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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 MARCH 31, 2003 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Page
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Part I - Financial Information
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..................................... 15
Part II - Other Information
Item 4. Controls and Procedures......................................... 21
Item 5. Other Information............................................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 22
Signatures................................................................ 22
Certification by Chief Executive Officer.................................. 23
Certification by Chief Financial Officer.................................. 24
2
Part I Financial Information
Item 1. Financial Statements
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
----------- ------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 26,072 $ 35,008
Restricted cash and US Treasury securities at amortized cost - held to maturity 30,182 33,218
Subscriber receivables, net 10,372 11,843
Inventory 3,675 2,579
Prepaid expenses and other assets 6,221 6,276
Receivables from related parties 25 320
--------- ---------
Total current assets 76,547 89,244
Property and equipment, net 177,777 189,878
Restricted cash -- 8,000
Intangible assets, net 48,048 55,517
Note receivable 160 174
Other assets 16,869 17,612
--------- ---------
Total assets $ 319,401 $ 360,425
========= =========
Liabilities and Stockholder's deficit
Current liabilities:
Accounts payable $ 10,883 $ 14,994
Accrued expenses 29,352 29,320
Current maturities of long-term obligations in default 350,564 --
--------- ---------
Total current liabilities 390,799 44,314
Long term obligations in default -- 350,207
Other 776 951
Stockholder's deficit:
Common stock 1 1
Additional paid in capital 446,449 446,449
Retained deficit (518,624) (481,497)
--------- ---------
Total stockholder's deficit (72,174) (35,047)
--------- ---------
Total liabilities and stockholder's deficit $ 319,401 $ 360,425
========= =========
See accompanying notes to condensed consolidated financial statements.
3
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
For the Three Months
Ended March 31,
--------------------
2003 2002
-------- --------
Revenues:
Subscriber $ 30,073 $ 25,965
Roaming 7,081 7,014
Merchandise sales 1,751 2,554
Other revenue 115 3
-------- --------
Total revenue 39,020 35,536
Expense:
Cost of service 17,478 17,530
Merchandise cost of sales 2,511 4,577
General and administrative 12,978 19,382
Sales and marketing 8,532 8,519
Depreciation and amortization 13,374 5,714
Asset abandonment charge 12,403 --
-------- --------
Total operating expense 67,276 55,722
-------- --------
Operating loss (28,256) (20,186)
Other expense:
Interest expense, net (8,871) (6,650)
-------- --------
Net loss $(37,127) $(26,836)
======== ========
See accompanying notes to condensed consolidated financial statements.
4
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2003 2002
-------- --------
Cash flows from operating activities
Net cash used in operating activities $(15,392) $(14,868)
Cash flows from investing activities
Purchases of property and equipment (4,579) (29,144)
Proceeds on maturities of marketable securities -- 6,000
Release of restricted cash and US Treasury securities 11,035 10,717
Purchase of marketable securities -- --
-------- --------
Net cash provided (used in) by investing activities 6,456 (12,427)
Cash flows from financing activities
Proceeds from long-term debt -- 40,000
Principal payments of long-term debt -- (15,000)
Other financing activities -- --
-------- --------
Net cash provided by financing activities -- 25,000
-------- --------
Net change in cash and cash equivalents (8,936) (2,295)
Cash and cash equivalents at beginning of period 35,008 3,394
-------- --------
Cash and cash equivalents at end of period $ 26,072 $ 1,099
======== ========
See accompanying notes to condensed consolidated financial statements.
5
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(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-month
period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
The condensed consolidated balance sheet at December 31, 2002 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, 2002, filed on March 31, 2003 with the Securities and Exchange
Commission.
2. Description of the Organization
IWO Holdings, Inc. ("the Company" or "IWO") is a wholly owned subsidiary of
US Unwired Inc. ("US Unwired") and is principally engaged in the ownership
and operation of wireless personal communications systems ("PCS") in the
northeastern region of the United States.
Certain reclassifications have been made to the financial statements for
periods prior to the April 1, 2002 acquisition by US Unwired in order to
conform the presentation to the three-month period ended March 31, 2003.
3. Liquidity
The Company has been unable to develop a business plan that provides
sufficient liquidity in 2003, and has engaged in discussions with the
holders of its senior bank credit facility and the holders of the its
senior notes regarding the restructuring of the Company.
As of March 31, 2003, the Company had $26.1 million in cash and cash
equivalents and $30.2 million in restricted cash; availability in revolving
loans under its senior bank credit facility of $25.2 million; and,
indebtedness that consisted of $213.2 million related to its senior bank
credit facility and $137.4 million related to its senior notes for a total
of $350.6 million. A portion of the original proceeds of the senior notes
offering was set aside as restricted cash to make the first six scheduled
interest payments on the senior notes through January 2004. Repayment of
the senior bank credit facility commences in March 2004.
The Company was not in compliance with its restrictive covenants under its
senior bank credit facility at March 31, 2003, and as a result of these
covenant violations, the Company was in default of its senior bank credit
facility. The holders of the senior bank credit facility have the right to
deny the Company access to the remaining $25.2 million of availability as a
result of these covenant violations. Without the remaining $25.2 million,
the Company will not have sufficient liquidity through 2003. The Company is
in discussions with its banking group and note holders to arrive at an
acceptable restructuring to preserve its liquidity. The
6
Company, holders of the senior bank credit facility and holders of the
senior notes have all retained advisors to assist in evaluating
alternatives for the Company.
A default under the Company's senior bank credit facility does not result
in the Company being in default under its senior notes. Should the holders
of the senior bank credit facility accelerate repayment, that acceleration
will serve to trigger a default in the senior notes. Should this occur,
both the holders of the senior bank credit facility and the holders of the
senior notes may demand immediate payment of all outstanding indebtedness.
If the indebtedness is accelerated, the Company does not have sufficient
cash to repay its indebtedness. As a result, the Company would be forced to
seek protection under bankruptcy.
As a result of liquidity challenges, the Company has made the decision to
reduce capital expenditures for network expansion. With the assistance of
its advisors, the Company determined that it does not have sufficient
liquidity, at this time, to complete all cell sites under construction as
of March 31, 2003. As a result, the Company has elected to abandon
construction of cell sites that do not provide a sufficient level of
enhanced coverage. The Company recorded an asset abandonment charge of
$12.4 million during the three-month period ended March 31, 2003 for the
cell sites and the related property leases of these abandoned cell sites.
Included in this asset abandonment charge are cell sites that the Company
is required to construct to meet the build out requirements under its
Sprint management agreement. Failure to complete the build out of its
service area will place the Company in violation of its Sprint management
agreement. As a result, Sprint PCS could declare the Company in default and
take action up to and including termination of its Sprint management
agreement. At March 31, 2003, construction in progress included $13.6
million primarily related to cell sites that the Company plans to complete
and management estimates that completion of these cell sites will require
approximately $10.9 million in additional construction costs to complete
construction and to place these sites in operation. The Company anticipates
that only a portion of these sites will be completed in 2003.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to the Company. Further, the
Company's creditors, lenders and note holders cannot place any liens or
encumbrances on the assets of US Unwired. Should the holders of the senior
bank credit facility place the Company in default, US Unwired's
relationship with the Company may change and several alternatives exist
ranging from US Unwired working for the holders of the senior bank credit
facility and the holders of the senior notes as a manager of the Company's
territory, subject to the approval by Sprint PCS, to no involvement with
the Company at all.
Considering the covenant violations and the actions that may result from
such covenant violations and the operating losses incurred to date, there
is substantial doubt about the Company's ability to continue as a going
concern.
The Company's Business Strategy
The Company has already identified and undertaken several initiatives for
2003. The Company has:
. reinstated the deposit requirement for higher credit risk
subscribers and will request not to participate in any Sprint PCS
programs where the Company's analysis indicates adversely
impacted levels of customer turnover or unsatisfactory economic
returns.
. restructured sales employees' programs to pay higher commissions
on subscribers with better credit ratings.
. revised the local agent commission structure. The Company no
longer offers handset discounts to its local agents and instead
pays higher commissions for subscribers with good credit ratings.
The Company has cancelled and continues to cancel agreements with
local agents that continue to target higher risk subscribers or
provide low economic value.
. introduced a pre-pay program that requires advance payment for
minutes of use. The Company believes that this program offers
higher credit risk subscribers a less stressful environment in
which to subscribe to the Company's service. The Company believes
that there is a lower susceptibility for this credit class of
subscribers to churn than with a post-pay program, and this
service allows these subscribers to better manage their
expenditures for the service provided.
. supplemented Sprint PCS's customer service function with its own
staff that focuses on subscriber retention.
7
. limited its capital expenditures to: (1) capacity and required
technical upgrades of existing equipment, and (2) only adding
additional cell site coverage in areas that will produce positive
cash returns as a result of either new subscriber growth or
decreases in subscriber turnover.
. continued to divest of certain non-revenue producing properties
and, depending on market conditions, will divest of most of the
remaining cell site towers that the Company owns.
. undertaken a corporate wide evaluation of expenses. This includes
the consolidation of functions, divesting of unused and under
utilized facilities, renegotiation of vendor contracts, extension
of vendor payment terms and other cost cutting measures.
. evaluated its markets and is reducing sales staffing levels and
closing retail outlets that do not meet its minimum internal
rates of returns.
. continued to work with Sprint PCS to improve the detail,
timeliness and accuracy of information processed by Sprint PCS on
the Company's behalf.
While the Company believe that these initiatives will have a positive
impact on operating results, the Company cannot state with certainty that
these initiatives will result in its ability to sustain operations beyond
or even to the end of 2003, given the information as discussed above
regarding the Company's indebtedness.
4. Details of Certain Balance Sheet Accounts
Major categories of property and equipment consisted of the following:
March 31, December 31,
2003 2002
---------- ------------
(In thousands)
Land $ 168 $ 168
Buildings and leasehold improvements 9,361 9,352
Facilities and equipment 170,375 164,636
Furniture, fixtures and vehicles 5,814 5,685
Construction in progress 13,625 25,697
-------- --------
199,343 205,538
Less accumulated depreciation and amortization 21,566 15,660
-------- --------
$177,777 $189,878
======== ========
Intangibles consisted of the following:
March 31, December 31,
2003 2002
---------- ------------
(In thousands)
Intangible assets:
Sprint PCS management agreement $19,766 $19,766
Subscriber base 57,500 57,500
------- -------
77,266 77,266
Less: accumulated amortization 29,218 21,749
------- -------
Intangible assets, net $48,048 $55,517
======= =======
5. Long-Term Obligations
Long-term obligations consisted of the following:
March 31, December 31,
2003 2002
---------- ------------
(In thousands)
Senior bank credit facility, in default $213,184 $213,184
Senior subordinated discount notes 137,380 137,023
-------- --------
Long-term obligations 350,564 350,207
Less current maturities, in default 350,564 --
-------- --------
Long-term obligations, excluding current
maturities $ -- $350,207
======== ========
8
The Company is an unrestricted subsidiary of US Unwired. As a result, funds
available under the Company's senior bank credit facility can only be used
by the Company to finance the operations of the Company and, funds
available under US Unwired's senior bank credit facility can only be used
by US Unwired to finance operations of US Unwired.
As of March 31, 2003, there was $25.2 million of availability under the
Company's senior bank credit facility. The Company was not in compliance
with the restrictive covenants under its senior bank credit facility at
March 31, 2003 and as a result of these restrictive covenant violations,
was in default of its senior bank credit facility at March 31, 2003. The
holders of the senior bank credit facility have the right to deny the
Company access to the remaining $25.2 million of availability. As a result
of the covenant violations and the impact of these covenant violations of
the senior bank credit facility as discussed in Note 3, the Company has
classified all outstanding indebtedness of both the senior bank credit
facility and the senior notes as a current liability.
Senior Bank Credit Facility - $240 million
Effective December 2000, Independent Wireless One Corporation, a wholly
owned subsidiary of the Company, entered into amended and restated secured
bank credit facility ("senior 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 reducing 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 collateralized by all of the assets of
the Company and its subsidiaries. The senior bank credit facility is
available only to the Company and its subsidiaries.
Senior Notes - 14%
In February 2001, the Company issued 160,000 units, each consisting of
$1,000 principal amount of 14% Senior Notes ("senior notes") due January
15, 2011 and one warrant to purchase 12.50025 shares of the Company's class
C common stock at an exercise price of $7.00 per share. As a result of US
Unwired's acquisition of the Company in April 2002, this warrant was
converted to a US Unwired warrant to purchase 12.96401 shares of the US
Unwired's common stock at $6.75 per share. Interest is payable
semi-annually on January 15 and July 15 of each year. Independent Wireless
One Corporation, a wholly owned subsidiary of the Company, is the sole
guarantor of the senior notes. All of the Company's restricted subsidiaries
formed or acquired after the issuance of the senior notes that guarantee
the Company's senior bank credit facility will also be required to
guarantee the senior notes. The senior notes are not guaranteed by
Independent Wireless One Realty Corporation, a wholly owned subsidiary of
the Company. Effective April 1, 2002, with the acquisition by US Unwired,
the Company's senior notes were revalued to a fair value of $136.0 million.
The discount is being accreted over the remaining life of the notes using
the effective interest method.
A portion of the original proceeds of the senior notes were used to
purchase a portfolio of U.S. government securities which will generate
sufficient proceeds to make the first six scheduled interest payments on
the senior notes 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 senior notes.
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 March 31, 2003, management believes that Sprint PCS has met
the requirements necessary for the licenses that the Company operates for
Sprint PCS under its 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 PCS'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
9
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.
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 March 31, 2003and December 31, 2002 and the condensed
consolidating results of operations and cash flows for the three-month
periods ended March 31, 2003 and 2002 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
March 31, 2003
------------------------------------------------------------------------
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 $ -- $ 26,072 $ -- $ -- $ 26,072
Investment securities at amortized cost -
held to maturity -- -- -- -- --
Restricted cash and US Treasury securities
at amortized cost - held to maturity 22,182 8,000 -- -- 30,182
Subscriber receivables, net -- 10,372 -- -- 10,372
Intercompany receivable (payable) 160,000 (158,038) (1,937) -- 25
Inventory -- 3,675 -- -- 3,675
Prepaid expenses and other assets -- 4,284 1,937 -- 6,221
--------- --------- ------- --------- ---------
Total current assets 182,182 (105,635) -- -- 76,547
Restricted cash and US Treasury securities at
amortized cost - held to maturity -- -- -- -- --
Investment in subsidiary (112,309) -- -- 112,309 --
Property and equipment, net -- 177,777 -- -- 177,777
Goodwill and other intangible assets, net -- 48,048 -- -- 48,048
Note receivable -- 160 -- -- 160
Other assets -- 16,869 -- -- 16,869
--------- --------- ------- --------- ---------
Total assets $ 69,873 $ 137,219 $ -- $ 112,309 $ 319,401
========= ========= ======= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ -- $ 10,883 $ -- $ -- $ 10,883
Accrued expenses 4,667 24,685 -- -- 29,352
Current maturities of long-term obligations 137,380 213,184 -- -- 350,564
--------- --------- ------- --------- ---------
Total current liabilities 142,047 248,752 -- -- 390,799
Long-term obligations -- -- -- -- --
Other -- 776 -- -- 776
--------- ---------
Stockholder's deficit:
Common stock 1 -- -- -- 1
Additional paid-in capital 446,449 383,444 -- (383,444) 446,449
Retained deficit (518,624) (495,753) -- 495,753 (518,624)
--------- --------- ------- --------- ---------
Total stockholder's equity (deficit) (72,174) (112,309) -- 112,309 (72,174)
--------- --------- ------- --------- ---------
Total liabilities and stockholder's equity
(deficit) $ 69,873 $ 137,219 $ -- $ 112,309 $ 319,401
========= ========= ======= ========= =========
11
Condensed Consolidating Balance Sheet
December 31, 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 $ -- $ 35,008 $ -- $ -- $ 35,008
Investment securities at amortized cost -
held to maturity -- -- -- -- --
Restricted cash and US Treasury securities
at amortized cost - held to maturity 33,218 -- -- -- 33,218
Subscriber receivables, net -- 11,843 -- -- 11,843
Intercompany receivable (payable) 160,000 (156,716) (2,964) -- 320
Inventory -- 2,579 -- -- 2,579
Prepaid expenses and other assets -- 3,312 2,964 -- 6,276
--------- --------- ------- --------- ---------
Total current assets 193,218 (103,974) -- -- 89,244
Restricted cash -- 8,000 -- -- 8,000
Investment in subsidiary (80,975) -- -- 80,975 --
Property and equipment, net -- 189,878 -- -- 189,878
Goodwill and other intangible assets, net -- 55,517 -- -- 55,517
Note receivable -- 174 -- -- 174
Other assets -- 17,612 -- -- 17,612
--------- --------- ------- --------- ---------
Total assets $ 112,243 $ 167,207 $ -- $ 80,975 $ 360,425
========= ========= ======= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ -- $ 14,994 $ -- $ -- $ 14,994
Accrued expenses 10,267 19,053 -- -- 29,320
--------- --------- ------- --------- ---------
Total current liabilities 10,267 34,047 -- -- 44,314
Long-term debt 137,023 213,184 -- -- 350,207
Other -- 951 -- -- 951
Stockholder's deficit:
Common stock 1 -- -- -- 1
Additional paid-in capital 446,449 383,444 -- (383,444) 446,449
Retained deficit (481,497) (464,419) -- 464,419 (481,497)
--------- --------- ------- --------- ---------
Total Stockholder's equity (deficit) (35,047) (80,975) -- 80,975 (35,047)
--------- --------- ------- --------- ---------
Total liabilities and stockholder's equity
(deficit) $ 112,243 $ 167,207 $ -- $ 80,975 $ 360,425
========= ========= ======= ========= =========
12
Condensed Consolidating Statement of Operations
Three-month period ended March 31, 2003
------------------------------------------------------------------------
Independent
IWO Independent Wireless One
Holdings, Wireless Leased Realty
Inc. One Corp. Corp. Consolidating
(Parent) (Guarantor) (Non-guarantor) Entries Consolidated
--------- ----------- --------------- ------------- ------------
(In thousands)
Revenues $ -- $ 39,020 $3,775 $(3,775) $ 39,020
Operating expenses -- 67,276 3,775 (3,775) 67,276
-------- -------- ------ ------- --------
Operating loss -- (28,256) -- -- (28,256)
Other income (expense), net (5,792) (3,079) -- -- (8,871)
Equity in losses of wholly-owned subsidiaries (31,335) -- -- 31,335 --
-------- -------- ------ ------- --------
Net loss $(37,127) $(31,335) $ -- $31,335 $(37,127)
======== ======== ====== ======= ========
Condensed Consolidating Statement of Operations
Three-month period ended 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 -- 55,722 3,092 (3,092) 55,722
-------- -------- ------ ------- --------
Operating loss -- (20,186) -- -- (20,186)
Other income (expense), net (4,613) (2,037) -- -- (6,650)
Equity in losses of wholly-owned subsidiaries (22,223) -- -- 22,223 --
-------- -------- ------ ------- --------
Net loss $(26,836) $(22,223) $ -- $22,223 $(26,836)
======== ======== ====== ======= ========
13
Condensed Consolidating Statement of Cash Flows
Three-month period ended March 31, 2003
------------------------------------------------------------------------
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 $(11,035) $(4,357) $-- $-- $(15,392)
Cash flows from investing activities:
Release of restricted cash and U.S. Treasury
securities 11,035 -- -- -- 11,035
Payments for the purchase of equipment -- (4,579) -- -- (4,579)
Maturities of marketable securities -- -- -- -- --
-------- ------- --- --- --------
Net cash provided by (used in) investing
activities 11,035 (4,579) -- -- 6,456
Cash flows from financing activities:
Proceeds from long-term debt -- -- -- -- --
Proceeds from promissory notes -- -- -- -- --
-------- ------- --- --- --------
Net cash provided by (used in) financing
activities -- -- -- -- --
-------- ------- --- --- --------
Net increase in cash and cash equivalents -- (8,936) -- -- (8,936)
Cash and cash equivalents at beginning of period -- 35,008 -- -- 35,008
-------- ------- --- --- --------
Cash and cash equivalents at end of period $ -- $26,072 $-- $-- $ 26,072
======== ======= === === ========
Condensed Consolidating Statement of Cash Flows
Three-month period ended 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
======== ======== === === ========
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plan,
construction schedule, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-looking
statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the investment
considerations described elsewhere, specific factors that might cause such a
difference include, but are not limited to (i) our ability to integrate
operations and finance future growth opportunities; (ii) our dependence on
Sprint PCS; (iii) our ability to expand our Sprint PCS network or to upgrade the
Sprint PCS network to accommodate new technologies; (iv) limited operating
history in the PCS market and anticipation of future losses; (v) potential
fluctuations in operating results; (vi) changes or advances in technology; (vii)
changes in law or government regulation; (viii) competition in the industry and
markets in which we operate; (ix) future acquisitions; (x) our ability to
attract and retain skilled personnel; (xi) our dependence on contractor and
consultant services, network implementation and information technology support;
(xii) our potential inability to expand the services and related products we
provide in the event of substantial increases in demand in excess of supply for
network and handset equipment and related services and products; (xiii) the
availability at acceptable terms of sufficient funds to pay for our business
plans; (xiv) changes in labor, equipment and capital costs; (xv) any inability
to comply with the indentures that govern our senior notes or credit agreements;
(xvi) changes in management; and (xvii) general economic and business
conditions.
You should not rely too heavily on any forward-looking statement. We cannot
assure you that our forward-looking statements will prove to be correct. We have
no obligation to update or revise publicly any forward-looking statement based
on new information, future events or otherwise. This discussion should be read
in conjunction with our financial statements included in this report and with
the financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K for IWO Holdings, Inc. for
the year ended December 31, 2002, filed on March 31, 2003 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 disclosures of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
activation fee revenues and related expense, revenue recognition of credit
challenged subscribers, contract cancellation fees, inventory reserves,
intangible assets and contingencies. We base our estimates on our historical
experience, the historical experience of Sprint PCS and the historical
experience of other Sprint PCS affiliates and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may vary from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Reliance on Sprint PCS Processing
We rely on Sprint PCS for much of our financial reporting information including:
revenues; commissions paid to national retailers; fees paid for customer care
and billing; roaming revenue and roaming expense on the Sprint PCS and Sprint
PCS affiliate network; and the maintenance of accounts receivable, including
cash collections, the write off of customer balances that are not collectible
and the accuracy of our accounts receivable balance. Based upon the timing of
the information received from Sprint PCS, we make certain assumptions that the
information is accurate and that it is consistent with historical trends. We
also rely upon the evaluation of internal controls as performed by Sprint PCS's
external auditors that were performed in accordance with AICPA Statement on
Auditing Standards (SAS) No. 70.
15
Bad Debt Expense
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of subscribers to make payments. If the financial conditions of
our subscribers deteriorate, resulting in the subscribers' inability to make
payments, additional allowances will be required.
We estimate our allowance by examining the components of our revenue. We
establish a general reserve of all accounts receivable that are estimated to be
uncollectible. In addition, we do not recognize 100% of our late fees or
cancellation fees as revenue because of high uncertainty of the collectibility
of these amounts. Reserves for these amounts are recorded to our allowance for
doubtful accounts. Our evaluation of the adequacy of these amounts includes our
own historical experience and discussions with Sprint PCS and other Sprint PCS
affiliates.
Revenue Recognition
We recognize only a portion of contract cancellation fees billed to subscribers
that disconnect service prior to fulfilling the contractual length of service,
as there is significant uncertainty that all contract cancellation fees that are
billed will be collected. We have very limited information at a detail level
sufficient to perform our own evaluation and rely on Sprint PCS historical
trending to make our estimates. If the collections on contract cancellation fees
are less than that recognized, additional allowances may be required.
We recognize only a portion of late fees billed to subscribers that fail to pay
their bills within the required payment period, as there is no assurance that
all late fees that are billed will be collected. We have very limited
information at a detail level sufficient to perform our own evaluation and rely
on Sprint PCS historical trending to make our estimates. If the collections on
late fees are less than that recognized, additional allowances may be required.
We defer revenues collected for activation fees over the estimated life of the
subscriber relationship, which we believe to be 15-24 months, based upon our
historical trends of average customer lives and discussions with Sprint PCS. We
also defer an activation expense in an amount equal to the activation fee
revenue and amortize this expense in an amount equal to the activation fee
revenue over the life of the subscriber relationship. If the estimated life of
the subscriber relationship increases or decreases, the amounts of deferred
revenue and deferred expense will be adjusted over the revised estimated life of
the subscriber relationship.
Inventory Reserves
We review our inventory quarterly and write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
necessary.
Accrued Commissions
We accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both a commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. We base our accruals on
information provided by Sprint PCS on subscriber additions and recognize that
there are typically timing differences between the point of subscriber
activation and the time that we are invoiced for commissions by Sprint PCS. We
periodically and annually evaluate the adequacy of our accruals through analysis
of historical information and discussions with Sprint PCS. Depending on the
level of sales and other factors, our estimates of the amounts accrued for
commissions and other costs owed to such retailers may require modification of
our previous estimates.
Goodwill and Intangible Assets Impairment Analysis
We perform impairment tests of goodwill and indefinite lived assets as required
by Statements of Financial Accounting Standards No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. The impairment analysis
requires numerous subjective assumptions and estimates to determine fair value
of the respective reporting units as required by FAS No. 142. Depending on level
of sales, our liquidity and other factors, we may be required to recognize
impairment charges in the future.
16
Overview
IWO Holdings, Inc. ("IWO" or "we" or "us" or "our") is a wholly owned subsidiary
of US Unwired Inc. ("US Unwired").
Through our subsidiary, Independent Wireless One Corporation, 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) br names in our
service area.
Certain reclassifications have been made to our financial statements for periods
prior to our April 1, 2002 acquisition by US Unwired in order to conform the
presentation to the three-month period ended March 31, 2003.
Liquidity and Capital Resources
US Unwired has a senior bank credit facility and senior subordinated discount
notes. IWO has a senior bank credit facility and senior notes. US Unwired and
IWO entered into these prior to the acquisition. Under the terms of these debt
instruments, funds available under the US Unwired debt can only be used by US
Unwired, and funds available under the IWO debt can only be used by IWO. US
Unwired is not obligated for the payment of IWO's debt, and IWO is not obligated
for the payment of US Unwired's debt.
Liquidity
We have been unable to develop a business plan that provides sufficient
liquidity in 2003, and we have engaged in discussions with the holders of our
senior bank credit facility and the holders of our senior notes regarding the
restructuring our company.
As of March 31, 2003, we had $26.1 million in cash and cash equivalents and
$30.2 million in restricted cash; availability in revolving loans under our
senior bank credit facility of $25.2 million; and, indebtedness that consisted
of $213.2 million related to our senior bank credit facility and $137.4 million
related to our senior notes for a total of $350.6 million. A portion of the
original proceeds of the senior notes offering was set aside as restricted cash
to make the first six scheduled interest payments on the senior notes through
January 2004. Repayment of the senior bank credit facility commences in March
2004.
We were not in compliance with our restrictive covenants under our senior bank
credit facility at March 31, 2003, and as a result of these covenant violations,
we are in default of our senior bank credit facility. The holders of the senior
bank credit facility have the right to deny us access to the remaining $25.2
million of availability as a result of these covenant violations. Without the
remaining $25.2 million, we will not have sufficient liquidity through 2003. We
are in discussions with our banking group and note holders to arrive at an
acceptable restructuring to preserve our liquidity. We, the holders of the
senior bank credit facility and the holders of the senior notes have all
retained advisors to assist in evaluating alternatives.
A default under our senior bank credit facility does not result in us being in
default under our senior notes. Should the holders of the senior bank credit
facility accelerate repayment, that acceleration will serve to trigger a default
in our senior notes. Should this occur, both the holders of the senior bank
credit facility and the holders of the senior notes may demand immediate payment
of all outstanding indebtedness . If the indebtedness is accelerated, we do not
have sufficient cash to repay its indebtedness. As a result, we would be forced
to seek protection under bankruptcy.
As a result of liquidity challenges, we made the decision to reduce capital
expenditures for network expansion. With the assistance of our advisors, we
determined that we do not have sufficient liquidity, at this time, to complete
all cell sites under construction as of March 31, 2003. As a result, we have
elected to abandon the construction of cell sites that do not provide a
sufficient level of enhanced coverage. We recorded an asset abandonment charge
of
17
$12.4 million during the three-month period ended March 31, 2003 for the cell
sites and the related property leases of these abandoned cell sites. Included in
this asset abandonment charge are cell sites that we are required to construct
to meet the build out requirements under our Sprint management agreement.
Failure to complete the build out of our service area will place us in violation
of our Sprint management agreement. As a result, Sprint PCS could declare us in
default and take action up to and including termination of our Sprint management
agreement. At March 31, 2003, construction in progress included $13.6 million
related to cell sites that we plan to complete, and we estimate that completion
of these cell sites will require approximately $10.9 million in additional
construction costs to complete construction and to place these sites in
operation. We anticipate that only a portion of these sites will be completed in
2003.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to us. Further, our creditors,
lenders and note holders cannot place any liens or encumbrances on the assets of
US Unwired. Should the holders of the senior bank credit facility place us in
default, US Unwired's relationship with us may change and several alternatives
exist ranging from US Unwired working for the holders of the senior bank credit
facility and the holders of the senior notes as a manager of our territory,
subject to the approval by Sprint PCS, to no involvement with us at all.
Considering the covenant violations and the actions that may result from such
covenant violations and the operating losses incurred to date, there is
substantial doubt about our ability to continue as a going concern.
Our Business Strategy
We have already identified and undertaken several initiatives for 2003. We have:
. reinstated the deposit requirement for higher credit risk subscribers
and will request not to participate in any Sprint PCS programs where
our analysis indicates adversely impacted levels of customer turnover
or unsatisfactory economic returns.
. restructured sales employees' programs to pay higher commissions on
subscribers with better credit ratings.
. revised the local agent commission structure. We no longer offer
handset discounts to our local agents and instead pay higher
commissions for subscribers with good credit ratings. We have
cancelled and continue to cancel agreements with local agents that
continue to target higher risk subscribers or provide low economic
value.
. introduced a pre-pay program that requires advance payment for minutes
of use. We believe that this program offers higher credit risk
subscribers a less stressful environment in which to subscribe to our
service. We believe that there is a lower susceptibility for this
credit class of subscribers to churn than with a post-pay program, and
this service allows these subscribers to better manage their
expenditures for the service provided.
. supplemented Sprint PCS's customer service function with our own staff
that focuses on subscriber retention.
. limited our capital expenditures to: (1) capacity and required
technical upgrades of existing equipment, and (2) only adding
additional cell site coverage in areas that will produce positive cash
returns as a result of either new subscriber growth or decreases in
subscriber turnover.
. continued to divest of certain non-revenue producing properties and,
depending on market conditions, will divest of most of the remaining
cell site towers that we own.
. undertaken a corporate wide evaluation of expenses. This includes the
consolidation of functions, divesting of unused and under utilized
facilities, renegotiation of vendor contracts, extension of vendor
payment terms and other cost cutting measures.
. evaluated our markets to reduce sales staffing levels and will close
retail outlets that do not meet our minimum internal rates of returns.
. continued to work with Sprint PCS to improve the detail, timeliness
and accuracy of information processed by Sprint PCS on our behalf.
While we believe that these initiatives will have a positive impact on operating
results, we cannot state with certainty that these initiatives will result in
our ability to sustain operations beyond or even to the end of 2003, given the
information as discussed above regarding our indebtedness.
18
Cash Flows
Net cash used in operating activities during the three-month period ended March
31, 2003 was $15.4 million. Net cash provided by investing activities during the
three-month period ended March 31, 2003 was $6.5 million and included $11.0
million in proceeds of restricted cash offset by $4.6 million for capital
expenditures. Net cash provided by financing activities during the three-month
period ended March 31, 2003 was $0.
Three Month Period Ended March31, 2003 Compared to the Three Month Period Ended
31, 2002
Subscriber Additions
As of March 31, 2003, we provided personal communication services to 205,800
customers as compared to 169,200 customers at March 31, 2002. We added customers
during the three-month period ended March 31, 2003 as compared to 14,000 new
customers during the three-month period ended March 31, 2002. The increase in
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.
Subscriber and Roaming Revenue
Subscriber revenue consists primarily of a basic service plan (where the
customer purchases a pre-allotted number of minutes for voice and/or data
transmission); airtime (which consists of billings for minutes that either
exceed or are not covered by the basic service plan); long distance; and charges
associated with travel outside our service area.
Roaming revenue consists primarily of Sprint PCS travel revenue and foreign
roaming revenue. Sprint PCS travel revenue is generated on a per minute basis
when a Sprint PCS subscriber outside of our markets uses our service when
traveling through our markets. Foreign roaming revenue is generated when a
non-Sprint PCS customer uses our service when traveling through our markets.
Under our agreement with Sprint PCS, we believe that Sprint PCS can change the
travel rate within certain limitations that we receive and pay for each Sprint
PCS travel minute after December 31, 2002. Effective January 1, 2003, Sprint PCS
reduced our reciprocal travel rate from $0.10 per minute in 2002 to $0.058 per
minute in 2003. While we believe that this reduction is not in accordance with
our management agreement with Sprint PCS, we are reviewing our options, but our
recourses against Sprint PCS for this reduction may be limited. Currently the
fees that we receive from Sprint PCS for Sprint PCS's subscribers using our
network exceeds those that we pay to Sprint PCS for our subscribers using Sprint
PCS's network. For the three-month period ended March 31, 2003, the change in
the travel rate has resulted in approximately a $4.0 million decrease to our
revenues, a $3.6 million decrease to our expenses and a $.4 decrease to our net
travel position, which is the difference between travel revenue and travel
expense, increased our net loss by $.4 million and decreased cash flow from
operations by $.4 million.
Revenues
Three-month period ended March 31,
----------------------------------
2003 2002
------- -------
(In thousands)
Subscriber revenues $30,073 $25,965
Roaming revenues 7,081 7,014
Merchandise sales 1,751 2,554
Other revenues 115 3
------- -------
Total revenues $39,020 $35,536
======= =======
Subscriber revenues
Total subscriber revenues were $30.1 million for the three-month period ended
March 31, 2003 as compared to $26.0 million for the three-month period ended
March 31, 2002, representing an increase of $4.1 million and was primarily the
result of an increase in subscribers.
19
Roaming revenues
Roaming revenues were $7.1 million for the three-month period ended March 31,
2003 as compared to $7.0 million for the three-month period ended March 31,
2002, representing an increase of $0.1 million and was the result of an increase
of $4.1 million related to a higher volume of PCS subscribers traveling though
our service area offset by a decrease of $4.0 million related to our decrease in
the roaming revenue rate as discussed in Subscriber and Roaming Revenue above.
Merchandise sales
Merchandise sales were $1.8 million for the three-month period ended March 31,
2003 as compared to $2.6 million for the three-month period ended March 31,
2002, representing an decrease of $0.8 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 March 31,
----------------------------------
2003 2002
------- -------
(In thousands)
Cost of service $17,478 $17,530
Merchandise cost of sales 2,511 4,577
General & administrative 12,978 19,382
Sales & marketing 8,532 8,519
Depreciation & amortization 13,374 5,714
Asset abandonment charge 12,403 --
------- -------
Total operating expenses $67,276 $55,722
======= =======
Cost of service
Cost of service was unchanged at $17.5 million for the three-month period ended
March 31, 2003 and the three-month period ended March 31, 2002. An increase of
$0.6 million in cell lease expenses and escalators of existing leases were
offset by a $0.5 million decrease in roaming expense. The overall decrease in
roaming expense consisted of an increase $3.1 million related to a higher volume
of our subscribers traveling though other Sprint PCS and Sprint PCS affiliate
service area offset by a decrease of $3.6 million related to our decrease in the
roaming revenue rate as discussed in Subscriber and Roaming Revenue above.
Merchandise cost of sales
Merchandise cost of sales was $2.5 million for the three-month period ended
March 31, 2003 as compared to $4.6 million for the three-month period ended
March 31, 2002, representing a decrease of $2.1 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 $13.0 million for the three-month
period ended March 31, 2003 as compared to $19.4 million for the three-month
period ended March 31, 2002, representing a decrease of $6.4 million and was
primarily related to the inclusion of $7.7 million of merger related expenses in
the three-month period ended March 31, 2002 offset by a decrease of $1.0 million
in bad debt expense and a decrease of $200,000 in corporate office rental for
the three-month period ended March 31, 2003.
Sales and marketing expenses
Sales and marketing expenses were unchanged at $8.5 million for the three-month
period ended 30, March 31, 2003
20
and the three-month period ended March 31, 2002.
Depreciation and amortization expense
Depreciation and amortization expense was $13.4 million for the three-month
period ended March 31, 2003 as compared to $5.7 million for the three-month
period ended March 31, 2002, representing an increase of $7.7 million and was
primarily due to $6.6 million related to the amortization of intangible assets
and $1.1 million related to depreciation expense. The amortization of intangible
assets relates to values assigned to the Sprint PCS management agreement and the
subscriber base as a result of our acquisition by US Unwired.
Asset abandonment
As discussed in Liquidity above, we recorded a $12.4 million write off of
construction in progress and related lease expense due to abandoned cell site
construction.
Other Income/(Expense)
Three-month period
ended March 31,
------------------
2003 2002
------- -------
(In thousands)
Interest expense $(9,169) $(8,065)
Interest income 298 1,415
------- -------
Total other expense $(8,871) $(6,650)
======= =======
Interest expense was $9.2 million for the three-month period ended March 31,
2003 as compared to $8.1 million for the three-month period ended March 31,
2002, representing an increase of $1.1 million. The increase in interest expense
resulted from the increase in outstanding debt. Our outstanding debt was $350.6
million at March 31, 2003 as compared to $322.5 million at March 31, 2002.
Interest income was $0.3 million for the three-month period ended March 31, 2003
as compared to $1.4 million for the three-month period ended March 31, 2002,
representing a decrease of $1.1 million. The decrease was primarily due to less
cash and cash equivalents available for investment and a decrease in interest
rates.
Seasonality
Like the wireless communications industry in general, there is an increase in
subscriber additions in the fourth quarter due to the holiday season. A greater
number of phones sold at holiday promotional prices causes our losses on
merchandise sales to increase. Our sales and marketing expenses increase also
with holiday promotional activities. We generally have the weakest demand for
new wireless services during the summer. We expect these trends to continue
based on historical operating results.
Part II Other Information
Item 4. Controls and Procedures
As of March 31, 2003, 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 March 31, 2003. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to March 31, 2003.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
21
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 Form 10-K of IWO
Holdings, Inc. filed on March 31, 2003).
(3)(ii) Bylaws of IWO Holdings, Inc., as amended. (incorporated by
reference to Form 10-K of IWO Holdings, Inc. filed on March 31,
2003).
(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.
May 13, 2003 IWO HOLDINGS, INC.
By: /s/ Jerry E. Vaughn
------------------------------------
Jerry E. Vaughn
Chief Financial Officer
22
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 officer 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.
May 13, 2003 IWO HOLDINGS, INC.
By: /s/ Robert W. Piper
--------------------------------------
Robert W. Piper
President, Chief Executive Officer and
Director (Principal Executive Officer)
23
CERTIFICATION
I, Jerry E. Vaughn, certify that:
5. I have reviewed this quarterly report on Form 10-Q of IWO Holdings, Inc.:
6. 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;
7. 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;
8. The registrant's other certifying officer 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.
May 13, 2003 IWO HOLDINGS, INC.
By: /s/ Jerry E. Vaughn
--------------------------------------
Jerry E. Vaughn
Chief Financial Officer
24