10-Q 1 v74960e10-q.txt FORM 10-Q QUARTER ENDED JUNE 30, 2001 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER: 0-27442 OMNIPOINT CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ~~DELAWARE 04-2969720 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)~~

~~12920 - 38TH STREET S.E. BELLEVUE, WASHINGTON 98006 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)~~

(425) 378-4000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) N/A (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 [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

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2 3 OMNIPOINT CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS JUNE 30, 2001 DECEMBER 31, 2000 ----------- ---------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 5,238 $ 118,183 Accounts receivable, net of allowance for doubtful accounts of $29,663 and $28,073 respectively........... 148,189 102,538 Inventory................................................. 6,659 7,244 FCC license deposits and other current assets............. 8,886 9,552 ----------- ---------- Total current assets.............................. 168,972 237,517 Property and equipment, net of accumulated depreciation of $13,052 and $90,009, respectively......................... 902,443 747,234 Goodwill, net of accumulated amortization of $28,366 and $164,874, respectively.................................... 6,779,362 3,790,209 Licensing costs and other intangible assets, net of accumulated amortization of $30,087 and $18,698, respectively.............................................. 8,344,251 907,036 Investments in and advances to unconsolidated affiliates.... 1,310,147 538,258 Other assets and investments................................ 2,991 21,712 ----------- ---------- $17,508,166 $6,241,966 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 8,205 $ 25,124 Accrued liabilities....................................... 114,976 144,704 Deferred revenue.......................................... 35,547 26,636 Construction accounts payable............................. 21,940 8,724 Payable to VoiceStream.................................... 514,539 660,333 Current portion long-term debt............................ -- 32,113 ----------- ---------- Total current liabilities......................... 695,207 897,634 Long-term debt.............................................. 2,153,770 2,134,867 Deferred tax liability...................................... 1,883,339 -- Commitments and contingencies (see Note 8) Shareholders' equity: 7% cumulative convertible preferred stock, par value $1,000 per share, 10,000,000 shares authorized; 317,669 shares issued and outstanding as of December 31, 2000................................................... -- 312,513 Series A non-voting convertible preferred stock, par value $.01 per share, 12,500 shares authorized; issued and outstanding............................................ 300,000 300,000 Common stock and paid-in capital.......................... 12,569,523 3,493,837 Accumulated other comprehensive loss...................... -- (16,738) Deferred compensation..................................... (11,134) -- Deficit................................................... (82,539) (880,147) ----------- ---------- Total shareholders' equity........................ 12,775,850 3,209,465 ----------- ---------- $17,508,166 $6,241,966 =========== ==========

See accompanying notes to consolidated financial statements. 3 4 OMNIPOINT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (DOLLARS IN THOUSANDS) (UNAUDITED)

See accompanying notes to consolidated financial statements 4 5 OMNIPOINT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) JUNE 1, 2001 JANUARY 1, 2001 FEBRUARY 25, 2000 JANUARY 1, 2000 THROUGH THROUGH THROUGH THROUGH JUNE 30, 2001 MAY 31, 2001 JUNE 30, 2000 FEBRUARY 24, 2000 -------- ----------- ----------- --------- Operating activities: Net loss......................... $(82,539) $ (388,856) $ (255,922) $(141,303) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............. 71,505 152,206 108,788 38,603 Income tax benefit.......... (37,173) -- -- -- Allowance for bad debts..... (1,162) 1,452 (10,546) 4,103 Interest accretion.......... (179) 27 (154) -- Equity in net losses of unconsolidated affiliates............... 12,829 39,848 24,876 -- Stock-based compensation.... 318 -- -- -- Other, net.................. (1) (18,444) -- 386 Changes in operating assets and liabilities, net of effects from consolidating acquired interests: Accounts receivable......... 1,651 (51,692) (21,944) (19,053) Inventory................... (103) 688 (41,104) 5,684 Prepaid expenses and other current assets........... 155 511 8,942 2,390 Accounts payable and accrued liabilities.............. (24,072) (3,821) 38,503 (95,895) -------- ----------- ----------- --------- Net cash used in operating activities.................. (58,771) (268,081) (148,561) (205,085) -------- ----------- ----------- --------- Investing activities: Purchases of property and equipment..................... (20,520) (219,659) (98,417) (40,341) Acquisitions of wireless properties, net of cash acquired...................... -- (7,750) -- -- Investments in and advances to unconsolidated affiliates..... 1,732 (26,290) 8,792 (1,291) Other............................ -- 34,194 (3,067) -- -------- ----------- ----------- --------- Net cash used in investing activities.................. (18,788) (219,505) (92,692) (41,632) -------- ----------- ----------- --------- Financing activities: Net proceeds from issuance of common and preferred stock.... -- -- -- 3,599 Long-term debt borrowings........ -- -- 2,030,000 10,917 Long-term debt repayments........ -- (32,113) (1,777,312) (41,812) Net payments (to) from affiliate..................... 77,421 406,892 (23,313) -- Deferred financing costs......... -- -- (57,254) -- -------- ----------- ----------- --------- Net cash provided by (used in) financing activities........ 77,441 374,779 172,121 (27,296) -------- ----------- ----------- --------- Change in cash and cash equivalents...................... (138) (112,807) (69,132) (274,013) Cash and cash equivalents, beginning of period.............. 5,376 118,183 73,544 347,557 -------- ----------- ----------- --------- Cash and cash equivalents, end of period........................... $ 5,238 $ 5,376 $ 4,412 $ 73,544 ======== =========== =========== ========= Supplemental disclosure of cash flow information: Cash paid for interest (net of capitalized interest)......... $ 29,400 $ 79,200 $ 7,300 $ 108,800 Non-cash investing and financing activities: Capital contribution to unconsolidated affiliates... $ -- $ 1,521,500 $ -- $ -- Conversion of preferred stock....................... $ -- $ 317,600 $ 5,200 $ --

See accompanying notes to consolidated financial statements 5 6 OMNIPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION Omnipoint Corporation ("Omnipoint," "we," "our" and "us"), directly and through joint venture entities in which we hold non-controlling interests, provides personal communication services ("PCS") using the Global System for Mobile Communications ("GSM") technology in urban markets in the United States including New York, NY, Detroit, MI, Boston, MA, Philadelphia, PA, Miami, FL and Indianapolis, IN. On February 25, 2000, Omnipoint completed a merger with VoiceStream Wireless Corporation ("VoiceStream") and is now a subsidiary of VoiceStream. References to "VoiceStream" refer to VoiceStream and its subsidiaries including Omnipoint, unless the context requires otherwise. VoiceStream also provides PCS services in urban markets in the United States using GSM. On May 31, 2001 Deutsche Telekom AG ("Deutsche Telekom") acquired 100% of the common shares of VoiceStream. The merger qualified as a tax-free reorganization. VoiceStream shareholders received for each VoiceStream common share either 3.6693 shares of Deutsche Telekom stock and $15.7262 in cash, 3.6683 shares of Deutsche Telekom stock and $15.9062 or 3.7647 shares of Deutsche Telekom stock. Deutsche Telekom transferred all of its VoiceStream shares to T-Mobile International AG ("T-Mobile"). T-Mobile is a wholly owned subsidiary of Deutsche Telekom and is the holding company for Deutsche Telekom's GSM wireless operations primarily in Europe and the United States. Upon consummation of the merger (hereafter referred to as "the T-Mobile merger"), VoiceStream common shares were deregistered and delisted from NASDAQ and are no longer publicly traded. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation and Financial Statement Presentation The unaudited consolidated financial statements of Omnipoint and its consolidated subsidiaries include the accounts of all majority-owned subsidiaries that are controlled by Omnipoint. Affiliates that are 20 percent to 50 percent owned are generally accounted for on an equity basis. Intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements of Omnipoint for the three and six months ended June 30, 2001 and 2000 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 interim periods. Such adjustments include those of a normal, recurring nature and those related to the T-Mobile merger as described below. The operating results for the interim periods presented herein are not necessarily indicative of results of operations for the entire year. Reference should be made to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2000. As a result of the T-Mobile merger and the VoiceStream/Omnipoint merger and the push down accounting that resulted, we have adjusted the basis of our assets, liabilities and shareholders' equity to reflect fair value on the closing date of the mergers. As a result of these new bases, our consolidated balance sheets, results of operations and cash flows for periods subsequent to May 31, 2001 and February 25, 2000, the closing date of the mergers, are not comparable to those prior to the mergers. The consolidated financial statements of Omnipoint for the three and six months ended June 30, 2001 are each presented as two distinct periods, the two and five months prior to the T-Mobile merger, and the period from June 1, 2001 to June 30, 2001, subsequent to the merger. The consolidated financial statements of Omnipoint for the six months ended June 30, 2000 are presented as two distinct periods, the period from January 1, 2000 to February 24, 2000, prior to the VoiceStream/Omnipoint merger, and the period from February 25, 2000 to June 30, 2000, subsequent to the merger. 6 7 OMNIPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Loss Per Common Share Omnipoint no longer presents loss per share information as all of Omnipoint's common shares are owned by VoiceStream. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". The statements establish accounting and reporting standards for derivative instruments and hedging activities and require recognition of all derivatives as either assets or liabilities measured at fair value. Changes to the fair value of derivatives are recognized in earnings unless specific hedge accounting criteria are met. We adopted the provisions of these accounting standards as of January 1, 2001 with no material impact on our financial position and results of operations. In June 2001 the FASB approved SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires companies to cease amortizing goodwill and other intangible assets with indefinite lives that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001. Any goodwill and other intangible assets with indefinite lives resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The adoption of SFAS No. 142 will result in the discontinuation of amortization of our goodwill and any intangible assets with indefinite lives; however, we will be required to test goodwill for impairment under the new standard beginning in the first quarter of 2002, which could have an adverse effect on our future results of operations if an impairment occurs. Reclassifications Certain of the comparative figures in the prior period financial statements have been reclassified to conform to the current period presentation. 3. BUSINESS COMBINATIONS AND OTHER TRANSACTIONS T-Mobile Merger As a result of the T-Mobile merger, we adjusted the basis of our assets, liabilities and shareholder's equity to reflect the purchase allocations recorded by T-Mobile (see Note 2). These non-cash adjustments, which 7 8 OMNIPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) have not been finalized and may be subject to change, resulted in the following changes to our balance sheet at May 31, 2001 (dollars in thousands): ASSETS Other current assets........................................ $ (17,537) Licenses and other intangibles (excluding goodwill)......... 7,408,202 Goodwill.................................................... 3,099,839 Other long-term assets...................................... (47,143) ----------- $10,443,361 =========== LIABILITIES AND SHAREHOLDER'S EQUITY Other current liabilities................................... $ 3,638 Long-term debt.............................................. 19,015 Deferred tax liability...................................... 1,920,512 Common stock and additional paid in capital................. 7,241,240 Deferred compensation....................................... (11,452) Accumulated other comprehensive loss........................ 1,405 Deficit..................................................... 1,269,003 ----------- $10,443,361 ===========

VoiceStream/Omnipoint Merger Refer to the Annual Report on Form 10-K of Omnipoint Corporation for its Fiscal Year Ended December 31, 2000 for discussion of the VoiceStream/Omnipoint merger. License exchange between Omnipoint and Cingular Wireless On May 11, 2001, we completed the exchange of licenses covering approximately 35 million people with Cingular Wireless ("Cingular"). Cingular acquired from Omnipoint 10 MHz of spectrum for the New York, NY Major Trading Area ("MTA"), as well as 10 MHz in each of the St. Louis, MO and Detroit, MI Basic Trading Areas ("BTAs"). Omnipoint acquired from Cingular 10 MHz of spectrum in the Los Angeles and San Francisco MTA's, which cover most of California and Nevada. There was no gain or loss recorded on this transaction. Unaudited Pro Forma Operating Results The following are the unaudited pro forma operating results, assuming that the T-Mobile merger and the VoiceStream/Omnipoint merger occurred on January 1 of each of the respective years (dollars in thousands):

8 9 OMNIPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. PROPERTY AND EQUIPMENT Our property and equipment were adjusted to fair value at May 31, 2001 (see Note 2). The accumulated depreciation balance at June 30, 2001 includes depreciation expense for one month.

Depreciation expense was $38.0 million and $26.0 million for the three months ended June 30, 2001 and 2000, respectively, and $73.7 million and $82.2 million during the six months ended June 30, 2001 and 2000, respectively. 5. LICENSING COSTS AND OTHER INTANGIBLE ASSETS Our intangible assets were adjusted to fair value at May 31, 2001 (see Note 2). The accumulated amortization at June 30, 2001 includes amortization expense for one month. Also, effective June 1, 2001 we have changed our amortization period for licenses from 40 to 20 years to conform with T-Mobile policy.

Amortization expense, excluding goodwill amortization, was $33.8 million and $7.1 million for the three months ended June 30, 2001 and 2000, respectively, and $39.3 million and $13.3 million during the six months ended June 30, 2001 and 2000, respectively. Goodwill amortization was $61.3 million and $52.3 for the three months ended June 30, 2001 and 2000, respectively, and $110.7 million and $69.4 million during the six months ended June 30, 2001 and 2000, respectively. 9 10 OMNIPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

VS GSM II and VS GSM III At June 30, 2001 and December 31, 2000, we had a 49.9% interest in two entities controlled by VoiceStream directly and through its affiliates: VoiceStream GSM II PCS Holdings, LLC ("VS GSM II"), and VoiceStream GSM III PCS Holdings, LLC ("VS GSM III"). We provide certain funding to VS GSM II and VS GSM III through intercompany payable balances. VS GSM II operates the Philadelphia, PA, Atlantic City, NJ and Dover, DE markets. All other PCS licenses held by VS GSM II and VS GSM III are not operating. 7. LONG-TERM DEBT Long-term debt was adjusted to fair value at May 31, 2001 (see Note 2). The adjustment resulted in a premium of $19.0 million to the carrying value of our fixed rate long-term debt. This premium will be amortized to reduce interest expense over the remaining term of the related debt.

We share a credit facility with VoiceStream which includes revolving credit loans and term loans. VoiceStream's credit agreement permits borrowings up to $4.75 billion of which $4.0 billion are currently committed and $2.65 billion are outstanding at June 30, 2001. The agreement includes a revolving credit facility of $1.35 billion, term loans of $1.9 billion, a vendor facility of up to $1.0 billion and an incremental vendor facility of up to $500 million. The $2.65 billion of borrowings outstanding consist of $1.9 billion of term loans and $750 million of the vendor facility. Committed but undrawn facilities consist of the $1.35 billion revolver. The $500 million incremental vendor facility and $250 million of the $1.0 billion vendor facility are currently not committed. The repayment of the facilities is secured by, among other things, the grant of a security interest in certain assets of VoiceStream and certain of its subsidiaries and in the capital stock of certain of VoiceStream's subsidiaries. 10 11 OMNIPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Borrowings under the credit facilities bear interest, at our option, at annual rates of interest ranging up to either (1) the greater of (a) the prime rate, or (b) the Federal Funds rate plus 5/8%, or (2) a Eurodollar rate, in each instance plus applicable margins. Such applicable margins will range to a maximum of 2.75%, in the case of loans based on the prime rate or Federal Funds rate, and to a maximum of 4.00%, in the case of loans based on a Eurodollar rate, in each case based upon certain factors including the borrower's leverage ratio, as defined in each of the credit facilities. On August 10, 2001, we repaid the $350 million outstanding under the VS GSM II loan facility. This loan facility is no longer available for future borrowings. Maturities The aggregate principal maturities of long-term debt at June 30, 2001 are as follows (dollars in thousands): Twelve months ending June 30, 2002................ $ -- Remainder of 2002............................... -- Year ending: 2003......................................... 100,000 2004......................................... 145,000 2005......................................... 190,000 Thereafter...................................... 1,702,247 ---------- $2,137,247 ==========

8. COMMITMENTS AND CONTINGENCIES Commitments Future minimum payments required under operating leases and agreements that have initial or remaining non-cancelable terms in excess of one year as of June 30, 2001, are summarized below (dollars in thousands): Twelve months ending June 30, 2002................ $ 78,994 Remainder of 2002............................... 39,811 Year ending: 2003......................................... 77,918 2004......................................... 78,424 2005......................................... 78,570 Thereafter...................................... 178,393 -------- $532,110 ========

Aggregate rent expense was $23.0 million and $17.0 million for the three months ended June 30, 2001 and 2000, respectively, and $45.4 million and $31.7 million during the six months ended June 30, 2001 and 2000, respectively. Omnipoint and its affiliates have various other purchase commitments for materials, supplies and other items incidental to the ordinary course of business which are neither significant individually nor in the aggregate. Such commitments are not at prices in excess of current market value. 11 12 OMNIPOINT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. RELATED PARTY TRANSACTIONS VoiceStream and certain of its affiliates were parties to technical services agreements and reciprocal resale agreements which entitled each party to utilize the other's spectrum, and/or utilize wireless system infrastructure, in certain agreed upon markets through the first quarter 2001. The agreements were structured such that each party performed as a reseller for the other and related fees were charged and paid between the parties. In December 2000 and February 2001 VoiceStream acquired a controlling interest in the entities that were parties to these agreements. Therefore, these revenues and expenses ceased to be incurred in the second quarter of 2001. Omnipoint's financial statements include an allocation of certain centralized costs that were incurred by VoiceStream and benefit all of its operations, including those of Omnipoint. Such allocations include the costs of customer service operations, accounting and other administrative functions. These costs are allocated to the respective operational units in a manner that reflects the relative time and associated costs devoted to each of the operational units. Omnipoint was allocated costs of $96.7 million and $190.2 million for the three months and six months ended June 30, 2001, respectively. We allocated $2.5 million from February 25, 2000 to March 31, 2000, and $20.1 million for the three months ended June 30, 2000. Included in interest expense for the three months and six months ended June 30, 2001 is $6.6 million and $13.3 million, respectively, of interest due to VoiceStream on intercompany debt. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE LITIGATION REFORM ACT OF 1995. Information contained or incorporated by reference herein that is not based on historical fact, including without limitation, statements containing the words "believes," "may," "will," "estimate," "continue," "anticipates," "intends," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which Omnipoint operates; technology changes; competition; changes in business strategy or development plans; the high leverage of Omnipoint; the ability to attract and retain qualified personnel; existing governmental regulations and changes in, or the failure to comply with, governmental regulations; liability and other claims asserted against Omnipoint; and other factors referenced in Omnipoint's filings with the Securities and Exchange Commission. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. Omnipoint disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments. The following is a discussion and analysis of the consolidated financial condition and results of operations of Omnipoint and should be read in conjunction with our consolidated financial statements and notes thereto and other financial information included herein and in our Form 10-K for the year ended December 31, 2000. Due to the stage of development of our personal communications services ("PCS") operations and the significance of recent mergers, including the change in control due to the T-Mobile merger, and other transactions, our operating results for prior periods may not be indicative of future performance. Unless the context requires otherwise, "Omnipoint", "we", "our" and "us" include us and our predecessors and subsidiaries. References to "VoiceStream" refer to VoiceStream and its subsidiaries, including Omnipoint, unless the context requires otherwise. OVERVIEW We provide PCS service in urban markets 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. The following chronology highlights the key events in the periods covered by these financial statements: - On February 25, 2000, we merged with VoiceStream. Each outstanding Omnipoint common share was exchanged for 0.825 of a VoiceStream common share plus $8.00 in cash, and we became a subsidiary of VoiceStream. Omnipoint's operations are directly controlled by VoiceStream. Since the merger, all of Omnipoint's markets have been relaunched under the VoiceStream brand. We market, provide and bill our services under the VoiceStream brand, and do not compete with VoiceStream in the markets we serve. Our wireless network is also fully integrated with VoiceStream's network such that, from a customer's perspective, our services are indistinguishable from VoiceStream's. Additionally, immediately prior to the VoiceStream/Omnipoint merger, certain of our licenses, assets and operations were transferred to VS GSM II and VS GSM III, in which we hold a 49.9% minority interest. - On May 31, 2001, Deutsche Telekom AG ("Deutsche Telekom") acquired 100% of the common shares of VoiceStream. The merger qualified as a tax-free reorganization. VoiceStream shareholders received for each VoiceStream common share either 3.6693 shares of Deutsche Telekom stock and $15.7262 in cash, 3.6683 shares of Deutsche Telekom stock and $15.9062 or 3.7647 shares of Deutsche Telekom stock. Deutsche Telekom transferred all of its VoiceStream shares to T-Mobile International AG ("T-Mobile"). T-Mobile is a wholly owned subsidiary of Deutsche Telekom and is the holding company for Deutsche Telekom's GSM wireless operations primarily in Europe and the United States. 13 14 Upon consummation of the merger, VoiceStream common shares were deregistered and delisted from NASDAQ and are no longer publicly traded. As a result of the T-Mobile merger and the VoiceStream/Omnipoint merger and the push down accounting that resulted, we have adjusted the basis of our assets, liabilities and shareholder's equity to reflect fair value on the closing date of the mergers. As a result of these new bases, our consolidated balance sheets, results of operations and cash flows for periods subsequent to May 31, 2001 and February 25, 2000, the closing date of the mergers, are not comparable to those prior to the mergers. The consolidated financial statements of Omnipoint for the three and six months ended June 30, 2001 are each presented as two distinct periods, the two and five months prior to the T-Mobile merger, and the period from June 1, 2001 to June 30, 2001, subsequent to the merger. The consolidated financial statements of Omnipoint for the six months ended June 30, 2000 are presented as two distinct periods, the period from January 1, 2000 to February 24, 2000, prior to the VoiceStream/Omnipoint merger, and the period from February 25, 2000 to June 30, 2000, subsequent to the merger. The following discussion and analysis refers to the results and activities for the three months and six months ended June 30, 2001. Where necessary, we have provided explanations to improve comparability between the pre-merger and post-merger activity. In addition to purchase price adjustments related to the merger, results prior to February 25, 2000 are not comparable with subsequent periods due to the transfer of Omnipoint's C and F Block licenses, assets and liabilities associated with these licenses and operations (primarily Philadelphia, Atlantic City and certain non-operating licenses) to VS GSM II and VS GSM III. Subsequent to February 24, 2000, these operations were accounted for using the equity method. Operating Markets The following operational markets, shown by the years they were initially launched, are currently owned and operated by us or by joint ventures in which we hold interests:

RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 We had approximately 2,004,500 customers at June 30, 2001, of which 1,231,100 were monthly subscribers and 775,400 were prepaid customers. As of June 30, 2000, we had approximately 909,900 customers, of which approximately 305,200 were monthly subscribers and approximately 604,700 were prepaid customers. REVENUES Service revenues, which include subscriber, prepaid and roamer revenues, were $257.0 million and $492.9 million for the three months and six months ended June 30, 2001, respectively, as compared to revenues of $136.2 million and $282.4 million for the same periods in 2000, respectively. The increase was primarily due to growth in our customer base during these periods. Equipment revenues were $45.5 million and $83.9 million for the three months and six months ended June 30, 2001, respectively, as compared to revenues of $25.9 million and $44.3 million for the same periods in 2000, respectively. The increase was primarily attributable to the increased number of handsets sold and correlates to the growth in our customer base. 14 15 OPERATING EXPENSES Total cost of service was $73.0 million and $158.5 million for the three months and six months ended June 30, 2001, respectively, as compared to expenses of $48.2 million and $91.4 million for the same periods in 2000, respectively. The increase was primarily the result of additional costs associated with supporting a larger customer base. Cost of equipment sales were $70.4 million and $138.7 million for the three months and six months ended June 30, 2001, respectively, as compared to $53.8 million and $101.7 million for the same periods in 2000, respectively. The increase was a result of increased handset sales. General and administrative costs were $104.4 million and $201.8 million for the three months and six months ended June 30, 2001, respectively, as compared to $43.1 million and $116.4 million for the same periods in 2000, respectively. The increase was due to a combination of integration expenses related to the VoiceStream/Omnipoint merger and increased costs associated with supporting a larger customer base. Sales and marketing costs were $118.8 million and $246.7 million for the three months and six months ended June 30, 2001, respectively, as compared to $50.5 million and $103.2 million for the same periods in 2000, respectively. The increase was primarily due to continued subscriber growth in our markets during 2001. Depreciation and amortization expenses were $133.1 million and $223.7 million for the three months and six months ended June 30, 2001, respectively, as compared to $81.9 million and $147.4 million for the same periods in 2000, respectively. The increase was primarily due to the increase in intangibles, including goodwill relating to purchase accounting for the T-Mobile merger OTHER INCOME (EXPENSE) Interest and financing expenses were $38.9 million and $96.8 million for the three months and six months ended June 30, 2001, respectively, as compared to $77.5 million and $158.8 million for the same periods in 2000, respectively. The decrease was due to the decrease in the average balance of long-term debt outstanding at June 30, 2001 as compared to June 30, 2000. Other income (expense) also includes equity in net losses of unconsolidated affiliates of $29.1 million and $52.7 million for the three months and six months ended June 30, 2001, respectively, as compared to $23.2 million and $24.9 million for the same periods in 2000, respectively. These amounts primarily represent our portion of VS GSM II and VS GSM III net losses. NET LOSS Our net loss was $221.4 million and $471.4 million for the three months and six months ended June 30, 2001, respectively, as compared to $196.6 million and $397.2 million for the same periods in 2000, respectively. The increase in 2001 was the result the increase in amortization expense related to the write-up of our assets associated with the purchase accounting for the T-Mobile Merger. Additionally, we incurred significant incremental costs related to customer growth together with the related expenditures in sales and marketing necessary to support this growth. LIQUIDITY AND CAPITAL RESOURCES Mergers, Acquisitions, Investments and Capital Expenditures On February 25, 2000, we completed our merger with VoiceStream. Pursuant to the merger agreement, 0.825 of a VoiceStream common share plus $8.00 in cash were exchanged for each outstanding Omnipoint common share. Total consideration for the merger including liabilities assumed was $6.25 billion. In conjunction with the merger agreement signed on June 23, 1999, VoiceStream invested a total of $150 million in Omnipoint, of which $102.5 million was invested in Omnipoint preferred shares upon signing of the merger agreement, and the remaining $47.5 million was invested in Omnipoint preferred shares on October 1, 1999. 15 16 We spent $240.2 million on capital expenditures during the six months ended June 30, 2001 primarily for the continuing build out of our wireless network. We expect to incur significant further capital expenditures through 2001, directly and through VS GSM II and VS GSM III, for license purchases and capital expansion of operating markets. Actual capital expenditures could vary considerably depending on opportunities that arise over the course of the year and on funding availability. Future funding of our on-going cash requirements will be provided through Deutsche Telekom or its related parties. Financing Activities VoiceStream's credit agreement permits borrowings up to $4.75 billion of which $4.0 billion are currently committed and $2.65 billion are outstanding at June 30, 2001. The agreement includes a revolving credit facility of $1.35 billion, term loans of $1.9 billion, a vendor facility of up to $1.0 billion and an incremental vendor facility of up to $500 million. The $2.65 billion of borrowings outstanding consist of $1.9 billion of term loans and $750 million of the vendor facility. Committed but undrawn facilities consist of the $1.35 billion revolver. The $500 million incremental vendor facility and $250 million of the $1.0 billion vendor facility are currently not committed. The repayment of the facilities is secured by, among other things, the grant of a security interest in certain assets of VoiceStream and certain of its subsidiaries and in the capital stock of certain of VoiceStream's subsidiaries. On August 10, 2001, we repaid the $350 million outstanding under the VS GSM II loan facility. This loan facility is no longer available for future borrowings. We expect continued use of cash in operating activities due to operating losses and increased working capital requirements together with continuing investments in network infrastructure to grow and support our customer base. The cost of completing the build-out in any particular market, the magnitude of operating losses, debt service requirements and the funding requirements of license or operating business acquisitions could vary significantly from current estimates. We plan to use cash on hand and funding from Deutsche Telekom or its related parties to fund these activities and expenditures. We are a 100% owned subsidiary of T-Mobile and T-Mobile is a 100% owned subsidiary of Deutsche Telekom. In the past, we have received funding from Deutsche Telekom. If such financing is not fully available, we may be required to curtail our rate of growth or our service operations. Cash Flow Information Net cash used in operating activities was $326.8 million for the six months ended June 30, 2001. Adjustments to the $471.4 million net loss to reconcile to net cash used in operating activities included $223.7 million of depreciation and amortization expense. We recorded a $37.2 million non-cash income tax benefit based on our operating loss for the period and $52.7 million in non-cash equity in net losses of unconsolidated affiliates. Net cash used in operating activities was $353.6 million for the six months ended June 30, 2000. Net cash used in investing activities was $238.3 million for the six months ended June 30, 2001. Investing activities consisted primarily of fixed asset purchases of $240.2 million related to the expansion of our wireless network and other investing activities of $34.2 million primarily the result of cash proceeds received on the sale of investments. Net cash used in investing activities was $134.3 million for the six months ended June 30, 2000. Net cash provided by financing activities was $452.2 million for the six months ended June 30, 2001. Financing activities included net advances from VoiceStream totaling $484.3 million used to fund our operations and repayment of long-term debt of $32.1 million. Net cash provided by financing activities was $144.8 million for the six months ended June 30, 2000. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", 16 17 as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". The statements establish accounting and reporting standards for derivative instruments and hedging activities and require recognition of all derivatives as either assets or liabilities measured as fair value. Changes to the fair value of derivatives are recognized in earnings unless specific hedge accounting criteria are met. We adopted the provisions of these accounting standards as of January 1, 2001 with no material impact on our financial position and results of operations. In June 2001 the FASB approved SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The adoption of SFAS No. 142 will result in the discontinuation of amortization of our goodwill; however, we will be required to test goodwill for impairment under the new standard beginning in the first quarter of 2002, which could have an adverse effect on our future results of operations if an impairment occurs. MARKET SENSITIVE FINANCIAL INSTRUMENT RISK MANAGEMENT During the six months ended June 30, 2001, there were no material changes to the qualitative or quantitative disclosures about market risks presented in the Annual Report on Form 10-K for the year ended December 31, 2000. 17 18 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Except as referenced in the Form 10-K for the year ended December 31, 2000, there are no material, pending legal proceedings to which we or any of our 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 their financial position, results of operations or cash flows. ITEM 2. CHANGES IN SECURITIES (a) None. (b) None. (c) 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 Omnipoint filed a Current Report on Form 8-K dated May 31, 2001, in which Omnipoint reported under Item 1 that on May 31, 2001, Deutsche Telekom AG acquired VoiceStream Wireless Corporation, a Delaware corporation that is the parent of Omnipoint Corporation. 18 19 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/ DONALD GUTHRIE By /s/ ALLYN P. HEBNER -------------------------------------------- -------------------------------------------- Donald Guthrie Allyn P. Hebner Vice Chairman and Director Vice President and Controller (Principal Financial Officer) (Principal Accounting Officer)

Dated: August 14, 2001 19

OMNIPOINT CORP \DE\ 10-Q