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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
________________.
Commission file number...333-39746
IWO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 14-1818487
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Lakeshore Drive
Lake Charles, LA 70601
(Address of principal executive offices) (Zip code)
(337) 436-9000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No.
1
Part I - Financial Information
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ........................... 3
Condensed Consolidated Statements of Operations ................. 4
Condensed Consolidated Statements of Cash Flows ................. 5
Notes to Condensed Consolidated Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 17
Part II OTHER INFORMATION
Item 2. Changes in Securities ........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ............. 25
Item 6. Exhibits and Reports on Form 8-K ................................ 25
Signatures ............................................................... 26
2
Part I Financial Information
Item 1. Financial Statements
IWO HOLDINGS, INC.AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
-------- ------------
2002 2001
---- ----
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $797 $3,394
Investment securities at amortized cost - held to maturity 54,077 56,519
Restricted cash and US Treasury securities at amortized cost - held to maturity 33,849 33,858
Subscriber receivables, net 10,281 10,001
Inventory 4,560 4,375
Prepaid expenses and other assets 4,726 6,790
-------- --------
Total current assets 108,290 114,937
Restricted cash and US Treasury securities at amortized cost - held to maturity 18,100 27,861
Property and equipment, net 170,223 176,226
Goodwill and other intangibles, net 507,612 52,702
Note receivable 174 194
Other assets 22,059 24,040
Investment securities at amortized cost - held to maturity --- 17,161
-------- --------
Total assets $826,458 $413,121
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 19,443 $ 16,264
Accrued expenses 34,052 43,463
-------- --------
Total current liabilities 53,495 59,727
Deferred tax liability 21,723 ---
Long term obligations 326,365 297,407
Common stock 1 377
Treasury stock at cost --- (598)
Additional paid in capital 447,991 184,305
Retained deficit (23,117) (128,097)
-------- --------
Total stockholders' equity 424,875 55,987
-------- --------
Total liabilities and stockholders' equity $826,458 $413,121
======== ========
See accompanying notes to condensed consolidated financial statements.
3
IWO HOLDINGS, INC.AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(Unaudited) Three month periods Six month periods
------------------- -----------------
Three Three
months months January 1, 2002 April 1, 2002 Six months
ended June ended June through March 31, through June 30, ended
30, 2002 30, 2001 2002 2002 June 30, 2001
-------- -------- ---- ---- ----
Revenues:
Subscriber $28,427 $16,166 $25,965 $28,427 $29,332
Roaming 9,108 7,051 7,014 9,108 13,016
Merchandise sales 2,034 1,649 2,554 2,034 2,865
Other revenue 7 --- 3 7 ---
- --- - - ---
Total revenue 39,576 24,866 35,536 39,576 45,213
Expense:
Cost of service 18,837 15,445 17,532 18,837 27,928
Merchandise cost of sales 2,708 2,405 4,577 2,708 4,248
General and administrative 11,966 7,486 19,382 11,966 14,199
Sales and marketing 8,638 6,165 8,519 8,638 11,200
Non-cash stock compensation --- 97 --- --- 308
Depreciation and amortization 14,705 4,422 5,714 14,705 8,568
------ ----- ----- ------ -----
Total operating expense 56,854 36,020 55,724 56,854 112,578
------ ------ ------ ------ -------
Operating loss (17,278) (11,154) (20,188) (17,278) (21,238)
Other expense:
Interest expense, net (8,461) (5,554) (6,648) (8,461) (10,189)
------- ------- ------- ------- --------
Loss before income tax benefit (25,739) (16,708) (26,836) (25,739) (31,427)
Income tax benefit 2,622 --- --- 2,622 ----
----- --- --- ----- ----
Net loss $(23,117) $(16,708) $(26,836) $(23,117) $(31,427)
======== ======== ======== ======== ========
See accompanying notes to condensed consolidated statements.
4
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
April 1, Six
January 1, 2002 months
2002 through through ended
March 31, June 30, June 30,
2002 2002 2001
---- ---- ----
Cash flows from operating activities
- ------------------------------------
Net cash used in operating activities
$(14,868) $(17,011) $(21,867)
Cash flows from investing activities
- ------------------------------------
Release of restricted cash and US Treasury securities 10,717 (284) (62,572)
Payments for the purchase of equipment (29,144) (16,492) (28,927)
Proceeds on maturities of marketable securities 6,000 13,465 12,371
Purchase of marketable securities --- --- (105,328)
--- --- ---------
Net cash used in investing activities (12,427) (3,311) (184,456)
Cash flows from financing activities
- ------------------------------------
Proceeds from long-term debt 40,000 20,000 190,000
Debt issuance costs --- --- (7,343)
Principal payments of long-term debt (15,000) --- ---
Proceeds from note receivable --- 20 396
Proceeds from stock options exercised --- --- 397
Purchase of treasury stock --- --- (173)
--- --- -----
Net cash provided by financing activities 25,000 20,020 183,277
------ ------ -------
Net decrease in cash and cash equivalents (2,295) (302) (23,046)
Cash and cash equivalents at beginning of period 3,394 1,099 36,313
----- ----- ------
Cash and cash equivalents at end of period $1,099 $797 $13,267
====== ==== =======
See accompanying notes to condensed consolidated financial statements.
5
IWO HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three and
six-month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The condensed consolidated financial statements contained
herein should be read in conjunction with the financial statements and
notes included in the Form 10-K for IWO Holdings, Inc. for the year ended
December 31, 2001, filed on March 26, 2002 with the Securities and Exchange
Commission.
2. Description of the Organization
IWO Holdings, Inc. ("the Company") is principally engaged in the ownership
and operation of wireless personal communications systems ("PCS") in the
northeastern region of the United States.
On April 1, 2002, US Unwired Inc. ("US Unwired"), acquired 100% of the
outstanding common stock of the Company, by issuing to the former
stockholders of the Company approximately 39.0 million shares of US Unwired
common stock and reserving approximately 6.9 million additional shares of
US Unwired common stock for issuance upon the exercise of options and
warrants that US Unwired assumed or exchanged in connection with the
acquisition. The acquisition was effected pursuant to a merger of IWO
Holdings, Inc. with a wholly owned subsidiary of US Unwired, Northeast
Unwired, Inc. As a result of the acquisition, the Company became a wholly
owned subsidiary of US Unwired. The purchase accounting effects of this
acquisition have been pushed down from US Unwired to the accompanying
financial statements. Accordingly, the Company has adjusted its equity as
of the acquisition date to reflect the amount paid by US Unwired and
allocated that amount to the assets and liabilities of the Company based on
the initial estimate of their fair values. US Unwired is in the process of
obtaining an independent valuation from a national valuation firm to assist
in the allocation of the purchase price. The Company expects to receive the
final valuation report from the independent national valuation firm before
December 31, 2002. The following summarizes the US Unwired purchase
consideration and the push down of this purchase consideration to the
accompanying financial statements.
(In thousands)
Consideration:
Common stock issued $389,828
Stock options and warrants granted 49,410
Cash, including merger related costs 8,561
-----
Total purchase price $447,799
========
6
Allocated to:
Working capital $ 43,289
Restricted cash and US Treasury obligations 28,100
Investment securities 3,103
Property and equipment 164,126
Deferred financing costs and other assets 21,768
Long-term debt (306,000)
Deferred tax liability (24,345)
Acquired customer base 57,500
Sprint affiliation agreement 215,000
Goodwill 245,258
-------
Total $447,799
========
The Company is amortizing the acquired customer base over a period of 24
months and the Sprint Affiliation agreements over the remaining life of the
agreements - approximately 18 years. None of the above goodwill is expected
to be tax deductible.
As a result of the US Unwired acquisition and the application of push down
accounting that resulted, the Company has adjusted the basis of its assets,
liabilities and shareholders' equity to reflect fair value on the closing
date of the acquisition. As a result of this new basis, our consolidated
balance sheets, results of operations and cash flows for periods subsequent
to April 1, 2002, the closing date of the acquisition, are not comparable
to those prior to the acquisition. The statements of operations and cash
flows of the Company for the three and six months ended June 30, 2002 are
each presented as two distinct periods; the three months prior to the
merger ended March 31, 2002 and the three months subsequent to the merger
ended June 30, 2002. Certain reclassifications have been made to our
financial statements for periods prior to the acquisition in order to
conform the presentation to the three-month period ended June 30, 2002.
3. Details of Certain Balance Sheet Accounts
Major categories of property and equipment consisted of the following:
June 30, December 31,
2002 2001
---- ----
(In thousands)
Land $168 $169
Buildings and leasehold improvements 9,135 11,680
Facilities and equipment 127,337 138,923
Furniture, fixtures and vehicles 5,253 8,165
Construction in progress 32,889 37,023
------ ------
174,782 195,960
Less accumulated depreciation and amortization 4,559 19,734
----- ------
$170,223 $176,226
======== ========
Goodwill and other intangibles consisted of the following:
June 30, 2002 December 31, 2001,
------------- ------------------
(In thousands)
Goodwill $245,258 $50,599
Sprint affiliation agreement 215,000 ---
Subscriber base 57,500 14,000
---------- ------
517,758 64,599
Less accumulated amortization 10,146 11,897
------ ------
$507,612 $52,702
======== =======
7
4. Long-Term Obligations
Long-term obligations consisted of the following:
June 30, 2002 December 31, 2001
------------- -----------------
(In thousands)
Debt outstanding under senior credit facilities:
Bank credit facility $190,000 $145,000
Senior subordinated discount notes 136,365 152,407
------- -------
Long-term obligations $326,365 $297,407
======== ========
Senior Subordinated Discount Notes - 14%
In February 2001, IWO issued 160,000 units, each consisting of $1,000
principal amount of 14% Senior Notes due January 15, 2011 and one warrant
to purchase 12.50025 shares of IWO's class C common stock at an exercise
price of $7.00 per share. On April 1, 2002, with the acquisition of IWO by
US Unwired, the warrants were converted to US Unwired warrants, and each
warrant is now exercisable for 12.96401 shares of US Unwired's common
stock. Interest is payable semi-annually on January 15 and July 15 of each
year. The gross proceeds from the offering were $160,000,000. Independent
Wireless One Corporation is the sole guarantor of the senior notes. All of
IWO's restricted subsidiaries formed or acquired after the issuance of the
Notes that guarantee the Company's senior credit facility will also
guarantee the Notes. The Notes are not guaranteed by US Unwired Inc. or any
of its subsidiaries.
Concurrently with the closing of the Notes, a portion of the proceeds of
the offering was used to purchase a portfolio of U.S. government securities
which will generate sufficient proceeds to make the first six scheduled
interest payments on the senior notes. The account holding the investment
securities and all of the securities and other items contained in the
account have been pledged to the trustee for the benefit of the holders of
the Notes.
Senior Bank Credit Facility - $240 million
Effective December 2000, the Company entered into an amended and restated
secured bank credit facility under which it may borrow up to $240 million
in the aggregate consisting of up to $70 million in revolving loans and
$170 million in term loans. The senior bank credit facility matures in
2008. The term loans will be repaid in quarterly installments beginning in
March 2004 and the revolver matures in March 2008. All loans under the
senior bank credit facility bear interest at variable rates tied to the
prime rate, the federal funds rate or LIBOR. The senior bank credit
facility is secured by all of the assets of the Company and its
subsidiaries. At June 30, 2002, the Company had $48.4 million available
under this facility.
The Company must comply with certain financial and operating covenants for
the subordinated discount notes and the senior bank credit facility and at
June 30, 2002 the Company was in compliance with these restrictive
covenants.
5. Goodwill and Other Intangible Assets - Adoption of Statement 142
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives.
The Company adopted these new rules on accounting for goodwill and other
intangible assets on January 1, 2002. During the second quarter of 2002,
the Company completed the first of the required
8
impairment tests of goodwill and indefinite lived assets as of January 1,
2002 and determined that the adoption of this provision of the new rules
had no impact on the Company's financial statements.
The following information provides net loss for the three and six-month
periods ended June 30, 2001 adjusted to exclude amortization expense
recognized in these periods related to goodwill.
Three-month period Six-month period
ended June 30, 2001 ended June 30, 2001
------------------- -------------------
(In thousands)
Reported net loss $(16,708) $(31,427)
Add back: Goodwill amortization 668 1,336
--- -----
Adjusted net loss $(16,040) $(30,091)
========= =========
6. Changes in Accounting Estimate
Effective April 1, 2002 and in connection with the acquisition by US
Unwired, the Company began deferring activation expense in an amount equal
to deferred activation revenue. The Company defers activation expense only
to the extent of the deferred activation fee revenues. It is the Company's
policy to defer both revenue for activation fees and the direct expense of
acquiring the customer in equal amounts and amortize these amounts over the
life of the customer relationship.
7. Commitments and Contingencies
The Sprint PCS licenses are subject to a requirement that the Company
construct network facilities that offer coverage to 25% of the population
or have substantial service in each of its Business Trading Areas ("BTAs")
within five years from the grant of the licenses. As of June 30, 2002,
management believes Sprint PCS has met the requirements necessary for the
licenses that the Company operates for Sprint PCS under the Sprint PCS
management agreements.
The Company uses Sprint PCS to process all PCS subscriber billings
including monthly recurring charges, airtime and other charges such as
access and interconnect fees. The Company pays various fees to Sprint PCS
for new subscribers as well as recurring monthly fees for services
performed for existing customers including billing and management of
customer accounts. Additionally, Sprint PCS has contracted with national
retailers that sell handsets and service to new PCS subscribers in the
Company's markets. Sprint PCS pays these national retailers a new
subscriber commission and provides handsets to such retailers below cost.
Sprint PCS passes these costs of commissions and the handset subsidies to
the Company.
The Company periodically reviews all charges from Sprint PCS and from time
to time, the Company may dispute certain of these charges. Based upon the
information provided to the Company by Sprint PCS to date, the Company
believes the accompanying condensed consolidated balance sheet adequately
reflects its obligation to Sprint PCS for these charges.
On July 3, 2002, the FCC issued an order, involving Sprint PCS, that PCS
wireless carriers could not unilaterally impose terminating long distance
access charges pursuant to FCC commission rules. This FCC order did not
preclude such charges when a contactual basis existed for such. The Company
has previously received terminating long distance access revenues from
Sprint PCS, who has asserted a claim to recover certain of these long
distance access revenues from the Company as a result of this FCC order.
The Company believes the accompanying consolidated balance sheet adequately
reflects any amounts that may ultimately be determined to be due to Sprint
PCS in connection with this matter.
8. Income Taxes
The Company's effective income tax rate for the interim periods presented
is based on management's estimate of the Company's effective tax rate for
the applicable year and differs from the federal statutory income tax rate
primarily due to nondeductible permanent differences, state income taxes
and changes in the valuation allowance for deferred tax assets. The
Company's income or loss for tax purposes is included in the income tax
return of the parent. However, the Company's income tax provision is
computed on a separate basis.
9
9. Condensed Consolidating Financial Information
Independent Wireless One Leased Realty Corporation (the "Non-Guarantor"), a
100% wholly owned subsidiary of Independent Wireless One Corporation, is
precluded from guaranteeing the debt of IWO Holdings, Inc. based on current
agreements in effect. Independent Wireless One Corporation is not
restricted from serving as a guarantor of the IWO Holdings, Inc. debt.
Independent Wireless One Leased Realty Corporation holds all of the cell
site leases and certain leases related to the administrative office
facilities and retail stores. Operating expenses are comprised of rent
expense from these leases. Independent Wireless One Leased Realty
Corporation has charged Independent Wireless One Corporation a fee equal to
its rent expense for use of its leased cell sites, office and retail space.
The information which follows presents the condensed consolidating balance
sheet as of June 30, 2002 and December 31, 2001 and the condensed
consolidating results of operations and cash flows for the three and
six-month periods ended June 30, 2002 and 2001 of (a) the Parent Company,
IWO Holdings, Inc., (b) the "Guarantor", Independent Wireless One
Corporation, and (c) the "Non-Guarantor", Independent Wireless One Leased
Realty Corporation, and includes condsolidating entries and the Company on
a consolidated basis.
10
Condensed Consolidating Balance Sheet
June 30, 2002
-------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
ASSETS:
- ------
Current Assets
- --------------
Cash and cash equivalents $ --- $ 797 $ --- $ --- $ 797
Subscriber receivables, net --- 10,281 --- --- 10,281
Investment securities at amortized cost -
held to maturity --- 54,077 --- --- 54,077
Restricted cash and US Treasury securities
at amortized cost - held to maturity 33,849 --- --- --- 33,849
Intercompany receivable (payable) --- 2,841 (2,841) --- ---
Inventory --- 4,560 --- --- 4,560
Prepaid expenses and other assets --- 1,861 2,865 --- 4,726
--- ----- ----- --- -----
Total current assets 33,849 74,417 24 --- 108,290
Restricted cash and US Treasury securities at
amortized cost - held to maturity 10,100 8,000 --- --- 18,100
Investment in subsidiary 527,558 --- --- (527,558) ---
Property and equipment, net --- 170,223 --- --- 170,223
Goodwill and other intangible assets, net --- 507,612 --- --- 507,612
Promissory note --- 174 --- --- 174
Other --- 22,059 --- --- 22,059
--- ------ --- --- ------
Total assets $ 571,507 $782,485 $ 24 $(527,558) $ 826,458
========= ======== ====== ========== =========
LIABILITIES AND STOCKHOLDERS'
- -----------------------------
EQUITY
- ------
Current liabilities:
Accounts payable $ --- $ 19,443 $ --- $ --- $19,443
Accrued expenses 10,267 23,761 24 --- 34,052
------ ------ -- --- ------
Total current liabilities 10,267 43,204 24 --- 53,495
Deferred tax liability --- 21,723 --- --- 21,723
Long-term debt 136,365 190,000 --- --- 326,365
------- ---
Stockholders' equity:
Common stock 1 --- --- --- 1
Additional paid-in capital 447,991 544,992 --- (544,992) 447,991
Retained deficit (23,117) (17,434) --- 17,434 (23,117)
-------- -------- --- ------ --------
Total stockholders' equity 424,875 527,558 --- (527,558) 424,875
------- ------- --- --------- -------
Total liabilities and stockholders' equity $571.507 $ 782,485 $ 24 $ (527,558) $826,458
======== ========= ===== =========== ========
11
Condensed Consolidating Balance Sheet
December 31, 2001
-----------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
ASSETS:
- -------
Current Assets
- --------------
Cash and cash equivalents $ --- $ 3,394 $ --- $ --- $ 3,394
Subscriber receivables, net --- 10,001 --- --- 10,001
Investment securities at amortized cost -
held to maturity --- 56,519 --- --- 56,519
Restricted cash and US Treasury securities
at amortized cost - held to maturity 33,858 --- --- --- 33,858
Intercompany receivable 156,464 55,979 24 (212,467) ---
Inventory --- 4,375 --- --- 4,375
Prepaid expenses and other assets --- 5,128 1,662 --- 6,790
--- ----- ----- --- -----
Total current assets 190,322 135,396 1,686 (212,467) 114,937
Restricted cash and US Treasury securities at
amortized cost--held to maturity 19,861 8,000 --- --- 27,861
Investment in subsidiary 74,492 --- --- (74,492) ---
Property and equipment, net --- 176,226 --- --- 176,226
Goodwill and other intangible assets, net --- 52,702 --- --- 52,702
Promissory note --- 194 --- --- 194
Other --- 24,040 --- --- 24,040
Investment securities at amortized cost--held
to maturity --- 17,161 --- --- 17,161
--- ------ --- --- ------
Total assets $ 284,675 $413,719 $ 1,686 $(286,959) $ 413,121
========= ======== ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ --- $ 16,264 $ --- $ --- $16,264
Intercompany payable 54,317 156,488 1,662 (212,467) ---
Accrued expenses 10,267 33,172 24 --- 43,463
------ ------ -- --- ------
Total current liabilities 64,584 205,924 1,686 (212,467) 59,727
Long-term debt 152,407 145,000 --- --- 297,407
--------- ----------
Stockholders' equity:
Common stock 377 2,750 --- (2,750) 377
Treasury stock at cost (598) --- --- --- (598)
Additional paid-in capital 196,002 173,303 --- (185,000) 184,305
Retained deficit (128,097) (113,258) --- 113,258 (128,097)
--------- --------- --- ------- ---------
Total stockholders' equity 67,684 62,795 --- (74,492) 55,987
------ ------ --- -------- ------
Total liabilities and stockholders' equity $284,675 $ 413,719 $ 1,686 $ (286,959) $413,121
======== ========= ======= =========== ========
12
Condensed Consolidating Statement of Operations
Three-month period ended June 30, 2002
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
Revenues $ --- $ 39,576 $ 3,430 $ (3,430) $ 39,576
Operating expenses --- 56,854 3,430 (3,430) 56,854
--- ------ ----- ------- ------
Operating loss --- (17,278) --- --- (17,278)
Other income (expense)
Interest expense (5,965) (3,314) --- --- (9,279)
Interest income 282 536 --- --- 818
--- --- --- --- ---
Total other expense (5,683) (2,778) --- --- (8,461)
Equity in losses of wholly-owned subsidiaries (17,434) --- --- 17,434 ---
-------- --- --- ------ ---
Net loss before income benefit (23,117) (20,056) --- 17,434 (25,739)
Income tax benefit --- 2,622 --- 2,622
--- ----- --- -----
Net loss $ (23,117) $(17,434) $ --- $ 17,434 $ (23,117)
========== ========= ======= ======== ==========
Condensed Consolidating Statement of Operations
Three-month period ended June 30, 2001
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
Revenues $ --- $ 24,866 $ 1,967 $ (1,967) $ 24,866
Operating expenses --- 36,020 1,967 (1,967) 36,020
--- ------ ----- ------- ------
Operating loss --- (11,154) --- --- (11,154)
Other income (expense)
Interest expense (4,758) (3,135) --- --- (7,893)
Interest income 674 1,665 --- --- 2,339
--- ----- --- --- -----
Total other expense (4,084) (1,470) --- --- (5,554)
Equity in losses of wholly-owned subsidiaries (12,624) --- --- 12,624 ---
-------- --- --- ------ ---
Net loss $ (16,708) $ (12,624) $ --- $ 12,624 $ (16,708)
========== ========== ======= ======== ==========
13
Condensed Consolidating Statement of Operations
January 1, 2002 through March 31, 2002
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
Revenues $ --- $ 35,536 $ 3,092 $ (3,092) $35,536
Operating expenses --- 55,724 3,092 (3,092) 55,724
--- ------ ----- ------- ------
Operating loss --- (20,188) --- --- (20,188)
Other income (expense):
Interest expense (5,096) (2,968) --- --- (8,064)
Interest income 483 933 --- --- 1,416
--- --- --- --- -----
Total other expense (4,613) (2,035) --- --- (6,648)
Equity in losses of subsidiaries (22,223) --- --- 22,223 ---
-------- --- --- ------ ---
Net loss before income tax benefit (22,223) --- --- 22,223 ---
Income tax benefit --- --- --- --- ---
--- --- --- --- ---
Net loss $(22,223) $ (22,223) $ --- $ 22,223 $ (26,836)
========= ========== ======= ======== ==========
Condensed Consolidating Statement Operations
April 1, 2002 through June 30, 2002
-----------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
Revenues $ --- $ 39,576 $ 3,430 $ (3,430) $ 39,576
Operating expenses --- 56,854 3,430 (3,430) 56,854
--- ------ ----- ------- ------
Operating loss --- (17,278) --- --- (17,278)
Other income (expense):
Interest expense (5,965) (3,314) --- --- (9,279)
Interest income 282 536 --- --- 818
--- --- --- --- ---
Total other expense (5,683) (2,778) --- --- (8,461)
Equity in losses of subsidiaries (17,434) --- --- 17,434 ---
-------- --- --- ------ ---
Net loss before income tax benefit (23,117) (20,056) --- 17,434 (25,739)
Income tax benefit --- 2,622 --- 2,622
--- ----- --- -----
Net loss $ (23,117) $(17,434) $ --- $ 17,434 $ (23,117)
========== ========= ======= ======== ==========
14
Condensed Consolidating Statement of Operations
Six-month period ended June 30, 2001
------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
Revenues $ --- $ 45,213 $ 3,560 $ (3,560) $ 45,213
Operating expenses --- 66,451 3,560 (3,560) 66,451
--- ------ ----- ------- ------
Operating loss --- (21,238) --- --- (21,238)
Other income (expense):
Interest expense (7,711) (6,646) --- --- (14,357)
Interest income 1,119 3,049 --- --- 4,168
----- ----- --- --- -----
Total other expense (6,592) (3,597) --- --- (10,189)
Equity in losses of wholly-owned subsidiaries (24,835) --- --- 24,835 ---
-------- --- --- ------ ---
Net loss $(31,427) $ (24,835) $ --- $ 24,835 $ (31,427)
========= ========== ======= ========= ==========
Condensed Consolidating Statement of Cash Flows
January 1, 2002 through March 31, 2002
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
Cash flows from operating activities: (In thousands)
- -------------------------------------
Net cash provided by (used in) operating
activities $(10,717) $ (4,151) $ --- $ --- $ (14,868)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities 10,717 --- --- --- 10,717
Payments for the purchase of equipment --- (29,144) --- --- (29,144)
Maturities of marketable securities --- 6,000 --- --- 6,000
--- ----- --- --- -----
Net cash provided by (used in) investing
activities 10,717 (23,144) --- --- (12,427)
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt --- 40,000 --- --- 40,000
Principal payments of long-term debt --- (15,000) --- --- (15,000)
Net cash provided by financing activities --- 25,000 --- --- 25,000
--- ------ --- --- ------
Net decrease in cash and cash equivalents --- (2,295) --- --- (2,295)
Cash and cash equivalents at beginning of period --- 3,394 --- --- 3,394
--- ----- --- --- -----
Cash and cash equivalents at end of period $ --- $ 1,099 $ --- $ --- $ 1,099
======= ======== ======= ======= =======
15
Condensed Consolidating Statement of Cash Flows
April 1, 2002 through June 30, 2002
-----------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- --------- ------------- ------- ------------
Cash flows from operating activities: (In thousands)
- -------------------------------------
Net cash provided by (used in) operating
activities $ 284 $ (17,295) $ --- $ --- $ (17,011)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities (284) --- --- --- (284)
Payments for the purchase of equipment --- (16,492) --- --- (16,492)
Maturities of marketable securities --- 13,465 --- --- 13,465
--- ------ --- --- ------
Net cash provided by (used in) investing
activities (284) (3,027) --- --- (3,311)
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt --- 20,000 --- --- 20,000
Proceeds from promissory notes --- 20 --- --- 20
--- -- --
Net cash provided by financing activities --- 20,020 --- --- 20,020
--- ------ --- --- ------
Net decrease in cash and cash equivalents --- (302) --- --- (302)
Cash and cash equivalents at beginning of period --- 1,099 --- --- 1,099
--- ----- --- --- -----
Cash and cash equivalents at end of period $ --- $ 797 $ --- $ --- $ 797
======= ====== ======= ======= ======
Condensed Consolidating Statement of Cash Flows
Six-month period ended June 30, 2001
------------------------------------
Independent Independent
IWO Wireless Wireless One
Holdings, One Corp. Leased Realty
Inc. (Guarantor) Corp. Consolidating Consolidated
(Parent) ----------- (Non-guarantor) Entries ------------
-------- ------------- -------
Cash flows from operating activities: (In thousands)
- -------------------------------------
Net cash provided by (used in) operating
activities $(98,048) $76,181 $ --- $ --- $ (21,867)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities (62,572) --- --- --- (62,572)
Payments for the purchase of equipment --- (28,927) --- --- (28,927)
Maturities of marketable securities --- 12,371 --- --- 12,371
Purchase of marketable securities --- (105,328) --- --- (105,328)
--- --------- --- --- ---------
Net cash used in investing activities (62,572) (121,884) --- --- (184,456)
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt 160,000 30,000 --- --- 190,000
Debt issuance costs --- (7,343) --- --- (7,343)
Other financing activities 620 --- --- --- 620
--- --- --- --- ---
Net cash provided by financing activities 160,620 22,657 --- --- 183,277
------- ------ --- --- -------
Net decrease in cash and cash equivalents --- (23,046) --- --- (23,046)
Cash and cash equivalents at beginning of period --- 36,313 --- --- 36,313
--- ------ --- --- ------
Cash and cash equivalents at end of period $ --- $ 13,267 $ --- $ --- $ 13,267
======= ======== ======= ======= ========
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plan,
construction schedule, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-looking
statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the investment
considerations described elsewhere, specific factors that might cause such a
difference include, but are not limited to (i) our ability to integrate
operations and finance future growth opportunities; (ii) our dependence on
Sprint PCS; (iii) our ability to expand our Sprint PCS network or to upgrade the
Sprint PCS network to accommodate new technologies; (iv) limited operating
history in the PCS market and anticipation of future losses; (v) potential
fluctuations in operating results; (vi) changes or advances in technology; (vii)
changes in law or government regulation; (viii) competition in the industry and
markets in which we operate; (ix) future acquisitions; (x) our ability to
attract and retain skilled personnel; (xi) our dependence on contractor and
consultant services, network implementation and information technology support;
(xii) our potential inability to expand the services and related products we
provide in the event of substantial increases in demand in excess of supply for
network and handset equipment and related services and products; (xiii) the
availability at acceptable terms of sufficient funds to pay for our business
plans; (xiv) changes in labor, equipment and capital costs; (xv) any inability
to comply with the indentures that govern our senior notes or credit agreements;
(xvi) changes in management; and (xvii) general economic and business
conditions.
You should not rely too heavily on any forward-looking statement. We cannot
assure you that our forward-looking statements will prove to be correct. We have
no obligation to update or revise publicly any forward-looking statement based
on new information, future events or otherwise. This discussion should be read
in conjunction with our financial statements included in this report and with
the financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations and with risk factors identified in
Investment Considerations that are included in the Form 10-K for IWO Holdings,
Inc. for the year ended December 31, 2001, filed on March 26, 2002 with the
Securities and Exchange Commission ("SEC").
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
activation fee revenues and related expense, revenue recognition of credit
challenged customers, contract cancellation fees, inventory reserves, intangible
assets and contingencies. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may vary from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements.
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of customers to make payments. If the financial conditions of our
customers deteriorate, resulting from the customers' inability to make payments,
additional allowances will be required.
We provide additional allowances for economically challenged customers that have
been granted limited credit and recognize the revenue only after the customer
has made an initial payment. If these credit challenged customers fail to make
payments after making an initial payment, additional allowances may be required.
We recognize only a portion of contract cancellation fees billed to customers
that disconnect service prior to fulfilling the contractual length of service,
as there is no assurance that all contract cancellation fees that are billed
will be collected. If the collections on contract cancellation fees are less
than that recognized, additional allowances may be required.
17
We defer revenues collected for activation fees over the estimated life of the
subscriber relationship, which we believe to be 15-24 months, based upon our
historical trends of average customer lives and discussions with Sprint PCS. We
also defer an activation expense in an amount equal to activation fee revenue
and amortize this expense in an amount equal to the activation fee revenue over
the life of the subscriber relationship. If the estimated life of the subscriber
relationship increases or decreases, the amounts of deferred revenue and
deferred expense will be adjusted over the revised estimated life of the
subscriber relationship.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be necessary.
We accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. Depending on the level of sales
and other factors, our estimates of the amounts accrued for commissions and
other costs owed to such retailers may require modification of our previous
estimates.
We rely on Sprint PCS for much of our billing information and based upon the
timing of that information, make certain assumptions that the information is
accurate and that it is consistent with historical trends. While we believe our
basis for making such assumptions are reasonable, actual results may vary from
these estimates.
Overview
Through our subsidiary, Independent Wireless One Corporation ("IWO"), we provide
wireless personal communication services, commonly referred to as PCS, to an
area containing 6.3 million residents in the northeastern United States. Our
territory extends from suburban New York City (Orange and Sullivan Counties)
north to the Canadian border and reaches from the eastern suburbs of Rochester
to Syracuse, Ithaca, Binghamton and Elmira in central New York State (and
extending into a small portion of north central Pennsylvania), east to include
all of Vermont and New Hampshire (except Nashua, New Hampshire) and a portion of
western Massachusetts. We are a network partner of Sprint PCS, the personal
communications services group of Sprint Corporation. Sprint PCS, directly and
through affiliates like us, provides wireless services in more than 4,000 cities
and communities across the country. We have the exclusive right to provide
digital PCS services under the Sprint(R) and Sprint PCS(R) brand names in our
service area.
On April 1, 2002, 100% of our outstanding stock was acquired by US Unwired Inc.
("US Unwired"). US Unwired provides PCS services and related products to
customers in the southeastern United States as part of Sprint PCS's network. US
Unwired's service area, prior to acquiring us, consisted of 11.3 million
residents in Louisiana, Texas, Florida, Arkansas, Mississippi, Georgia and
Alabama. Each share of our stock was converted to 1.0371 shares of US Unwired
common stock. As a result, approximately 37.6 million outstanding shares of IWO
stock were converted to approximately 39.0 million shares of US Unwired common
stock. In addition, 6.9 million shares of US Unwired common stock were reserved
for issuance upon exercise of IWO options, IWO Founders and Management Warrants
and IWO High Yield Warrants based upon the same conversion ratio.
As a result of the US Unwired acquisition and the application of push down
accounting that resulted, we adjusted the basis of our assets, liabilities and
shareholders' equity to reflect fair value on the closing date of the
acquisition. As a result of this new basis, our consolidated balance sheets,
results of operations and cash flows for periods subsequent to April 1, 2002,
the closing date of the acquisition, are not comparable to those prior to the
acquisition. Our statements of operations and cash flows for the three and six
months ended June 30, 2002 are each presented as two distinct periods; the three
months prior to the merger ended March 31, 2002 and the three months subsequent
to the merger ended June 30, 2002. Certain reclassifications have been made to
our financial statements for periods prior to the acquisition in order to
conform the presentation to the three-month period ended June 30, 2002.
For discussion purposes, we have combined the three month period of January 1,
2002 to March 31, 2002 (pre-acqusition period) and the three month period of
April 1, 2002 to June 30, 2002 (post-acquisition period) for comparison to the
six month period ended June 30, 2001.
18
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Subscriber $28,427 $16,166 $54,392 $29,332
Roaming 9,108 7,051 16,122 13,016
Merchandise sales 2,034 1,649 4,588 2,865
Other revenue 7 --- 10 ---
- --- -- ---
Total revenue 39,576 24,866 75,112 45,213
Expense:
Cost of service 18,837 15,445 36,369 27,928
Merchandise cost of sales 2,708 2,405 7,285 4,248
General and administrative 11,966 7,486 31,348 14,199
Sales and marketing 8,638 6,165 17,157 11,200
Non-cash stock compensation --- 97 --- 308
Depreciation and amortization 14,705 4,422 20,419 8,568
------ ----- ------ -----
Total operating expense 56,854 36,020 112,578 66,451
------ ------ ------- ------
Operating loss (17,278) (11,154) (37,466) (21,238)
Other expense:
Interest expense, net (8,461) (5,554) (15,109) (10,189)
------- ------- -------- --------
Loss before income tax benefit (25,739) (16,708) (52,575) (31,427)
Income tax benefit 2,622 --- 2,622 ---
----- --- ----- ---
Net loss $(23,117) $(16,708) $(49,953) $(31,427)
========= ========= ========= =========
For the six months ended
June 30,
2002 2001
---- ----
Cash flows from operating activities
- ------------------------------------
Net cash used in operating activities $(31,879) $(21,867)
Cash flows from investing activities
- ------------------------------------
Release of restricted and US Treasury securities 10,433 (62,572)
Payments for the purchase of equipment (45,636) (28,927)
Proceeds on maturities of marketable securities 19,465 12,371
Purchase of marketable securities --- (105,328)
--- ---------
Net cash used in investing activities (15,738) (184,456)
Cash flows from financing activities
- ------------------------------------
Proceeds from long-term debt 60,000 190,000
Debt issuance costs --- (7,343)
Principal payments of long-term debt (15,000) ---
Proceeds from note receivable 20 396
Proceeds from stock options exercised --- 397
Purchase of treasury stock --- (173)
--- -----
Net cash provided by financing activities 45,020 183,277
------ -------
Net decrease in cash and cash equivalents (2,597) (23,046)
Cash and cash equivalents at beginning of period 3,394 36,313
----- ------
Cash and cash equivalents at end of period $797 $13,267
==== =======
19
Three Month Period Ended June 30, 2002 Compared to the Three Month Period Ended
June 30, 2001
Subscriber Additions
As of June 30, 2002, we provided personal communication services to 181,800
customers as compared to 102,600 customers at June 30, 2001. We added 12,600
customers during the three-month period ended June 30, 2002 as compared to
11,000 new customers during the three-month period ended June 30, 2001. The
increased customers are attributable to the expansion of the network within our
existing markets as well as the expansion into new markets within our territory.
We do not include in our customer base an estimate of customers that never make
their initial payment.
Revenues
Three-month period ended June 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $28,427 $16,166
Roaming revenues 9,108 7,051
Merchandise sales 2,034 1,649
Other revenues 7 ---
- ---
Total revenues $39,576 $24,866
======= =======
Subscriber revenues
Total subscriber revenues were $28.4 million for the three-month period ended
June 30, 2002 as compared to $16.2 million for the three-month period ended June
30, 2001, representing an increase of $12.2 million and was primarily the result
of an increase in subscribers.
Roaming revenues
Roaming revenues were $9.1 million for the three-month period ended June 30,
2002 as compared to $7.1 million for the three-month period ended June 30, 2001,
representing an increase of $2.0 million and was primarily the result of a
higher volume of Sprint PCS(R) subscribers traveling through our markets and the
expansion of our network coverage. We are continuing to expand our service by
upgrading network equipment and adding cell sites in certain markets that we
believe will help us provide better service.
Merchandise sales
Merchandise sales were $2.0 million for the three-month period ended June 30,
2002 as compared to $1.6 million for the three-month period ended June 30, 2001,
representing an inrease of $.4 million and related to subscriber additions. The
cost of handsets typically exceeds the amount received from our subscribers
because we subsidize the price of handsets to remain competitive in the
marketplace.
Operating Expenses
Three-month period ended June 30,
2002 2001
---- ----
(In thousands)
Cost of service $18,837 $15,445
Merchandise cost of sales 2,708 2,405
General & administrative 11,966 7,486
Sales & marketing 8,638 6,165
Non-cash stock compensation --- 97
Depreciation & amortization 14,705 4,422
------ -----
Total operating expenses $56,854 $36,020
======= =======
20
Cost of service
Cost of service was $18.8 million for the three-month period ended June 30, 2002
as compared to $15.4 million for the three-month period ended June 30, 2001,
representing an increase of $3.4 million, which primarily related to an increase
in carrier roaming expenses and circuit and usage costs as a result of our
larger subscriber base and market coverage.
Merchandise cost of sales
Merchandise cost of sales was $2.7 million for the three-month period ended June
30, 2002 as compared to $2.4 million for the three-month period ended June 30,
2001, representing a increase of $.3 million and primarily related to the
addition of new subscribers. The cost of handsets typically exceeds the amount
received from our subscribers because we subsidize the price of handsets to
remain competitive in the marketplace.
General and administrative expenses
General and administrative expenses were $12.0 million for the three-month
period ended June 30, 2002 as compared to $7.5 million for the three-month
period ended June 30, 2001, representing an increase of $4.5 million and was
primarily related to billing cost, servicing costs and bad debt expense due to
our increased subscriber base.
Sales and marketing expenses
Sales and marketing expenses were $8.6 million for the three-month period ended
June 30, 2002 as compared to $6.2 million for the three-month period ended June
30, 2001, representing an increase of $2.4 million that primarily relates to
increases in direct selling headcount and commissions paid for new subscribers
to national third party retailers contracted to sell our product.
Depreciation and amortization expense
Depreciation and amortization expense was $14.7 million for the three-month
period ended June 30, 2002 as compared to $4.4 million for the three-month
period ended June 30, 2001, representing an increase of $10.3 million and was
primarily due to the amortization of intangible assets. Net property and
equipment for our PCS markets increased to $170.2 million at June 30, 2002 from
$144.4 million at June 30, 2001.
Operating loss
The operating loss was $17.3 million for the three-month period ended June 30,
2002 as compared to $11.2 million for the three-month period ended June 30,
2001, representing an increase of $6.1 million that was primarily due to
increases in subscriber revenue offset by the cost of adding new subscribers and
increased depreciation costs associated with building out our markets.
Other Income/(Expense)
Three-month period ended June 30,
2002 2001
---- ----
( In thousands)
Interest expense $ (9,279) $ (7,893)
Interest income 818 2,339
--- -----
Total other expense $ (8,461) $ (5,554)
========= =========
Interest expense was $9.3 million for the three-month period ended June 30, 2002
as compared to $7.9 million for the three-month period ended June 30, 2001,
representing an increase of $1.4 million. The increase in interest expense
resulted from the increase in outstanding debt. Our outstanding debt was $326.4
million at June 30, 2002 as compared to $262.2 million at June 30, 2001.
Interest income was $.8 million for the three-month period ended June 30, 2002
as compared to $2.3 million for the three-month period ended June 30, 2001,
representing a decrease of $1.5 million. The decrease was primarily due to less
cash and cash equivalents available for investment and a decrease in interest
rates.
Six-Month Period Ended June 30, 2002 Compared to the Six-Month Period Ended June
30, 2001:
21
Subscriber Additions
As of June 30, 2002, we provided personal communication services to 181,800
customers as compared to 102,600 customers at June 30, 2001. We added 26,500
customers during the six-month period ended June 30, 2002 as compared to 21,000
new customers during the six-month period ended June 30, 2001. The increased
customers are attributable to the expansion of the network within our existing
markets as well as the expansion into new markets within our territory. We do
not include in our customer base an estimate of customers that never make their
initial payment.
Revenues
Six-month period ended June 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $54,392 $29,332
Roaming revenues 16,122 13,016
Merchandise sales 4,588 2,865
Other revenues 10 ---
-- ---
Total revenues $75,112 $45,213
======= =======
Subscriber revenues
Total subscriber revenues were $54.4 million for the six-month period ended June
30, 2002 as compared to $29.3 million for the six-month period ended June 30,
2001, representing an increase of $25.1 million and was primarily the result of
an increase in subscribers.
Roaming revenues
Roaming revenues were $16.1 million for the six-month period ended June 30, 2002
as compared to $13.0 million for the six-month period ended June 30, 2001,
representing an increase of $3.1 million and was primarily the result of a
higher volume of Sprint PCS(R) subscribers traveling through our markets and the
expansion of our network coverage. We are continuing to expand our service by
upgrading network equipment and adding cell sites in certain markets that we
believe will help us provide better service.
Merchandise sales
Merchandise sales were $4.6 million for the six-month period ended June 30, 2002
as compared to $2.9 million for the six-month period ended June 30, 2001,
representing an increase of $1.7 million and related to subscriber additions.
The cost of handsets typically exceeds the amount received from our subscribers
because we subsidize the price of handsets to remain competitive in the
marketplace.
Operating Expenses
Six-month period ended June 30,
2002 2001
---- ----
(In thousands)
Cost of service $36,369 $27,928
Merchandise cost of sales 7,285 4,248
General & administrative 31,348 14,199
Sales & marketing 17,157 11,200
Non-cash stock compensation --- 308
Depreciation & amortization 20,419 8,568
------ -----
Total operating expenses $112,578 $66,451
======== =======
22
Cost of service
Cost of service was $36.4 million for the six-month period ended June 30, 2002
as compared to $27.9 million for the six-month period ended June 30, 2001,
representing an increase of $8.5 million, which primarily related to an increase
in carrier roaming expenses and circuit and usage costs as a result of our
larger subscriber base and market coverage.
Merchandise cost of sales
Merchandise cost of sales was $7.3 million for the six-month period ended June
30, 2002 as compared to $4.2 million for the six-month period ended June 30,
2001, representing an increase of $3.1 million and primarily related to the
addition of new subscribers. The cost of handsets typically exceeds the amount
received from our subscribers because we subsidize the price of handsets to
remain competitive in the marketplace.
General and administrative expenses
General and administrative expenses were $31.3 million for the six-month period
ended June 30, 2002 as compared to $14.2 million for the six-month period ended
June 30, 2001, representing an increase of $17.1 million and was primarily
related to billing costs, servicing costs, bad debt expense related to the
increase in our subscribers and merger related expenses related to the US
Unwired acquisition.
Sales and marketing expenses
Sales and marketing expenses were $17.2 million for the six-month period ended
June 30, 2002 as compared to $11.2 million for the six-month period ended June
30, 2001, representing an increase of $6.0 million that primarily relates to
increases in direct selling headcount and commissions paid to local and national
third party retailers contracted to sell our product.
Depreciation and amortization expense
Depreciation and amortization expense was $20.4 million for the six-month period
ended June 30, 2002 as compared to $8.6 million for the six-month period ended
June 30, 2001, representing an increase of $11.8 million and was primarily due
to the amortization of intangible assets. Net property and equipment for our PCS
markets increased to $170.2 million at June 30, 2002 from $144.4 million at June
30, 2001.
Operating loss
The operating loss was $37.5 million for the six-month period ended June 30,
2002 as compared to $21.2 million for the six-month period ended June 30, 2001,
representing an increase of $16.3 million that was primarily due to increases in
subscriber revenue offset by the cost of adding new subscribers and increased
depreciation costs associated with building out our markets.
Other Income/(Expense)
Six-month period ended June 30,
2002 2001
---- ----
( In thousands)
Interest expense $(17,343) $(14,357)
Interest income 2,234 4,168
----- -----
Total other expense $(15,109) $(10,189)
========= =========
Interest expense was $17.3 million for the six-month period ended June 30, 2002
as compared to $14.4 million for the six-month period ended June 30, 2001,
representing an increase of $2.9 million. Our outstanding debt was $326.4
million at June 30, 2002 as compared to $262.2 million at June 30, 2001.
Interest income was $2.2 million for the six-month period ended June 30, 2002 as
compared to $4.2 million for the six-month period ended June 30, 2001,
representing a decrease of $2.0 million. The decrease was primarily due to less
cash and cash equivalents available for investment and a decrease in interest
rates.
Liquidity and Capital Resources
23
As of June 30, 2002, we had $.8 million in cash and cash equivalents, $54.1
million in investment securities, $51.9 million in restricted cash and US
Treasury securities for our senior notes and total availability in revolving
loans under our senior bank credit facility of $48.4 million.
We are an unrestricted subsidiary of US Unwired. Funds available under our
senior bank credit facility and cash flow can only be used by us, and,
respectively, funds available under US Unwired's senior bank credit facility and
cash flow can only be used by US Unwired.
We used $31.9 million of cash in operating activities during the six-month
period ended June 30, 2002. The $15.7 million of cash used in investing
activities during the six-month period ended June 30, 2002 includes cash outlays
of $45.6 million for capital expenditures, partially offset by the $10.4 million
release of restricted cash and U.S. Treasury securities to be used to pay
interest related to the senior notes, and by $19.5 million in proceeds from
matured investments. The $45.0 million in cash provided by financing activities
during the six-month period ended June 30, 2002 consisted of the borrowings
under the senior credit facility net of repayments.
We expect that cash and cash equivalents and our investments in securities,
together with future advances under the senior bank credit facility, will fund
our capital expenditures and our working capital requirements through 2004, at
which time we anticipate we will be cash flow positive. The senior bank credit
facility and senior notes are subject to certain restrictive covenants including
maintaining certain financial ratios, attaining defined subscriber growth and
network coverage goals, and limiting annual capital expenditures. Further, the
senior bank credit facility and senior note indenture restrict the payment of
dividends on our common stock.
As of June 30, 2002, management believes that we are in compliance with all
financial and operational covenants associated with our senior credit facility,
senior notes and agreements with Sprint PCS.
Seasonality
Like the wireless communications industry in general, there is an increase in
subscriber additions in the fourth quarter due to the holiday season. A greater
number of phones sold at holiday promotional prices causes our losses on
merchandise sales to increase. Our sales and marketing expenses increase also
with holiday promotional activities. We generally have the weakest demand for
new wireless services during the summer. We expect these trends to continue
based on historical operating results.
Part II
ITEM 2. Changes in securities.
On April 1, 2002, US Unwired Inc., a Louisiana corporation ("US Unwired"),
acquired IWO Holdings, Inc., a Delaware corporation ("IWO"), by merging
Northeast Unwired Inc., a Delaware corporation ("Northeast Unwired") that is US
Unwired's indirect, wholly owned subsidiary, into IWO (the "Merger"). In
connection with the Merger, US Unwired issued to the former stockholders of IWO
approximately 39.0 million shares of US Unwired common stock and reserved
approximately 6.9 million additional shares of its common stock for issuance
upon the exercise of options and warrants that US Unwired assumed or exchanged
in connection with the Merger. As a result of the Merger, IWO became an
indirect, wholly owned subsidiary of US Unwired and US Unwired, through its
direct, wholly owned subsidiary Louisiana Unwired, LLC ("Louisiana Unwired")
owns 100% of the voting securities of IWO. The acquisition was effected pursuant
to an Agreement and Plan of Merger dated as of December 19, 2001 (the "Merger
Agreement") by and among US Unwired, Northeast Unwired and IWO. The officers and
directors of IWO immediately following the Merger were the persons who,
immediately prior to the Merger, were the officers and directors of Northeast
Unwired. The Merger Agreement provides that at least one director and one
executive officer of IWO must be a person who is not a director or executive
officer of US Unwired, for so long as that is required by the Indenture that
relates to the 13 3/8% Series A and B Senior Subordinated Discount Notes of US
Unwired due 2009. At the effective time of the Merger, all of the shares of IWO
were pledged by Louisiana Unwired to secure US Unwired's borrowings under the
Amended and Restated Credit Agreement by and among US Unwired as borrower;
CoBank, ACB, as administrative agent and a lender; First Union Securities Inc.,
as syndication agent and a co-arranger; The Bank of New York, as documentation
agent and a lender; BNY Capital Markets, Inc., as a co-arranger; First Union
National Bank, as a lender; General Electric Capital Corporation, as co-
documentation agent and a lender; and the other lenders referred to therein. An
event of default under the credit agreement described above could result in a
foreclosure sale of the pledged shares, which would cause a change in
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control of IWO.
ITEM 4. Submission of Matters to a Vote of Security Holders
We submitted to a vote of our former stockholders, through a solicitation by
proxy, the approval of the merger with US Unwired and the merger agreement. The
matters were approved by an Action By Written Consent In Lieu of A Meeting of
the Stockholders of IWO Holdings, Inc. dated February 28, 2002 pursuant to
Section 228 of the Delaware General Corporation Law. The Written Consent was
signed by stock holders of the Company holding an aggregate of 12,221,356.387
shares of Class B Common Stock of the Company and an aggregate of 60,000,000
shares of Class D Common Stock of the Company, collectively representing 96.79%
of the votes entitled to be cast.
ITEM 6. Exhibits and Reports on Form 8-K.
a. The following exhibits are filed as part of this report:
(2) Agreement and Plan of Merger, dated as of December 19, 2001, by
and among US Unwired Inc., Northeast Unwired Inc. and IWO
Holdings, Inc. (Incorporated by reference to Exhibit 2.1 filed
with the registration statement on Form S-4 filed by the
Registrant on February 1, 2002).
(3)(i) Amended and Restated Certificate of Incorporation of IWO Holdings,
Inc. (incorporated by reference to Exhibit 3.1 to IWO Holdings,
Inc.'s and Independent Wireless One Corporation's Registration
Statement on Form S-4, Registration No. 333-58902, filed on April
13, 2001
(3)(ii) Bylaws of IWO Holdings, Inc., as amended (incorporated by
reference to Exhibit 3.2 to IWO Holdings, Inc.'s and Independent
Wireless One Corporation's Registration Statement on Form S-4,
Registration No. 333-58902, filed on April 13, 2001)
(4) Indenture, dated as of February 2, 2001, among IWO Holdings, Inc.,
Independent Wireless One Corporation and Firstar Bank, N.A., as
trustee for the Senior Notes (incorporated by reference to Exhibit
4.1 to IWO Holdings, Inc.'s and Independent Wireless One
Corporation's Registration Statement on Form S-4, Registration No.
333-58902, filed on April 13, 2001)
(10) (i)(a) Credit Agreement, dated as of December 20, 1999, among
Independent Wireless One Corporation, as borrower, the lenders
thereto from time to time, Chase Securities Inc., as book
manager and lead arranger, First Union National Bank and BNP
Paribas (as successor in interest to Paribas), as senior
managing agents, UBS AG, Stamford Branch, as documentation
agent, and The Chase Manhattan Bank, as administrative agent
(incorporated by reference to Exhibit 10.27 to IWO Holdings,
Inc.'s Registration Statement on Form S-1, Registration No.
333-39746, filed on June 21, 2000)
(10)(i)(b) Amendment No. 1, dated as of June 30, 2000, to the Credit
Agreement (incorporated by reference to Exhibit 10.6.2 to IWO
Holdings, Inc.'s and Independent Wireless One Corporation's
Registration Statement on Form S-4, Registration No. 333-58902,
filed on April 13, 2001)
(10)(i)(c) Amendment No. 2, dated as of December 8, 2000, to the Credit
Agreement (incorporated by reference to Exhibit 10.6.3 to IWO
Holdings, Inc.'s and Independent Wireless One Corporation's
Registration Statement on Form S-4, Registration No. 333-58902,
filed on April 13, 2001)
(16) Change in Certifying Accountant for IWO Holdings, Inc.
(Incorporated by reference to Exhibit 16 of Form 8-K filed by IWO
Holding Inc. on April 23, 2002).
(99.1) Certification by President and Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(99.2) Certification by Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
On April 15, 2002, we filed a Current Report on Form 8-K reporting a "Change in
Control of the Registrant" pursuant to which we disclosed that we were acquired
by US Unwired Inc. through the merger of an indirect, wholly subsidiary of US
Unwired Inc. into IWO Holdings, Inc.
On April 30, 2002, we filed a Current Report on Form 8-K pursuant to which we
disclosed that effective April 23, 2002, we dismissed our independent
accountant, PricewaterhouseCoopers ("PwC") and engaged Ernst & Young, the
existing independent accountant of US Unwired Inc. The Current Report further
stated that 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 9, 2002 IWO HOLDINGS, INC.
By: /s/ Jerry E. Vaughn
---------------------------
Jerry E. Vaughn
Chief Financial Officer
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