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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
________________.
Commission file number ...333-39746
IWO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 14-1818487
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Lakeshore Drive
Lake Charles, LA 70601
(Address of principal executive offices) (Zip code)
(337) 436-9000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.___
---
Part I - Financial Information
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ............................................... 3
Condensed Consolidated Statements of Operations ..................................... 4
Condensed Consolidated Statements of Cash Flows ..................................... 5
Notes to Condensed Consolidated Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................................... 17
Item 4. Controls and Procedures ............................................................. 25
Part II - Other Information
Item 5. Other Information ................................................................... 25
Item 6. Exhibits and Reports on Form 8-K .................................................... 45
Signatures ......................................................................................... 45
Certification Chief Executive Officer .............................................................. 46
Certification Chief Financial Officer .............................................................. 47
2
Part I Financial Information
Item 1. Financial Statements
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
------------ -----------
2002 2001
---- ----
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 3,695 $ 3,394
Investment securities at amortized cost - held to maturity 33,995 56,519
Restricted cash and US Treasury securities at amortized cost - held to maturity 22,957 33,858
Subscriber receivables, net 10,517 10,001
Inventory 3,612 4,375
Prepaid expenses and other assets 3,420 6,790
--------- ---------
Total current assets 78,196 114,937
Restricted cash and US Treasury securities at amortized cost - held to maturity 18,028 27,861
Property and equipment, net 184,659 176,226
Goodwill and other intangibles, net 491,426 52,702
Note receivable 174 194
Other assets 22,283 24,040
Investment securities at amortized cost - held to maturity -- 17,161
--------- ---------
Total assets $ 794,766 $ 413,121
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,409 $ 16,264
Accrued expenses 30,988 43,463
--------- ---------
Total current liabilities 41,397 59,727
Deferred tax liability 19,841 --
Long term obligations 336,694 297,407
Stockholders' equity:
Common stock 1 377
Treasury stock at cost -- (598)
Additional paid in capital 446,449 184,305
Retained deficit (49,616) (128,097)
--------- ---------
Total stockholders' equity 396,834 55,987
--------- ---------
Total liabilities and stockholders' equity $ 794,766 $ 413,121
========= =========
See accompanying notes to condensed consolidated financial statements.
3
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands)
(Unaudited) Three month periods Nine month periods
------------------- ------------------
Three months Three months April 1, 2002 Nine months
ended ended January 1, 2002 through ended
September September through March 31, September 30, September 30,
30, 2002 30, 2001 2002 2002 2001
-------- -------- ---- ---- ----
Revenues:
Subscriber $ 28,970 $ 19,231 $ 25,965 $ 57,397 $ 48,563
Roaming 11,806 10,929 7,014 20,914 23,945
Merchandise sales 1,881 2,366 2,554 3,915 5,231
Other revenue 11 6 3 18 6
--------- --------- --------- --------- ---------
Total revenue 42,668 32,532 35,536 82,244 77,745
Expense:
Cost of service 18,325 18,300 17,532 37,162 46,228
Merchandise cost of sales 2,741 4,646 4,577 5,449 8,894
General and administrative 14,347 8,183 19,382 26,313 22,382
Sales and marketing 11,421 8,717 8,519 20,059 19,917
Non-cash stock compensation -- 26 -- -- 334
Depreciation and amortization 15,326 4,924 5,714 30,031 13,492
--------- --------- --------- --------- ---------
Total operating expense 62,160 44,796 55,724 119,014 111,247
--------- --------- --------- --------- ---------
Operating loss (19,492) (12,264) (20,188) (36,770) (33,502)
Other expense:
Interest expense, net (8,889) (5,822) (6,648) (17,350) (16,011)
--------- --------- --------- --------- ---------
Loss before income tax benefit (28,381) (18,086) (26,836) (54,120) (49,513)
Income tax benefit 1,882 -- -- 4,504 --
--------- --------- --------- --------- ---------
Net loss $ (26,499) $ (18,086) $ (26,836) $ (49,616) $ (49,513)
========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
April 1, Nine
January 1, 2002 months
2002 through through ended
March 31, September September
2002 30, 2002 30, 2001
------------ --------- ---------
Cash flows from operating activities
- ------------------------------------
Net cash used in operating activities
$ (14,868) $ (30,536) $ (32,165)
Cash flows from investing activities
- ------------------------------------
Release of restricted cash and US Treasury securities 10,717 10,682 (53,057)
Payments for the purchase of equipment (29,144) (40,737) (64,188)
Proceeds on maturities of marketable securities 6,000 33,167 28,079
Purchase of marketable securities --- --- (105,328)
------------ --------- ---------
Net cash (used in) provided by investing activities (12,427) 3,112 (194,494)
Cash flows from financing activities
- ------------------------------------
Proceeds from long-term debt 40,000 30,000 220,000
Debt issuance costs --- --- (7,724)
Principal payments of long-term debt (15,000) --- ---
Other financing activities --- 20 620
------------ --------- ---------
Net cash provided by financing activities 25,000 30,020 212,896
------------ --------- ---------
Net (decrease) increase in cash and cash equivalents (2,295) 2,596 (13,763)
Cash and cash equivalents at beginning of period 3,394 1,099 36,313
------------ --------- ---------
Cash and cash equivalents at end of period $ 1,099 $ 3,695 $ 22,550
============ ========= =========
See accompanying notes to condensed consolidated financial statements.
5
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three and
nine-month periods ended September 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002.
The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The condensed consolidated financial statements contained
herein should be read in conjunction with the financial statements and
notes included in the Form 10-K for IWO Holdings, Inc. for the year ended
December 31, 2001, filed on March 26, 2002 with the Securities and Exchange
Commission.
2. Description of the Organization
IWO Holdings, Inc. ("the Company") is principally engaged in the ownership
and operation of wireless personal communications systems ("PCS") in the
northeastern region of the United States.
On April 1, 2002, US Unwired Inc. ("US Unwired") acquired 100% of the
outstanding common stock of the Company, by issuing to the former
stockholders of the Company approximately 39.0 million shares of US Unwired
common stock and reserving approximately 6.9 million additional shares of
US Unwired common stock for issuance upon the exercise of options and
warrants that US Unwired assumed or exchanged in connection with the
acquisition. The acquisition was effected pursuant to a merger of IWO
Holdings, Inc. with a wholly owned subsidiary of US Unwired, Northeast
Unwired, Inc. As a result of the acquisition, the Company became a wholly
owned subsidiary of US Unwired. The purchase accounting effects of this
acquisition have been pushed down from US Unwired to the accompanying
financial statements. Accordingly, the Company has adjusted its equity as
of the acquisition date to reflect the amount paid by US Unwired and
allocated that amount to the assets and liabilities of the Company based on
the initial estimate of their fair values. US Unwired is in the process of
obtaining an independent valuation from a national valuation firm to assist
in the allocation of the purchase price. The Company expects to receive the
final valuation report from the independent national valuation firm before
December 31, 2002. The following summarizes the US Unwired purchase
consideration and the push down of this purchase consideration to the
accompanying financial statements.
(In thousands)
Consideration:
Common stock issued $389,828
Stock options and warrants granted 49,410
Cash, including merger related costs 7,019
--------
Total purchase price $446,257
========
6
Allocated to:
Working capital $ 51,994
Restricted cash and US Treasury obligations 28,100
Investment securities 3,103
Property and equipment 159,919
Deferred financing costs and other assets 21,768
Long-term debt (306,000)
Deferred tax liability (24,345)
Acquired customer base 57,500
Sprint affiliation agreement 215,000
Goodwill 239,218
--------
Total $446,257
========
The Company is amortizing the acquired customer base over a period of 24
months and the Sprint Affiliation agreements over the remaining life of the
agreements - approximately 18 years. None of the above goodwill is expected
to be tax deductible.
As a result of the US Unwired acquisition and the application of push down
accounting that resulted, the Company has adjusted the basis of its assets,
liabilities and shareholders' equity to reflect fair value on the closing
date of the acquisition. As a result of this new basis, our consolidated
balance sheets, results of operations and cash flows for periods subsequent
to April 1, 2002, the closing date of the acquisition, are not comparable to
those prior to the acquisition. The statements of operations and cash flows
of the Company for the three and nine months ended September 30, 2002 are
each presented as two distinct periods; the three months prior to the merger
ended March 31, 2002 and the six months subsequent to the merger ended
September 30, 2002. Certain reclassifications have been made to our
financial statements for periods prior to the acquisition in order to
conform the presentation to the six-month period ended September 30, 2002.
During the three-month period ended September 30, 2002, the Company adjusted
its initial purchase price allocation by $1.5 million for reductions in
certain estimates related to the overall costs of the acquisition, $8.7
million for changes in the Company's initial estimates of working capital
acquired that included reductions of estimated liabilities for circuits,
long distance, commissions and rebates and a $4.2 million reduction in the
Company's estimated property and equipment valuation. These changes resulted
in a decrease to goodwill of $6.0 million.
3. Details of Certain Balance Sheet Accounts
Major categories of property and equipment consisted of the following:
September 30, December 31,
2002 2001
------------- ------------
(In thousands)
Land $ 168 $ 169
Buildings and leasehold improvements 9,149 11,680
Facilities and equipment 152,807 138,923
Furniture, fixtures and vehicles 5,464 8,165
Construction in progress 26,810 37,023
------------- ------------
194,398 195,960
Less accumulated depreciation and amortization 9,739 19,734
------------- ------------
$ 184,659 $ 176,226
============= ============
7
Goodwill and other intangibles consisted of the following:
September 30, December 31,
-------------
2002 2001
------------- ------------
(In thousands)
Goodwill $ 239,218 $ 50,599
Sprint affiliation agreement 215,000 ---
Subscriber base 57,500 14,000
------------- ------------
511,718 64,599
Less accumulated amortization 20,292 11,897
------------- ------------
$ 491,426 $ 52,702
============= ============
4. Long-Term Obligations
Long-term obligations consisted of the following:
September 30, December 31,
-------------
2002 2001
------------- ------------
(In thousands)
Debt outstanding under senior credit facilities:
Bank credit facility $ 200,000 $ 145,000
Senior subordinated discount notes 136,694 152,407
------------- ------------
Long-term obligations $ 336,694 $ 297,407
============= ============
Senior Subordinated Discount Notes - 14%
In February 2001, IWO issued 160,000 units, each consisting of $1,000
principal amount of 14% Senior Notes due January 15, 2011 and one warrant
to purchase 12.50025 shares of IWO's class C common stock at an exercise
price of $7.00 per share. On April 1, 2002, with the acquisition of IWO by
US Unwired, the warrants were converted to US Unwired warrants, and each
warrant is now exercisable for 12.96401 shares of US Unwired's common
stock. Interest is payable semi-annually on January 15 and July 15 of each
year. The gross proceeds from the offering were $160 million. Independent
Wireless One Corporation is the sole guarantor of the Senior Notes. All of
IWO's restricted subsidiaries formed or acquired after the issuance of the
Notes that guarantee the Company's senior credit facility will also
guarantee the Notes. The Notes are not guaranteed by US Unwired Inc. or any
of its subsidiaries.
Concurrent with the closing of the Notes, a portion of the proceeds of the
offering was used to purchase a portfolio of U.S. government securities
that will generate sufficient proceeds to make the first six scheduled
interest payments on the Senior Notes through January 2004. The account
holding the investment securities and all of the securities and other items
contained in the account have been pledged to the trustee for the benefit
of the holders of the Notes.
Senior Bank Credit Facility - $240 million
Effective December 2000, Independent Wireless One Corporation, a wholly
owned subsidiary of the Company, entered into an amended and restated
secured bank credit facility under which it may borrow up to $240 million
in the aggregate consisting of up to $70 million in revolving loans and
$170 million in term loans. The senior bank credit facility matures in
2008. The term loans will be repaid in quarterly installments beginning in
March 2004 and the revolver matures in March 2008. All loans under the
senior bank credit facility bear interest at variable rates tied to the
prime rate, the federal funds rate or LIBOR. The senior bank credit
facility is secured by all of the assets of the Company and its
subsidiaries. At September 30, 2002, the Company had $38.4 million
available under this facility.
The Company must comply with certain financial and operating covenants for
the subordinated discount notes and the senior bank credit facility and at
September 30, 2002 the Company was in compliance with these restrictive
covenants.
8
5. Goodwill and Other Intangible Assets - Adoption of Statement 142
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives.
The Company adopted these new rules on accounting for goodwill and other
intangible assets on January 1, 2002. During the second quarter of 2002,
the Company completed the first of the required impairment tests of
goodwill and indefinite lived assets as of January 1, 2002 and determined
that the adoption of this provision of the new rules had no impact on the
Company's financial statements. The Company intends to perform the first of
the required annual impairment tests of goodwill and indefinite lived
assets in the fourth quarter of 2002.
The following information provides net loss for the three and nine-month
periods ended September 30, 2001 adjusted to exclude amortization expense
recognized in these periods related to goodwill.
Three-month period Nine-month period
ended September 30, ended September 30,
------------------- -------------------
2001 2001
---- ----
(In thousands)
Reported net loss $(18,086) $(49,513)
Add back: Goodwill amortization 668 2,004
-------- --------
Adjusted net loss $(17,418) $(47,509)
======== ========
6. Commitments and Contingencies
The PCS licenses that the Company operates for Sprint PCS are subject to a
requirement that the Company construct network facilities that offer
coverage to 25% of the population or have substantial service in each of
its Basic Trading Areas ("BTAs") within five years from the grant of the
licenses. As of September 30, 2002, management believes that Sprint PCS has
met the requirements necessary for the licenses that the Company operates
for Sprint PCS under the Sprint PCS management agreements.
The Company uses Sprint PCS to process all PCS subscriber billings
including monthly recurring charges, airtime and other charges such as
interconnect fees. The Company pays various fees to Sprint PCS for new
subscribers as well as recurring monthly fees for services performed for
existing customers including billing and management of customer accounts.
Sprint's billing for these services is based upon an estimate of the actual
costs incurred by Sprint PCS to provide such services. At the end of each
calendar year, Sprint PCS compares its actual costs to provide such
services to remittances by the Company for estimated billings and either
refunds overpayments or bills for costs in excess of the payments made.
Based upon information as provided by Sprint PCS, the Company believes it
has adequately provided for the above-mentioned costs in the accompanying
consolidated financial statements. Additionally, Sprint PCS has contracted
with national retailers that sell handsets and service to new PCS
subscribers in the Company's markets. Sprint PCS pays these national
retailers a new subscriber commission and provides handsets to such
retailers below cost. Sprint PCS passes these costs of commissions and the
handset subsidies to the Company.
The Company periodically reviews all charges from Sprint PCS and from time
to time, the Company may dispute certain of these charges. Based upon the
information provided to the Company by Sprint PCS to date, the Company
believes the accompanying condensed consolidated balance sheet adequately
reflects its obligation to Sprint PCS for these charges.
On July 3, 2002, the FCC issued an order, involving Sprint PCS, that PCS
wireless carriers could not unilaterally impose terminating long distance
access charges pursuant to FCC commission rules. This FCC order did not
preclude such charges when a contractual basis existed for such. The
Company has previously recognized only a portion of the terminating long
distance access revenues billed by Sprint PCS and passed to the Company.
The Company believes the accompanying consolidated financial statements
adequately
9
provides for any amounts that may ultimately be determined to be not
collectible in connection with this matter.
7. Income Taxes
The Company's effective income tax rate for the interim periods presented
is based on management's estimate of the Company's effective tax rate for
the applicable year and differs from the federal statutory income tax rate
primarily due to nondeductible permanent differences, state income taxes
and changes in the valuation allowance for deferred tax assets. The
Company's income or loss for tax purposes is included in the income tax
return of the parent. However, the Company's income tax provision is
computed on a separate basis.
8. Condensed Consolidating Financial Information
Independent Wireless One Leased Realty Corporation (the "Non-Guarantor"), a
100% wholly owned subsidiary of Independent Wireless One Corporation, is
precluded from guaranteeing the debt of IWO Holdings, Inc. based on current
agreements in effect. Independent Wireless One Corporation is not
restricted from serving as a guarantor of the IWO Holdings, Inc. debt.
Independent Wireless One Leased Realty Corporation holds all of the cell
site leases and certain leases related to the retail stores and tower site
leases. Operating expenses are comprised of rent expense from these leases.
Independent Wireless One Leased Realty Corporation has charged Independent
Wireless One Corporation a fee equal to its rent expense for use of its
leased cell sites, office and retail space.
The information which follows presents the condensed consolidating balance
sheet as of September 30, 2002 and December 31, 2001 and the condensed
consolidating results of operations and cash flows for the nine-month
periods ended September 30, 2002 and 2001 of (a) the Parent Company, IWO
Holdings, Inc., (b) the "Guarantor", Independent Wireless One Corporation,
and (c) the "Non-Guarantor", Independent Wireless One Leased Realty
Corporation, and includes consolidating entries and the Company on a
consolidated basis.
10
Condensed Consolidating Balance Sheet
September 30, 2002
------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
ASSETS:
- ------
Current Assets
- --------------
Cash and cash equivalents $ -- $ 3,695 $ -- $ -- $ 3,695
Investment securities at amortized cost -
held to maturity -- 33,995 -- -- 33,995
Restricted cash and US Treasury securities
at amortized cost - held to maturity 22,957 -- -- -- 22,957
Subscriber receivables, net -- 10,517 -- -- 10,517
Intercompany receivable (payable) -- 2,807 (2,807) -- --
Inventory -- 3,612 -- -- 3,612
Prepaid expenses and other assets -- 559 2,861 -- 3,420
--------- --------- --------- --------- ---------
Total current assets 22,957 55,185 54 -- 78,196
Restricted cash and US Treasury securities at
amortized cost - held to maturity 10,028 8,000 -- -- 18,028
Investment in subsidiary 505,210 -- -- (505,210) --
Property and equipment, net -- 184,659 -- -- 184,659
Goodwill and other intangible assets, net -- 491,426 -- -- 491,426
Note receivable -- 174 -- -- 174
Other assets -- 22,283 -- -- 22,283
--------- --------- --------- --------- ---------
Total assets $ 538,195 $ 761,727 $ 54 $(505,210) $ 794,766
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ -- $ 10,355 $ 54 $ -- $ 10,409
Accrued expenses 4,667 26,321 -- -- 30,988
--------- --------- --------- --------- ---------
Total current liabilities 4,667 36,676 54 -- 41,397
Deferred tax liability -- 19,841 -- -- 19,841
Long-term obligations 136,694 200,000 -- -- 336,694
--------- ---------
Stockholders' equity:
Common stock 1 -- -- -- 1
Additional paid-in capital 446,449 543,444 -- (543,444) 446,449
Retained deficit (49,616) (38,234) -- 38,234 (49,616)
--------- --------- --------- --------- ---------
Total stockholders' equity 396,834 505,210 -- (505,210) 396,834
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 538,195 $ 761,727 $ 54 $(505,210) $ 794,766
========= ========= ========= ========= =========
11
Condensed Consolidating Balance Sheet
December 31, 2001
-----------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
(In thousands)
ASSETS:
- -------
Current Assets
- --------------
Cash and cash equivalents $ --- $ 3,394 $ --- $ --- $ 3,394
Investment securities at amortized cost -
held to maturity --- 56,519 --- --- 56,519
Restricted cash and US Treasury securities
at amortized cost - held to maturity 33,858 --- --- --- 33,858
Subscriber receivables, net --- 10,001 --- --- 10,001
Intercompany receivable 156,464 55,979 24 (212,467) ---
Inventory --- 4,375 --- --- 4,375
Prepaid expenses and other assets --- 5,128 1,662 --- 6,790
--------- --------- -------- ---------- ---------
Total current assets 190,322 135,396 1,686 (212,467) 114,937
Restricted cash and US Treasury securities at
amortized cost--held to maturity 19,861 8,000 --- --- 27,861
Investment in subsidiary 74,492 --- --- (74,492) ---
Property and equipment, net --- 176,226 --- --- 176,226
Goodwill and other intangible assets, net --- 52,702 --- --- 52,702
Note receivable --- 194 --- --- 194
Other assets --- 24,040 --- --- 24,040
Investment securities at amortized cost--held
to maturity --- 17,161 --- --- 17,161
--------- --------- -------- ---------- ---------
Total assets $ 284,675 $ 413,719 $ 1,686 $ (286,959) $ 413,121
========= ========= ======== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Current liabilities:
Accounts payable $ --- $ 16,264 $ --- $ --- $ 16,264
Intercompany payable 54,317 156,488 1,662 (212,467) ---
Accrued expenses 10,267 33,172 24 --- 43,463
--------- --------- -------- ---------- ---------
Total current liabilities 64,584 205,924 1,686 (212,467) 59,727
Long-term obligations 152,407 145,000 --- --- 297,407
--------- ----------
Stockholders' equity:
Common stock 377 2,750 --- (2,750) 377
Treasury stock at cost (598) --- --- --- (598)
Additional paid-in capital 196,002 173,303 --- (185,000) 184,305
Retained deficit (128,097) (113,258) --- 113,258 (128,097)
--------- --------- -------- ---------- ---------
Total stockholders' equity 67,684 62,795 --- (74,492) 55,987
--------- --------- -------- ---------- ---------
Total liabilities and stockholders' equity $ 284,675 $ 413,719 $ 1,686 $ (286,959) $ 413,121
========= ========= ======== ========== =========
12
Condensed Consolidating Statement of Operations
Three-month period ended September 30, 2002
-------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
--------- ----------- --------------- ------- ------------
(In thousands)
Revenues $ --- $ 42,668 $ 3,529 $ (3,529) $ 42,668
Operating expenses --- 62,160 3,529 (3,529) 62,160
--------- --------- -------- --------- ---------
Operating loss --- (19,492) --- --- (19,492)
Other income (expense), net (5,699) (3,190) --- --- (8,889)
Equity in losses of wholly-owned subsidiaries (20,800) --- --- 20,800 ---
--------- --------- -------- --------- ---------
Loss before income tax benefit (26,499) (22,682) --- 20,800 (28,381)
Income tax benefit --- 1,882 --- --- 1,882
--------- --------- -------- --------- ---------
Net loss $ (26,499) $ (20,800) $ --- $ 20,800 $ (26,499)
========= ========= ======== ========= =========
Condensed Consolidating Statement of Operations
Three-month period ended September 30, 2001
-------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
--------- ----------- --------------- ------- ------------
(In thousands)
Revenues $ --- $ 32,532 $ 2,483 $ (2,483) $ 32,532
Operating expenses --- 44,796 2,483 (2,483) 44,796
--------- --------- -------- --------- ---------
Operating loss --- (12,264) --- --- (12,264)
Other income (expense), net (4,088) (1,734) --- --- (5,822)
Equity in losses of wholly-owned subsidiaries (13,998) --- --- 13,998 ---
--------- --------- -------- --------- ---------
Net loss $ (18,086) $ (13,998) $ --- $ 13,998 $ (18,086)
========= ========= ======== ========= =========
13
Condensed Consolidating Statement of Operations
January 1, 2002 through March 31, 2002
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ----------- --------------- ------- ------------
(In thousands)
Revenues $ --- $ 35,536 $ 3,092 $ (3,092) $ 35,536
Operating expenses --- 55,724 3,092 (3,092) 55,724
---------- ----------- --------------- ------------- ------------
Operating loss --- (20,188) --- --- (20,188)
Other income (expense), net (4,613) (2,035) --- --- (6,648)
Equity in losses of subsidiaries (22,223) --- ---- 22,223 ---
---------- ----------- --------------- ------------- ------------
Loss before income tax benefit (26,836) (22,223) --- 22,223 (26,836)
Income tax benefit --- --- ---- --- ---
---------- ----------- --------------- ------------- ------------
Net loss $ (26,836) $ (22,223) $ --- $ 22,223 $ (26,836)
========== =========== =============== ============= ============
Condensed Consolidating Statement Operations
April 1, 2002 through September 30, 2002
----------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
---------- ----------- --------------- ------------- ------------
(In thousands)
Revenues $ --- $ 82,244 $ 6,744 $ (6,744) $ 82,244
Operating expenses --- 119,014 6,744 (6,744) 119,014
---------- ----------- --------------- ------------- ------------
Operating loss --- (36,770) --- --- (36,770)
Other income (expense), net (11,382) (5,968) --- --- (17,350)
Equity in losses of subsidiaries (38,234) --- --- 38,234 ---
---------- ----------- --------------- -------------- ------------
Net loss before income tax benefit (49,616) (42,738) --- 38,234 (54,120)
Income tax benefit --- 4,504 --- --- 4,504
---------- ----------- --------------- ------------- ------------
Net loss $ (49,616) $ (38,234) $ --- $ 38,234 $ (49,616)
========== =========== =============== ============= ============
14
Condensed Consolidating Statement of Operations
Nine-month period ended September 30, 2001
------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- -------------- ------- ------------
(In thousands)
Revenues $ --- $ 77,745 $ 6,045 $ (6,045) $ 77,745
Operating expenses --- 111,247 6,045 (6,045) 111,247
-------- --------- -------- --------- ---------
Operating loss --- (33,502) --- --- (33,502)
Other income (expense), net (10,680) (5,331) --- --- (16,011)
Equity in losses of subsidiaries (38,833) --- --- 38,833 ---
-------- --------- -------- --------- ---------
Net loss $(49,513) $ (38,833) $ --- $ 38,833 $ (49,513)
======== ========= ======== ========= =========
Condensed Consolidating Statement of Cash Flows
January 1, 2002 through March 31, 2002
--------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- --------------- ------- ------------
(In thousands)
Cash flows from operating activities:
- -------------------------------------
Net cash provided by (used in) operating activities $(10,717) $ (4,151) $ --- $ --- $ (14,868)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities 10,717 --- --- --- 10,717
Payments for the purchase of equipment --- (29,144) --- --- (29,144)
Maturities of marketable securities --- 6,000 --- --- 6,000
-------- --------- -------- --------- ---------
Net cash provided by (used in) investing activities 10,717 (23,144) --- --- (12,427)
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt --- 40,000 --- --- 40,000
Principal payments of long-term debt --- (15,000) --- --- (15,000)
-------- --------- -------- --------- ---------
Net cash provided by (used in) financing activities --- 25,000 --- --- 25,000
-------- --------- -------- --------- ---------
Net decrease in cash and cash equivalents --- (2,295) --- --- (2,295)
Cash and cash equivalents at beginning of period --- 3,394 --- --- 3,394
-------- --------- -------- --------- ---------
Cash and cash equivalents at end of period $ --- $ 1,099 $ --- $ --- $ 1,099
======== ========= ======== ========= =========
15
Condensed Consolidating Statement of Cash Flows
April 1, 2002 through September 30, 2002
----------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
Cash flows from operating activities: (In thousands)
- -------------------------------------
Net cash provided by (used in) operating
activities $ (10,682) $ (19,854) $ --- $ --- $ (30,536)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities 10,682 --- --- --- 10,682
Payments for the purchase of equipment --- (40,737) --- --- (40,737)
Maturities of marketable securities --- 33,167 --- --- 33,167
--------- --------- --------- ---------- ---------
Net cash provided by (used in) investing
activities 10,682 (7,570) --- --- 3,112
Cash flows from financing activities:
- ------------------------------------
Proceeds from long-term debt --- 30,000 --- --- 30,000
Proceeds from promissory notes --- 20 --- --- 20
--------- --------- ---------- ---------- ---------
Net cash provided by (used in) financing
activities --- 30,020 --- --- 30,020
--------- --------- ---------- ---------- ---------
Net increase in cash and cash equivalents --- 2,596 --- --- 2,596
Cash and cash equivalents at beginning of period --- 1,099 --- --- 1,099
--------- --------- ---------- ---------- ---------
Cash and cash equivalents at end of period $ --- $ 3,695 $ --- $ --- $ 3,695
========= ========= ========== ========== =========
Condensed Consolidating Statement of Cash Flows
Nine-month period ended September 30, 2001
------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
-------- ---------- ------------- ------- ------------
Cash flows from operating activities: (In thousands)
- -------------------------------------
Net cash provided by (used in) operating
activities $(107,167) $ 75,002 $ --- $ --- $ (32,165)
Cash flows from investing activities:
- -------------------------------------
Release of restricted cash and U.S. Treasury
securities (53,057) --- --- --- (53,057)
Payments for the purchase of equipment --- (64,188) --- --- (64,188)
Maturities of marketable securities --- 28,079 --- --- 28,079
Purchase of marketable securities --- (105,328) --- --- (105,328)
--------- --------- ---------- ---------- ---------
Net cash provided by (used in) investing
activities (53,057) (141,437) --- --- (194,494)
Cash flows from financing activities:
- ------------------------------------
Proceeds from long-term debt 160,000 60,000 --- --- 220,000
Debt issuance costs --- (7,724) --- --- (7,724)
Other financing activities 224 396 --- --- 620
--------- --------- ---------- ---------- ---------
Net cash provided by (used in) financing
activities 160,224 52,672 --- --- 212,896
--------- --------- ---------- ---------- ---------
Net decrease in cash and cash equivalents --- (13,763) --- --- (13,763)
Cash and cash equivalents at beginning of period --- 36,313 --- --- 36,313
--------- --------- ---------- ---------- ---------
Cash and cash equivalents at end of period $ --- $ 22,550 $ --- $ --- $ 22,550
========= ========= ========== ========== =========
16
9. Subsequent Events
Under the Company's agreements with Sprint PCS, Sprint PCS can change the
current fee ("Travel Rate") that the Company receives and pays for each Sprint
PCS travel minute after December 31, 2002. The Company has received notice from
Sprint PCS that the reciprocal Travel Rate will change $0.10 per minute in 2002
to $0.058 per minute in 2003. Currently the fees that the Company receives from
Sprint PCS for Sprint PCS's customers using the Company's networks exceed those
that the Company pays to Sprint PCS for the Company's customers using Sprint
PCS's network. The change in Travel Rate will likely decrease the Company's
revenues, expenses and the Company's net travel position, which is the
difference between travel revenue and travel expense and will likely increase
the Company's net loss and decrease cash flow from operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plan,
construction schedule, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-looking
statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the investment
considerations described elsewhere, specific factors that might cause such a
difference include, but are not limited to (i) our ability to integrate
operations and finance future growth opportunities; (ii) our dependence on
Sprint PCS; (iii) our ability to expand our Sprint PCS network or to upgrade the
Sprint PCS network to accommodate new technologies; (iv) limited operating
history in the PCS market and anticipation of future losses; (v) potential
fluctuations in operating results; (vi) changes or advances in technology; (vii)
changes in law or government regulation; (viii) competition in the industry and
markets in which we operate; (ix) future acquisitions; (x) our ability to
attract and retain skilled personnel; (xi) our dependence on contractor and
consultant services, network implementation and information technology support;
(xii) our potential inability to expand the services and related products we
provide in the event of substantial increases in demand in excess of supply for
network and handset equipment and related services and products; (xiii) the
availability at acceptable terms of sufficient funds to pay for our business
plans; (xiv) changes in labor, equipment and capital costs; (xv) any inability
to comply with the indentures that govern our senior notes or credit agreements;
(xvi) changes in management; and (xvii) general economic and business
conditions.
You should not rely too heavily on any forward-looking statement. We cannot
assure you that our forward-looking statements will prove to be correct. We have
no obligation to update or revise publicly any forward-looking statement based
on new information, future events or otherwise. This discussion should be read
in conjunction with our financial statements and with the Risk Factors included
in this report under Item 5 Other Information and with the financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Form 10-K for IWO Holdings, Inc. for the year ended December
31, 2001, filed on March 26, 2002 with the Securities and Exchange Commission
("SEC").
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
activation fee revenues and related expense, revenue recognition of credit
challenged customers, contract cancellation fees, inventory reserves, intangible
assets and contingencies. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may vary from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements.
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of customers to make payments. If the financial conditions of our
customers deteriorate, resulting from the customers' inability to
17
make payments, additional allowances will be required.
We provide additional allowances for economically challenged customers that have
been granted limited credit and recognize the revenue only after the customer
has made an initial payment. If these credit challenged customers fail to make
payments after making an initial payment, additional allowances may be required.
We recognize only a portion of contract cancellation fees and late fees billed
to customers that disconnect service prior to fulfilling the contractual length
of service, as there is no assurance that all contract cancellation fees and
late fees that are billed will be collected. If the collections on contract
cancellation fees and late fee are less than that recognized, additional
allowances may be required.
We defer revenues collected for activation fees over the estimated life of the
subscriber relationship, which we believe to be 15-24 months, based upon our
historical trends of average customer lives and discussions with Sprint PCS. We
also defer an activation expense in an amount equal to activation fee revenue
and amortize this expense in an amount equal to the activation fee revenue over
the life of the subscriber relationship. If the estimated life of the subscriber
relationship increases or decreases, the amounts of deferred revenue and
deferred expense will be adjusted over the revised estimated life of the
subscriber relationship.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be necessary.
We accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. Depending on the level of sales
and other factors, our estimates of the amounts accrued for commissions and
other costs owed to such retailers may require modification of our previous
estimates.
We rely on Sprint PCS for much of our billing information and based upon the
timing of that information, make certain assumptions that the information is
accurate and that it is consistent with historical trends. While we believe our
basis for making such assumptions are reasonable, actual results may vary from
these estimates.
Overview
Through our subsidiary, Independent Wireless One Corporation ("IWO"), we provide
wireless personal communication services, commonly referred to as PCS, to an
area containing 6.3 million residents in the northeastern United States. Our
territory extends from suburban New York City (Orange and Sullivan Counties)
north to the Canadian border and reaches from the eastern suburbs of Rochester
to Syracuse, Ithaca, Binghamton and Elmira in central New York State (and
extending into a small portion of north central Pennsylvania), east to include
all of Vermont and New Hampshire (except Nashua, New Hampshire) and a portion of
western Massachusetts. We are a network partner of Sprint PCS, the personal
communications services group of Sprint Corporation. Sprint PCS, directly and
through affiliates like us, provides wireless services in more than 4,000 cities
and communities across the country. We have the exclusive right to provide
digital PCS services under the Sprint(R) and Sprint PCS(R) brand names in our
service area.
On April 1, 2002, 100% of our outstanding stock was acquired by US Unwired Inc.
("US Unwired"). US Unwired provides PCS services and related products to
customers in the southeastern United States as part of Sprint PCS's network. US
Unwired's service area, prior to acquiring us, consisted of 11.3 million
residents in Louisiana, Texas, Florida, Arkansas, Mississippi, Georgia and
Alabama. Each share of our stock was converted to 1.0371 shares of US Unwired
common stock. As a result, approximately 37.6 million outstanding shares of IWO
stock were converted to approximately 39.0 million shares of US Unwired common
stock. In addition, 6.9 million shares of US Unwired common stock were reserved
for issuance upon exercise of IWO options, IWO Founders and Management Warrants
and IWO High Yield Warrants based upon the same conversion ratio.
As a result of the US Unwired acquisition and the application of push down
accounting that resulted, we adjusted the basis of our assets, liabilities and
shareholders' equity to reflect fair value on the closing date of the
acquisition. As a result of this new basis, our consolidated balance sheets,
results of operations and cash flows for periods subsequent to April 1, 2002,
the closing date of the acquisition, are not comparable to those prior to the
acquisition.
18
Our statements of operations and cash flows for the nine months ended September
30, 2002 are presented as two distinct periods; the three months prior to the
merger ended March 31, 2002 and the six months subsequent to the merger ended
September 30, 2002. Certain reclassifications have been made to our financial
statements for periods prior to the acquisition in order to conform the
presentation to the six-month period ended September 30, 2002.
For discussion purposes, we have combined the three-month period of January 1,
2002 to March 31, 2002 (pre-acquisition period) and the six-month period of
April 1, 2002 to September 30, 2002 (post-acquisition period) for comparison to
the nine month period ended September 30, 2001.
For the three months ended For the nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Subscriber $ 28,970 $ 19,231 $ 83,362 $ 48,563
Roaming 11,806 10,929 27,928 23,945
Merchandise sales 1,881 2,366 6,469 5,231
Other revenue 11 6 21 6
--------- --------- --------- ---------
Total revenue 42,668 32,532 117,780 77,745
Expense:
Cost of service 18,325 18,300 54,694 46,228
Merchandise cost of sales 2,741 4,646 10,026 8,894
General and administrative 14,347 8,183 45,695 22,382
Sales and marketing 11,421 8,717 28,578 19,917
Non-cash stock compensation --- 26 --- 334
Depreciation and amortization 15,326 4,924 35,745 13,492
--------- --------- --------- ---------
Total operating expense 62,160 44,796 174,738 111,247
--------- --------- --------- ---------
Operating loss (19,492) (12,264) (56,958) (33,502)
Other expense:
Interest expense, net (8,889) (5,822) (23,998) (16,011)
--------- --------- --------- ---------
Loss before income tax benefit (28,381) (18,086) (80,956) (49,513)
Income tax benefit 1,882 --- 4,504 ---
--------- --------- --------- ---------
Net loss $ (26,499) $ (18,086) $ (76,452) $ (49,513)
========= ========= ========= =========
For the nine months ended
September 30,
2002 2001
---- ----
Cash flows from operating activities
- ------------------------------------
Net cash used in operating activities $ (45,404) $ (32,165)
Cash flows from investing activities
- ------------------------------------
Release of restricted and US Treasury securities 21,399 (53,057)
Payments for the purchase of equipment (69,881) (64,188)
Proceeds on maturities of marketable securities 39,167 28,079
Purchase of marketable securities --- (105,328)
--------- ---------
Net cash used in investing activities (9,315) (194,494)
Cash flows from financing activities
- ------------------------------------
Proceeds from long-term debt 70,000 220,000
Debt issuance costs --- (7,724)
Principal payments of long-term debt (15,000) ---
Other financing activities 20 620
--------- ---------
Net cash provided by financing activities 55,020 212,896
--------- ---------
Net change in cash and cash equivalents 301 (13,763)
19
Cash and cash equivalents at beginning of period 3,394 36,313
------ -------
Cash and cash equivalents at end of period $3,695 $22,550
====== =======
Three Month Period Ended September 30, 2002 Compared to the Three Month Period
Ended September 30, 2001
Subscriber Additions
As of September 30, 2002, we provided personal communication services to 190,900
customers as compared to 125,800 customers at September 30, 2001. We added 9,100
customers during the three-month period ended September 30, 2002 as compared to
23,200 new customers during the three-month period ended September 30, 2001. The
increased customers are attributable to the expansion of the network within our
existing markets as well as the expansion into new markets within our territory
offset by decreases due to competition in the market place. We do not include in
our customer base an estimate of customers that will not make their initial
payment.
Revenues
Three-month period ended September 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $28,970 $19,231
Roaming revenues 11,806 10,929
Merchandise sales 1,881 2,366
Other revenues 11 6
------- -------
Total revenues $42,668 $32,532
======= =======
Subscriber revenues
Total subscriber revenues were $29.0 million for the three-month period ended
September 30, 2002 as compared to $19.2 million for the three-month period ended
September 30, 2001, representing an increase of $9.8 million and was primarily
the result of an increase in subscribers.
Roaming revenues
Roaming revenues were $11.8 million for the three-month period ended September
30, 2002 as compared to $10.9 million for the three-month period ended September
30, 2001, representing an increase of $.9 million and was primarily the result
of a higher volume of Sprint PCS(R) subscribers traveling through our markets
and the expansion of our network coverage. We are continuing to expand our
service by upgrading network equipment and adding cell sites in certain markets
that we believe will help us provide better service.
Merchandise sales
Merchandise sales were $1.9 million for the three-month period ended September
30, 2002 as compared to $2.4 million for the three-month period ended September
30, 2001, representing an decrease of $.5 million and related to fewer
subscriber additions and higher discounts offered to new subscribers. The cost
of handsets typically exceeds the amount received from our subscribers because
we subsidize the price of handsets to remain competitive in the marketplace.
Operating Expenses
Three-month period ended September 30,
2002 2001
---- ----
(In thousands)
Cost of service $18,325 $18,300
Merchandise cost of sales 2,741 4,646
General & administrative 14,347 8,183
Sales & marketing 11,421 8,717
Non-cash stock compensation --- 26
Depreciation & amortization 15,326 4,924
------- -------
20
Total operating expenses $62,160 $44,796
======= =======
Cost of service
Cost of service was $18.3 million for the three-month period ended September 30,
2002 and three-month period ended September 30, 2001. The increased usage as a
result of our subscriber growth was off set by contractual usage rate decreases
from third party carriers.
Merchandise cost of sales
Merchandise cost of sales was $2.7 million for the three-month period ended
September 30, 2002 as compared to $4.6 million for the three-month period ended
September 30, 2001, representing a decrease of $1.9 million that was primarily
related to fewer subscribers additions. The cost of handsets typically exceeds
the amount received from our subscribers because we subsidize the price of
handsets to remain competitive in the marketplace.
General and administrative expenses
General and administrative expenses were $14.3 million for the three-month
period ended September 30, 2002 as compared to $8.2 million for the three-month
period ended September 30, 2001, representing an increase of $6.1 million and
was primarily related to billing and customer care costs, the Sprint affiliation
fee and bad debt expense due to our increased subscriber base. We are also
evaluating the impact of customer fraud on bad debt expense that occurred by
customers entering incorrect bank information into Sprint PCS's electronic
payment system
Sales and marketing expenses
Sales and marketing expenses were $11.4 million for the three-month period ended
September 30, 2002 as compared to $8.7 million for the three-month period ended
September 30, 2001, representing an increase of $2.7 million that primarily
relates to increases in direct selling headcount and commissions paid for new
subscribers to national third party retailers contracted to sell our product.
Depreciation and amortization expense
Depreciation and amortization expense was $15.3 million for the three-month
period ended September 30, 2002 as compared to $4.9 million for the three-month
period ended September 30, 2001, representing an increase of $10.4 million and
was primarily due to $10.2 million related to the amortization of intangible
assets. Net property and equipment for our PCS markets increased to $184.7
million at September 30, 2002 from $156.1 million at September 30, 2001.
Operating loss
The operating loss was $19.5 million for the three-month period ended September
30, 2002 as compared to $12.3 million for the three-month period ended September
30, 2001, representing an increase of $7.2 million that was primarily due to
increases in subscriber revenue offset by the cost of adding new subscribers and
increased depreciation costs associated with building out our markets.
Other Income/(Expense)
Three-month period
ended September 30,
2002 2001
---- ----
(In thousands)
Interest expense $ (9,476) $ (7,629)
Interest income 587 1,807
--------- ---------
Total other expense $ (8,889) $ (5,822)
========= =========
Interest expense was $9.5 million for the three-month period ended September 30,
2002 as compared to $7.6 million for the three-month period ended September 30,
2001, representing an increase of $1.9 million. The increase in interest expense
resulted from the increase in outstanding debt. Our outstanding debt was $336.7
million at September 30, 2002 as compared to $292.3 million at September 30,
2001.
21
Interest income was $.6 million for the three-month period ended September 30,
2002 as compared to $1.8 million for the three-month period ended September 30,
2001, representing a decrease of $1.2 million. The decrease was primarily due to
less cash and cash equivalents available for investment and a decrease in
interest rates.
Nine-month Period Ended September 30, 2002 Compared to the Nine-month Period
Ended September 30, 2001:
Subscriber Additions
As of September 30, 2002, we provided personal communication services to 190,900
customers as compared to 125,800 customers at September 30, 2001. We added
35,600 customers during the nine-month period ended September 30, 2002 as
compared to 44,200 new customers during the nine-month period ended September
30, 2001. The increased customers are attributable to the expansion of the
network within our existing markets as well as the expansion into new markets
within our territory. We do not include in our customer base an estimate of
customers that never make their initial payment.
Revenues
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $ 83,362 $48,563
Roaming revenues 27,928 23,945
Merchandise sales 6,469 5,231
Other revenues 21 6
-------- -------
Total revenues $117,780 $77,745
======== =======
Subscriber revenues
Total subscriber revenues were $83.4 million for the nine-month period ended
September 30, 2002 as compared to $48.6 million for the nine-month period ended
September 30, 2001, representing an increase of $34.8 million and was primarily
the result of an increase in subscribers.
Roaming revenues
Roaming revenues were $27.9 million for the nine-month period ended September
30, 2002 as compared to $23.9 million for the nine-month period ended September
30, 2001, representing an increase of $4.0 million and was primarily the result
of a higher volume of Sprint PCS(R) subscribers traveling through our markets
and the expansion of our network coverage. We are continuing to expand our
service by upgrading network equipment and adding cell sites in certain markets
that we believe will help us provide better service.
Merchandise sales
Merchandise sales were $6.5 million for the nine-month period ended September
30, 2002 as compared to $5.2 million for the nine-month period ended September
30, 2001, representing an increase of $1.3 million and related to sales to new
subscribers partially offset by an increase in handset discounts. The cost of
handsets typically exceeds the amount received from our subscribers because we
subsidize the price of handsets to remain competitive in the marketplace.
22
Operating Expenses
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Cost of service $ 54,694 $ 46,228
Merchandise cost of sales 10,026 8,894
General & administrative 45,695 22,382
Sales & marketing 28,578 19,917
Non-cash stock compensation --- 334
Depreciation & amortization 35,745 13,492
-------- --------
Total operating expenses $174,738 $111,247
======== ========
Cost of service
Cost of service was $54.7 million for the nine-month period ended September 30,
2002 as compared to $46.2 million for the nine-month period ended September 30,
2001, representing an increase of $8.5 million, which primarily related to an
increase in carrier roaming expenses and circuit and usage costs as a result of
our larger subscriber base and market coverage.
Merchandise cost of sales
Merchandise cost of sales was $10.0 million for the nine-month period ended
September 30, 2002 as compared to $8.9 million for the nine-month period ended
September 30, 2001, representing an increase of $1.1 million and primarily
related to sales to new subscribers. The cost of handsets typically exceeds the
amount received from our subscribers because we subsidize the price of handsets
to remain competitive in the marketplace.
General and administrative expenses
General and administrative expenses were $45.7 million for the nine-month period
ended September 30, 2002 as compared to $22.4 million for the nine-month period
ended September 30, 2001, representing an increase of $23.3 million and was
primarily related to billing and customer care costs, the Sprint affiliation fee
and bad debt expense due to our increased subscriber base and merger related
expenses related to the US Unwired acquisition. We are also evaluating the
impact of customer fraud on bad debt expense that occurred by customers entering
incorrect bank information into Sprint PCS's electronic payment system
Sales and marketing expenses
Sales and marketing expenses were $28.6 million for the nine-month period ended
September 30, 2002 as compared to $19.9 million for the nine-month period ended
September 30, 2001, representing an increase of $8.7 million that primarily
relates to increases in direct selling headcount and commissions paid to local
and national third party retailers contracted to sell our product.
Depreciation and amortization expense
Depreciation and amortization expense was $35.7 million for the nine-month
period ended September 30, 2002 as compared to $13.5 million for the nine-month
period ended September 30, 2001, representing an increase of $22.2 million and
was primarily due to $20.3 million related to the amortization of intangible
assets. Net property and equipment for our PCS markets increased to $184.7
million at September 30, 2002 from $156.1 million at September 30, 2001.
Operating loss
The operating loss was $57.0 million for the nine-month period ended September
30, 2002 as compared to $33.5 million for the nine-month period ended September
30, 2001, representing an increase of $23.5 million that was primarily due to
increases in subscriber revenue offset by the cost of adding new subscribers and
increased depreciation costs associated with building out our markets.
23
Other Income/(Expense)
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Interest expense $ (26,819) $ (21,986)
Interest income 2,821 5,975
--------- ---------
Total other expense $ (23,998) $ (16,011)
========= =========
Interest expense was $26.8 million for the nine-month period ended September 30,
2002 as compared to $22.0 million for the nine-month period ended September 30,
2001, representing an increase of $4.8 million. Our outstanding debt was $336.7
million at September 30, 2002 as compared to $292.3 million at September 30,
2001.
Interest income was $2.8 million for the nine-month period ended September 30,
2002 as compared to $6.0 million for the nine-month period ended September 30,
2001, representing a decrease of $3.2 million. The decrease was primarily due to
less cash and cash equivalents available for investment and a decrease in
interest rates.
Liquidity and Capital Resources
As of September 30, 2002, we had $3.7 million in cash and cash equivalents,
$34.0 million in investment securities, $41.0 million in restricted cash and US
Treasury securities for our senior notes and total availability in revolving
loans under our senior bank credit facility of $38.4 million.
We are an unrestricted subsidiary of US Unwired. Funds available under our
senior bank credit facility and cash flow can only be used by us, and,
respectively, funds available under US Unwired's senior bank credit facility and
cash flow can only be used by US Unwired.
We used $45.4 million of cash in operating activities during the nine-month
period ended September 30, 2002. The $9.3 million of cash used in investing
activities during the nine-month period ended September 30, 2002 includes cash
outlays of $69.9 million for capital expenditures, partially offset by the $21.4
million release of restricted cash and U.S. Treasury securities to be used to
pay interest related to the senior notes, and by $39.2 million in proceeds from
matured investments. The $55.0 million in cash provided by financing activities
during the nine-month period ended September 30, 2002 consisted of the
borrowings under the senior credit facility net of repayments.
A number of factors, including the rapidly changing wireless industry, general
economic uncertainty, lower than expected new subscriber additions, higher rates
of customer turnover, bad debt losses higher than anticipated and unanticipated
charges from Sprint PCS, has caused management to review the assumptions
underlying the business plan for IWO. While these forward-looking projections
are being refined, they indicate that, despite these adverse trends, cash, cash
flow from operations and borrowings from our senior bank credit facility, are
expected to be sufficient to fund operating losses, meet capital expenditure
needs, and service debt requirements for IWO through 2003. Management's
projections contain significant assumptions including projections for new
customer additions, CPGA, capital expenditures, ARPU, churn, bad debt expense,
wireless handset upgrade costs, operating expenses, fees charged by Sprint PCS
and travel revenue and expense. If one or more of these assumptions are not
correct, IWO may not have sufficient sources of cash to meet its cash
requirements through 2003.
The senior bank credit facility, established in December 2000, is subject to
certain restrictive covenants including maintaining certain financial ratios,
attaining defined subscriber growth and network coverage goals, and limiting
annual capital expenditures. A number of factors have changed in our business
that could have an adverse effect on our being able to meet these covenants in
2003, in particular the minimum subscriber covenant. In September, we elected to
discontinue offering Sprint PCS's no deposit Clear Pay product because of
unacceptable high churn rates and bad debt losses. Our decision to focus on
quality customers with increased profitability will impair our ability to add
subscribers at a level to meet the minimum requirements at various times in
2003. If we are unable to amend our senior bank credit facility or obtain the
appropriate waivers, we would not be eligible to borrow under our revolving
credit facility. Without the funds from our senior bank credit facility, we will
not have sufficient liquidity to meet our current business forecast without
significantly reducing our cash expenditures to levels that will impair the
future viability of our business. Moreover, if as a result of covenant
violations, our bank lenders declare our existing loans in default, our
outstanding senior notes would also become in default, and it is unlikely that
we
24
would be able to obtain the funds to repay the banks and the senior note
holders.
As of September 30, 2002, management believes that we are in compliance with
all financial and operational covenants associated with our senior credit
facility, senior notes and agreements with Sprint PCS.
On October 31,2002, IWO made a request to borrow $15 million under its revolving
credit agreement with its banks with proceeds from the borrowing due to IWO on
November 7, 2002. On November 7, 2002 we received $13.2 million from the bank
group with one bank failing to fund its portion of the request. IWO believes
that it met all conditions for the borrowing request and has forwarded a notice
of default to the bank failing to make its funding. Any such failure of our
banks to fund a valid borrowing request leave us with insufficient funds to meet
our cash requirements in 2003 even if we are in compliance with our bank
covenants.
Seasonality
Like the wireless communications industry in general, there is an increase in
subscriber additions in the fourth quarter due to the holiday season. A greater
number of phones sold at holiday promotional prices causes our losses on
merchandise sales to increase. Our sales and marketing expenses increase also
with holiday promotional activities. We generally have the weakest demand for
new wireless services during the summer. We expect these trends to continue
based on historical operating results.
Item 4. Controls and Procedures
In September, an evaluation was performed under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of the evaluation date. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation date.
Part II Other Information
Item 5. Other Information
RISK FACTORS
In addition to the other information included in this document and incorporated
into it by reference, you should carefully consider these risk factors. An
extremely brief overview introduces each of the subsections below. We think the
overview captures the gist of the subsection, but it is not a substitute for
reading the entire subsection.
Introduction
IWO Holdings, Inc. ("IWO") is principally engaged in the ownership and operation
of wireless personal communications system ("PCS"). IWO has its own Sprint PCS
territory and its own agreement with Sprint PCS. On April 1, 2002, IWO was
acquired by US Unwired. "We" and "our" refer collectively to IWO Holdings, Inc.
and its subsidiaries.
Risks Related to Our Merger
Overview of this subsection: We will not achieve the benefits of our merger with
US Unwired unless we successfully integrate the operations of territories that
are geographically separated from each other. The separate debt of US Unwired
and IWO will make this integration more difficult. Our merger expenses were
approximately $7.7 million, which was paid from our cash reserves.
Our integration with US unwired presents significant challenges.
We entered into the merger agreement with US Unwired with the expectation that
the merger will result in expanding our existing network and customer base and
taking advantage of the best operating practices of both organizations.
Achieving the benefits of the mergers will depend in part on integrating the
operations of both companies in an efficient manner. We cannot assure you that
this will occur. To realize the anticipated benefits of
25
this combination, our management team must develop strategies and implement a
business plan that will successfully:
. manage the combined company's networks and markets;
. maintain adequate focus on existing business and operations while
working to integrate both companies;
. combine both companies that do not have extensive operating histories
in the PCS market;
. manage each company's cash and available credit lines for use in
financing future growth and working capital needs;
. manage the marketing and sales of each of both companies;
. manage the geographic distance between the territories of both
companies;
. manage the integration of operational and financial reporting software;
. retain and attract key employees during a period of transition.
The diversion of management's attention from ongoing operations and any
difficulties encountered in the transition and integration process could have a
material adverse effect on our financial condition and results of operations and
cash flows.
Our ability to operate as a combined company will be limited by our and US
Unwired's separate public debt indentures and credit facilities.
In order to comply with the indenture governing US Unwired's senior notes, IWO
was designated as an unrestricted subsidiary of US Unwired. As a result, for
purposes of US Unwired's and IWO's respective public debt indentures, IWO, on
the one hand, and the rest of our companies, on the other hand, will operate as
separate business entities. Due to restrictions in US Unwired's indenture, US
Unwired will be unable to provide direct or indirect credit support to IWO.
Likewise, IWO will be restricted under its debt instruments from paying
dividends or freely transferring money to US Unwired and our other companies.
These restrictions may hinder the combined company's ability to achieve the
anticipated benefits of the merger with US Unwired, react to developments in our
or US Unwired's business or take advantage of business opportunities.
US Unwired and IWO depend on the cash flows of their respective subsidiaries to
satisfy our respective debt obligations.
US Unwired and IWO depend on their respective subsidiaries (other than IWO, in
the case of US Unwired) for cash flow and to service their respective debt
obligations. Existing or future credit agreements may restrict or prohibit IWO's
subsidiaries from paying dividends not only to IWO but also to US Unwired and
our other companies and may also restrict or prohibit subsidiaries of US Unwired
from paying dividends not only to us but also to IWO. State law may also limit
the amount of the dividends that the respective subsidiaries are permitted to
pay.
We may not achieve the anticipated benefits from our mergers.
We believe that certain benefits will result from the merger. We cannot assure
you, however, that integrating our business with US Unwired's, even if completed
in an efficient, effective and timely manner, will result in combined results of
operations and financial condition superior to those that we could have achieved
independently. The success of the transactions for us will depend on revenue
growth or other benefits sufficient to offset the dilutive effects of the
additional shares US Unwired issued in the merger. We cannot assure you that we
will achieve sufficient benefits.
We have incurred significant costs associated with the mergers.
We have incurred significant direct transaction expenses, which have either
been expensed for accounting purposes as incurred or are treated as part of the
total purchase price. In addition, US Unwired has incurred significant direct
26
transaction costs associated with the merger, which are included as a part of
the total purchase price for accounting purposes. In either event, these
expenses have decreased our cash reserves. Further, we are incurring severance
expenses, and we will incur other costs associated with integrating the
companies. We cannot assure you that we will not incur additional material
charges in subsequent quarters to reflect additional costs associated with the
merger.
Risks Related to the Combined Company's Business, Strategy and Operations
Overview of this subsection: We have never operated profitably or achieved
consistent positive cash flow. If that doesn't change, we will not have enough
cash to run our business. Timely expansion or completion of the PCS networks of
our operating subsidiary is a key to our success, but we face numerous
challenges in doing that. Revenues we receive from travelers in our territories
may not meet our expectations.
We have not yet operated our business profitably or achieved consistent positive
cash flow.
We expect to continue to incur significant operating losses and to continue to
generate negative cash flow while we complete and expand our PCS networks and
build our customer base. Our ultimate profitability will depend upon many
factors, including our ability to market our services successfully and operate
our networks efficiently, in addition to numerous other factors that are
described in this "Risk Factors" section. If we fail to achieve at least
positive cash flow within a reasonable period of time, an investment in our 14%
Senior Notes may not have much value.
If we do not successfully manage the operations and expected growth of the
combined company following the merger, our operating performance may be
adversely impacted.
We have limited operating history as a Sprint PCS affiliate. IWO began
operations as a Sprint PCS affiliate on January 5, 2000. Our ability to achieve
and sustain operating profitability will depend upon many factors, including our
ability to effectively market Sprint PCS services and manage customer turnover
rates in their respective markets. In addition, a key factor our operational
performance will depend upon is our ability to manage growth through the
expansion or completion of our network build-out and through implementing the
best practices to increase market penetration in our current and future markets.
Market penetration means the number of people in our markets who use our Sprint
PCS services. To be successful, we will require continued development,
construction, testing, deployment and operation of our network. These activities
are expected to place demands on our managerial, operational and financial
resources
The failure to timely expand or complete the build-out of our network, or to
obtain the equipment needed for completion on a timely basis, may result in a
decrease in the number of expected new PCS subscribers and adversely affect the
results of operations or result in a breach of its agreement with Sprint PCS.
IWO has not yet completed its required build-out. In order to expand or complete
network build-outs, we must successfully lease or otherwise retain rights to a
sufficient number of radio communications and network control sites, complete
the purchase and installation of equipment, build-out the physical
infrastructure and test the network. We must also meet all requirements of our
agreements with Sprint PCS and all FCC requirements. One of these FCC
requirements is that our network must not interfere with microwave radio
systems. Compliance with that requirement could delay or impede expansion or
built-out of our network. Regulatory changes, engineering design changes and
required technological upgrades could affect the number and location of our PCS
towers as well as our ability to obtain sufficient rights to meet their network
build-out expansion goals or requirements. Some of the radio communications and
network control sites required for IWO to complete its required build-out are
likely to require zoning variances or other local governmental or third party
approvals. The local governmental authorities in various locations in IWO's
markets have, at times, placed moratoriums on the construction of additional
cell sites. Any failure by IWO to complete its network build-out on a timely
basis may limit its network capacity and/or reduce the number of its expected
new PCS subscribers, either of which could adversely affect the results of
operations and our financial condition or result in a breach of its agreement
with Sprint PCS.
From time to time, there is considerable demand for the communications equipment
that we need to expand or complete our network, and manufacturers of this
equipment could have substantial backlogs of orders. Competitors who purchase
large quantities of communications equipment may receive priority in the
delivery of this equipment. If we cannot get this equipment, we may fail to
expand or construct our network timely. This could limit our ability
27
to compete effectively or to meet the construction requirements of the FCC or
our Sprint PCS agreements. If we do not meet these construction requirements, we
could breach our agreements with Sprint PCS.
We obtain most of our network equipment from two suppliers. This equipment is
not interchangeable, and we would be materially adversely affected if we could
not obtain this network equipment timely or at all.
Our PCS networks are either Lucent networks, meaning that the network equipment
is supplied by Lucent, or Nortel networks. If additional equipment is needed for
expansion or repair of a network, it must come from Lucent, if the network is a
Lucent network, or Nortel, if the network is a Nortel network, for compatibility
with our existing network equipment. If either of these suppliers should cease
to supply its equipment, or should it delay supplying it, we would be prevented
or delayed in expanding or repairing the affected network.
Any inability to expand our networks, or to keep them repaired, could have a
material adverse effect on us.
If we lose the right to install our equipment on wireless towers or we are
unable to renew expiring leases for wireless towers on favorable terms or at
all, our business and results of operations could be adversely impacted.
Substantially all of our cell sites are installed on leased tower facilities
that are shared with one or more other wireless service providers. In addition,
a large portion of these leased tower sites are owned by a few tower companies.
If a master agreement with one of these tower companies were to terminate, or if
one of these tower companies were unable to support use of its tower sites, we
would have to find new sites or may be required to rebuild the affected portion
of their networks. In addition, the concentration of our cell sites with a few
tower companies could adversely affect our results of operations and financial
condition if we are unable to renew our expiring leases with these tower
companies on favorable terms or at all. If any of the tower leasing companies
that we do business with should experience severe financial difficulties, or
file for bankruptcy protection, our ability to use our towers could be adversely
affected. That, in turn, would adversely affect our revenues and financial
condition if a material number of towers were involved.
The loss of the officers and skilled employees upon whom we depend to operate
our business or the inability to attract additional personnel for the combined
company's growth could adversely affect the combined company's results of
operations.
The combined company's business is managed by a small number of executive
officers. We believe that our future success will depend in part on our
continued ability to retain these executive officers and to attract and retain
highly qualified technical and management personnel for the combined company. We
may not be successful in retaining key personnel or in attracting and retaining
other highly qualified technical and management personnel. We do not maintain
policies of life insurance on our key executives.
Expanding our PCS territory may have a material adverse effect on our business
and reduce the market value of our 14% Senior Notes.
As part of our continuing operating strategy, we may expand our territory
through the grant of additional markets from Sprint PCS or through acquisitions
of other Sprint PCS network partners. These transactions may require the
approval of Sprint PCS and commonly involve a number of risks, including the:
. difficulty of integrating acquired operations and personnel;
. diversion of management's attention;
. disruption of ongoing business;
. impact on our cash and available credit lines for use in financing
future growth and working capital needs;
. inability to retain key personnel;
. inability to successfully incorporate acquired assets and rights into
our service offerings;
. inability to maintain uniform standards, controls, procedures and
policies; and
28
. impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business.
Our service area will be threatened by bad weather, including severe winter
weather, which could cause interruptions in service resulting in increased
expenses and reduced operating results.
Our entire service area is located in the northeastern section of the United
States and could be adversely affected by severe winter storms. We may face
service interruptions for indefinite periods if a winter storm strikes one or
more of our service areas, resulting in increased expenses and reduced operating
results.
Unauthorized use of our networks could disrupt our business.
We will likely incur costs associated with the unauthorized use of our networks,
including administrative and capital costs associated with detecting, monitoring
and reducing the incidence of fraud. Fraud impacts interconnection costs,
capacity costs, administrative costs, fraud prevention costs and payments to
other carriers for unbillable fraudulent roaming.
Because we depend heavily on outsourcing, the inability of third parties to
fulfill their contractual obligations to IWO may materially disrupt its services
or the build-out of its portion of the Sprint PCS network.
Because we outsource portions of our business, it depends heavily on third-party
vendors, suppliers, consultants, contractors and local telephone and utility
companies. We have retained those persons to:
. design and engineer its systems;
. design and construct retail stores;
. obtain permits for the construction of base stations, switch facilities
and towers;
. construct cell sites and switching facilities;
. obtain cell site leases;
. install transmission lines; and
. deploy its wireless personal communications services network systems.
The failure by any of our vendors, suppliers, consultants, contractors or local
telephone and utility companies to fulfill their contractual obligations to IWO
could materially disrupt the operations of our portion of our Sprint PCS network
or its build-out.
IWO's projected build-out plan does not cover all of their territories, which
could make it difficult to maintain profitable customer bases.
Our projected build-out plan for our territory does not cover all areas of our
territories. By the end of 2003, we expect to cover approximately 74% of the
resident population in our territory. Our planned coverage may not adequately
serve the needs of the potential customers in our respective territories or
attract enough subscribers to operate our business successfully. To correct this
potential problem we may have to cover a greater percentage of our territory
than anticipated, which we may not have the financial resources to complete or
may be unable to do profitably.
We may not receive as much Sprint PCS net travel, or roaming, revenue as we
anticipate.
29
We are paid a fee from Sprint PCS for every minute that a Sprint PCS subscriber
based outside of our markets uses the Sprint PCS network in our markets.
Similarly, we pay a fee to Sprint PCS for every minute that a Sprint PCS
subscriber based in our markets uses the Sprint PCS network outside our markets.
Sprint PCS customers from our markets may spend more time in other Sprint PCS
coverage areas than we anticipate and Sprint PCS customers from outside our
markets may spend less time in our markets or may use our services less than we
anticipate. As a result, we may receive less Sprint PCS travel revenue than we
anticipate or we may have to pay more Sprint PCS travel fees than the travel
revenue we collect.
Under our agreements with Sprint PCS, Sprint PCS can change the current fee
called the travel rate, that we receive and pay for each Sprint PCS travel
minute after December 31, 2002. Sprint PCS has notified us that the reciprocal
travel rate will change for IWO from $0.10 per minute in 2002 to $0.058 per
minute in 2003. Currently, the fees we receive for customers of Sprint PCS and
its other network partners using our network exceed those that we pay for our
customers using their networks. We therefore expect the decrease in the travel
rate to decrease both our revenues and expenses from travel as well as our
EBITDA and cash flow from operations, and any such decreases could be material.
Sprint PCS's roaming arrangements may not be competitive with other wireless
service providers, which may restrict our ability to attract and retain
customers and create other risks for us.
We rely on Sprint PCS's roaming arrangements with other wireless service
providers for coverage in some areas where Sprint PCS service is not yet
available. The risks related to these arrangements include:
. the quality of the service provided by another provider during a
roaming call may not approximate the quality of the service provided by
the Sprint PCS network;
. the price of a roaming call off our network may not be competitive with
prices of other wireless companies for roaming calls;
. customers must end a call in progress and initiate a new call when
leaving the Sprint PCS network and entering another wireless network;
. Sprint PCS customers may not be able to use Sprint PCS's advanced
features, such as voicemail notification, while roaming; and
. Sprint PCS or the carriers providing the service may not be able to
provide us with accurate billing information on a timely basis.
If Sprint PCS customers are not able to roam instantaneously or efficiently onto
other wireless networks, we may lose current Sprint PCS subscribers and our
Sprint PCS services will be less attractive to new customers.
Sales of Sprint PCS products and services in our territory by a "reseller" that
is 50% owned by Sprint PCS could reduce our number of subscribers and our
margins.
We allow a company, called a reseller, to sell Sprint PCS products and services
in our territories. Our networks provide the Sprint PCS services that are sold
by the reseller in our territories. We receive income from the reseller that we
consider to be a fair return for this use of our networks, but our margins are
greater when we generate our own subscribers. The reseller is 50% owned by
Sprint PCS.
Risks Particular to the Indebtedness of IWO and US Unwired
Both IWO and US Unwired have separate debt structures. Each of US Unwired and
IWO has issued senior notes, and each of them has senior credit facilities with
banks. Because of restrictions in the indentures governing the senior notes and
the credit agreements governing the senior credit facilities, funds borrowed by
US Unwired may not be used to finance IWO and IWO's subsidiaries but are
available for all of US Unwired's other subsidiaries, including LA Unwired, TX
Unwired and Georgia PCS. Because of the same restrictions, funds borrowed by IWO
may be used only to finance IWO and IWO's subsidiaries.
Overview of this subsection: IWO has very substantial amount of debt. We cannot
borrow from our banks unless we meet the banks' requirements for borrowing. The
economic downturn will make it more difficult to meet these
30
requirements. If we fail to repay our debt on time, our lenders may foreclose on
our assets and, if that occurs, our 14% senior notes will probably be worthless.
We have substantial debt that we may not be able to service; a failure to
service this debt may result in the lenders under this debt taking away assets
of ours.
Our substantial debt will have a number of important consequences for our
operations and our investors, including the following:
. we will have to dedicate a substantial portion of any cash flow from
our operations to the payment of interest on, and principal of, its
debt, which will reduce funds available for other purposes;
. we may not be able to obtain additional financing for unanticipated
capital requirements, capital expenditures, working capital
requirements and other corporate purposes;
. our financing under our senior credit facility, will be at variable
rates of interest, which could result in higher interest expense in the
event of increases in market interest rates; and
Our ability to make payments on our debt will depend upon our future operating
performance, which is subject to general economic and competitive conditions and
to financial, business and other factors, many of which we can not control. If
the cash flow from our operating activities is insufficient, we may take
actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations or may adversely affect our results of
operations. Further, we may be unable to take any of these actions on
satisfactory terms, in a timely manner or at all. The credit facilities and
indentures governing our debt, limit our ability to take several of these
actions, and limits our ability to borrow more money. The failure to generate
sufficient funds to pay our debts or to successfully undertake any of these
actions could, among other things, materially adversely affect the market value
of our 14% senior notes, the US Unwired common stock or result in lenders
controlling the assets of IWO.
If we do not meet all of the conditions required under our credit facility, we
may not be able to draw down all of the funds we anticipate receiving from the
lenders and we may not be able to fund operating losses and working capital
needs.
As of September 30, 2002, we had borrowed $200.0 million under our senior credit
facility. Also, as of September 30, 2002, IWO had $37.7million in unrestricted
cash and investment securities. The availability of the remaining $38.4 million
available under our senior credit facility is subject to IWO meeting all of the
conditions specified by the respective financing documents and, in addition, is
subject at each funding date to specific conditions, including the following:
. that the representations and warranties in our loan documents are true
and correct;
. that our financial and operating covenant tests are satisfied,
including leverage and operating o performance covenants and covenants
relating to earnings before interest, taxes, depreciation and
amortization, referred to as EBITDA; and
. the absence of a default under our loan documents, including its
indenture.
We anticipate that we will need some or all of the funding available under our
senior credit facilities to fund continuing operations. If the assumptions
underlying the business plans of IWO are not correct for market growth,
subscriber additions, churn, revenue from subsidiaries, roaming revenue,
operating expenses (including bad debt losses), unanticipated capital
requirements, capital expenditures, charges for Sprint PCS provided services,
working capital requirements or other corporate charges, they may not meet the
conditions at each funding date, and our senior lenders may not lend some or all
of the remaining amounts under our senior credit facility. If other sources of
funds are not available, we may not be in a position to meet our operating cash
needs or meet our obligations under our agreement with Sprint PCS.
31
Please see the discussion under "Risks Related to Factors Currently Affecting
Our Business," which begins on page 43.
IWO will be in default under its indebtedness if it fails to pass financial and
business tests.
Our senior credit facilities require us to maintain specified financial ratios
and to satisfy specified tests. Collectively, these tests relate to:
. minimum covered population;
. minimum number of subscribers and/or average revenue per subscriber;
. minimum annualized revenues;
. maximum dollar amounts for capital expenditures;
. various leverage tests;
. minimum earnings before interest, taxes, depreciation and amortization,
or EBITDA; and
. maximum EBITDA loss.
If we fail to satisfy any of the financial ratios and tests, we could be in
default under our senior credit facility. In addition to making funds under the
senior credit facility unavailable to IWO, an event of default under our senior
credit facility may prohibit us from paying our senior notes, which would cause
a default under our indenture, or may result in our lenders controlling
substantially all of our assets or accelerating the maturity of the our debt.
Should this occur, the 14% senior notes or common stock of US Unwired may have
little or no value.
Please see the discussion under "Risks Related to Factors Currently Affecting
Our Business," which begins on page 43.
If we need additional financing that we cannot obtain, we may have to change our
network construction plans and modify our business plans.
IWO expects to make significant capital expenditures to complete or expand its
PCS network. Actual expenditures may differ significantly from estimates. IWO
would have to obtain additional financing to fund its network construction or
expansion plans, if:
. existing sources of capital are unavailable or insufficient;
. IWO significantly departs from or changes its business plan;
. IWO experiences unexpected delays or cost overruns in the expansion or
completion of its network, including changes to the schedule or scope
of the network build-out or expansion;
. changes in technology or governmental regulations create unanticipated
costs; or
. Sprint PCS grants IWO more service areas to build out and manage.
We cannot predict whether any additional financing will be available to IWO or
on what terms such financing would be available. If IWO needs additional
financing that it cannot obtain, we will have to change our plans for the
remainder of its network.
IWO's indebtedness place restrictions on it that will limit our operating
flexibility and US Unwired's ability to engage in some transactions.
The respective indentures governing US Unwired's and IWO's senior notes and
their respective senior credit facilities impose material operating and
financial restrictions on US Unwired and its subsidiaries (other than IWO)
32
and on IWO and its subsidiaries. These restrictions may limit their ability to
engage in some transactions, including the following:
. completing designated types of mergers or consolidations;
. creating liens;
. paying dividends or other distributions to their stockholders;
. making investments;
. selling assets;
. repurchasing their common stock;
. changing lines of business;
. borrowing additional money;
. entering into transactions with their affiliates; and
. issuing additional shares of common stock.
These restrictions could also limit their ability to obtain financing by
borrowing money or issuing common stock, refinance or pay principal or interest
on US Unwired's or IWO's outstanding debt, consummate acquisitions for cash or
debt or react to changes in our operating environment. Moreover, these
restrictions could cause the combined company to be at a competitive
disadvantage to competitors who do not have similar restrictions.
If a specified change in control of IWO occurs, it may not be able to buy back
its senior notes as required by its indenture.
If IWO has a change in control as defined under its indenture, it will be
required to offer to buy back all of its outstanding senior notes. We cannot
assure you that IWO will have sufficient funds at the time of a change in
control to perform this obligation or that restrictions in its credit facilities
would allow it to do so. IWO's requirement to buy back its notes upon a change
in control could impair the value of US Unwired common stock or could cause a
default under IWO's indenture which, in turn, would cause a default under its
senior credit facility. In addition, a change in control as defined under IWO's
credit facility would cause it to default under its senior credit facility.
If IWO defaults under its senior credit facility, its lenders may declare its
debt to be immediately due and payable and Sprint PCS may force IWO to sell its
assets to Sprint PCS without stockholder approval.
If IWO defaults under its senior credit facility and it's lenders accelerate the
maturity of it's debt, Sprint PCS has the option to purchase the IWO's assets at
a discount to market value and assume IWO's obligations under its senior credit
facilities without further approval of the stockholders of IWO. If Sprint PCS
does not exercise this option, IWO's lenders may sell its assets to third
parties without further approval of the stockholders of IWO.
If IWO fails to pay the debt under its credit facility, Sprint PCS has the
option of purchasing IWO's loans, giving Sprint PCS certain rights of a creditor
to foreclose on IWO's assets.
Sprint PCS has contractual rights, triggered by an acceleration of the maturity
of the debt under IWO's respective senior credit facility, pursuant to which
Sprint PCS may purchase IWO's obligations to its senior lenders and obtain the
rights of a senior lender. To the extent Sprint PCS purchases these obligations,
Sprint PCS's interests as a creditor could conflict with our interests. Sprint
PCS's rights as a senior lender would enable it to exercise rights with respect
to IWO's assets and its continuing relationship with Sprint PCS in a manner not
otherwise permitted under IWO's Sprint PCS agreements.
Risks Particular to the Combined Company's Relationship with Sprint PCS
33
Overview of this subsection: We depend heavily on Sprint PCS. It performs our
billing, designs and advertises the products and services we sell, and provides
our customer service, in addition to a wide variety of other services. If Sprint
PCS does not succeed, it is highly unlikely that we will succeed. We have little
influence with Sprint PCS under our agreements with it.
The termination of IWO's affiliation with Sprint PCS or Sprint PCS's failure to
perform its obligations under the Sprint PCS agreements would severely restrict
our ability to conduct its business.
IWO does not own any FCC licenses as it operates under the FCC licenses of
Sprint PCS. The ability IWO to offer Sprint PCS products and operate a PCS
network is dependent on its Sprint PCS agreements remaining in effect and not
being terminated.
. These agreements give it the right to use the Sprint(R) and Sprint
PCS(R) brand names and logos and related rights. If it loses these
rights, our operations will be impaired.
. These agreements impose strict requirements on the construction of our
network. IWO has not yet completed construction of its network. If IWO
does not meet these requirements, these agreements may be terminated
and IWO could lose the right to be the provider or sole provider of
Sprint PCS products and services in IWO's service area.
. These agreements require IWO to meet strict technical requirements such
as the percentage of time the network is operative, the percentage of
dropped calls, the ratio of blocked call attempts to total call
attempts, the ratio of call origination to termination failures, and
call transport requirements for links between cell sites, switches and
outside telephone systems. If these and other requirements are not met,
Sprint PCS can terminate the affected agreements.
. The Sprint PCS agreements of IWO may be terminated also if any of
Sprint PCS's FCC licenses are lost or jeopardized, or if IWO becomes
insolvent.
. These agreements give Sprint PCS a substantial amount of influence and
control over the conduct of IWO's business. Sprint PCS may make
decisions that adversely affect IWO's business, like introducing costly
new products that fail in the marketplace or setting the prices for its
national plans at levels that may not be economically sufficient for
IWO's business.
. If the management agreements of IWO with Sprint PCS are terminated or
breached, IWO may be required to o sell its PCS assets to Sprint PCS at
prices that are unfavorable to us or Sprint PCS may be required to
assign IWO some of Sprint PCS's licensed spectrum.
. The management agreements are not perpetual. If Sprint PCS decides not
to renew the management agreements at the expiration of the 20-year
initial term or any 10-year renewal term, IWO would no
longer be a part of the Sprint PCS network. Even with all renewals, the
management agreement with IWO terminates in 50 years, and this
agreement can be terminated at any time for breach of any material
term.
. Sprint PCS is permitted to terminate the management agreement for
breach of any of the material terms of the agreements. These terms
include operational and network requirements that are extremely
technical and detailed and apply to each retail store, cell site and
switch site. Many of these operational and network requirements can be
changed by Sprint PCS with little notice. As a result, IWO may not
always be in compliance with all requirements of the Sprint PCS
agreements. Sprint PCS conducts periodic audits of compliance with
various aspects of its program guidelines and identifies issues it
believes needs to be addressed. There may be substantial costs
associated with remedying any non-compliance, and such costs may
adversely affect our operating results and cash flow.
Sprint PCS may make business decisions that are not in the best interests of
IWO, which may adversely affect the relationships of IWO with customers in its
territories, increase its expenses and/or decrease its revenues.
34
Sprint PCS, under the Sprint PCS agreements, has a substantial amount of
influence and control over the conduct of the businesses of IWO. Accordingly,
Sprint PCS may make decisions that adversely affect, IWO's, business, such as
the following:
. Sprint PCS could price its national plans based on its own objectives
and could set price levels or other terms that may not be economically
sufficient for IWO's, business;
. Sprint PCS could raise the costs for Sprint PCS to perform back office
services for IWO or otherwise seek to increase what we pay Sprint PCS,
or it could reduce levels of services it provides to IWO;
. Sprint PCS has sought to charge us more as a result of launching the
new "third generation" or 3G technology called "one times radio
transmission technology" or 1XRTT;
. Sprint PCS can reduce the travel rate at any date for IWO;
. Sprint PCS prohibits IWO from selling non-Sprint PCS approved
equipment;
. Sprint PCS could develop products and services, or establish credit
policies such as the NDASL program that is described below, that
adversely affected our business;
. Sprint PCS introduced a payment method for subscribers to
pay the cost of service with us. This payment method did not
initially have adequate controls or limitations, and we have
discovered that some fraudulent payments were made to
accounts using this payment method. The controls and
limitations have now been strengthened. We are investigating
the scope of this fraud and its financial impact on us. If
the fraud turns out to be widespread, it could have a
material adverse impact on our results of operations and
financial condition;
. Sprint PCS could keep us from developing our own promotional plans that
we may believe to be necessary to attract new subscribers or from
selling equipment selected by us;
. Sprint PCS could, subject to limitations under IWO's agreement, alter
its network and technical o requirements or request that IWO, build out
additional areas within its territories, which could result in
increased equipment and build-out costs;
. Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint(R) and Sprint PCS(R) brand names, products or services; and
. Sprint PCS could decide not to renew the Sprint PCS agreements or to no
longer perform its obligations, which would severely restrict IWO's
ability to conduct business.
Decisions such as those referred to above could adversely affect our
relationship with our customers by changing products, services and price plans
to which those customers had become accustomed. Should Sprint PCS have a change
of control, or should management of Sprint PCS otherwise change, the pace at
which decisions such as the foregoing occur could accelerate, increasing the
risk of disfavor from customers of IWO.
We deal with Sprint PCS weekly on a variety of issues. Sometimes we disagree
with Sprint PCS or oppose what Sprint PCS would like us to do. This occurs
particularly when Sprint PCS tells us we must adopt business methods or pricing
plans that we think will hurt our business. Because we rely so heavily on our
relationship with Sprint PCS, any deterioration of that relationship or of
Sprint PCS's desire to cooperate with IWO could adversely affect our business.
Change in Sprint PCS products and services may reduce customer additions.
The competitiveness and effective promotion of Sprint PCS products and services
are key factors in our ability to attract and retain customers. For example,
under the Sprint PCS service plans, customers who do not meet certain credit
criteria can nevertheless select any plan offered subject to an account-spending
limit, referred to as ASL, to control credit exposure. Account spending limits
range from $125 to $200 depending on the credit quality of the customer. Prior
to May 2001, all of these customers were required to make a deposit ranging from
$125 to $200 that could be credited against future billings. In May 2001, a new
Sprint PCS program, called NDASL for no
35
deposit account spending limit, eliminated the deposit requirement on certain,
but not all, credit classes. As a result, a significant amount of our new
customer additions have been under the NDASL program. Sprint PCS has replaced
the NDASL program with the "Clear Pay Program" without reinstating the deposit
requirement. The Clear Pay Program is substantially similar to the NDASL program
but with an increased emphasis on payment of outstanding amounts. Under the
Clear Pay Program, customers who do not meet certain credit criteria can select
any plan offered, subject to an account-spending limit. The NDASL program has
had the effect of increasing churn and bad debt expense. Sprint PCS has the
right to end or materially change the terms of the Clear Pay Program. If Sprint
PCS chooses to eliminate the Clear Pay Program or alter its features, the growth
rate we expect to achieve may decrease. Effective September 24, 2002, IWO
reinstated deposits for the Clear Pay program. We believe that reinstatement of
the deposit will reduce the number of potential new customers in these markets.
The inability of Sprint PCS to maintain high quality back office services or
IWO's inability to use Sprint PCS's back office services and third party
vendors' back office systems, could lead to customer dissatisfaction, impair the
ability of IWO to make necessary adjustments to its business plan, increase the
loss of subscribers or otherwise increase, IWO's, costs or adversely affect our
business.
IWO relies on Sprint PCS's internal support systems, including customer care,
billing and other back office support. IWO's, operations could be disrupted if
Sprint PCS is unable to maintain and expand its internal support systems in a
high quality manner, or to efficiently outsource those services and systems
through third party vendors. We expect the rapid expansion of Sprint PCS's
business to continue to pose a significant challenge to its internal support
systems. Additionally, Sprint PCS has relied on third party vendors for a
significant number of important functions and components of its internal support
systems and may continue to rely on these vendors in the future. IWO will depend
on Sprint PCS's willingness to continue to offer these services and to provide
these services effectively and at competitive costs. IWO's, agreements with
Sprint PCS provide that, upon nine months' prior written notice, Sprint PCS may
elect to terminate any of these services. The inability of Sprint PCS to
maintain high quality back office services, or IWO's inability to use Sprint
PCS's back office services and third party vendors' back office systems, could
lead to customer dissatisfaction, increase the loss of subscribers or otherwise
increase IWO's, costs.
Should Sprint PCS fail to deliver timely and accurate information, this may lead
to adverse short-term decisions and inaccurate assumptions in our business plan.
It could also adversely affect our cash flow because Sprint PCS collects our
receivables and sends us a net amount that is based on the financial information
it produces for us.
If Sprint PCS does not complete the construction of its nationwide PCS network,
IWO may not be able to attract and retain customers.
Sprint PCS currently intends to cover a significant portion of the population of
the United States, Puerto Rico and the U.S. Virgin Islands by creating a
nationwide PCS network through its own construction efforts and those of its
network partners like IWO. Sprint PCS is still constructing its nationwide
network and does not yet offer PCS services, either on its own network or
through its roaming agreements, in every city in the United States.
If one of IWO's customers travels in an area where a Sprint PCS or compatible
system is not yet operational, the customer would not be able to make a call on
that area's system unless he or she has a telephone handset that can make calls
on both systems. Generally, these handsets are more costly. Moreover, the Sprint
PCS network does not allow for calls to be transferred without interruption
between the Sprint PCS network and another wireless network. This means that a
customer must end a call in progress and initiate a new call when entering an
area not served by the Sprint PCS network. The quality of the service provided
by another network may not be equal to that of the Sprint PCS network, and IWO's
customers may not be able to use some of the advanced features of its network.
This could result in customer dissatisfaction and loss of customers.
Sprint PCS has entered into management agreements similar to IWO's with
companies in other markets under its nationwide PCS build-out strategy. IWO's
results of operations are dependent on Sprint PCS's national network and, to a
lesser extent, on the networks of Sprint PCS's other network partners. Sprint
PCS's network may not provide nationwide coverage to the same extent as its
competitors, which could adversely affect IWO's ability to attract and retain
customers.
If Sprint PCS does not succeed, or if IWO does not maintain a good relationship
with Sprint PCS, IWO's, business may not succeed.
36
If Sprint PCS has a significant disruption to its business plan or network,
fails to operate its business in an efficient manner, or suffers a weakening of
its brand name, IWO's operations and profitability would likely be impaired. IWO
uses its relationship with Sprint PCS to obtain, at favorable prices, handsets
and the equipment for the construction or expansion and operation of their
networks. Any disruption in their relationships with Sprint PCS could make it
much more difficult for them to obtain this equipment.
If Sprint PCS should have significant financial problems, including bankruptcy,
our PCS business would suffer material adverse consequences that could include
termination or revision of our Sprint PCS agreements. We have no reason to
believe that Sprint PCS will have significant financial problems, including
bankruptcy.
If other Sprint PCS network partners have financial difficulties, the Sprint PCS
network could be disrupted.
Sprint PCS's national network is a combination of networks. The large
metropolitan areas are owned and operated by Sprint PCS, and the areas in
between them are owned and operated by Sprint PCS network partners, all of which
are independent companies like we are. We believe that most, if not all, of
these companies have incurred substantial debt to pay the large cost of building
out their networks.
If other network partners experience financial difficulties, the Sprint PCS
network could be disrupted in the territories of those partners. If the Sprint
PCS agreements of those partners are like ours, Sprint PCS would have the right
to step in and operate the affected territory. Of course this right could be
delayed or hindered by legal proceedings, including any bankruptcy proceeding
relating to the affected network partner.
Material disruptions in the Sprint PCS network would have a material adverse
effect on our ability to attract and retain subscribers.
IWO may have difficulty in obtaining an adequate supply of certain handsets from
Sprint PCS, which could adversely affect IWO's results of operations.
IWO depends on its relationship with Sprint PCS to obtain handsets. Sprint PCS
orders handsets from various manufacturers. IWO could have difficulty obtaining
specific types of handsets in a timely manner if:
. Sprint PCS does not adequately project the need for handsets for
itself, its Sprint PCS network partners and its other third party
distribution channels, particularly in transition to new technologies
such as 3G;
. Sprint PCS gives preference to other distribution channels;
. IWO does not adequately project its need for handsets;
. Sprint PCS modifies its handset logistics and delivery plan in a manner
that restricts or delays, IWO's access to handsets; or
. there is an adverse development in the relationship between Sprint PCS
and its suppliers or vendors.
The occurrence of any of the foregoing could disrupt, IWO's customer service
and/or result in a decrease in IWO's subscribers, which could adversely affect
its results of operations.
Non-renewal or revocation by the FCC of the Sprint PCS licenses that IWO uses
would significantly harm IWO's business.
PCS licenses are subject to renewal and revocation by the FCC. Sprint PCS's
licenses, IWO's territories will begin to expire in 2005 but may be renewed for
additional ten-year terms. There may be opposition to renewal of these licenses
upon their expiration, and the licenses may not be renewed. The FCC has adopted
specific standards to apply to PCS license renewals. Any failure by Sprint PCS
or IWO to comply with these standards could cause revocation or forfeiture of
the licenses for its territories. If any of the licenses of Sprint PCS that we
are using should be lost, IWO would be severely restricted in its ability to
conduct business.
If Sprint PCS does not maintain control over its licensed spectrum, the Sprint
PCS agreements may be terminated, which would result in IWO's inability to
provide PCS service.
37
The FCC requires that license holders like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or managers.
Although the Sprint PCS agreements with IWO reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot assure you that the FCC will agree. If the FCC were to
determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control IWO has agreed with Sprint PCS to use best efforts to
modify the Sprint PCS agreements to comply with applicable law. If IWO cannot
agree with Sprint PCS to modify the Sprint PCS agreements, the agreements may be
terminated. If the Sprint PCS agreements are terminated, IWO would no longer be
a part of the Sprint PCS network and IWO would be severely restricted in its
ability to conduct business.
We have limited rights if Sprint PCS fails to perform its obligations to IWO
under their agreements with Sprint PCS. Should that occur, the consequences to
us would be severe.
If Sprint PCS fails to perform its obligations to IWO, the consequences to us
would be severe. IWO could terminate its Sprint PCS agreements, but in that case
it may have to discontinue its PCS business or to conduct it on a reduced scale.
It would not be permitted to offer Sprint PCS products and services. We would in
these events suffer material adverse consequences to our results of operations
and financial condition. The only remedy of IWO would be to require Sprint PCS
either to purchase its operating assets at a price that would be unfavorable to
us, or to assign to IWO limited amounts of Sprint PCS's licensed spectrum for a
price equal to the greater of 10% of the business value of IWO or Sprint PCS's
original cost for the spectrum plus any costs incurred in relocating microwave
radio systems.
Sprint PCS has notified us of new charges and fees that it intends to pass on to
us. We did not anticipate these charges and fees when we formulated our business
plan and if they are material, they could materially and adversely affect our
results of operations and financial condition.
Sprint PCS has notified us of new charges and fees that we did not expect when
we formulated our business plan. These new charges and fees include:
. Undetermined development costs to upgrade Sprint PCS's billing system
to cover new third generation technology (known as 1XRTT) services
offered to our customers.
. Unspecified charges resulting from the objection by long distance
carriers, including Sprint, to charges they paid to Sprint PCS for the
conclusion of long distance calls in our service territory. Sprint PCS
has paid us what they estimated they would collect from those long
distance carriers, but the long distance carriers are now contesting
whether they were obligated to pay those charges. Sprint PCS has
indicated that it will seek to recover from us any such charges it paid
us but cannot collect from the long distance carriers.
We are discussing with Sprint PCS whether there is a basis for these new charges
and fees under our management agreements and service agreements with Sprint PCS.
If we disagree with Sprint PCS on the validity of these (or any other) new
charges or fees, we have the right to formally dispute the charges or fees. We
cannot now determine whether these charges and fees are material. If they are
material, and if Sprint PCS is entitled to collect them, they could have a
material adverse effect on our results of operations or financial condition or
both.
Sprint PCS's outside auditors periodically review various accounts between
Sprint PCS and its network partners. If errors in these accounts are uncovered,
Sprint PCS may attempt to pass on additional charges to us. If these charges are
material, they could adversely affect our financial condition.
Sprint PCS's outside auditors are in the process of completing a review of
various accounts between Sprint PCS and its network partners to determine if the
accounts have been settled correctly. We have not been notified of the date by
which the auditors will complete their review. If the review identifies errors
in the settlement process, Sprint could pass additional charges on to us. If
these charges are material, they could adversely affect our financial condition.
Risks Particular to the Combined Company's Industry
Overview of this subsection: The wireless telephone industry started out with
just two competitors in each market. Competition is now extreme. There are
numerous competitors, and the result is that prices of wireless services have
dramatically dropped. In addition, other factors affecting our industry are
changing rapidly. If we cannot
38
effectively meet the challenges of these conditions we probably will not
succeed. Activists are seeking new laws that would restrict use of telephones by
drivers, our placement of the towers that carry our transmissions and disposal
of wireless phones. Such laws could adversely impact our business.
Sprint PCS and IWO face intense competition that may reduce its and our market
share and harm its and our financial performance.
There is substantial competition in the telecommunications industry. According
to information it has filed with the SEC, Sprint believes that the traditional
dividing lines between long distance, local, wireless, and Internet services are
increasingly becoming blurred. Through mergers and various service integration
strategies, major providers, including Sprint, are striving to provide
integrated solutions both within and across all geographical markets.
Sprint expects competition to intensify as a result of the entrance of new
competitors and the rapid development of new technologies, products, and
services. Sprint cannot predict which of many possible future technologies,
products, or services will be important to maintain its competitive position or
what expenditures will be required to develop and provide these technologies,
products or services. Sprint's ability to compete successfully will depend on
marketing and on its 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. To the extent Sprint does not keep
pace with technological advances or fails to respond timely to changes in
competitive factors in its industry, it could lose market shares or experience a
decline in revenue and net income.
Each of the markets in which Sprint PCS competes is served by other wireless
service providers, including cellular, enhanced specialized mobile radio, called
ESMR, and PCS operators and resellers. A majority of markets have five or more
CMRS providers. Each of the top 50 metropolitan markets has at least two other
PCS competitors in addition to one ESMR competitor and two cellular incumbents.
Some of these competitors have been operating for a number of years and
currently serve a substantial subscriber base. The FCC recently decided to allow
CMRS providers to own more spectrum, up to 55 MHz, in urban markets and to
eliminate in January 2003 its rule imposing spectrum limits. However, the FCC
plans to continue to review proposed mergers and combinations involving spectrum
after the spectrum limits are eliminated. Competition may continue to increase
to the extent that licenses are transferred from smaller stand-alone operators
to larger, better capitalized, and more experienced wireless communications
operators. These larger wireless communications operators may be able to offer
customers network features not offered by Sprint PCS. The actions of these
larger wireless communications operators could negatively affect Sprint PCS's
and our customer churn, ability to attract new customers, average revenue per
user, cost to acquire customers, and operating costs per customer.
Sprint PCS relies on agreements with competitors to provide automatic roaming
capability to Sprint PCS customers in many of the areas of the United States not
covered by the Sprint PCS network, which primarily serves metropolitan areas.
Certain competitors may be able to offer coverage in areas not served by Sprint
PCS's network or may be able to offer roaming rates that are lower than those
offered by Sprint PCS. Certain of Sprint PCS's competitors are seeking to reduce
access to their networks through actions pending with the FCC. Moreover, the
engineering standard, called AMPS, for the dominant air interface on which PCS
customers roam is currently being considered for elimination by the FCC as part
of a streamlining proceeding. If the FCC eliminates this mandatory standard and
cellular operators cease to offer their AMPS networks for roaming, some Sprint
PCS customers may have difficulty roaming in certain markets.
Some wireless providers, some of which have an infrastructure in place and have
been operating for a number of years, have been upgrading their systems and
provide expanded and digital services to compete with Sprint PCS's services.
Some of these wireless providers require their customers to enter into long-term
contracts, which may make it more difficult for Sprint PCS to attract customers
away from these wireless providers.
Sprint PCS anticipates that market prices for wireless voice services and
products generally will continue to decline in the future as a result of
increased competition. It also expects to face increased competition for access
to distribution channels. Consequently, it may be forced to increase spending
for advertising and promotions. All of this may lead to greater choices for
customers, possible consumer confusion, and increased industry churn.
Significant competition in the wireless communications services industry may
result in IWO's, competitors offering new or better products and services or
lower prices, which could prevent IWO from operating profitably or reduce its
profitability.
39
Competition in the wireless communications industry is intense. We anticipate
that competition will cause the market prices for two-way wireless products and
services to decline in the future. IWO's, ability to compete will depend, in
part, on our ability to anticipate and respond to various competitive factors
affecting the telecommunications industry. Our major competitors include such
wireless companies as Verizon, Cingular, AT&T, Nextel and T-Mobile.
IWO's dependence on Sprint PCS to develop competitive products and services and
the requirement that we obtain Sprint PCS's consent to sell local pricing plans
and equipment that Sprint PCS has not approved may limit their ability to keep
pace with competitors on the introduction of new products, services and
equipment. Some of these competitors are larger than IWO, may have entered the
wireless communications services market before our IWO did, possess greater
resources and more extensive coverage areas, may offer lower rates, and may
market other services, such as landline telephone service, cable television and
internet access, with their wireless communications services. In addition, we
may be at a competitive disadvantage since we may have more debt than some of
our competitors.
Furthermore, there has been a recent trend in the wireless communications
industry towards consolidation of wireless service providers through joint
ventures, reorganizations and acquisitions. We expect this consolidation to lead
to larger competitors over time. We may be unable to compete successfully with
larger companies that have substantially greater resources or that offer more
services than IWO does.
Alternative technologies and current uncertainties in the wireless market may
reduce demand for PCS.
PCS providers in the United States use one of three technological standards.
Even though the three standards share basic characteristics, they are not
compatible or interchangeable with each other. IWO and Sprint PCS use the
standard known as CDMA. If another standard becomes preferred in the industry,
IWO may be at a competitive disadvantage. If Sprint PCS changes its standard,
IWO will need to change ours as well, which will be costly and time consuming.
If IWO cannot change the standard, we may not be able to compete with other
systems.
The wireless communications industry is experiencing significant technological
change, as evidenced by the increasing pace of digital upgrades in existing
analog wireless systems, satellite coverage, evolving industry standards,
ongoing improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences. Technological advances and industry changes could
cause the technology used on IWO's network to become obsolete. Sprint PCS may
not be able to respond to such changes and implement new technology on a timely
basis, or at an acceptable cost.
If Sprint PCS is unable to keep pace with these technological changes or changes
in the wireless communications market based on the effects of consolidation from
the Telecommunications Act of 1996 or from the uncertainty of future government
regulation, the technology used on IWO's network, or our business strategy, may
become obsolete. In addition, wireless carriers are seeking to implement an
upgrade to one times radio transmission technology, or 1XRTT, which is broadly
known as third generation, or 3G, technology throughout the industry. The 3G
technology promises high-speed, always-on Internet connectivity and high-quality
video and audio. We cannot assure you that IWO or Sprint PCS can implement 1XRTT
or 3G technology successfully or on a cost-effective basis.
Regulation by government and taxing agencies may increase IWO's costs of
providing service or require them to change their services, either of which
could impair IWO's financial performance.
Our operations and the operations of Sprint PCS are subject to varying degrees
of regulation by the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the Occupational Safety and
Health Administration and state and local regulatory agencies and legislative
bodies. Adverse decisions or regulation of these regulatory bodies could
negatively impact operations and costs of doing business. For example, changes
in tax laws or the interpretation of existing tax laws by state and local
authorities could subject us to increased income, sales, gross receipts or other
tax costs or require IWO to alter the structure of its current relationship with
Sprint PCS. In addition:
. The loss of Sprint PCS's FCC licenses in IWO's service area, would
impair IWO's business and operating results.
40
. The FCC may revoke any of Sprint PCS's PCS licenses at any time for
cause. Cause could be a failure to o comply with terms of the licenses
or applicable FCC rules. We cannot ensure that Sprint PCS's PCS
licenses will be renewed when they expire.
. The FCC regulates IWO's, relationship with Sprint PCS the Sprint PCS
agreements.
. IWO may need to acquire additional licenses, which may require approval
of regulatory authorities. These regulatory authorities may not grant
approval in a timely manner, if at all.
. All PCS licenses, including Sprint PCS's licenses, are subject to the
FCC's build-out regulations. These regulations require license holders
to offer specified levels of service to the population in their service
areas within set time periods. Even though IWO has developed a
build-out plan that meets these requirements, we may be unable to meet
their build-out schedules. If IWO or Sprint PCS does not meet these
requirements, the FCC could take back the portions of the service area
that are not being served, impose fines, or even revoke the related
licenses.
. The FCC may license additional spectrum for new carriers, which would
increase the competition IWO faces.
The future prospects of IWO are uncertain because the future prospects of the
PCS industry are uncertain.
PCS systems have not operated in the United States for very long, and we cannot
assure you that the operation of these systems in IWO's markets will become
profitable. In addition, we cannot estimate how much demand there will be for
PCS in the IWO's markets or how much competitive pricing pressure there will be.
As a result, the future prospects of the PCS industry, including IWO's
prospects, remain uncertain. The future demand for wireless communications
services in general is uncertain. We also cannot predict what new challenges we
may face in this changing industry environment. If we cannot react promptly and
effectively to these challenges, our business could be materially and adversely
affected.
IWO's business may suffer because subscribers frequently disconnect their
service in the PCS industry. The rate at which these disconnections occur,
called churn, may be even higher in the future.
The PCS industry in general and Sprint PCS in particular have experienced a high
rate of subscribers who disconnect their service. This rate is referred to as
churn. We have experienced even higher churn in recent months due in large part,
we believe, to the NDASL program that Sprint introduced in May 2001 and the
Clear Pay program that replaced NDASL. These programs are described under "Risks
Particular to IWO's Relationship with Sprint PCS." Our future churn rate may be
higher than our historical rate due to intense competition and general economic
conditions, among other factors. Factors that tend to contribute to higher churn
include:
. inability of customers to pay, which caused a significant percentage of
our churn in our quarter ended September 30, 2002. We believe that a
large portion of this churn is attributable to the NDASL and Clear Pay
Program that resulted in subscriber accounts with greater than normal
credit risks.
. our generous handset return policy, which makes it easier to cancel an
account.
. intense competition in our industry.
. performance and coverage of our networks.
. ineffective customer service.
. increases in prices.
. performance and reliability of handsets.
. changes in our products and services.
41
A high rate of PCS subscriber churn could harm the competitive position of IWO
and our results of operations. We subsidize some of the costs of handsets for
our new subscribers, pay commissions for new accounts and incur expenses to
advertise and maintain a distribution network. When we experience a high rate of
churn, we may not receive sufficient revenue to offset these costs.
Use of hand-held phones may pose health risks, which could result in the reduced
use of wireless services or liability for personal injury claims.
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose IWO to potential litigation. Any resulting
decrease in demand for wireless services, or costs of litigation and damage
awards, could impair our ability to achieve and sustain profitability.
IWO may be subject to potential litigation relating to the use of wireless
phones while driving. In addition, several state and local governments are
considering, or have recently adopted, legislation that restricts the use of
wireless handsets by drivers.
Some studies have indicated that some aspects of using wireless phones while
driving may impair drivers' attention in certain circumstances, making accidents
more likely. These concerns could lead to potential litigation relating to
accidents, deaths or serious bodily injuries, or to new restrictions or
regulations on wireless phone use, any of which also could have material adverse
effects on our results of operations.
A number of U.S. state and local governments are considering or have recently
enacted legislation that would restrict or prohibit the use of a wireless
handset while driving a vehicle or, alternatively, require the use of a
hands-free telephone. The state of New York has enacted legislation, effective
November 1, 2001, that bans the use of handheld wireless handsets while driving
a vehicle except in the case of emergencies. The legislation also provides that
effective December 1, 2001, persons who violate this ban are subject to fines of
up to $100 per violation. Legislation of this sort, if continued to be enacted,
would require wireless service providers to provide hands-free enhanced services
such as voice activated dialing and hands-free speaker phones and headsets so
that they can keep generating revenue from their subscribers, who make many of
their calls while on the road. If IWO is unable to provide hands-free services
and products to its subscribers in a timely and adequate fashion, the volume of
wireless phone usage would likely decrease, and the combined company's ability
to generate revenues would suffer.
Environmentalists have asked the FCC to halt the building of towers used for
transmission of wireless signals.
Three environmental groups claim that towers used for transmission of wireless
signals kill migratory birds. They have petitioned the FCC to study how many
birds die from flying into towers. They have asked the FCC to halt tower
construction until the study is completed. If we cannot build new towers, we
cannot complete or expand our networks.
At least one environmental group and one state believe that the disposal of
wireless phones could pose a threat to public health. If new regulations
governing wireless phone disposal are passed, or if our industry does not
develop an efficient disposal or recycling program, our operating costs could
increase.
An environmental research group has argued that the disposal of used wireless
phones could pose a threat to public health because the phones contain small
amounts of toxic chemicals that may leak into the soil and water supply when
they are deposited in landfills. At least one state has begun a study of the
environmental effects of wireless phone disposal and has announced that it will
issue appropriate regulations if the study concludes that those effects could be
harmful. If new and burdensome regulations governing the disposal of wireless
phones are passed in the states covered by our network, or if the PCS industry
cannot develop a cost-effective disposal or recycling program for wireless
phones, our operating costs could increase.
42
Risks Related to Factors Currently Affecting our Business
Overview of this subsection. Our business has recently been challenged by a
number of adverse factors. If these factors do not improve, it is likely that
our business will suffer to the point that we will not meet some of the
covenants in our bank debt agreements. If that occurs and our banks do not agree
to revise our covenants, they would be able to declare a default under our bank
debt and refuse to advance funds to us.
Our business is being adversely affected by slower subscriber growth than we
anticipated, increased churn, higher uncollectible receivables, general economic
conditions and other factors. If our business does not improve it is likely that
we will have to ask our bank lenders to waive compliance with covenants in our
current bank agreements. If they refuse, we would be in default on our bank debt
and our bank lenders could refuse to advance more loans and demand payment of
what we owe them. If payment is demanded, we would also be in default under our
indentures. If these events occur it is likely that we will not have enough cash
to operate.
Our business has been adversely affected in recent months particularly by the
following factors:
. Our subscriber growth has slowed from what we had expected.
. Our churn has increased as described in a risk factor above.
. Our uncollectible accounts have increased.
. General economic conditions in our markets have not been good, further
adversely affecting subscriber growth and churn.
In addition, these are other factors that could contribute to a continuation of
poor business conditions for us. These include:
. Uncertainty whether our expected level of capital expenditures will be
sufficient to support our networks.
. Uncertainty about charges that Sprint PCS may seek to impose on us, as
described above.
. Uncertainty about achieving operating efficiencies from our mergers as
quickly as we expected.
If our adverse business conditions continue, due to the above or other factors
that we do not now anticipate, it is likely that IWO will fail during 2003 to
meet some of the loan covenants with our banks. Loan covenants are promises that
borrowers make either to do or not to do specified things or not to allow
specified things to happen.
A failure to meet a loan covenant has three principal consequences. First, it
permits the lender to refuse to advance additional borrowings. IWO would not
have sufficient cash to operate if they are unable to obtain the proceeds under
their bank loan agreements or comparable amounts from alternative financing
sources. Alternative financing would probably not be available on terms that we
would normally accept. Second, failure to meet a loan covenant allows the lender
to declare the loan to be in default and to insist on payment of all amounts due
under the loan. IWO would not have sufficient cash to repay these loans, and our
failure to repay them, if repayment is demanded by the banks, would allow our
note holders to declare a default under the indentures that govern the notes and
to insist on payment of all amounts due under the notes. If these things happen
and we were unable to work out a debt restructure with our banks and note
holders on mutually acceptable terms, we likely would have no other alternative
than to seek protection under bankruptcy laws. Third, during any time that a
default exists, even if the lenders do not insist on payment, our debt would be
classified as a current liability on our balance sheet and our outside auditors
would place a going concern qualification on their opinion on our financial
statements.
Because of the potentially material adverse consequences of any default on IWO's
bank loans or indentures, IWO plans to ask their bank groups to revise the bank
loan covenants as necessary to keep IWO in compliance with them. We cannot
assure you that our banks will cooperate with us.
On October 31, 2002, IWO made a request to borrow $15,000,000 under its
revolving credit agreement with its bank with proceeds from the borrowing due to
IWO on November 7, 2002. On November 7, 2002 we received $13,200,000 from the
bank group with one bank failing to fund its portion of the request. IWO
believes that it met
43
all conditions for the borrowing request and has forwarded a notice of default
to the bank failing to make its funding. Any such failure of our banks to fund a
valid borrowing request may leave us with insufficient funds to run our business
even if we are in compliance with our bank covenants.
We expect that IWO will continue to be in compliance with our indenture
covenants, other than as a result of any failure to comply with our bank loan
covenants.
For more up-to-date information on the issues discussed above, please see the
subsection "Liquidity and Capital Resources" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section in what is, at
the time you are reading this, our most recent report on Form 10-Q or 10-K,
whichever is the later.
The economic downturn in the United States has caused a general weakening of our
business. If our business in general, and our sales and churn in particular, do
not improve, we may not have the financial and operational performance that we
were expecting.
In recent months, we have not achieved the number of new subscribers that we
expected in our business plan. We attribute this in part to weak economic
conditions in our markets and intense price competition. To make matters worse,
our rate of churn has increased as described above. If the economic downturn
continues, we may have an even lower number of new subscribers and may not be
able to add subscribers on terms we expected. In addition, the weak economy may
hurt our existing subscribers' ability to pay us on time, which may force us to
terminate their service. If these things happen, our financial and operational
performance may suffer.
A recession in the United States involving significantly lowered spending could
continue to negatively affect our results of operations.
Our primary customer base is individual consumers and our accounts receivable
represent unsecured credit. If the economic downturn that the United States and
our territories have recently experienced becomes more pronounced or lasts
longer than currently expected and spending by individual consumers drops
significantly, our business would continue to be negatively affected.
Our allowance for doubtful accounts may not be sufficient to cover uncollectible
accounts.
On an ongoing basis, we estimate the amount of customer receivables that we will
not be able to collect. This allows us to calculate the expected loss on our
receivables for the period we are reporting. Our allowance for doubtful accounts
may underestimate actual unpaid receivables for various reasons, including:
. adverse changes in our churn rate exceeding our estimates;
. adverse changes in the economy generally exceeding our expectations; or
. unanticipated changes in Sprint PCS's products and services.
If our allowance for doubtful accounts is insufficient to cover losses on our
receivables, our business, financial position or results of operations could be
materially adversely affected.
Demand for some of Sprint's communications products and services has been
adversely affected by a downturn in the United States economy as well as changes
in the global economy.
Demand for some of Sprint's communications products and services has been
adversely affected by a downturn in the United States economy as well as changes
in the global economy. According to Sprint, a number of its suppliers have
recently experienced financial challenges. If these suppliers cannot meet their
commitments, Sprint states that it would have to use different vendors and this
could result in delays, interruptions, or additional expenses associated with
the upgrade and expansion of Sprint's networks and the offering of its products
and services. If current general economic conditions continue or worsen, the
revenues, cash flow, and operating results of Sprint PCS could be adversely
affected. Any of these developments could adversely affect our business,
financial position or results of operations.
44
Item 6. Exhibits and Reports on Form 8-K.
a. The following exhibits are filed as part of this report:
(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)
(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
None
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.
November 14, 2002 IWO HOLDINGS, INC.
By: /s/ Jerry E. Vaughn
---------------------------
Jerry E. Vaughn
Chief Financial Officer
45
CERTIFICATION
I, Robert W. Piper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IWO Holdings, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 11, 2002 IWO HOLDINGS, INC.
By: /s/ Robert W. Piper
-------------------------
Robert W. Piper
President, Chief Executive Officer and
Director (Principal Executive Officer)
46
CERTIFICATION
I, Jerry E. Vaughn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IWO Holdings, Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
d. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
e. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
f. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
6. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
c. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
7. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 11, 2002 IWO HOLDINGS, INC.
By: /s/ Jerry E. Vaughn
---------------------------
Jerry E. Vaughn
Chief Financial Officer
47