was $1.7
million, as compared to $2.4 million in the third quarter of 1998 and $4.7
million for the nine months ended September 30, 1999 as compared to $6.5 million
for the nine months ended September 30, 1998. The Company expects to incur
additional losses as a result of its equity ownership interest in the PCS One
joint venture.
Interest income for the third quarter of 1999 was $3.4 million, as compared
to $2.1 million for the third quarter of 1998, an increase of $1.3 million, or
62.3%. Interest income for the nine months ended September 30, 1999 was $7.8
million, as compared to $9.3 million for the nine months ended September 30,
1998, a decrease of $1.5 million, or 15.9%.
Interest expense for the third quarter of 1999 was $66.1 million, as
compared to $44.4 million for the third quarter of 1998, an increase of $21.7
million, or 48.9%. The increase was due to the increased amounts outstanding
from loans payable under financing agreements and senior notes and cessation of
capitalization of interest during construction of the network, partially offset
by a reduction in FCC obligations. Interest expense for the nine months ended
September 30, 1999 was $192.6 million, as compared to $136.7 million for the
nine months ended September 30, 1998, an increase of $56.0 million, or 41.0%.
Net loss after accretion of the 7% Cumulative Convertible Preferred Stock
for the third quarter of 1999 was $139.5 million, as compared to $162.3 million
for the third quarter of 1998, an improvement of $22.8 million, or 14.1%. Net
loss after accretion of the 7% Cumulative Convertible Preferred Stock for the
nine months ended September 30, 1999 was $510.3 million, as compared to $470.9
million, an increase of $39.4 million, or 8.4%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents and short-term investments of
$369.2 million as of September 30, 1999, compared to $238.3 million as of
December 31, 1998. Of this balance, cash and cash equivalents of $251.3 million
increased by $56.6 million from December 31, 1998. This increase was primarily
due to $547.0 million of cash provided from financing activities, partially
offset by $413.8 million of cash used in operating activities and $76.6 million
of cash used in investing activities. As of September 30, 1999, the Company had
working capital of $79.7 million. The Company expects operating losses and
working capital deficits to continue as the Company continues to grow its PCS
operations. The Company believes that access to capital and financial
flexibility is necessary to successfully implement its strategy.
Operations of the Company for the three and nine months ended September 30,
1999 have been principally financed through proceeds from the issuance of
preferred stock related to the Merger, proceeds from the issuance of Senior
Notes, advances from various financing agreements and payments from subscribers
and working capital management.
The cash provided from financing activities included net proceeds of $248.5
million from the issuance of Series A Non-Voting Convertible Preferred Stock
related to the merger, $199.4 million from issuance of 11 1/2% Senior Notes,
$150 million of funding by Siemens and Nortel via their participation in the
Institutional OCI Financing Agreement, and $90.8 million of proceeds from vendor
financings for working capital and purchases of network fixed assets. These
amounts were partially offset by principal repayments associated with the
Company's FCC and related obligations and financings.
Cash used in operating activities resulted from the Company's operations
and expenses related to its core PCS networks and interest expense on its
various borrowings as well as net purchases of trading securities of $74.3
million. The Company incurred increased network operating costs due to the
growth in the number of subscribers and the related network usage.
Cash used in investing activities related to the purchase of fixed assets
of $98.8 million to support the Company's continuing expansion and the FCC
license payments of $20.3 million in connection with the FCC's Auction 22. The
Company also received $52.1 million from the sale of a majority interest and
advances related to a joint venture with Siemens and the proceeds on the sale of
a tower venture.
The Company anticipates that its future revenue growth will outpace the
percentage growth in operating costs and expenses (exclusive of depreciation and
amortization). In the third quarter of 1999, the number of managed subscribers
grew by approximately 101,000, which is expected to decrease the cash
requirement that would otherwise be used in operations during the rest of the
year. The Company plans to reduce customer acquisition cost per subscriber and
improve its economies of scale in its network operating costs relative to 1998.
The Company also anticipates decreasing its level of 1999 (as compared to 1998)
capital expenditures to approximately $250 million, almost all of which will be
financed through vendors. The Company has future purchase commitments, which it
plans to finance pursuant to available financing agreements with related
vendors.
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<PAGE>
The Company also believes that access to capital during 1999 and future
periods is necessary to build out its networks. The Company continues to have
recurring operating losses, working capital deficiencies, and negative cash
flows from operating activities. On June 23, 1999, the Company entered into a
Purchase Agreement with VoiceStream and Hutchison providing for gross proceeds
from the issuance of Non-Voting Convertible Preferred Stock. On June 24, 1999,
the Company received $205 million from VoiceStream and Hutchison and
subsequently received an additional $95 million from them with the receipt of
$47.5 million from Hutchison on September 30, 1999 and $47.5 million from
VoiceStream on October 1, 1999. In the unlikely event that Omnipoint will be
required to pay the $70 million termination fee in connection with the merger,
due to the fact that it has received a competing acquisition proposal which is
superior to that of VoiceStream, Omnipoint will apply the part of the funds to
be received from the third party bidder to pay the termination fee.
Additionally, the Company has available cumulative financing commitments of $330
million. The Company, if necessary, may seek additional financing from the
remaining availability under the Institutional OCI Financing Agreement, prior
vendor commitments and arrangements, along with other incremental actions. Other
incremental actions, if necessary, may include the sale of non-core assets (such
as towers or licenses for markets which the Company has no plans to build),
inventory reduction and the raising of additional debt. Additionally, certain of
the Company's financing arrangements may be increased under certain
circumstances to provide additional working capital. Although the Company does
not currently plan to do so, the Company also at its discretion, may gain access
to working capital through the issuance of its capital stock in lieu of cash
under certain existing finance agreements.
The Company's future financing requirements will depend on many factors,
including the successful development of products and services, the extent and
timing of acceptance of the Company's products and services in the market,
requirements to maintain adequate facilities, the progress of the Company's
research and development efforts, expansion of the Company's marketing and sales
efforts, the Company's results of operations and the status of competitive
products and services.
The Company believes that it will require substantial amounts of additional
capital over the next several years and anticipates that this capital will be
derived from the consummation of the merger, a mix of strategic partnering
arrangements or public offerings and private placements of debt or equity
securities or both. There can be no assurance, however, that the Company will
obtain additional funding to fund its operations and capital expenditures. To
the extent that the buildout of the networks is faster than expected, the costs
are greater than anticipated or the Company takes advantage of other
opportunities, including those that may arise through current and future FCC
actions, the Company may require additional funding to implement its business
strategy.
YEAR 2000 COMPLIANCE
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally (the "Y2K" issue). A number of the Company's technology
systems are affected by the Y2K issue. To ensure that the Company will be Y2K
compliant before the new millennium, the Company formed a Y2K compliance team in
the fourth quarter of 1997 and allocated corporate resources to determine the
extent of non-compliance with the Y2K issue and to formulate a Y2K compliance
plan. Since then, the Company has been reviewing its embedded technology and
infrastructure equipment, as well as non-embedded technology equipment to
identify those that contain two-digit year codes, and is in the process of
upgrading its infrastructure and corporate facilities to achieve Y2K compliance.
In addition, the Company is actively working with its suppliers to assess their
compliance and remediation efforts and the Company's exposure to them. The
Company believes that all of its critical business systems are Y2K compliant,
with additional system testing and contingency planning to continue.
The Company has focused on three major areas of concern for the Y2K issue:
embedded technology and infrastructure equipment, non-embedded technology
equipment and third party suppliers. The Y2K compliance team created a five-
stage process for becoming Y2K compliant. The five process stages the Company
performed were:
. compiling a complete inventory of all date sensitive technology
equipment;
. prioritizing systems affected based on estimated time to compliance, as
well as vendor and maintenance schedules;
. performing modification to affected systems;
. completing testing of modified systems; and
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<PAGE>
. implementing modified systems.
The Company has completed the inventory and assessment of its date
sensitive technology equipment and modified and tested all of its systems.
Embedded Technology and Infrastructure Equipment. The embedded technology
and infrastructure equipment area of concern consists primarily of the hardware
portion of the switching platforms and network surveillance equipment. Much of
this equipment, specifically the switching platforms, is purchased from third
party vendors and has maintenance contracts. The maintenance contracts include
regular software and hardware upgrades that should automatically bring the
equipment into Y2K compliance. The Company is dependent on those third parties
to assess the impact of the Y2K problem on the technology they have supplied and
to take any necessary corrective action. All corrective action taken by these
third parties is covered under maintenance contracts and would be part of
regularly scheduled maintenance. The Company is monitoring the progress of these
third parties and selectively conducting tests to determine whether they have
accurately assessed the problem and taken corrective action. The Company
believes that all embedded technology systems and infrastructure equipment
directly supporting call processing are Y2K compliant. The remaining embedded
technology systems and infrastructure equipment are Y2K compliant. In addition,
in order to protect against the acquisition of additional non-compliant
products, the Company now requires suppliers to warrant that products sold or
licensed to the Company are Y2K compliant.
Non-embedded Technology Equipment. Non-embedded technology systems include
predominately applications software and interfacing software. Much of this
equipment has previously been upgraded to Y2K compliance through software
upgrades and the purchase of new systems. The Company has prioritized the
systems that are not Y2K compliant and believes that it has upgraded non-
compliant systems. The Company also believes that all business-critical non-
embedded technology systems have been upgraded to Y2K compliant versions. These
have been tested either by the Company's vendors and/or by the Company. Testing
will continue throughout 1999. Thus far, no significant Y2K issues have been
found.
Third Party Suppliers. The Company has prioritized its critical suppliers
and communicated with them in order to obtain their plans and progress in
addressing the Y2K issue. Detailed evaluations of the most critical third party
suppliers are complete. The Company believes that its major third party
suppliers are prepared for Y2K. However, the Company has developed contingency
plans to deal with their non-compliance, if any.
Risk and Contingency Plan. There are many risks associated with the Y2K
issue, including the possibility of a failure of the Company's signal, computer,
and non-information technology systems. Such failures could have a material
adverse effect upon the Company and may cause systems malfunctions, signal loss,
incorrect or incomplete transaction processing, the inability to reconcile
accounting books and records, and the inability of the Company to manage its
business. In addition, even if the Company successfully becomes Y2K compliant,
it can be materially and adversely affected by failures of third parties to
become Y2K compliant. The failure of third parties with which the Company has
financial or operational relationships such as network maintenance contractors,
roaming partners, handset and accessory providers, financial institutions,
payroll contractors, regulatory agencies and utility companies, to become Y2K
compliant in a timely manner could result in material adverse effects on the
Company's results of operations.
The Company believes that all of its business-critical systems are Y2K
compliant, with testing to continue throughout the remainder of 1999. However,
there can be no assurance that the Company will be successful in taking
corrective action in a timely manner. The Company has developed and continues
to assess contingency plans with regard to its key technology systems, although
there can be no assurance that these contingency plans will successfully avoid a
service disruption. The Company is documenting Y2K contingency plans as part of
its Y2K risk mitigation efforts.
Costs. Total costs incurred to date specifically associated with becoming
Y2K compliant have been approximately $1.2 million. The Company believes that
the total costs of becoming Y2K compliant have been substantially incurred with
no significant additional expenditures planned for the remainder of 1999.
Previous estimates included costs to replace existing software for a critical
business system. The Company was able to remediate this software which resulted
in significantly lower expenditures than the $2.8 million that was originally
planned. Non-specific costs associated with becoming Y2K compliant, such as
maintenance contracts that automatically upgrade certain technology components
within a larger upgrade, which have not been included in this estimate are
approximately $10.6 million. These costs are considered by the Company to be a
normal expense. The portions of these costs that relate specifically to Y2K
compliance are included in the Y2K estimates if they can be separately
identified.
The Company's expectations about future costs and timely completion of its
Y2K modifications are subject to uncertainties that could cause actual results
to differ materially from what has been discussed above. Factors that could
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<PAGE>
influence the amount of future costs and the effective timing of remediation
efforts include the success of the Company in identifying embedded technology
and infrastructure equipment as well as non-embedded equipment that contain two-
digit year codes, the nature and amount of programming and testing required to
upgrade or replace each of the affected systems and equipment, the nature and
amount of testing, verification, the rate and magnitude of related labor costs,
and the success of the Company's suppliers in addressing the Y2K issue.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is from time to time the subject of, or involved in,
judicial proceedings. Management believes that any liability or loss
resulting from such matters will not have a material adverse effect on
the consolidated financial position, results of operations or cash
flows of the Company.
ITEM 5: OTHER INFORMATION
11-1/2% Senior Notes due 2009
-----------------------------
On September 23, 1999, the Company completed the private placement
of $205 million in aggregate principal amount of its 11-1/2% Senior
Notes due 2009. See Note 7 to the Condensed Consolidated Financial
Statements.
East/West Merger
----------------
Pursuant to the Merger, each issued and outstanding share of the
common stock of EWCM shall be converted into the right to receive one
share of Series E Preferred Stock of Omnipoint (the "Series E
Preferred"), and each issued and outstanding share of existing
preferred stock of East West shall be converted into the right to
receive the liquidation value of each such share plus all accrued and
unpaid dividends thereon, representing approximately $8 million in the
aggregate. The Merger is subject to customary closing conditions and
governmental approvals. See Note 11 to Notes to Condensed Consolidated
Financial Statements.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Indenture, by and between Omnipoint Corporation and HSBC Bank
USA, as trustee, dated as of September 23, 1999.
4.2 Form of Note.
10.1 Purchase Agreement, by and among Omnipoint Corporation, Lehman
Brothers Inc and Barclays Capital Inc., dated September 17,
1999.
10.2 Registration Rights Agreement, by and among Omnipoint
Corporation, Lehman Brothers Inc and Barclays Capital Inc.,
dated September 23, 1999.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On July 2, 1999, a Form 8-K was filed relating to the Reorganization
Agreement and the Purchase Agreement. See Notes 2 and 9 to the Condensed
Consolidated Financial Statements.
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<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNIPOINT CORPORATION
Date: January 18, 2000
/s/ Harry Plonskier
-------------------
Treasurer and Chief Accounting Officer
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