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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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)
14-1818487
Delaware (I.R.S. Employer
(State or other Identification Number)
jurisdiction of
incorporation or 70601
Organization) (Zip code)
901 Lakeshore Drive
Lake Charles, Louisiana 70601
(Address of principal executive offices)
(337) 436-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
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DOCUMENTS INCORPORATED BY REFERENCE
None.
2
IWO HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business 4
ITEM 2. Properties 12
ITEM 3. Legal Proceedings 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 4A. Executive Officers of the Registrant 12
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters 12
ITEM 6. Selected Financial Data 13
ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations 14
ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk 24
ITEM 8. Financial Statements 24
ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 25
PART III
ITEM 10. Directors And Executive Officers Of The Registrant 25
ITEM 11. Executive Compensation 25
ITEM 12. Security Ownership Of Certain Beneficial Owners And Management 25
ITEM 13. Certain Relationships And Related Transactions. 25
ITEM 14. Controls and Procedures. 26
PART IV
ITEM 15. Exhibits, Financial Statements, Schedules, and Reports On Form 8-K. 26
Signatures 28
Certification Chief Executive Officer 29
Certification Chief Financial Officer 30
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plans,
construction schedules, 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 risk factors
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; (xvii) war or terrorism and (xviii) 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.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Through our wholly owned subsidiary, we provide wireless personal communication
services, commonly referred to as PCS, in upstate New York, New Hampshire (other
than the Nashua market), Vermont and portions of Massachusetts and Pennsylvania.
We are a network partner of Sprint PCS, the personal communications services
group of Sprint Corporation. Sprint PCS, directly and through network partners
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 service areas that had
approximately 6.3 million residents as of December 31, 2002.
At December 31, 2002, we were providing PCS service to approximately 200,000
subscribers and network coverage to approximately 4.6 million residents or 73%
out of approximately 6.3 million total residents. The number of residents in our
service area does not represent the number of Sprint PCS subscribers that we
expect to have in our service area.
OUR BACKGROUND
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.
RECENT DEVELOPMENTS
Our operating and financial results have been adversely affected by (i) a highly
competitive wireless market, (ii) further increased penetration of the potential
customer universe, (iii) decreases in wireless pricing, (iv) a general weakening
of the economy, and (v) challenges in our affiliate relationship with Sprint
PCS. These changes have had, and if they continue will have, an adverse impact
on our ability to meet future obligations under our highly leveraged capital
structure. These changes have also caused us to review our business plan.
Changes in the Wireless Market
.. Subscriber growth has declined in the United States due to what we believe
is a general decline in the economy. This decline has resulted in lowering
overall estimated penetration and possible near market saturation of
subscribers whose credit is in good standing. Penetration refers to the
percentage of the total population that is estimated to become wireless
subscribers.
.. Average monthly revenue per subscriber continues to decline and handset
subsidies continue to increase as wireless carriers compete for subscribers
by offering increased allotments of minutes and free or reduced price
features like wireless web. When the handset is sold below cost, the
discount is referred to as a handset subsidy.
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.. Churn, or the subscriber turnover rate, continues to increase as
subscribers abandon brand loyalty in favor of pricing considerations and as
service is offered to people who are considered high risk due to a
sub-standard credit rating.
Our Relationship with Sprint PCS
We have entered into long-term agreements with Sprint PCS and are dependent on
Sprint PCS for services to our subscribers such as billing, customer care, cash
collections and maintenance of our subscriber accounts receivable balances. We
rely on Sprint PCS's system of internal controls to capture information such as
subscriber minutes of use, long distance, national sales commissions, the time
that our subscribers use the network outside our service area and the time that
Sprint PCS and other affiliate subscribers use the network within our service
area.
We also rely on Sprint PCS:
.. For national pricing plans, marketing and advertising. Unless we request
from Sprint PCS, and are granted permission, Sprint PCS believes that we
are required to participate in the programs offered by Sprint PCS. One such
program was designed to attract higher credit risk subscribers that for a
period of time waived the normal deposit requirement. We believe that a
significant portion of our subscriber turnover, bad debt expense,
commission expense and handset subsidies in 2002 was the result of this
program.
.. For customer care. This limits our ability to interact with our subscribers
and implement programs to reduce subscriber turnover.
.. To manage subscriber fraud. During 2002, Sprint PCS implemented a program
that we believe increased the level of customer fraud resulting in
increased financial loss to us.
.. For cash collections on our subscriber billing. Sprint PCS is required to
remit to us 92% of collected revenue. Because a subscriber billing
typically includes revenue that belongs to us and revenue that belongs to
Sprint PCS, Sprint PCS developed a formula based on historical information
of these relationships to distribute cash collections. As a result of our
review of the formula and its application to our collected revenues, we
received an adjustment to our collections of $9.4 million in January and
February 2003.
At various times during 2002 Sprint PCS notified us of unanticipated expenses
due to a lag between the time the charges have been incurred and the time that
Sprint PCS has notified us of the charges. At times, we have been invoiced by
Sprint PCS for charges that we believe cannot be charged to us. We review all
charges from Sprint PCS and dispute certain of these charges based upon our
interpretation of the management agreement and are attempting to work with
Sprint PCS to improve the process. We believe that these items have affected our
liquidity and our ability to accurately forecast our cash flows from operations.
Under our agreements with Sprint PCS, we believe that Sprint PCS can change the
travel rate within certain limitations that we receive and pay for each Sprint
PCS travel minute after December 31, 2002. We received notice from Sprint PCS
that the reciprocal travel rate will change from $0.10 per minute in 2002 to
$0.058 per minute in 2003. While we believe that this reduction is not in
accordance with our management agreement with Sprint PCS, we are reviewing our
options, but our recourses against Sprint PCS for this reduction may be limited.
Currently the fees that we receive from Sprint PCS for Sprint PCS's subscribers
using our network exceeds those that we pay to Sprint PCS for our subscribers
using Sprint PCS's network. The change in the travel rate will likely decrease
the our revenues, expenses and our net travel position, which is the difference
between travel revenue and travel expense, increase our net loss and decrease
cash flow from operations.
Our Highly Leveraged Capital Structures
US Unwired has a senior bank credit facility and senior subordinated discount
notes. IWO has a senior bank credit facility and senior notes. US Unwired and
IWO entered into these prior to the acquisition. Under the terms of these debt
instruments, funds available under the US Unwired debt can only be used by US
Unwired, and funds available under the IWO debt can only be used by IWO. US
Unwired is not obligated for the payment of IWO's debt, and IWO is not obligated
for the payment of US Unwired's debt.
Liquidity
We have been unable to develop a business plan for IWO that provides sufficient
liquidity in 2003, and we have engaged in discussions with the holders of the
IWO senior bank credit facility and the holders of the IWO senior notes
regarding restructuring of IWO.
As of December 31, 2002, IWO had $35.0 million in cash and cash equivalents and
$41.2 million in restricted cash. Total availability in revolving loans under
our senior bank credit facility was $25.2 million. As of December 31, 2002, IWO
indebtedness consisted of $213.2 million related to the IWO senior bank credit
facility and $137.0 million related to the IWO senior notes for a total of
$350.2 million. A portion of the original proceeds of the IWO senior notes
offering was set aside as restricted cash to make the first six scheduled
interest payments on IWO senior notes through January 2004. Repayment of the IWO
senior bank credit facility commences in March 2004.
Although IWO was in compliance with all financial covenants under the IWO senior
bank credit facility at December 31, 2002, we believe that IWO will violate
certain covenants of the IWO senior bank credit facility in 2003. Moreover,
because of the developments in IWO's business referred to above, we believe it
is likely the IWO bank group will elect not to make the remaining $25.2 million
of our revolving credit facility available to us. Without the remaining $25.2
million, IWO will not have sufficient liquidity through 2003. We are in
discussions with the IWO banking group and note holders to arrive at an
acceptable restructuring to preserve IWO liquidity. IWO, holders of the IWO
senior bank credit facility and holders of the IWO senior notes have all
retained advisors to assist in evaluating alternatives for IWO liquidity.
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Without sufficient liquidity, IWO will reduce capital expenditures for network
expansion required for compliance under the IWO management agreement. Failure to
complete the build-out of the IWO service area will place us in violation of the
IWO management agreement. As a result, Sprint PCS could take declare IWO in
default and take action up to and including termination of the IWO management
agreement.
A default under the IWO senior bank credit facility does not result in IWO being
in default under the IWO senior notes. Should IWO be unable to amend the senior
bank credit facility or obtain waivers for any violated restricted covenants,
the holders of IWO senior bank credit facility can place IWO in default,
restrict any remaining future borrowing capacity and accelerate repayment of the
senior bank credit facility. Should the holders of IWO senior bank credit
facility place us in default and accelerate repayment, that acceleration will
serve to trigger a default in the IWO senior notes. Should this occur, both the
holders of the IWO senior bank credit facility and the holders of the IWO senior
notes may demand immediate payment of all outstanding indebtedness. If the
indebtedness is accelerated, IWO does not have sufficient cash to repay its
indebtedness. As a result, IWO would be forced to seek protection under
bankruptcy.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to IWO. Further, IWO creditors,
IWO lenders and IWO note holders cannot place any liens or encumbrances on the
assets of US Unwired. Should the holders of the IWO's senior bank credit
facility place IWO in default, US Unwired's relationship with IWO may change and
several alternatives exist ranging from working for the holders of the senior
bank credit facility and the holders of the senior notes as a manager of the IWO
territory, subject to the approval by Sprint PCS, to no involvement with IWO at
all.
Due to the indicators of impairment as discussed above, during the fourth
quarter of 2002, we engaged a nationally recognized valuation firm to assist us
in performing a fair value assessment of goodwill and other long-lived assets of
US Unwired and IWO. Based on the results of these impairment analyses, we
recorded impairment charges totaling $402.5 million for the impairment of
goodwill and an intangible asset that resulted from the acquisition of IWO. This
is further discussed in Note 3 in our consolidated financials statements that
are included in this filing.
Considering the expected covenant violations in 2003 and the actions that may
result from such covenant violations and the operating losses incurred to date,
there is substantial doubt about IWO's ability to continue as a going concern.
Our Business Strategy
We have already identified and undertaken several initiatives that we believe
will help us meet our operational and financial objectives and enhance liquidity
at IWO. The following represents some of our key strategic initiatives for 2003:
We must reduce our customer turnover or churn rate:
.. In 2002, we opted out of Sprint PCS's program that attracted higher credit
risk subscribers, and we will request not to participate in any Sprint PCS
programs where our analysis indicates adversely impacted levels of customer
turnover or unsatisfactory economic returns.
.. We have restructured our sales employees' programs to pay higher
commissions on subscribers with better credit ratings.
.. We have revised our local agent commission structure. We no longer offer
handset discounts to our local agents and instead pay higher commissions
for subscribers with good credit ratings. We are also canceling agreements
with local agents that continue to target higher risk subscribers or
provide low economic value.
.. We have introduced a pre-pay program, which requires advance payment for
minutes of use. We believe that this program offers higher credit risk
subscribers a less stressful environment in which to subscribe to our
service. We believe that there is a higher susceptibility for this credit
class of subscribers to churn than with a post-pay program, and this
service allows these subscribers to better manage their expenditures for
the service provided.
.. We now supplement Sprint PCS's customer service function with our own staff
that focuses on subscriber retention.
We must continue to focus on cash flow:
.. We are selectively completing our build out by attempting to collocate cell
sites instead of constructing them ourselves.
.. We intend to divest of certain non-revenue producing properties and,
depending on market conditions, will divest of most of the remaining cell
site towers that we own.
.. We have undertaken a corporate wide evaluation of expenses. This includes
the consolidation of functions, divesting of unused and under utilized
facility, renegotiation of vendor contracts, extension of vendor payment
terms and other cost cutting measures.
.. We have begun an evaluation of our markets and are reducing sales staffing
levels and closing retail outlets and other distribution points that do not
meet our minimum internal rates of returns.
We must improve our relationship with Sprint PCS:
We believe that our ability to market ourselves as Sprint PCS creates value. We
believe that Sprint PCS's brand name recognition, national advertising programs
and national coverage helps us attract and grow our subscribers. We also believe
that the Sprint PCS affiliate program is important to Sprint PCS.
.. We must continue to work with Sprint PCS to improve the timeliness and
accuracy of information processed by Sprint PCS on our behalf.
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.. We must continue to work with Sprint PCS to provide more detailed
information to improve our business decisions relative to our subscribers
and our service area.
.. We must ensure that Sprint PCS provides us with the same advantages that
Sprint PCS has from its nationally negotiated contracts to help us to
reduce our expenses.
.. We must ensure that products/programs that Sprint PCS develops meet our
minimum acceptable return requirements.
While we believe that these initiatives will be sufficient, we cannot state with
certainty that these initiatives will result in our ability to sustain
operations beyond or even to the end of 2003, given the information as discussed
above regarding our indebtedness.
OUR AFFILIATION WITH SPRINT PCS
Sprint PCS has adopted a strategy to extend its 100% digital, 100% PCS network
by entering into agreements with independent wireless companies such as us,
which we refer to as affiliates, to construct and manage Sprint PCS markets and
market Sprint PCS services. Through these affiliations, Sprint PCS services are
available in key cities contiguous to current and future Sprint PCS markets. The
Sprint PCS network uses code division multiple access, or CDMA, technology
nationwide.
Under our agreements with Sprint PCS, we market Sprint PCS products and services
in our service area using licenses that Sprint PCS acquired from the FCC in 1994
and 1996. We are the only provider of Sprint PCS products and services in our
service area. Some key points about these agreements are:
. Each agreement lasts up to 50 years with an initial period of 20
years and three successive 10-year renewal periods.
. Each agreement requires revenue sharing of 8% to Sprint PCS and
92% to IWO, except that IWO retains 100% of revenues from
non-IWO Sprint PCS customers traveling in our service area,
merchandise sales and other income as defined by the agreement.
. If we terminate or breach the agreements, we may be required to
sell our PCS business and network to Sprint PCS or to purchase
the Sprint PCS licenses from Sprint PCS.
. If Sprint PCS terminates or breaches the agreements, we may be
able to sell our PCS business and network to Sprint PCS or to
purchase the Sprint PCS licenses from Sprint PCS.
We use Sprint PCS to process all PCS subscriber billings including monthly
recurring charges, airtime and other charges such as interconnect fees. We pay
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.
Additionally, Sprint PCS has contracted with national retailers that sell
handsets and service to new PCS subscribers in our service area. 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 us. We are fully dependent upon and rely upon the internal
controls of Sprint PCS to provide timely and accurate information.
We believe that our service area is important to the Sprint PCS network. To
date, Sprint PCS has made considerable investments in the licenses covering our
service area.
OUR SERVICE AREA
Our Sprint PCS service area includes all or portions of 20 markets spanning over
57,600 square miles with a population of approximately 6.3 million people in
upstate New York, New Hampshire (other than the Nashua market) and portions of
Massachusetts and Pennsylvania as a network partner of Sprint PCS, the personal
communications services group of Sprint Corporation. The number of residents in
our service area does not represent the number of Sprint PCS subscribers that we
expect to have in our service area.
PCS SERVICES AND FEATURES
We offer Sprint PCS products and services in our service area. Our products and
services are designed to mirror those of Sprint PCS and to be a part of the
Sprint PCS nationwide network. Sprint PCS customers in our service area may use
Sprint PCS services throughout our contiguous markets and seamlessly throughout
the Sprint network.
We support the Sprint's newest technology, PCS Vision(TM), throughout our
service area. PCSVision(TM) allows customers that purchase handsets with the
appropriate features the ability to access the Internet, receive and send email,
download pictures and sounds, and take digital pictures either a built-in or
attachable camera.
We offer Code Division Multiple Access (CDMA) handsets that weigh 2.7 to 7.0
ounces and can offer up to 16 days of standby time and up to 3.8 hours of talk
time. Many of these models are dual-mode handsets that allow customers to make
and receive calls on both PCS and cellular frequency bands. All handsets are
equipped with preprogrammed features and are sold under the Sprint PCS brand
name.
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We provide roaming service to both Sprint PCS subscribers that are traveling
through our service area as well as non-Sprint subscribers traveling through our
service area. Sprint PCS and other affiliates provide a similar service to our
subscribers traveling outside of our market area. Roaming allows a person to
make a phone call outside the service are where they purchased the service.
PCS MARKETING STRATEGY
We benefit from the recognizable Sprint PCS brand names and logos and from
Sprint PCS's technological developments. We enhance the national effort with
local marketing managers and coordinators who develop strategies specifically
tailored to our local markets. They assist the sales force in driving traffic to
the stores through promotions, contests and community relations programs and
assist the outside sales force in targeting business sales.
Pricing
We use the Sprint PCS pricing strategy to offer our subscribers a menu of
service plans typically structured with monthly recurring charges, large local
calling areas, bundles of minutes and options and features such as voicemail,
enhanced caller identification, call waiting, three-way calling and wireless
web. In order to meet the competitive needs of our specific local markets, we
occasionally alter Sprint PCS's pricing plans.
Advertising
We capitalize on the Sprint PCS name and reputation to attract subscribers. We
benefit from Sprint PCS's national advertising campaign at no additional cost.
Sprint PCS also runs numerous promotional campaigns that provide subscribers
with benefits such as additional features at the same rate or free ancillary
services. We direct our media and promotional efforts at the community level by
advertising Sprint PCS's products and services through radio, print, outdoor,
billing inserts, direct mail and promotional displays in our retail stores.
Sponsorships
Sprint PCS sponsors numerous national and regional events. These sponsorships
provide Sprint PCS with brand name and product awareness. Our regional marketing
teams sponsor local events, teams and projects to increase consumer awareness of
the Sprint PCS brand in the local community and to provide occasions to develop
positive community relationships in our markets.
SALES AND DISTRIBUTION
We target a broad range of consumer and business markets through a sales and
distribution plan. We use traditional sales channels, like our retail stores,
mass merchandisers and other national retail outlets, independent agents and an
outside sales force. We also use lower-cost methods like direct marketing and a
corporate website.
Retail stores
We have 22 PCS retail outlets. Our PCS retail outlets are located in principal
retail districts in each market, designed in accordance with Sprint PCS
specifications and branded as Sprint PCS stores. We use our stores for the
distribution and sale of our handsets and services. Sales representatives in
these outlets receive in-depth training that allows them to explain our service
in an informed manner. We believe that these representatives foster effective
and enduring customer relationships.
Mass merchandisers and outlets
We target customers through our mass-market retail outlets. We have negotiated
distribution agreements based on Sprint PCS's arrangements with national and
regional mass merchandisers and consumer electronic retailers, including Radio
Shack, Wal-Mart, Best Buy and Office Depot and have a presence in over 300
national retail outlet locations in our market area.
Independent agents
We have a contracted network of independent agents with over 135 outlets that
creates additional opportunities for local distribution. Most of these
businesses are family-owned consumer electronics dealers and wireless
telecommunication retailers.
Other Sprint PCS initiatives
We participate in Sprint PCS's national accounts program, which targets Fortune
1000 companies, take advantage of Sprint PCS's inbound telemarketing sales
program and Sprint PCS's internet site that allows customers in our service area
who purchase products and services over the Sprint PCS internet site become
customers of our PCS network.
No single manufacturer has accounted for more than 10% of our sales in the
current reporting period or in the past three years.
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SUPPLIERS AND EQUIPMENT VENDORS
We do not manufacture any of the handsets that we use in our operations. We
purchase our equipment pursuant to various Sprint PCS vendor arrangements that
provide us volume discounts. Under such arrangements, we purchase our handsets
directly from Sprint PCS and our accessories from certain other third party
vendors.
COMPETITION
We face significant competition in our service area from a number of
competitors. There are five other national mobile telephony operators that offer
service in at least some portion of our service area - AT&T Wireless, Verizon,
Cingular, Nextel and T-Mobile. In addition, there are many local and regional
carriers that offer PCS and cellular services in our service area. According to
the FCC's Seventh Annual Commercial Mobile Services Competition ("CDMR") Report,
released July 3, 2002, "...268 million people, or 94% of the total population,
have three or more different operators offering mobile telephone service in the
counties in which they live."
This competition has resulted in higher subscriber turnover as wireless users
move between carriers with more frequency than experienced in prior years. In
order to attract new subscribers, we have offered steeper discounts on handsets
and more generous service plans that include more minutes and/or more anytime
time minutes and other ancillary enhancements such as free long distance. Based
upon increased competition, we anticipate that market prices for two-way
wireless services will continue to decline in the future. We compete to attract
and retain subscribers principally on the basis of services and features, the
size and location of our service areas, network coverage and reliability,
customer care and pricing. Our ability to compete successfully depends, in part,
on our ability to anticipate and respond to various competitive factors
affecting the industry, including new services that may be introduced, changes
in consumer preferences, demographic trends, economic conditions and discount
pricing strategies by competitors.
Our ability to compete effectively with other PCS providers will depend on:
. the continued expansion and improvement of the Sprint PCS
network, customer care system and telephone handset options.
. the continued success of CDMA technology in providing better
call quality and clarity than other systems.
. our competitive pricing with various options suiting individual
subscribers calling needs.
The main wireless technologies used in the United States are: Code Division
Multiple Access ("CDMA"), Global System Mobile Communications ("GSM") and Time
Division Multiple Access ("TDMA").
Sprint PCS has chosen CDMA technology, which we believe offers significant
advantages in the marketplace.
CDMA offers superior call quality and clarity. CDMA also offers the highest
capacity of the three standards. This means that more simultaneous calls can be
handled on a CDMA network than on equivalent TDMA or GSM networks. CDMA also
offers a high level of security, giving customers confidence that their calls
remain private. CDMA offers many advanced features such as short text messaging,
Internet access, call waiting, call forwarding and three way calling. Several
providers in the United States, including Sprint PCS, T-Mobile and Verizon use
CDMA technology.
TDMA is generally less expensive to deploy if a carrier seeks to overlay an
analog network, like a cellular carrier would be required to do. TDMA also
offers increased call security and advanced features like those available on a
CDMA network. Several providers in the United States, including AT&T and
Cingular use TDMA but have announced intentions to overlay their existing TDMA
networks with GSM technology.
GSM is the most widely adopted standard around the world. It originated in
Europe, where it continues to be the dominant standard. It has been widely
deployed for over ten years, which means that economies of scale for network and
handset equipment have been achieved. This has lowered the cost of purchasing
the equipment for a GSM system. GSM also offers increased call security and
advanced features like those available on a CDMA network.
We do not currently face significant competition from resellers on our
facilities. A reseller buys blocks of wireless telephone numbers and capacity
from a licensed carrier and resells service through its own distribution network
to the public but does not hold FCC licenses or own facilities. Thus, a reseller
is both a customer of a wireless licensee's services and also a competitor of
that and other licensees. We expect to continue to be subject to the FCC rule
that requires cellular and PCS licensees to permit resale of carrier service.
We have experienced significant competition in our cellular markets from digital
technologies that has resulted in an erosion of our cellular and paging customer
base. We anticipate that this trend will continue.
NETWORK BUILD OUT AND OPERATIONS
We have completed substantial portion of our initial network build out plan for
our service area. The Sprint PCS management agreement requires us to provide
network coverage to 65% of the resident population in our service area. We have
not met this requirement in all of our markets and cannot state with certainty
that we will have sufficient liquidity to do so. Should we be unable to complete
the IWO build-out,
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Sprint PCS has the right to place the IWO Sprint PCS management agreement in
default and take actions up to and including termination of the IWO Sprint PCS
Management Agreement.
Cell sites
We obtain cell sites in three ways: (1) co-location, (2) construction of a tower
by an independent build-to-suit company, or (3) construction of a tower by us.
Co-location describes the network strategy of leasing available space on a tower
or cell site owned by another company. We prefer to co-locate with another
wireless company by leasing space on an existing tower or building. When we
co-locate, we generally have lower construction costs, and it is likely that any
zoning difficulties have been resolved. As of December 31, 2002, we had 629 PCS
cell sites, of which approximately 97% were co-locations and 3% owned.
Microwave relocation
Fixed microwave operators previously used the frequencies that are now allocated
for PCS licenses. The FCC has established procedures for PCS licensees to
relocate these existing microwave paths, generally at the PCS licensee's
expense. With Sprint PCS's assistance, we have relocated all microwave paths for
the PCS licenses that we own.
Switching centers
We own or lease property for our three switching centers in Albany, New York for
our service area. Each switching center serves several purposes, including
subscriber validation, call routing, managing call hand off and managing access
to landlines and access to Sprint PCS national platforms.
Interconnection
We connect our digital PCS network to the landline telephone system through
interconnection agreements with local exchange carriers. Through our agreements
with Sprint PCS, we benefit from the interconnection agreements that Sprint PCS
negotiates.
Network monitoring systems
We use Sprint PCS's Network Operations Control to provide monitoring and
maintenance of our entire network, including the constant monitoring for blocked
or dropped calls, call clarity and signs of tampering, cloning or fraud, the
recording of network traffic statistics and the overseeing of customer usage,
data collected at switch facilities and billing.
GOVERNMENT REGULATION
The FCC and other federal, state and local regulatory agencies regulate our PCS
and cellular systems.
Licensing of PCS systems.
A broadband PCS system operates under a service area license granted by the FCC
for a particular market. These licenses operate on one of six frequency blocks
allocated for broadband PCS service. Narrowband PCS is for non-voice
applications such as paging and data service and is separately licensed. The FCC
awards all PCS licenses by auction.
All PCS licenses have a 10-year term and must be renewed at the end of this
term. The FCC generally will renew a PCS license if the licensee provided
substantial service during the past license term and substantially complied with
applicable law. The FCC may revoke a license for serious violations of FCC
rules. All PCS licensees must satisfy coverage requirements. Licensees that fail
to meet the coverage requirements may lose the service area that is not covered,
or the license.
For up to five years after a PCS license is granted, the licensee must share
spectrum with existing licensees that operate fixed microwave systems within its
license area. To operate our PCS systems efficiently and with adequate
population coverage, we must relocate many of these existing licensees. The FCC
has adopted a transition plan to relocate microwave operators and a cost-sharing
plan for relocation that benefits more than one PCS licensee. These plans expire
on April 4, 2005.
Licensing of cellular telephone systems.
The FCC awards licenses for cellular telephone systems by auction. Cellular
licenses generally last for 10 years and may be renewed for periods of up to 10
years. The FCC may revoke a license for serious violations of FCC rules. The FCC
may deny renewal if it determines that the grant of an application would not
serve the public interest. In addition, at the renewal time, other parties may
file competing applications for the license. A license in good standing is
entitled to renewal expectancy. This gives the current license holder an
advantage over competing applicants.
The FCC regulates the terms under which ancillary services may be provided
through cellular facilities.
10
We use landline facilities to connect cell sites and to link them to the main
switching office. The FCC separately licenses and regulates these landlines.
Other regulatory requirements.
The Communications Act preempts state and local regulation of the entry of, or
the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service ("CMRS"), which includes PCS and cellular
service. The FCC does not regulate CMRS or private mobile radio service rates.
However, CMRS providers are common carriers and are required under the
Communications Act to offer their services to the public without unreasonable
discrimination.
The FCC imposes additional regulatory requirements on all CMRS, operators, which
include PCS and cellular systems as well as some specialized mobile radio
systems. These requirements may change. Some of the current requirements
include:
. Roaming. CMRS carriers must provide service to all subscribers
of a compatible CMRS service in another geographic region.
. Number portability. CMRS carriers will soon be required to allow
their customers to take their phone numbers with them if they change to
a competitive service and must now be able to deliver calls to carried
numbers.
. Enhanced 911. CMRS carriers must transmit 911 calls from any
qualified handset without credit check or validation, must provide 911
service to individuals with speech or hearing disabilities, and must
provide the approximate location of the 911 caller.
. Wiretaps. CMRS carriers must provide law enforcement personnel
with sufficient capacity to enable wiretaps on the CMRS network.
. Customer information. The FCC has rules that protect the
customer against the use of customer proprietary information for
marketing purposes.
. Interconnection. All telecommunications carriers, including CMRS
carriers, must interconnect directly or indirectly with other
telecommunications carriers.
. Universal service and other fees. The FCC imposes large
universal service support fees on telecommunications carriers, including
CMRS carriers. The FCC imposes smaller fees for telecommunications relay
service, number portability and the cost of FCC regulation.
. Tower Construction, Marking and Lighting. The FCC and FAA
regulate the location, height, and marking of proposed towers.
Transfers and assignments of PCS and cellular licenses.
The FCC must approve the assignment or transfer of control of a license for a
PCS or cellular system. In addition, the FCC requires licensees who transfer
control of a PCS license within the first three years of their license term to
disclose the total consideration received for the transfer. FCC approval is not
required for the sale of an interest that does not transfer control of a
license. Any acquisition or sale of PCS or cellular interests may also require
the prior approval of the Federal Trade Commission, the Department of Justice
and state or local regulatory authorities.
State and Local Regulation
State governments can regulate other terms and conditions of wireless service
and several states have imposed, or have proposed legislation that will impose,
various consumer protection regulations on the wireless industry. States also
may impose their own universal service support regimes on wireless carriers,
similar to the requirements that have been established by the FCC. At the local
level, wireless facilities typically are subject to zoning and land use
regulation, although the Communications Act preempts both state and local
governments from categorically prohibiting the construction of wireless
facilities in any community or unreasonably discriminating against a carrier.
Numerous state and local jurisdictions have considered imposing conditions on a
driver's use of wireless technology while operating a motor vehicle, and a few
have actually done so. On June 28, 2001 New York state, which represents a
significant portion of our service area, enacted a law prohibiting the use of
handheld wireless phones while driving other than through the use of hands free
equipment.
Foreign ownership.
The Communications Act of 1934 limits the non-U.S. ownership of licensees. If
foreign ownership exceeds the permitted level, the FCC may revoke the PCS
licenses or require an ownership restructuring.
Additional spectrum.
From time to time, the FCC conducts auctions of additional spectrum. We have no
way of knowing whether the new spectrum in our service area will be used to
compete with our PCS systems.
Intellectual Property.
11
The Sprint(R) and Sprint PCS(R) brand names and logos are registered service
marks owned by Sprint. We have license agreements with Sprint that allow us to
use, without payment and only in our service area, the Sprint design logo and
diamond symbol and other Sprint service marks, like the phrases The Clear
Alternative to Cellular and Clear Across the Nation. We can use some of Sprint's
licensed marks on some wireless telephone handsets. The license agreements have
many restrictions on our use of their licensed marks. We are the only person
entitled to market Sprint PCS products and services in our service area, except
for the Sprint PCS national marketing programs.
EMPLOYEES
As of December 31, 2002, we had approximately 270 employees. No union represents
our employees. We believe that we have good relations with our employees.
SEASONALITY
Like the wireless communications industry in general, our subscribers increase
in the fourth quarter due to the holiday season. A greater number of phones sold
at holiday promotional prices increases our losses on merchandise sales. Our
sales and marketing expenses increase also with holiday promotional activities.
We generally have the most use and revenue per subscriber in the summer because
of an increase in revenues from fees charged to non-IWO, non-Sprint PCS
customers who use our network while traveling in our service area. We believe
that the increased traffic in our service area comes from people traveling
during summer vacation. We expect these trends to continue based on historical
operating results.
ITEM 2. PROPERTIES.
We lease property in a number of locations, primarily for administrative office
space, our Sprint PCS stores, cell sites and switching centers. We have leased
approximately 38,000 square feet for a regional headquarters in Albany, New
York. This lease expires on October 14, 2006. As of December 31, 2002, we had
629 PCS cell sites, of which approximately 97% were co-locations and 3% owned.
We own property that houses switching equipment that supports our markets.
We are reviewing alternatives for our regional headquarters, including lease
termination of the lease or sub-leasing.
ITEM 3. LEGAL PROCEEDINGS
We have been from time to time involved in litigation that we believe ordinarily
accompanies the communications business. We do not believe that any of our
pending or threatened litigation will have a material adverse effect on our
business or financial situation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Not applicable
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the consolidated
financial statements of IWO Holdings, Inc. and subsidiaries. The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included herein.
For the For the For the For the
Period From Period From period period
April 1, January 1, January 1, December 21, For the Year
2002 through 2002 through For the Year Ended 1999 through 1999 through Ended
December 31, March 31, December 31, December 20, December 31, December 31,
2002 2002 2001 2000 1999 1999 1998
-------------------------------------------------------------------------------------------------
STATEMENT OF OPERATION
DATA: (1)
Revenues $ 124,896 $ 35,536 $ 111,324 $ 59,313 $ -- $ -- $ --
Cost of services and
merchandise sold 64,835 22,109 79,523 43,165 -- -- --
Other operating expenses 112,886 33,615 86,766 58,196 14,764 844 59
Impairment of goodwill (2) 214,191 -- -- -- -- -- --
Impairment of intangible
assets (2) 188,330 -- -- -- -- -- --
-------------------------------------------------------------------------------------------------
Operating loss $ (455,346) $ (20,188) $ (54,965) $ (42,048) $ (14,764) $ (844) $ (59)
=================================================================================================
Loss from continuing
operations $ (481,497) $ (26,836) $ (76,941) $ (50,080) $ (14,842) $ (1,076) $ (59)
=================================================================================================
As of December 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ----------- ------------ -------------- ------------
(In thousands)
BALANCE SHEET DATA: (1)
Cash and cash equivalents $ 35,008 $ 3,394 $ 36,313 $ 104,752 $ 319
Investments securities held to maturity at -- 73,680 -- -- --
amortized costs
Restricted cash and US Treasury securities held to 41,218 61,719 8,000 -- --
maturity
Property and equipment, net 189,878 176,226 102,564 782 --
Total assets 360,425 412,927 232,699 129,058 1,386
Long-term debt 350,207 297,407 80,000 -- --
Redeemable common stock -- -- 346 310 --
Stockholders' equity (deficit) (35,047) 55,793 123,494 122,591 435
(1) On April 1, 2002, US Unwired Inc. ("US Unwired") acquired 100% of the
outstanding common stock of the Company. The purchase accounting effects
of this acquisition have been pushed down from US Unwired to the
Company's 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. For a
detailed discussion of this topic, refer to Footnote No. 2 Acquisitions
in our Notes to Consolidated Financial Statements included in this
filing.
(2) The Company recognized an impairment of goodwill and intangible assets
as a result of its impairment testing of IWO in compliance with SFAS No.
142 Goodwill and Other Intangible Assets and SFAS No. 144 Accounting for
the Disposal of Long-Lived Assets. For a detailed discussion on this
topic, see Note No. 3 in our Notes to Consolidated Financial Statements
including in this filing.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes included elsewhere in this Report.
The discussion contains forward-looking statements that involve risks and
uncertainties. For a detailed discussion on this topic, refer to our opening
comments at the beginning of this Form 10-K.
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 disclosures 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 subscribers, contract cancellation fees, inventory reserves,
intangible assets and contingencies. We base our estimates on our historical
experience, the historical experience of Sprint PCS and the historical
experience of other Sprint PCS affiliates 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.
Reliance on Sprint PCS Processing
We rely on Sprint PCS for much of our financial reporting information including:
revenues; commissions paid to national retailers; fees paid for customer care
and billing; roaming revenue and roaming expense on the Sprint PCS and Sprint
PCS affiliate network; and, the maintenance of accounts receivable, including
cash collections and the write off of customer balances that are not collectible
and the accuracy of our accounts receivable balance. Based upon the timing of
the information received from Sprint PCS, we make certain assumptions that the
information is accurate and that it is consistent with historical trends. We
also rely upon the evaluation of internal controls as performed by Sprint PCS's
external auditors that were performed in accordance with AICPA Statement on
Auditing Standards (SAS) No. 70.
Bad Debt Expense
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of subscribers to make payments. If the financial conditions of
our subscribers deteriorate, resulting in the subscribers' inability to make
payments, additional allowances will be required.
We estimate our allowance by examining the components of our revenue. We
establish a general reserve of all accounts receivable that are estimated to be
uncollectible. In addition, we do not recognize 100% of our late fees,
cancellation fees or high credit risk billings as revenue because of the high
uncertainty of the collectibility of these amounts. Reserves for these amounts
are recorded to our allowance for doubtful accounts. Our evaluation of the
adequacy of these amounts includes our own historical experience and discussions
with Sprint PCS and other Sprint PCS affiliates. During 2002, we believe that a
significant portion of our write offs of accounts receivable were primarily the
result of a Sprint PCS initiative of extending credit to subscribers with higher
credit risk who were unable to satisfy their obligations related to basic
service plans.
Revenue Recognition
We recognize only a portion of contract cancellation fees billed to subscribers
that disconnect service prior to fulfilling the contractual length of service,
as there is significant uncertainty that all contract cancellation fees that are
billed will be collected. We have limited information at a detail level
sufficient to perform historical evaluation relative to our subscriber base. We
have very limited information at a detail level sufficient to perform our own
evaluation and rely on Sprint PCS historical trending to make our estimates. If
the collections on contract cancellation fees are less than that recognized,
additional allowances may be required.
We recognize only a portion of late fees billed to subscribers that fail to pay
their bills within the required payment period, as there is no assurance that
all late fees that are billed will be collected. We have very limited
information at a detail level sufficient to perform our own evaluation and rely
on Sprint PCS historical trending to make our estimates. If the collections on
contract cancellation fees 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 the 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.
14
Inventory Reserves
We review our inventory quarterly and 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.
Accrued Commissions
We accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both a commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. We base our accruals on
information provided by Sprint PCS on subscriber additions and recognize that
there are typically timing differences between the point of subscriber
activation and the time that we are invoiced for commissions by Sprint PCS. We
periodically and annually evaluate the adequacy of our accruals through analysis
of historical information and discussions with Sprint PCS. 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.
Goodwill and Intangible Assets Impairment Analysis
We perform impairment tests of goodwill and indefinite lived assets as required
by Statements of Financial Accounting Standards No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets and in the fourth quarter of
2002 recorded an impairment charge to IWO goodwill and intangible assets. The
impairment analysis requires numerous subjective assumptions and estimates to
determine fair value of the respective reporting units as required by FAS No.
142. Depending on level of sales, our liquidity and other factors, we may be
required to recognize additional impairment charges in the future. Our analysis
of fair value was based upon an independent valuation performed by a national
valuation firm.
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.
RECENT DEVELOPMENTS
Our operating and financial results have been adversely affected by (i) a highly
competitive wireless market, (ii) further increased penetration of the potential
customer universe, (iii) decreases in wireless pricing, (iv) a general weakening
of the economy, and (v) challenges in our affiliate relationship with Sprint
PCS. These changes have had, and if they continue will have, an adverse impact
on our ability to meet future obligations under our highly leveraged capital
structure. These changes have also caused us to review our business plan.
Changes in the Wireless Market
.. Subscriber growth has declined in the United States due to what we believe
is a general decline in the economy. This decline has resulted in lowering
overall estimated penetration and possible near market saturation of
subscribers whose credit is in good standing. Penetration refers to the
percentage of the total population that is estimated to become wireless
subscribers.
.. Average monthly revenue per subscriber continues to decline and handset
subsidies continue to increase as wireless carriers compete for subscribers
by offering increased allotments of minutes and free or reduced price
features like wireless web. When the handset is sold below cost, the
discount is referred to as a handset subsidy.
.. Churn, or the subscriber turnover rate, continues to increase as
subscribers abandon brand loyalty in favor of pricing considerations and as
service is offered to people who are considered high risk due to a
sub-standard credit rating.
Our Relationship with Sprint PCS
We have entered into long-term agreements with Sprint PCS and are dependent on
Sprint PCS for services to our subscribers such as billing, customer care, cash
collections and maintenance of our subscriber accounts receivable balances. We
rely on Sprint PCS's system of internal controls to capture information such as
subscriber minutes of use, long distance, national sales commissions, the time
that our subscribers use the network outside our service area and the time that
Sprint PCS and other affiliate subscribers use the network within our service
area.
15
We also rely on Sprint PCS:
.. For national pricing plans, marketing and advertising. Unless we request
from Sprint PCS, and are granted permission, Sprint PCS believes that we
are required to participate in the programs offered by Sprint PCS. One such
program was designed to attract higher credit risk subscribers that for a
period of time waived the normal deposit requirement. We believe that a
significant portion of our subscriber turnover, bad debt expense,
commission expense and handset subsidies in 2002 was the result of this
program.
.. For customer care. This limits our ability to interact with our subscribers
and implement programs to reduce subscriber turnover.
.. To manage subscriber fraud. During 2002, Sprint PCS implemented a program
that we believe increased the level of customer fraud resulting in
increased financial loss to us.
.. For cash collections on our subscriber billing. Sprint PCS is required to
remit to us 92% of collected revenue. Because a subscriber billing
typically includes revenue that belongs to us and revenue that belongs to
Sprint PCS, Sprint PCS developed a formula based on historical information
of these relationships to distribute cash collections. As a result of our
review of the formula and its application to our collected revenues, we
received an adjustment to our collections of $9.4 million in January and
February 2003.
At various times during 2002 Sprint PCS notified us of unanticipated expenses
due to a lag between the time the charges have been incurred and the time that
Sprint PCS has notified us of the charges. At times, we have been invoiced by
Sprint PCS for charges that we believe cannot be charged to us. We review all
charges from Sprint PCS and dispute certain of these charges based upon our
interpretation of the management agreement and are attempting to work with
Sprint PCS to improve the process. We believe that these items have affected our
liquidity and our ability to accurately forecast our cash flows from operations.
Under our agreements with Sprint PCS, we believe that Sprint PCS can change the
travel rate within certain limitations that we receive and pay for each Sprint
PCS travel minute after December 31, 2002. We received notice from Sprint PCS
that the reciprocal travel rate will change from $0.10 per minute in 2002 to
$0.058 per minute in 2003. While we believe that this reduction is not in
accordance with our management agreement with Sprint PCS, we are reviewing our
options, but our recourses against Sprint PCS for this reduction may be limited.
Currently the fees that we receive from Sprint PCS for Sprint PCS's subscribers
using our network exceeds those that we pay to Sprint PCS for our subscribers
using Sprint PCS's network. The change in the travel rate will likely decrease
the our revenues, expenses and our net travel position, which is the difference
between travel revenue and travel expense, increase our net loss and decrease
cash flow from operations.
LIQUIDITY AND CAPITAL RESOURCES
We have been unable to develop a business plan for IWO that provides sufficient
liquidity in 2003, and we have engaged in discussions with the holders of the
IWO senior bank credit facility and the holders of the IWO senior notes
regarding restructuring of IWO.
As of December 31, 2002, IWO had $35.0 million in cash and cash equivalents and
$41.2 million in restricted cash. Total availability in revolving loans under
our senior bank credit facility was $25.2 million. As of December 31, 2002, IWO
indebtedness consisted of $213.2 million related to the IWO senior bank credit
facility and $137.0 million related to the IWO senior notes for a total of
$350.2 million. A portion of the original proceeds of the IWO senior notes
offering was set aside as restricted cash to make the first six scheduled
interest payments on IWO senior notes through January 2004. Repayment of the IWO
senior bank credit facility commences in March 2004.
Although IWO was in compliance with all financial covenants under the IWO senior
bank credit facility at December 31, 2002, we believe that IWO will violate
certain covenants of the IWO senior bank credit facility in 2003. Moreover,
because of the developments in IWO's business referred to above, we believe it
is likely the IWO bank group will elect not to make the remaining $25.2 million
of our revolving credit facility available to us. Without the remaining $25.2
million, IWO will not have sufficient liquidity through 2003. We are in
discussions with the IWO banking group and note holders to arrive at an
acceptable restructuring to preserve IWO liquidity. IWO, holders of the IWO
senior bank credit facility and holders of the IWO senior notes have all
retained advisors to assist in evaluating alternatives for IWO liquidity.
Without sufficient liquidity, IWO will reduce capital expenditures for network
expansion required for compliance under the IWO management agreement. Failure to
complete the build-out of the IWO service area will place us in violation of the
IWO management agreement. As a result, Sprint PCS could take declare IWO in
default and take action up to and including termination of the IWO management
agreement.
A default under the IWO senior bank credit facility does not result in IWO being
in default under the IWO senior notes. Should IWO be unable to amend the senior
bank credit facility or obtain waivers for any violated restricted covenants,
the holders of IWO senior bank credit facility can place IWO in default,
restrict any remaining future borrowing capacity and accelerate repayment of the
senior bank credit facility. Should the holders of IWO senior bank credit
facility place us in default and accelerate repayment, that acceleration will
serve to trigger a default in the IWO senior notes. Should this occur, both the
holders of the IWO senior bank credit facility and the holders of the IWO senior
notes may demand immediate payment of all outstanding indebtedness. If the
indebtedness is accelerated, IWO does not have sufficient cash to repay its
indebtedness. As a result, IWO would be forced to seek protection under
bankruptcy.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to IWO. Further, IWO creditors,
IWO lenders and IWO note holders cannot place any liens or encumbrances on the
assets of US Unwired. Should the holders of the IWO's senior bank credit
facility place IWO in default, US Unwired's relationship with IWO may change and
several alternatives exist ranging from working for the holders of the senior
bank credit facility and the holders of the senior notes as a manager of the IWO
territory, subject to the approval by Sprint PCS, to no involvement with IWO at
all.
16
Due to the indicators of impairment as discussed above, during the fourth
quarter of 2002, we engaged a nationally recognized valuation firm to assist us
in performing a fair value assessment of goodwill and other long-lived assets of
US Unwired and IWO. Based on the results of these impairment analyses, we
recorded impairment charges totaling $402.5 million for the impairment of
goodwill and an intangible asset that resulted from the acquisition of IWO. This
is further discussed in Note 3 in our consolidated financials statements that
are included in this filing.
Considering the expected covenant violations in 2003 and the actions that may
result from such covenant violations and the operating losses incurred to date,
there is substantial doubt about IWO's ability to continue as a going concern.
Cash Flows
Cash used in operating activities was $47.6 million in 2002. This primarily
consisted of our net loss of $508.3 million offset by a $3.0 million increase in
working capital and non-cash charges of $54.2 million in depreciation and
amortization, $214.2 million in goodwill impairment, $188.3 million in
impairment of intangible assets and $1.1 million in debt discount accretion.
Cash used in operations was $44.6 million for 2001 and $20.0 million for 2000.
Cash provided by investing activities was $11.0 million for 2002. This primarily
consisted of $73.0 million in proceeds from the sales and maturities of
marketable securities and maturities held to maturity, $21.2 million in released
restricted securities offset by $83.0 million in equipment purchases. Cash used
in investing activities was $206.2 million in 2001 and $172.8 million in 2000.
Cash flow provided by financing activities was $68.2 million in 2002 and
consisted of $83.2 million in long-term debt proceeds offset by $15.0 million in
principal payments on long-term debt. Net cash provided by financing activities
was $217.9 million in 2001 and $124.3 million in 2000.
Contractual Obligations
Our future contractual obligations related to long-term debt, capital lease
obligations, and non-cancelable operating leases at December 31, 2002 were as
follows:
Payments due by period
Less than 1-3 4-5 After
Total 1 Year Years Years 5 Years
(In thousands)
Senior subordinated discount notes $ 137,023 -- -- -- $ 137,023
Senior bank credit facility 213,184 -- 69,000 144,184 --
---------------------------------------------------------------------------
Total long-term debt obligations 350,207 -- 69,000 144,184 137,023
IWO Holdings, Inc. operating leases 61,786 12,706 34,094 7,861 7,125
---------------------------------------------------------------------------
$ 411,993 $ 12,706 $ 103,094 $ 152,045 $ 144,148
===========================================================================
At December 31, 2002, total availability in revolving loans under the senior
bank credit facility of $25.2 million. In October 2002, we requested to borrow
$15 million under IWO's revolving credit agreement and 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.
The availability under this bank credit facility will be permanently reduced by
the following amounts in the future as follows (in millions):
Reduction by period
---------------------------------------------------------------
Current Next 1-3 4-5
Availability Year Years Years
---------------------------------------------------------------
IWO senior bank credit facility $ 25.2 $ 0 $ 0 $ 25.2
---------------------------------------------------------------
TERMS AND DEFINITIONS UNIQUE TO OUR INDUSTRY
The wireless telecommunications industry uses terms such as subscriber
additions, average revenue per user, churn and cost per gross addition as
performance measurements or metrics. None of these terms are measures of
financial performance under accounting principles generally accepted in the
United States. When we use these terms, they may not be comparable to similar
terms used by other wireless telecommunications companies.
Subscriber Additions
As of December 31, 2002, we provided personal communication services to 200,000
customers as compared to 155,200 customers at
17
December 31, 2001, an increase of 44,800 subscribers.
As of December 31, 2002, we provided network coverage in an area comprising
approximately 4.6 million residents out of approximately 6.3 million total
residents or 73% of the people in our service area. The number of people in our
service area does not represent the number of Sprint PCS subscribers that we
expect to have in our service area.
Subscriber and Roaming Revenue
We refer to our customers as subscribers.
Subscriber revenue consists primarily of a basic service plan (where the
customer purchases a pre-allotted number of minutes for voice and/or data
transmission); airtime (which consists of billings for minutes that either
exceed or are not covered by the basic service plan); long distance; and charges
associated with travel outside our service area. We do not include subscriber
revenue for an estimate of customers who we anticipate will never make their
initial payment.
Roaming revenue consists primarily of Sprint PCS travel revenue and foreign
roaming revenue. Sprint PCS travel revenue is generated on a per minute basis
when a Sprint PCS subscriber outside of our markets uses our service when
traveling through our markets. Foreign roaming revenue is generated when a
non-Sprint PCS customer uses our service when traveling through our markets.
Average Revenue per User
Average revenue per user ("ARPU") is the average monthly service revenue per
user (subscriber) and is calculated by dividing total subscriber revenue for the
period by the average number of subscribers during the period adjusted for an
estimate of customers who we anticipate will never make an initial payment. ARPU
not including roaming was $52.41 for 2002 was comparable to the $54.34 for 2001.
The decrease in ARPU was the result of less expensive service plans due to the
competition in our service area.
Churn
Churn is the monthly rate of customer turnover expressed as a percentage of our
overall average customers for the reporting period. Customer turnover includes
both customers that elected voluntarily to not continue using our service and
customers that were involuntarily terminated from using our service because of
non-payment. Churn is calculated by dividing the sum of (i) the number of
customers that discontinue service; (ii) less those customers discontinuing
their service within a 30-day period of their original activation date; and,
(iii) adding back those customers that reactivate their service, by our overall
average customers for the reporting period. We exclude from the calculation an
estimate of customers who we anticipate will not make their initial payment.
Churn was 3.5% for 2002 as compared to 2.5% for 2001. The increase in churn was
due to adding a higher number of credit challenged subscribers in 2002 that were
involuntarily terminated from using our service because of non-payment.
Cost per Gross Addition
Cost per gross addition ("CPGA") summarizes the average cost to acquire all
customers during the reporting period, including those customers who we estimate
will not make an initial payment. CPGA is computed by adding selling and
marketing expenses, cost of equipment and activation costs and reducing the
amount by the revenue from handset and accessory sales. The net amount is
divided by the number of total new subscribers added for the period. CPGA was
$324 for 2002 as compared to $354 for 2001. The decrease in CPGA was primarily
the result of a decrease in advertising expenses on a per subscriber basis.
18
RESULTS OF OPERATIONS
2002 COMPARED TO 2001
For discussion purposes, we have combined the nine-month period of April 1, 2002
to December 31,2002 (post-acquisition period) and the three-month period of
January 1, 2002 to March 31, 2002 (pre-acquisition period) for comparison to
2001.
2002 2001
-------------- -----------
Revenues:
Subscriber $ 113,086 $ 70,867
Roaming 39,044 32,594
Merchandise sales 8,258 7,852
Other revenue 44 11
-------------- -----------
Total revenue 160,432 111,324
Expense:
Cost of service 73,848 64,239
Merchandise cost of sales 13,096 15,284
General and administrative 58,093 35,711
Sales and marketing 38,381 31,619
Non-cash stock compensation -- 334
Depreciation and amortization 50,027 19,102
Impairment of goodwill 214,191 --
Impairment of intangible assets 188,330 --
-------------- -----------
Total operating expense 635,966 166,289
-------------- -----------
Operating loss (475,534) (54,965)
Other expense:
Interest expense, net (32,799) (21,976)
-------------- -----------
Net loss $ (508,333) $ (76,941)
============== ===========
2002 2001
-------------- -----------
Cash flows from operating activities
Net cash used in operating activities $ (47,568) $ (44,640)
Cash flows from investing activities
Release (restriction) of restricted and US Treasury securities 21,166 (53,719)
Payments for the purchase of equipment (82,964) (77,793)
Proceeds from maturities and sales of marketable securities 72,967 30,684
Purchase of marketable securities -- (105,328)
Other investing activities (191) --
-------------- -----------
Net cash provided by (used in) investing activities 10,978 (206,156)
Cash flows from financing activities
Proceeds from long-term debt 83,184 225,000
Debt issuance costs -- (7,725)
Principal payments of long-term debt (15,000) --
Other financing activities 20 602
-------------- -----------
Net cash provided by financing activities 68,204 217,877
-------------- -----------
Net change in cash and cash equivalents 31,614 (32,919)
Cash and cash equivalents at beginning of period 3,394 36,313
-------------- -----------
Cash and cash equivalents at end of period $ 35,008 $ 3,394
============== ===========
19
Revenues
Year Ended December 31,
2002 2001
---------------------------------
(In thousands)
Subscriber revenues $ 113,086 $ 70,867
Roaming revenues 39,044 32,594
Merchandise revenues 8,258 7,852
Other revenues 44 11
-------------- --------------
Total Revenues $ 160,432 $ 111,324
============== ==============
Subscriber revenues
Total subscriber revenues were $113.1 million for 2002 as compared to $70.9
million for 2001, representing an increase of $42.2 million and was primarily
the result of an increase in subscribers as discussed in Subscriber Additions
above.
Roaming revenues
Roaming revenues were $39.0 million 2002 as compared to $32.6 million for 2001,
representing an increase of $6.4 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 that included the build out a significant
portion of the markets in our service area. We provided service in most or all
our 20 markets at December 31, 2002 as compared to 13 markets at December 31,
2001.
Merchandise sales
Merchandise sales were $8.3 million for 2002 as compared to $7.9 million for
2001, representing an increase of $.4 million related to steeper discounts on
handsets sold to new subscribers due to more competition in our service area.
Due to increased competition, our average handset selling price decreased
approximately 25% in 2002 when compared to 2001. We face significant competition
in our marketplace and typically sell handsets below cost to new subscribers in
order to remain competitive in the market place through steep discounts and
instant rebates.
Operating Expenses
Year Ended December 31,
2002 2001
---------------------------------
(In thousands)
Cost of service $ 73,848 $ 64,239
Merchandise cost of sales 13,096 15,284
General and administrative 58,093 35,711
Sales and marketing 38,381 31,619
Non-cash stock compensation -- 334
Depreciation and amortization 50,027 19,102
Impairment of goodwill 214,191 --
Impairment of intangible assets 188,330 --
---------------- --------------
Total operating expense $ 635,966 $ 166,289
================ ==============
Cost of service
Cost of service was $73.8 million for 2002 as compared to $64.2 million for
2001, representing an increase of $9.6 million, which primarily related to an
increase of $2.0 million in carrier roaming expenses, an increase of $2.9
million in circuit and usage costs and a $4.6 million increase cell site leases
as a result of our larger subscriber base and market coverage.
Merchandise cost of sales
Merchandise cost of sales was $13.1 million for 2002 as compared to $15.3
million for 2001, representing a decrease of $2.2 million. A portion of our
2001 merchandise cost of sales related to a selective group of existing
subscribers that returned handsets and were provided new models at no charge. In
2002, we identified these transactions, which amounted to $4.9 million, and
recognized the cost in our 2002 General and Administrative expenses. We view
these transactions as a customer retention expense due to our highly competitive
market. We are unable to quantify this cost for 2001 as they were not identified
when the transaction occurred. In order to compare 2002 to 2001, 2002
merchandise
20
cost of sales should be increased by $4.9 million. 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. This subsidy
continues to increase to remain competitive.
General and administrative expenses
General and administrative expenses were $58.1 million for 2002 as compared to
$35.7 million for 2001, representing an increase of $22.4 million that was
primarily related to $9.3 million in increases for billing, customer service
costs and Sprint PCS affiliation fees associated with our subscriber base
increase; $3.4 million in increased bad debts associated primarily with Sprint
PCS rate plans that extended credit to credit challenged subscribers; $5.3
million in acquisition related expenses that we incurred prior to the
acquisition and $4.9 million in expenses associated with handset upgrades
provided to existing subscribers in subscriber retention initiatives.
Sales and marketing expenses
Sales and marketing expenses were $38.4 million for 2002 as compared to $31.6
million for 2001, representing an increase of $6.8 million that primarily
related to the increase in subscribers as well as launching markets within our
service area. We provided service in most of our 20 markets at December 31, 2002
as compared to 13 markets at December 31, 2001.
Non-cash stock compensation
Non-cash compensation was $0 for 2002 as compared to $334,000 for 2001. The
non-cash stock compensation consists of compensation expense related to the
granting of certain stock options for our stock with exercise prices less than
the market value of the our stock at the date of the grant. As a result of our
acquisition by US Unwired in April 2002, all option grants were converted to US
Unwired common stock.
Depreciation and amortization expense
Depreciation and amortization expense was $50.0 million for 2002 as compared to
$19.1 million for 2001, representing an increase of $30.9 million and is
primarily related to the amortization of intangible assets. Net property and
equipment increased to $189.9 million at December 31, 2002 from $176.2 million
at December 31, 2001. 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 and assigned $215.0 million in intangible assets
to our Sprint PCS affiliation agreement and $57.5 million in intangible assets
to our subscriber base. We incurred approximately $28.7 million in intangible
asset amortization expense in 2002 as compared to $0 in 2001.
Impairment of Goodwill and Intangible Assets
As a result of the purchase accounting related to our acquisition by US Unwired,
we recorded the following intangible assets (See Note No. 2 in our consolidated
financial statements that are included in this filing for a detailed description
of the accounting treatment of our acquisitions):
(In thousands)
Acquired customer base $ 57,500
Sprint affiliation agreement 215,000
Goodwill 214,191
Due to the indicators of impairment as discussed above, during the fourth
quarter of 2002, we engaged a nationally recognized valuation firm to assist us
in performing a fair value assessment of our goodwill and other long-lived
assets. Based on the results of the impairment analysis, we recorded impairment
charges totaling $402.5 million for the impairment of goodwill and an intangible
asset that resulted from the acquisition of IWO. This is further discussed in
Note 3 in our consolidated financials statements that are included in this
filing.
We determined that IWO is to be considered a separate reporting unit under SFAS
No. 142 as it constitutes a separate business for which discrete financial
information is available and management regularly reviews the operating results
of this businesses. This determination is further supported as IWO has a
separate senior bank credit facility and separate senior notes (collectively
referred to as "debt instruments"). Under the terms of these debt instruments,
funds available under the IWO debt instruments can only be used to finance the
operations of IWO, and the funds available under the US Unwired debt instruments
can only be used to finance the operations of US Unwired.
The results of these impairment valuations indicated that both goodwill and a
significant portion of IWO's intangible assets were impaired. As a result, we
recorded a goodwill impairment of approximately $214.2 million and an impairment
of the IWO Sprint PCS Management Agreement intangible asset of $188.3 million
during the quarter ended December 31, 2002. The IWO Sprint Affiliation Agreement
was originally assigned a value of $215.0 million and was being amortized using
the straight-line method over 218 months. The valuation analysis determined that
carrying amount of the IWO subscriber base was not impaired.
21
Other Income/(Expense)
Year Ended December 31,
2002 2001
----------------- ------------------
(In thousands)
Interest expense $ (36,125) $ (29,570)
Interest income 3,326 7,594
----------------- ------------------
Total other expense $ (32,799) $ (21,976)
================= ==================
Interest expense was $36.1 million for 2002 as compared to $29.6 million for
2001, representing an increase of $6.6 million. The increase in interest expense
resulted from the increase in outstanding debt. Our outstanding debt was $350.2
million at December 31, 2002 as compared to $297.4 million at December 31, 2001.
Interest income was $3.3 million for 2002 as compared to $7.6 million for 2001,
representing a decrease of $4.3 million. The decrease was primarily due to less
cash and cash equivalents available for investment.
2001 COMPARED TO 2000
As of December 31, 2001, we provided personal communication services to 155,200
customers as compared to 81,600 customers at December 31, 2000, an increase of
73,600 subscribers.
As of December 31, 2001, we provided network coverage in an area comprising
approximately in 13 of our 20 markets. The number of our subscribers who are
located in the markets we have launched varies based upon the total population
of the markets, how long the markets have been launched and the extent of our
marketing efforts in such markets.
2001 2000
---------- ----------
Revenues:
Subscriber $ 70,867 $ 38,107
Roaming 32,594 18,553
Merchandise sales 7,852 2,653
Other revenue 11 --
---------- ----------
Total revenue 111,324 59,313
Expense:
Cost of service 64,239 39,673
Merchandise cost of sales 15,284 3,492
General and administrative 35,711 24,088
Sales and marketing 31,619 19,753
Non-cash stock compensation 334 1,817
Depreciation and amortization 19,102 12,538
---------- ----------
Total operating expense 166,289 101,361
---------- ----------
Operating loss (54,965) (42,048)
Other expense:
Interest expense, net (21,976) (8,032)
---------- ----------
Net loss $ (76,941) $ (50,080)
========== ==========
22
Revenues
Year Ended December 31,
2001 2000
-------------- --------------
(In thousands)
Subscriber revenues $ 70,867 $ 38,107
Roaming revenues 32,594 18,553
Merchandise revenues 7,852 2,653
Other revenues 11 --
-------------- --------------
Total Revenues $ 111,324 $ 59,313
============== ==============
Subscriber revenues
Total subscriber revenues were $70.9 million for 2001 as compared to $38.1
million for 2000, representing an increase of $32.8 million and was primarily
the result of an increase in subscribers as discussed in Subscriber Additions
above.
Roaming revenues
Roaming revenues were $32.6 million for 2001 as compared to $18.6 million for
2000, representing an increase of $14.0 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 that included the build out a significant
portion of the markets in our service area. We provided service in 13 markets at
December 31, 2001 as compared to 7 markets at December 31, 2000.
Merchandise sales
Merchandise sales were $7.9 million for 2001 as compared to $2.7 million for
2000, representing an increase of $5.2 million and was primarily the result of
an increase in subscribers as discussed in Subscriber Additions above.
Operating Expenses
Year Ended December 31,
2001 2000
---------------------------
(In thousands)
Cost of service 64,239 39,673
Merchandise cost of sales 15,284 3,492
General and administrative 35,711 24,088
Sales and marketing 31,619 19,753
Non-cash stock compensation 334 1,817
Depreciation and amortization 19,102 12,538
----------- ------------
Total operating expense $ 166,289 $ 101,361
=========== ============
Cost of service
Cost of service was $64.2 million for 2001 as compared to $39.7 million for
2000, representing an increase of $24.5 million, which primarily related to an
increase of $10.0 million in carrier roaming expenses, an increase of $9.5
million in circuit and usage costs and a $4.5 million increase cell site leases
as a result of our larger subscriber base and market coverage.
Merchandise cost of sales
Merchandise cost of sales was $15.3 million for 2001 as compared to $3.5 million
for 2001, representing an increase of $11.8 million primarily related to the
increase in 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. This subsidy continues to increase to
remain competitive.
General and administrative expenses
General and administrative expenses were $35.7 million for 2001 as compared to
$24.1 million for 2000, representing an increase of $11.6 million that was
primarily related to $7.0 million in increases for billing, customer service
costs and Sprint PCS affiliation fees associated with our subscriber base
increase; $2.0 million in increased bad debts associated primarily with Sprint
PCS rate plans that extended credit to credit challenged subscribers and $2.4
million in acquisition related expenses that we incurred prior to the
acquisition with US Unwired.
23
Sales and marketing expenses
Sales and marketing expenses were $31.6 million for 2001 as compared to $19.8
million for 2000, representing an increase of $11.8 million that primarily
relate to an increase in subscribers as well as launching markets within our
footprint. We provided service in 13 markets at December 31, 2001 as compared to
7 markets at December 31, 2000.
Non-cash stock compensation
Non-cash compensation was $0.3 million for 2001 as compared to $1.8 million for
2000. The non-cash stock compensation consists of compensation expense related
to the granting of certain stock options for our stock with exercise prices less
than the market value of the our stock at the date of the grant.
Depreciation and amortization expense
Depreciation and amortization expense was $19.1 million for 2001 as compared to
$12.5 million for 2000, representing an increase of $6.6 million and is
primarily related to the expansion of the operating network. Net property and
equipment increased to $176.2 million at December 31, 2001 from $102.6 million
at December 31, 2000. We incurred approximately $6.2 million in intangible asset
amortization expense in 2001 as compared to $5.7 million in 2000.
Other Income/(Expense)
Year Ended December 31,
2001 2000
--------------- ----------------
(In thousands)
Interest Expense $ (29,570) $ (10,064)
Interest income 7,594 2,032
--------------- ----------------
Total other expense $ (21,976) $ (8,032)
=============== ================
Interest expense was $29.6 million for 2001 as compared to $10.1 million for
2000, representing an increase of $19.5 million. The increase in interest
expense resulted from the increase in outstanding debt. Our outstanding debt,
was $297.4 million at December 31, 2001 as compared to $80.0 million at December
31, 2000.
Interest income was $7.6 million for 2001 as compared to $2.0 million for 2001,
representing an increase of $5.6 million. The increase was primarily due to
higher average invested balances as a result of the proceeds from the December
2000 equity offering and the February 2001 debt offering, partially offset by
decreasing interest rates.
INFLATION
We believe that inflation has not impaired, and will not impair, our results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the Company's operations are exposed to
interest rate risk on its credit facility and any future financing requirements.
At December 31, 2002, our outstanding debt instruments consisted of $137 million
in IWO senior notes and a $213.2 million draw against the IWO $240 million
senior credit facility. Interest on the IWO senior notes is fixed at 14% and is
payable semi-annually on January 15 and July 15 of each year. At December 31,
2002, the market value of the IWO senior notes was $25 million.
Borrowings under the IWO senior credit facility totaled $213.2 million at
December 31, 2002. These borrowings bear interest at a variable rate. A 1%
increase in interest rates in 2002 would have resulted in a $2.3 million
increase in interest expense for the year ended December 31, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are listed under Item 15(a) of this annual report and
are filed as part of this report on the pages indicated.
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective April 23, 2002, we dismissed our independent accountant,
PricewaterhouseCoopers ("PwC") and engaged Ernst & Young, the existing
independent accountant of US Unwired Inc. During the fiscal years ending
December 31, 2000 and 2001 and through April 23, 2002, there were no
disagreements between us and PwC on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table presents information with respect to our board members and
executive officers:
Name Age Position
---- --- --------
Robert W. Piper 44 President, Chief Executive
Officer and Chairman of the
Board of Directors
Thomas G. Henning 43 Secretary and General Counsel
and Director
George J. Mack 39 Director
Jerry E. Vaughn 57 Vice President and Chief
Financial Officer
Michael E. Cusack 38 Vice President and Assistant
General Counsel and Assistant
Secretary
Robert W. Piper has been our President since our acquisition by US Unwired on
April 1, 2002. He was named chief executive officer of US Unwired in 2000. He
has been the President and a member of the Board of Directors of US Unwired
since 1995.
Thomas G. Henning has been our Board of Director's Secretary and our Secretary
and General Counsel since our acquisition by US Unwired on April 1, 2002. He has
been Secretary and General Counsel for US Unwired since 1994.
George J. Mack has been a Board Member since our acquisition by US Unwired on
April 1, 2002. He has been employed by Cameron Communications Corporation
("Cameron"), a local exchange carrier, since 1994 in various positions and has
been President and General Manager of Cameron since 1998. Mr. Mack is a
certified public accountant, chairman of the Louisiana Telecommunications
Association and serves on the committee of the National Telephone Cooperative
Association.
Jerry E. Vaughn has been our Chief Financial Officer since our acquisition by US
Unwired on April 1, 2002. He has been the Chief Financial Officer of US Unwired
since June 1999. He has over 20 years of diversified financial management
experience and focused the last 11 of these years in the telecommunications
industry. From 1994 until he joined US Unwired, Mr. Vaughn was President of NTFC
Capital Corporation, a subsidiary of GE Capital. Before that, he was Treasurer
of Northern Telecom Finance Corporation and Vice President of Mellon Bank
Corporation.
Michael E. Cusack has been our Assistant Secretary since our acquisition by US
Unwired on April 1, 2002. He joined IWO in 2000 as General Counsel and currently
serves as Assistant General Counsel for US Unwired. Prior to joining IWO, Mr.
Cusack was employed by the law firm of Cooper, Erving, Savage, Nolan & Heller,
LLP for seven years where he was managing partner of the firm's municipal and
telecommunications practice groups.
ITEM 11. EXECUTIVE COMPENSATION.
Our executives and board members receive no compensation from us.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
IWO Holdings, Inc. is a 100% owned subsidiary of US Unwired Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 20, 1999, the Company and an affiliate of a stockholder entered into
a five-year advisory agreement whereby the Company will receive consulting
services from the affiliate for a $5,000,000 fee. The $5,000,000 fee, which was
prepaid on December 20, 1999 was included in prepaid expenses and was being
amortized over the term of the agreement. On March 31, 2002 in connection with
the acquisition by US Unwired, Inc., the remaining balance of $2.8 million was
written-off as an operating expense.
On December 12, 2001, the Company entered into a financial advisory agreement
with certain investment banking firms (of which certain
25
principals are stockholders of the Company) for a period of three months whereby
such firms would advise the Company with respect to the sale, recapitalization,
merger, consolidation or other business combination of the Company. The fee for
the successful completion of these services is 1.125% of the Enterprise Value of
the Company as defined in the agreement. The Company incurred expenses under
this agreement for the nine months ended December 31, 2002, the three months
ended March 31, 2002, and the year ended December 31, 2001 amounting to $-0-
million, $1.5 million, and $250,000, respectively.
In connection with the Company's senior credit facility, two participating
financial institutions are also shareholders of the Company. Interest expense
incurred on their portion of debt outstanding for the nine months ended December
31, 2002, the three months ended March 31, 2002, for the years ended December
31, 2001 and 2000, amounted to $1.4 million, $0.4 million, $1.5 million and $0.6
million, respectively.
The Company utilizes the services of a law firm in which a partner of the law
firm is a stockholder of IWO. On December 20, 1999, the Company entered into a
three-year professional services agreement with its outside General
Counsel/stockholder, whereby the General Counsel/stockholder will provide legal
services annually up to $400,000 and participate in the Company's stock option
program. On September 17, 2000 the Company terminated the professional services
agreement and replaced it with a one-year consulting agreement that provides for
monthly payments of $10,000 and a bonus up to $250,000. Legal fees incurred
under the professional services agreement/consulting agreement for the nine
months ended December 31, 2002, the three months ended March 31, 2002, and for
the years ended December 31, 2001 and 2000 were approximately $-0- million, $0.2
million, $0.9 million and $1.2 million, respectively.
The Company has entered into a management service agreement with its parent US
Unwired, Inc. effective April 1, 2002. The Company incurred expenses under this
agreement of $5.3 million for the nine-month period ended December 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days before the filing of this Report, the Company's principal
executive officer and principal financial officer evaluated the effectiveness of
the Company's disclosure controls and procedures. Based on the evaluation, the
Company's principal executive officer and principal financial officer believe
that:
.. the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms; and
.. the Company's disclosure controls and procedures were effective to ensure
such information was accumulated and communicated to the Company's
management, including the Company's principal executive officer and
principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to their evaluation, nor have there been any corrective actions with
regard to significant deficiencies or material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Financial Statements
Listed in the Index to Consol