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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 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 ...333-39746
IWO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 14-1818487
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Lakeshore Drive
Lake Charles, LA 70601
(Address of principal executive offices) (Zip code)
(337) 436-9000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.___
---
Part I - Financial Information
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ............................................... 3
Condensed Consolidated Statements of Operations ..................................... 4
Condensed Consolidated Statements of Cash Flows ..................................... 5
Notes to Condensed Consolidated Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................................... 17
Item 4. Controls and Procedures ............................................................. 25
Part II - Other Information
Item 5. Other Information ................................................................... 25
Item 6. Exhibits and Reports on Form 8-K .................................................... 45
Signatures ......................................................................................... 45
Certification Chief Executive Officer .............................................................. 46
Certification Chief Financial Officer .............................................................. 47
2
Part I Financial Information
Item 1. Financial Statements
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
------------ -----------
2002 2001
---- ----
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 3,695 $ 3,394
Investment securities at amortized cost - held to maturity 33,995 56,519
Restricted cash and US Treasury securities at amortized cost - held to maturity 22,957 33,858
Subscriber receivables, net 10,517 10,001
Inventory 3,612 4,375
Prepaid expenses and other assets 3,420 6,790
--------- ---------
Total current assets 78,196 114,937
Restricted cash and US Treasury securities at amortized cost - held to maturity 18,028 27,861
Property and equipment, net 184,659 176,226
Goodwill and other intangibles, net 491,426 52,702
Note receivable 174 194
Other assets 22,283 24,040
Investment securities at amortized cost - held to maturity -- 17,161
--------- ---------
Total assets $ 794,766 $ 413,121
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,409 $ 16,264
Accrued expenses 30,988 43,463
--------- ---------
Total current liabilities 41,397 59,727
Deferred tax liability 19,841 --
Long term obligations 336,694 297,407
Stockholders' equity:
Common stock 1 377
Treasury stock at cost -- (598)
Additional paid in capital 446,449 184,305
Retained deficit (49,616) (128,097)
--------- ---------
Total stockholders' equity 396,834 55,987
--------- ---------
Total liabilities and stockholders' equity $ 794,766 $ 413,121
========= =========
See accompanying notes to condensed consolidated financial statements.
3
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(Unaudited) Three month periods Nine month periods
------------------- ------------------
Three months Three months April 1, 2002 Nine months
ended ended January 1, 2002 through ended
September September through March 31, September 30, September 30,
30, 2002 30, 2001 2002 2002 2001
-------- -------- ---- ---- ----
Revenues:
Subscriber $ 28,970 $ 19,231 $ 25,965 $ 57,397 $ 48,563
Roaming 11,806 10,929 7,014 20,914 23,945
Merchandise sales 1,881 2,366 2,554 3,915 5,231
Other revenue 11 6 3 18 6
--------- --------- --------- --------- ---------
Total revenue 42,668 32,532 35,536 82,244 77,745
Expense:
Cost of service 18,325 18,300 17,532 37,162 46,228
Merchandise cost of sales 2,741 4,646 4,577 5,449 8,894
General and administrative 14,347 8,183 19,382 26,313 22,382
Sales and marketing 11,421 8,717 8,519 20,059 19,917
Non-cash stock compensation -- 26 -- -- 334
Depreciation and amortization 15,326 4,924 5,714 30,031 13,492
--------- --------- --------- --------- ---------
Total operating expense 62,160 44,796 55,724 119,014 111,247
--------- --------- --------- --------- ---------
Operating loss (19,492) (12,264) (20,188) (36,770) (33,502)
Other expense:
Interest expense, net (8,889) (5,822) (6,648) (17,350) (16,011)
--------- --------- --------- --------- ---------
Loss before income tax benefit (28,381) (18,086) (26,836) (54,120) (49,513)
Income tax benefit 1,882 -- -- 4,504 --
--------- --------- --------- --------- ---------
Net loss $ (26,499) $ (18,086) $ (26,836) $ (49,616) $ (49,513)
========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
April 1, Nine
January 1, 2002 months
2002 through through ended
March 31, September September
2002 30, 2002 30, 2001
------------ --------- ---------
Cash flows from operating activities
- ------------------------------------
Net cash used in operating activities
$ (14,868) $ (30,536) $ (32,165)
Cash flows from investing activities
- ------------------------------------
Release of restricted cash and US Treasury securities 10,717 10,682 (53,057)
Payments for the purchase of equipment (29,144) (40,737) (64,188)
Proceeds on maturities of marketable securities 6,000 33,167 28,079
Purchase of marketable securities --- --- (105,328)
------------ --------- ---------
Net cash (used in) provided by investing activities (12,427) 3,112 (194,494)
Cash flows from financing activities
- ------------------------------------
Proceeds from long-term debt 40,000 30,000 220,000
Debt issuance costs --- --- (7,724)
Principal payments of long-term debt (15,000) --- ---
Other financing activities --- 20 620
------------ --------- ---------
Net cash provided by financing activities 25,000 30,020 212,896
------------ --------- ---------
Net (decrease) increase in cash and cash equivalents (2,295) 2,596 (13,763)
Cash and cash equivalents at beginning of period 3,394 1,099 36,313
------------ --------- ---------
Cash and cash equivalents at end of period $ 1,099 $ 3,695 $ 22,550
============ ========= =========
See accompanying notes to condensed consolidated financial statements.
5
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three and
nine-month periods ended September 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002.
The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The condensed consolidated financial statements contained
herein should be read in conjunction with the financial statements and
notes included in the Form 10-K for IWO Holdings, Inc. for the year ended
December 31, 2001, filed on March 26, 2002 with the Securities and Exchange
Commission.
2. Description of the Organization
IWO Holdings, Inc. ("the Company") is principally engaged in the ownership
and operation of wireless personal communications systems ("PCS") in the
northeastern region of the United States.
On April 1, 2002, US Unwired Inc. ("US Unwired") acquired 100% of the
outstanding common stock of the Company, by issuing to the former
stockholders of the Company approximately 39.0 million shares of US Unwired
common stock and reserving approximately 6.9 million additional shares of
US Unwired common stock for issuance upon the exercise of options and
warrants that US Unwired assumed or exchanged in connection with the
acquisition. The acquisition was effected pursuant to a merger of IWO
Holdings, Inc. with a wholly owned subsidiary of US Unwired, Northeast
Unwired, Inc. As a result of the acquisition, the Company became a wholly
owned subsidiary of US Unwired. The purchase accounting effects of this
acquisition have been pushed down from US Unwired to the accompanying
financial statements. Accordingly, the Company has adjusted its equity as
of the acquisition date to reflect the amount paid by US Unwired and
allocated that amount to the assets and liabilities of the Company based on
the initial estimate of their fair values. US Unwired is in the process of
obtaining an independent valuation from a national valuation firm to assist
in the allocation of the purchase price. The Company expects to receive the
final valuation report from the independent national valuation firm before
December 31, 2002. The following summarizes the US Unwired purchase
consideration and the push down of this purchase consideration to the
accompanying financial statements.
(In thousands)
Consideration:
Common stock issued $389,828
Stock options and warrants granted 49,410
Cash, including merger related costs 7,019
--------
Total purchase price $446,257
========
6
Allocated to:
Working capital $ 51,994
Restricted cash and US Treasury obligations 28,100
Investment securities 3,103
Property and equipment 159,919
Deferred financing costs and other assets 21,768
Long-term debt (306,000)
Deferred tax liability (24,345)
Acquired customer base 57,500
Sprint affiliation agreement 215,000
Goodwill 239,218
--------
Total $446,257
========
The Company is amortizing the acquired customer base over a period of 24
months and the Sprint Affiliation agreements over the remaining life of the
agreements - approximately 18 years. None of the above goodwill is expected
to be tax deductible.
As a result of the US Unwired acquisition and the application of push down
accounting that resulted, the Company has adjusted the basis of its assets,
liabilities and shareholders' equity to reflect fair value on the closing
date of the acquisition. As a result of this new basis, our consolidated
balance sheets, results of operations and cash flows for periods subsequent
to April 1, 2002, the closing date of the acquisition, are not comparable to
those prior to the acquisition. The statements of operations and cash flows
of the Company for the three and nine months ended September 30, 2002 are
each presented as two distinct periods; the three months prior to the merger
ended March 31, 2002 and the six months subsequent to the merger ended
September 30, 2002. Certain reclassifications have been made to our
financial statements for periods prior to the acquisition in order to
conform the presentation to the six-month period ended September 30, 2002.
During the three-month period ended September 30, 2002, the Company adjusted
its initial purchase price allocation by $1.5 million for reductions in
certain estimates related to the overall costs of the acquisition, $8.7
million for changes in the Company's initial estimates of working capital
acquired that included reductions of estimated liabilities for circuits,
long distance, commissions and rebates and a $4.2 million reduction in the
Company's estimated property and equipment valuation. These changes resulted
in a decrease to goodwill of $6.0 million.
3. Details of Certain Balance Sheet Accounts
Major categories of property and equipment consisted of the following:
September 30, December 31,
2002 2001
------------- ------------
(In thousands)
Land $ 168 $ 169
Buildings and leasehold improvements 9,149 11,680
Facilities and equipment 152,807 138,923
Furniture, fixtures and vehicles 5,464 8,165
Construction in progress 26,810 37,023
------------- ------------
194,398 195,960
Less accumulated depreciation and amortization 9,739 19,734
------------- ------------
$ 184,659 $ 176,226
============= ============
7
Goodwill and other intangibles consisted of the following:
September 30, December 31,
-------------
2002 2001
------------- ------------
(In thousands)
Goodwill $ 239,218 $ 50,599
Sprint affiliation agreement 215,000 ---
Subscriber base 57,500 14,000
------------- ------------
511,718 64,599
Less accumulated amortization 20,292 11,897
------------- ------------
$ 491,426 $ 52,702
============= ============
4. Long-Term Obligations
Long-term obligations consisted of the following:
September 30, December 31,
-------------
2002 2001
------------- ------------
(In thousands)
Debt outstanding under senior credit facilities:
Bank credit facility $ 200,000 $ 145,000
Senior subordinated discount notes 136,694 152,407
------------- ------------
Long-term obligations $ 336,694 $ 297,407
============= ============
Senior Subordinated Discount Notes - 14%
In February 2001, IWO issued 160,000 units, each consisting of $1,000
principal amount of 14% Senior Notes due January 15, 2011 and one warrant
to purchase 12.50025 shares of IWO's class C common stock at an exercise
price of $7.00 per share. On April 1, 2002, with the acquisition of IWO by
US Unwired, the warrants were converted to US Unwired warrants, and each
warrant is now exercisable for 12.96401 shares of US Unwired's common
stock. Interest is payable semi-annually on January 15 and July 15 of each
year. The gross proceeds from the offering were $160 million. Independent
Wireless One Corporation is the sole guarantor of the Senior Notes. All of
IWO's restricted subsidiaries formed or acquired after the issuance of the
Notes that guarantee the Company's senior credit facility will also
guarantee the Notes. The Notes are not guaranteed by US Unwired Inc. or any
of its subsidiaries.
Concurrent with the closing of the Notes, a portion of the proceeds of the
offering was used to purchase a portfolio of U.S. government securities
that will generate sufficient proceeds to make the first six scheduled
interest payments on the Senior Notes through January 2004. The account
holding the investment securities and all of the securities and other items
contained in the account have been pledged to the trustee for the benefit
of the holders of the Notes.
Senior Bank Credit Facility - $240 million
Effective December 2000, Independent Wireless One Corporation, a wholly
owned subsidiary of the Company, entered into an amended and restated
secured bank credit facility under which it may borrow up to $240 million
in the aggregate consisting of up to $70 million in revolving loans and
$170 million in term loans. The senior bank credit facility matures in
2008. The term loans will be repaid in quarterly installments beginning in
March 2004 and the revolver matures in March 2008. All loans under the
senior bank credit facility bear interest at variable rates tied to the
prime rate, the federal funds rate or LIBOR. The senior bank credit
facility is secured by all of the assets of the Company and its
subsidiaries. At September 30, 2002, the Company had $38.4 million
available under this facility.
The Company must comply with certain financial and operating covenants for
the subordinated discount notes and the senior bank credit facility and at
September 30, 2002 the Company was in compliance with these restrictive
covenants.
8
5. Goodwill and Other Intangible Assets - Adoption of Statement 142
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives.
The Company adopted these new rules on accounting for goodwill and other
intangible assets on January 1, 2002. During the second quarter of 2002,
the Company completed the first of the required impairment tests of
goodwill and indefinite lived assets as of January 1, 2002 and determined
that the adoption of this provision of the new rules had no impact on the
Company's financial statements. The Company intends to perform the first of
the required annual impairment tests of goodwill and indefinite lived
assets in the fourth quarter of 2002.
The following information provides net loss for the three and nine-month
periods ended September 30, 2001 adjusted to exclude amortization expense
recognized in these periods related to goodwill.
Three-month period Nine-month period
ended September 30, ended September 30,
------------------- -------------------
2001 2001
---- ----
(In thousands)
Reported net loss $(18,086) $(49,513)
Add back: Goodwill amortization 668 2,004
-------- --------
Adjusted net loss $(17,418) $(47,509)
======== ========
6. Commitments and Contingencies
The PCS licenses that the Company operates for Sprint PCS are subject to a
requirement that the Company construct network facilities that offer
coverage to 25% of the population or have substantial service in each of
its Basic Trading Areas ("BTAs") within five years from the grant of the
licenses. As of September 30, 2002, management believes that Sprint PCS has
met the requirements necessary for the licenses that the Company operates
for Sprint PCS under the Sprint PCS management agreements.
The Company uses Sprint PCS to process all PCS subscriber billings
including monthly recurring charges, airtime and other charges such as
interconnect fees. The Company pays various fees to Sprint PCS for new
subscribers as well as recurring monthly fees for services performed for
existing customers including billing and management of customer accounts.
Sprint's billing for these services is based upon an estimate of the actual
costs incurred by Sprint PCS to provide such services. At the end of each
calendar year, Sprint PCS compares its actual costs to provide such
services to remittances by the Company for estimated billings and either
refunds overpayments or bills for costs in excess of the payments made.
Based upon information as provided by Sprint PCS, the Company believes it
has adequately provided for the above-mentioned costs in the accompanying
consolidated financial statements. Additionally, Sprint PCS has contracted
with national retailers that sell handsets and service to new PCS
subscribers in the Company's markets. Sprint PCS pays these national
retailers a new subscriber commission and provides handsets to such
retailers below cost. Sprint PCS passes these costs of commissions and the
handset subsidies to the Company.
The Company periodically reviews all charges from Sprint PCS and from time
to time, the Company may dispute certain of these charges. Based upon the
information provided to the Company by Sprint PCS to date, the Company
believes the accompanying condensed consolidated balance sheet adequately
reflects its obligation to Sprint PCS for these charges.
On July 3, 2002, the FCC issued an order, involving Sprint PCS, that PCS
wireless carriers could not unilaterally impose terminating long distance
access charges pursuant to FCC commission rules. This FCC order did not
preclude such charges when a contractual basis existed for such. The
Company has previously recognized only a portion of the terminating long
distance access revenues billed by Sprint PCS and passed to the Company.
The Company believes the accompanying consolidated financial statements
adequately
9
provides for any amounts that may ultimately be determined to be not
collectible in connection with this matter.
7. Income Taxes
The Company's effective income tax rate for the interim periods presented
is based on management's estimate of the Company's effective tax rate for
the applicable year and differs from the federal statutory income tax rate
primarily due to nondeductible permanent differences, state income taxes
and changes in the valuation allowance for deferred tax assets. The
Company's income or loss for tax purposes is included in the income tax
return of the parent. However, the Company's income tax provision is
computed on a separate basis.
8. Condensed Consolidating Financial Information
Independent Wireless One Leased Realty Corporation (the "Non-Guarantor"), a
100% wholly owned subsidiary of Independent Wireless One Corporation, is
precluded from guaranteeing the debt of IWO Holdings, Inc. based on current
agreements in effect. Independent Wireless One Corporation is not
restricted from serving as a guarantor of the IWO Holdings, Inc. debt.
Independent Wireless One Leased Realty Corporation holds all of the cell
site leases and certain leases related to the retail stores and tower site
leases. Operating expenses are comprised of rent expense from these leases.
Independent Wireless One Leased Realty Corporation has charged Independent
Wireless One Corporation a fee equal to its rent expense for use of its
leased cell sites, office and retail space.
The information which follows presents the condensed consolidating balance
sheet as of September 30, 2002 and December 31, 2001 and the condensed
consolidating results of operations and cash flows for the nine-month
periods ended September 30, 2002 and 2001 of (a) the Parent Company, IWO
Holdings, Inc., (b) the "Guarantor", Independent Wireless One Corporation,
and (c) the "Non-Guarantor", Independent Wireless One Leased Realty
Corporation, and includes consolidating entries and the Company on a
consolidated basis.
10
Condensed Consolidating Balance Sheet
September 30, 2002
------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
ASSETS:
- ------
Current Assets
- --------------
Cash and cash equivalents $ -- $ 3,695 $ -- $ -- $ 3,695
Investment securities at amortized cost -
held to maturity -- 33,995 -- -- 33,995
Restricted cash and US Treasury securities
at amortized cost - held to maturity 22,957 -- -- -- 22,957
Subscriber receivables, net -- 10,517 -- -- 10,517
Intercompany receivable (payable) -- 2,807 (2,807) -- --
Inventory -- 3,612 -- -- 3,612
Prepaid expenses and other assets -- 559 2,861 -- 3,420
--------- --------- --------- --------- ---------
Total current assets 22,957 55,185 54 -- 78,196
Restricted cash and US Treasury securities at
amortized cost - held to maturity 10,028 8,000 -- -- 18,028
Investment in subsidiary 505,210 -- -- (505,210) --
Property and equipment, net -- 184,659 -- -- 184,659
Goodwill and other intangible assets, net -- 491,426 -- -- 491,426
Note receivable -- 174 -- -- 174
Other assets -- 22,283 -- -- 22,283
--------- --------- --------- --------- ---------
Total assets $ 538,195 $ 761,727 $ 54 $(505,210) $ 794,766
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ -- $ 10,355 $ 54 $ -- $ 10,409
Accrued expenses 4,667 26,321 -- -- 30,988
--------- --------- --------- --------- ---------
Total current liabilities 4,667 36,676 54 -- 41,397
Deferred tax liability -- 19,841 -- -- 19,841
Long-term obligations 136,694 200,000 -- -- 336,694
--------- ---------
Stockholders' equity:
Common stock 1 -- -- -- 1
Additional paid-in capital 446,449 543,444 -- (543,444) 446,449
Retained deficit (49,616) (38,234) -- 38,234 (49,616)
--------- --------- --------- --------- ---------
Total stockholders' equity 396,834 505,210 -- (505,210) 396,834
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 538,195 $ 761,727 $ 54 $(505,210) $ 794,766
========= ========= ========= ========= =========
11
Condensed Consolidating Balance Sheet
December 31, 2001
-----------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
ASSETS:
- -------
Current Assets
- --------------
Cash and cash equivalents $ --- $ 3,394 $ --- $ --- $ 3,394
Investment securities at amortized cost -
held to maturity --- 56,519 --- --- 56,519
Restricted cash and US Treasury securities
at amortized cost - held to maturity 33,858 --- --- --- 33,858
Subscriber receivables, net --- 10,001 --- --- 10,001
Intercompany receivable 156,464 55,979 24 (212,467) ---
Inventory --- 4,375 --- --- 4,375
Prepaid expenses and other assets --- 5,128 1,662 --- 6,790
--------- --------- -------- ---------- ---------
Total current assets 190,322 135,396 1,686 (212,467) 114,937
Restricted cash and US Treasury securities at
amortized cost--held to maturity 19,861 8,000 --- --- 27,861
Investment in subsidiary 74,492 --- --- (74,492) ---
Property and equipment, net --- 176,226 --- --- 176,226
Goodwill and other intangible assets, net --- 52,702 --- --- 52,702
Note receivable --- 194 --- --- 194
Other assets --- 24,040 --- --- 24,040
Investment securities at amortized cost--held
to maturity --- 17,161 --- --- 17,161
--------- --------- -------- ---------- ---------
Total assets $ 284,675 $ 413,719 $ 1,686 $ (286,959) $ 413,121
========= ========= ======== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Current liabilities:
Accounts payable $ --- $ 16,264 $ --- $ --- $ 16,264
Intercompany payable 54,317 156,488 1,662 (212,467) ---
Accrued expenses 10,267 33,172 24 --- 43,463
--------- --------- -------- ---------- ---------
Total current liabilities 64,584 205,924 1,686 (212,467) 59,727
Long-term obligations 152,407 145,000 --- --- 297,407
--------- ----------
Stockholders' equity:
Common stock 377 2,750 --- (2,750) 377
Treasury stock at cost (598) --- --- --- (598)
Additional paid-in capital 196,002 173,303 --- (185,000) 184,305
Retained deficit (128,097) (113,258) --- 113,258 (128,097)
--------- --------- -------- ---------- ---------
Total stockholders' equity 67,684 62,795 --- (74,492) 55,987
--------- --------- -------- ---------- ---------
Total liabilities and stockholders' equity $ 284,675 $ 413,719 $ 1,686 $ (286,959) $ 413,121
========= ========= ======== ========== =========
12
Condensed Consolidating Statement of Operations
Three-month period ended September 30, 2002
-------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
--------- ----------- --------------- ------- ------------
(In thousands)
Revenues $ --- $ 42,668 $ 3,529 $ (3,529) $ 42,668
Operating expenses --- 62,160 3,529 (3,529) 62,160
--------- --------- -------- --------- ---------
Operating loss --- (19,492) --- --- (19,492)
Other income (expense), net (5,699) (3,190) --- --- (8,889)
Equity in losses of wholly-owned subsidiaries (20,800) --- --- 20,800 ---
--------- --------- -------- --------- ---------
Loss before income tax benefit (26,499) (22,682) --- 20,800 (28,381)
Income tax benefit --- 1,882 --- --- 1,882
--------- --------- -------- --------- ---------
Net loss $ (26,499) $ (20,800) $ --- $ 20,800 $ (26,499)
========= ========= ======== ========= =========
Condensed Consolidating Statement of Operations
Three-month period ended September 30, 2001
-------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
--------- ----------- --------------- ------- ------------
(In thousands)
Revenues $ --- $ 32,532 $ 2,483 $ (2,483) $ 32,532
Operating expenses --- 44,796 2,483 (2,483) 44,796
--------- --------- -------- --------- ---------
Operating loss --- (12,264) --- --- (12,264)
Other income (expense), net (4,088) (1,734) --- --- (5,822)
Equity in losses of wholly-owned subsidiaries (13,998) --- --- 13,998 ---
--------- --------- -------- --------- ---------
Net loss $ (18,086) $ (13,998) $ --- $ 13,998 $ (18,086)
========= ========= ======== ========= =========
13
Condensed Consolidating Statement of Operations
January 1, 2002 through March 31, 2002
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ----------- --------------- ------- ------------
(In thousands)
Revenues $ --- $ 35,536 $ 3,092 $ (3,092) $ 35,536
Operating expenses --- 55,724 3,092 (3,092) 55,724
---------- ----------- --------------- ------------- ------------
Operating loss --- (20,188) --- --- (20,188)
Other income (expense), net (4,613) (2,035) --- --- (6,648)
Equity in losses of subsidiaries (22,223) --- ---- 22,223 ---
---------- ----------- --------------- ------------- ------------
Loss before income tax benefit (26,836) (22,223) --- 22,223 (26,836)
Income tax benefit --- --- ---- --- ---
---------- ----------- --------------- ------------- ------------
Net loss $ (26,836) $ (22,223) $ --- $ 22,223 $ (26,836)
========== =========== =============== ============= ============
Condensed Consolidating Statement Operations
April 1, 2002 through September 30, 2002
----------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
---------- ----------- --------------- ------------- ------------
(In thousands)
Revenues $ --- $ 82,244 $ 6,744 $ (6,744) $ 82,244
Operating expenses --- 119,014 6,744 (6,744) 119,014
---------- ----------- --------------- ------------- ------------
Operating loss --- (36,770) --- --- (36,770)
Other income (expense), net (11,382) (5,968) --- --- (17,350)
Equity in losses of subsidiaries (38,234) --- --- 38,234 ---
---------- ----------- --------------- -------------- ------------
Net loss before income tax benefit (49,616) (42,738) --- 38,234 (54,120)
Income tax benefit --- 4,504 --- --- 4,504
---------- ----------- --------------- ------------- ------------
Net loss $ (49,616) $ (38,234) $ --- $ 38,234 $ (49,616)
========== =========== =============== ============= ============
14
Condensed Consolidating Statement of Operations
Nine-month period ended September 30, 2001
------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- -------------- ------- ------------
(In thousands)
Revenues $ --- $ 77,745 $ 6,045 $ (6,045) $ 77,745
Operating expenses --- 111,247 6,045 (6,045) 111,247
-------- --------- -------- --------- ---------
Operating loss --- (33,502) --- --- (33,502)
Other income (expense), net (10,680) (5,331) --- --- (16,011)
Equity in losses of subsidiaries (38,833) --- --- 38,833 ---
-------- --------- -------- --------- ---------
Net loss $(49,513) $ (38,833) $ --- $ 38,833 $ (49,513)
======== ========= ======== ========= =========
Condensed Consolidating Statement of Cash Flows
January 1, 2002 through March 31, 2002
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- --------------- ------- ------------
(In thousands)
Cash flows from operating activities:
- -------------------------------------
Net cash provided by (used in) operating activities $(10,717) $ (4,151) $ --- $ --- $ (14,868)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities 10,717 --- --- --- 10,717
Payments for the purchase of equipment --- (29,144) --- --- (29,144)
Maturities of marketable securities --- 6,000 --- --- 6,000
-------- --------- -------- --------- ---------
Net cash provided by (used in) investing activities 10,717 (23,144) --- --- (12,427)
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt --- 40,000 --- --- 40,000
Principal payments of long-term debt --- (15,000) --- --- (15,000)
-------- --------- -------- --------- ---------
Net cash provided by (used in) financing activities --- 25,000 --- --- 25,000
-------- --------- -------- --------- ---------
Net decrease in cash and cash equivalents --- (2,295) --- --- (2,295)
Cash and cash equivalents at beginning of period --- 3,394 --- --- 3,394
-------- --------- -------- --------- ---------
Cash and cash equivalents at end of period $ --- $ 1,099 $ --- $ --- $ 1,099
======== ========= ======== ========= =========
15
Condensed Consolidating Statement of Cash Flows
April 1, 2002 through September 30, 2002
----------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
Cash flows from operating activities: (In thousands)
- -------------------------------------
Net cash provided by (used in) operating
activities $ (10,682) $ (19,854) $ --- $ --- $ (30,536)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities 10,682 --- --- --- 10,682
Payments for the purchase of equipment --- (40,737) --- --- (40,737)
Maturities of marketable securities --- 33,167 --- --- 33,167
--------- --------- --------- ---------- ---------
Net cash provided by (used in) investing
activities 10,682 (7,570) --- --- 3,112
Cash flows from financing activities:
- ------------------------------------
Proceeds from long-term debt --- 30,000 --- --- 30,000
Proceeds from promissory notes --- 20 --- --- 20
--------- --------- ---------- ---------- ---------
Net cash provided by (used in) financing
activities --- 30,020 --- --- 30,020
--------- --------- ---------- ---------- ---------
Net increase in cash and cash equivalents --- 2,596 --- --- 2,596
Cash and cash equivalents at beginning of period --- 1,099 --- --- 1,099
--------- --------- ---------- ---------- ---------
Cash and cash equivalents at end of period $ --- $ 3,695 $ --- $ --- $ 3,695
========= ========= ========== ========== =========
Condensed Consolidating Statement of Cash Flows
Nine-month period ended September 30, 2001
------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
Cash flows from operating activities: (In thousands)
- -------------------------------------
Net cash provided by (used in) operating
activities $(107,167) $ 75,002 $ --- $ --- $ (32,165)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities (53,057) --- --- --- (53,057)
Payments for the purchase of equipment --- (64,188) --- --- (64,188)
Maturities of marketable securities --- 28,079 --- --- 28,079
Purchase of marketable securities --- (105,328) --- --- (105,328)
--------- --------- ---------- ---------- ---------
Net cash provided by (used in) investing
activities (53,057) (141,437) --- --- (194,494)
Cash flows from financing activities:
- ------------------------------------
Proceeds from long-term debt 160,000 60,000 --- --- 220,000
Debt issuance costs --- (7,724) --- --- (7,724)
Other financing activities 224 396 --- --- 620
--------- --------- ---------- ---------- ---------
Net cash provided by (used in) financing
activities 160,224 52,672 --- --- 212,896
--------- --------- ---------- ---------- ---------
Net decrease in cash and cash equivalents --- (13,763) --- --- (13,763)
Cash and cash equivalents at beginning of period --- 36,313 --- --- 36,313
--------- --------- ---------- ---------- ---------
Cash and cash equivalents at end of period $ --- $ 22,550 $ --- $ --- $ 22,550
========= ========= ========== ========== =========
16
9. Subsequent Events
Under the Company's agreements with Sprint PCS, Sprint PCS can change the
current fee ("Travel Rate") that the Company receives and pays for each Sprint
PCS travel minute after December 31, 2002. The Company has received notice from
Sprint PCS that the reciprocal Travel Rate will change $0.10 per minute in 2002
to $0.058 per minute in 2003. Currently the fees that the Company receives from
Sprint PCS for Sprint PCS's customers using the Company's networks exceed those
that the Company pays to Sprint PCS for the Company's customers using Sprint
PCS's network. The change in Travel Rate will likely decrease the Company's
revenues, expenses and the Company's net travel position, which is the
difference between travel revenue and travel expense and will likely increase
the Company's net loss and decrease cash flow from operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plan,
construction schedule, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-looking
statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the investment
considerations described elsewhere, specific factors that might cause such a
difference include, but are not limited to (i) our ability to integrate
operations and finance future growth opportunities; (ii) our dependence on
Sprint PCS; (iii) our ability to expand our Sprint PCS network or to upgrade the
Sprint PCS network to accommodate new technologies; (iv) limited operating
history in the PCS market and anticipation of future losses; (v) potential
fluctuations in operating results; (vi) changes or advances in technology; (vii)
changes in law or government regulation; (viii) competition in the industry and
markets in which we operate; (ix) future acquisitions; (x) our ability to
attract and retain skilled personnel; (xi) our dependence on contractor and
consultant services, network implementation and information technology support;
(xii) our potential inability to expand the services and related products we
provide in the event of substantial increases in demand in excess of supply for
network and handset equipment and related services and products; (xiii) the
availability at acceptable terms of sufficient funds to pay for our business
plans; (xiv) changes in labor, equipment and capital costs; (xv) any inability
to comply with the indentures that govern our senior notes or credit agreements;
(xvi) changes in management; and (xvii) general economic and business
conditions.
You should not rely too heavily on any forward-looking statement. We cannot
assure you that our forward-looking statements will prove to be correct. We have
no obligation to update or revise publicly any forward-looking statement based
on new information, future events or otherwise. This discussion should be read
in conjunction with our financial statements and with the Risk Factors included
in this report under Item 5 Other Information and with the financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Form 10-K for IWO Holdings, Inc. for the year ended December
31, 2001, filed on March 26, 2002 with the Securities and Exchange Commission
("SEC").
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
activation fee revenues and related expense, revenue recognition of credit
challenged customers, contract cancellation fees, inventory reserves, intangible
assets and contingencies. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may vary from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements.
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of customers to make payments. If the financial conditions of our
customers deteriorate, resulting from the customers' inability to
17
make payments, additional allowances will be required.
We provide additional allowances for economically challenged customers that have
been granted limited credit and recognize the revenue only after the customer
has made an initial payment. If these credit challenged customers fail to make
payments after making an initial payment, additional allowances may be required.
We recognize only a portion of contract cancellation fees and late fees billed
to customers that disconnect service prior to fulfilling the contractual length
of service, as there is no assurance that all contract cancellation fees and
late fees that are billed will be collected. If the collections on contract
cancellation fees and late fee are less than that recognized, additional
allowances may be required.
We defer revenues collected for activation fees over the estimated life of the
subscriber relationship, which we believe to be 15-24 months, based upon our
historical trends of average customer lives and discussions with Sprint PCS. We
also defer an activation expense in an amount equal to activation fee revenue
and amortize this expense in an amount equal to the activation fee revenue over
the life of the subscriber relationship. If the estimated life of the subscriber
relationship increases or decreases, the amounts of deferred revenue and
deferred expense will be adjusted over the revised estimated life of the
subscriber relationship.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be necessary.
We accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. Depending on the level of sales
and other factors, our estimates of the amounts accrued for commissions and
other costs owed to such retailers may require modification of our previous
estimates.
We rely on Sprint PCS for much of our billing information and based upon the
timing of that information, make certain assumptions that the information is
accurate and that it is consistent with historical trends. While we believe our
basis for making such assumptions are reasonable, actual results may vary from
these estimates.
Overview
Through our subsidiary, Independent Wireless One Corporation ("IWO"), we provide
wireless personal communication services, commonly referred to as PCS, to an
area containing 6.3 million residents in the northeastern United States. Our
territory extends from suburban New York City (Orange and Sullivan Counties)
north to the Canadian border and reaches from the eastern suburbs of Rochester
to Syracuse, Ithaca, Binghamton and Elmira in central New York State (and
extending into a small portion of north central Pennsylvania), east to include
all of Vermont and New Hampshire (except Nashua, New Hampshire) and a portion of
western Massachusetts. We are a network partner of Sprint PCS, the personal
communications services group of Sprint Corporation. Sprint PCS, directly and
through affiliates like us, provides wireless services in more than 4,000 cities
and communities across the country. We have the exclusive right to provide
digital PCS services under the Sprint(R) and Sprint PCS(R) brand names in our
service area.
On April 1, 2002, 100% of our outstanding stock was acquired by US Unwired Inc.
("US Unwired"). US Unwired provides PCS services and related products to
customers in the southeastern United States as part of Sprint PCS's network. US
Unwired's service area, prior to acquiring us, consisted of 11.3 million
residents in Louisiana, Texas, Florida, Arkansas, Mississippi, Georgia and
Alabama. Each share of our stock was converted to 1.0371 shares of US Unwired
common stock. As a result, approximately 37.6 million outstanding shares of IWO
stock were converted to approximately 39.0 million shares of US Unwired common
stock. In addition, 6.9 million shares of US Unwired common stock were reserved
for issuance upon exercise of IWO options, IWO Founders and Management Warrants
and IWO High Yield Warrants based upon the same conversion ratio.
As a result of the US Unwired acquisition and the application of push down
accounting that resulted, we adjusted the basis of our assets, liabilities and
shareholders' equity to reflect fair value on the closing date of the
acquisition. As a result of this new basis, our consolidated balance sheets,
results of operations and cash flows for periods subsequent to April 1, 2002,
the closing date of the acquisition, are not comparable to those prior to the
acquisition.
18
Our statements of operations and cash flows for the nine months ended September
30, 2002 are presented as two distinct periods; the three months prior to the
merger ended March 31, 2002 and the six months subsequent to the merger ended
September 30, 2002. Certain reclassifications have been made to our financial
statements for periods prior to the acquisition in order to conform the
presentation to the six-month period ended September 30, 2002.
For discussion purposes, we have combined the three-month period of January 1,
2002 to March 31, 2002 (pre-acquisition period) and the six-month period of
April 1, 2002 to September 30, 2002 (post-acquisition period) for comparison to
the nine month period ended September 30, 2001.
For the three months ended For the nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Subscriber $ 28,970 $ 19,231 $ 83,362 $ 48,563
Roaming 11,806 10,929 27,928 23,945
Merchandise sales 1,881 2,366 6,469 5,231
Other revenue 11 6 21 6
--------- --------- --------- ---------
Total revenue 42,668 32,532 117,780 77,745
Expense:
Cost of service 18,325 18,300 54,694 46,228
Merchandise cost of sales 2,741 4,646 10,026 8,894
General and administrative 14,347 8,183 45,695 22,382
Sales and marketing 11,421 8,717 28,578 19,917
Non-cash stock compensation --- 26 --- 334
Depreciation and amortization 15,326 4,924 35,745 13,492
--------- --------- --------- ---------
Total operating expense 62,160 44,796 174,738 111,247
--------- --------- --------- ---------
Operating loss (19,492) (12,264) (56,958) (33,502)
Other expense:
Interest expense, net (8,889) (5,822) (23,998) (16,011)
--------- --------- --------- ---------
Loss before income tax benefit (28,381) (18,086) (80,956) (49,513)
Income tax benefit 1,882 --- 4,504 ---
--------- --------- --------- ---------
Net loss $ (26,499) $ (18,086) $ (76,452) $ (49,513)
========= ========= ========= =========
For the nine months ended
September 30,
2002 2001
---- ----
Cash flows from operating activities
- ------------------------------------
Net cash used in operating activities $ (45,404) $ (32,165)
Cash flows from investing activities
- ------------------------------------
Release of restricted and US Treasury securities 21,399 (53,057)
Payments for the purchase of equipment (69,881) (64,188)
Proceeds on maturities of marketable securities 39,167 28,079
Purchase of marketable securities --- (105,328)
--------- ---------
Net cash used in investing activities (9,315) (194,494)
Cash flows from financing activities
- ------------------------------------
Proceeds from long-term debt 70,000 220,000
Debt issuance costs --- (7,724)
Principal payments of long-term debt (15,000) ---
Other financing activities 20 620
--------- ---------
Net cash provided by financing activities 55,020 212,896
--------- ---------
Net change in cash and cash equivalents 301 (13,763)
19
Cash and cash equivalents at beginning of period 3,394 36,313
------ -------
Cash and cash equivalents at end of period $3,695 $22,550
====== =======
Three Month Period Ended September 30, 2002 Compared to the Three Month Period
Ended September 30, 2001
Subscriber Additions
As of September 30, 2002, we provided personal communication services to 190,900
customers as compared to 125,800 customers at September 30, 2001. We added 9,100
customers during the three-month period ended September 30, 2002 as compared to
23,200 new customers during the three-month period ended September 30, 2001. The
increased customers are attributable to the expansion of the network within our
existing markets as well as the expansion into new markets within our territory
offset by decreases due to competition in the market place. We do not include in
our customer base an estimate of customers that will not make their initial
payment.
Revenues
Three-month period ended September 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $28,970 $19,231
Roaming revenues 11,806 10,929
Merchandise sales 1,881 2,366
Other revenues 11 6
------- -------
Total revenues $42,668 $32,532
======= =======
Subscriber revenues
Total subscriber revenues were $29.0 million for the three-month period ended
September 30, 2002 as compared to $19.2 million for the three-month period ended
September 30, 2001, representing an increase of $9.8 million and was primarily
the result of an increase in subscribers.
Roaming revenues
Roaming revenues were $11.8 million for the three-month period ended September
30, 2002 as compared to $10.9 million for the three-month period ended September
30, 2001, representing an increase of $.9 million and was primarily the result
of a higher volume of Sprint PCS(R) subscribers traveling through our markets
and the expansion of our network coverage. We are continuing to expand our
service by upgrading network equipment and adding cell sites in certain markets
that we believe will help us provide better service.
Merchandise sales
Merchandise sales were $1.9 million for the three-month period ended September
30, 2002 as compared to $2.4 million for the three-month period ended September
30, 2001, representing an decrease of $.5 million and related to fewer
subscriber additions and higher discounts offered to new subscribers. The cost
of handsets typically exceeds the amount received from our subscribers because
we subsidize the price of handsets to remain competitive in the marketplace.
Operating Expenses
Three-month period ended September 30,
2002 2001
---- ----
(In thousands)
Cost of service $18,325 $18,300
Merchandise cost of sales 2,741 4,646
General & administrative 14,347 8,183
Sales & marketing 11,421 8,717
Non-cash stock compensation --- 26
Depreciation & amortization 15,326 4,924
------- -------
20
Total operating expenses $62,160 $44,796
======= =======
Cost of service
Cost of service was $18.3 million for the three-month period ended September 30,
2002 and three-month period ended September 30, 2001. The increased usage as a
result of our subscriber growth was off set by contractual usage rate decreases
from third party carriers.
Merchandise cost of sales
Merchandise cost of sales was $2.7 million for the three-month period ended
September 30, 2002 as compared to $4.6 million for the three-month period ended
September 30, 2001, representing a decrease of $1.9 million that was primarily
related to fewer subscribers additions. The cost of handsets typically exceeds
the amount received from our subscribers because we subsidize the price of
handsets to remain competitive in the marketplace.
General and administrative expenses
General and administrative expenses were $14.3 million for the three-month
period ended September 30, 2002 as compared to $8.2 million for the three-month
period ended September 30, 2001, representing an increase of $6.1 million and
was primarily related to billing and customer care costs, the Sprint affiliation
fee and bad debt expense due to our increased subscriber base. We are also
evaluating the impact of customer fraud on bad debt expense that occurred by
customers entering incorrect bank information into Sprint PCS's electronic
payment system
Sales and marketing expenses
Sales and marketing expenses were $11.4 million for the three-month period ended
September 30, 2002 as compared to $8.7 million for the three-month period ended
September 30, 2001, representing an increase of $2.7 million that primarily
relates to increases in direct selling headcount and commissions paid for new
subscribers to national third party retailers contracted to sell our product.
Depreciation and amortization expense
Depreciation and amortization expense was $15.3 million for the three-month
period ended September 30, 2002 as compared to $4.9 million for the three-month
period ended September 30, 2001, representing an increase of $10.4 million and
was primarily due to $10.2 million related to the amortization of intangible
assets. Net property and equipment for our PCS markets increased to $184.7
million at September 30, 2002 from $156.1 million at September 30, 2001.
Operating loss
The operating loss was $19.5 million for the three-month period ended September
30, 2002 as compared to $12.3 million for the three-month period ended September
30, 2001, representing an increase of $7.2 million that was primarily due to
increases in subscriber revenue offset by the cost of adding new subscribers and
increased depreciation costs associated with building out our markets.
Other Income/(Expense)
Three-month period
ended September 30,
2002 2001
---- ----
(In thousands)
Interest expense $ (9,476) $ (7,629)
Interest income 587 1,807
--------- ---------
Total other expense $ (8,889) $ (5,822)
========= =========
Interest expense was $9.5 million for the three-month period ended September 30,
2002 as compared to $7.6 million for the three-month period ended September 30,
2001, representing an increase of $1.9 million. The increase in interest expense
resulted from the increase in outstanding debt. Our outstanding debt was $336.7
million at September 30, 2002 as compared to $292.3 million at September 30,
2001.
21
Interest income was $.6 million for the three-month period ended September 30,
2002 as compared to $1.8 million for the three-month period ended September 30,
2001, representing a decrease of $1.2 million. The decrease was primarily due to
less cash and cash equivalents available for investment and a decrease in
interest rates.
Nine-month Period Ended September 30, 2002 Compared to the Nine-month Period
Ended September 30, 2001:
Subscriber Additions
As of September 30, 2002, we provided personal communication services to 190,900
customers as compared to 125,800 customers at September 30, 2001. We added
35,600 customers during the nine-month period ended September 30, 2002 as
compared to 44,200 new customers during the nine-month period ended September
30, 2001. The increased customers are attributable to the expansion of the
network within our existing markets as well as the expansion into new markets
within our territory. We do not include in our customer base an estimate of
customers that never make their initial payment.
Revenues
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $ 83,362 $48,563
Roaming revenues 27,928 23,945
Merchandise sales 6,469 5,231
Other revenues 21 6
-------- -------
Total revenues $117,780 $77,745
======== =======
Subscriber revenues
Total subscriber revenues were $83.4 million for the nine-month period ended
September 30, 2002 as compared to $48.6 million for the nine-month period ended
September 30, 2001, representing an increase of $34.8 million and was primarily
the result of an increase in subscribers.
Roaming revenues
Roaming revenues were $27.9 million for the nine-month period ended September
30, 2002 as compared to $23.9 million for the nine-month period ended September
30, 2001, representing an increase of $4.0 million and was primarily the result
of a higher volume of Sprint PCS(R) subscribers traveling through our markets
and the expansion of our network coverage. We are continuing to expand our
service by upgrading network equipment and adding cell sites in certain markets
that we believe will help us provide better service.
Merchandise sales
Merchandise sales were $6.5 million for the nine-month period ended September
30, 2002 as compared to $5.2 million for the nine-month period ended September
30, 2001, representing an increase of $1.3 million and related to sales to new
subscribers partially offset by an increase in handset discounts. The cost of
handsets typically exceeds the amount received from our subscribers because we
subsidize the price of handsets to remain competitive in the marketplace.
22
Operating Expenses
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Cost of service $ 54,694 $ 46,228
Merchandise cost of sales 10,026 8,894
General & administrative 45,695 22,382
Sales & marketing 28,578 19,917
Non-cash stock compensation --- 334
Depreciation & amortization 35,745 13,492
-------- --------
Total operating expenses $174,738 $111,247
======== ========
Cost of service
Cost of service was $54.7 million for the nine-month period ended September 30,
2002 as compared to $46.2 million for the nine-month period ended September 30,
2001, representing an increase of $8.5 million, which primarily related to an
increase in carrier roaming expenses and circuit and usage costs as a result of
our larger subscriber base and market coverage.
Merchandise cost of sales
Merchandise cost of sales was $10.0 million for the nine-month period ended
September 30, 2002 as compared to $8.9 million for the nine-month period ended
September 30, 2001, representing an increase of $1.1 million and primarily
related to sales to new subscribers. The cost of handsets typically exceeds the
amount received from our subscribers because we subsidize the price of handsets
to remain competitive in the marketplace.
General and administrative expenses
General and administrative expenses were $45.7 million for the nine-month period
ended September 30, 2002 as compared to $22.4 million for the nine-month period
ended September 30, 2001, representing an increase of $23.3 million and was
primarily related to billing and customer care costs, the Sprint affiliation fee
and bad debt expense due to our increased subscriber base and merger related
expenses related to the US Unwired acquisition. We are also evaluating the
impact of customer fraud on bad debt expense that occurred by customers entering
incorrect bank information into Sprint PCS's electronic payment system
Sales and marketing expenses
Sales and marketing expenses were $28.6 million for the nine-month period ended
September 30, 2002 as compared to $19.9 million for the nine-month period ended
September 30, 2001, representing an increase of $8.7 million that primarily
relates to increases in direct selling headcount and commissions paid to local
and national third party retailers contracted to sell our product.
Depreciation and amortization expense
Depreciation and amortization expense was $35.7 million for the nine-month
period ended September 30, 2002 as compared to $13.5 million for the nine-month
period ended September 30, 2001, representing an increase of $22.2 million and
was primarily due to $20.3 million related to the amortization of intangible
assets. Net property and equipment for our PCS markets increased to $184.7
million at September 30, 2002 from $156.1 million at September 30, 2001.
Operating loss
The operating loss was $57.0 million for the nine-month period ended September
30, 2002 as compared to $33.5 million for the nine-month period ended September
30, 2001, representing an increase of $23.5 million that was primarily due to
increases in subscriber revenue offset by the cost of adding new subscribers and
increased depreciation costs associated with building out our markets.
23
Other Income/(Expense)
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Interest expense $ (26,819) $ (21,986)
Interest income 2,821 5,975
--------- ---------
Total other expense $ (23,998) $ (16,011)
========= =========
Interest expense was $26.8 million for the nine-month period ended September 30,
2002 as compared to $22.0 million for the nine-month period ended September 30,
2001, representing an increase of $4.8 million. Our outstanding debt was $336.7
million at September 30, 2002 as compared to $292.3 million at September 30,
2001.
Interest income was $2.8 million for the nine-month period ended September 30,
2002 as compared to $6.0 million for the nine-month period ended September 30,
2001, representing a decrease of $3.2 million. The decrease was primarily due to
less cash and cash equivalents available for investment and a decrease in
interest rates.
Liquidity and Capital Resources
As of September 30, 2002, we had $3.7 million in cash and cash equivalents,
$34.0 million in investment securities, $41.0 million in restricted cash and US
Treasury securities for our senior notes and total availability in revolving
loans under our senior bank credit facility of $38.4 million.
We are an unrestricted subsidiary of US Unwired. Funds available under our
senior bank credit facility and cash flow can only be used by us, and,
respectively, funds available under US Unwired's senior bank credit facility and
cash flow can only be used by US Unwired.
We used $45.4 million of cash in operating activities during the nine-month
period ended September 30, 2002. The $9.3 million of cash used in investing
activities during the nine-month period ended September 30, 2002 includes cash
outlays of $69.9 million for capital expenditures, partially offset by the $21.4
million release of restricted cash and U.S. Treasury securities to be used to
pay interest related to the senior notes, and by $39.2 million in proceeds from
matured investments. The $55.0 million in cash provided by financing activities
during the nine-month period ended September 30, 2002 consisted of the
borrowings under the senior credit facility net of repayments.
A number of factors, including the rapidly changing wireless industry, general
economic uncertainty, lower than expected new subscriber additions, higher rates
of customer turnover, bad debt losses higher than anticipated and unanticipated
charges from Sprint PCS, has caused management to review the assumptions
underlying the business plan for IWO. While these forward-looking projections
are being refined, they indicate that, despite these adverse trends, cash, cash
flow from operations and borrowings from our senior bank credit facility, are
expected to be sufficient to fund operating losses, meet capital expenditure
needs, and service debt requirements for IWO through 2003. Management's
projections contain significant assumptions including projections for new
customer additions, CPGA, capital expenditures, ARPU, churn, bad debt expense,
wireless handset upgrade costs, operating expenses, fees charged by Sprint PCS
and travel revenue and expense. If one or more of these assumptions are not
correct, IWO may not have sufficient sources of cash to meet its cash
requirements through 2003.
The senior bank credit facility, established in December 2000, is subject to
certain restrictive covenants including maintaining certain financial ratios,
attaining defined subscriber growth and network coverage goals, and limiting
annual capital expenditures. A number of factors have changed in our business
that could have an adverse effect on our being able to meet these covenants in
2003, in particular the minimum subscriber covenant. In September, we elected to
discontinue offering Sprint PCS's no deposit Clear Pay product because of
unacceptable high churn rates and bad debt losses. Our decision to focus on
quality customers with increased profitability will impair our ability to add
subscribers at a level to meet the minimum requirements at various times in
2003. If we are unable to amend our senior bank credit facility or obtain the
appropriate waivers, we would not be eligible to borrow under our revolving
credit facility. Without the funds from our senior bank credit facility, we will
not have sufficient liquidity to meet our current business forecast without
significantly reducing our cash expenditures to levels that will impair the
future viability of our business. Moreover, if as a result of covenant
violations, our bank lenders declare our existing loans in default, our
outstanding senior notes would also become in default, and it is unlikely that
we
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would be able to obtain the funds to repay the banks and the senior note
holders.
As of September 30, 2002, management believes that we are in compliance with
all financial and operational covenants associated with our senior credit
facility, senior notes and agreements with Sprint PCS.
On October 31,2002, IWO made a request to borrow $15 million under its revolving
credit agreement with its banks with proceeds from the borrowing due to IWO on
November 7, 2002. On November 7, 2002 we received $13.2 million from the bank
group with one bank failing to fund its portion of the request. IWO believes
that it met all conditions for the borrowing request and has forwarded a notice
of default to the bank failing to make its funding. Any such failure of our
banks to fund a valid borrowing request leave us with insufficient funds to meet
our cash requirements in 2003 even if we are in compliance with our bank
covenants.
Seasonality
Like the wireless communications industry in general, there is an increase in
subscriber additions in the fourth quarter due to the holiday season. A greater
number of phones sold at holiday promotional prices causes our losses on
merchandise sales to increase. Our sales and marketing expenses increase also
with holiday promotional activities. We generally have the weakest demand for
new wireless services during the summer. We expect these trends to continue
based on historical operating results.
Item 4. Controls and Procedures
In September, an evaluation was performed under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of the evaluation date. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation date.
Part II Other Information
Item 5. Other Information
RISK FACTORS
In addition to the other information included in this document and incorporated
into it by reference, you should carefully consider these risk factors. An
extremely brief overview introduces each of the subsections below. We think the
overview captures the gist of the subsection, but it is not a substitute for
reading the entire subsection.
Introduction
IWO Holdings, Inc. ("IWO") is principally engaged in the ownership and operation
of wireless personal communications system ("PCS"). IWO has its own Sprint PCS
territory and its own agreement with Sprint PCS. On April 1, 2002, IWO was
acquired by US Unwired. "We" and "our" refer collectively to IWO Holdings, Inc.
and its subsidiaries.
Risks Related to Our Merger
Overview of this subsection: We will not achieve the benefits of our merger with
US Unwired unless we successfully integrate the operations of territories that
are geographically separated from each other. The separate debt of US Unwired
and IWO will make this integration more difficult. Our merger expenses were
approximately $7.7 million, which was paid from our cash reserves.
Our integration with US unwired presents significant challenges.
We entered into the merger agreement with US Unwired with the expectation that
the merger will result in expanding our existing network and customer base and
taking advantage of the best operating practices of both organizations.
Achieving the benefits of the mergers will depend in part on integrating the
operations of both companies in an efficient manner. We cannot assure you that
this will occur. To realize the anticipated benefits of
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this combination, our management team must develop strategies and implement a
business plan that will successfully:
. manage the combined company's networks and markets;
. maintain adequate focus on existing business and operations while
working to integrate both companies;
. combine both companies that do not have extensive operating histories
in the PCS market;
. manage each company's cash and available credit lines for use in
financing future growth and working capital needs;
. manage the marketing and sales of each of both companies;
. manage the geographic distance between the territories of both
companies;
. manage the integration of operational and financial reporting software;
. retain and attract key employees during a period of transition.
The diversion of management's attention from ongoing operations and any
difficulties encountered in the transition and integration process could have a
material adverse effect on our financial condition and results of operations and
cash flows.
Our ability to operate as a combined company will be limited by our and US
Unwired's separate public debt indentures and credit facilities.
In order to comply with the indenture governing US Unwired's senior notes, IWO
was designated as an unrestricted subsidiary of US Unwired. As a result, for
purposes of US Unwired's and IWO's respective public debt indentures, IWO, on
the one hand, and the rest of our companies, on the other hand, will operate as
separate business entities. Due to restrictions in US Unwired's indenture, US
Unwired will be unable to provide direct or indirect credit support to IWO.
Likewise, IWO will be restricted under its debt instruments from paying
dividends or freely transferring money to US Unwired and our other companies.
These restrictions may hinder the combined company's ability to achieve the
anticipated benefits of the merger with US Unwired, react to developments in our
or US Unwired's business or take advantage of business opportunities.
US Unwired and IWO depend on the cash flows of their respective subsidiaries to
satisfy our respective debt obligations.
US Unwired and IWO depend on their respective subsidiaries (other than IWO, in
the case of US Unwired) for cash flow and to service their respective debt
obligations. Existing or future credit agreements may restrict or prohibit IWO's
subsidiaries from paying dividends not only to IWO but also to US Unwired and
our other companies and may also restrict or prohibit subsidiaries of US Unwired
from paying dividends not only to us but also to IWO. State law may also limit
the amount of the dividends that the respective subsidiaries are permitted to
pay.
We may not achieve the anticipated benefits from our mergers.
We believe that certain benefits will result from the merger. We cannot assure
you, however, that integrating our business with US Unwired's, even if completed
in an efficient, effective and timely manner, will result in combined results of
operations and financial condition superior to those that we could have achieved
independently. The success of the transactions for us will depend on revenue
growth or other benefits sufficient to offset the dilutive effects of the
additional shares US Unwired issued in the merger. We cannot assure you that we
will achieve sufficient benefits.
We have incurred significant costs associated with the mergers.
We have incurred significant direct transaction expenses, which have either
been expensed for accounting purposes as incurred or are treated as part of the
total purchase price. In addition, US Unwired has incurred significant direct
26
transaction costs associated with the merger, which are included as a part of
the total purchase price for accounting purposes. In either event, these
expenses have decreased our cash reserves. Further, we are incurring severance
expenses, and we will incur other costs associated with integrating the
companies. We cannot assure you that we will not incur additional material
charges in subsequent quarters to reflect additional costs associated with the
merger.
Risks Related to the Combined Company's Business, Strategy and Operations
Overview of this subsection: We have never operated profitably or achieved
consistent positive cash flow. If that doesn't change, we will not have enough
cash to run our business. Timely expansion or completion of the PCS networks of
our operating subsidiary is a key to our success, but we face numerous
challenges in doing that. Revenues we receive from travelers in our territories
may not meet our expectations.
We have not yet operated our business profitably or achieved consistent positive
cash flow.
We expect to continue to incur significant operating losses and to continue to
generate negative cash flow while we complete and expand our PCS networks and
build our customer base. Our ultimate profitability will depend upon many
factors, including our ability to market our services successfully and operate
our networks efficiently, in addition to numerous other factors that are
described in this "Risk Factors" section. If we fail to achieve at least
positive cash flow within a reasonable period of time, an investment in our 14%
Senior Notes may not have much value.
If we do not successfully manage the operations and expected growth of the
combined company following the merger, our operating performance may be
adversely impacted.
We have limited operating history as a Sprint PCS affiliate. IWO began
operations as a Sprint PCS affiliate on January 5, 2000. Our ability to achieve
and sustain operating profitability will depend upon many factors, including our
ability to effectively market Sprint PCS services and manage customer turnover
rates in their respective markets. In addition, a key factor our operational
performance will depend upon is our ability to manage growth through the
expansion or completion of our network build-out and through implementing the
best practices to increase market penetration in our current and future markets.
Market penetration means the number of people in our markets who use our Sprint
PCS services. To be successful, we will require continued development,
construction, testing, deployment and operation of our network. These activities
are expected to place demands on our managerial, operational and financial
resources
The failure to timely expand or complete the build-out of our network, or to
obtain the equipment needed for completion on a timely basis, may result in a
decrease in the number of expected new PCS subscribers and adversely affect the
results of operations or result in a breach of its agreement with Sprint PCS.
IWO has not yet completed its required build-out. In order to expand or complete
network build-outs, we must successfully lease or otherwise retain rights to a
sufficient number of radio communications and network control sites, complete
the purchase and installation of equipment, build-out the physical
infrastructure and test the network. We must also meet all requirements of our
agreements wit