<PAGE>
As filed with the Securities and Exchange Commission on June 20, 2000
Registration No. 333-
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
IWO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 4812 14-1818487
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
--------------
319 Great Oaks Boulevard
Albany, New York 12203
(518) 862-6001
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Solon L. Kandel
President and Chief Executive Officer
IWO Holdings, Inc.
319 Great Oaks Boulevard
Albany, New York 12203
(518) 862-6001
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
E. Michael Greaney, Esq. Gregg A. Noel, Esq.
Gibson, Dunn & Crutcher LLP Skadden, Arps, Slate, Meagher & Flom
200 Park Avenue LLP
New York, New York 10166 300 South Grand Avenue
(212) 351-4000 Los Angeles, California 90071
(212) 351-4035 (fax) (213) 687-5000
-------------- (213) 687-5600 (fax)
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
--------------
Calculation of Registration Fee
<TABLE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<CAPTION>
Title Of Each Class Of Proposed Maximum Amount Of
Securities To Be Registered Aggregate Offering Price (1) Registration Fee (2)
-------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par
value..................... $172,500,000 $45,540
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457 under the Securities Act.
(2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed
maximum aggregate offering price.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- DATED JUNE , 2000
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--------------------------------------------------------------------------------
Prospectus
, 2000
[LOGO OF INDEPENDENT WIRELESS ONE]
IWO Holdings, Inc.
Shares of Common Stock
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IWO Holdings, Inc.: The Offering:
. We provide wireless . We are offering
personal shares of our
communications common stock.
services in our
territory in the . We have granted the
northeastern underwriters an
United States. option to purchase
a maximum of
. IWO Holdings, Inc. additional shares
319 Great Oaks of common stock to
Boulevard cover over-allotments.
Albany, New York
12203 . This is our initial
(518) 862-6001 public offering. We
anticipate the
Proposed Symbol & initial public
Market: offering price will
between $ and
. IONE/Nasdaq National $ per share.
Market
. Closing: , 2000.
---------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
---------------------------------------------------------
<S> <C> <C>
Public offering price (estimated): $ $
Underwriting fees:
Proceeds to IWO Holdings, Inc.:
---------------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 9.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette Chase H&Q
Deutsche Banc Alex. Brown
First Union Securities, Inc.
UBS Warburg LLC
DLJdirect Inc.
<PAGE>
- Pictures of Sprint PCS Handsets
- Map of Our Network Coverage Area and Inset Map of United States
- Customers Using Sprint PCS Phone
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary................. 3
Risk Factors....................... 9
Forward-Looking Statements......... 24
Use of Proceeds.................... 25
Dividend Policy.................... 26
Capitalization..................... 27
Dilution........................... 28
Unaudited Pro Forma Condensed
Consolidated Statement of
Operations...................... 29
Selected Historical Consolidated
Financial Data.................. 31
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 34
Business........................... 43
Our Agreements with Sprint PCS..... 64
</TABLE>
<TABLE>
<S> <C>
Management........................ 75
Certain Transactions.............. 85
Regulation of the Wireless
Telecommunications Industry.... 87
Principal Stockholders............ 93
Description of Certain
Indebtedness................... 95
Description of Capital Stock...... 98
Shares Eligible for Future Sale... 104
Underwriting...................... 106
Legal Matters..................... 109
Experts........................... 109
Where You Can Find Additional
Information.................... 110
Index to Consolidated Financial
Statements..................... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we believe is especially
important concerning our business and this offering of common stock. It does
not contain all of the information that may be important to your investment
decision. You should read the entire prospectus, including "Risk Factors" and
the accompanying financial statements and related notes, before deciding to
invest in our common stock.
IWO Holdings
Overview
We provide digital wireless personal communications services, commonly
referred to as PCS, and related products to customers located in a region in
the northeastern United States comprising approximately 6.2 million residents.
We are an affiliate of Sprint PCS, the PCS group of Sprint Corporation. Sprint
PCS operates the only 100% digital personal communications services network in
the United States with licenses to provide nationwide service utilizing a
single frequency band and a single technology. We have the exclusive right to
use all 30 megahertz of Sprint PCS-owned spectrum in our territory for all
wireless services, including wireless local loop services, and the exclusive
right to market and provide wireless personal communications services under the
Sprint and Sprint PCS brand names in our territory.
Our territory is located in 20 contiguous markets across upstate New York,
New Hampshire (other than the Nashua market), Vermont, and portions of
Massachusetts and Pennsylvania. Our territory includes the cities of Albany and
Syracuse, New York and Manchester, New Hampshire.
We believe that our territory represents an opportunity for us to achieve
attractive penetration rates and revenues per subscriber. Although we believe
that our territory is relatively underserved by competing wireless service
providers, the wireless penetration rates in our territory are higher than the
national average. In addition, our territory is surrounded by well-developed
Sprint PCS markets containing approximately 36.6 million residents and contains
over 3,800 miles of highways connecting major metropolitan centers and numerous
year-round tourist destinations. We believe the regional nature of the
northeast economy results in a relatively mobile population which contributes
to increased demand for wireless services.
We have added over 11,000 net new subscribers since the beginning of the
year and as of May 31, 2000 provided service to approximately 56,000
subscribers. In March 2000, we purchased a network from Sprint PCS that covers
approximately 1.8 million residents or 30% of the residents in our territory.
We expect to cover approximately 2.4 million residents or 39% of the residents
in our territory by the end of 2000, approximately 4.1 million residents or 67%
of the residents in our territory by the end of 2001 and approximately 4.3
million residents or 70% of the residents in our territory by the end of 2002.
3
<PAGE>
Together with the proceeds of this offering, the equity investment made
and arranged by Investcorp and borrowings under our bank credit facilities, we
believe we have adequate capital resources in place to fund our business plan,
including the planned development of our network. After giving effect to our
acquisition of the Albany, Syracuse and Manchester markets from Sprint PCS, pro
forma 1999 revenues were $23.4 million and pro forma 1999 operating losses were
$54.0 million. We began operations on January 5, 2000 and, accordingly, we have
very limited operations, very limited revenues, significant losses, substantial
future capital requirements and an expectation of continued significant losses.
Our Competitive Strengths
We believe that our competitive strengths include the following:
. benefits from our Sprint PCS affiliation, including exclusive use of
the Sprint and Sprint PCS brand names in our territory and back office
support services;
. attractive and contiguous markets;
. existing network infrastructure and a subscriber base of approximately
56,000;
. access to all 30 megahertz of Sprint PCS-owned spectrum in every one
of our markets; and
. with this offering, a fully-financed business plan through 2003,
during which year we expect to achieve positive cash flow.
Our Business Strategy
We intend to:
. capitalize on our Sprint PCS affiliation;
. build a high quality personal communications services network;
. execute an integrated marketing strategy, including marketing and
build-out opportunities with local independent telephone companies
that operate in our territory;
. develop an efficient operating structure; and
. pursue selective acquisitions.
4
<PAGE>
The Offering
Common stock offered........ shares
Common stock outstanding
after this offering....
shares
Use of proceeds............. We will use the net proceeds from this sale of
our common stock to fund the following:
. capital expenditures, including the build-out
of our personal communications services
network;
. operating losses;
. working capital requirements; and
. general corporate purposes.
See "Use of Proceeds" for more detailed
information.
Proposed Nasdaq National
Market symbol..........
"IONE"
Unless otherwise indicated, all references to shares of common stock in
this prospectus:
. exclude shares reserved for issuance under our Management Stock
Incentive Plan, including outstanding options to purchase
approximately 63,269 shares at an exercise price of $172.34 per share.
. exclude outstanding options to purchase approximately 65,118 shares at
a weighted average exercise price of $132.43 per share.
. exclude 40,000 shares issuable upon exercise of outstanding warrants
at an exercise price of $172.34 per share.
. assume that the underwriters do not exercise their over-allotment
option.
. give effect to the conversion of all of our outstanding shares of
capital stock into shares of common stock upon the closing of this
offering.
5
<PAGE>
Summary Financial Data
IWO Holdings, Inc.
The summary consolidated financial data presented below for the period
from our inception on August 22, 1997 through December 31, 1997 and for the
years ended December 31, 1998 and 1999 and the balance sheet data as of
December 31, 1997, 1998 and 1999 are derived from our audited consolidated
financial statements. The summary financial data presented below for the three
months ended March 31, 1999 and 2000 and as of March 31, 2000 are derived from
our unaudited consolidated financial statements, which have been prepared on
the same basis as our audited consolidated financial statements and, in our
opinion, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for these periods. The results of operations for the
three months ended March 31, 2000 are not necessarily indicative of the results
for the full year. The data set forth below should be read in conjunction with
our consolidated financial statements and accompanying notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
Period from December 31, March 31,
Inception Through --------------- --------------
December 31, 1997 1998 1999 1999 2000
----------------- ----- -------- ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............... $-- $ -- $ -- $ -- $10,011
Operating expenses:
Costs of services and
equipment............. -- -- -- -- 9,466
General and
administrative........ -- 51 3,417 93 3,931
Selling and marketing.... 6 8 41 -- 3,291
Depreciation and
amortization.......... -- -- -- -- 1,146
Financial advisory fees.. -- -- 9,250 -- --
Stock-based
compensation.......... -- -- 2,900 -- 380
---- ----- -------- ----- -------
Total operating
expenses............ 6 59 15,608 93 18,214
---- ----- -------- ----- -------
Operating loss............. (6) (59) (15,608) (93) (8,203)
Interest income............ -- -- 171 -- 952
Interest expense........... -- -- (78) (13) --
Amortization of debt
issuance costs.......... -- -- (84) -- (628)
Other debt financing fees.. -- -- (319) -- (944)
---- ----- -------- ----- -------
Net loss................... $ (6) $ (59) $(15,918) $(106) $(8,823)
==== ===== ======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
-------------------- March 31,
1997 1998 1999 2000
---- ---- ---- ---------
(In thousands)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 31 $ 319 $104,752 $ 20,446
Total assets................................... 185 1,386 129,058 175,359
Long-term debt................................. -- -- -- 50,000
Total stockholders' equity..................... 119 435 122,901 114,561
</TABLE>
6
<PAGE>
Albany, Syracuse and Manchester Markets
The summary financial data presented below for each of the three years in
the period ended December 31, 1999 and as of December 31, 1998 and 1999 are
derived from the audited financial statements of the Albany, Syracuse, and
Manchester markets that we acquired.
Operations were not launched until December 27, 1996 in the Albany market,
December 30, 1996 in the Syracuse market and November 12, 1997 in the
Manchester market. As a result, we have not presented financial data for 1996
because revenues were less than $10,000. The data set forth below should be
read in conjunction with the Albany, Syracuse, and Manchester markets'
financial statements and accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues........................................... $ 2,113 $ 9,137 $23,401
Operating expenses:
Costs of services and equipment...................... 8,381 12,201 20,203
General and administrative........................... 6,675 7,361 8,976
Selling and marketing................................ 3,998 3,724 5,870
Depreciation and amortization........................ 6,841 9,491 10,205
------- ------- -------
Total operating expenses............................ 25,895 32,777 45,254
------- ------- -------
Operating expenses in excess of net revenues........... $23,782 $23,640 $21,853
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1999
---- ----
(In thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets purchased................................... $ 64,175 $ 62,886
========== ==========
</TABLE>
7
<PAGE>
IWO Holdings, Inc. on a Pro Forma Basis
The unaudited summary pro forma financial data presented below for the
year ended December 31, 1999 gives effect to our acquisition of the Albany,
Syracuse and Manchester markets and our initial borrowings of $50.0 million in
term loans under our $240.0 million senior credit facilities. The data set
forth below should be read in conjunction with the financial statements and
accompanying notes, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Condensed
Consolidated Statement of Operations" included elsewhere in this prospectus.
(In thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................... $ 23,401
Operating expenses:
Costs of services and
equipment................... 20,203
General and administrative..... 12,393
Selling and marketing.......... 5,911
Depreciation and amortization.. 16,365
Financial advisory fees........ 9,250
Stock-based compensation....... 2,900
--------
Operating loss................... (43,621)
Interest income.................. 171
Interest expense................... (5,453)
Amortization of debt issuance
costs......................... (2,485)
Other debt financing fees........ (2,594)
--------
Net loss......................... $(53,982)
========
Basic and diluted net loss....... $(228.74)
========
Weighted average shares
outstanding................... 236,000
========
</TABLE>
8
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors in addition to
the other information contained in this prospectus before purchasing our common
stock.
Risks Particular to Our Relationship with Sprint PCS
If we materially breach our management agreement, Sprint may terminate the
agreement and purchase our operating assets at a discount to market value
without further stockholder approval, and we would no longer be able to offer
Sprint PCS services.
Since we do not own any licenses to operate a wireless network, our
ability to offer Sprint PCS products and services and our network's operation
are dependent on our agreements with Sprint PCS not being terminated. The
principal categories of our obligations under the management agreement relate
to the following:
. the build-out of our network;
. the products and services we offer;
. our marketing and sales activities;
. our use of Sprint brands;
. our advertising and promotions;
. Sprint PCS' technical requirements;
. customer service;
. Sprint PCS' various program requirements;
. payment of fees;
. regulatory compliance; and
. indemnification.
Any material breach of our obligations under the management agreement
could lead to a termination. We cannot predict what might be deemed by Sprint
PCS to be a material breach. If the management agreement is terminated, we will
no longer be able to offer Sprint PCS products and services, and we may be
required to sell our operating assets to Sprint PCS. This sale may take place
without further stockholder approval and for a price equal to 72% of our entire
business value. Our entire business value includes the value of our right to
use the spectrum licenses in our markets, our business operations and other
assets. The provisions of our management agreement that allow Sprint PCS to
purchase our operating assets at a discount could adversely affect the value of
our common stock, may limit our ability to sell our business and may reduce the
price a buyer would be willing to pay for our business. See "Our Agreements
with Sprint PCS--The Management Agreement."
9
<PAGE>
We may encounter difficulties in completing the build-out of our network
required under our management agreement, which could increase costs and delay
completion of our build-out.
As part of our build-out, we must successfully lease or otherwise retain
rights to a sufficient number of radio communications sites, commonly referred
to as cell sites, and switching facilities, build out the physical
infrastructure and complete the purchase and installation of equipment. We
expect a majority of our cell sites to be located on facilities shared with one
or more wireless providers, or collocated. If our collocation agreements were
to terminate, our operations would be materially adversely affected. Some of
the cell sites are likely to require us to obtain zoning variances or other
local governmental or third party approvals. A lack of cell site availability
due to difficulty in obtaining local regulatory approvals or other reasons may
delay the build-out of our portion of the Sprint PCS network. The local
governmental authorities in various locations in our markets have, at times,
placed moratoriums on the construction of additional cell sites. Moreover, we
may have to make changes to our network design as a result of difficulties in
the site acquisition process. We must also meet the technical standards
described in our management agreement in connection with the build-out of our
network. Additionally, the Federal Communications Commission requires that our
network must not interfere with the operations of microwave radio systems, and
we and Sprint PCS may be required to relocate incumbent microwave operations to
enable us to complete our build-out. Any difficulty in constructing our portion
of the Sprint PCS network on a timely basis may increase our costs, affect our
ability to provide services in our markets on a schedule consistent with our
current business plan, limit our network capacity or reduce the number of new
Sprint PCS subscribers, and may constitute a breach of our management agreement
with Sprint PCS that could lead to a termination. Any significant delays could
have a material adverse effect on our business.
Sprint PCS' failure to perform its obligations under our management agreement
would severely restrict our ability to conduct our business. In addition, if we
terminate the agreement because of this failure or because of any other event
of termination caused by Sprint PCS, we have only limited rights upon such
termination.
We are dependent on Sprint PCS' ability to perform its obligations under
our agreements. The failure of Sprint PCS to perform its obligations under our
management agreement would severely restrict our ability to conduct our
business. In addition, if we terminate the agreement because of this failure or
because of any other event of termination caused by Sprint PCS, we will no
longer be able to offer Sprint PCS products and services, and our only remedy
would be to require Sprint PCS to purchase our operating assets for a price
equal to 80% of our entire business value or to require Sprint PCS to assign to
us up to 10 megahertz of its licensed spectrum for a price equal to 10% of our
entire business value or Sprint PCS' original cost plus microwave relocation
costs, whichever is greater. See "Our Agreements with Sprint PCS--The
Management Agreement--Rights on Termination."
We may not receive as much Sprint PCS travel revenue as we anticipate because
more of our subscribers may travel on other networks, fewer of Sprint PCS' and
its affiliates' subscribers may travel on our network or Sprint PCS may change
the rate we receive.
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
10
<PAGE>
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
inbound travel revenue than we anticipate or we may have to pay more Sprint PCS
outbound travel fees than the inbound travel revenue we collect. Our outbound
travel fees currently substantially exceed our inbound travel revenues. Sprint
PCS has agreed not to charge us for this excess until January 1, 2003, after
which we will incur losses to the extent of this excess.
In addition, under our agreements with Sprint PCS, Sprint PCS can change
the current fee we receive or pay for each Sprint PCS travel minute. The
unilateral change by Sprint PCS in the inbound travel revenue we are paid could
substantially decrease our revenues and profitability. For more information,
see "Business--Products and Services--Traveling and Roaming."
The inability to use Sprint PCS' support services could disrupt our business
and increase our operating costs.
We rely on Sprint PCS' internal support systems, including customer care,
customer activation, billing and other administrative support. Our operations
could be disrupted if Sprint PCS is unable to maintain and expand these back
office services or to efficiently outsource those services and systems through
third-party vendors.
The rapid expansion of Sprint PCS' business is expected to require that
Sprint PCS continue to enhance its internal support systems. Sprint PCS'
ability to provide adequate capacity for billing and other systems is dependent
on a number of factors, including forecasts of customer growth, customer usage
pattern and software releases from third-party vendors. We cannot assure you
that Sprint PCS will be able to successfully add system capacity or that its
internal support systems will be adequate. It is likely that problems with
Sprint PCS' internal support systems could cause:
. delays or problems in our own operations or service;
. delays or difficulty in gaining access to customer and financial
information;
. a loss of Sprint PCS customers; and
. an increase in the costs of those services.
Our services agreement with Sprint PCS provides that, upon nine months'
prior written notice, Sprint PCS may terminate any service that we purchase
from Sprint PCS. We do not have a contingency plan if Sprint PCS terminates any
service it provides. If Sprint PCS terminates a service for which we have not
developed a cost-effective alternative or increases the amount it charges us
for these services, our operating costs may increase beyond our expectations
and our operations may be interrupted or restricted.
We rely on the use of the Sprint PCS brand name and logo to market our
services, and a loss of use of this brand and logo or a decrease in the market
value of this brand and logo would hinder our ability to market our products.
The Sprint PCS brand and logo is highly recognizable. If we lose our
rights to use the Sprint PCS brand and logo under our trademark and service
mark license agreements, we would lose the advantages associated with marketing
efforts conducted by Sprint PCS. If we lose the rights to use
11
<PAGE>
this brand and logo, customers may not recognize our brand readily and we may
have to spend significantly more money on advertising to create brand
recognition. See "Our Agreements with Sprint PCS--The Trademark and Service
Mark License Agreements."
Our relationship with Sprint PCS or its successor may be adversely affected by
the proposed merger of Sprint and WorldCom, which could restrict our ability to
operate successfully or result in the loss of the Sprint PCS brand name and
logo.
Sprint and WorldCom have announced that the stockholders of both companies
have approved a definitive merger agreement whereby the two companies would
merge to form a new company called WorldCom. Although the companies have
approved the merger, the completion of the merger is still subject to various
conditions, including the approvals of the Federal Communications Commission,
the Justice Department, various state governmental bodies and foreign antitrust
authorities. If the merger is completed, the results of the merger may alter
the nature of our relationship with Sprint PCS, which could restrict our
ability to operate successfully. Also, any negative impact on Sprint as a
result of the merger could have a negative impact on us as a Sprint PCS
affiliate.
In particular, if the merger is completed, WorldCom has indicated that the
merged entity may not retain the Sprint PCS brand name. Consequently, there
would be significant costs associated with countering any customer confusion
and promoting the new brand name. While the merged entity would incur most of
the required advertising expenditures at the national level, we would also
incur costs in promoting recognition and acceptance in our markets. In
addition, we might gain fewer new subscribers and lose some existing
subscribers while the new brand name was being established. If there is a new
brand name, we cannot predict whether it will achieve the level of recognition
and acceptance currently enjoyed by the Sprint PCS brand name. Any diminution
in brand recognition or loyalty could cause a decrease in our revenues.
Sprint PCS' roaming arrangements may not be competitive with other wireless
service providers, which may restrict our ability to attract and retain
customers.
We rely on Sprint PCS' roaming arrangements with other wireless service
providers for coverage in some areas. Some risks related to these arrangements
are as follows:
. 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 may not be competitive with prices of
other wireless companies for roaming calls;
. customers may have to use a more expensive dual-band/dual-mode handset
with diminished standby and talk-time capacities;
. customers must end a call in progress and initiate a new call when
leaving the Sprint PCS network and entering another wireless network;
and
. Sprint PCS customers may not be able to use Sprint PCS' advanced
features, such as voicemail notification, while roaming.
12
<PAGE>
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.
Sprint PCS may make business decisions that would not be in our best interest.
Under our management agreement, Sprint PCS has a substantial amount of
control over the conduct of our business. Conflicts between us and Sprint PCS
may arise, and because Sprint PCS owes us no duties except as set forth in the
management agreement, these conflicts may not be resolved in our favor.
Accordingly, Sprint PCS may make decisions that adversely affect our business,
such as the following:
. Sprint PCS prices its national plans based on its own objectives and
could set price levels that may not be economically sufficient for our
business;
. Sprint PCS could change the per minute rate for Sprint PCS inbound
travel revenue it must pay to us, the per minute charge we must pay to
Sprint PCS for outbound travel fees, and the costs for Sprint PCS to
perform support services;
. we must obtain Sprint PCS' consent to sell non-Sprint PCS approved
equipment, which consent could be withheld;
. Sprint PCS may alter its network and technical requirements, which
could result in increased equipment and build-out costs;
. Sprint PCS may request that we build out additional areas within our
markets, which if undertaken, could result in less return on
investment;
. Sprint PCS could breach its obligations under our affiliation
agreements, which could substantially reduce our revenues, create
difficulty in obtaining important financial or subscriber information
or severely restrict our ability to conduct business; and
. Sprint or Sprint PCS could make other business decisions which could
adversely affect the Sprint and Sprint PCS brand names, products or
services.
Provisions of our management agreement with Sprint PCS may diminish our value
and restrict the sale of our business.
Sprint PCS must approve any change of control of our ownership and consent
to any assignment of our management agreement with Sprint PCS. Sprint PCS has a
right of first refusal if we decide to sell our operating assets to a third
party. We are also subject to a number of restrictions on the transfer of our
business including a prohibition on the sale of us or our operating assets to
competitors of Sprint or Sprint PCS. These restrictions and other restrictions
in our management agreement with Sprint PCS could adversely affect the value of
our common stock, may limit our ability to sell the business, may reduce the
price a buyer would be willing to pay for our business and may reduce our
entire business value.
If Sprint PCS does not maintain control over its licensed spectrum, our
management agreement with Sprint PCS may be terminated.
Sprint PCS, not us, owns the licenses necessary to provide wireless
services in our markets. The Federal Communications Commission requires that
licensees like Sprint PCS maintain control of
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their licensed systems and not delegate control to third-party operators or
managers like us. If the Federal Communications Commission were to determine
that our management agreement with Sprint PCS needs to be modified to increase
the level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the agreement to comply with applicable law. If we cannot
agree with Sprint PCS to modify the agreement, it may be terminated. If the
agreement is terminated, we would no longer be a part of the Sprint PCS network
and it would be extremely difficult to conduct our business.
The Federal Communications Commission may not renew the Sprint PCS licenses,
which would prevent us from providing wireless services.
We do not own any licenses to operate wireless networks. We are dependent
on Sprint PCS' licenses, which are subject to renewal and revocation. Sprint
PCS' licenses in our markets will expire in June 2005, but may be renewed for
additional 10-year terms. The Federal Communications Commission has adopted
specific standards that apply to wireless personal communications services
license renewals which, in the event of a comparative proceeding with competing
applications, includes the award of a renewal expectancy to Sprint PCS upon its
showing of "substantial service" during the past license term. Any failure by
Sprint PCS or us to comply with these standards could cause nonrenewal of the
Sprint PCS licenses for our markets. Additionally, if Sprint PCS does not
demonstrate to the Federal Communications Commission that Sprint PCS has met
the 5-year and 10-year construction requirements for each of its wireless
personal communications services licenses, it can lose the affected licenses
and be ineligible to regain them.
If Sprint PCS does not complete the construction of its nationwide personal
communications services network, we 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 personal communications services network through its own
construction efforts and those of its affiliates. Sprint PCS is still
constructing its nationwide network and does not offer personal communications
services, either on its own network or through its roaming agreements, in every
city in the United States. Sprint PCS has entered into, and anticipates
entering into, management agreements similar to ours with companies in other
markets under its nationwide personal communications services build-out
strategy. Our results of operations are dependent on Sprint PCS' national
network and, to a lesser extent, on the networks of its other affiliates.
Sprint PCS' and its affiliates' networks may not provide nationwide coverage to
the same extent as its competitors which could adversely affect our ability to
attract and retain customers.
If Sprint PCS does not renew our management agreement, our ability to conduct
our business would be severely restricted.
Our management agreement with Sprint PCS is not perpetual. Sprint PCS can
choose not to renew the agreement at the expiration of the 20-year initial term
or any 10-year renewal term. Our agreement with Sprint PCS terminates in all
events in 50 years. If Sprint PCS decides not to renew the management agreement
or terminates it in accordance with its terms, we would no longer be a part of
the Sprint PCS network and it would severely restrict our ability to conduct
our business.
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Other Risks Particular to Us
We have a limited operating history and if we do not successfully manage our
anticipated rapid growth, we may not be able to complete our entire network by
our target date, if at all.
Our operating history is very limited. Our performance as a personal
communications services provider will depend on our ability to manage
successfully the network build-out process, implement operational and
administrative systems, expand our base of employees, and train and manage our
employees, including engineering, marketing and sales personnel. We will
require expenditures of significant funds for the development, construction,
testing and deployment of our personal communications services network before
expanding commercial operations. These activities are expected to place
significant demands on our managerial, operational and financial resources.
The management of our anticipated growth will require, among other things:
. continued development of our operational and administrative systems;
. control of costs of network build-out;
. integration of our network infrastructure with the rest of the Sprint
PCS network;
. increased marketing activities;
. the ability to attract and retain qualified management, technical and
sales personnel; and
. the training of new personnel.
Failure to successfully manage our expected rapid growth and development
could impair our ability to achieve profitability and expand the coverage in
our markets.
We may not achieve or sustain operating profitability or positive cash flow
from operating activities.
We expect to incur significant operating losses and to generate
significant negative cash flow until at least 2003 while we develop and
construct our personal communications services network and build our customer
base. Our operating profitability will depend upon many factors, including,
among others, our ability to market our services successfully, achieve our
projected market penetration and manage customer turnover rates effectively.
Our expectation of becoming cash flow positive during 2003 is based upon our
current business model. Our business model is based, in large part, upon our
expectations as to future events, including future costs and revenues. We are a
new company with a limited operating history upon which to base our model. We
may not become cash flow positive during 2003 for numerous reasons, including
the risks identified in this prospectus. If we do not achieve and maintain
operating profitability and positive cash flow on a timely basis, we may not be
able to meet our debt service requirements.
We may need more capital than we currently project to build out our portion of
the Sprint PCS network. If we fail to obtain required additional capital, we
may not have sufficient funds to complete our build-out in accordance with the
terms of our management agreement with Sprint PCS and Sprint PCS may terminate
our management agreement and purchase our operating assets at a discount to
market value without further approval of our stockholders.
The build-out of our portion of the Sprint PCS network will require
substantial capital. Additional funds could be required for a variety of
reasons, including unanticipated capital
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expenditures, expenses or operating losses. In addition, we may need additional
funding if we bring in new customers more quickly than expected because the up-
front costs associated with new customers will likely exceed the initial
revenue generated by such customers. Additional funds may not be available.
Even if those funds are available, we may not be able to obtain them on a
timely basis, on terms acceptable to us or within limitations permitted by the
covenants under our senior credit facilities. Failure to obtain additional
funds, should the need for them develop, could result in the delay or
abandonment of our development and expansion plans. If we do not have
sufficient funds to complete our build-out, we may be in breach of our
management agreement with Sprint PCS and or default under our credit
facilities. If Sprint PCS terminates our management agreement as a result of
this breach, we may be required to sell our operating assets to Sprint PCS at a
discount to market value without further stockholder approval. The provisions
in our management agreement that allow Sprint PCS to purchase our operating
assets at a discount could adversely affect the value of our common stock, may
limit our ability to sell our business and may reduce the price a buyer would
be willing to pay for our business.
Because we depend heavily on outsourcing, the inability of third parties to
fulfill their contractual obligations to us may disrupt our services or the
build-out of our portion of the Sprint PCS network.
Because we outsource portions of our business, we depend heavily on third-
party vendors, suppliers, consultants, contractors and local telephone and
utility companies. We have retained those persons to:
. design and engineer our 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 our 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 us could materially delay construction and adversely affect the operations
of our portion of the Sprint PCS network.
We lease a portion of the cell sites for our network systems through
master lease agreements with communication site management companies. Many of
the companies, in turn, have separate leasing arrangements with each of the
owners of the sites. If these companies were to become insolvent or were to
breach those arrangements, we may lose access to those cell sites and
experience extended service interruption in the areas serviced by those sites,
which could adversely affect the operations of our portion of the Sprint PCS
network.
We will have substantial debt which we may not be able to service and which may
result in our lenders controlling our assets in an event of default.
In December 1999, we entered into $240.0 million of senior credit
facilities and in March 2000 borrowed $50.0 million under these facilities. As
a result, we have a substantial amount of long-term debt. See "Description of
Certain Indebtedness" and "Use of Proceeds."
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The substantial amount of our debt will have a number of important
consequences for our operations, including the following:
. we will have to dedicate a substantial portion of any cash flow from
operations to the payment of interest on, and principal of, our debt,
which will reduce funds available for other purposes;
. we may not have sufficient funds to pay interest on, and principal of
our debt;
. we may not be able to obtain additional financing for currently
unanticipated capital expenditures, working capital requirements and
other corporate purposes;
. our credit facilities place restrictions on our ability to incur
additional debt or issue additional equity without our lenders'
consent;
. borrowings under our credit facilities will be at variable rates of
interest, which would result in higher interest expense in the event
of increases in market interest rates;
. due to the liens on substantially all of our assets that secure our
credit facilities, our lenders may control our assets upon a default;
. we may become more highly leveraged than some of our competitors,
which may put us at a competitive disadvantage;
. we may be unable to refinance our credit facilities on terms
reasonably satisfactory to us;
. our ability to repay our credit facilities at maturity may depend on
our ability to refinance such indebtedness at maturity; and
. due to the liens on substantially all of our assets that secure our
senior debt, our lenders may control our assets if a default occurs.
Our ability to make payments on our debt depends 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 cannot control. If
our cash flow 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. Further, we may be unable to take any of these actions on
satisfactory terms, in a timely manner or at all. Our senior credit facilities
limit our ability to take several of these actions. Under our current business
plan, we expect to incur substantial debt before achieving positive cash flow.
Our 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 value of our common stock.
If we do not meet all of the conditions required under our credit facilities,
we may not be able to borrow all of the funds we anticipate receiving and may
not be able to complete the build-out of our portion of the Sprint PCS network.
Our anticipated future borrowings under our credit facilities will be
subject at each funding date to several conditions, including:
. acquiring minimum numbers of Sprint PCS subscribers and achieving
minimum network coverage on schedule; and
. adhering to financial and performance related covenants.
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If we do not meet these conditions, among others, at each funding date,
our lenders may choose not to lend any or all of the remaining amounts. If
other sources of funds are not available, we may be unable to complete the
build-out of our portion of the Sprint PCS network. If we do not have
sufficient funds to complete our network build-out, we may be in breach of our
management agreement with Sprint PCS and be in default under our credit
facilities.
If we default under our senior credit facilities, our lenders may declare our
debt immediately due and payable and Sprint PCS may force us to sell our assets
without stockholder approval.
Our $240.0 million senior credit facilities require that we comply with
specified financial ratios and other performance covenants. If we fail to
comply with these covenants or we default on our obligations under our senior
credit facilities, our lenders may accelerate the maturity of our debt. If our
lenders accelerate our debt, Sprint PCS has the option to purchase our
operating assets at a discount to market value and assume our obligations under
the senior credit facilities, without further stockholder approval. If Sprint
PCS does not exercise this option, our lenders may sell our assets to third
parties without approval of our stockholders. If Sprint PCS provides notice to
our lenders that we are in breach of our management agreement with Sprint PCS
and, as a result, our obligations under the credit facilities are accelerated
and Sprint PCS does not elect to operate our business, our lenders may
designate a third party to operate our business without the approval of our
stockholders.
We may not be able to respond effectively to the significant competition in the
wireless communications services industry or keep pace with our competitors in
the introduction of new products, services and equipment, which could impair
our ability to attract new customers.
Our dependence on Sprint PCS to develop competitive products and services
and the requirement that we obtain Sprint PCS' consent to sell non-Sprint PCS
approved equipment may limit our ability to keep pace with our competitors in
the introduction of new products, services and equipment. Additionally, we
expect existing cellular providers will upgrade their systems and provide
expanded, digital services to compete with the Sprint PCS products and services
we offer. These wireless providers require their customers to enter into long-
term contracts, which may make it more difficult for us to attract customers
away from them. Sprint PCS generally does not require its customers to enter
into long-term contracts, which may make it easier for other wireless providers
to attract customers away from us.
We may not be able to compete with larger, more established wireless providers
who have resources to competitively price their products and services, which
could result in a reduction of our subscribers.
We compete with several wireless providers, some of which have an
infrastructure in place and have been operational for a number of years. Some
of our competitors:
. have substantially greater financial, technological, marketing and
sales and distribution resources than us;
. have more extensive coverage in specific areas of our markets and have
broader regional coverage than us; and
. may market other services, such as traditional telephone service,
cable television access and access to the Internet, with their
wireless communications services.
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We may be unable to compete successfully with these larger competitors who
have substantially greater resources or who offer more services than we do to a
larger subscriber base, which could result in a reduction in new subscribers.
We may not be able to respond to the recent trend toward consolidation of the
wireless communications industry or compete with potential acquirers for
acquisitions, which could result in a reduction of our subscribers, decline in
prices for our products and services and additional dilution to our
stockholders if we issue our common stock in acquisitions.
There has been a recent trend in the wireless communications industry
toward consolidation of wireless service providers through joint ventures,
mergers and acquisitions. We expect this consolidation to lead to larger
competitors over time. Several large competitors already exist, such as AT&T
Wireless with over 12 million subscribers, Verizon Wireless with over 18
million subscribers and the announced combination of SBC Communications and
BellSouth Wireless with over 16 million subscribers. We may not be able to
respond to pricing pressures that may result from a consolidation in our
industry, which could result in a reduction of new subscribers or cause market
prices for our products and services to continue to decline.
If we expand our operations through acquisitions, we will compete with
other potential acquirers, some of which may have greater financial or
operational resources than us. If we issue additional shares of our common
stock in connection with any acquisition, this may result in dilution to our
stockholders. In addition, we may not be able to participate in any Sprint PCS
affiliate consolidation, which may adversely affect the price of our common
stock.
We may have difficulty in obtaining handsets and equipment, which could cause
delays and increased costs in the build-out of our network.
We currently purchase all handsets and equipment through Sprint PCS. The
demand for the equipment we require to construct our portion of the Sprint PCS
network is considerable and manufacturers of this equipment have substantial
order backlogs. In addition, the demand for specific types of handsets is
strong and the manufacturers of those handsets may have to distribute their
limited supply or products among the manufacturers' numerous customers. If
Sprint PCS modifies its handset logistics and delivery plan or if we are not
able to continue to rely on Sprint PCS' relationships with suppliers and
vendors, some of which provide us with vendor discounts on equipment, we could
have difficulty obtaining specific types of handsets and equipment in a timely
manner and our equipment costs could increase. As a result, we could suffer
delays in the build-out of our portion of the Sprint PCS network, disruptions
in service and a reduction in subscribers.
The technology we use has limitations and could become obsolete, which would
require us to implement new technology at substantially increased costs and
limit our ability to compete effectively.
We intend to employ digital wireless communications technology selected by
Sprint PCS for its nationwide network. Code division multiple access, known as
CDMA, is a relatively new technology. CDMA may not provide the advantages
expected by Sprint PCS. If another technology becomes the preferred industry
standard, we may be at a competitive disadvantage and competitive
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pressures may require Sprint PCS to change its digital technology which, in
turn, may require us to make changes at substantially increased costs.
Technologies are being developed to support new wireless services, including
multimedia mobile applications. We may not be able to respond to such pressures
and implement new technology on a timely basis or at an acceptable cost. We
also expect to face competition from other existing communications technologies
such as specialized mobile radio, enhanced specialized mobile radio and
domestic and global mobile satellite service. Specialized mobile radio and
enhanced specialized mobile radio systems can provide services that may be
competitive with those offered by personal communications services and are
often less expensive to build than personal communications services systems. In
the future we expect that providers of wireless communications services will
compete more directly with providers of traditional telephone services, energy
companies, utility companies and cable operators who expand their services to
offer communications services. Potential users of personal communications
services systems may find their communications needs satisfied by other current
and developing technologies. One- or two-way paging or beeper services that
feature voice messaging and data display as well as tone-only service may be
adequate for potential subscribers who do not need to speak to the caller. See
"Business--Technology."
Our services may not be broadly used and accepted by consumers, which could
reduce the amount of our new subscriber revenue.
Personal communications services systems have a limited operating history
in the United States. The extent of potential demand for personal
communications services, in our markets cannot be estimated with any degree of
certainty. Our inability to establish and successfully market personal
communications services could have a material adverse effect on our financial
condition and results of operations.
We may experience a high rate of customer turnover which would increase our
costs of operations and reduce our revenue.
Our strategy to reduce customer turnover may not be successful. The rate
of customer turnover may be the result of several factors, including network
coverage, reliability issues such as blocked calls and dropped calls, handset
problems, non-use of phones, change of employment, the non-use of customer
contracts, affordability, customer care concerns and other competitive factors.
Price competition and other competitive factors could also cause increased
customer turnover. A high rate of customer turnover could adversely affect our
competitive position, results of operations and our costs of, or losses
incurred in, obtaining new subscribers, especially because we subsidize some of
the costs of initial purchases of handsets by customers.
Unauthorized use of our network could disrupt our business.
We will likely incur costs associated with the unauthorized use of our
personal communications services network, 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.
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Our certificate of incorporation and bylaws include provisions that may
discourage a change of control transaction and which may affect the rights of
holders of our common stock.
Some provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of us. For example, our board may issue shares of
preferred stock which could be used to fend off a takeover attempt. In
addition, our stockholders may not take action by written consent or call a
special meeting of the stockholders and are limited in the manner in which they
may make proposals at stockholder meetings. In addition, please refer to "Risks
Relating to This Offering--Our existing stockholders, directors and officers
may be able to control the outcome of significant matters presented to
stockholders following the completion of this offering."
Our projected build-out plan does not cover all of our territory, which could
make it difficult to maintain a profitable customer base.
Our projected build-out plan for our territory does not cover all areas of
our territory. By the end of 2003, we expect to cover 71% of the resident
population in our territory. As a result, our plan may not adequately serve the
needs of the potential customers in our territory 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 we anticipate, which
we may not have the financial resources to complete or may be unable to do
profitably.
The loss of any of our officers or skilled employees could adversely affect our
ability to manage our business.
Our business is managed by a small number of executive officers. The loss
of one or more key officers could have a material adverse effect on us. We
believe that our future success will also depend in large part on our continued
ability to attract and retain highly qualified technical and management
personnel. We believe that there is and will continue to be intense competition
for qualified personnel in the personal communications services equipment and
services industry as the personal communications services market continues to
develop. We may not be successful in retaining our key personnel or in
attracting and retaining other highly qualified technical and management
personnel. We intend to evaluate the need for, but do not currently maintain,
"key man" life insurance for some of our employees.
Risks Particular to Our Industry
Use of hand-held phones may pose health risks, which could result in a
reduction in subscribers and increased exposure to litigation.
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health concerns, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. The actual or perceived risk of radio frequency emissions
from portable telephones could adversely affect us through a reduced subscriber
growth rate, a reduction in subscribers, reduced network usage per subscriber,
reduced financing available to the mobile communications industry and increased
exposure to potential litigation.
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Regulation by government agencies and taxing authorities may increase our costs
of providing service, require us to change our services or increase
competition.
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunication systems are regulated to varying
degrees by the Federal Communications Commission, the Federal Trade Commission,
the Federal Aviation Administration, the Environmental Protection Agency, the
Occupational Safety and Health Administration and, depending on the
jurisdiction, state and local regulatory agencies and legislative bodies.
Adverse decisions regarding these regulatory requirements could negatively
impact Sprint PCS' operations and our 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 us to alter the structure of our relationship
with Sprint PCS. In addition, the Federal Communications Commission may license
additional spectrum for new carriers, which would increase the competition we
face.
Our business is seasonal and worse than expected fourth quarter results may
cause our stock price to drop and significantly reduce our overall results of
operations.
The wireless industry is heavily dependent on fourth quarter results.
Among other things, the industry relies on significantly higher customer
additions and handset sales in the fourth quarter as compared to the other
three calendar quarters. The price of our common stock may drop and our overall
results of operations could be significantly reduced if we have a worse than
expected fourth quarter for any reason, including:
. our inability to match or beat pricing plans offered by competitors;
. the failure to adequately promote Sprint PCS' products, services and
pricing plans;
. our inability to obtain an adequate supply or selection of handsets;
. a downturn in the economy or our markets; or
. a poor holiday shopping season.
There is also uncertainty as to the extent of customer demand as well as
the extent to which airtime and monthly recurring charges may continue to
decline. As a result, our future prospects and those of the industry, and the
success of personal communications services and other competitive services,
remain uncertain.
Risks Relating to This Offering
Our existing stockholders, directors and officers may be able to control the
outcome of significant matters presented to stockholders following the
completion of this offering.
Upon completion of this offering of common stock, our existing
stockholders, directors and officers will beneficially own approximately % of
our outstanding common stock on a fully diluted basis, or approximately % if
the underwriters' over-allotment option is exercised in full, each depending on
how many shares our existing stockholders purchase in this offering.
Stockholders holding % of our outstanding common stock after this offering
have entered into a stockholders
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agreement regarding how they will vote in the election of our directors.
Consequently, these stockholders will be able to elect all of our directors and
control the outcome of matters submitted for stockholder action. The interests
of these stockholders may differ from the interests of purchasers of common
stock in this offering, including with respect to a change in control. For more
information on this subject, please refer to "Management," "Principal
Stockholders" and "Description of Capital Stock--Stockholders Agreement."
Possible sales of our common stock could cause the market price of our common
stock to decrease.
After this offering, our current stockholders will continue to hold large
portions of our common stock. The occurrence of sales of a large number of
shares of our common stock, or the perception that these sales could occur,
could limit increases in the price of our common stock, cause a drop in our
stock price and could impair our ability to obtain capital through any future
offerings of equity securities. See "Shares Eligible for Future Sale."
An active market for the common stock may not develop and the price for our
common stock may be volatile.
Prior to this offering, there has been no public market for our common
stock. An active or liquid trading market in our common stock may not develop
upon completion of this offering, or if it does develop, it may not continue.
The initial public offering price of our common stock will be determined
through our negotiations with the underwriters and may be more than the market
price of common stock after this offering. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
The market price of our common stock could be subject to significant
fluctuations in response to variations in quarterly operating results,
announcements of technological innovations or new products and services by us
or our competitors, our failure to achieve operating results consistent with
securities analysts' projections of our performance, the operating and stock
price performance of other companies that investors may deem comparable to us
and other events or factors.
The stock market has experienced extreme price and volume fluctuations and
volatility that have particularly affected the market prices of many emerging
growth and development stage companies. Such fluctuations and volatility have
often been unrelated or disproportionate to the operating performance of those
companies. Factors such as announcements of the introduction of new or enhanced
services or related products by us or our competition, announcements of joint
development efforts or corporate partnerships in the wireless
telecommunications market, market conditions in the technology,
telecommunications and other emerging growth sectors, and rumors relating to us
or our competitors may have a significant impact on the market price of the
common stock.
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FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations,
which are "forward-looking statements." Any statement in this prospectus that
is not a statement of historical fact may be deemed to be a forward-looking
statement. These forward-looking statements include:
. forecasts of growth in the number of consumers using wireless personal
communications services and in estimated number of residents;
. statements regarding our plans for, and costs of the build-out of our
portion of the Sprint PCS network;
. statements regarding our future revenues, expense levels, liquidity
and capital resources, operating losses and projections of when we
will launch commercial wireless personal communications services,
products and distribution channels in particular markets;
. statements regarding expectations or projections about markets in our
territory; and
. other statements, including statements containing words such as "may,"
"might," "could," "would," "anticipate," "believe," "plan,"
"estimate," "project," "expect," "seek," "intend" and other similar
words that signify forward-looking statements.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements.
Specific factors that might cause such a difference include, but are not
limited to:
. the need to successfully complete the build-out of our portion of the
Sprint PCS network on our anticipated schedule;
. our dependence on our affiliation with Sprint PCS;
. our dependence on Sprint PCS' back office services;
. our limited operating history and anticipation of future losses;
. our potential need for additional capital;
. the continued ability to borrow under our senior credit facilities;
. our dependence on contractor and consultant services, network
implementation and information technology support;
. our competition;
. our potential inability to expand our services and related products in
the event of substantial increases in demand in excess of supply for
network and handset equipment and related services and products;
. changes or advances in technology;
. our ability to attract and retain skilled personnel; and
. potential fluctuations in our operating results.
For a discussion of some of these factors, see "Risk Factors" beginning on
page 9.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the common stock we are
offering, after deducting underwriting discounts and commissions and estimated
offering expenses, are expected to be approximately million, or
approximately million if the underwriters' over-allotment option is
exercised in full, assuming an initial public offering price of $ per share
(the mid-point of the range shown on the cover page of this prospectus). For
the period from inception on August 22, 1997 through December 31, 2003, we
intend to use the net proceeds from this offering, net proceeds from our
private equity placements and borrowings under our senior credit facilities, as
presented in the following table:
<TABLE>
<CAPTION>
Amount
(In millions)
<S> <C>
Sources:
Gross proceeds from this offering.............................. $
Gross proceeds from private equity placements..................
Senior credit facilities(1)....................................
---
Total sources................................................. $
===
Uses:
Purchase of assets from Sprint PCS............................. $
Capital expenditures...........................................
Debt and related fees and expenses and private equity issuance
costs ......................................................
Operating losses and working capital...........................
Fees and expenses(2)...........................................
Cash on hand, including $8.0 million that is restricted........
---
Total uses.................................................... $
===
</TABLE>
---------------------
(1) In December 1999 we entered into senior credit facilities for up to $240.0
million of borrowings and in March 2000 we borrowed $50.0 million under
these facilities. Through December 2003, we expect to borrow the remaining
$190.0 million available under the senior credit facilities.
(2) Includes fees and expenses relating to this offering and our purchase of
assets from Sprint PCS.
The foregoing represents our best estimate of the allocation of the net
proceeds of this offering, net proceeds from our private equity placements and
borrowings under our senior credit facilities based upon our current markets
and our current plans for these markets. Actual expenditures may vary
substantially from these estimates and we may find it necessary or advisable to
reallocate the net proceeds from these sources within the above-described
categories or to use portions thereof for other purposes. In addition, we may
need to obtain additional capital to finance the build-out of our network.
We intend to use the balance of the net proceeds of this offering for
general corporate purposes. Pending such uses, we expect to invest the net
proceeds from the sale of the common stock in short-term investment grade
securities which will earn interest.
25
<PAGE>
DIVIDEND POLICY
We intend to retain our future earnings, if any, to fund the development
and growth of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Our future decisions concerning the
payment of dividends on the common stock will depend upon our results of
operations, financial condition and capital expenditure plans, as well as such
other factors as the board of directors, in its sole discretion, may consider
relevant. In addition, our existing indebtedness restricts, and we anticipate
our future indebtedness may restrict, our ability to pay dividends.
26
<PAGE>
CAPITALIZATION
The following table shows the cash and cash equivalents position and our
total capitalization as of March 31, 2000 and as adjusted to reflect the
receipt of net proceeds of $ million from this offering (assuming the mid-
point of the range shown on the cover page of this prospectus).
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------
Actual As Adjusted
-------- -----------
(In thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 20,446 $
Restricted cash.......................................... 8,000
-------- ----
Total cash and cash equivalents and restricted cash...... $ 28,446 $
-------- ----
Long-term debt:
Senior credit facilities................................. $ 50,000 $
Stockholders' equity:
Common stock and additional paid-in capital............ 139,536
Deficit accumulated during development stage, retained
deficit and share repurchase........................ (24,975)
-------- ----
Total stockholders' equity............................. 114,561
-------- ----
Total capitalization..................................... $164,561 $
======== ====
</TABLE>
27
<PAGE>
DILUTION
Our pro forma net tangible book value at March 31, 2000 was approximately
$ million or $ per share of common stock after giving effect to the
conversion of all of our outstanding shares of capital stock into shares of
common stock. Pro forma net tangible book value per share represents the amount
of total tangible assets reduced by the amount of total liabilities and divided
by the number of shares of common stock outstanding after giving effect to the
conversion of all our outstanding shares of capital stock into shares of common
stock. After giving effect to our sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share, and
deducting underwriting discounts and commissions and estimated offering
expenses, our adjusted pro forma net tangible book value as of March 31, 2000
would have been approximately $ million, or $ per share. This represents
an immediate dilution of $ per share to new investors purchasing shares of
common stock in this offering and an immediate increase in net tangible book
value to existing stockholders of $ per share.
Dilution per share represents the difference between the price per share
to be paid by new investors and the net tangible book value per share
immediately after the sale of common stock in this offering. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share as of March 31, 2000... $
Increase per share attributable to new investors...................
----
Pro forma as adjusted net tangible book value per share after this
offering..........................................................
----
Dilution per share to new investors.................................. $
====
</TABLE>
The following table summarizes, on an as adjusted pro forma basis as of
March 31, 2000, the number of shares of common stock purchased, the total
consideration paid and the average price per share paid by our existing
stockholders and by new investors purchasing shares of common stock in this
offering. The calculation below is based on an assumed initial public offering
price of $ per share, before the deduction of underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares
Purchased Total Consideration
-------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... % $ % $
New investors............... $
--- ---- --------- ---------- ----
Total....................... 100% 100%
=== ==== ========= ==========
</TABLE>
The tables above assume no exercise of the underwriters' over-allotment
option and no exercise of outstanding stock options and warrants. To the extent
that any shares are issued in connection with the underwriters' over-allotment
option, outstanding options or warrants or options or warrants issued in the
future, you will experience further dilution. We may issue additional stock
options to our employees and may amend our stock option plan to increase the
number of shares available for issuance. The exercise of such options would
cause you to experience further dilution and could cause the market price of
our common stock to decrease. The market price of our common stock could
decrease due to the existence of such options or the perception that we will
issue such options. See "Management--Management Stock Incentive Plan."
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
We derived unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1999 from our historical
consolidated financial statements and from other financial data included
elsewhere in this prospectus. Our financial results have been adjusted based on
currently available information and assumptions that we believe are reasonable
to give effect to the following transactions as if each transaction had
occurred as of January 1, 1999 for the purpose of the pro forma statement of
operations:
. our acquisition of the Albany, Syracuse, and Manchester markets; and
. our initial borrowings of $50.0 million in term loans under our $240.0
million senior credit facilities.
We provide the following unaudited pro forma condensed consolidated
statement of operations and related notes for informational purposes only. The
accompanying data does not purport to represent what our results of operations
would have been if the pro forma transactions had been completed on the date
indicated, nor do they purport to indicate our future results of operations.
The data shown below should be read in conjunction with "Capitalization,"
"Summary Financial Data," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and accompanying notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------------
Historical
Historical Acquired Pro Forma Pro Forma
IWO Markets Adjustments As Adjusted
---------- ---------- ----------- -----------
(In thousands, except share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues................. $ -- $ 23,401 $ -- $ 23,401
Operating expenses:
Costs of services and
equipment............... -- 20,203 -- 20,203
General and administrative
........................ 3,417 8,976 -- 12,393
Selling and marketing...... 41 5,870 -- 5,911
Depreciation and
amortization............ -- 10,205 6,160 (1) 16,365
Financial advisory fees.... 9,250 -- -- 9,250
Stock-based compensation... 2,900 -- -- 2,900
-------- -------- -------- --------
Operating loss............... (15,608) (21,853) (6,160) (43,621)
Interest income.............. 171 -- -- 171
Interest expense............. (78) -- (5,375)(2) (5,453)
Amortization of debt issuance
costs..................... (84) -- (2,401)(3) (2,485)
Other debt financing fees.... (319) -- (2,275)(4) (2,594)
-------- -------- -------- --------
Net loss..................... $(15,918) $(21,853) $(16,211) $(53,982)
======== ======== ======== ========
Basic and diluted net loss
per share................. $ (67.45) $(228.74)
======== ========
Weighted average shares
outstanding............... 236,000 236,000
======== ========
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
Year Ended December 31, 1999
(Dollars in thousands)
For the purpose of determining the pro forma effect of transactions
described above on our consolidated statement of operations for the year ended
December 31, 1999, the following adjustments have been made:
(1) Represents the amortization of intangible assets recorded from the
acquisition of the acquired markets consisting of the following:
<TABLE>
<S> <C>
Goodwill in the amount of $49,875 over a period of 20 years which is
the initial term of the Sprint PCS management agreement............... $2,494
Acquired subscribers in the amount of $14,000 being amortized over
four years, the average life of those subscribers..................... 3,500
Acquired assembled workforce in the amount of $500 being amortized
over three years...................................................... 166
------
$6,160
======
(2) Interest expense on $50,000 borrowed under senior credit facilities
assuming an interest rate of 10.75%................................... $5,375
(3) Amortization of $12,271 of deferred financing fees from senior credit
facilities over a period of approximately 7.5 years, net of $112
recognized for the year................................................. 1,534
Amortization of $200 administration fee on senior credit facilities
over a period of one year............................................. 200
Amortization of $1,000 debt issuance costs related to bridge loan
commitment over a period of 1.5 years................................. 667
------
$2,401
======
(4) Unused commitment fee of 1.25% on senior credit facilities of which
$190,000 remains unused, net of $100 recognized for the year............ $2,275
</TABLE>
30
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
IWO Holdings, Inc.
. The selected historical consolidated financial data presented on the
following page for the period from our inception on August 22, 1997
through December 31, 1997 and for the years ended December 31, 1998
and 1999, and balance sheet data as of December 31, 1997, 1998 and
1999, are derived from and should be read in conjunction with our
audited consolidated financial statements included elsewhere in this
prospectus; and
. The selected consolidated financial data presented below for the three
months ended March 31, 1999 and 2000 and as of March 31, 2000 are
derived from and should be read in conjunction with our unaudited
consolidated financial statements included elsewhere in this
prospectus.
In our opinion, the unaudited interim financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary to
present fairly the financial position and the results of operations for the
interim periods. Financial and operating results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the full year.
It is important that you also read the section of the prospectus titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the accompanying
notes included elsewhere in this prospectus.
31
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
Period from December 31, March 31,
Inception Through -------------- ------------
December 31, 1997 1998 1999 1999 2000
------------------ ---- ---- ---- ----
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues.............. $-- $ -- $ -- $ -- $10,011
Operating expenses:
Costs of services and
equipment............ -- -- -- -- 9,466
General and
administrative....... -- 51 3,417 93 3,931
Selling and marketing... 6 8 41 -- 3,291
Depreciation and
amortization......... -- -- -- -- 1,146
Financial advisory
fees................. -- -- 9,250 -- --
Stock-based
compensation......... -- -- 2,900 -- 380
---- ----- -------- ------ -------
Total operating
expenses............ 6 59 15,608 93 18,214
---- ----- -------- ------ -------
Operating loss............ (6) (59) (15,608) (93) (8,203)
Interest income........... -- -- 171 (13) 952
Interest expense.......... -- -- (78) -- --
Amortization of debt
issuance costs......... -- -- (84) -- (628)
Other debt financing
fees................... -- -- (319) -- (944)
---- ----- -------- ------ -------
Net loss.................. $ (6) $ (59) $(15,918) $ (106) $(8,823)
==== ===== ======== ====== =======
Basic and diluted net loss
per share(1)........... $ (67.45) $(0.50) $ (8.74)
======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
-------------------- March 31,
1997 1998 1999 2000
---- ---- ---- ---------
(In thousands)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 31 $ 319 $104,752 $ 20,446
Total assets................................... 185 1,386 129,058 175,359
Long-term debt................................. -- -- -- 50,000
Total stockholders' equity..................... 119 435 122,901 114,561
</TABLE>
---------------------
(1) Basic and diluted net loss per share of common stock is computed by
dividing net loss by the weighted average number of common shares
outstanding. We have assumed that our shares issued to the prior
stockholders of our subsidiary on December 20, 1999 were outstanding for
all of 1999. No shares were outstanding prior to 1999.
32
<PAGE>
Albany, Syracuse, and Manchester Markets
The selected financial data presented below under the caption "Statement
of Operations" for each of the three years in the period ended December 31,
1999, and under the caption "Balance Sheet Data" as of December 31, 1998 and
1999, are derived from the audited financial statements of the Albany,
Syracuse, and Manchester markets that we acquired.
Operations were not launched until December 27, 1996 in the Albany market,
December 30, 1996 in the Syracuse market and November 12, 1997 in the
Manchester market. As a result, we have not presented financial data for 1996
because revenues were less than $10,000. The data set forth below should be
read in conjunction with the Albany, Syracuse, and Manchester markets'
financial statements and accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues........................................... $ 2,113 $ 9,137 $23,401
Operating expenses:
Costs of services and equipment...................... 8,381 12,201 20,203
General and administrative........................... 6,675 7,361 8,976
Selling and marketing................................ 3,998 3,724 5,870
Depreciation and amortization........................ 6,841 9,491 10,205
------- ------- -------
Total operating expenses............................ 25,895 32,777 45,254
------- ------- -------
Operating expenses in excess of net revenues........... $23,782 $23,640 $21,853
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of
December 31,
---------------
1998 1999
---- ----
(In thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets purchased......................................... $64,175 $62,886
======= =======
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes included elsewhere
in this prospectus. The discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
factors including, but not limited to, those under "Risk Factors" and elsewhere
in this prospectus. We have emerged from being a development stage company as
of January 5, 2000 and intend to significantly expand our operations.
Accordingly, we do not believe the discussion and analysis of our historical
financial condition and results of operations set forth below are indicative
nor should they be relied upon as an indicator of our future performance.
Overview
We provide digital wireless personal communications services, or PCS, and
related products to customers in the northeastern United States as part of
Sprint PCS' licenses to provide nationwide service. In February 1999, we
entered into a management agreement, a services agreement and trademark and
service mark license agreements with Sprint PCS to provide these services. Our
20-year agreements with Sprint PCS can be extended for an additional 30 years,
in 10-year increments.
We are responsible for building, owning and managing the portion of the
Sprint PCS network located in our territory. Our portion of the Sprint PCS
network is designed to offer a seamless connection with Sprint PCS' and its
affiliates' 100% digital wireless network licensed nationwide. We have the
exclusive right to provide 100% digital wireless services under the Sprint and
Sprint PCS brand names in our territory. We offer national plans designed by
Sprint PCS and intend to offer specialized local plans tailored to our local
market demographics. We market wireless products and services through a number
of distribution outlets in our territory, including major national
distributors, local sales agents and retailers, and our own Sprint PCS stores
and direct sales force. In addition, we expect to purchase our network
infrastructure and subscriber equipment under Sprint PCS' vendor contracts that
reflect its volume discounts.
Independent Wireless One, LLC was formed on August 22, 1997 by a
consortium of independent local telephone companies to become a provider of
wireless telecommunications and data services. In September 1998, its status
was changed to a C-corporation and its name was changed to Independent Wireless
One Corporation.
In October 1999, IWO Holdings, Inc. was formed to hold an investment in
Independent Wireless One Corporation. In December 1999, all of the stockholders
of Independent Wireless One Corporation exchanged their equity ownership for an
aggregate of 210,000 shares of our capital stock, while other investors and
management invested approximately $135.0 million for approximately 79% of our
equity.
34
<PAGE>
Under an asset purchase agreement and other agreements with Sprint PCS, we
purchased assets from Sprint PCS for approximately $116.7 million and obtained
the right to manage approximately 45,000 subscribers in our territory. The
asset purchase agreement contained a multi-phase closing process. In January
2000, we paid Sprint approximately $32.4 million and received from Sprint PCS
certain furniture, fixtures and equipment and the leasehold interest in our
corporate offices. In addition, we obtained the outstanding accounts receivable
balance as of December 31, 1999 and the right to manage approximately 45,000
subscribers based within our territory. In February 2000, Sprint transferred to
us the retail related assets including furniture, fixtures and equipment and
the leasehold interest at three Sprint retail stores. In March 2000, Sprint
transferred to us certain of its network assets and its interest in various
cell site and other network related leases for approximately $84.3 million. We
formed Independent Wireless One Leased Realty Corporation in February 2000 to
hold all of our leased real properties including administrative office space,
retail stores, cell sites and switch facilities.
We recognize 100% of our revenues from Sprint PCS subscribers based in our
territory, proceeds from the sale of handsets and accessories and fees from
Sprint PCS and its affiliates when their customers travel onto our portion of
the Sprint PCS network. Sprint PCS retains 8% of net collected service revenue,
excluding travel and roaming revenues, from Sprint PCS subscribers based in our
territory. We report the amount retained by Sprint PCS as an operating expense.
As part of our agreements with Sprint PCS, we have the option to pay
Sprint PCS to provide us with back office services such as customer activation,
handset logistics, billing, customer service and network monitoring services.
We have elected to contract the performance of these services to Sprint PCS in
order to take advantage of Sprint PCS' economies of scale, focus more on
customer acquisition, network build-out and new market launches and lower our
initial capital requirements. The cost of these services is primarily
calculated on a per-subscriber and per-transaction basis and is recorded as an
operating expense.
We incur sales and marketing expenses that include local advertising
expenses, promotional costs, sales commissions and expenses related to our
distribution channels. We expect that our cost per new customer will be higher
in the initial years of operation and will decline as our sales and marketing
expenses are distributed over a greater area of operation and we acquire more
customers. Costs (and subsidies) of handsets are also expected to decline. We
expect to benefit from the use of the Sprint and Sprint PCS brand names, Sprint
PCS national advertising and other marketing programs. Our costs for handsets
and accessories will reflect Sprint PCS volume discounts. To increase our
subscriber base, we offer our handsets at a price less than our costs, a common
industry practice.
In addition to the benefits and services provided through our agreements
with Sprint PCS, we will also utilize the services of third parties to build
and support the operations of our network. As a result of this outsourcing, we
are substantially dependent on Sprint PCS and the other third parties for the
build-out and operation of our network. If we fail to complete the build-out on
schedule or meet Sprint PCS' program requirements, we would be in breach of our
management agreement with Sprint PCS which could result in its termination. If
the management agreement is terminated, we will no longer be able to offer
Sprint PCS products and services and we may be required to sell our operating
assets to Sprint PCS at a discount to market value and without further
stockholder approval.
35
<PAGE>
Along with Sprint PCS and its other affiliates, we plan to operate our
personal communications services network seamlessly with the Sprint PCS
network. This allows our customers to use these communications services and
features in any Sprint PCS service area throughout the United States without
incurring additional charges. Similarly, our personal communications services
network is available to customers traveling within our service areas. A
standard service fee is exchanged by Sprint PCS and its affiliates for these
inbound and outbound travel services. Our outbound travel expenses exceeded our
inbound travel revenues in the first quarter 2000 by approximately $1.3 million
due to the limitations of our current network coverage. We expect this trend to
continue but at a declining rate at least until 2002 as our network build-out
progresses. However, due to our agreement with Sprint PCS, we will not be
charged outbound travel expenses in excess of our inbound travel revenue until
January 1, 2003. We expect to benefit from a positive net travel margin
beginning in 2002 and expect this margin to increase thereafter as our network
nears completion and the number of Sprint PCS subscribers continues to grow in
adjacent markets. If, however, outbound travel expenses continue to exceed
inbound travel revenues, our margins may decline when this agreement with
Sprint PCS expires.
Until January 5, 2000, we were a development stage company. We have had
very limited operations and revenues, significant losses and substantial
capital requirements. We incurred net losses of $6,000 in 1997, $59,000 in 1998
and $15.9 million in 1999. After giving effect to various transactions
described in "Unaudited Pro Forma Condensed Consolidated Statement of
Operations," pro forma net loss for 1999 were $54.0 million. Our current
operations cover approximately 1.8 million residents and approximately 56,000
subscribers. We expect to continue to incur significant operating losses and to
generate significant negative cash flow from operating activities until at
least 2003 while we develop and construct our network and build our customer
base.
We expect future quarterly operating expenses for the remainder of 2000 to
increase substantially compared to the three months ended March 31, 2000. Our
costs of services and equipment and general and administrative expense will
increase as a result of the accelerated expansion of our network, human
resource infrastructure and subscriber base. Our selling and marketing expenses
will also increase due to the introduction of new sales and marketing programs,
increased levels of advertising expenditures, the launch of new retail stores
and seasonal increases in the fourth quarter holiday season. We also expect
quarterly net revenue to increase as our subscriber base continues to grow and
our network coverage expands.
Results of Operations
IWO Holdings, Inc.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
We commenced operations on January 5, 2000. For the three months ended
March 31, 2000, we recognized $10.0 million in net revenues, primarily from
monthly access and airtime fees. Our costs of services and equipment during
this period was $9.5 million, or 94.6% of net revenues. Our selling and
marketing expenses were $3.3 million, or 32.9% of net revenues. Our general and
administrative expenses were $3.9 million, or 39.3% of net revenues.
Depreciation and amortization of the assets acquired, principally from Sprint
PCS, during the three months ended March 31, 2000
36
<PAGE>
was approximately $1.1 million. We also recognized $380,000 in non-cash, stock-
based compensation expense from stock options granted to our General Counsel.
In the three months ended March 31, 1999, we were a development stage
company which incurred a loss of $106,000, consisting of $93,000 in general and
administrative expenses and $13,000 in interest expense.
Development Stage Period from August 22, 1997 Through December 31, 1999
We were in a development stage from our inception on August 22, 1997
through December 31, 1999. We incurred losses of $6,000 in 1997, $59,000 in
1998, and $15.9 million in 1999. Selling and marketing expenses were $6,000 in
1997, $8,000 in 1998 and $41,000 in 1999. General and administrative expenses
were $51,000 in 1998 and $3.4 million in 1999. Other expenses in 1999 consisted
primarily of $9.3 million in advisory fees related to financing efforts and
$2.9 million in non-cash, stock-based compensation to our President and
Chairman of the Board.
Albany, Syracuse, and Manchester Markets
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The 1998 and 1999 operations reflect the operation of the Albany,
Syracuse, and Manchester markets by Sprint PCS. Historical results are not
necessarily indicative of future operations that we will manage.
Net revenues increased by $14.3 million or 156.1% to $23.4 million in 1999
compared to 1998. Net revenues primarily consisted of subscriber revenue from
monthly access and airtime service fees. The increase is primarily attributable
to an increased number of subscribers.
Costs of services and equipment increased by $8.0 million or 65.6% to
$20.2 million in 1999 compared to 1998. These costs were approximately 86% of
net revenues in 1999 compared to approximately 134% in 1998. The increase in
costs is primarily attributable to the increase in subscribers. The decrease in
costs as a percentage of net revenues reflects increased efficiencies.
General and administrative expenses increased by $1.6 million or 21.9% to
$9.0 million in 1999 compared to 1998. These expenses were approximately 38% of
revenues in 1999 compared to approximately 81% in 1998. The decrease in
expenses as a percentage of net revenues reflects increased efficiencies.
Selling and marketing expenses increased by $2.1 million or 57.6% to $5.9
million in 1999 compared to 1998. These expenses were approximately 25% of
revenues in 1999 compared to approximately 41% in 1998. The increase in
expenses is due to increased sales and marketing activities and more customers
acquired. The decrease in expenses as a percentage of net revenues reflects
more customers acquired.
Depreciation and amortization expense increased $714,000 or 7.5% to $10.2
million in 1999 compared to 1998. This increase is due to increases in
property, plant and equipment.
Operating expenses in excess of net revenues decreased by approximately
$1.8 million or 7.6% to $21.9 million in 1999 compared to 1998. This decrease
is a result of increased costs and expenses more than offset by increased net
revenues.
37
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The 1997 and 1998 operations reflect the operation of the Albany,
Syracuse, and Manchester markets by Sprint PCS. Historical results are not
necessarily indicative of future operations that we will manage.
Net revenues increased by $7.0 million or 332.4% to $9.1 million in 1998
compared to 1997. Net revenues primarily consisted of subscriber revenue from
monthly access and airtime service fees. The increase is primarily attributable
to an increased number of subscribers.
Costs of services and equipment increased by $3.8 million or 45.6% to
$12.2 million in 1998 compared to 1997. These costs were approximately 134% of
net revenues in 1998 compared to approximately 397% in 1997. The increase in
costs is primarily attributable to expanded operations and an increase in
subscribers.
General and administrative expenses increased by $686,000 or 10.3% to $7.4
million in 1998 compared to 1997 due to expanded operations. These expenses
were approximately 81% of net revenues in 1998 compared to approximately 316%
in 1997. The decrease as a percentage of net revenues is primarily attributable
to increased revenues and subscribers.
Selling and marketing expenses decreased by $274,000 or 6.9% to $3.7
million in 1998 compared to 1997. These expenses represented approximately 41%
of net revenues in 1998 compared to approximately 189% in 1997. The decrease in
both amounts and percentages are due to the Manchester market launch in 1997
and greater efficiencies in 1998.
The increase of $2.7 million or 38.7% in depreciation and amortization
from 1997 to 1998 is principally due to expansion of the network in the
Manchester market which was launched in November 1997.
Operating expenses in excess of net revenues decreased by $142,000 or 0.6%
to $23.6 million in 1998 compared to 1997. This decrease is a result of
increased costs and expenses more than offset by increased net revenues.
Liquidity and Capital Resources
Since inception, our activities have consisted principally of raising
capital, consummating and supporting our agreements with Sprint PCS, developing
the initial design of our network and adding to our management team. We have
relied on the proceeds from equity and debt financing, rather than revenues, as
our primary sources of capital. Specifically, these activities to date have
been funded through equity investments of $138.0 million in the form of common
stock, as well as borrowings of $50.0 million under our $240.0 million senior
credit facilities. See "Description of Certain Indebtedness."
We estimate the capital requirements of the network build-out, the
marketing of our services, operating losses and other capital expenditures for
the period from inception through the end of 2000, will total approximately
$231.0 million. We intend the network in our territory to cover approximately
71% of its 6.2 million residents within four years. Capital expenditures are
expected to include switches, radio base stations, towers, antennas, radio
frequency engineering, cell site acquisition and construction and
administrative assets. Actual amounts of capital required to complete the
network build-out may be materially greater than these estimates.
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We estimate capital expenditures for 2000 will total approximately $145.3
million, including $84.3 million of costs incurred in March 2000 related to
the purchase of 172 operating cell sites and one switch from Sprint PCS.
Although we do not plan to open any additional markets in 2000, our capital
spending in 2000 will be targeted to expand the number of residents that we
cover in our operational markets as well as to improve the quality of service
in areas that we already cover. We estimate that the number of residents
covered by our network will increase to approximately 2.4 million residents,
from the 1.8 million residents covered today. Additionally, at the end of
2000, we estimate that our network will cover approximately 1,400 highway
miles and be comprised of 282 cell sites and three switches, at which time we
expect to cover approximately 39% of the potential customers in our licensed
area.
In 2001, our network build-out will focus on building out the core cities
and towns not covered in our year 2000 build-out, expanding our highway
coverage by 2,100 additional miles and adding approximately 395 new cell
sites. We estimate capital expenditures for 2001 will total approximately
$78.4 million. At the end of 2001, we expect to be able to provide services to
approximately 4.1 million residents, an increase of 1.7 million, and we expect
our network will include 16 markets, 677 cell sites and three switches, span
approximately 3,500 highway miles and cover approximately 67% of the residents
in our licensed area.
During 2002 and 2003, we intend to build out our network in order to
expand the coverage of our existing markets. We estimate capital expenditures
for this period will total approximately $37.0 million. By the end of 2003, we
expect to provide services in 19 of our markets, covering approximately 4.4
million residents, approximately 3,800 highway miles, and approximately 71% of
the residents in our licensed area through the use of approximately 752 cell
sites and three switches. Thereafter, we anticipate providing additional
capacity and improving coverage in the areas already covered.
As part of our management agreement, Sprint PCS requires us to build out
portions of our network by various dates. See "Our Agreements with Sprint PCS
--The Management Agreement--Network Build-Out." Based on our current budget,
we expect our network build-out including the network assets purchased from
Sprint PCS will require approximately $237.3 million of capital expenditures
by the end of 2003. Our capital expenditure budget is comprised of
expenditures mandated by our agreements with Sprint, maintenance expenditures
and discretionary expenditures. Our capital expenditure budget will be
modified based upon the circumstances at the time of the expenditures,
including the preferences of our customers, technological developments and
other factors. The table below identifies our actual and planned capital
expenditures through 2004:
<TABLE>
<CAPTION>
Netwok
Capital Expenditures
(In millions)
<S> <C>
Purchase of Sprint PCS network assets...................... $84.3
2000....................................................... 50.3
2001....................................................... 72.7
2002....................................................... 18.4
2003....................................................... 11.6
</TABLE>
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We expect our credit facilities and the proceeds of this offering to be
the primary sources of funding for our projected capital requirements. Our
$240.0 million senior secured credit facilities include:
. a $70.0 million delayed draw, eight-year revolving credit facility;
. a $120.0 million delayed draw, eight-year term loan facility; and
. a $50.0 million eight and one-half year term loan facility.
We borrowed the full amount available under the $50.0 million term loan
facility in March 2000 at the closing of our purchase from Sprint PCS of the
network assets in our territory. Generally, amounts repaid under the revolving
credit facility may be reborrowed. The availability of the $120.0 million term
loan is subject to the following requirements:
. not less than 25% of the aggregate term loan must be drawn within 6
months of April 1, 2000;
. not less than 50% of the aggregate term loan must be drawn within 12
months of April 1, 2000; and
. not less than 75% of the aggregate term loan must be drawn within 18
months of April 1, 2000.
If less than the required amount is drawn at the expiration of the applicable
period, this term loan commitment will be permanently reduced to the extent of
the undrawn amount relative to that period.
Our senior credit facilities are collateralized by a perfect first
security interest in all our tangible and intangible assets, including an
assignment of our affiliate agreement with Sprint PCS and a pledge of the
capital stock of all of our subsidiaries. The senior credit facilities are
governed by financial covenants that measure our progress against our business
plan and require certain minimum operating results. These covenants, among
other things, restrict our ability to incur additional debt, pay dividends,
make investments, and incur capital expenditures. Scheduled amortization
payments of principal for the term loans under the senior credit facilities
begin on March 31, 2004. In connection with the facilities, we deposited $8.0
million as a compensating balance with the commercial lenders of the
facilities. The compensating balance must be maintained until the senior credit
facilities are repaid in full.
We currently have a commitment for a bridge loan under which we may borrow
up to $100.0 million. The commitment terminates upon the earlier of the
issuance of at least $100.0 million of our debt or equity securities or June
30, 2000. We have not borrowed any amounts under this commitment. We are
currently discussing a possible extension of the commitment with our lenders.
Net cash used in operating activities was approximately $2.3 million for
the three months ended March 31, 2000 and an aggregate of $15.7 million from
inception to March 31, 2000. Cash used in operating activities for the period
was attributable to operating losses and working capital needs. Net cash used
in investing activities was approximately $131.5 million during the three
months ended March 31, 2000. These uses were related primarily to the purchase
of $116.7 million in assets from Sprint PCS, the purchase of $6.6 million of
property and equipment and construction
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in progress, and restricted cash of $8.0 million. Net cash provided by
financing activities was approximately $49.5 million, consisting primarily of
borrowings under our senior credit facilities. At March 31, 2000, $190 million
remained available under the senior credit facilities and we had working
capital of $14.7 million.
Currently, we have insufficient sources of revenue to meet our anticipated
capital requirements. We believe the net proceeds from this offering together
with the borrowings available under our credit facilities will provide us with
funds sufficient to complete our network and provide working capital, including
debt service requirements and operating losses, and for general corporate
purposes through fiscal year 2003. During fiscal year 2003, we anticipate
achieving positive cash flow. Although we estimate that we will have sufficient
funds through 2003, additional funding may be necessary and such funding may be
unavailable.
Recent Accounting Pronouncements
In June 1998 and 1999, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of SFAS No. 133." These statements establish
accounting and reporting standards for derivative instruments and hedging
activities. It requires that entities recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at
fair value. Management believes the adoption of SFAS No. 133 will not have a
material effect on our financial position, results of operations or cash flows.
SFAS No. 133 will be effective for our fiscal year ending December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We are required to adopt SAB 101
in the second quarter of 2000. Management does not expect the adoption of SAB
101 to have a material effect on our financial condition or results of
operations.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to certain market risks which are inherent in our financial
instruments. These instruments arise from transactions entered into in the
normal course of business. We are currently subject to interest rate risk on
our existing credit facilities. Our variable rate debt will consist of
borrowings made under our $240.0 million senior credit facilities.
Our primary market risk exposure will relate to:
. the interest rate risk on long-term and short-term borrowings; and
. the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants.
We may decide, from time to time, to manage the interest rate risk on our
outstanding long-term and short-term debt through the use of fixed and variable
rate debt and interest rate swaps, but are not obligated to do so.
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Inflation
Management believes that inflation has not had, and will not have, a
material adverse effect on our results of operations.
Seasonality
Our business is seasonal because the wireless industry is heavily
dependent on fourth quarter results. Among other things, the industry relies on
significantly higher customer additions and handset sales in the fourth quarter
as compared to the other three calendar quarters. The factors contributing to
this trend include the increasing use of retail distribution, which is
dependent on year-end holiday shopping, the timing of new product and service
offerings, competitive pricing pressures and aggressive marketing and
promotions during the holiday season.
42
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BUSINESS
Overview
We are a Sprint PCS affiliate located in the northeastern United States.
We provide digital wireless personal communications services, or PCS, and
related products to customers as part of Sprint PCS' network. Sprint PCS
operates the only 100% digital personal communications services network in the
United States with licenses to provide nationwide service utilizing a single
frequency band and a single technology. Our territory is comprised of
approximately 6.2 million residents located in 20 contiguous markets across a
large portion of upstate New York, New Hampshire (other than the Nashua
market), Vermont, and portions of Massachusetts and Pennsylvania. Under an
affiliation agreement with Sprint PCS, we have the exclusive right to use all
30 megahertz of Sprint PCS-owned spectrum in our territory for all wireless
services, including wireless local loop services, and the exclusive right to
market and provide personal communications services under the Sprint and Sprint
PCS brand names in our territory. As of May 31, 2000, we served approximately
56,000 subscribers on our personal communications services network that covered
approximately 1.8 million residents in our territory. We expect to cover
approximately 2.4 million residents or approximately 39% of the residents in
our territory by the end of 2000, approximately 4.1 million or 67% of the
residents in our territory by the end of 2001 and approximately 4.3 million
residents or 70% of the residents in our territory by the end of 2002.
Our management team has a strong wireless telecommunications background
with an average of over ten years experience in the industry. Solon L. Kandel,
our President and Chief Executive Officer, has held a number of senior
positions at McCaw Cellular Communications and AT&T Wireless Services where he
was instrumental in the implementation of personal communications services
networks. Other members of the management team have held senior positions for
such prominent U.S. wireless and wireline telecommunications companies as
Sprint PCS, AT&T Wireless, NYNEX Mobile Communications, Triton PCS, Inc.,
Comcast Cellular Communications, NEXTEL Communications, Inc., NEXTLINK
Communications, Inc. and Motorola Communications & Electronics. Members of our
management team have been instrumental in network design, site acquisition,
engineering and deployment of large wireless networks. Additionally, members of
our management team have contributed significantly to the launch and growth of
new wireless operations through successful sales and marketing.
In December 1999, affiliates of Investcorp S.A., certain international
investors arranged by Investcorp S.A. and certain institutional investors made
a $135.0 million equity contribution in our company. In addition, twelve
independent telephone companies located in our territory made a strategic
investment in our company. These independent telephone companies offer existing
customer and other strategic relationships within communities in our territory.
We plan to pursue marketing opportunities with these and other local
independent telephone companies that operate in our territory.
Wireless Industry Overview
Since the introduction of commercial cellular service in 1983, the
wireless communications industry has experienced dramatic growth. The number of
wireless subscribers for cellular, wireless personal communications services
and enhanced specialized mobile radio service has increased from an estimated
340,213 at the end of 1985 to an estimated 86.0 million as of December 31,
1999,
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according to the Cellular Telecommunications Industry Association, an
international association for the wireless industry. The following chart sets
forth statistics for the domestic wireless telephone industry derived from
statistics published by the Cellular Telecommunications Industry Association.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Wireless Industry
Statistics(1)
Total service revenues (in
billions).................. $ 14.2 $ 19.1 $ 23.6 $ 27.5 $ 33.1 $ 40.0
Wireless subscribers at end of
period (in millions)....... 24.1 33.8 44.0 55.3 69.2 86.0
Subscriber growth............. 50.8% 40.0% 30.4% 25.6% 25.1% 24.3%
Average local monthly
bill(2).................... $56.21 $51.00 $47.70 $42.78 $39.43 $41.24
</TABLE>
---------------------
(1) Reflects domestic commercial cellular, enhanced specialized mobile radio
service and wireless personal communications services providers.
(2) Does not include revenue from roaming and long distance.
Paul Kagan Associates, Inc., an independent media and telecommunications
research firm, estimates in its publication, Wireless Telecom Investor--January
14, 2000, that the number of domestic wireless users will increase to
approximately 107.4 million by the end of 2000 and 201.9 million by the end of
2005. We expect this growth to be driven largely by a substantial projected
increase in wireless personal communications services users, who are forecast
to account for approximately 24.6% of total wireless users in 2000 and 42.4% in
2005, representing a significant increase from approximately 17.6% as of the
end of 1999. Paul Kagan Associates projects that total wireless industry
penetration, defined as the number of wireless subscribers nationwide divided
by total United States population, will grow from an estimated 38.2% in 2000 to
68.9% in 2005. The foregoing market statistics may not reflect the future
growth rates of the wireless communications industry or our growth rate.
We believe that a significant portion of the predicted growth in the
consumer market for wireless telecommunications will result from:
. anticipated declines in costs of service;
. increased service and pricing versatility; and
. increased awareness of the productivity, convenience and privacy
benefits associated with the services offered by wireless personal
communications services providers.
We also believe that the rapid growth in the use of laptop computers and
personal digital assistants, combined with emerging software applications for
delivery of electronic mail, fax and database searching, and Internet services
will contribute to the growing demand for wireless services.
Sprint PCS Overview
Sprint is a diversified telecommunications service provider whose
principal activities include long distance service, local service, wireless
telecommunications products and services, product distribution and directory
publishing activities, and other telecommunications activities, investments and
alliances. Sprint PCS, a wholly-owned subsidiary of Sprint, operates the only
100% digital, 100% PCS wireless network in the United States with licenses to
provide service nationwide using a single frequency and a single technology.
The Sprint PCS network uses code division multiple access, or CDMA, technology
nationwide.
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Sprint launched the first commercial personal communications service in
the United States in November 1995. Since then, Sprint PCS has experienced
rapid subscriber growth, providing service to more than 6.5 million customers
as of March 31, 2000. In the first quarter of 2000, Sprint PCS added more than
800,000 new subscribers and during 1999, it added more than 3.1 million new
subscribers. Sprint PCS, together with its affiliates, operates the largest
all-digital, all-PCS nationwide wireless network in the United States, already
serving more than 330 metropolitan markets including more than 4,000 cities and
communities across the country. Sprint PCS has licenses covering more than 270
million people in all 50 states, Puerto Rico and the U.S. Virgin Islands.
However, Sprint PCS does not currently offer personal communications services
in every state in the United States. The graph below illustrates Sprint PCS'
subscriber growth from the beginning of 1997 through the first quarter of 2000.
These statistics may not reflect Sprint PCS' future subscriber growth nor our
subscriber growth.
Sprint PCS currently provides nationwide service through:
. operation of its own digital network;
. strategic affiliations with other companies, such as us, primarily in
and around smaller metropolitan areas;
. roaming on analog cellular networks of other providers using dual-
band/dual-mode handsets; and
. roaming on digital personal communications services networks of other
CDMA-based providers.
Sprint PCS has adopted a strategy to rapidly extend its 100% digital, 100%
PCS network by entering into agreements with independent wireless companies
such as us to construct and manage Sprint PCS markets and market Sprint PCS
services. Through these affiliations, Sprint PCS services will be available in
key cities contiguous to current and future Sprint PCS markets. Sprint PCS'
affiliates are an integral part of its plan to provide nationwide seamless
coverage.
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Benefits from Sprint PCS Affiliation
Our long-term strategic affiliation with Sprint PCS provides us with many
business, operational and marketing advantages including the following:
Exclusive provider of Sprint PCS products and services. We have the
exclusive right to use the Sprint and Sprint PCS brand names for the sale of
all Sprint PCS products and services in our territory. We provide these
products and services exclusively under the Sprint and Sprint PCS brand names.
Sprint PCS licenses and long-term commitments. We have the exclusive right
to use Sprint PCS' licensed spectrum to provide Sprint PCS products and
services in our territory. Sprint PCS has invested approximately $90 million to
purchase the wireless personal communications services licenses in our
territory and to pay costs to remove sources of microwave signals that
interfere with the licensed spectrum, a process generally referred to as
microwave clearing. As a Sprint PCS affiliate, we did not have to fund the
acquisition of these licenses, thereby reducing our start-up costs. Our
agreements with Sprint PCS are for a total of 50 years, including an initial
term of 20 years and three 10-year renewal terms. These agreements will
automatically renew for the renewal period unless at least two years prior to
the commencement of any renewal period either party notifies the other party
that it does not wish to renew the agreement.
Nationwide network. Sprint PCS operates the only 100% digital personal
communications services network in the United States with licenses to provide
nationwide service utilizing a single frequency band and single technology,
providing consistent high quality service. As of December 31, 1999, Sprint PCS,
together with its affiliates, operated personal communications systems
providing service in metropolitan markets within the United States containing
nearly 195 million people nationwide, including all of the 50 largest
metropolitan markets. We plan to operate our personal communications services
network seamlessly with the Sprint PCS network, providing our customers with
the ability to place calls in any Sprint PCS service area throughout the United
States without incurring additional charges while traveling on Sprint PCS'
network or, under certain pricing plans, incurring only long distance charges.
We will reimburse Sprint PCS and its affiliates for our customers' usage while
traveling on their portion of the Sprint PCS network. In addition, we expect to
derive additional revenue from Sprint PCS and its customers when their
customers based outside of our territory travel on our portion of the Sprint
PCS network.
Established direct and indirect distribution channels. We have access to
all the national distribution channels used by Sprint PCS. These channels
include:
. national third-party retailers such as Radio Shack, Ritz Camera, K-
Mart, Staples, Office Max, Best Buy, Circuit City and Office Depot;
. Sprint PCS' national inbound telemarketing sales program, accessible
by dialing 1-800-480-4PCS;
. Sprint PCS' business-to-business and national accounts sales programs;
and
. Sprint PCS' electronic commerce sales platform.
Sprint PCS' national brand name recognition and national advertising
support. We benefit from the strength and the reputation of the Sprint and
Sprint PCS brands. Sprint PCS' national
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advertising campaigns and developed marketing programs are provided to us at
little or no additional cost under our Sprint PCS agreements. We offer the same
strategic pricing plans, promotional campaigns and handset and accessory
promotions as Sprint PCS, and have the ability to add pricing plans and
marketing promotions that target local market needs.
Better equipment availability and pricing. We are able to acquire our
network equipment, handsets and accessories more quickly and at a significantly
lower cost than we would without our strategic relationship with Sprint PCS. We
purchase our network equipment, handsets and accessories under Sprint PCS'
vendor arrangements that provide for volume discounts. These discounts
significantly reduce the overall capital required to build our network and
significantly reduce our costs of handsets and accessories.
Sprint PCS Wireless Web. Our network will support and market the Sprint
PCS Wireless Web. The Sprint PCS Wireless Web allows customers with data
capable or web-browser enabled handsets to connect to the Internet and browse
specially designed text-based web sites, including AOL, Yahoo!, Amazon.com,
Bloomberg.com, CNN Interactive, MapQuest.com, Fox Sports, EBay.com, E-Compare,
FTD.com, GetThere.com, Ameritrade, InfoSpace.com, weather.com and
barnesandnoble.com. For more information on the Sprint PCS Wireless Web, see
"--Products and Services--Access to the Sprint PCS Wireless Web."
Sprint PCS' extensive research and development. We benefit from Sprint
PCS' extensive research and development effort, which provides us with ongoing
access to new technological products and enhanced service features without
significant research and development expenditures of our own. We have prompt
access to any developments produced by Sprint PCS for use in our network.
Sprint PCS' proven back office services. We have contracted with Sprint
PCS to provide critical back office services, including customer activation,
handset logistics, billing, customer care and network monitoring services.
Since we do not have to establish and operate our own systems, we are able to
focus on accelerating our market launches, acquiring and retaining customers
and capitalizing on Sprint PCS' economies of scale. In our markets, Sprint PCS
also offers engineering services that may be required for microwave clearance
and handles any design, planning and relocation of related facilities.
Other Competitive Strengths
In addition to the benefits from our strategic affiliation with Sprint
PCS, our other competitive strengths, including the following, will enable us
to successfully execute our business strategy.
Our Attractive Markets
We believe our markets have attractive characteristics that may result in
high wireless penetration rates and superior revenues per subscriber. These
attractive characteristics include the following:
. Strategic northeast location. Our territory is surrounded by many of
the major urban centers in the northeastern United States and Canada
including: New York City, Boston, Buffalo, Rochester, Toronto and
Montreal. Sprint PCS has systems covering approximately 36.6 million
residents in territories adjacent to ours. In addition, our territory
is traversed by several well traveled interstate highways, including
the New York State Thruway (I-90 and I-87), that link the major
centers to significant business and
47
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governmental centers, including state capitals, in our territory. We
believe that, upon the substantial completion of our network build-
out, our location will generate significant traveling revenue for us.
. High demand for wireless services. Although we believe that our
territory is underserved by other wireless providers, it has a
wireless penetration rate that is higher than the national average. We
believe the regional nature of the northeast economy results in a
relatively mobile population which contributes to increased demand for
wireless services. Additionally, our territory is surrounded by well-
developed Sprint PCS markets that we believe increase awareness in our
markets and make it easier for us to market our products and services.
Since the beginning of the year, we have added over 11,000 net new
subscribers and as of May 31, 2000 served over 56,000 subscribers.
. Attractive footprint. Our markets are contiguous and approximately 60%
of the residents in our markets are located in less than 25% of the
total square mileage in our territory. The relatively high population
densities of the major urban centers in our territory (the
Albany/Schenectady basic trading area, which includes the state
capital of New York, is the largest market contained in the territory
of any Sprint PCS affiliate) make it easier to market wireless
services. We believe this enables us to lower the cost of building out
our network, reduce the costs of operations including network
maintenance and transmission costs, better control the service quality
of our network, and offer customized regional calling plans such as
large local calling areas.
. Numerous tourist destinations. Our markets contain numerous tourist
destinations including: Lake Champlain, Lake Placid, Lake George, the
Finger Lakes, Saratoga Springs, Cooperstown (location of the Baseball
Hall of Fame and the Glimmerglass Opera House), the Berkshires, the
Catskills, Tanglewood and numerous ski resorts, including Hunter and
Whiteface Mountains, Killington, Okemo, Mt. Snow, Stratton, Stowe and
Sugarbush. We believe that Sprint PCS customers traveling within our
service area will provide a significant source of traveling revenue
for us.
. Attractive competitive environment. We currently face fewer strong
competitors in our territory than is generally the case for wireless
service providers in many other areas. Although our competitors have
licenses that cover the markets in our territory, their coverage is
typically fragmented. In some cases, our competitors employ analog
technology. Some of these networks may be incompatible with roaming on
a digital system. In addition, some of our competitors have configured
their networks to only cover highways. We believe that our largest
competitor in terms of market coverage, Verizon Wireless, serves
approximately 65% of our markets and that our next largest competitor,
SBC Communications, serves approximately 30% of our markets.
. Numerous colleges and universities. Our markets are home to major
colleges and universities of national and international renown. Our
markets have 70 four-year colleges and universities with a total
enrollment of more than 254,000 students. We believe college students
are receptive to new technology and are particularly attracted to the
wireless voice and data services we provide.
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Existing Network Infrastructure and Subscribers
We believe the subscriber base and existing operating network that we
purchased from Sprint PCS provided us with an excellent base from which to
expand our operations. As of May 31, 2000, we served approximately 56,000
subscribers on our personal communications services network that covered
approximately 1.8 million residents and included 172 operating cell sites and
one switch. This network covers the Albany/Schenectady basic trading area,
which is the largest single market managed by a Sprint PCS affiliate; Syracuse
and Orange County, New York; Manchester, New Hampshire; and major highways
including Interstate Routes 87 and 90.
30 Megahertz of Spectrum
Since Sprint is not a local exchange carrier in our territory, we have the
exclusive right to use all 30 megahertz of Sprint PCS-owned spectrum throughout
our territory for all wireless services, including fixed wireless or wireless
local loop services.
Fixed wireless or wireless local loop is the use of wireless radio
frequencies in lieu of traditional copper or fiber-optic cables to connect
homes and businesses to the public telephone system and the Internet. Current
wireless digital technologies provide fiber-like broadband transmission speeds,
capacity and quality.
The availability of the full 30 megahertz of wireless spectrum combined
with CDMA technology gives us the capacity, speed and flexibility to meet the
growing demand for high speed, broadband communications, fixed and mobile,
including local and long distance voice, data and entertainment transmissions.
Fully Financed Business Plan
We estimate we require an aggregate of approximately $339.6 million of
capital to fully fund from our inception the acquisition of the Albany,
Syracuse and Manchester markets, the planned construction of our network and
the initial operating losses through 2003, during which year we expect to
achieve positive cash flow. After this offering, we believe we will have
sufficient capital to fund our plan. Components of our capital structure
include:
. $ million of estimated net proceeds from this offering;
. $138.0 million of private equity; and
. $240.0 million of bank credit facilities.
Business Strategy
We are a full-service provider of wireless voice, data and Internet
personal communications services and products in our territory. We believe that
the following elements of our business strategy will enable us to rapidly
expand our portion of the Sprint PCS network, distinguish our wireless service
offerings from those of our competitors and compete successfully in the
wireless communications marketplace.
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Build High Quality Personal Communications Services Network
We are constructing a state-of-the-art, high quality 100% personal
communications services network using 100% digital technology.
. Our network design allows our system to handle higher traffic demand
than cellular operators and other personal communications services
operators who do not employ CDMA technology. This allows us to offer
lower per-minute rates.
. We use cost-effective equipment such as repeaters and micro cells in
our network design which enables us to reach difficult locations and
coverage gaps within our wireless network, reducing our capital
expenditures and overall operating costs.
. We will maintain low construction costs for our network by planning to
collocate on existing towers as our primary strategy and developing
our radio frequency design around this strategy.
. We plan to leverage our relationships with our 12 local independent
telephone company strategic investors to acquire difficult-to-obtain
cell sites in remote locations.
. We plan for our network to cover both densely populated areas, in
order to provide a higher quality network to a significant portion of
the residents in our territory, and highways and destination points,
including well-known ski resorts, lakes and vacation spots, in order
to capture traveling revenues.
Execute an Integrated Marketing Plan
Our marketing approach leverages Sprint PCS's highly recognizable brand
name and reputation and its relationship with major national retailers. We
emphasize the improved quality, enhanced features and favorable pricing of
Sprint PCS service. In addition, we benefit from Sprint PCS':
. organized national accounts sales force;
. e-commerce web site; and
. pre-negotiated contracts with national retailers.
To complement our national benefits from Sprint PCS on the local level,
we:
. market our products and services using point-of-sale, direct mail,
telemarketing, radio and print campaigns;
. distribute our products and services through our own Sprint-branded
and Sprint PCS stores, a business focused sales force and local agents
and retailers; and
. plan to pursue marketing opportunities with the 12 local independent
telephone companies located in our territory which have made a
strategic investment in our company.
We believe that our strategy will help us to maximize market penetration
and minimize customer turnover.
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Develop an Efficient Operating Structure
We intend to maximize operating efficiency by using Sprint PCS' existing
back office services. As the customer base in our territory grows, we may elect
to develop our own internal systems for certain back office functions, such as
customer activation, billing and customer care, or outsource such functions
directly to third-party vendors if it is more cost-effective. In the interim,
the immediate availability of Sprint PCS' back office services significantly
reduces our risks of execution in starting and growing our business and allows
us to focus more attention on building our network and acquiring and keeping
customers. For example, we intend to purchase billing and customer care from
Sprint PCS on a per-subscriber basis, thereby avoiding the costly, time-
consuming and labor-intensive tasks of building our own systems.
Pursue Selective Acquisitions
We plan to evaluate and explore opportunities for strategic expansion,
both with Sprint PCS and other possible affiliations.
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Markets and Build-Out Plan
Our territory encompasses approximately 6.2 million people located within
20 markets in the northeastern United States. Our territory is cradled by the
metropolitan areas of New York City, Boston, Buffalo, Rochester, Montreal and
Toronto. The territory extends from suburban New York City (Orange and Sullivan
Counties) north to the Canadian border. Our territory reaches from the eastern
suburbs of Rochester to Syracuse, Ithaca, Binghamton and Elmira in Central New
York State, east to include all of Vermont and New Hampshire (except Nashua,
New Hampshire, but including the extreme northwestern suburbs of Boston).
Details of our market and build-out plan are as follows:
<TABLE>
<CAPTION>
Percentage
of Estimated
Covered
Market
Estimated Expected Population
Basic Market Initial at
Trading Population Date of December 31, Megahertz
Market Area(1) (In thousands) Operation 2003 of Spectrum
------ ------- -------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Albany/Schenectady, NY.. 7 1,034 Operating 91% 30
Syracuse, NY............ 438 778 Operating 98% 30
Poughkeepsie, NY........ 361 430 Operating 69% 30
Orange/Sullivan County,
NY................... 321 404 Operating 59% 30
Binghamton, NY, PA...... 43 335 Q1 2001 67% 30
Utica, NY............... 453 282 Operating 74% 30
Elmira, NY, PA.......... 127 310 Q3 2002 45% 30
Watertown, NY........... 463 302 Q2 2003 60% 30
Plattsburgh, NY......... 352 111 Q3 2002 59% 30
Glen Falls, NY.......... 164 123 Q4 2000 62% 30
Oneonta, NY............. 333 108 Q3 2002 66% 30
Ithaca, NY.............. 208 97 Q4 2002 59% 30
Manchester, NH.......... 274 513 Operating 73% 30
Rockingham/Strafford
County, NH........... 51 394 Operating 53% 30
Lebanon, NH............. 249 177 Q2 2003 50% 30
Keene, NH............... 227 115 Q1 2003 51% 30
Burlington, VT.......... 63 400 Q2 2003 63% 30
Rutland, VT............. 388 99 Operating 50% 30
Pittsfield, MA.......... 351 133 Operating 55% 30
Total--Estimated 2000
Market
Population(2)........ 6,176
</TABLE>
---------------------
(1) A basic trading area, or BTA, is a collection of counties surrounding a
metropolitan area in which there is a commercial community of interest. The
basic trading area number in the table is assigned to that market by the
Federal Communications Commission for the purpose of issuing licenses for
wireless services.
(2) Estimated total population is based on 1998 Paul Kagan Associates, Inc.
data for each BTA within a given market extrapolated based on estimated
Kagan growth rates by BTA and is adjusted for BTAs not in our territory.
Estimated BTA residents may not add-up due to rounding.
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Within the region there are significant volumes of traffic on major
highways including the Massachusetts Turnpike (I-90), the New York State
Thruway (I-87), the Northway, and several other interstate highways.
<TABLE>
<CAPTION>
Linear Miles Avg. Daily
Between Areas Linear Miles Traffic Count
Interstate Areas Linked Linked Within Territory in Territory
---------- ------------ -------------- ----------------- --------------
<S> <C> <C> <C> <C>
I-84 Danbury, CT to the Catskill
Mountains 79 58 20,745
I-87 Main route from New York City to
Albany to Montreal, Canada 376 288 21,292
I-89 Burlington, VT to Concord, NH 189 189 21,396
I-90 Boston to Buffalo via Albany,
Syracuse, & Rochester, NY 456 212 31,365
I-95 Boston, MA to Portland, ME 107 16 53,587
I-93 St. Johnsbury, VT to Boston, MA 171 141 28,856
I-81 Canadian border south through the
Appalachian Mountains via
Syracuse and Binghamton, NY 1,302 170 14,800
I-91 Canadian border south to new
Haven, CT via Hartford, CT, and
Springfield, MA 310 174 15,200
----- ----- -------
Total................................................. 2,990 1,248 207,241
</TABLE>
Build-out Strategy. Sprint PCS has developed an operating network in eight
markets within our territory which will serve as a foundation for our network.
In 2000, we expect to expand coverage of the markets acquired from Sprint PCS
and launch service in the markets in our territory with the highest population
densities. In 2001, we expect to build out the next eight mostly densely
populated markets in our territory and expand our highway coverage. In 2002 and
2003, we expect to expand our coverage of our existing markets. The following
table summarizes cumulative operating data and timing of this network build-out
plan:
<TABLE>
<CAPTION>
As of December
31,
-------------------
Network Build-Out Plan(1) 2000 2001 2003
------------------------- ----- ----- -----
<S> <C> <C> <C>
Number of Markets.......................................... 8 16 19
Residents in Launched Markets (in thousands)............... 3,968 5,753 6,144
% Total 2000 Residents..................................... 64% 93% 99%
Covered Residents (in thousands)........................... 2,425 4,108 4,365
% Total 2000 Residents..................................... 39% 67% 71%
Miles of Highway........................................... 1,427 3,538 3,789
Switches................................................... 3 3 3
Cell Sites................................................. 282 677 752
</TABLE>
---------------------
(1) Total population covered and total cells will depend on the final network
design and site availability.
Products and Services
We offer established products and services throughout our territory under
the Sprint and Sprint PCS brand names. Our products and services are designed
to mirror the service offerings of Sprint PCS and to integrate with the Sprint
PCS network. The Sprint PCS products and services we currently offer include
the following:
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100% Digital, 100% PCS Network
We are part of the only 100% digital, 100% wireless PCS network in the
country. Sprint PCS and its affiliates cover more than 190 million people in
more than 330 metropolitan areas across the country. Although Sprint PCS and
its affiliates do not currently offer personal communications services in every
state in the United States, they provide an extended coverage area for our
customers, allowing access to Sprint PCS services throughout the Sprint PCS
network. Dual-band/dual-mode handsets allow roaming on wireless networks where
Sprint PCS has roaming agreements.
Access to the Sprint PCS Wireless Web
We offer and support the recently announced "Sprint PCS Wireless Web" in
our territory. The Sprint PCS Wireless Web allows customers with data capable
handsets to connect their portable computers or personal digital assistants to
the Internet. Sprint PCS customers with data capable handsets also have the
ability to receive selected information updates, including stock prices, sports
scores and weather reports. Sprint PCS customers with web-browser enabled
handsets have the ability to connect to and browse specially designed text-
based Internet sites on an interactive basis. Sprint PCS has agreements with
Internet companies including AOL, Yahoo!, Amazon.com, Bloomberg.com, CNN
Interactive, MapQuest.com, Fox Sports, EBay.com, E-Compare, FTD.com,
GetThere.com, Ameritrade, InfoSpace.com, weather.com and barnesandnoble.com to
provide services for the Sprint PCS Wireless Web.
Service Packages
Sprint PCS offers various pricing options including a fixed number of
updates or a bundle of data minutes as add-ons to existing Sprint PCS "Free and
Clear" plans or a bundle of minutes for a set price that can be used for either
data or voice. Additionally, we will be able to offer local pricing plans
tailored to our customers' needs and market interests.
Advanced Handsets and Longer Battery Life
We primarily offer a selection of dual-band handsets with various advanced
features and technology, such as Internet readiness described in "--Access to
the Sprint PCS Wireless Web" above. All handsets are equipped with pre-
programmed features such as caller ID, call waiting, phone books, speed dial
and last number redial and are sold under the Sprint and Sprint PCS brand
names. CDMA handsets weighing approximately five to seven ounces offer up to
five days of standby time and approximately four hours of talk time. We also
offer dual-band/dual-mode handsets that allow customers to make and receive
calls on both personal communications services and cellular frequency bands
with the applicable digital or analog technology. These handsets allow roaming
on cellular networks where Sprint PCS digital service is not available. When
roaming in analog markets, stand-by and talk times are greatly reduced.
Privacy and Security
Sprint PCS provides voice transmissions encoded into a digital format with
a significantly lower risk of unauthorized use and eavesdropping than analog-
based systems. Sprint PCS customers using dual-band/dual-mode handsets in
analog mode, such as when roaming, do not have the benefit of digital security.
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Improved Voice Quality
We believe that, compared to time division multiple access and analog
technologies, CDMA technology offers significantly improved voice quality, more
powerful error correction, less susceptibility to call fading and enhanced
interference rejection, all of which result in fewer dropped calls.
Simple Activation
Customers can purchase a Sprint PCS handset at a retail location and
activate their service and program the handset by calling Sprint PCS customer
care.
Customer Care
Sprint PCS provides customer care services to customers based in our
territory under our services agreement. Sprint PCS offers customer care 24
hours a day, seven days a week. Customers can call the Sprint PCS toll-free
customer care number from anywhere in the country. All Sprint PCS handsets are
pre-programmed with a speed dial feature that allows customers to easily reach
customer care at any time by dialing "*2". Customers may also check their
accounts by dialing "*4" from their Sprint PCS phone. In addition, customers
may manage their Sprint PCS accounts through the Internet on the Sprint PCS web
site.
Other Services
In addition to the above-stated services, and since Sprint is not a local
exchange carrier in our territory, we may also offer wireless local loop
services throughout our territory. We also believe that new features and
services will be developed on the Sprint PCS national network to capitalize on
CDMA technology. Sprint PCS conducts ongoing research and development to
produce innovative services that are intended to give Sprint PCS a competitive
advantage. We expect to benefit from Sprint PCS' research and development,
although we may incur additional expenses in modifying our technology to
provide these additional features and services.
Traveling and Roaming
Sprint PCS Traveling. On-network usage between Sprint PCS and its
affiliate markets is referred to as "travel." Sprint PCS traveling includes
inbound travel, when a Sprint PCS subscriber based outside of our territory
uses our portion of the Sprint PCS network, and outbound travel, when a Sprint
PCS subscriber based in our territory uses the Sprint PCS network outside of
our territory. Sprint PCS pays us a per minute fee for inbound Sprint PCS
travel. Similarly, we pay a per minute fee to Sprint PCS for outbound Sprint
PCS travel. Pursuant to our affiliation agreements with Sprint PCS, Sprint PCS
has the discretion to change the per minute rate for Sprint PCS inbound travel
revenues and outbound travel fees. Currently, outbound travel exceeds inbound
travel. We believe this is due to our small network build compared to the
extensive builds in the surrounding metropolitan areas. In order to relieve us
of the cash outflow that would otherwise occur during our network build-out,
our management agreement with Sprint PCS provides that until December 31, 2002
we will not be required to pay more fees for outbound travel than we receive
for inbound travel. Because we serve smaller markets adjacent to larger
metropolitan areas and due to the large number of recreation and destination
points in our markets, we believe inbound travel will exceed outbound travel
once we have substantially built out our network.
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<PAGE>
Non-Sprint PCS Roaming. Non-Sprint PCS roaming includes both inbound non-
Sprint PCS roaming, when a non-Sprint PCS subscriber uses our portion of the
Sprint PCS network, and outbound non-Sprint PCS roaming, when a Sprint PCS
subscriber based in our territory uses a non-Sprint PCS network. Pursuant to
roaming agreements between Sprint PCS and other wireless service providers,
when another wireless service provider's subscriber uses our portion of the
Sprint PCS network, we earn inbound non-Sprint PCS roaming revenue. These
wireless service providers must pay fees for their subscribers' use of our
portion of the Sprint PCS network and, as part of our collected revenues under
our management agreement with Sprint PCS, we are entitled to 92% of these fees.
Currently, pursuant to our services agreement with Sprint PCS, Sprint PCS bills
these wireless service providers for these fees. When another wireless service
provider provides service to one of the Sprint PCS subscribers based in our
territory, we pay outbound non-Sprint PCS roaming fees for that service. Sprint
PCS then bills the Sprint PCS subscriber for use of that provider's network at
rates specified in his or her contract and pays us 100% of this outbound non-
Sprint PCS roaming revenue collected from that subscriber on a monthly basis.
For a discussion of products and services provided under our management
agreement with Sprint PCS, see "Our Agreements with Sprint PCS--The Management
Agreement--Products and Services." For a discussion of roaming fees and prices
under our management agreement with Sprint PCS, see "Our Agreements with Sprint
PCS--The Management Agreement--Service Pricing, Roaming, Travel and Fees."
Marketing
We use a marketing approach that leverages Sprint PCS' nationwide
licenses, brand name and proven strategies which have helped Sprint PCS to
become a rapidly growing, leading provider of personal communications services
in the United States. Simultaneously, our marketing approach capitalizes on our
regional focus and our flexibility, through pricing and marketing enhancements,
to respond quickly to changing customer needs.
Use of Sprint PCS' Brand Name and Marketing. We will continue to build on
Sprint PCS' national distribution channels and advertising programs by
featuring exclusively and prominently the nationally recognized Sprint and
Sprint PCS brand names in our marketing efforts. We expect our customers to
perceive and use our personal communications services network, the Sprint PCS
national network and its affiliates' networks as a unified national network.
Pricing. We use Sprint PCS' pricing strategy to offer our customers
simple, easy-to-understand pricing plans. Sprint PCS' consumer pricing plans
are typically structured with competitive monthly recurring charges for a fixed
number of minutes and per-minute rates for excess usage beyond the plan amount.
Lower per-minute rates relative to analog cellular providers are possible in
part because the CDMA technology that both we and Sprint PCS employ has greater
capacity than current analog cellular systems, enabling us to market high-use
customer plans at significantly lower prices. Sprint PCS' current national
plans typically:
. include large local calling areas;
. offer the option of service features such as voicemail, enhanced
caller ID, call waiting, and three-way calling;
. include minutes in any Sprint PCS market with no traveling charges;
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<PAGE>
. require no annual contracts;
. offer a wide selection of feature-rich phones to meet the needs of
consumers and businesses; and
. provide a limited-time money-back guarantee on Sprint PCS phones.
In addition, Sprint PCS' "Free and Clear" national calling plans include
one additional service option, such as long distance calling from anywhere on
the Sprint PCS national network to anywhere in the United States at no
additional charge.
Advertising. We can use the Sprint PCS brand and logo in all of our
wireless communications marketing efforts and external communications. Sprint
PCS has launched a national advertising campaign to promote its products, and
we expect to use the Sprint PCS name and reputation to attract customers more
efficiently than we could if we did not have the benefit of the use of the
Sprint PCS name.
In addition, Sprint PCS is a sponsor of numerous selective, broad-based
national and regional events. These sponsorships provide Sprint PCS with brand
name and product recognition in high profile events, provide a forum for sales
and promotional events and enhance our promotional efforts in our territory.
Local Focus. Our advertising and promotional program is tailored to our
territory and may consist of local radio, television, printed collateral,
billboards, and newspaper advertising. We are expanding a local sales force to
execute our marketing strategy through direct business-to-business contacts,
company owned retail stores, local distributors and other channels. Finally,
because we can leverage the Sprint PCS brand allowing us to achieve our
objectives more efficiently than competitors with lower brand awareness, we
will be able to devote more of our resources to local rather than national or
brand awareness building communications. See "Our Agreements with Sprint PCS--
The Management Agreement--Advertising and Promotions."
Bundling of Services. We capitalize on the complete array of
communications services offered by bundling Sprint PCS services with other
Sprint products, such as long distance and Internet access.
Customer Segmentation. We have two customer target segments.
. Consumer Market. We target two consumer market segments: wireless
intenders and wireless users. The wireless intender does not currently
own or use a wireless phone but believes they will purchase a phone in
the next six months, while the wireless user currently subscribes to a
wireless service. We prepare appropriate marketing programs to target
these customer segments, specifically addressing key service needs
including superior clarity, base level services, functional quality
and service reliability.
. Business Market. We target small- to medium-sized business customers
with a differentiated, more locally oriented wireless product by
highlighting the all-digital nature of Sprint PCS' network, the
network's superior quality, capacity and coverage, increased security,
and increased functionality through advanced features. Business
professional users typically have much higher average minutes of use
and are more receptive to lower-priced bundled packages. Our service
area has an attractive pool of over 157,000 potential business
enterprises, according to U.S. Census County Business Patterns, 1997.
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Sales and Distribution
Our sales and distribution plan mirrors and builds upon Sprint PCS' proven
multiple channel sales and distribution plan. We have identified the following
six distribution channels that combine traditional cellular channels like
retail stores, with more innovative outlets such as web-based sales, to reach
our target markets.
. Sprint PCS retail sales. We operate our own Sprint PCS-branded retail
stores within our coverage area, primarily targeting the non-business
consumer. We currently have three retail stores and plan to expand to
30 stores by the end of 2004. We will locate our stores in principal
metropolitan markets within our territory, providing us with a strong
local presence and a high degree of visibility. Our showrooms are
designed in accordance with Sprint PCS specifications and branded as
Sprint PCS stores.
. Business-to-business sales. Our direct sales force is focused on
business users.
. Sprint PCS national sales effort. Sprint PCS has an extensive national
account marketing program that focuses on the corporate headquarters
of Fortune 1,000 companies. Once a Sprint PCS representative reaches
an agreement with the corporate headquarters, we service the offices
of that corporation on a local basis and record the revenue generated
by the corporate client. We reimburse Sprint PCS for certain purchase
costs related to those customers. We visit local branches of Sprint
PCS' national accounts to reinforce the relationship with Sprint PCS.
. Indirect sales. Indirect sales is also commonly referred to as the
dealer channel. Within our territory, Sprint PCS has approximately 192
retail points of sale under third-party agent agreements, including 83
Radio Shack stores, 23 Ritz Camera stores, 17 K-Mart stores, 17
Staples stores, 14 Office Max stores, six Best Buy stores, five
Circuit City Stores, three Tweeter stores, four May Department Stores,
one Montgomery Ward store, one TSR Wireless location, one Office Depot
store and 17 local agents. Additionally, we have relationships with 12
local independent telephone companies that currently operate in the
markets we plan to serve. We intend to capitalize on these
relationships to further penetrate our markets.
. Telemarketing. Sprint PCS operates both inbound and outbound
telemarketing services. Sprint PCS' telemarketing efforts are targeted
primarily to current or previous Sprint long distance customers. As
the exclusive provider of Sprint PCS products and services in our
market, we use the national Sprint "1-800-480-4PCS" number campaigns
that generate call-in leads. These leads are handled by Sprint PCS'
inbound telemarketing group.
. Alternative sales channels. Sprint PCS launched an Internet web site
in December 1998 which contains information on Sprint PCS products and
services. We sell personal communications services over Sprint PCS'
web site and use Sprint PCS' "phone-in-a-box" program, which enables
activation by dialing 1-800-480-4PCS.
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Technology
General
In the commercial wireless communications industry there are two principal
services licensed by the Federal Communications Commission for transmitting
two-way, real-time voice and data signals: "cellular" and "personal
communications services." In addition, enhanced specialized mobile radio
service, a relatively new technology, allows for interconnected two-way real
time voice and data services. The Federal Communications Commission licenses
these applications, each of which operates in a distinct radio frequency block.
Cellular, which uses the 800 megahertz frequency block, was the original form
of widely-used commercial wireless voice communications. Cellular systems are
predominantly analog-based, but over the last several years cellular operators
have started to use digital service in the 800 megahertz frequency block.
Digital services have been deployed, as a complement to the analog based
services, in most of the major metropolitan markets.
In 1993, the Federal Communications Commission allocated the 1900
megahertz frequency block of the radio spectrum for wireless personal
communications services. Wireless personal communications services differ from
traditional analog cellular telephone service principally in that wireless
personal communications services systems operate at a higher frequency and
employ advanced digital technology. Analog-based systems send signals in which
the transmitted signal resembles the input signal, the caller's voice. Digital
systems convert voice or data signals into a stream of digits that permit a
single radio channel to carry multiple simultaneous transmissions. Digital
systems also achieve greater frequency reuse than analog systems, resulting in
greater capacity than analog systems. This enhanced capacity, along with
enhancements in digital protocols, allows digital-based wireless technologies,
whether using wireless personal communications services or cellular
frequencies, to offer new and enhanced services, including greater call privacy
and more robust data transmission, such as facsimile, electronic mail and
connecting notebook computers with computer/data networks.
Wireless communications systems, whether personal communications services
or cellular, are divided into multiple geographic coverage areas, known as
"cells." In both personal communications services and cellular systems, each
cell contains a transmitter, a receiver and signaling equipment, known as the
"base station." The base station is connected by microwave or landline
telephone lines to a switch that uses computers to control the operation of the
cellular or personal communications services network system. The system:
. controls the transfer of calls from cell to cell as a subscriber's
handset travels;
. coordinates calls to and from handsets;
. allocates calls among the cells within the system; and
. connects calls to the local landline telephone system or to a long
distance carrier.
Wireless communications providers establish interconnection agreements
with local exchange carriers and interexchange carriers, thereby integrating
their system with the existing landline public telecommunications system and
the Internet. Because the signal strength of a transmission between a handset
and a base station declines as the handset moves away from the base station,
the switching
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office and the base station monitor the signal strength of calls in progress.
When the signal strength of a call declines to a predetermined level, the
switching office may "hand off" the call to another base station where the
signal strength is stronger.
Wireless digital signal transmission is accomplished through the use of
various forms of frequency management technology or "air interface protocols."
Personal communications systems operate under one of three principal air
interface protocols, code division multiple access, commonly referred to as
CDMA, time division multiple access, commonly referred to as TDMA, or global
system for mobile communications, commonly referred to as GSM.
Time division multiple access and global system for mobile communications
are both time division multiple access systems but are incompatible with each
other. The CDMA system is incompatible with both of those systems. Accordingly,
a subscriber of a system that utilizes CDMA technology is unable to use a CDMA
handset when traveling in an area not served by CDMA-based wireless personal
communications services operators, unless the customer carries a dual-
band/dual-mode handset that permits the customer to use the analog cellular
system in that area. The same issue would apply to users of the other systems.
All of the wireless personal communications services operators now have
dual-mode or tri-mode handsets available to their customers. Because digital
networks do not cover all areas in the country, these handsets will remain
necessary for segments of the subscriber base.
Code Division Multiple Access Technology
Sprint PCS' national network and its affiliates' networks all use digital
CDMA technology. We believe that CDMA technology provides important system
performance benefits such as:
. Greater capacity. We believe, based on studies by manufacturers of
CDMA products, that CDMA systems can provide system capacity that is
approximately eight to ten times greater than that of current analog
technology and approximately three to six times greater than time
division multiple access systems and global system for mobile
communications systems.
. Superior voice quality. We believe that CDMA technology provides
superior voice quality and reduces background noise.
. Privacy and security. One of the benefits of CDMA technology is that
it combines a constantly changing digital coding scheme with a low
power signal to enhance call security and privacy.
. Soft hand-off. CDMA systems transfer calls throughout the CDMA network
using a technique referred to as a soft hand-off, which connects a
mobile customer's call with a new cell site while maintaining a
connection with the cell site currently in use. CDMA networks monitor
the quality of the transmission received by multiple cell sites
simultaneously to select a better transmission path and to ensure that
the network does
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not disconnect the call in one cell unless replaced by a stronger
signal from another cell site. Analog, time division multiple access
technology and global system for mobile communications technology
networks use a "hard hand-off" that disconnects the call from the
current cell site and connects with a new cell site without any
simultaneous connection to both cell sites, which results in more
dropped calls.
. Simplified frequency planning. Frequency planning is the process used
to analyze and test alternative patterns of frequency use within a
wireless network to minimize interference and maximize capacity.
Unlike systems based on time division multiple access technology or
global system for mobile communications technology, systems based on
CDMA technology can reuse the same subset of allocated frequencies in
every cell, substantially reducing the need for costly frequency reuse
patterning and constant frequency plan management.
. Longer battery life. Due to their greater efficiency in power
consumption, CDMA handsets can provide longer standby time and more
talk time availability when used in the digital mode than handsets
using alternative digital or analog technologies.
While CDMA technology has the inherent benefits discussed above, time
division multiple access networks are generally less expensive when overlaying
existing analog systems because time division multiple access spectrum usage
is more compatible with analog spectrum planning. In addition, global system
for mobile communications technology, unlike CDMA technology, allows multi-
vendor equipment to be used in the same network. This, along with the fact
that global system for mobile communications technology is currently more
widely used throughout the world than CDMA technology, provides economies of
scale for handset and equipment purchases. A standards process is also
underway which will allow wireless handsets to support analog, time division
multiple access and global system for mobile communications technologies in a
single unit. Currently, there are no plans to have CDMA handsets that also
support either the time division multiple access or global system for mobile
communications technologies.
Equipment
We will utilize Sprint PCS' approved vendors to obtain switch and cell
site equipment and handsets at estimated savings of up to 30% to 40% of the
price we would otherwise pay as a small independent wireless company. We are
entitled to these discounts as a result of equipment and handset agreements
between Sprint PCS and its suppliers.
. Cell sites and switch equipment. Currently, we are operating a single
5ESS Lucent switch and related cell site equipment. We have negotiated
and completed a contract with Lucent to provide the cell site and
switch equipment necessary for the further build-out of our markets.
. Handsets. We will offer both single-band CDMA and dual-band
CDMA/analog multi-network telephone handsets. Handset costs are
expensive for the typical consumer and require subsidy, although in
the long term, such prices are expected to decline. We expect to
continue to subsidize handset costs. All handsets are subject to
Sprint PCS discount purchase savings averaging an estimated 30-40% of
the wholesale price. In addition, because Sprint PCS is a participant
in the handset development process, we expect to gain access to newer
handsets earlier than non-Sprint PCS carriers using CDMA technology.
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Competition
We compete with a number of cellular carriers and new personal
communications services entrants in each of our markets. These providers in our
service area serve different geographic segments but no single carrier provides
complete coverage throughout our service territory. The two largest competitors
in terms of market coverage are Verizon Wireless, which serves approximately
65% of our markets, and SBC Communications, which serves approximately 30% of
our markets. Both of these carriers are cellular operators and have been
selectively upgrading their networks to digital technologies. Other smaller
competitors include AT&T Wireless which owns cellular licenses and is upgrading
its network to time division multiple access technology, Nextel
Communications/Nextel partners which primarily targets business customers with
its proprietary digital technology and Omnipoint/Voicestream Wireless which is
in the process of building a global system for mobile communications network in
some of our markets.
Many of our competitors operate analog or hybrid analog/digital networks
and provide coverage that is typically fragmented. Additionally, each of our
competitors is different from us in terms of brand recognition, digital
coverage, quality of service and feature offered. We, along with Sprint PCS and
its other affiliates, will be the only wireless provider in our entire service
area offering 100% digital 100% PCS using CDMA technology over a single
frequency band on a nationwide network.
We believe we compete effectively against these wireless competitors
primarily by targeting business and personal users who benefit from the voice
clarity, reliability and national footprint of the Sprint PCS network. We offer
Sprint PCS' nationwide value and competitively priced packages to our
customers, which include a variety of advanced features such as caller ID,
voice mail, messaging, wireless data and Internet services, call waiting,
conference calling, and call forwarding. We will also exercise the flexibility
enabled under our management agreement to establish our own pricing programs
and promotions tailored to our markets and customer demographics. Since we
benefit substantially from Sprint PCS' national "spillover" brand marketing
campaigns, we are able to utilize funds, which otherwise would have been
designated for creative fees to fund more advertising, to more efficiently
attract additional subscribers for advertising dollars expended. Lastly, we
will build a state-of-the-art CDMA network that we believe should exceed the
coverage, capacity and reliability of our competitors' networks.
We also face competition from paging, specialized mobile radio and
dispatch companies in our markets. Potential users of personal communications
services systems may find their communications needs satisfied by other current
and developing technologies. In addition, we face competition from resellers
that provide wireless services to customers but do not hold Federal
Communications Commission licenses or own facilities. The Federal
Communications Commission requires all cellular and personal communications
services licensees to permit resale of their services. In the future, we expect
to face competition from other entities using additional frequencies to be
licensed by the Federal Communications Commission for advanced mobile services
or providing similar services using other communications technologies,
including satellite-based telecommunications and wireless cable systems.
Although some of these technologies are currently operational, others are being
developed or may be developed in the future.
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Properties
We lease property in a number of locations, primarily for administrative
office space, our Sprint PCS stores, cell sites and switching centers. We have
leased approximately 22,000 square feet of administrative office space at 220
and 319 Great Oaks Boulevard, Albany, New York for our headquarters. These
leases expire with respect to a portion of our headquarters in February 2002
and with respect to the remainder in December 2004. As of March 31, 2000, we
leased space on 172 sites, of which we are collocated with other wireless
service providers on approximately 40% of these sites. We own property that
houses switching equipment which supports our markets. We believe our
properties are currently adequate for our business operations.
Employees
As of May 31, 2000, we had a total of approximately 131 employees, of
which 47 are in sales and marketing, 57 are in operations, 10 are in customer
service and 17 are in administration. We expect the number of employees to
increase steadily as our network expands and as the number of subscribers
justifies the addition of new personnel. None of our employees are represented
by a labor union or subject to a collective bargaining agreement.
Intellectual Property
The Sprint diamond design logo is a service mark registered with the
United States Patent and Trademark Office. The service mark is owned by Sprint.
We use the Sprint and Sprint PCS brand names, the Sprint diamond design logo
and other service marks of Sprint in connection with marketing and providing
wireless services within our territory. The terms of the trademark and service
mark license agreements with Sprint and Sprint PCS provide for the use of the
Sprint and Sprint PCS brand names and Sprint service marks.
Except in instances that are noncompetitive and other than in connection
with the national distribution agreements, Sprint PCS has agreed not to grant
to any other person a right or license to use the licensed marks in our
territory.
The trademark license agreements contain numerous restrictions with
respect to the use and modification of any of the licensed marks. See "Our
Agreements with Sprint PCS--The Trademark and Service Mark License Agreements."
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OUR AGREEMENTS WITH SPRINT PCS
The transactions defining our relationship with Sprint PCS were completed
in a multi-phase closing process. Stage one was completed in December 1999,
when we executed an agreement with Sprint PCS to manage the subscribers in our
territory and also entered into an interim services agreement with Sprint PCS
relating to services that it provides to us. Stage two was completed in January
2000 when we paid Sprint PCS a fee of $32.4 million and began our operations,
managing approximately 45,000 subscribers previously managed by Sprint PCS in
our territory. Stage three was completed in February 2000 when we occupied
retail locations occupied by Sprint PCS. The final stage was completed in March
2000 when we purchased from Sprint PCS its existing wireless infrastructure in
our territory, which included all network equipment and 172 operating cell
sites covering approximately 1.8 million residents for approximately $84.3
million.
Our major agreements with Sprint PCS, are:
. the management agreement;
. the services agreement;
. two trademark and service mark license agreements with different
Sprint entities; and
. the interim services agreement.
The following is a description of the material terms and provisions of our
affiliation agreements with Sprint PCS. We have filed the text of our
affiliation agreements with Sprint PCS and the consent and agreement as
exhibits to the registration statement of which this prospectus is a part.
Under our affiliation agreements with Sprint PCS, we have the exclusive
right to provide wireless services under the Sprint and Sprint PCS brand names
in our territory. Sprint PCS holds the spectrum licenses and controls the
network through its agreements with us. Our affiliation agreements with Sprint
PCS require us to interface with the Sprint PCS wireless network by building
our portion of the Sprint PCS network to operate on the 30 megahertz of
personal communications services frequencies licensed to Sprint PCS in the 1900
megahertz range. The management agreement has an initial term of 20 years and
three 10-year renewal options which would lengthen the contract to a total term
of 50 years. The three 10-year renewal terms automatically occur unless we or
Sprint PCS provide the other with two years prior written notice to terminate
the agreements or unless we are in material default of our obligations under
the agreements.
The Management Agreement
Under our management agreement with Sprint PCS, we have agreed to:
. own, construct and manage a network in our territory in compliance
with Sprint PCS' licenses and the terms of the management agreement;
. share with Sprint the costs associated with its relocation of
interfering microwave sources in our territory;
. distribute during the term of the management agreement Sprint PCS
products and services;
. use Sprint PCS' and our own distribution channels in our territory;
. conduct advertising and promotion activities in our territory; and
. manage that portion of Sprint PCS' customer base assigned to our
territory.
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Sprint PCS will supervise our personal communications services network
operations and has the right to unconditional access to our personal
communications services network.
Exclusivity
We are designated as the only person or entity that can manage or operate
a personal communications services network for Sprint PCS in our territory.
Sprint PCS is prohibited from owning, operating, building or managing another
wireless mobility communications network in our territory while our management
agreement is in place. Sprint PCS is permitted under our agreement to make
national sales to companies in our territory and, as required by the Federal
Communications Commission, to permit resale of the Sprint PCS products and
services in our territory. If Sprint PCS decides to expand the geographic size
of our build-out, Sprint PCS must provide us with written notice of the
proposed expansion. We have the right to appeal this decision to Sprint PCS'
management if the proposed expansion:
. causes us to incur a cost exceeding 5% of the sum of our equity plus
our outstanding long-term debt; or
. causes our long-term operating expenses to increase by more than 10%
on a net present value basis.
If Sprint PCS denies our appeal and we fail to confirm within 90 days that
we will comply with the proposed expansion, Sprint PCS has the termination
rights described below.
Network Build-Out
The management agreement specifies the terms of the Sprint PCS
affiliation, including the required network build-out plan. We have agreed on a
minimum build-out plan which includes specific coverage and deployment
schedules for the network planned within our service area as depicted in the
table below. The aggregate required coverage will result in network coverage of
approximately 67% of the population in our territory of 6.2 million by the end
of 2003. We have agreed to operate our personal communications services network
to provide for a seamless hand-off of a call initiated in our territory to a
neighboring Sprint PCS network.
<TABLE>
<CAPTION>
Build-Out Plan By Market
---------------------------------------------------------------------------------------------------------------------
December September October November December December
2000 2001 2001 2001 2001 2002
---------------------- ------------ -------------------- ---------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C>
Albany/Schenectady, NY Utica, NY Binghamton, NY, PA-- Glens Falls, NY Rockingham County, NH Binghamton, NY, PA--
Orange County, NY Syracuse, NY Phase I Poughkeepsie, NY Stratford County, NH Phase II
Burlington, VT-- Burlington, VT--
Phase I Phase II
Ithaca, NY Oneonta, NY--
Keene, NH Phase I
Lebanon, NH
Manchester, NH
Sullivan County, NY
Pittsfield, MA
Plattsburgh, NY
Poughkeepsie, NY--
Taconic State Parkway
Rutland, VT
Elmira, NY, PA
Syracuse, NY
Watertown, NY
</TABLE>
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Products and Services
The management agreement identifies the products and services that we can
offer in our territory. These services include, but are not limited to, Sprint
PCS consumer and business products and services available as of the date of the
agreement, or as modified by Sprint PCS. We are also allowed to sell wireless
products and services that are not Sprint PCS products and services if those
additional products and services do not cause distribution channel conflicts
or, in Sprint PCS' sole determination, consumer confusion with Sprint PCS'
products and services. We may cross-sell services such as long distance
service, Internet access, handsets, and prepaid phone cards with Sprint, Sprint
PCS and other Sprint PCS affiliates. If we decide to sell the same services of
third parties, we must give Sprint PCS an opportunity to provide the services
on the same terms and conditions. We can also offer wireless local loop
services specifically designed for the competitive local exchange market in all
of our markets.
We will participate in the Sprint PCS sales programs for national sales to
customers, and will pay the expenses and receive the compensation from national
accounts located in our territory. As a participant in these sales programs,
our responsibilities include assisting Sprint PCS' national sales team in our
territory in connection with implementing national sales programs, negotiating
customer contracts and managing customer accounts. We must use Sprint's long
distance service for calls made from within designated portions of our
territory to areas outside those designated portions and to connect our network
to the national platforms Sprint PCS uses to provide some of its services under
our services agreement. We must pay Sprint PCS the same price for this service
that Sprint PCS pays to Sprint, along with an additional administrative fee.
Service Pricing, Roaming, Travel and Fees
We must offer Sprint PCS subscriber pricing plans designated for regional
or national offerings, including Sprint PCS' "Free and Clear" plans. We are
permitted to establish our own local pricing plans for Sprint PCS products and
services offered only in our territory, subject to Sprint PCS' approval. We are
entitled to receive a weekly fee from Sprint PCS equal to 92% of "collected
revenues" for all obligations under the management agreement, adjusted by the
cost of customer services provided by Sprint PCS. "Collected revenues" include
revenue from Sprint PCS subscribers based in our territory and inbound non-
Sprint PCS roaming. Sprint PCS will receive 8% of the collected revenues.
Collected revenues do not include outbound non-Sprint PCS roaming revenue,
inbound and outbound Sprint PCS travel fees, proceeds from the sales of
handsets and accessories, proceeds from sales not in the ordinary course of
business, and amounts collected with respect to taxes. Except in the case of
taxes, we will retain 100% of these revenues. Many Sprint PCS subscribers
purchase bundled pricing plans that allow Sprint PCS traveling anywhere on the
Sprint PCS network without incremental Sprint PCS travel charges. We will earn
revenue from Sprint PCS based on a per minute rate established by Sprint PCS
when Sprint PCS' or its affiliates' subscribers travel on our portion of the
Sprint PCS network. Similarly, we will pay the same rate for every minute our
subscribers in our territory use the Sprint PCS network outside our territory.
The analog roaming rate onto a non-Sprint PCS provider's network is set under
Sprint PCS' third-party roaming agreements.
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Advertising and Promotions
Sprint PCS is responsible for all national advertising and promotion of
the Sprint PCS products and services. We are responsible for advertising and
promotion in our territory. Sprint PCS' service area includes the urban markets
around our territory. Sprint PCS will pay for advertising in these markets.
Given the proximity of those markets to our territory, we expect considerable
spill-over from Sprint PCS' advertising in surrounding urban markets.
Program Requirements
We are required to comply with Sprint PCS' program requirements for
technical standards, travel, roaming and interservice area calls, customer
service standards, national and regional distribution and national accounts
programs. Some of these technical standards relate to network up-time, dropped
calls, blocked call attempts and call origination and termination failures. We
are required to build a network that meets minimum transport requirements
established by Sprint PCS for links between our cell sites and switches. We are
also required to have minimal loss and echo return loss on our telephone lines.
We must meet substantially high network up-time percentages. Also, we must meet
a minimum dropped call rate percentage and a minimum ratio of blocked call
attempts to total call attempts as well as a minimum ratio of call origination
to termination failures. Sprint PCS can adjust the program requirements at any
time so long as it gives us at least 30 days prior notice. We have the right to
appeal to Sprint PCS' management adjustments which could cause an unreasonable
increase in cost to us if the adjustment:
. causes us to incur a cost exceeding 5% of the sum of our equity plus
our outstanding long-term debt, or
. causes our long-term operating expenses to increase by more than 10%
on a net present value basis.
If Sprint PCS denies our appeal and we fail to confirm within 90 days that
we will comply with the adjustment, Sprint PCS has the termination rights
described below.
We have elected to use Sprint PCS' established support services which
include customer service. Under our services agreement with Sprint PCS, Sprint
PCS may terminate, upon nine months' advance written notice, customer service.
We would then be required to establish and operate our own customer service
center to, among other things, handle customer inquiries 24 hours a day, 365
days a year, and activate handsets and accounts and handle billing and
collections within stringent time guidelines established by Sprint PCS, which
may range from 24 to 72 hours.
Non-Competition
We may not offer Sprint PCS products and services outside our territory
without the prior written approval of Sprint PCS. Within our territory we may
offer, market or promote telecommunications products and services only under
the Sprint PCS brands, our own brand, brands of related parties of ours or
other products and services approved under the management agreement, except
that no brand of a significant competitor of Sprint PCS or its related parties
may be used for those products and services. To the extent we have or obtain
licenses to provide PCS services outside our territory, we may not use the
spectrum to offer Sprint PCS products and services without prior
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<PAGE>
written consent from Sprint PCS. Additionally, if customers from our territory
travel to other geographic areas, we must route those customers' incoming and
outgoing calls according to Sprint PCS' roaming and inter-service area
requirements, without regard to any wireless networks that we or our affiliates
operate.
Inability to Use Non-Sprint PCS Brand
We may not market, promote, advertise, distribute, lease or sell any of
the Sprint PCS products and services on a non-branded, "private label" basis or
under any brand, trademark or trade name other than the Sprint PCS brand,
except for sales to resellers or as otherwise permitted under the trademark and
service mark license agreements.
Change of Control
Sprint PCS must consent to a change of control of our company, but this
consent cannot be unreasonably withheld.
Assignment
We cannot assign the Sprint PCS agreements to any person without the prior
consent of Sprint PCS, except that we can assign the agreements to any
affiliate of ours that is not a significant competitor of Sprint PCS in the
telecommunications business.
Rights of First Refusal
Sprint PCS has rights of first refusal to buy our assets, without further
stockholder approval, upon a proposed sale of all or substantially all of our
assets that are used in connection with the operation or management of the
Sprint PCS network in our territory.
Termination of Management Agreement
The management agreement can be terminated as a result of:
. termination of Sprint PCS' personal communications services licenses;
. an uncured breach under the management agreement;
. bankruptcy of a party to the management agreement;
. the management agreement not complying with any applicable law in any
material respect; or
. the termination of either of the trademark and service mark license
agreements.
However, Sprint PCS' rights of termination have been modified by the
consent and agreement and are discussed more particularly under "Consent and
Agreement." The termination or non-renewal of the management agreement triggers
certain of our rights and those of Sprint PCS.
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Transfer of Sprint PCS Network
Sprint PCS can sell, transfer or assign its wireless personal
communications services network to a third party if the third party agrees to
be bound by the terms of the Sprint PCS agreements.
Rights on Termination
If we have the right to terminate the management agreement because of an
event of termination caused by Sprint PCS, generally we may:
. require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to 80% of our entire
business value (as defined in the management agreement and described
below in "--Rights on Non-Renewal");
. if Sprint PCS is the licensee for 20 MHz or more of the spectrum on
the date of the management agreement, require Sprint PCS to assign to
us, subject to governmental approval, up to 10 MHz of licensed
spectrum for an amount equal to the greater of:
. the original cost to Sprint PCS of the license plus any
microwave relocation costs paid by Sprint PCS; or
. 10% of our entire business value; or
. sue Sprint PCS for damages or submit the matter to arbitration and
thereby not terminate the management agreement.
If Sprint PCS has the right to terminate the management agreement because
of an event of termination caused by us, generally Sprint PCS may:
. require us, without further stockholder approval, to sell our
operating assets to Sprint PCS for an amount equal to 72% of our
entire business value;
. require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of:
. the original cost to Sprint PCS of the license plus any
microwave relocation costs paid by Sprint; or
. 10% of our entire business value;
. take any action Sprint PCS deems necessary to cure our breach of the
management agreement, including assuming responsibility for, and
operating, our network; or
. sue us for damages or submit the matter to arbitration and thereby not
terminate the management agreement.
Rights on Non-Renewal
If Sprint PCS gives us timely notice that it does not intend to renew the
management agreement, we may:
. require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to 80% of our entire
business value; or
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. if Sprint PCS is the licensee for 20 MHz or more of the spectrum on
the date of the management agreement, require Sprint PCS to assign to
us, subject to governmental approval, up to 10 MHz of licensed
spectrum for an amount equal to the greater of:
. the original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint PCS; or
. 10% of our entire business value.
If we give Sprint PCS timely notice of non-renewal, or we both give notice
of non-renewal, or the management agreement is terminated for failure to comply
with legal requirements or regulatory considerations or expires by its terms if
no notice is provided, Sprint PCS may:
. purchase all of our operating assets, without further stockholder
approval, for an amount equal to 80% of our entire business value; or
. require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of:
. the original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint PCS; or
. 10% of our entire business value.
If the entire business value is to be determined, we and Sprint PCS will
each select one independent appraiser and the two appraisers will select a
third appraiser. Each appraiser must be an expert in valuing wireless
telecommunications companies. The three appraisers will determine the entire
business value on a going concern basis using the following guidelines:
. the entire business value will be based on the price a willing buyer
would pay a willing seller for the entire on-going business;
. the appraisers will use then-current customary means of valuing a
wireless telecommunications business;
. the appraisers will value the business as it is conducted under the
Sprint and Sprint PCS brands and the Sprint PCS agreements;
. where Sprint PCS may, or is required to, purchase our operating
assets, the appraisers will value the business as if we own the
spectrum and frequencies that we actually use. Where we may, or are
required to, purchase a portion of Sprint PCS' licensed spectrum, the
business will be valued as if we already own that portion of the
spectrum and frequencies that we are going to purchase; and
. the valuation will not include any value for the business not directly
related to the Sprint PCS products and services.
The rights and remedies of Sprint PCS outlined in the management agreement
resulting from an event of termination of the management agreement have been
materially amended by the consent and agreement as discussed below.
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Insurance
We are required to obtain and maintain with financially reputable insurers
who are licensed to do business in all jurisdictions where any work is
performed under the management agreement and who are reasonably acceptable to
Sprint PCS, workers' compensation insurance, commercial general liability
insurance, business automobile insurance, umbrella excess liability insurance
and "all risk" property insurance.
Indemnification
We have agreed to indemnify Sprint PCS and its directors, employees and
agents and related parties of Sprint PCS and their directors, managers,
officers, employees, agents and representatives against any and all claims
against any of the foregoing arising from our violation of any law, a breach by
us of any representation, warranty or covenant contained in the management
agreement or any other agreement between us and Sprint PCS, our ownership of
the operating assets or the actions or the failure to act of anyone employed or
hired by us in the performance of any work under this agreement, except we will
not indemnify Sprint PCS for any claims arising solely from the negligence or
willful misconduct of Sprint PCS. Sprint PCS has agreed to indemnify us and our
directors, managers, officers, employees, agents and representatives against
all claims against any of the foregoing arising from Sprint PCS' violation of
any law and from Sprint PCS' breach of any representation, warranty or covenant
contained in this agreement or any other agreement between Sprint PCS and us,
except Sprint PCS will not indemnify us for any claims arising solely from our
negligence or willful misconduct.
The Services Agreement
The services agreement outlines various fees and back office functions
provided by Sprint PCS and available to us at a per-subscriber rate. Some of
the available services and fees include:
. network monitoring through Sprint PCS' network operating control
center
. billing (including the administration of pre-paid services)
. customer care
. activation
. credit checks
. handset logistics
. remote switching
. home locator record
. voice mail
. directory assistance
. operator services
. long distance
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. roaming fees
. roaming clearinghouse fees
. interconnect fees
. inter service area fees
The services agreement allows us to discontinue our use of a particular
service upon three months notice to Sprint PCS. Sprint PCS may decide to
discontinue providing a service upon nine months notice to us. Sprint PCS has
agreed to a minimum decline in the aggregate costs of these services.
Sprint PCS offers three packages of available services. Each package
includes services which must be purchased from Sprint PCS and services which
may be purchased from a vendor or provided in-house. Our package includes
services such as billing, activation and customer care which must all be
purchased from Sprint PCS. We have chosen to engage Sprint PCS to perform these
services but may develop an independent capability over time. Sprint PCS may
also contract with third parties to provide expertise and services identical or
similar to those to be made available or provided to us.
We have agreed not to use the services performed by Sprint PCS in
connection with any other business or outside our territory. We have agreed
with Sprint PCS to indemnify each other as well as officers, directors,
employees and other related parties and their officers, directors and employees
for violations of law or the services agreement except for any liabilities
resulting from the negligence or willful misconduct of the person seeking to be
indemnified or its representatives. The services agreement also provides that
no party to the agreement will be liable to the other party for special,
indirect, incidental, exemplary, consequential or punitive damages, or loss of
profits arising from the relationship of the parties or the conduct of business
under, or breach of, the services agreement except as may otherwise be required
by the indemnification provisions. The services agreement automatically
terminates upon the management agreement's termination, and neither party may
terminate the services agreement for any other reason.
The Trademark and Service Mark License Agreements
We have non-transferable licenses to use, at no additional cost to us, the
Sprint and Sprint PCS brand names and "diamond" symbol, and several other U.S.
trademarks and service marks of Sprint and Sprint PCS such as "The Clear
Alternative to Cellular" and "Clear Across the Nation". Our use of the licensed
marks is subject to our adherence to quality standards determined by Sprint and
Sprint PCS and use of the licensed marks in a manner which would not reflect
adversely on the image of quality symbolized by the licensed marks. We have
agreed to promptly notify Sprint and Sprint PCS of any infringement of any of
the licensed marks within our territory of which we become aware and to provide
assistance to Sprint and Sprint PCS in connection with Sprint's and Sprint PCS'
enforcement of their rights. We have agreed with Sprint and Sprint PCS to
indemnify each other for losses incurred in connection with a material breach
of the trademark license agreements. In addition, we have agreed to indemnify
Sprint and Sprint PCS from any loss suffered by reason of our use of the
licensed marks or marketing, promotion, advertisement, distribution, lease or
sale of any Sprint or Sprint PCS products and services other than losses
arising solely out of our
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use of the licensed marks in compliance with certain guidelines. Sprint and
Sprint PCS can terminate the trademark and service mark license agreements if
we file for bankruptcy, materially breach the agreement or our management
agreement is terminated. We can terminate the trademark and service mark
license agreements upon Sprint's or Sprint PCS' abandonment of the licensed
marks or if Sprint or Sprint PCS files for bankruptcy or the management
agreement is terminated. Sprint and Sprint PCS can assign their interests in
the licensed marks to a third party if that third party agrees to be bound by
the terms of the trademark and service mark license agreements.
The Interim Services Agreement
On December 20, 1999, we entered into an interim services agreement
pursuant to which Sprint PCS will provide switching services and backhaul at a
service level equivalent to that maintained by Sprint PCS in its markets. Under
the interim services agreement, Sprint PCS will, until December 31, 2000,
provide us with switching services and backhaul from Sprint PCS' Boston,
Massachusetts switch. The interim services agreement automatically terminates
upon termination of the management agreement.
Consent and Agreement for the Benefit of Lenders Under Our Credit Facilities
Sprint PCS entered into a consent and agreement with an administrative
agent for the senior lenders under our credit facilities that we acknowledged.
This agreement modifies Sprint PCS' rights and remedies under our management
agreement for the benefit of our lenders.
General
The consent and agreement generally provides, among other matters, for the
following:
. Sprint PCS' consent to the pledge of substantially all of our assets
to the administrative agent, including our rights under the Sprint PCS
affiliation agreements, as collateral for our credit facilities;
. Sprint PCS and the administrative agent will provide each other with
notices of default by us under the Sprint PCS management agreement and
senior financing;
. at the administrative agent's request, Sprint PCS will redirect any
payments due to us under the management agreement to the
administrative agent during the continuation of our default under our
credit facilities;
. Sprint PCS or the administrative agent will have certain rights to
appoint interim replacements to operate our portion of the network
under our Sprint PCS affiliation agreements after an acceleration of
our credit facilities or an event of termination under our Sprint PCS
affiliation agreements;
. upon the acceleration of our obligations under our credit facilities,
the administrative agent or Sprint PCS will have rights to sell our
assets or the ownership interests of our operating subsidiaries to any
party, and to assign our rights under the Sprint PCS affiliation
agreements to a qualified purchaser, which must not be a major
competitor of Sprint PCS or Sprint;
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. Sprint PCS will not be able to terminate our Sprint PCS affiliation
agreements until our credit facilities are satisfied, unless our
subsidiaries or assets are sold or transferred to a non-qualifying
party; this sale requires the approval of the administrative agent;
. Sprint PCS will maintain at least 10 megahertz of PCS services
spectrum in all of our markets until our credit facilities are
satisfied or our operating assets, including in certain cases
spectrum, are sold if we default under our credit facilities; and
. in the event that Sprint PCS enters into a consent and agreement with
the secured lender of another affiliate on terms and conditions
different from those provided to the administrative agent, under
certain conditions and upon notice to the administrative agent and at
the administrative agent's request, Sprint PCS will amend our consent
and agreement to adopt the different terms and conditions in whole.
Sprint PCS' Right to Purchase Operating Assets or Ownership Interests in Our
Operating Subsidiaries upon Acceleration
Subject to the requirements of applicable law and following an
acceleration by the administrative agent of our obligations under our credit
facilities, the consent and agreement permits Sprint PCS to purchase our
operating assets or the interests of our operating subsidiaries on the
following general terms:
. Sprint PCS elects to make such a purchase within a specified period;
and
. the purchase price is the greater of an amount equal to 72% of our
entire business value or the amount outstanding under our credit
facilities.
If Sprint PCS gives notice of its intention to exercise its purchase
right, then the administrative agent may not foreclose on its security
interest in our assets for a specified period or until Sprint PCS rescinds its
intention to purchase. If we receive an acceptable written offer for our
operating assets or the ownership interests of our operating subsidiaries from
another prospective purchaser, Sprint PCS has the right to make the purchase
on terms at least as favorable to us. Sprint PCS must agree to purchase the
operating assets or the ownership interests of our operating subsidiaries
within 14 business days of its receipt of the offer on acceptable conditions
and in a prescribed amount of time.
Sale of Operating Assets or Ownership Interests of Our Operating Subsidiaries
to Third Parties
If Sprint PCS does not purchase our operating assets or the ownership
interests of our operating subsidiaries after an acceleration of the
obligations under our credit facilities, then the administrative agent may
sell the operating assets or ownership interests. Subject to the requirements
of applicable law, including the law relating to foreclosures of security
interests, the administrative agent has two options:
. to sell the assets or ownership interests of our operating
subsidiaries, including our rights under the Sprint PCS affiliation
agreements, to a permitted successor; or
. to sell the assets or ownership interests to any third party, subject
to specified conditions and limitations.
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MANAGEMENT
Directors and Executive Officers
The following table presents information with respect to our directors
and executive officers.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Solon L. Kandel......... 40 President, Chief Executive Officer and Director
David L. Standig........ 44 Chief Operating Officer
Steven M. Nielsen....... 44 Chief Financial Officer
John P. Hart, Jr........ 53 Chief Technology Officer
J.K. Hage III........... 49 Executive Vice President, Secretary, General Counsel and Director
Christopher J. Stadler.. 35 Director
Mamoun Askari........... 37 Director
James O. Egan........... 51 Director
Thomas J. Sullivan...... 37 Director
Savio W. Tung........... 49 Director
Christopher J. O'Brien.. 41 Director
Alfred F. Boschulte..... 57 Director
Brian Kwait............. 39 Director
Harley Ruppert.......... 54 Director
</TABLE>
Solon L. Kandel became our President and Chief Executive Officer in May
1999. Mr. Kandel has also been one of our directors since June 1999. From
January 1997 until February 1999, he held the positions of President, Chief
Executive Officer and member of the board of directors of IDF International,
Inc. and its predecessors. Prior to his employment at IDF International, Inc.,
Mr. Kandel held strategic management positions at AT&T Wireless Services and
McCaw Cellular Communications. In these capacities he guided the
implementation of personal communications services networks from Maine to
Virginia and created innovative programs for acquiring wireless communications
site links in bulk deployment throughout the United States. He also helped to
build McCaw's cellular markets in the New York metropolitan area.
David L. Standig became our Chief Operating Officer in June 1999. From
January 1998 through March 1999, Mr. Standig was Senior Vice President and
Chief Marketing Officer of Triton PCS, Inc., where he directed the creation,
implementation and launch of all marketing initiatives for the first AT&T
Wireless affiliate. Mr. Standig also held positions at Comcast Cellular from
1990 to 1997, serving as Vice President of Technology Marketing and directing
the creation, implementation and launch of all marketing initiatives for the
first AT&T Wireless affiliate.
Steven M. Nielsen became our Chief Financial Officer in May 2000. Most
recently, Mr. Nielsen was the Vice President and General Manager of NEXTLINK-
Washington, a competitive local exchange carrier, where he supervised all
operations, including network build and market launch. Prior to that time Mr.
Nielsen spent over 11 years with Sprint and Sprint PCS in key financial
positions. As the Sprint PCS Area Vice President for the Northwest, Mr.
Nielsen contributed significantly to the rapid early growth of the $10 billion
start-up business. He launched Sprint PCS markets and service in Washington
and Oregon, managed transitions from plan to rollout by building up large
sales and marketing teams and established nearly 500 distribution channels.
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<PAGE>
John P. Hart, Jr. became our Chief Technology Officer in June 1999. From
February 1998 to June 1999, Mr. Hart was Vice President of Engineering and
Operations at NEXTEL Communications, Inc. Mr. Hart directed the design,
implementation and operation of NEXTEL's advanced Integrated Digital Enhanced
Network System in the New York metropolitan area. From 1992 to 1998, he was
Vice President of System Development PCS Engineering and Network Operations at
AT&T Wireless Services. Mr. Hart also served as the Vice President of
Engineering and Network Operations for McCaw Cellular Communications and has
held various engineering positions at AT&T Bell Laboratories, Motorola, and
NYNEX Mobile Communications.
J.K. Hage III became our Executive Vice President, Secretary and General
Counsel at our inception. Mr. Hage is also the Managing Partner of Hage and
Hobaica, LLP., where he has practiced law for over 20 years primarily in the
telecommunications industry. Mr. Hage is Of Counsel to Lukas, Nace, Gutierrez &
Sachs Chartered, a Washington D.C. professional corporation organized to
practice communications law before the Federal Communications Commission, state
utility commissions and the federal courts. Mr. Hage is active in numerous
industry associations, including the New York State Telecommunications
Association, the Organization for the Preservation and Advancement of Small
Telephone Companies, the American Mobile Telecommunications Association, the
International Mobile Telecommunications Association, and the New York State
Municipal Electric Association. Mr. Hage is a member of the New York State Bar
Association Committee on Public Utility Law and the New York State Bar
Association Committee on Trusts and Estates.
Christopher J. Stadler became one of our directors in December 1999. Mr.
Stadler has been an executive of Investcorp or one or more of its wholly-owned
subsidiaries since April 1996. Prior to joining Investcorp, Mr. Stadler was a
Director of CS First Boston Corporation. Mr. Stadler is a director of Carter
Holdings, Inc. and its wholly-owned subsidiary, The William Carter Company.
Mamoun Askari became one of our directors in December 1999. Mr. Askari has
been an executive of Investcorp or one or more of its wholly-owned subsidiaries
since September 1990. Prior to joining Investcorp, Mr. Askari was an Associate
with Deloitte, Haskins & Sells.
James O. Egan became one of our directors in December 1999. Mr. Egan has
been an executive of Investcorp or one or more of its wholly-owned subsidiaries
since January 1999. Prior to joining Investcorp, Mr. Egan was a partner in the
accounting firm of KPMG from October 1997 to December 1998 and a Senior Vice
President and Chief Financial Officer of Riverwood International, a paperboard,
packaging and machinery company, from May 1996 to September 1997. Previously,
Mr. Egan was a partner in the accounting firm of Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP). Mr. Egan is a director of CSK Auto Corporation,
Harborside Healthcare Corporation, Werner Holding Co. (DE), Inc. and Synthetic
Industries, Inc.
Thomas J. Sullivan became one of our directors in December 1999. Mr.
Sullivan has been an executive of Investcorp or one or more of its wholly-owned
subsidiaries since April 1996. Prior to joining Investcorp, Mr. Sullivan was
Vice President and Treasurer of the Leslie Fay Companies, Inc. (now Leslie Fay
Company, Inc.). Mr. Sullivan is a director of Werner Holding Co. (DE), Inc.
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<PAGE>
Savio W. Tung became one of our directors in December 1999. Mr. Tung has
been an executive of Investcorp or one or more of its wholly-owned subsidiaries
since September 1984. Mr. Tung is a director of CSK Auto Corporation, Werner
Holding Co. (DE), Inc. and Synthetic Industries, Inc.
Christopher J. O'Brien became one of our directors in December 1999. Mr.
O'Brien has been an executive of Investcorp or one or more of its wholly-owned
subsidiaries since December 1993. Prior to joining Investcorp, Mr. O'Brien was
a Managing Director of Mancuso & Company, a private New York-based merchant
bank. Mr. O'Brien is a director of NationsRent, Inc., CSK Auto Corporation,
Harborside Healthcare Corporation, Synthetic Industries, Inc. and Carter
Holdings, Inc. and its wholly-owned subsidiary, The William Carter Company.
Alfred F. Boschulte became the chairman of our board of directors in March
1999. Mr. Boschulte is the former President and Chairman of NYNEX Mobile
Communications (which merged to form Bell Atlantic Mobile) where he served from
1990 through 1994. Mr. Boschulte is President and Chief Executive Officer of
Detecon, Inc., an affiliate of Deutsche Telecom. Detecon is a
telecommunications consulting firm specializing in strategic and technical
planning for wireline and wireless telecommunications businesses. Previously,
Mr. Boschulte was the Managing Director of Excelcomindo, a global system for
mobile communications service provider in Indonesia, from January 1996 to
December 1997. Prior to Excelcomindo, Mr. Boschulte was the President of
TOMCOM, L.P., a wireless joint service organization of AirTouch Communications,
Bell Atlantic, NYNEX, US West and their jointly-owned personal communications
services businesses.
Brian Kwait became one of our directors in December 1999. Mr. Kwait has
been a Managing Principal of Odyssey Investment Partners, LLC since 1997.
Previously, Mr. Kwait was a Principal in the private equity investing group of
Odyssey Partners, LP from 1989 to 1996. Mr. Kwait is a director of William
Scotsman Holdings, Inc. and PF.Net Communications, Inc.
Harley Ruppert became one of our directors at our inception. From 1978 to
the present, Mr. Ruppert has been employed by Newport Telephone Company, Inc.,
most recently as President. In 2000, Mr. Ruppert purchased a controlling
interest in Newport Telephone Company, Inc. Mr. Ruppert is also President and
Chief Executive Officer of NTCNet Inc., the holding company of Newport
Telephone Company, Inc., and all subsidiaries of Newport Telephone Company.
Board of Directors
We currently have 11 directors. Each of our directors was elected to our
board of directors pursuant to the terms of a stockholders agreement that we
entered into with certain of our stockholders in December 1999. The
stockholders agreement contains additional provisions with respect to the
election of directors. For a description of these provisions, see "Description
of Capital Stock--Stockholders Agreement--Voting."
Compensation of Directors
Currently, we do not compensate our directors. No director who is one of
our employees receives separate compensation for services rendered as a
director.
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<PAGE>
Board Committees
Our board of directors has established three committees: the compensation
committee, the executive committee and the audit/finance committee.
The compensation committee is responsible for reviewing and approving all
compensation arrangements for our officers, and is also responsible for
administering our Management Stock Incentive Plan. The current members of the
compensation committee are Messrs. Boschulte, Kwait and Stadler.
The executive committee is responsible for advising and aiding our
officers on all matters concerning the management of our business and affairs.
The current members of the executive committee are Messrs. Askari, Boschulte,
Kandel, Stadler and Sullivan.
The audit/finance committee is responsible for recommending to the board
of directors the engagement of our independent auditors and reviewing with the
independent auditors the scope and results of their audits, our internal
accounting controls, audit practices and the professional services furnished by
the independent auditors. In addition, the audit/finance committee provides
budget oversight and reviews capital structure issues. The current members of
the audit/finance committee are Messrs. Egan, Ruppert and Sullivan.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a director or member of the
compensation committee, or other committee serving an equivalent function, of
any entity of which an executive officer has served as a member of the
compensation committee of our board of directors.
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<PAGE>
Executive Compensation
The following table sets forth information regarding aggregate cash
compensation, stock option awards and other compensation earned by our Chief
Executive Officer and our four other most highly compensated executive officers
for services rendered in all capacities to us in 1999, collectively referred to
as our named executive officers. None of the named executed officers received
compensation from us in 1997 or 1998.
Summary Compensation Table(1)
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
--------------------------------- ----------------------
Restricted Securities All Other
Other Annual Stock Underlying Compen-
Name and Principal Salary Bonus Compensation(2) Awards(3) Options sation(4)
Position -------- -------- --------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Solon L. Kandel......... $162,660 $416,667 $ -- $83,333 56,179.7753 $ --
President and Chief
Executive Officer
David L. Standig........ 87,347 145,833 61,778 29,167 16,853.9326 --
Chief Operating
Officer
John P. Hart, Jr. ...... 91,682 145,833 78,403 29,167 11,235.9551 --
Chief Technology
Officer
J.K. Hage III........... 127,721 300,000 -- -- 12,902.6218 --
Executive Vice
President and General
Counsel
John P. Prinner......... 72,596 125,000 33,186 25,000 11,235.9551 450,000
Former Chief
Financial Officer
</TABLE>
---------------------
(1) Mr. Nielsen, our current Chief Financial Officer, would have been a named
executive officer listed in the table above if he had served in his present
position with us during 1999. For a description of Mr. Nielsen's
compensation, see "--Employment and Professional Services Agreements."
(2) Amounts shown in the column "Other Annual Compensation" include amounts
paid in reimbursement of relocation expenses as follows: $53,652 to Mr.
Standig, $75,000 to Mr. Hart and $30,740 to Mr. Prinner.
(3) Amounts shown in the column "Long-Term Compensation Awards--Restricted
Stock Awards" include shares of stock received, pursuant to management
bonus stock purchase agreements, in lieu of bonus amounts payable in 1999.
See "--Management Bonus Stock Purchase Agreements." The value of restricted
stock holdings at the end of 1999 was calculated by multiplying the number
of shares by a value per share of $172.34043 representing the market value
of our stock at the end of 1999 as follows: Mr. Kandel, 483.5391 shares
valued at $83,333.34; Mr. Standig, 169.2387 shares valued at $29,166.67;
Mr. Hart, 169.2387 shares valued at $29,166.67; and Mr. Prinner, 145.0617
shares valued at $25,000.00.
(4) Mr. Prinner resigned from his position in January 2000. We and Mr. Prinner
entered into a separation agreement pursuant to which we have agreed to
make certain payments to Mr. Prinner, as described in "--Employment and
Professional Services Agreements--Separation Agreement." The amount shown
in the column "All Other Compensation" for Mr. Prinner represents a
separation payment of $375,000 and legal expenses paid on Mr. Prinner's
behalf in the amount of $75,000.
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<PAGE>
Stock Option Grants In 1999
The following table sets forth information regarding stock options granted
to our named executive officers in 1999, including the potential realizable
value of each grant assuming an initial public offering price of $ per
share that appreciates at annualized rates of 5% and 10% for the ten-year term
of the option from the date of grant. The assumed appreciation rates of 5% and
10% have been specified by the Securities and Exchange Commission for
illustrative purposes only and are not intended to predict our stock price
performance, which will depend on various factors, including market conditions
and our future performance and prospects. We have not granted any stock
appreciation rights.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Potential
Realizable
Value
at Assumed
Percentage Annual Rates
Number of of Total of Stock Price
Shares Options Appreciation
Underlying Granted to Exercise for Option Term
Option Employees Price (per Expiration ---------------
Name Grants in 1999 share) Date 5% 10%
---- ----------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Solon L. Kandel......... 11,235.9551 10.0% $ 43.521 4/30/09
44,943.8202 40.0% 172.34043 4/30/09
David L. Standig........ 16,853.9326(1) 15.0% 172.34043 12/20/09
John P. Hart, Jr........ 11,235.9551(1) 10.0% 172.34043 12/20/09
J.K. Hage III........... 12,902.6218 11.5% 172.34043 12/20/09
John P. Prinner......... 11,235.9551(2) 10.0% 172.34043 12/20/09
</TABLE>
---------------------
(1) A portion of these options vest upon the achievement of performance-based
targets.
(2) Pursuant to his separation agreement, Mr. Prinner retained fully vested
options to purchase 5,148.6843 shares and forfeited his remaining options.
Because Mr. Prinner's retained options are exercisable until January 1,
2003, the amounts shown in the column "Potential Realizable Value at
Assumed Annual Rates of Stock Price Appreciation for Option Term" have been
calculated using a term commencing on December 20, 1999 and ending on
January 1, 2003.
The percentage shown under "Percentage of Total Options Granted to
Employees in 1999" is based on an aggregate of 112,340.8245 options granted to
our employees and our General Counsel in 1999. The exercise price of each
option granted was equal to the fair market value of our stock as determined by
the board of directors on the date of grant.
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<PAGE>
Year-End 1999 Option Values
The following table sets forth information regarding the number and value
of securities underlying unexercised options that are held by each of our named
executive officers at December 31, 1999. No shares were acquired on the
exercise of stock options by these individuals during 1999.
Amounts shown under the column "Value of Unexercised In-the-Money Options
at December 31, 1999" are based on an assumed initial public offering price of
$ per share, without taking into account any taxes that may be payable in
connection with the exercise of options, multiplied by the number of shares
underlying the option, less the exercise price payable for these shares.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 1999 at December 31, 1999
------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Solon L. Kandel.... 28,089.8877 28,089.8876
David L. Standig... 5,056.1798 11,797.7528
John P. Hart, Jr... 3,370.7865 7,865.1686
J.K. Hage III...... 6,161.0487 6,741.5731
John P. Prinner.... 3,370.7865 7,865.1686
</TABLE>
Management Stock Incentive Plan
Our Management Stock Incentive Plan was adopted by our board of directors
and stockholders in December 1999. The purpose of the plan is to attract and
retain the services of our key management employees, outside directors and
consultants by providing those persons with a proprietary interest in us. The
plan allows us to provide that proprietary interest through the grant of:
. incentive stock options within the meaning of Section 422 of the
Internal Revenue Code;
. nonqualified stock options;
. stock appreciation rights; and
. restricted stock.
A total of shares may be issued under the plan. As of June 12, 2000,
an aggregate of shares were subject to outstanding options granted under
the plan, and shares were available for future grants. The maximum number
of shares with respect to which awards may be granted to any individual may not
exceed 16,853.9326 shares during any calendar year.
Our compensation committee administers the plan and is authorized, subject
to the provisions of the plan, to grant awards and establish rules and
regulations as it deems necessary for the proper administration of the option
plan and to make whatever determinations and interpretations it deems necessary
or advisable. The compensation committee has authority to determine:
. to whom awards are granted;
. the number of shares subject to an award;
. the term and vesting period of the award;
. the exercise or purchase price of an award (which price, in the case
of incentive options, may not be less than the fair market value of
the stock on the date of grant, or 110% of
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<PAGE>
fair market value if the option recipient owns more than 10% of the
total voting power of our capital stock);
. any restrictions on sale and repurchase rights which are to be placed
on shares purchased upon exercise of an award; and
. other terms, provisions, limitations and performance requirements
approved by the committee, but not inconsistent with the plan.
The exercise price for each option may be paid in cash, or if permitted
by the applicable option agreement or the compensation committee, with
surrendered shares of stock or through a procedure involving a broker-assisted
sale of option shares which have been held for at least six months. The
maximum term of incentive stock options is ten years and nonqualified stock
options may have a term of up to ten years and 30 days. No awards may be
granted under the plan after December 20, 2009.
Employment and Professional Services Agreements
Employment Agreements. We entered into employment agreements in December
1999 with Messrs. Kandel, Standig and Hart and in May 2000 with Mr. Nielsen.
The term of each agreement ends on December 31, 2002.
Mr. Kandel is entitled to receive an annual base salary of $300,000 in
2000, $325,000 in 2001 and $350,000 in 2002. Messrs. Standig and Hart each
received an annual base salary of $175,000 for the first four months of 2000
and are entitled to receive, along with Mr. Nielsen, an annual base salary of
$200,000 for the remainder of 2000, $205,000 in 2001 and $210,000 in 2002.
In addition, Messrs. Kandel, Standig, Hart and Nielsen are each eligible
to receive an annual bonus of up to 100% of their current base salary, or 90%
in the case of Mr. Kandel, upon the achievement of performance-based targets
set by our board of directors. Each officer's bonus is calculated by
multiplying his potential bonus by the percentage of his performance-based
target that he achieves. No bonus will be paid to an officer if he does not
achieve at least 75% of his performance-based target. Mr. Kandel is eligible
for an additional achievement bonus of up to 90% of his current base salary
based upon the board of directors' discretionary evaluation of his
performance. Pursuant to the terms of their agreements, Mr. Kandel received an
aggregate bonus of $500,000 and Messrs. Standig and Hart each received a bonus
of $175,000 in 1999.
Mr. Kandel is entitled to a monthly car allowance of $1,500 and an annual
allowance of $10,000 for estate planning, financial planning and investment
advisory services. We have also agreed to lease residential housing for Mr.
Kandel at a cost of up to $2,000 per month or, at Mr. Kandel's option, the
monthly maintenance costs of purchasing a residence at a maximum purchase
price of $300,000. We have also agreed to lease residential housing for Mr.
Nielsen at a cost of up to $1,500 per month until August 2000 and to reimburse
him up to $100,000 for relocation costs.
If we terminate any of these employment agreements for other than cause
or disability, we are required to pay the officer, in addition to accrued
bonus amounts and benefits, the lesser of (1) his base salary for the
remainder of the term of his employment agreement or (2) the base salary he
would be entitled to receive if he remained employed for the 12-month period
following the termination date, or the 18-month period in the case of Mr.
Kandel.
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<PAGE>
Professional Services Agreement. We have a professional services agreement
with Mr. Hage under which Mr. Hage is an independent contractor serving as our
Executive Vice President, General Counsel, Secretary and Chief Legal Officer.
The professional services agreement was effective as of December 20, 1999 and
extends until December 31, 2002. Mr. Hage may engage in other professional or
business activities (including activities in the telephone, wireless, fiber,
Internet and cable television businesses) if such activities do not actually
and materially conflict with our business interests. We will pay Mr. Hage an
hourly fee of $200 for a total of no more than 2,000 billable hours per annum
for all legal services performed personally by Mr. Hage.
Mr. Hage may receive an annual success bonus of up to $300,000 based upon
a reasonable discretionary evaluation by our board of directors of Mr. Hage's
individual performance. Mr. Hage received a bonus of $300,000 for 1999. We will
reimburse Mr. Hage for all reasonable and necessary business expenses incurred
or paid, to the extent such expenses are reasonably substantiated and
documented. Pursuant to a stock option agreement, Mr. Hage has received options
for 12,902.6218 shares of stock.
The professional services agreement will terminate upon written notice by
either party. If we terminate Mr. Hage's engagement, we are required to pay Mr.
Hage any unpaid fees and benefits that he earned through the date of
termination.
Separation Agreement. In connection with Mr. Prinner's resignation on
January 31, 2000, we entered into a separation agreement with Mr. Prinner.
Pursuant to the separation agreement, we agreed to pay Mr. Prinner $375,000 and
to pay legal expenses of $75,000 on Mr. Prinner's behalf. We also agreed to
repurchase 978.3950 shares of stock held by Mr. Prinner for a total purchase
price of $168,616.89. Mr. Prinner retained vested options to purchase
5,148.6843 shares of stock at an exercise price of $172.34043 per share and
forfeited his remaining options. Mr. Prinner's retained options are exercisable
until January 1, 2003.
Option Agreements
In connection with their employment agreements, we granted stock options
to Messrs. Kandel, Standig and Hart as shown in the table contained in "--
Executive Compensation--Stock Option Grants in 1999." In connection with Mr.
Nielsen's employment agreement, we granted to Mr. Nielsen options to purchase
11,235.9551 shares of stock, a portion of which vest upon the achievement of
performance-based targets. The options held by Mr. Kandel will become
immediately exercisable upon a change of control of our company or if his
employment is terminated without cause or for death, disability or retirement.
The options held by Messrs. Standig, Hart, Hage and Nielsen will become
immediately exercisable upon a change of control, but only if a certain annual
rate of return has occurred on an investment in our stock. To the extent only a
portion of the annual rate of return has been achieved, a pro rata portion of
the unexercisable options will become exercisable.
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<PAGE>
Management Bonus Stock Purchase Agreements
In December 1999, pursuant to management bonus stock purchase agreements,
one of our affiliates sold shares of stock to Messrs. Kandel, Standig, Hart and
Prinner at a price per share of $172.34043 as follows:
<TABLE>
<CAPTION>
Total
Name Number of Shares Purchase Price
---- ---------------- --------------
<S> <C> <C>
Solon L. Kandel................................. 483.5391 $83,333.34
David L. Standig................................ 169.2387 29,166.67
John P. Hart, Jr................................ 169.2387 29,166.67
John P. Prinner................................. 145.0617 25,000.00
</TABLE>
Messrs. Kandel, Standig, Hart and Prinner each made payment of the
purchase price by withholding a portion of his bonus payable for 1999 pursuant
to his employment agreement. We repurchased the 145.0617 shares held by Mr.
Prinner in connection with his separation agreement.
Management Warrants
Also in December 1999, we issued warrants to our named executive officers
to purchase a total of 12,400 shares of stock at an exercise price of $172.3404
per share as follows:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Solon L. Kandel................................................ 2,480
David L. Standig............................................... 2,480
John P. Hart, Jr............................................... 2,480
J.K. Hage III.................................................. 2,480
John P. Prinner................................................ 2,480
</TABLE>
Pursuant to its terms, Mr. Prinner's warrant automatically terminated upon
his resignation in January 2000. The terms of the management warrants are
described in "Description of Capital Stock--Description of Warrants." In May
2000, we issued a warrant to Mr. Nielsen to purchase 2,480 shares of stock at
an exercise price of $172.3404 per share.
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<PAGE>
CERTAIN TRANSACTIONS
We have engaged in the following transactions with our directors, officers
and holders of more than 5% of our voting securities and their respective
affiliates since 1997.
Management Stock Purchases
In December 1999, pursuant to a management stock purchase agreement, we
issued 833.3333 shares of our stock to Mr. Hage at a price per share of
$172.34043 for a total purchase price of $143,617.02.
In March 2000, pursuant to management stock purchase agreements, one of
our affiliates sold shares of our stock to Messrs. Standig and Hart at a price
per share of $172.34043 as follows:
<TABLE>
<CAPTION>
Total
Name Number of Shares Purchase Price
---- ---------------- --------------
<S> <C> <C>
David L. Standig................................ 833.3333 $143,617.02
John P. Hart, Jr................................ 833.3333 143,617.02
</TABLE>
Concurrently with their stock purchases, we issued to each of Messrs.
Standig and Hart options to purchase 1,666.6667 shares of stock at an exercise
price of $172.34043 per share.
Messrs. Standig and Hart each received a loan from our subsidiary,
Independent Wireless One, in the principal amount of $143,617.02 to fund the
cost of purchasing their shares. Each officer's loan is collateralized by the
shares purchased by the officer in addition to his rights in the stock option
granted to him in 2000. Mr. Standig's loan is payable on September 1, 2000 and
bears interest at a rate of 10.75% per annum. Mr. Hart's loan is payable on
January 1, 2003 and bears interest, payable annually, at the prime rate
announced by The Chase Manhattan Bank from time to time.
Stockholders Agreement
We have entered into a stockholders agreement with certain of our initial
investors. The stockholders agreement grants registration rights with respect
to shares of our capital stock held by these investors and contains agreements
regarding how the investors will vote in the election of our directors. For a
description of these provisions, see "Description of Capital Stock--
Stockholders Agreement." The stockholders agreement also provides that certain
of our stockholders who are independent telephone companies will use their
commercially reasonable efforts to strategically augment our network build-out
program and imposes certain terms and conditions on these efforts. For a
description of our build-out plan, see "Business--Markets and Build-Out Plan."
Transactions with Directors
During 1997 and 1998, Independent Wireless One obtained marketing,
information technology, and management consulting services from Detecon, Inc.,
and AFB Consulting, Inc., each an affiliate of one of our directors, Alfred F.
Boschulte. Independent Wireless One incurred fees payable to Detecon of
approximately $125,000 in 1998 and $123,000 in 1999 and incurred fees payable
to AFB Consulting of approximately $297,000 in 1999.
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<PAGE>
In December 1999, we issued to Mr. Boschulte vested options to purchase
11,235.9551 shares of stock at an exercise price of $43.521 per share. The
option granted to Mr. Boschulte was made in exchange for Mr. Boschulte's option
to acquire a 1% equity interest in Independent Wireless One Corporation, which
option was granted to him in August 1999. At the same time, we also issued to
Mr. Boschulte 148.3441 shares of our stock at a price per share of $172.34043
for a total purchase price of $25,565.69.
Independent Wireless One has used the services of the law firm of Hage and
Hobaica, LLP. J.K. Hage III, a member of Hage and Hobaica, serves as our
Secretary, General Counsel and Executive Vice President and is one of our
directors and stockholders. We incurred legal fees payable to Hage and Hobaica
of approximately $61,000 in 1997, $273,000 in 1998 and $1,116,000 in 1999.
In December 1999, we issued 577.4293 shares of our stock to Mr. Hage at a
price per share of $172.34043 for a total purchase price of $99,514.41, and
30,000.0000 shares to his affiliate Cedar Familia LLC in exchange for 2,051
shares of the common stock of Independent Wireless One held by Cedar Familia.
In addition, we granted to Cedar Familia LLC a warrant to purchase 3,942.8571
shares of our stock at an exercise price of $172.34043 per share.
Management Consulting Services and Credit Financings
In December 1999, Independent Wireless One entered into a five-year
agreement with Investcorp International, Inc., an affiliate of Investcorp, for
management advisory and consulting services pursuant to which Independent
Wireless One prepaid Investcorp International a fee of approximately $5.0
million. Also in December 1999, Independent Wireless One paid Odyssey
Investment Partners, LLC a transaction fee of $1.5 million.
In connection with the senior credit facilities, Independent Wireless One
paid Investcorp International a loan advisory fee of approximately $3.5
million.
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<PAGE>
REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
Federal Regulation
The Federal Communications Commission can have a substantial impact upon
entities that manage and/or provide personal communications services and
systems, fixed wireless and other telecommunications services because the
Federal Communications Commission regulates the licensing, construction,
operation, purchase and interconnection arrangements of telecommunications
systems in the United States.
The Federal Communications Commission has promulgated, or is in the
process of promulgating, a series of rules, regulations and policies to, among
other things:
. grant or deny licenses for personal communications services
frequencies;
. grant or deny personal communications services license renewals;
. grant or deny consent for assignments and/or transfers of control of
personal communications services licenses;
. govern the interconnection of personal communications services
networks with other wireless and landline service providers;
. possibly facilitate the offering of calling party pays as an optional
wireless service for consumers;
. establish access and universal service funding provisions;
. impose fines and forfeitures for violations of any of the Federal
Communications Commission's rules; and
. regulate the technical standards of personal communications services
networks.
The Federal Communications Commission currently prohibits a single entity
from having a combined attributable interest of 20% or greater in any license
in broadband personal communications services, cellular and specialized mobile
radio, commonly referred to as SMR, totaling more than 45 megahertz in any
metropolitan area, or more than 55 megahertz in any rural area, as such areas
are defined by the Federal Communications Commission. Interests held by passive
institutional investors, small companies and rural telephone companies are not
usually deemed attributable for purposes of this prohibition if these interests
do not exceed 40%.
Transfers and Assignments of Wireless Personal Communications Services
Licenses
The Federal Communications Commission must give prior approval to the
assignment of, or transfers involving, substantial changes in ownership or
control of a personal communications services license. This means that we and
our stockholders will receive advance notice of any and all transactions
involved in transferring control of Sprint PCS or the assignment of some or all
of the personal communications services licenses held by Sprint PCS. Non-
controlling interests in an entity that holds a personal communications
services license or operates personal communications services networks
generally may be bought or sold without prior Federal Communications Commission
approval. In addition, a recent Federal Communications Commission order
requires only post-consummation notification of certain pro forma assignments
or transfers of control.
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Conditions of Wireless Personal Communications Services Licenses
All personal communications services licenses are granted for ten year
terms conditioned upon timely compliance with the Federal Communications
Commission's build-out requirements. Pursuant to the Federal Communications
Commission's build-out requirements, all 30 megahertz broadband personal
communications services licensees must construct facilities that offer coverage
to one-third of the population within five years and to two-thirds of the
population within ten years, and all 10 megahertz broadband personal
communications services licensees must construct facilities that offer coverage
to at least one-quarter of the population within 5 years or make a showing of
"substantial service" within that five year period. If the build-out
requirements are not met, personal communications services licenses could be
forfeited. The Federal Communications Commission also requires licensees to
maintain control over their licenses. Our affiliation agreements with Sprint
PCS reflect a management agreement that the parties believe meets the Federal
Communications Commission requirements for licensee control of licensed
spectrum. If the Federal Communications Commission were to determine that our
affiliation agreements with Sprint PCS need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the agreements necessary to cause the agreements to comply
with applicable law and to preserve to the extent possible the economic
arrangements set forth in the agreements. If the agreements cannot be modified,
the agreements may be terminated pursuant to their terms. In addition to
revoking the licenses, the Federal Communications Commission could impose
monetary penalties on us.
Personal communications services licensees must comply with microwave
relocation rules. For a period of up to ten years after the grant of a personal
communications services license (subject to extension), a personal
communications services licensee will be required to share spectrum with
existing licensees that operate specified fixed microwave systems which exist
within the personal communications services licensee's markets. To secure a
sufficient amount of unencumbered spectrum to offer our personal communications
services efficiently, we may need to negotiate agreements to relocate many of
these existing licensees and may need to pay for the relocation of these
existing licensees. In places where relocation is necessary to permit offering
of our personal communications services, any delay in the relocation of these
licensees may adversely affect our ability to commence timely commercial
operation of our personal communications services. In an effort to balance the
competing interests of existing microwave users and newly authorized personal
communications services licensees, the Federal Communications Commission has
adopted a transition plan to relocate these microwave operators to other
spectrum blocks and a cost sharing plan so that if the relocation of an
incumbent benefits more than one personal communications services licensee, the
benefiting personal communications services licensees will share the costs of
the relocation. For the licenses our network uses, this transition plan allows
most microwave users to operate in the personal communications services
spectrum for a two-year voluntary negotiation period and an additional one-year
mandatory negotiation period. For public safety entities dedicating a majority
of their system communications for police, fire or emergency medical services
operations, the voluntary negotiation period is three years, with a two-year
mandatory negotiation period. Parties unable to reach agreement within these
time periods may refer the matter to the Federal Communications Commission for
resolution, but the existing microwave user is permitted to continue its
operations until final Federal Communications Commission resolution of the
matter. The transition
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and cost sharing plans expire in April 2005, at which time remaining incumbents
in the personal communications services spectrum will be responsible for their
costs to relocate to alternate spectrum locations. We believe that we are in
compliance with applicable spectrum relocation requirements enacted by the
Federal Communications Commission.
Wireless Personal Communications Services License Renewal
Wireless personal communications services licensees can renew their
licenses for additional ten year terms. Wireless personal communications
services renewal applications are not subject to auctions. However, under the
Federal Communications Commission's rules, third parties may oppose renewal
applications and/or file competing applications. If one or more competing
applications are filed, a renewal application will be subject to a comparative
renewal hearing. The Federal Communications Commission's rules afford personal
communications services renewal applicants involved in comparative renewal
hearings with a "renewal expectancy." The renewal expectancy is the most
important comparative factor in a comparative renewal hearing and is applicable
if the personal communications services renewal applicant has:
. provided "substantial service" during its license term; and
. substantially complied with all applicable laws and Federal
Communications Commission rules and policies.
The Federal Communications Commission's rules define "substantial service" in
this context as service that is sound, favorable and substantially above the
level of mediocre service that might minimally warrant renewal.
Interconnection
The Federal Communications Commission has the authority to order
interconnection between commercial mobile radio services providers and any
other common carrier. The Federal Communications Commission has ordered local
exchange carriers to provide reciprocal compensation to commercial mobile radio
services and providers for the termination of traffic. We will negotiate
interconnection agreements for the Sprint PCS network in our market area with
Bell Atlantic, GTE and several smaller local telephone companies.
Interconnection agreements are negotiated on a state-wide basis. If an
agreement cannot be reached, parties to interconnection negotiations can submit
outstanding disputes to state authorities for arbitration. Negotiated
interconnection agreements are subject to state approval. The states'
regulatory commissions must consider applications for approval in a manner
consistent with the terms of the federal Communications Act of 1934, as
amended. The Federal Communications Commission rules, as well as the state
arbitration proceedings, will directly impact the nature and cost of the
facilities necessary for interconnection of the Sprint PCS systems with local,
national and international telecommunications networks. These agreements will
determine the nature and amount of revenues we and Sprint PCS can receive for
terminating calls originating on the networks of local exchange and other
telecommunications carriers.
Other Federal Communications Commission Requirements
In June 1996, the Federal Communications Commission adopted rules that
prohibit broadband personal communications services providers from unreasonably
restricting or disallowing resale of
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their services or unreasonably discriminating against resellers. Resale
obligations are scheduled to expire in November 2002. These resale requirements
and their expiration may affect the number of resellers competing with us and
Sprint PCS in various markets. The Federal Communications Commission recently
decided that these prohibitions apply to services, but not to equipment such as
handsets, whether sold alone or in bundled packages.
The Federal Communications Commission also adopted rules in June 1996 that
require local exchange and most commercial mobile radio services providers, to
program their networks to allow customers to change service providers without
changing telephone numbers, which is referred to as service provider local
number portability. By November 2002, commercial mobile radio services
providers are required to offer full number portability without impairment of
quality, reliability, or convenience when switching service providers,
including the ability to support roaming throughout their networks. The Federal
Communications Commission currently requires most commercial mobile radio
services providers to be able to deliver calls from their networks to ported
numbers anywhere in the country, and to contribute to the Local Number
Portability Fund. Implementation of wireless service provider full number
portability will require personal communications services providers like us and
Sprint PCS to purchase more expensive switches and switch upgrades. However, it
will also enable existing cellular customers to change to personal
communications services without losing their existing wireless telephone
numbers, which should make it easier for personal communications services
providers to market their services to existing cellular users.
In June 1996, the Federal Communications Commission adopted rules
requiring broadband and other commercial mobile radio services providers to
implement enhanced 911 capabilities. Full compliance with the rules must occur
by October 1, 2001.
In June 1999, the Federal Communications Commission initiated a regulatory
proceeding seeking comment from the public on a number of issues related to
competitive access to multiple-
tenant buildings, including the following: the Federal Communications
Commission's tentative conclusion that the Communications Act of 1934, as
amended, requires utilities to permit telecommunications service providers
access to rooftop and other rights-of-way in multiple tenant buildings under
just, reasonable and nondiscriminatory rates, terms and conditions; and whether
building owners that make access available to a telecommunications service
provider should be required to make access available to all other
telecommunications service providers on a nondiscriminatory basis, and whether
the Federal Communications Commission has the authority to impose such a
requirement. This proceeding could affect the availability and pricing of sites
for our antennas and those of our competitors.
The Federal Communications Commission also requires that aggregate radio
wave emissions from every site location meet certain standards. Although we
believe that our existing networks meet these standards, a site audit may
reveal the need to reduce or modify emissions at one or more sites. This would
increase our costs and have a material adverse affect on our operations. In
addition, these regulations will also affect site selection for new network
build-outs and may increase the costs of building out our network. The
increased costs and delays from these regulations may have a material adverse
affect on our operations.
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Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act, or CALEA, enacted
in 1994 requires personal communications service and other telecommunications
service providers to meet capability and capacity requirements needed by
federal, state and local law enforcement to preserve their electronic
surveillance capabilities. Wireless personal communications services providers
must comply with the current industry CALEA capability standard by June 30,
2000, and with recently adopted additions by September 30, 2001. Several
carriers, including Sprint PCS, have filed petitions with the Federal
Communications Commission for extension of the deadline for compliance. The
Federal Communications Commission has stated that petitioners that provide
timely and sufficient information to permit a preliminary and expeditious
determination that compliance with the current deadline is not reasonably
achievable through application of technology available within the compliance
period may receive an extension of this deadline. At present, most personal
communications services providers are ineligible for federal reimbursement for
the software and hardware upgrades necessary to comply with the CALEA
capability and capacity requirements, but several bills pending in Congress may
expand reimbursement rights if they are enacted and an appellate court is
reviewing the requirements. In addition, the Federal Bureau of Investigation
has been discussing with the industry options for reducing or waiving CALEA
compliance requirements in geographic areas with minimal or nonexistent
electronic surveillance needs.
The Federal Communications Commission is considering petitions from
numerous parties to establish and implement technical compliance standards
pursuant to CALEA requirements. In sum, CALEA capability and capacity
requirements are likely to impose some additional switching and network costs
upon us, Sprint PCS and other wireless entities.
Other Federal Regulations
We must bear the expense of compliance with Federal Communications
Commission and Federal Aviation Administration regulations regarding the
siting, lighting and construction of transmitter towers and antennas. In
addition, Federal Communications Commission environmental regulations may cause
some of our cell site locations to become subject to the additional expense of
regulation under the National Environmental Policy Act. The Federal
Communications Commission is required to implement the National Environmental
Policy Act by requiring service providers to meet land use and radio frequency
standards.
Review of Universal Service Requirements
The Federal Communications Commission and the states are required to
establish a universal service program to ensure that affordable, quality
telecommunications services are available to all Americans. Sprint PCS is
required to contribute to the federal universal service program as well as
existing state programs. The Federal Communications Commission has determined
that Sprint PCS' contribution to the federal universal service program is a
variable percentage of end-user telecommunications revenues and is
approximately 5.5% for the third quarter of 2000. Although many states are
likely to adopt a similar assessment methodology, the states are free to
calculate telecommunications service provider contributions in any manner they
choose as long as the process is not inconsistent with the Federal
Communications Commission's rules. At the present time it is not
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possible to predict the extent of the Sprint PCS total federal and state
universal service assessments or its ability to recover from the universal
service fund. However, some wireless entities are seeking state commission
designation as eligible telecommunications carriers, enabling them to receive
federal and state universal service support, and are preparing to compete
aggressively with wireline telephone companies for universal service revenue.
State Regulation of Wireless Service
Section 332 of the Communications Act preempts states from regulating the
rates and entry of commercial mobile radio service providers. Section 332 does
not prohibit a state from regulating the other terms and conditions of
commercial mobile services, including consumer billing information and
practices, billing disputes and other consumer protection matters. However,
states may petition the Federal Communications Commission to regulate those
providers and the Federal Communications Commission may grant that petition if
the state demonstrates that market conditions fail to protect subscribers from
unjust and unreasonable rates or rates that are unjustly or unreasonably
discriminatory, or when commercial mobile radio service is a replacement for
landline telephone service within the state. To date, the Federal
Communications Commission has granted no such petition. To the extent we
provide fixed wireless service, we may be subject to additional state
regulation.
Partitioning; Disaggregation
The Federal Communications Commission's rules allow broadband personal
communications services licensees to partition their market areas and/or to
disaggregate their assigned spectrum and to transfer partial market areas or
spectrum assignments to eligible third parties.
Equal Access
Wireless providers are not required to provide equal access to common
carriers for toll services. However, the Federal Communications Commission is
authorized to require unblocked access to toll carriers subject to certain
conditions.
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PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial
ownership of our common stock as of June 12, 2000, and as adjusted to reflect
the sale of our common stock offered by this prospectus, by:
. each person, or group of affiliated persons, who is known by us to
beneficially own 5% or more of our common stock;
. each of our named executive officers;
. each of our directors; and
. all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of stock subject to options that are
currently exercisable or exercisable within 60 days of June 12, 2000 are deemed
outstanding for purposes of computing the percentage ownership of any person.
These shares, however, are not considered outstanding when computing the
percentage ownership of any other person. Except as indicated in the footnotes
to this table and pursuant to state community property laws, each stockholder
named in the table has sole voting and investment power for the shares shown as
beneficially owned by them. Percentage of ownership before this offering is
based on 1,009,686.6299 shares of common stock outstanding on June 12, 2000 and
assumes the conversion of all of our outstanding shares of our capital stock
into shares of common stock. Percentage of ownership after this offering is
based on shares of common stock to be outstanding after completion of this
offering and assumes no exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
Percentage of
Ownership(1)
Number Options --------------------
of Shares Included in Before the After the
Beneficially Owned Beneficial Ownership Offering Offering
Name of Beneficial Owner ------------------ -------------------- ---------- ---------
<S> <C> <C> <C> <C>
Investcorp S.A(2)....... 203,743.6481 16,668.8200 20.2%
SIPCO Limited(3)........ 203,743.6481 16,668.8200 20.2%
Odyssey Investment
Partners Fund,
LP(4)................ 123,302.4660 -- 12.2%
Investcorp IWO Limited
Partnership(5)....... 121,616.1443 20,090.8000 12.0%
Wireless IIP
Limited(6)........... 64,273.5000 -- 6.4%
Solon L. Kandel(7)...... 34,319.6686 33,836.1295 3.3%
David L. Standig(7)..... 9,334.3662 8,331.7942 *
John P. Hart, Jr.(7).... 6,844.4991 5,841.9271 *
J.K. Hage III(8)........ 38,950.9094 6,540.1468 3.8%
John P. Prinner(9)...... 5,148.6843 5,148.6843 *
Christopher J.
Stadler(10).......... -- -- --
Mamoun Askari(10)....... -- -- --
James O. Egan(10)....... -- -- --
Thomas J. Sullivan(10).. -- -- --
Savio W. Tung(10)....... -- -- --
Christopher J.
O'Brien(10).......... -- -- --
Alfred J.
Boschulte(11)........ 11,384.2992 8,938.2138 1.1%
Brian Kwait(12)......... 123,302.4660 -- 12.2%
Harley Ruppert(13)...... 33,335.6171 -- 3.3%
All directors and
executive officers as
a group (13
persons)............. 265,874.6154 71,891.0012 24.6%
</TABLE>
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---------------------
* Less than 1%.
(1) We have entered into a stockholders agreement with certain of our
stockholders with respect to the voting, and in certain circumstances the
disposition, of the shares of our capital stock. See "Description of
Capital Stock--Stockholders Agreement." All such stockholders may be
deemed to be a control group for such purposes, and each stockholder may
thus be deemed to beneficially own all shares owned by all other such
stockholders. Because we believe that it more accurately reflects
ownership of our capital stock, this table does not reflect shares which
may be deemed to be beneficially owned by any entity solely by virtue of
the stockholders agreement.
(2) Investcorp does not directly own any of our stock. The number of shares of
stock shown as beneficially owned by Investcorp includes all of the shares
beneficially owned by Investcorp Investment Equity Limited, Alloway
Limited, Carrigan Limited, Frankfort Limited, Paugus Limited, Equity IWO
Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited,
Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited and Zinnia Limited. Investcorp Investment Equity Limited is a
Cayman Islands corporation and a wholly-owned subsidiary of Investcorp.
Investcorp owns no stock in Alloway Limited, Carrigan Limited, Frankfort
Limited, Paugus Limited, Equity IWO Limited, Ballet Limited, Denary
Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger
Limited, Quill Limited, Radial Limited, Shoreline Limited or Zinnia
Limited, each of which is a Cayman Islands corporation, or in the
beneficial owners of these entities. Investcorp may be deemed to share
beneficial ownership of the shares held by these entities because the
entities have entered into revocable management services or similar
agreements with an affiliate of Investcorp, pursuant to which each such
entity has granted such affiliate the authority to direct the voting and
disposition of the shares owned by such entity for so long as such
agreement is in effect. The number of shares of stock shown as
beneficially owned by Investcorp also includes 118,194.1641 shares
beneficially owned by Investcorp IWO Limited Partnership, including
16,668.8200 shares of outstanding stock that Investcorp IWO Limited
Partnership has the right, pursuant to an option, to acquire from other
stockholders. Investcorp owns a majority economic ownership interest in
and is the sole general partner of Investcorp IWO Limited Partnership, a
Cayman Islands limited partnership. Investcorp is a Luxembourg corporation
with its address at 37 rue Notre-Dame, Luxembourg.
(3) SIPCO Limited may be deemed to control Investcorp through its ownership of
a majority of a company's stock that indirectly owns a majority of
Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands.
(4) Includes 580.2469 shares owned by Odyssey Coinvestors, LLC, an affiliate
of Odyssey Investment Partners Fund, LP. The address of Odyssey Investment
Partners Fund, LP is 280 Park Avenue, 38th Floor, New York, New York
10017.
(5) Includes 20,090.8000 shares of outstanding stock that Investcorp IWO
Limited Partnership has the right, pursuant to an option, to acquire from
other stockholders. The address of Investcorp IWO Limited Partnership is
P.O. Box 1111, George Town, Grand Cayman, Cayman Islands, British West
Indies.
(6) The address of Wireless IIP Limited is P.O. Box 1111, George Town, Grand
Cayman, Cayman Islands, British West Indies.
(7) The address of each of Messrs. Kandel, Standig and Hart is c/o IWO
Holdings, Inc., 319 Great Oaks Boulevard, Albany, New York 12203.
(8) Includes 30,000 shares held by Cedar Familia LLC, an affiliate of J.K.
Hage III. Mr. Hage's address is c/o Hage and Hobaica, LLP, 610 Charlotte
Street, Utica, New York 13501.
(9) Mr. Prinner's address is 6 Musket Lane, Redding, Connecticut 06896.
(10) The address of each of Messrs. Stadler, Askari, Egan, Sullivan, Tung and
O'Brien is c/o Investcorp International, Inc., 280 Park Avenue, 37th
Floor, New York 10017.
(11) Mr. Boschulte's address is c/o Detecon, Inc., 10700 Parkridge Boulevard,
Suite 100, Reston, Virginia 20191.
(12) Consists of 122,722.2191 shares held by Odyssey Investment Partners Fund,
LP and 580.2469 shares held by Odyssey Coinvestors, LLC. Mr. Kwait is a
general partner or general member of Odyssey Investment Partners Fund, LP
and Odyssey Coinvestors, LLC. Mr. Kwait may be deemed to have beneficial
ownership of the shares because he shares voting and investment power with
respect to the shares. Mr. Kwait disclaims beneficial ownership of all of
the shares. Mr. Kwait's address is c/o Odyssey Investment Partners, LLC,
280 Park Avenue, 38th Floor, New York, New York 10017.
(13) Consists of 33,335.6171 shares held by Newport PCS Inc., an affiliate of
Mr. Ruppert. Mr. Ruppert's address is c/o Newport PCS Inc., P.O. Box 201,
Bridge Street, Newport, New York 13416.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Secured Credit Facilities
On December 20, 1999, we entered into $240.0 million of senior secured
credit facilities with The Chase Manhattan Bank as a lender and also as the
administrative agent for the other lenders under the facilities.
The credit facilities provide for a:
. $70.0 million revolving credit commitment which expires on March 31,
2008;
. $120.0 million term loan A commitment which expires on March 31, 2002;
and
. $50.0 million term loan B commitment which was fully funded on March 31,
2000.
Our ability to draw under the revolving credit and the term loan A
commitments is conditioned upon the receipt of certain additional financing.
Before we can borrow under these lines of credit, we must receive at least
$100.0 million from any combination of borrowings under our bridge loan
commitment or the issuance of our debt or equity securities. This additional
financing condition must be satisfied by June 30, 2000. We are in discussions
with our lenders regarding this requirement.
The term loan A commitment will be reduced by the amount by which the
aggregate principal amount of the term loan A drawn by September 30, 2000 is
less than $30 million, by March 31, 2001 is less than $60 million and by
September 30, 2001 is less than $90 million.
The proceeds of term loan B were used to help finance our purchase from
Sprint PCS of network assets in our territory on March 31, 2000.
Term loan A will mature on March 31, 2008 and term loan B will mature on
September 30, 2008.
We must repay term loan A in 17 consecutive quarterly installments
beginning on March 31, 2004. The first quarterly payment is $2.0 million; each
of the next two quarterly installments is $3.0 million; each of the next four
installments is $4.8 million; each of the next four installments is $7.2
million; each of the next four installments is $10.0 million; and each of the
last two quarterly installments is $12.0 million.
We must repay term loan B in 19 consecutive quarterly installments. Each
of the first 16 quarterly payments is $250,000; the following quarterly
payment is $5.0 million; the next quarterly payment is $10.0 million; and the
final payment at maturity is $31.0 million.
Generally, amounts repaid under the revolving credit facility may be re-
borrowed until its termination on March 31, 2008.
Interest on the term loans accrues, at our option, either at:
. a eurodollar-based rate; or
. an alternative base rate, which is the greatest of the prime rate as
specified in the credit facility, the base CD rate as specified in the
credit facility plus 1%, or the federal funds rate plus 1/2%;
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plus the following margin percentages:
<TABLE>
<CAPTION>
Eurodollar- Alternate
Based Base Rate
Loans Loans
----------- ---------
<S> <C> <C>
Term loan A.......................................... 3.25% 2.25%
Term loan B.......................................... 3.75% 2.75%
Revolving credit loans............................... 3.25% 2.25%
</TABLE>
After we demonstrate positive earnings before interest, taxes,
depreciation, amortization and other adjustments for four consecutive fiscal
quarters, the margin percentage may be reduced to vary between 0.50% and 2.00%
for alternate base rate loans and 1.50% and 3.00% for eurodollar-based loans
depending on our ratio of debt to earnings before interest, taxes,
depreciation, amortization plus other adjustments.
Interest on any overdue amounts accrues at a rate per annum equal to 2%
above the rate otherwise applicable.
In connection with the credit facilities, we deposited $8.0 million as a
compensating balance with the commercial lenders of the facilities. The
compensating balance must be maintained until the credit facilities are repaid
in full.
The credit facilities require us to pay a quarterly commitment fee for the
unused portion of the facilities. The commitment fee varies between an annual
rate of 0.75% and 1.25% of the unused commitments. The rate is calculated by
dividing the sum of the outstanding amounts of revolving credit loans and term
loan A by the sum of the revolving credit commitments, the outstanding amount
of term loan A and the unused term loan A commitment. If the ratio resulting
from this calculation is less than 33%, then the annual rate is 1.25%; if the
ratio is equal to or greater than 33% but less than 66%, then the annual rate
is 1.00%; if the ratio is equal to or greater than 66%, then the annual rate is
0.75%. We are also required to pay a separate agent's fee to the administrative
agent.
We must repay the term loans, and the term loan A and, in certain
instances, the revolving credit commitments will be reduced, in an aggregate
amount equal to:
. 50.0% of excess cash flow in each fiscal year;
. 100.0% of the net proceeds of specified asset sales in excess of $2
million or that occur six months following the last application of
asset sale net proceeds as provided in the credit agreement, except to
the extent not otherwise reinvested in telecommunications assets;
. 100.0% of the net cash proceeds of specified incurrence of
indebtedness; and
. 100.0% of the net cash proceeds of specified issuances of equity
securities, other than proceeds from this offering.
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Our credit facilities are collateralized by a perfected security interest
in substantially all of our tangible and intangible assets, including an
assignment of our affiliate agreements with Sprint PCS and a pledge of all of
the capital stock of our subsidiaries. We have guaranteed all of the
obligations under the credit facilities.
The credit facilities contain customary covenants, including covenants
limiting indebtedness, dividends and distributions on, and redemptions and
repurchases of, capital stock and other similar payments, and the acquisition
and disposition of assets. The credit facilities also require that we comply
with specified financial covenants, including interest coverage ratios, fixed
charge coverage ratios and total and senior indebtedness to total capital
ratios. We must also comply with other specified covenants including coverage
of a specified percentage of the population in our market areas and maintenance
of a minimum number of subscribers. Our credit facilities provide for customary
events of default, including judgment defaults and events of bankruptcy. Upon
the occurrence of an event of default, our lenders may declare our obligations
due and payable.
Under a commitment letter dated December 17, 1999, we may borrow up to
$100.0 million. Interest would be payable quarterly and is tied to the London
Interbank Offering Rate, the Treasury rate or an index based on rates for high
yield debt. The bridge loan would be subordinated to our senior credit
facilities. We were required to pay a fee of $1.0 million upon obtaining the
commitment and will be required to pay a fee of 1.25% per annum of amounts
available under the commitment and 1.5% of any amounts we may borrow under the
commitment. We have not borrowed any amounts under the commitment. The
commitment terminates upon the earlier of the issuance of at least $100.0
million of our debt or equity securities or June 30, 2000. We are currently
discussing a possible extension of the commitment with our lenders.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and some of the provisions
of our amended and restated certificate of incorporation and bylaws and other
agreements to which we and our stockholders are parties is only a summary and
is qualified by the provisions of the amended and restated certificate of
incorporation, bylaws and such other agreements, and the provisions of
applicable law.
General
Upon the filing of our amended and restated certificate of incorporation
upon the closing of this offering, our authorized capital stock will consist of
shares of common stock, $0.01 par value per share, and shares of
preferred stock, $0.01 per share.
Prior to the closing of this offering our outstanding capital stock
consisted of Class A, Class B, Class C and Class D stock, each share of which
will be converted into one share of common stock immediately prior to the
closing of this offering. As of June 12, 2000, we had 1,009,686.6299
outstanding shares of capital stock held by 69 holders of record, and had
reserved 128,386.5237 shares of stock for issuance upon exercise of outstanding
options and 40,000 shares for issuance upon exercise of outstanding warrants.
Common Stock
Holders of common stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of common stock are not entitled to vote
cumulatively for the election of directors. Holders of common stock are
entitled to receive proportionally any dividends declared by our board of
directors, subject to any preferential dividend rights of outstanding preferred
stock.
Holders of common stock have no redemption, conversion, preemptive or
other subscription rights. There are no sinking fund provisions relating to our
common stock. In the event of the liquidation, dissolution or winding up of our
company, holders of common stock are entitled to share ratably in all of our
assets, if any, remaining after satisfaction of our debts and liabilities. The
outstanding shares of common stock are, and the shares of the common stock
offered by this prospectus will be, when issued and paid for, validly issued,
fully paid and nonassessable.
Preferred Stock
Under our certificate of incorporation, our board of directors is
authorized, subject to limitations prescribed by law, to issue shares of
preferred stock in one or more series without further stockholder approval. The
board has discretion to determine the rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, of each series of preferred
stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances.
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<PAGE>
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could make
it more difficult for a third party to acquire, or could discourage a third
party from acquiring, a majority of our outstanding voting stock.
Stockholders Agreement
We have entered into a stockholders agreement with certain of our initial
investors. The stockholders agreement, which will remain in effect after this
offering, grants registration rights with respect to shares of our stock held
by these initial investors and contains agreements regarding how the initial
investors will vote in the election of our directors.
Voting
All of our current directors were elected pursuant to the stockholders
agreement.
The stockholders agreement contains the following voting agreements:
. Until the date on which certain international investors arranged by
Investcorp collectively own less than 50% of the shares initially held
by them, certain initial investors will vote in the same manner in
which the shares held by the Investcorp investors are voted in any
election of directors to our board.
. Until the date on which the founders of Independent Wireless One
collectively own less than 25% of the shares initially held by them,
the Investcorp investors will vote in favor of three directors
designated by the founders in any election of directors to our board.
The founder-designated directors are currently Alfred F. Boschulte,
J.K. Hage III and Harley Ruppert. Pursuant to the stockholders
agreement, none of the founder-designated directors may be removed
from our board without the approval of a majority of the initial
investors.
. Until the date on which Odyssey Investment Partners Fund, LP and its
affiliates collectively own less than 50% of the shares initially held
by them, the Investcorp investors will vote in favor of one director
designated by Odyssey in any election of directors to our board. The
Odyssey-designated director is currently Brian Kwait.
. Until the date on which the founders collectively own less than 25% of
the shares initially held by them, we will vote to elect the members
of our board of directors to the board of directors of Independent
Wireless One.
Registration Rights
The stockholders agreement provides certain of our stockholders with
registration rights as set forth below.
Demand Registration. At any time after December 1, 2000, Investcorp
investors representing a specified minimum percentage of the stock held by them
may, on up to two occasions, request that we register their shares pursuant to
the Securities Act. In addition, any Investcorp investor may request at any
time that we register their shares pursuant to the Securities Act using an
abbreviated
99
<PAGE>
registration form if we are eligible to use such abbreviated registration form,
but no more than once during any 12-month period, and only if the registration
would involve an offering size of at least $2 million. The stockholders
agreement imposes limitations on both types of demand registration rights. In
addition, the other stockholders who are parties to the stockholders agreement
may request that their shares also be included when the Investcorp investors
initiate a demand registration. The stockholders agreement contains provisions
for determining which shares will be included in a registration in the event
the underwriters in the offering decide, for marketing reasons, to limit the
number of shares that may be included in the registration.
Piggyback Registration Rights. In any registration initiated by us for the
sale of securities for our own account, stockholders who are entitled to have
shares registered pursuant to the stockholders agreement may request that their
shares be included in the registration. The underwriters in the offering may
decide, for marketing reasons, to limit the number of shares that may be
included in the registration, in which case the shares proposed to be sold by
us would have priority over any shares with respect to which stockholders
request registration. No stockholders entitled to piggyback registration rights
are participating in this offering.
Lock Up
The Investcorp investors and the initial investors have agreed that they
will not transfer their shares, except in limited circumstances, until the
earlier of:
. 18 months following the closing of this offering; or
. the closing of a transaction resulting in a change of control of our
company.
However, they may sell up to 10% of the shares that they own on the date
of the closing of this offering 12 months after such date.
Description of Warrants
In December 1999, we issued warrants to purchase an aggregate of 40,000
shares of our stock at an exercise price of $172.34043 per share. Warrants to
purchase a total of 27,600 shares were issued to the founders of Independent
Wireless One and warrants to purchase a total of 12,400 shares were issued to
our named executive officers. The names of the warrant holders who are named
executive officers and the number of shares covered by their warrants are set
forth in "Management--Management Warrants." In addition, in May 2000, we issued
a warrant to purchase 2,480 shares of our stock to Steven M. Nielsen, our Chief
Financial Officer, at an exercise price of $172.34043. The number of shares
that may be purchased pursuant to the warrants and the exercise price of the
warrants are subject to adjustment for changes in our capitalization such as
stock splits or dividends.
The warrants will become immediately exercisable in the instances
described below. As used below, an "approved sale" means a transaction that
results in a change of economic ownership of our company of greater than 50
percent, whether pursuant to a sale of our stock, a sale of substantially all
of our assets or a merger or consolidation.
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Each warrant will vest as to half the shares covered by it upon the
earlier to occur of the following:
. immediately prior to an approved sale if (1) the approved sale enables
the initial investors to realize in cash an amount greater than two
times their initial investment and (2) this amount represents a 40
percent annual return on their initial investment; and
. if an initial public offering has occurred, 90 days following the sale
by the initial investors of at least 50 percent of their initial
investment if (1) the investors have realized in cash an amount
greater than one-and-a-half times their investment and (2) this
amount, together with the amount the investors could realize in a
public sale of their remaining shares, represents a 40 percent annual
return on their initial investment.
Each warrant will vest as to the remaining shares covered by it upon the
earlier to occur of the following:
. immediately prior to an approved sale if (1) the approved sale enables
the initial investors to realize in cash an amount greater than three
times their initial investment and (2) this amount represents a 60
percent annual return on their investment; and
. if an initial public offering has occurred, 90 days following the sale
by the initial investors of at least 50 percent of their initial
investment if (1) the investors have realized in cash an amount
greater than three times their investment and (2) this amount,
together with the amount the investors could realize in the public
sale of their remaining shares, represents a 60 percent annual return
on their initial investment.
The warrants issued to both the founders and our named executive officers
will terminate automatically upon the occurrence of an approved sale unless the
board of directors provides for their continuance or such provision is made in
connection with the approved sale. The warrants issued to our named executive
officers will also terminate automatically in December 2009 if no approved sale
has occurred by then, and will terminate earlier if the officer ceases to be
employed with us.
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. The provisions of Section 203 may make it more difficult to
acquire us by means of a tender offer, a proxy contest or otherwise or to
remove incumbent officers and directors. These provisions are expected to
discourage types of coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of us to first negotiate
with us. We believe that the disadvantages of discouraging these proposals are
outweighed by the increased protection of our potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us because, among other things, the negotiation of such proposals
could result in an improvement of their terms.
In general, the statute prohibits us from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date that the person became an interested stockholder, unless one of the
following conditions is satisfied:
. Prior to the date that the person became an interested stockholder,
the transaction or business combination that resulted in the person
becoming an interested stockholder is approved by the board of
directors;
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. Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of our outstanding voting stock; or
. On or after the date that the person became an interested stockholder,
the business combination is approved by our board of directors and by
the holders of at least two-thirds of our outstanding voting stock,
excluding voting stock owned by the interested stockholder.
Generally, a "business combination" includes a merger, asset or stock sale
or other transaction resulting in a financial benefit to the stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who
together with that person's affiliates and associates owns, or within the
previous three years did own, 15% or more of our voting stock.
Provisions of Our Certificate of Incorporation and Bylaws That May Prevent
Takeovers
Our amended and restated certificate of incorporation and amended and
restated bylaws, which will take effect upon the closing of this offering,
contain provisions that may delay, defer or prevent a change in control of our
company and make it more difficult to remove our management.
Our certificate of incorporation will provide that only the board of
directors may fix the number of directors. Our bylaws will provide that a
stockholder may nominate directors only if the stockholder delivers written
notice to us 60 days in advance of an annual meeting, or within ten days after
the date of notice or our public disclosure of a special meeting involving the
election of directors and will limit the manner in which stockholders may make
proposals at stockholder meetings. Our bylaws will provide that directors may
be removed from office only for cause and only by the vote of holders of 75% of
our outstanding voting stock.
Our certificate of incorporation and bylaws will provide that any action
required or permitted to be taken by our stockholders may be taken only at a
duly called annual or special meeting of stockholders, and may not be taken by
written consent. Special meetings may be called only by the chairman of the
board of directors, the President or the board of directors. These provisions
could have the effect of delaying a vote on stockholder actions that are
favored by a majority of our stockholders until the next annual stockholders
meeting. These provisions may also discourage another person or entity from
making an offer to stockholders to purchase their stock.
Our certificate of incorporation will provide that the bylaws may be
amended or repealed by the board of directors, or by the holders of at least
75% of our outstanding voting stock. Our certificate of incorporation will
require the approval of the holders of at least two-thirds of our outstanding
voting stock to amend or repeal any of the provisions of the certificate of
incorporation described above.
The foregoing provisions, together with the ability of the board of
directors to issue preferred stock without further stockholder action, may
delay or frustrate the removal of incumbent directors or the completion of
transactions that would be beneficial, in the short term, to our stockholders.
The provisions may also discourage or make more difficult a merger, tender
offer, other business combination or proxy contest, the assumption of control
by a holder of a large block of our securities or the removal of incumbent
management, even if these events would be favorable to the interests of our
stockholders.
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Our certificate of incorporation will require us to indemnify our
directors and officers to the fullest extent permitted by law. In addition, as
permitted by Delaware law, the certificate of incorporation provides that no
director will be liable to us or our stockholders for monetary damages for
breach of certain fiduciary duties as a director. The effect of this provision
is to restrict our rights and the rights of our stockholders in derivative
suits to recover monetary damages against a director for breach of certain
fiduciary duties as a director, except that a director will be personally
liable for:
. acts or omissions not in good faith which involve intentional
misconduct or a knowing violation of law;
. the payment of dividends or the redemption or purchase of stock in
violation of Delaware law;
. any breach of his or her duty of loyalty to us or our stockholders; or
. any transaction from which the director derived an improper personal
benefit.
Certain Provisions of the Sprint PCS Agreements
Pursuant to our management agreement with Sprint PCS, under specific
circumstances and without further stockholder approval, Sprint PCS may purchase
our operating assets or capital stock for 72% or 80% of our entire business
value, which includes the value of our right to use the spectrum licenses, our
business operations and other assets more fully described in "Our Agreements
with Sprint PCS--The Management Agreement." In addition, Sprint PCS must
approve any change of control of our ownership and consent to any assignment of
our management agreement with Sprint PCS. Sprint PCS has a right of first
refusal if we decide to sell our operating assets to a third party. We are also
subject to a number of restrictions on the transfer of our business including a
prohibition on the sale of our company or our operating assets to competitors
of Sprint or Sprint PCS. These restrictions and other restrictions in our
management agreement with Sprint PCS may limit our ability to sell the business
and may have a substantial anti-takeover effect.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is .
103
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Furthermore, because only a
limited number of shares will be available for sale shortly after the
consummation of this offering due to contractual and legal restrictions on
resale, as described below, sales of substantial amounts of common stock in the
public market after the restrictions lapse could adversely affect the
prevailing market price of the common stock and our ability to raise equity
capital in the future. Upon completion of this offering, we will have
outstanding an aggregate of shares of common stock, assuming no exercise of
the underwriters' over-allotment option and after giving effect to the
conversion of all of our outstanding shares of capital stock into shares of
common stock. Of these shares, all of the shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by our affiliates may
generally only be sold in compliance with the limitations of Rule 144 described
below.
Sales of Restricted Shares; Options
All of the shares of common stock sold in this offering will be freely
tradeable under the Securities Act, unless purchased by our affiliates, as
defined by the Securities Act. In general, under Rule 144 as currently in
effect, a person or persons whose shares are aggregated, including an
affiliate, who has beneficially owned restricted stock for at least one year is
entitled to sell, within any three-month period, a number of shares of stock
that does not exceed the greater of one percent of the then outstanding shares
of common stock, or the average weekly trading volume in the common stock
during the four calendar weeks preceding the date on which notice of that sale
is filed. In addition, under Rule 144(k), a person who is not an affiliate and
has not been an affiliate for at least three months prior to the sale and who
has beneficially owned shares of restricted stock for at least two years may
resell those shares without compliance with the foregoing requirements. In
meeting the one and two year holding periods described above, a holder of
restricted stock can include the holding periods of prior owners who were not
an affiliate.
Additional shares of common stock are available for future grants under
our Stock Option Plan. See "Management--Management Stock Incentive Plan." We
intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issuable pursuant to our benefit plans that do
not qualify for an exemption under Rule 701 from the registration requirements
of the Securities Act. We expect to file these registration statements as soon
as practicable following the closing of this offering, and these registration
statements are expected to become effective upon filing. Shares covered by
these registration statements will be eligible for sale in the public market
subject to the lock-up agreements described below, to the extent applicable.
Lock-Up Agreements
We and all of our current stockholders, members of senior management and
directors have agreed, pursuant to lock-up agreements, that during the period
beginning from the date of this prospectus and continuing and including the
date 180 days after the date of this prospectus, they will not, directly or
indirectly offer, pledge, sell, contract to sell, grant any option, right or
warrant to purchase, or otherwise dispose of any shares of common stock,
including but not limited to any
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common stock or securities convertible into or exercisable or exchangeable for
common stock which may be deemed to be beneficially owned in accordance with
the rules and regulations of the Securities and Exchange Commission or enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of common stock, or make any demand for, or
exercise any right with respect to, the registration of common stock or any
securities convertible into or exercisable or exchangeable for common stock,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
Following the lock-up period, approximately shares of common stock
will become eligible for sale, subject to compliance with Rule 144 of the
Securities Act as described above.
Registration Rights
After December 1, 2000, holders of approximately shares of our common
stock that are restricted securities will be entitled to require us to register
sales of their shares with the Securities and Exchange Commission pursuant to a
stockholders agreement. For a description of the registration rights provisions
of the stockholders agreement, see "Description of Capital Stock--Stockholders
Agreement--Registration Rights."
105
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 2000, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation, Chase Securities Inc., Deutsche Bank
Securities Inc., First Union Securities, Inc., UBS Warburg LLC and DLJdirect
Inc. have severally agreed to purchase from IWO Holdings, Inc. the number of
shares of common stock shown opposite their names below.
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......................
Chase Securities Inc.....................................................
Deutsche Bank Securities Inc.............................................
First Union Securities, Inc.
UBS Warburg LLC..........................................................
DLJdirect Inc............................................................
----
Total..................................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval by their counsel of
legal matters and other conditions. The underwriters must purchase and accept
delivery of all of the shares of common stock offered by this prospectus, other
than those shares covered by the over-allotment option described below, if any
are purchased.
The underwriters propose initially to offer some of the shares of common
stock directly to the public at the public offering price on the cover page of
this prospectus and some of these shares of common stock to dealers, including
the underwriters, at the public offering price less a concession not in excess
of $ per share. The underwriters may allow, and these dealers may re-
allow, a concession not in excess of $ per share on sales to other
dealers. After the initial offering of the common stock to the public, the
representatives of the underwriters may change the public offering price and
other selling terms.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase up to additional
shares of common stock at the initial public offering price less underwriting
discounts and commissions. The underwriters may exercise this option solely to
cover over-allotments, if any, made in connection with the offering. To the
extent that the underwriters exercise this option, each underwriter will become
obligated, under conditions specified in the underwriting agreement, to
purchase its pro rata portion of the additional shares based on that
underwriter's percentage underwriting commitment as indicated in the preceding
table.
The following table shows the underwriting fees to be paid by us in this
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share.................................................
Total.....................................................
</TABLE>
106
<PAGE>
We will pay the offering expenses, estimated to be $ .
We, our officers and directors and all of our stockholders have agreed,
for a period of 180 days after the date of this prospectus, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation, not
to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer
directly or indirectly any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a
portion of the economic consequences of ownership of the common
stock, whether any such transaction described above is to be settled
by delivery of common stock or other securities, in cash or
otherwise.
The underwriting agreement contains limited exceptions to these lock-up
agreements.
An electronic prospectus is available on the web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation.
We have agreed to indemnify the underwriters against specified civil
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make because of these
liabilities.
Prior to the offering, there has been no established trading market for
the common stock. We and the underwriters negotiated the initial public
offering price for the shares of common stock offered by this prospectus. The
factors considered in determining the public offering price included:
. the history of and the prospects for the industry in which we
compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. the general condition of the securities markets at the time of the
offering.
We have applied for quotation on the Nasdaq National Market under the
symbol "IONE".
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot the offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover a syndicate short position
or to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed common stock in syndicate
covering transactions, in stabilization transactions or in some other way or
if Donaldson,
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Lufkin & Jenrette Securities Corporation receives a report that indicates
clients of such syndicate members have "flipped" the common stock. These
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
Other than in the United States, no action has been taken by us, or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements associated with the offer and sale of any
of the shares of common stock offered through this prospectus be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of that jurisdiction. You
should inform yourself and observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any shares
of common stock offered in this prospectus in any jurisdiction in which an
offer or a solicitation is unlawful.
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LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of common
stock offered hereby will be passed upon for us by Gibson, Dunn & Crutcher LLP,
New York, New York and for the underwriters by Skadden, Arps, Slate, Meagher &
Flom LLP, Los Angeles, California.
EXPERTS
The financial statements of IWO Holdings, Inc. and subsidiaries as of
December 31, 1998 and 1999 and for the period from inception (August 22, 1997)
to December 31, 1997 and for the years ended December 31, 1998 and 1999 and
cumulative amounts from inception through December 31, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Ernst & Young LLP, independent auditors, have audited the statements of
assets sold of the Sprint Spectrum Albany, Syracuse and Manchester Markets
(wholly owned by Independent Wireless One Corporation) as of December 31, 1998
and 1999 and the related statements of revenues and expenses for each of the
three years in the period ended December 31, 1999, as set forth in their
report. We have included these financial statements in this prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report given on their authority as experts in accounting and auditing.
109
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of the registration statement on Form
S-1, together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement, which we
have filed with the Securities and Exchange Commission with respect to the
common stock offered in this prospectus. This prospectus does not contain all
of the information in the registration statement. For further information about
us and our securities, see the registration statement and its exhibits. This
prospectus contains a description of the material terms and features of some
material contracts, reports or exhibits to the registration statement required
to be disclosed. However, as the descriptions are summaries of the contracts,
reports or exhibits, we urge you to refer to the copy of each material
contract, report and exhibit attached to the registration statement. Copies of
the registration statement and the exhibits to the registration statement, as
well as the periodic reports, proxy statements and other information we will
file with the Commission after this offering, may be examined without charge in
the Public Reference Room maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New York 10048.
You can get information about the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. Copies of all or a portion of the
registration statement can be obtained from the Public Reference Room upon
payment of prescribed fees. In addition, the Commission maintains a web site
which provides online access to periodic reports, proxy and information
statements and other information regarding registrants that file electronically
with the Exchange Commission at the address http://www.sec.gov.
As a result of this offering, we will become subject to the information
and reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission. We will send an annual report to
stockholders and any additional reports or statements required by the
Securities and Exchange Commission. The annual report to stockholders will
contain financial information that has been examined and reported on, with an
opinion expressed by an independent public accountant.
110
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
IWO Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Accountants...................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Sprint Spectrum Albany, Syracuse and Manchester Markets
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Auditors......................................... F-28
Statements of Assets Sold.............................................. F-29
Statements of Revenues and Expenses.................................... F-30
Notes to Statements of Assets Sold and Statements of Revenues and
Expenses............................................................ F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IWO Holdings, Inc. and
Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
IWO Holdings, Inc. and Subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for the period from inception
(August 22, 1997) through December 31, 1997, and for the years ended December
31, 1998 and 1999 and cumulative amounts from inception through December 31,
1999 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Albany, New York
April 1, 2000
F-2
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, As of
------------------------- March 31,
1998 1999 2000
---------- ------------ ------------
(Unaudited)
(in thousands except share data)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 319 $ 104,752 $ 20,446
Accounts receivable, net of allowances
of $563 at March 31, 2000.......... -- -- 3,449
Inventory............................. -- 315 185
Prepaid expenses...................... -- 263 306
Other current assets.................. -- 61 68
Prepaid management fee-related party.. -- 1,000 1,000
---------- ------------ ----------
Total current assets................. 319 106,391 25,454
Deferred costs, net.................... 1,067 17,915 12,759
Restricted cash........................ -- -- 8,000
Prepaid management fee-related party... -- 3,970 3,720
Property and equipment, net............ -- 539 55,780
Construction in progress............... -- 243 6,079
Intangible assets, net................. -- -- 63,338
Other.................................. -- -- 229
---------- ------------ ----------
Total assets......................... $ 1,386 $ 129,058 $ 175,359
========== ============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................... $ 100 $ 807 $ 3,073
Accounts payable--related parties..... 251 4,866 138
Due to Sprint......................... -- -- 4,272
Accrued expenses...................... -- 484 1,781
Accrued expenses--related party....... -- -- 619
Unearned revenue...................... -- -- 915
Debt.................................. 600 -- --
---------- ------------ ----------
Total current liabilities............ 951 6,157 10,798
Term loan.............................. -- -- 50,000
---------- ------------ ----------
951 6,157 60,798
Commitments and contingencies
Stockholders' equity:
Preferred stock (nonvoting)--$.01 par
value 500,000 shares authorized,
none issued and outstanding........ -- -- --
Common stock, Class A (nonvoting)--
$.01 par value 500,000 shares
authorized, issued and
outstanding........................ -- 5 5
Common stock, Class B (voting)--$.01
par value 561,000 shares
authorized, 389,977, 389,977 and
393,275 shares issued and
outstanding at December 31, 1998,
1999 and March 31, 2000............ -- 4 4
Common stock, Class C (nonvoting)--
$.01 par value 625,000 shares
authorized, 114,412 shares issued
and outstanding.................... -- 1 1
Common stock, Class D (voting)--$.01
par value 2,000 shares
authorized, issued and
outstanding........................ -- -- --
Common stock (voting)--$.01 par value
1,688,000 shares authorized,
none issued and outstanding........ -- -- --
Common stock subscribed............... 500 -- --
Additional paid-in capital............ -- 138,874 139,526
Deficit accumulated during development
stage.............................. (65) (15,983) (15,983)
Retained deficit...................... -- -- (8,823)
---------- ------------ ----------
435 122,901 114,730
Share repurchase--former CFO.......... -- -- (169)
---------- ------------ ----------
Total stockholders' equity........... 435 122,901 114,561
---------- ------------ ----------
Total liabilities and stockholders'
equity............................ $ 1,386 $ 129,058 $ 175,359
========== ============ ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from Inception (August 22, 1997) through December 31, 1997,
for the Years Ended December 31, 1998 and 1999, and Cumulative Amounts from
Inception, and for the Unaudited Three-Month Periods Ended March 31, 1999 and
2000
<TABLE>
<CAPTION>
Cumulative
For the Period Amounts
from Inception For the Years From Inception For the Three-Month
(August 22, 1997) Ended December 31, Through Periods Ended March 31,
through December ---------------------- December 31, -----------------------
31, 1997 1998 1999 1999 1999 2000
----------------- --------- ----------- -------------- ----------- -----------
(Unaudited) (Unaudited)
(In thousands except share data)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $-- $ -- $ -- $ -- $ -- $ 10,011
---- ------- ----------- -------- ------- ---------
Operating expenses:
Cost of service and
equipment........... -- -- -- -- -- 9,466
General and
administrative...... -- 51 3,387 3,438 93 3,491
General and
administrative-
related parties..... -- -- 30 30 -- 440
Selling and marketing.. 6 8 41 55 -- 3,291
Depreciation and
amortization........ -- -- -- -- -- 1,146
Financial advisory fees
($8,750 of fees to
related parties).... -- -- 9,250 9,250 -- --
Stock-based
compensation........ -- -- 2,900 2,900 -- 380
---- ------- ----------- -------- ------- ---------
Total operating
expenses........... 6 59 15,608 15,673 93 18,214
---- ------- ----------- -------- ------- ---------
Operating loss........ (6) (59) (15,608) (15,673) (93) (8,203)
Interest income......... -- -- 171 171 -- 952
Interest expense........ -- -- (78) (78) (13) --
Amortization of debt
issuance costs....... -- -- (84) (84) -- (628)
Other debt financing
fees................. -- -- (319) (319) -- (944)
---- ------- ----------- -------- ------- ---------
Net loss................ $ (6) $ (59) $ (15,918) $(15,983) $ (106) $ (8,823)
==== ======= =========== ======== ======= =========
Loss per share
Basic.................. $ (67.45) $ (.50) $ (8.74)
Diluted................ $ (67.45) $ (.50) $ (8.74)
Weighted average shares
outstanding
Basic.................. 236,000 210,000 1,009,000
Diluted................ 236,000 210,000 1,009,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
For the Period from Inception (August 22, 1997) through December 31, 1997,
for the Years Ended December 31, 1998 and 1999, and for the Unaudited Three-
Month Period Ended March 31, 2000
<TABLE>
<CAPTION>
Capital Stock
--------------------- Deficit
Independent Accumulated
IWO Wireless Common Additional During Share
Holdings, One Stock Paid-in Contributed Development Retained Repurchase- Stockholders'
Inc. Corporation Subscribed Capital Capital Stage Deficit Former CFO Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August
22, 1997........ $-- $-- $-- $ -- $ -- $ -- $ -- $ -- $ --
Capital
contributed
during 1997.... -- -- -- -- 125 -- -- -- 125
Net loss........ -- -- -- -- -- (6) -- -- (6)
---- ---- ---- -------- ------ -------- ------- ----- --------
Balance at
December 31,
1997............ -- -- -- -- 125 (6) -- -- 119
Capital
contributed
during 1998.... -- -- -- -- 375 -- -- -- 375
Members' equity
of LLC merged
into
Independent
Wireless One
Corporation on
September 9,
1998........... -- -- 500 -- (500) -- -- -- --
Net loss........ -- -- -- -- -- (59) -- -- (59)
---- ---- ---- -------- ------ -------- ------- ----- --------
Balance at
December 31,
1998............ -- -- 500 -- -- (65) -- -- 435
Independent
Wireless One
Corporation
stock issued to
Founders on
March 5,
1999........... -- 500 (500) -- -- -- -- -- --
Founders
contribute
capital to
Independent
Wireless One
Corporation.... -- -- -- -- 2,250 -- -- -- 2,250
Founders
exchange stock
of Independent
Wireless One
Corporation for
stock in IWO
Holdings,
Inc............ 2 (500) -- 2,748 (2,250) -- -- -- --
Proceeds from
IWO Holdings,
Inc. stock
issuance....... 8 -- -- 134,992 -- -- -- -- 135,000
Costs incurred
for IWO
Holdings, Inc.
stock
issuance....... -- -- -- (1,766) -- -- -- -- (1,766)
Stock-based
compensation... -- -- -- 2,900 -- -- -- -- 2,900
Net loss........ -- -- -- -- -- (15,918) -- -- (15,918)
---- ---- ---- -------- ------ -------- ------- ----- --------
Balance at
December 31,
1999............ 10 -- -- 138,874 -- (15,983) -- -- 122,901
Stock option
exercises
(unaudited).... -- -- -- 272 -- -- -- 272
Share repurchase
- former CFO
(unaudited).... -- -- -- -- -- -- -- (169) (169)
Stock-based
compensation
(unaudited).... -- -- -- 380 -- -- -- -- 380
Net loss
(unaudited).... -- -- -- -- -- -- (8,823) -- (8,823)
---- ---- ---- -------- ------ -------- ------- ----- --------
Balance at March
31, 2000
(unaudited)..... $ 10 $-- $-- $139,526 $ -- $(15,983) $(8,823) $(169) $114,561
==== ==== ==== ======== ====== ======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the Period from Inception (August 22, 1997) through December 31, 1997,
for the Years Ended December 31, 1998 and 1999, and Cumulative Amounts from
Inception and for the Unaudited Three-Month Periods Ended March 31, 1999 and
2000
<TABLE>
<CAPTION>
For the Period Cumulative
from Inception For the Years Amounts From
(August 22, 1997) Ended December Inception For the Three-Month
through 31, Through Periods Ended March 31,
December 31, --------------- December 31, -----------------------
1997 1998 1999 1999 1999 2000
----------------- ----- -------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $ (6) $ (59) $(15,918) $(15,983) $(106) $ (8,823)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Allowances for
doubtful accounts
and sales returns... -- -- -- -- -- 563
Depreciation and
amortization of
property and
equipment........... -- -- -- -- -- 109
Amortization of
intangible assets... -- -- -- -- -- 1,037
Amortization of debt
issuance costs...... -- -- 84 84 -- 628
Stock-based
compensation........ -- -- 2,900 2,900 -- 380
Changes in operating
assets and
liabilities:
Accounts receivable... -- -- -- -- -- (1,761)
Inventory............. -- -- (315) (315) -- 130
Prepaid expenses...... -- -- (263) (263) -- (43)
Other current assets.. -- -- (61) (61) -- (7)
Prepaid management
fee--related party.. -- -- (4,970) (4,970) -- 250
Other assets.......... -- -- -- -- -- (229)
Accounts payable...... -- -- 896 896 126 2,266
Accounts payable--
related parties..... -- -- 3,810 3,810 (252) (3,751)
Due to Sprint......... -- -- -- -- -- 4,272
Accrued expenses...... -- -- 484 484 -- 1,297
Accrued expenses--
related party....... -- -- -- -- -- 450
Unearned revenue...... -- -- -- -- -- 915
Organization costs.... (10) 5 (5) (10) -- --
---- ----- -------- -------- ----- ---------
Net cash used in
operating
activities......... (16) (54) (13,358) (13,428) (232) (2,317)
---- ----- -------- -------- ----- ---------
Cash flows from
investing activities:
Deferred acquisition
costs............... (40) (301) (4,010) (4,351) (349) (222)
Purchase of Sprint
assets.............. -- -- -- -- -- (116,665)
Restricted cash....... -- -- -- -- -- (8,000)
Purchase of property
and equipment....... -- -- (539) (539) -- (2,554)
Construction in
progress............ -- -- (243) (243) -- (4,020)
---- ----- -------- -------- ----- ---------
Net cash used in
investing
activities......... (40) (301) (4,792) (5,133) (349) (131,461)
---- ----- -------- -------- ----- ---------
Cash flows from
financing activities:
Gross proceeds
received from equity
investors........... 125 375 137,250 137,750 -- --
Stock option
exercises........... -- -- -- -- -- 272
Proceeds received from
issuance of debt.... -- 600 1,400 2,000 300 50,000
Payment of debt....... -- -- (2,000) (2,000) -- --
Payment of equity
issuance costs...... (35) (303) (1,428) (1,766) -- --
Payment of debt
issuance costs...... (3) (29) (12,639) (12,671) -- (800)
---- ----- -------- -------- ----- ---------
Net cash provided by
financing
activities......... 87 643 122,583 123,313 300 49,472
---- ----- -------- -------- ----- ---------
Net increase
(decrease) in cash
and cash
equivalents........ 31 288 104,433 104,752 (281) (84,306)
Cash and cash
equivalents,
beginning of period.. -- 31 319 -- 319 104,752
---- ----- -------- -------- ----- ---------
Cash and cash
equivalents, end of
period............... $ 31 $ 319 $104,752 $104,752 $ 38 $ 20,446
==== ===== ======== ======== ===== =========
Non-cash:
Deferred costs
included in accounts
payable and accounts
payable--related
parties............. $ 66 $ 285 $ 977 $ 977 $ 225 $ --
Share repurchase--
former CFO included
in accrued
expenses--related
party............... $-- $ -- $ -- $ -- $ -- $ 169
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Independent Wireless One, LLC, (the "LLC") a limited liability company,
was formed on August 22, 1997 by a consortium of independent local telephone
companies (the "Founders") to become a provider of wireless telecommunications
and data services throughout its proposed covered territory, described below.
On September 9, 1998 the LLC changed its status to a C-corporation and changed
its name to Independent Wireless One Corporation.
On October 29, 1999, IWO Holdings, Inc. was formed to hold an investment
in Independent Wireless One Corporation (Corp.). On December 20, 1999, the
Founders of Independent Wireless One Corporation exchanged their equity
ownership, representing in the aggregate 100% of the outstanding capital stock
of Corp. for an aggregate of 210,000 shares of Class B common stock of IWO
Holdings, Inc. (see Note 9). Further, certain investors and management invested
approximately $135,000,000 into IWO Holdings, Inc., for approximately 79% of
the equity of the Company. IWO Holdings, Inc. exchanged common stock, warrants
and options to purchase the non-monetary assets of Corp. As a result,
Independent Wireless One Corporation became a wholly-owned subsidiary of IWO
Holdings, Inc., (collectively referred to as "IWO" or the "Company").
A significant portion of IWO's business operations through December 31,
1999 relate to pre-operating, organizational and acquisition efforts and
related activities to obtain debt and equity financing. Such costs primarily
include consulting and legal fees associated with developing the organization
and raising the necessary capital to finance an acquisition and related future
operations.
The Company which was a development stage enterprise through December 31,
1999, commenced operations effective January, 2000.
In February 2000, the Company formed Independent Wireless One Leased
Realty Corporation to hold all leasehold interests in the retail stores,
administrative office and cell site leases (see Note 16).
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies:
Basis of consolidation:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of IWO Holdings, Inc., and its wholly-owned subsidiaries.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment information:
The Company believes it operates in only one segment, digital wireless
personal communication services.
Comprehensive income:
No statement of comprehensive income has been included in the accompanying
financial statements since the Company does not have any other comprehensive
income to report.
Cash and cash equivalents:
Cash and cash equivalents include cash, money market funds, and commercial
paper with original maturities of three months or less at the date of
acquisition. The carrying amount of cash and cash equivalents approximates fair
value.
Inventory:
Inventory consists of handsets and related accessories. Inventories are
carried at the lower of cost, (determined using weighted average method) or
market. Market is determined using replacement cost in accordance with industry
standards.
Property and equipment:
Property and equipment are reported at cost less accumulated depreciation.
Costs incurred to design and construct the wireless network in a market are
classified as construction in progress. When the wireless network for a
particular market is completed and placed into service, the related costs are
transferred from construction in progress to property and equipment. When
assets are sold, retired or otherwise disposed of, the related costs and
accumulated depreciation are removed from the respective accounts, and any
resulting gain or loss is recognized. All property and equipment available for
use was placed in service in January, 2000.
Effective January, 2000, property and equipment is being depreciated using
the straight-line method based on the following estimated useful lives of
assets:
<TABLE>
<S> <C>
Network equipment................................................. 5-10 years
Building and building improvements................................ 25 years
Furniture and office equipment.................................... 5-7 years
Computer software................................................. 5 years
</TABLE>
Leasehold improvements are being amortized over the shorter of the
estimated useful lives or lease term.
Construction in progress:
Construction in progress includes equipment engineering and site
development cost in connection with the build out of the Company's network. The
Company will capitalize interest on its
F-8
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
construction in progress activities. The capitalized interest will be recorded
as part of the asset to which it relates and will be amortized over the
remaining estimated useful life. No interest costs have been capitalized to
date.
Deferred costs:
The deferred costs relating to the development of the organization were
expensed in 1999. The deferred acquisition costs have been allocated to the
fair value of assets acquired and will be amortized over the respective assets
estimated useful lives using the straight-line method. Debt issuance costs are
being amortized over the estimated terms of the related loans using the
effective interest method. Costs related to the Senior Credit Facility and the
Bridge loan are being amortized over eight years and eighteen months,
respectively (see Note 8). Equity issuance costs have been charged to
additional paid-in capital.
Intangible assets:
The excess of purchase price over the fair value of net assets acquired
from Sprint is being amortized over twenty years (the term of the Management
Agreement--see note 3) using the straight-line method.
The purchased subscriber list and employee work-force are being amortized
over a four year period (churn rate) and a three year period (employee turnover
rate) respectively using the straight-line method.
Impairment of long-lived assets and long-lived assets to be disposed of:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and Long- Lived Assets to be Disposed Of. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The
Company has identified no such impairment losses in the periods presented.
Revenue recognition:
The Company recognizes revenue as services are performed. Under the
Affiliation Agreements (see Note 3), Sprint performs IWO's billings and
collections and retains 8% of collected service revenues from Sprint
subscribers based in IWO's territory and from non-Sprint subscribers who roam
onto IWO's network. The amount retained by Sprint is recorded as an operating
expense as incurred. Revenues generated from the sale of handsets and
accessories and from roaming revenues provided to Sprint subscribers not based
in IWO's territory are not subject to the 8% fee.
F-9
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sprint pays IWO a Sprint "travel" fee for each minute that a Sprint
subscriber based outside of the IWO territory roams onto IWO's network.
Conversely, IWO pays Sprint travel fees when a Sprint subscriber based in IWO's
territory roams onto the Sprint national network outside of IWO's territory
(see Note 3).
Product revenues from the sale of handsets and accessories are recorded
net of allowance for sales returns. The allowance is estimated based on
Sprint's fourteen day handset return policy. When handsets are returned to
Sprint for refurbishing, the Company receives a credit from Sprint, which is
less than the Company originally paid for the handset.
Unearned revenue represents amounts billed in advance of service being
provided.
Advertising costs:
The Company expenses all advertising costs as they are incurred.
Income taxes:
Independent Wireless One was originally formed as a limited liability
corporation and as such filed Federal and State tax returns under partnership
provisions for both 1997 and part of 1998. Upon conversion to a C corporation
on September 9, 1998, IWO accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable for future years to differences between
financial statement and tax basis of existing assets and liabilities. The
effect of tax rate changes on deferred taxes is recognized in the income tax
provision in the period that includes the enactment date. Effective December
20, 1999, Independent Wireless One Corporation became a wholly-owned subsidiary
of IWO Holdings, Inc. Accordingly, IWO will be filing a consolidated tax return
from the effective date.
Net loss per share:
The Company computes net loss per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the
provisions of SFAS 128 and SAB 98, basic and diluted net loss per common share
is computed by dividing the net loss available to common stockholders for the
period by the weighted average number of shares of common stock outstanding
during the period. In accordance with SFAS 128, no conversion of stock options
or warrants has been assumed in the calculation of diluted loss per share since
the effect would be antidilutive. Accordingly, the number of weighted average
shares outstanding as well as the amount of net loss per share are the same for
basic and diluted per share calculations for the period reflected in the
accompanying financial statements. The Company has assumed that the IWO
Holdings, Inc. shares issued to the Founders on December 20, 1999 were
outstanding for all of 1999. No shares were outstanding prior to 1999.
Risks and uncertainties:
The Company's profitability is dependent upon successful implementation of
the Company's business strategy and development of a sufficient subscriber
base. The Company will continue to
F-10
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
incur significant expenditures in connection with expanding and improving its
operations. If these and the other risks included under "Risk Factors" in the
Company's Registration Statement on Form S-1 are not properly managed and
resolved the results could have a material adverse impact on the Company's
financial statements.
Concentration of risk:
The Company maintains cash and cash equivalents in accounts with financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. The Company monitors the financial stability of these institutions
regularly and management does not believe there is a significant credit risk
associated with deposits in excess of federally insured amounts. At December
31, 1998, 1999, and (unaudited) March 31, 2000, cash and cash equivalent
balances maintained with financial institutions in excess of FDIC limits
approximated $500,000, $106,000,000, and $24,255,000 respectively.
Reclassifications:
Certain reclassifications have been made to the 1997 and 1998 amounts to
conform with the 1999 presentation.
Unaudited interim financial information:
The financial information as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 is unaudited but in the opinion of management
includes all adjustments, consisting only of normal recurring adjustments, that
are considered necessary for fair presentation of the Company's financial
position at March 31, 2000, and the Company's operations and cash flows for the
three-month periods ended March 31, 1999 and 2000 in accordance with accounting
principles generally accepted in the United States. Operating results for the
three month period ended March 31, 2000 are not necessarily indicative of
results that may be expected for the entire year.
Recent accounting pronouncements:
In June 1998, and June 1999 the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 137, "Accounting for Derivative Instruments and
Hedging activities--Deferral of the Effective date of SFAS No. 133. These
statements establish accounting and reporting standards for derivative
instruments and hedging activities. It requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Management believes the adoption of SFAS No.
133 will not have a material effect on the Company's financial position,
results of operations or cash flows. SFAS No. 133 will be effective for the
Company's fiscal year ending December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain
of the SEC's views in applying
F-11
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
generally accepted accounting principles to revenue recognition in financial
statements. The Company is required to adopt SAB 101 in the second quarter of
2000. Management does not expect the adoption of SAB 101 to have a material
effect on the Company's financial condition or results of operations.
3. Sprint Agreements
In 1999, IWO entered into a Management Agreement, a Services Agreement,
two Trademark and Service Mark License Agreements, collectively called the
"Affiliation Agreements", and an Asset Purchase Agreement, with Sprint PCS
("Sprint") to own and operate a wireless business covering a major portion of
the Northeastern United States. This territory covers a population of
approximately 6.3 million people and extends from suburban New York City in the
south to the Canadian border in the north and from Syracuse, New York in the
west to all of Vermont and New Hampshire (except Nashua, but including the
extreme northwestern suburbs of Boston) and parts of Massachusetts and
Northeastern Pennsylvania in the east.
Under the Asset Purchase Agreement (see Note 16) and the Management
Agreement, IWO purchased from Sprint for approximately $116,665,000 certain
assets, primarily network assets and obtained the right to manage approximately
forty-five thousand subscribers in the aforementioned territory. IWO received
the exclusive right to sell all Sprint wireless products and services in the
aforementioned territory, and also received the benefit of Sprint's national
advertising. Sprint performs IWO's billing and collections and retains 8% of
collected revenues as defined.
In connection with the Management Agreement, the Company has agreed on a
minimum network build-out plan which includes specific coverage and deployment
schedules for the network planned within IWO's service area (see Note 12). The
Company must comply with Sprint's program requirements for technical standards,
customer service standards, national and regional distribution and national
accounts program. The Company may not offer Sprint products and services
outside the Company's markets.
The Management Agreement also provides that from January 2000 until
December 2002, the Company will not be required to pay more fees for outbound
travel than the Company receives for inbound travel (see Note 2).
The Management Agreement is in effect for a period of 20 years with three
10-year renewal options unless terminated by either party under provisions
outlined in the Management Agreement.
If the Management Agreement is terminated as a result of an uncured
breach, an IWO bankruptcy or other events as defined, Sprint will have the
right to purchase all of IWO's operating assets at an amount equal to seventy-
two percent or eighty percent of its entire business value.
Under the Services Agreement Sprint will provide to the Company various
support services such as activation, billing and customer care. These services
are available to the Company at established rates. Sprint can change any or all
of the service rates one time in each twelve month period. The Company may
discontinue the use of any service upon three months written notice. Sprint may
discontinue a service provided that it gives nine months written notice. The
Services Agreement automatically terminates upon termination of the Management
Agreement.
F-12
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Trademark and Service Mark License Agreements Sprint will
provide the Company with non-transferable, royalty free licenses to use the
Sprint brand names and several other trademarks and service marks. The
Company's use of the licensed marks is subject to adherence to quality
standards determined by Sprint. Sprint can terminate the Trademark and Service
Mark License Agreements if the Company files for bankruptcy, materially
breaches the agreement or if the Management Agreement is terminated.
On December 20, 1999, the Company entered into an Interim Services
Agreement with Sprint. Pursuant to this agreement, Sprint will provide the
Company with nationwide network, advertising and other services through March
31, 2000 for a monthly fee of $1,417,597, certain switching services through
December 31, 2000 for a monthly fee of $41,167 and Retail Operations Services
for the month of January, 2000 at a fee of $475,584. Network services primarily
include cell site lease and operating expenses, back haul costs,
interconnection expense and network and engineering payroll and benefits.
Retail Store expenses include primarily retail store lease and occupancy
expenses, payroll and benefits to retail store employees and sales commissions
(see Note 16).
Under the agreements described above, the Company incurred operating
expenses aggregating approximately $9,400,000 for the (unaudited) three-month
period ended March 31, 2000 of which $4,272,000 was due to Sprint at
(unaudited) March 31, 2000.
4. Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Handsets............................................ $304 $163
Accessories......................................... 11 22
---- ----
$315 $185
==== ====
</TABLE>
5. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Land................................................ $-- $ 169
Building and building improvements.................. -- 2,112
Network equipment................................... -- 50,102
Furniture and office equipment...................... 389 2,654
Computer software................................... 150 612
Leasehold improvements.............................. -- 240
---- -------
539 55,889
Accumulated depreciation and amortization........... -- (109)
---- -------
$539 $55,780
==== =======
</TABLE>
F-13
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expense was $109,000 for the (unaudited)
three month period ended March 31, 2000.
6. Deferred Costs
Deferred costs consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1998 1999 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Deferred acquisition costs.............. $ 518 $ 4,528 $ --
Debt issuance costs..................... 47 13,471 13,471
Equity issuance costs................... 497 -- --
Organizational costs.................... 5 -- --
------ ------- -------
1,067 17,999 13,471
Accumulated amortization of debt
issuance costs....................... -- (84) (712)
------ ------- -------
$1,067 $17,915 $12,759
====== ======= =======
</TABLE>
Amortization expense of debt issuance costs for the year ended December
31, 1999 and for the (unaudited) three-month period ended March 31, 2000 was
$84,000 and $628,000, respectively.
7. Intangible Assets
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
2000
-----------
(Unaudited)
<S> <C>
Excess purchase price over the fair value of net assets acquired... $49,875
Subscriber list.................................................... 14,000
Employee work-force................................................ 500
-------
64,375
Accumulated amortization........................................... (1,037)
-------
$63,338
=======
</TABLE>
Amortization expense of intangible assets was $1,037,000 for the
(unaudited) three-month period ended March 31, 2000.
8. Debt
Bank lines of credit:
In December 1998, IWO obtained a bank line of credit of $1,000,000 that
bears interest at prime plus .5% (8.25% at December 31, 1998), of which
$600,000 was outstanding at December 31,
F-14
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998. The Company borrowed an additional $400,000 in 1999. The borrowings under
the line of credit, were due on demand, guaranteed by a shareholder and were
collateralized by shares of common stock of the guarantor. Interest was payable
monthly. Borrowings under this line of credit agreement were repaid in
December, 1999. In November, 1999, IWO obtained an additional $1,000,000 bank
line of credit which was fully drawn and subsequently repaid in December, 1999.
The second bank line of credit bore interest at prime plus .5%. Both lines of
credit expired in December 1999.
Interest paid under debt obligations was approximately $78,000 in 1999
including $13,000 for the (unaudited) three-month period ended March 31, 1999.
There were no interest payments made in 1997 and 1998 and for the (unaudited)
three-month period ended March 31, 2000.
Senior credit facility:
In December, 1999, the Company entered into a credit facility (the Senior
Credit Facility) with a group of commercial lenders, under which the Company
may borrow up to $240,000,000, in the aggregate consisting of (i) up to
$70,000,000 in revolving loans (the Senior Revolving Credit Facility) with a
maturity date eight years from the effective date of the loan, (ii) a
$120,000,000 term loan (the Tranche A Term Loan) with a maturity date of March
2008 and (iii) a $50,000,000 term loan (the Tranche B Term Loan) with a
maturity date of September 2008.
Beginning in March 2004, principal repayments will be made in 17 quarterly
installments for the Tranche A Term Loan and 19 quarterly installments for the
Tranche B Term Loan. Quarterly principal repayments for the Tranche A Term Loan
will range from $2,000,000 on March 31, 2004 to $12,000,000 on March 31, 2008.
Quarterly principal payments for the Tranche B Term Loan (see Note 16) will
range from $250,000 on March 31, 2004 to $31,000,000 on September 30, 2008.
Interest payments on the Senior Credit Facility are due quarterly.
The Senior Credit Facility contains a prepayment provision whereby certain
amounts borrowed must be repaid upon the occurrence of certain specified
events, including issuance of capital stock, proceeds from certain additional
indebtedness, certain asset sales and excess cash flows as defined in the
agreement.
The commitment under the Tranche A Term Loan is available at the effective
date (the date on or prior to May 1, 2000 on which certain conditions, as
defined in the Senior Credit Facility, are met) subject to completion of the
additional $100,000,000 financing event (see bridge loan below) by June 30,
2000 as defined in the Senior Credit Facility and is reduced by $30,000,000 on
each 6 month anniversary date of the effective date. The commitment under the
Tranche B Term Loan is available in its entirety only on the effective date and
is terminated if not used at that time. The commitment to make loans under the
Senior Revolving Credit Facility is available on the effective date and through
the eighth anniversary of that date under the same conditions as the Tranche A
Term Loan.
F-15
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interest rate applicable to the Senior Credit Facility is based on, at
the Company's option, (i) LIBOR (Eurodollar Loans) plus the Applicable Margin,
as defined, or (ii) the higher of the administrative agent's prime rate or the
Federal Funds Effective Rate (ABR Loans), plus the Applicable Margin, as
defined. The Applicable Margin for Eurodollar Loans will range from 150 to 375
basis points based on certain events by the Company, as specified. The
Applicable margin for ABR Loans will range from 50 to 275 basis points based on
certain events by the Company, as specified.
The loans from the Senior Credit Facility are subject to an annual
commitment fee, which ranges from .75% to 1.25% of the available portion of the
Tranche A Term Loan, the Tranche B Term Loan, and the Senior Revolving Credit
Facility.
The Company must comply with certain financial and operating covenants.
The most restrictive financial covenants include various debt to equity, debt
to EBITDA, interest coverage and fixed charge coverage ratios, as defined in
the Senior Credit Facility.
The Senior Credit Facility is collateralized by all of the issued and
outstanding shares of capital stock of Independent Wireless One Corporation and
repayment is guaranteed by IWO.
IWO paid a 2.5% underwriting fee ($6,000,000) to enter into the Senior
Credit Facility arrangement, which is included in debt issuance costs (see Note
2). Certain of the commercial lenders who have committed $57,000,000 under the
Senior Credit Facility are stockholders of the Company (see Note 14).
Bridge loan:
The Company received a commitment through a Bridge Loan Agreement with DLJ
Bridge Finance, Inc. (DLJ) and other lenders on December 17, 1999 under which
the Company may borrow up to $100,000,000. Interest is payable quarterly and is
based on the greater of (i) Adjusted LIBOR plus 750 basis points, (ii) Treasury
Rate plus 750 basis points, or (iii) DLJ High Yield Index Rate plus 150 basis
points. The commitment terminates upon the earlier of the issuance of at least
$100,000,000 of additional debt or equity by the Company or June 30, 2000. The
bridge loan which will be subordinated to the Senior Credit Facility requires
an annual commitment fee of 1.25% of the available portion. The Company is
subject to a takedown fee in the amount of 1.5% of the principal amount of any
borrowings. Any loans drawn under this agreement mature within one year of the
loan's closing date. IWO paid a $1,000,000 fee to obtain the bridge loan
commitment, which is included in debt issuance costs (see Note 2). Certain
lenders are also stockholders of the Company.
9. Equity
Prior to January 1, 1999, the Founders made capital contributions of
$500,000, for which 14,357 shares of common stock, were issued to the Founders
on March 5, 1999. Also, in 1999, the Founders of the Company contributed
additional capital totaling $2,250,000. On December 20, 1999, the Founders
exchanged their 14,357 shares of common stock for 210,000 shares of Class B
F-16
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock in IWO Holdings, Inc. Also, on December 20, 1999 certain investors
and management of IWO invested approximately $135,000,000 into IWO Holdings,
Inc. for approximately 79% of the equity of the Company. (See Note 1).
On December 16, 1999, Holdings restated its Certificate of Incorporation.
The Restated Certificate of Incorporation provides the Company with the
authority to issue 3,876,000 shares of capital stock, consisting of the
following:
<TABLE>
<S> <C>
Preferred Stock............................................. 500,000 shares
Class A Common Stock........................................ 500,000 shares
Class B Common Stock........................................ 561,000 shares
Class C Common Stock........................................ 625,000 shares
Class D Common Stock........................................ 2,000 shares
Common Stock................................................ 1,688,000 shares
</TABLE>
The outstanding Class B common stock has 389,976.7138 voting rights (1
vote per share) and the outstanding Class D common stock has 595,200 voting
rights (297.6 votes per share). Holders of Class A and Class C common stock
have no voting rights. Upon issuance common stockholders will have 1 vote per
share. Subject to the rights of the holders of any shares of then outstanding
Preferred Stock, holders of all classes of common stock and non class common
stock are entitled to participate on a pro rata basis in any dividends,
dissolution, or liquidation.
10. Income Taxes
All costs incurred by the Company during its development stage activities
are capitalized for tax purposes, which has resulted in a deferred tax asset of
approximately $21,000 and $5,574,000 at December 31, 1998 and 1999,
respectively. The Company commenced operations in January 2000 and recognized a
net operating loss of approximately $8,823,000 for the (unaudited) three-month
period ended March 31, 2000 resulting in an increase in the deferred tax asset
from $5,574,000 at December 31, 1999 to $8,662,000 at (unaudited) March 31,
2000. In accordance with FASB No. 109, the Company has recorded a full
valuation allowance against its deferred tax asset since it believes it is more
likely than not that such deferred tax asset will not be realized.
Income tax expense (benefit) differed from the amount computed by applying
the statutory U.S. Federal income tax rate of 35% to the loss recorded as a
result of the following (in thousands):
<TABLE>
<CAPTION>
Three-Month
Period Ended
December 31, December 31, March 31,
1998 1999 2000
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Computed "expected" tax benefit.......... $(21) $(5,571) $(3,088)
Other.................................... -- 18 --
Increase in valuation allowance.......... 21 5,553 3,088
---- ------- -------
Total income tax expense (benefit)..... $-- $ -- $ --
==== ======= =======
</TABLE>
F-17
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's net deferred tax asset consists of the following amounts of
deferred tax asset as of December 31, 1998 and 1999 and March 31, 2000 (in
thousands).
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1998 1999 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax asset................... $ 21 $5,574 $8,662
Less: Valuation allowance for
deferred tax asset................ (21) (5,574) (8,662)
---- ------ ------
Net deferred tax asset............... $-- $ -- $ --
==== ====== ======
</TABLE>
11. Loss Per Common Share
Loss per common share is as follows (in thousands except share data):
<TABLE>
<CAPTION>
August 22, Year Ended Three-Month Three-Month
1997 through December 31, Period Ended Period Ended
December 31, -------------- March 31, March 31,
1997 1998 1999 1999 2000
------------ ---- -------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Numerator
Net loss.............. $(6) $(59) $(15,918) (106) $ (8,823)
Denominator
Weighted average
shares
outstanding........ 236,000 210,000 1,009,000
</TABLE>
No options or warrants were included in the calculation of diluted loss
per share because their impact would have been anti-dilutive (see Note 2).
12. Commitments and Contingencies
Leases:
In 1999, the Company entered into an operating lease for corporate office
space that expires December 31, 2004. Annual lease payments approximate
$215,000. Rent expense for the year ended December 31, 1999 was $7,500. Rent
expense for the (unaudited) three-month period ended March 31, 2000 was
$66,000.
In connection with the Asset Purchase Agreement, the Company will assume
various cell site, tower and retail office space leases in 2000. Estimated
annual lease payments under these leases will approximate $3,000,000. Rent
expense for the retail office space was $45,000 for the (unaudited) three-month
period ended March 31, 2000.
F-18
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments:
As of December 31, 1999 and (unaudited) March 31, 2000, the Company had
purchase commitments for network equipment, hardware, software and related
services aggregating $6,255,000 and $8,580,000, respectively.
In connection with the Asset Purchase Agreement, the Company is required
to build out the Sprint Network territory it is managing. Estimated budgeted
annual expenditures for this network build are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $50,264
2001................................................................. 72,720
2002................................................................. 18,391
2003................................................................. 11,556
</TABLE>
Employment agreements:
During May and June, 1999, IWO entered into employment agreements with the
senior officers of the Company that included provisions guaranteeing certain
salary and relocation benefits aggregating $1,000,000.
On December 20, 1999, IWO entered into new employment agreements with four
of its senior officers and terminated the previous agreements. The term of each
agreement approximates three years and the aggregate annual compensation
obligation under these employment agreements ranges from $800,000 in year one
to $890,000 in year three as well as annual bonuses based on performance.
13. Stock Option and Performance Award and Warrant Programs
Stock incentive plan:
On December 20, 1999, the Board of Directors and Stockholders approved IWO
Holdings, Inc.'s Stock Incentive Plan. Under the Plan, the Company may grant to
its employees, incentive stock options (ISO), non-qualified stock options
(NSO), stock appreciation rights (SAR) and stock grants as defined by the Plan.
The Company has reserved 56,179 shares of Company Class B common stock for
issuance under the plan (see Note 16).
In December 1999, the Company granted to certain officers and employees,
stock options to acquire approximately 42,978 shares of Company Class B common
stock at a purchase price of $172.34043 per share (fair value). Options for
approximately 11,798 shares of Company Class B common stock vested immediately
(December 1999). Options for approximately 19,382 shares of Company Class B
common stock vest ratably on a daily basis over a three year period commencing
January 1, 2000. The remaining options to acquire 11,798 shares of Company
Class B common stock vest ratably over a five year period. Such options contain
accelerated vesting provisions over a three year period based upon the
achievement of certain annual performance goals.
F-19
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Company granted to its outside General
Counsel/stockholder stock options to acquire approximately 12,903 shares of
Company Class B common stock at a purchase price of $172.34043 per share.
Options for approximately 6,161 shares of Company Class B common stock vested
immediately in December 1999 and the remaining options for 6,742 shares of
Company Class B common stock vest ratably on a daily basis over a three year
period commencing January 1, 2000. The fair value of the fully vested options
approximating $930,000 will be recognized over the term of the professional
services agreement (see Note 13) as stock-based compensation with a
corresponding credit to additional paid-in capital. The unvested options, will
be fair valued under SFAS No. 123, therefore, the difference between the fair
value of the option and the exercise price of the option will result in charges
to operations with a corresponding credit to additional paid-in capital over
the three year vesting term (term of the professional services agreement) which
commences January 1, 2000. Stock-based compensation recognized for the
(unaudited) three-month period ended March 31, 2000 was $380,000.
Stock Purchase Agreement:
Further, in December 1999, the Company issued to the General
Counsel/stockholder 833 shares of Company Class B common stock at a purchase
price of $172.34043 per share. The Company has the right to repurchase the
shares from the General Counsel/stockholder and the General Counsel/stockholder
has the right to put the shares to the Company, in each case at the fair value
and only after six months from the date of stock issuance, subject to certain
conditions as defined in the agreement.
Stock option plans:
The President entered into an employment agreement with Corp. dated May
1999, whereby Corp. granted the President an option to acquire a 5% equity
ownership in Corp. at purchase prices equal to or in excess of fair value at
date of grant (as determined by the Board of Directors). The option agreement
contained an acceleration clause, whereby all options vest upon a change in
ownership control as defined in the agreement.
On December 20, 1999, a change in ownership control occurred resulting in
all options vesting immediately. In connection with the change in ownership,
vested options to acquire 11,236 and 16,854 shares of IWO holdings, Inc. Class
B common stock at exercise prices of $43.521 per share, and $172.34043 per
share, were granted to the President in exchange for the President's option to
acquire a 5% equity ownership in Corp. IWO Holdings, Inc. also granted to the
President unvested options to acquire 28,090 shares of Company Class B common
stock at an exercise price of $172.34043 per share. Such unvested options vest
ratably on a daily basis over three years. On December 20, 1999 the Corp.
recognized $1,450,000 of compensation expense with a corresponding credit to
additional paid-in capital for the difference between the option exercise price
($43.521) and the fair value of its stock on December 20, 1999 (172.34043).
On August 12, 1999, the Chairman of the Board was granted by Corp. a
vested option to acquire a 1% equity interest in Corp. at $489,000. On December
20, 1999, the Chairman of the Board exchanged his right to acquire 1% equity
interest in Corp. for vested options to acquire 11,236 shares of IWO Holdings,
Inc. Class B common stock at an exercise price $43.521 per share. Corp
F-20
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized $1,450,000 of compensation expense with a corresponding credit to
additional paid-in capital for the difference between the option exercise price
($43.521) and the fair value of its stock on December 20, 1999 ($172.34043).
All options are exercisable over a ten-year period.
Warrant programs:
The Founders, certain officers and the General Counsel/stockholder of the
Company have been granted warrants to purchase 27,600, 9,920 and 2,480 shares
of Company Class B Common Stock, respectively, at a purchase price of
$172.34043 per share. The warrants shall vest and become exercisable in full
upon the earliest to occur of the following: an approved sale of the Company or
an initial public offering, either of which results in a specified annual rate
of return to the Class A Common Stock, Class C Common Stock and Class D Common
Stock stockholders, as defined in the agreements. A measurement date is
established for the warrants at the time the aforementioned events become
probable (as defined in SFAS No. 5). For the warrants granted to certain
officers, IWO at the measurement date will record a charge to operations (under
APB No. 25 intrinsic value method) for the difference between the fair value of
its stock and the exercise price of the warrants. For the warrants granted to
the General Counsel/stockholder, IWO at the measurement date will record a
charge to operations (under SFAS No. 123 fair value method) for the difference
between the fair value of the warrant and the exercise price of the warrant.
Stock options and warrants outstanding were as follows:
<TABLE>
<CAPTION>
Outstanding Options Warrants
------------------------ ------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999..... -- $-- -- $--
Granted...................... 123,577 149 40,000 172
Forfeited.................... -- -- -- --
Exercised.................... -- -- -- --
------- ---- ------ ----
Balance, December 31, 1999... 123,577 149 40,000 172
Granted (unaudited).......... 4,083 172 -- --
Forfeited (unaudited)........ (6,087) 172 (2,480) 172
Exercised (unaudited)........ (3,298) 83 -- --
------- ---- ------ ----
Balance, March 31, 2000
(Unaudited)................. 118,275 $149 37,520 $172
======= ==== ====== ====
</TABLE>
F-21
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For various price ranges, weighted average characteristics of outstanding
options at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted-
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise At December 31, Contractual Exercise At December 31, Exercise
Price 1999 Life Price 1999 Price
-------- --------------- ----------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$ 44 22,472 10 years $ 44 22,472 $ 44
$172 101,105 10 years $172 34,813 $172
------- -------- ---- ------ ----
123,577 57,285
======= ======
</TABLE>
The Company follows APB Opinion No. 25, Accounting for Stock Issued to
Employees, to account for stock option plans. Had compensation cost for these
plans been determined based on the minimum value method at the grant dates for
awards as prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,
pro forma net loss and loss per share would have been (in thousands except
share data):
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Pro forma net loss................................................ $(17,583)
Pro forma basic and diluted loss per share........................ $ (74.50)
</TABLE>
The weighted average fair value of options granted under the plans during
fiscal year 1999, was $150. The assumptions used for the minimum value
calculation are:
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
Risk-free interest rate....................................... 5.24% to 6.28%
Expected term................................................. 5 years
Company's expected volatility................................. 86.93%
Dividend yield................................................ None
</TABLE>
14. Related Party Transactions
The Company received financial advisory and investment banking services
from several stockholders related to the Company's equity and debt financing
and acquisition of Sprint assets. Total amounts incurred for these services
were approximately $32,000, $96,000 and $12,923,000 in 1997, 1998 and 1999,
respectively and $25,000 and $-0- for the (unaudited) three-month periods ended
March 31, 1999 and 2000. In December 1999, the Company charged operations
$9,250,000 (of which $8,750,000 was to related parties--see Note 8) for
financial advisory fees not directly incurred in connection with the successful
financing. Amounts included in accounts payable--related parties at December
31, 1998, 1999, and (unaudited) March 31, 2000 were approximately $2,000,
$4,500,000 and $-0- respectively.
F-22
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 20, 1999, the Company and an affiliate of a stockholder
entered into a five year advisory agreement whereby the Company will receive
consulting services from the affiliate for a $5,000,000 fee. The $5,000,000
fee, which was prepaid on December 20, 1999 is included in prepaid management
fee-related party and is being amortized over the term of the agreement. In
addition, in 1999 the affiliate provided financial advisory services to the
Company in connection with the Senior Credit Facility. Costs incurred related
to the Senior Credit Facility and paid to the affiliate approximated
$3,552,000, all of which are included in debt issuance costs.
The Company utilizes the services of a law firm in which a partner is a
General Counsel/stockholder of IWO. On December 20, 1999, the Company entered
into a three year professional services agreement with its outside General
Counsel/stockholder, whereby the General Counsel/stockholder will provide legal
services annually up to $400,000 and participate in the Company's stock option
program (see Note 13). In addition, the General Counsel/stockholder is entitled
to an annual bonus of $300,000 based on performance. Legal fees incurred in
1997, 1998 and 1999 were approximately $61,000, $273,000 and $1,116,000,
respectively. Legal fees included in accounts payable--related parties at
December 31, 1998 and 1999 were approximately $212,000 and $315,000,
respectively. Legal fees incurred for the (unaudited) three-month periods ended
March 31, 1999 and 2000 approximated $92,000 and $279,000, respectively, of
which approximately $107,000 is included in accounts payable-related parties at
(unaudited) March 31, 2000.
The Company utilizes two firms for marketing, information technology, and
general management consulting which are affiliated with its Chairman of the
Board. Fees incurred in 1997, 1998 and 1999 approximated $0, $125,000 and
$420,000 of which approximately $37,000 and $51,000 is included in accounts
payable--related parties at December 31, 1998 and 1999, respectively. Fees
incurred for the (unaudited) three-month periods ended March 31, 1999 and 2000
approximated $53,000 and $114,000, respectively, of which approximately $31,000
was included in accounts payable-related parties at (unaudited) March 31, 2000.
F-23
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Fair Value of Financial Instruments
Fair value estimates, assumptions, and methods used to estimate the fair
value of the Company's financial instruments are made in accordance with the
requirements of SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments". The Company has used available information to derive its
estimates. However, because these estimates are made as of a specific point in
time, they are not necessarily indicative of amounts the Company could realize
currently. The use of different assumptions or estimating methods may have a
material effect on the estimated fair value amounts. The following represents
the fair value of financial instruments (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1998 1999 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents............. $319 $104,752 $20,446
Accounts receivable................... -- -- 3,449
Accounts payable...................... 100 807 3,073
Accounts payable--related parties..... 251 4,866 138
Due to Sprint......................... -- -- 4,272
Accrued expenses...................... -- 484 1,781
Accrued expenses--related party....... -- -- 619
Unearned revenue...................... -- -- 915
Debt.................................. 600 -- --
Term loan............................. -- -- 50,000
</TABLE>
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, accounts payable--related parties, due to Sprint, accrued
expenses, accrued expenses--related party, unearned revenue and debt are a
reasonable estimate of their fair value due to the short-term nature of the
instruments. The fair value of the term loan is valued at discounted future
cash flows using the current borrowing rate.
16. Unaudited Events
Asset Purchase Agreement and Affiliation Agreements:
Under the Asset Purchase Agreement and Affiliation Agreements, IWO
purchased from Sprint, for approximately $116,665,000, certain assets,
primarily network assets and obtained the right to manage approximately forty-
five thousand subscribers in the territory described in Note 1. The Asset
Purchase Agreement contained a four phase closing process. Effective January 5,
2000 Phase I and II closed. In connection with the Phase I and II closings, IWO
paid Sprint in the aggregate approximately $32,358,000 and received from Sprint
certain furniture, fixtures and equipment and the leasehold interest at IWO's
corporate offices. In addition, IWO obtained the outstanding accounts
receivable balance as of December 31, 1999 and the right to manage
approximately forty-five thousand subscribers based within IWO's network
territory. On February 1, 2000, the Phase III closing occurred, and Sprint
transferred to IWO the retail related assets including furniture, fixtures and
equipment and the leasehold interest at three Sprint retail stores. The Phase
IV closing occurred on March 31, 2000, at which time Sprint transferred to IWO,
its ownership in
F-24
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain of its network assets and its interest in various cell site and other
network related leases. IWO paid Sprint approximately $84,307,000 at the Phase
IV closing.
The acquisition of the Sprint assets has been accounted for under the
purchase method of accounting. Accordingly, the operations related to the
Sprint assets acquired have been included in IWO's operations at the
consummation date of each respective Phase closing, discussed above. The total
purchase price aggregating $116,665,000 plus direct acquisition costs
approximating $4,573,000 have been allocated to the estimated fair value of the
assets acquired, including the subscribers to be managed under the Affiliation
Agreements (see Note 3). IWO borrowed $50,000,000 from the Senior Credit
Facility in order to fund a portion of the acquisition (see Note 8).
The purchase price has been allocated to the fair value of the assets
acquired. The purchase price allocation is a preliminary allocation and is
expected to be finalized in 2000. The preliminary allocation of purchase price
is as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment and construction in progress
(primarily network assets)......................................... $ 54,612
Accounts receivable................................................... 2,251
Subscriber lists...................................................... 14,000
Employee work-force................................................... 500
Excess purchase price over net assets acquired........................ 49,875
--------
$121,238
========
</TABLE>
The following unaudited proforma balance sheet information reflects the
aforementioned acquisition as if it had occurred on December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Proforma
Summary Balance Adjustment Proforma Balance
Sheet Reported ---------------- Sheet as of
December 31, 1999 DR CR December 31, 1999
----------------- ------- -------- -----------------
<S> <C> <C> <C> <C>
Cash...................... $104,752 $50,000 $116,710 $ 38,042
Other current assets...... 1,639 2,251 -- 3,890
Long-term assets (includes
deferred acquisition
costs of $4,528 at
December 31, 1999)..... 22,667 114,459 -- 137,126
-------- --------
Total assets............ $129,058 $179,058
======== ========
Current liabilities....... $ 6,157 -- -- $ 6,157
Long-term debt............ -- -- 50,000 50,000
Stockholders' equity...... 122,901 -- -- 122,901
-------- --------
Total liabilities and
Stockholders'
equity............... $129,058 $179,058
======== ========
</TABLE>
Separation agreement:
IWO and a stockholder/former chief financial officer agreed to separate
effective January 31, 2000. Under the separation agreement, the
stockholder/former chief financial officer will be paid $375,000 plus $75,000
for legal expenses and approximately $169,000 for the repurchase of 978
F-25
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares at the fair value of $172.34043 per share. Further, under the agreement
the stockholder/former chief financial officer shall retain 5,149 vested stock
options. Accordingly, the Company charged operations in the amount of $450,000
for the (unaudited) three-month period ended March 31, 2000. In addition, the
Company accrued for the share repurchase which is classified as a reduction of
stockholders' equity. Total amounts included in accrued expenses--related party
approximated $619,000 at (unaudited) March 31, 2000.
Defined Contribution Plan:
Effective April 1, 2000, the Company established a 401(k) defined
contribution plan (the Plan) in which all full time employees (as defined) are
eligible to participate in the Plan. Under the Plan, participants may elect to
withhold up to 15% of their annual compensation, subject to IRS limitations.
The Company is required to make matching contributions based on a percentage of
the participant's contributions. Participants vest in the Company matching
contributions ratably over a four-year vesting period (25% per year).
Promissory Notes and Stock Option Agreements:
The Company entered into promissory note agreements effective March 2000
with certain officers to loan such officers approximately $287,000 in the
aggregate to purchase shares of the Company's common stock from a third party.
One of the notes will bear interest at 10.75%, with principal and interest
payable on September 1, 2000. The other note will bear interest at prime rate
plus the applicable margin related to the Senior Revolving Credit Facility.
Interest will be due quarterly commencing June 30, 2000 and principal will be
due on January 1, 2003. Both notes will be collateralized by the Company's
common stock owned by the officers. The Company will have the right to
repurchase the shares from the certain officers and these officers will have
the right to put the shares to the Company, in each case at the fair value and
only after six months from the date of stock issuance, subject to certain
conditions as defined in the agreements. As of April 1, 2000 no amounts were
loaned to the officers under the promissory note agreements.
In March 2000, certain officers of the Company were granted vested options
to acquire 3,333 share of Company Class B common stock at a purchase price of
$172.34043 per share (fair value as determined by the Board of Directors).
Compensating balance arrangement:
In connection with the Senior Credit Facility, an affiliate of a
stockholder was required to establish an $8,000,000 bank letter of credit,
which could be drawn down by the Senior Credit Facility commercial lenders,
upon certain events as defined in the Senior Credit Facility Agreement. In
2000, this bank letter of credit arrangement was terminated and replaced with
the Company depositing $8,000,000 as a compensating balance with the commercial
lenders of the Senior Credit Facility. The compensating balance (restricted
cash) will be maintained by IWO until the Senior Credit Facility borrowings are
repaid in full.
F-26
<PAGE>
IWO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment agreement:
Effective May 1, 2000, the Company entered into an employment agreement
with its Chief Financial Officer which expires December 31, 2002. The annual
compensation under this agreement includes salary of $200,000 through December
31, 2000 and increases of $5,000/year thereafter as well as annual bonuses. The
officer was also granted stock options to acquire 11,236 shares of Class B
common stock at a purchase price of $172.34043 per share. Options for
approximately 2,810 shares vested on May 1, 2000. Options for approximately
4,213 shares vest ratably on a daily basis from May 1, 2000 through December
31, 2002. The remaining options to acquire approximately 4,213 shares vest
ratably through December 31, 2004. Such options contain accelerated vesting
provisions through December 31, 2002 based upon the achievement of certain
annual performance goals. The officer was also granted a warrant to acquire
2,480 shares of Class B common stock at a purchase price of $172.34043 per
share (see Note 13).
Stock incentive plan:
In 2000, the Company is expected to increase the number of shares of
Company Class B common stock reserved for issuance under the Stock Incentive
Plan.
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Independent Wireless One Corporation
We have audited the accompanying statements of assets purchased of the
Sprint Spectrum Albany, Syracuse and Manchester Markets (as described in Note
1), which are wholly owned by Independent Wireless One Corporation (IWO) since
their March 31, 2000 acquisition from Sprint Spectrum L.P., as of December 31,
1999 and 1998 and the related statements of revenues and expenses for each of
the three years in the period ended December 31, 1999. These statements are the
responsibility of the Sprint Spectrum L.P.'s management. Our responsibility is
to express an opinion on these statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 2, the accompanying statements were prepared for
inclusion in the Registration Statement on Form S-1 of IWO for purposes of
complying with the rules and regulations of the Securities and Exchange
Commission in lieu of the full financial statements required by Rule 3-05 of
Regulation S-X for the transaction between IWO and Sprint Spectrum L.P. The
statements are not intended to be a complete presentation of the Sprint
Spectrum Albany, Syracuse and Manchester Markets' financial position or results
of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets purchased of the Sprint Spectrum Albany, Syracuse
and Manchester Markets as of December 31, 1999 and 1998, and the related
revenues and expenses for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Kansas City, Missouri
May 2, 2000
F-28
<PAGE>
SPRINT SPECTRUM ALBANY, SYRACUSE AND MANCHESTER MARKETS
(wholly owned by Independent Wireless One Corporation)
STATEMENTS OF ASSETS SOLD
<TABLE>
<CAPTION>
December 31
---------------
1998 1999
---- ----
<S> <C> <C>
Assets:
Accounts receivable, net of allowance for doubtful
accounts of $292,106 and $551,040................. $ 1,732,717 $ 3,356,472
Property, plant and equipment
Network equipment................................... 76,385,739 85,110,717
Other............................................... 757,022 757,022
Construction work in progress....................... 1,640,525 204,275
----------- -----------
Total property, plant and equipment.................. 78,783,286 86,072,014
Less: accumulated depreciation...................... 16,709,657 26,914,543
----------- -----------
Net property, plant and equipment.................... 62,073,629 59,157,471
Prepaid lease expense................................ 368,713 371,811
----------- -----------
Total assets sold...................................... $64,175,059 $62,885,754
=========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
SPRINT SPECTRUM ALBANY, SYRACUSE AND MANCHESTER MARKETS
(wholly owned by Independent Wireless One Corporation)
STATEMENTS OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues............................... $ 2,113,189 $ 9,137,334 $23,401,059
Operating expenses:
Costs of services and equipment.......... 8,381,175 12,200,739 20,203,145
General and administrative............... 6,674,493 7,360,750 8,975,967
Selling and marketing.................... 3,998,455 3,724,401 5,869,705
Depreciation and amortization............ 6,840,831 9,491,437 10,204,886
----------- ----------- -----------
Total operating expenses................ 25,894,954 32,777,327 45,253,703
----------- ----------- -----------
Operating expenses in excess of net
revenues................................ $23,781,765 $23,639,993 $21,852,644
=========== =========== ===========
</TABLE>
See accompanying notes.
F-30
<PAGE>
SPRINT SPECTRUM ALBANY, SYRACUSE AND MANCHESTER MARKETS
(wholly owned by Independent Wireless One Corporation)
NOTES TO STATEMENTS OF ASSETS SOLD AND
STATEMENTS OF REVENUES AND EXPENSES
1. Asset Purchase Agreement
On February 9, 1999, Independent Wireless One Corporation (IWO) and Sprint
Spectrum L.P. (Sprint Spectrum) entered into an Asset Purchase Agreement (the
Agreement) whereby IWO agreed to purchase from Sprint Spectrum certain assets
and IWO assumed certain leases as stipulated in the Agreement. Under the
Agreement, IWO purchased Sprint Spectrum's assets related to its wireless
mobile telephone services in the Albany and Syracuse, New York and Manchester,
New Hampshire markets (collectively, the "Acquired Markets"), which were wholly
owned by Sprint Spectrum. The assets purchased by IWO primarily consisted of
property, plant and equipment including network assets and retail stores
located in the Acquired Markets. IWO assumed certain operating leases within
the Acquired Markets; however no deferred revenue, commission or other similar
liabilities were assumed. This transaction closed on March 31, 2000.
Following the close of the transaction, IWO began operating the Acquired
Markets as Sprint PCS markets through an affiliation agreement with Sprint
Spectrum. Under the terms of this agreement, IWO sells wireless voice and data
telephone services under the Sprint PCS brand name in exchange for a fee. Also
as part of the agreement, Sprint Spectrum continues to provide network
monitoring, customer service, billing and collection services to IWO.
2. Basis of Presentation
Historically, financial statements have not been prepared for the Acquired
Markets as they had no separate legal status or existence. The accompanying
statements of assets sold and statements of revenues and expenses of the
Acquired Markets have been prepared for inclusion in the Registration Statement
on Form S-1 of IWO for purposes of complying with the rules and regulations of
the Securities and Exchange Commission in lieu of the full financial statements
required by Rule 3-05 of Regulation S-X for the transaction between IWO and
Sprint Spectrum. These statements have been derived from the historical
accounting records of Sprint Spectrum and include revenues and expenses
directly attributable to the Acquired Markets. Certain revenues and expenses
that are indirectly attributable to the Acquired Markets have been allocated
using the methods set forth below. As a result, the statements may not be
indicative of the financial position or operating results of the Acquired
Markets had they been operated as a separate, stand-alone company. Management
believes these allocation methodologies are reasonable and represent the most
appropriate methods of determining the expenses of the Acquired Markets.
Accounts Receivable
The accounts receivable balances included in the accompanying statements
of assets sold are those specifically associated with the subscribers of the
Acquired Markets. Allocations have been made of certain unbilled revenue and
bad debt accruals that are recorded by Sprint Spectrum at levels above the
market level. These allocations are based on average subscribers of the
Acquired Markets relative to total subscribers of Sprint Spectrum.
F-31
<PAGE>
SPRINT SPECTRUM ALBANY, SYRACUSE AND MANCHESTER MARKETS
(wholly owned by Independent Wireless One Corporation)
NOTES TO STATEMENTS OF ASSETS SOLD AND
STATEMENTS OF REVENUES AND EXPENSES--(Continued)
Property, Plant & Equipment
The property, plant and equipment balances included in the accompanying
statements of assets sold are assets specifically associated with the Acquired
Markets that were purchased by IWO pursuant to the Agreement.
Revenues
Service revenues included in the statements of revenues and expenses are
those specifically related to subscribers of the Acquired Markets. Allocations
have been made of certain unbilled revenue and bad debt accruals that are
recorded by Sprint Spectrum at levels above the market level. These allocations
are based on average subscribers of the Acquired Markets relative to total
subscribers of Sprint Spectrum.
Equipment revenues included in the statements of revenues and expenses
related to the Albany and Syracuse, New York markets include those specifically
related to equipment sales occurring in Sprint Spectrum's retail stores and
equipment sales to third-party retail stores located within these markets.
Certain equipment revenues related to the Manchester, New Hampshire market
are directly attributable to subscribers within that market. The remaining
equipment revenues related to the Manchester, New Hampshire market are based on
allocations of equipment sales occurring in Sprint Spectrum's retail stores and
equipment sales to third-party retail stores located in the Portland, Maine and
Boston, Massachusetts districts, which include the Manchester, New Hampshire
and other nearby markets. These allocations are based on the Manchester, New
Hampshire market's gross subscriber activations relative to total gross
subscriber activations of the markets included in the Portland, Maine and
Boston, Massachusetts districts.
Also included are allocations of revenues from equipment sales to national
third-party retail chains. These allocations are based on the Acquired Market's
gross subscriber activations via national third-party retail chains relative to
total gross subscriber activations of Sprint Spectrum via national third-party
retail chains.
Costs of Services and Equipment
Cost of services expense in the statements of revenues and expenses
includes those expenses directly attributable to the Acquired Markets. In
addition, allocations have been made of cost of services incurred at levels
above the market level. These allocations are based on the Acquired Markets'
directly attributable cost of services relative to the total Company's directly
attributable cost of services.
Cost of equipment included in the statements of revenues and expenses
related to the Albany and Syracuse, New York markets is that specifically
related to equipment sales occurring in Sprint Spectrum's retail stores and
equipment sales to third-party retail stores located within these markets.
F-32
<PAGE>
SPRINT SPECTRUM ALBANY, SYRACUSE AND MANCHESTER MARKETS
(wholly owned by Independent Wireless One Corporation)
NOTES TO STATEMENTS OF ASSETS SOLD AND
STATEMENTS OF REVENUES AND EXPENSES--(Continued)
Cost of equipment associated with certain equipment revenues related to
the Manchester, New Hampshire market are directly attributable to subscribers
within that market. The cost of equipment associated with the remaining
equipment revenues related to the Manchester, New Hampshire market is based on
allocations of the cost of equipment sales occurring in Sprint Spectrum's
retail stores and third-party retail stores located in the Portland, Maine and
Boston, Massachusetts districts, which include the Manchester, New Hampshire
and other nearby markets. These allocations are based on the Manchester, New
Hampshire market's gross subscriber activations relative to total gross
subscriber activations of the markets included in the Portland, Maine and
Boston, Massachusetts districts.
Also included are allocations of the cost of equipment associated with
equipment sales to national third-party retail chains. These allocations are
based on the Acquired Market's gross subscriber activations via national third-
party retail chains relative to total gross subscriber activations of Sprint
Spectrum via national third-party retail chains.
General and Administrative Expenses and Selling and Marketing Expenses
Direct general and administrative expenses and selling and marketing
expenses are those costs that were incurred as a result of providing wireless
mobile telephone services in the Acquired Markets and which are no longer
incurred by Sprint Spectrum subsequent to consummation of the transaction with
IWO.
General and administrative expenses and selling and marketing expenses of
Sprint Spectrum that are indirectly associated with the Acquired Markets'
operations were allocated to the Acquired Markets' statements of revenues and
expenses based on the number of subscribers of the Acquired Markets relative to
Sprint Spectrum's total subscribers.
Depreciation Expense
Depreciation expense included in the statements of revenues and expenses
is related to the assets specifically associated with the Acquired Markets that
were purchased by IWO pursuant to the Agreement.
3. Summary of Significant Accounting Policies
Revenue Recognition
Operating revenues are recognized as services are rendered or as equipment
is delivered to customers. Operating revenues are recorded net of an estimate
for uncollectible accounts.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of property,
plant and equipment is generally depreciated on a straight-line basis over
estimated economic useful lives ranging from seven to 20 years. Repair and
maintenance costs are expensed as incurred.
F-33
<PAGE>
SPRINT SPECTRUM ALBANY, SYRACUSE AND MANCHESTER MARKETS
(wholly owned by Independent Wireless One Corporation)
NOTES TO STATEMENTS OF ASSETS SOLD AND
STATEMENTS OF REVENUES AND EXPENSES--(Continued)
Advertising
Advertising costs are expensed when the advertisement occurs. Total
advertising expense amounted to $3,073,065 in 1997, $2,438,388 in 1998 and
$3,503,920 in 1999.
Use of Estimates
The statements of assets sold and statements of revenues and expenses are
prepared in conformity with accounting principles generally accepted in the
United States. These principles require management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Also,
as discussed in Note 2, the statements of revenues and expenses include
allocations and estimates that are not necessarily indicative of the revenues,
costs and expenses that would have resulted if the Acquired Markets had been
operated as a separate stand-alone company.
4. Operating Leases
The Acquired Markets' minimum rental commitments at year-end 1999 for all
non-cancelable operating leases, consisting mainly of leases for cell and
switch sites, are as follows:
<TABLE>
<S> <C>
2000.............................................................. $1,249,543
2001.............................................................. 636,662
2002.............................................................. 358,375
2003.............................................................. 208,700
2004.............................................................. 67,949
Thereafter........................................................ 195,269
----------
</TABLE>
The table excludes renewal options related to certain cell and switch site
leases. These renewal options generally have five-year terms and may be
exercised from time to time. The Acquired Markets' gross rental expense totaled
$2,546,996 in 1997, $2,585,344 in 1998 and $2,810,292 in 1999.
5. Cash Flows
The Acquired Markets' primary requirements for cash have been to fund
operating losses and capital expenditures associated with the network build-
out. Capital expenditures of the Acquired Markets were $58,209,747 in 1997,
$13,071,747 in 1998 and $6,560,077 in 1999.
6. Impact of Year 2000 (unaudited)
During 1999, Sprint Spectrum completed its remediation and testing of
systems related to its Year 2000 readiness. As a result of those efforts,
Sprint Spectrum experienced no significant disruptions in the mission critical
information technology and non-information technology systems
F-34
<PAGE>
SPRINT SPECTRUM ALBANY, SYRACUSE AND MANCHESTER MARKETS
(wholly owned by Independent Wireless One Corporation)
NOTES TO STATEMENTS OF ASSETS SOLD AND
STATEMENTS OF REVENUES AND EXPENSES--(Continued)
and believes those systems successfully responded to the Year 2000 date change.
Sprint Spectrum is not aware of any material problems resulting from Year 2000
issues, either with its equipment, its internal systems, or the equipment and
services of third parties. IWO will continue to monitor the mission critical
computer applications of the Acquired Markets and those of the Acquired
Markets' suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
F-35
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
, 2000
IWO Holdings, Inc.
Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Chase H&Q
Deutsche Banc Alex. Brown
First Union Securities, Inc.
UBS Warburg LLC
DLJdirect Inc.
--------------------------------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers that
effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and when selling previously unsold
allotments or subscriptions.
--------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities to be registered. All of
the amounts shown are estimated except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
Amount to
Be Paid
---------
<S> <C>
SEC registration fee.................................................. $45,540
NASD filing fee....................................................... 17,750
Nasdaq National Market listing fee.................................... *
Printing and engraving costs.......................................... *
Legal fees and expenses............................................... *
Accounting fees and expenses.......................................... *
Blue sky fees and expenses (including legal fees)..................... *
Transfer agent fees................................................... *
Miscellaneous......................................................... *
-------
Total................................................................. $
=======
</TABLE>
---------------------
* To be included by amendment.
Item 14. Indemnification of Officers and Directors
The registrant's Certificate of Incorporation (the "Certificate") provides
that, except to the extent prohibited by the Delaware General Corporation Law
(the "DGCL"), the registrant's directors shall not be personally liable to the
registrant or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the registrant. Under the DGCL, the directors have a
fiduciary duty to the registrant which is not eliminated by this provision of
the Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
(1) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) arising under Section
174 of the DGCL or (4) for any transaction from which the director derived an
improper personal benefit. This provision does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate provides that the registrant shall fully indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that such person is or
was a director or officer of
II-1
<PAGE>
the registrant, or is or was serving at the request of the registrant as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. The registrant has obtained liability insurance for its officers
and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
We have entered into indemnity agreements with each of our directors.
Item 15. Recent Sales of Unregistered Securities
Set forth below is a description of the registrant's sales of unregistered
securities during the past three years.
(a) In December 1999, the registrant issued shares of its capital stock to
initial investors at a price per share of $172.34043 as follows: (i)
500,000.0000 shares of Class A stock for an aggregate purchase price of
$86,170,215.00; (ii) 166,921.1585 shares of Class B stock for an aggregate
purchase price of $28,767,264.26; (iii) 144,412.1749 shares of Class C stock
for an aggregate purchase price of $19,717,843.41; and (iv) 2,000.0000 shares
of Class D stock for an aggregate purchase price of $344,680.86. In addition,
the registrant issued 210,000.0000 shares of Class B stock to the founders of
the registrant's operating subsidiary in exchange for 14,357 shares of the
common stock of the operating subsidiary held by the founders, and further
issued 13,055.5552 shares of Class B stock to the founders in exchange for past
capital contributions of $2,250,000 made by the founders to the operating
subsidiary.
(b) In December 1999, the registrant issued a warrant to an international
entity to purchase shares of Class A stock at an exercise price of $0.01 per
share.
(c) In December 1999, the registrant issued warrants to initial investors
and officers to purchase an aggregate of 40,000 shares of Class B stock at an
exercise price of $172.34043 per share.
(d) In January 2000, the registrant issued an aggregate of 3,297.7413
shares of Class B stock to officers and directors upon the exercise of stock
options.
(e) In May 2000, the registrant issued a warrant to one of its officers to
purchase 2,480.000 shares of Class B stock at an exercise price of $172.34043
per share.
(f) As of June 12, 2000, options to purchase an aggregate of 128,386.5237
shares of Class B stock were outstanding under the registrant's Management
Stock Incentive Plan and individual option agreements at exercise prices of
$43.521 and $172.34043 per share. The registrant has issued no shares of
capital stock to its officers, directors and employees upon the exercise of
stock options except as set forth above.
II-2
<PAGE>
The transactions set forth in paragraphs (a) through (c) and (e) above
were undertaken in reliance upon the exemption from the registration
requirements of the Securities Act afforded by Section 4(2) thereof and/or
Regulation D promulgated thereunder as sales not involving a public offering.
The transactions set forth in paragraphs (d) and (f) above were undertaken in
reliance upon the exemption from the registration requirements of the
Securities Act afforded by Rule 701 promulgated under the Securities Act as
sales by an issuer to employees, directors, officers, consultants or advisors
pursuant to written compensatory benefit plans or written contracts relating to
the compensation of such persons. The purchasers of the securities described
above acquired them for their own account and not with a view to any
distribution thereof to the public. The registrant believes that exemptions
other than those specified above may exist with respect to the transactions set
forth above.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
1.1* -- Form of Underwriting Agreement
3.1 -- Amended and Restated Certificate of Incorporation of the registrant
3.2* -- Form of Amendment to Certificate of Incorporation, to be filed prior to the closing of
the offering
3.3* -- Form of Amended and Restated Certificate of Incorporation, to be filed upon the closing
of the offering
3.4 -- Bylaws of the registrant
3.5* -- Form of Amended and Restated Bylaws of the registrant, to be effective upon
the closing of the offering
4.1* -- Specimen Certificate representing the registrant's common stock
5.1* -- Opinion of Gibson, Dunn & Crutcher LLP
10.1 -- Form of Founders Warrant
10.2 -- Stockholders Agreement, dated as of December 20, 1999, between the registrant and the
stockholders signatory thereto
+10.3* -- Sprint PCS Management Agreement, dated as of February 9, 1999, among Independent
Wireless One Corporation, Sprint Spectrum L.P. and WirelessCo, L.P., as amended by
Addendum I
+10.4* -- Addendum II, dated as of December 20, 1999, to Sprint PCS Management Agreement, dated
as of February 9, 1999, among Independent Wireless One Corporation, Sprint Spectrum
L.P., Sprint Communications Company, L.P. and WirelessCo, L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
10.5* -- Sprint PCS Services Agreement, dated as of February 9, 1999, between the
registrant and Sprint Spectrum L.P.
10.6* -- Sprint Trademark and Service Mark License Agreement, dated as of February 9,
1999, between the registrant and Sprint Communications Company, L.P.
10.7* -- Sprint Spectrum Trademark and Service Mark License Agreement, dated as of
February 9, 1999, between the registrant and Sprint Spectrum L.P.
+10.8* -- Asset Purchase Agreement, dated as of February 9, 1999, among Independent
Wireless One Corporation, Sprint Spectrum L.P., Sprint Spectrum Equipment
Company, L.P. and Sprint Spectrum Realty Company, L.P.
+10.9* -- Amendment No. 1, dated as of December 20, 1999, to Asset Purchase Agreement,
dated as of February 9, 1999, between Independent Wireless One Corporation,
Sprint Spectrum L.P., Sprint Spectrum Equipment Company, L.P. and Sprint
Spectrum Realty Company, L.P.
10.10* -- Interim Services Agreement, dated as of December 20, 1999, between
Independent Wireless One Corporation and Sprint Spectrum L.P.
10.11* -- Master Sublease Agreement, dated as of March 31, 2000, between Independent
Wireless One Leased Realty Corporation, Sprint Spectrum L.P. and Sprint
Spectrum Realty Company, L.P.
10.12* -- Consent and Agreement
10.13 -- Employment Agreement, dated as of December 20, 1999, between the registrant,
Independent Wireless One Corporation and Solon L. Kandel
10.14 -- Employment Agreement, dated as of December 20, 1999, between the registrant,
Independent Wireless One Corporation and David L. Standig, as amended
10.15 -- Employment Agreement, dated as of December 20, 1999, between the registrant,
Independent Wireless One Corporation and John P. Hart, Jr., as amended
10.16 -- Professional Services Agreement, dated as of December 20, 1999, between the
registrant, Independent Wireless One Corporation and J.K. Hage III
10.17 -- Employment Agreement, dated as of April 9, 2000, between the registrant,
Independent Wireless One Corporation and Steven M. Nielsen
</TABLE>
<TABLE>
<S> <C> <C>
10.18 -- Management Stock Incentive Plan
10.19 -- Form of Stock Option Agreement
10.20 -- Stock Option Agreement, dated as of December 20, 1999, between the
registrant and Solon L. Kandel
10.21 -- Stock Option Agreement, dated as of December 20, 1999, between the
registrant and Alfred F. Boschulte
10.22 -- Agreement for Management Advisory, Strategic Planning and Consulting
Services, dated as of December 20, 1999, between the registrant and
Investcorp International Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C>
10.23 -- Form of Management Bonus Stock Purchase Agreement
10.24 -- Form of Management Warrant
10.25 -- Lease, dated as of October 22, 1999, between Rosenblum Associates and
Independent Wireless One Corporation, as amended
10.26 -- Lease, dated as of September 30, 1996, between Jack Rosenblum and Sprint
Spectrum L.P., as amended
10.27 -- Credit Agreement, dated as of December 20, 1999, among Independent Wireless
One Corporation, the several lenders from time to time parties thereto,
Chase Securities Inc. as Book Manager and Lead Arranger, First Union
National Bank and Paribas as Senior Managing Agents, UBS AG, Stamford Branch
as Documentation Agent and The Chase Manhattan Bank, as Administrative Agent
for the lenders
21.1 -- Subsidiaries of the registrant
23.1 -- Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 -- Consent of Ernst & Young LLP, Independent Auditors
23.3* -- Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
24.1 -- Power of Attorney (see Signature Page)
27.1 -- Financial Data Schedule
</TABLE>
---------------------
* To be filed by amendment.
+ Confidential treatment to be requested for portions of these exhibits.
(b) Financial Statement Schedules
None.
Item 17. Undertakings
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors,
II-5
<PAGE>
officers and controlling persons of registrant pursuant to the Delaware
General Corporation Law, the Certificate of Incorporation of the
registrant, the Underwriting Agreement, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue. The undersigned registrant hereby
undertakes to provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Albany, State of New
York, on June 19, 2000.
IWO Holdings, Inc.
/s/ Solon L. Kandel
By: _________________________________
Solon L. Kandel
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
We, the undersigned directors and/or officers of IWO Holdings, Inc.,
hereby severally constitute and appoint Solon L. Kandel, David L. Standig and
Steven M. Nielsen, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full
powers to them and each of them to sign for us, in our names and in the
capacities indicated below, the registration statement on Form S-1 filed
herewith with the Securities and Exchange Commission, and any and all
amendments to said registration statement (including post-effective
amendments), and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, in connection with the registration under the
Securities Act of 1933, of equity securities of IWO Holdings, Inc., and to file
or cause to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitute or substitutes, shall do or
cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Solon L. Kandel President, Chief Executive June 19, 2000
______________________________________ Officer and Director
Solon L. Kandel (Principal Executive
Officer)
/s/ David L. Standig Chief Operating Officer June 19, 2000
______________________________________
David L. Standig
/s/ Steven M. Nielsen Chief Financial Officer June 19, 2000
______________________________________ (Principal Financial
Steven M. Nielsen Officer and Principal
Accounting Officer)
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ J.K. Hage III Executive Vice President, June 19, 2000
______________________________________ Secretary, General
J.K. Hage III Counsel and Director
/s/ Christopher J. Stadler Director June 19, 2000
______________________________________
Christopher J. Stadler
/s/ Mamoun Askari Director June 19, 2000
______________________________________
Mamoun Askari
/s/ James O. Egan Director June 19, 2000
______________________________________
James O. Egan
/s/ Thomas J. Sullivan Director June 19, 2000
______________________________________
Thomas J. Sullivan
/s/ Savio W. Tung Director June 19, 2000
______________________________________
Savio W. Tung
/s/ Christopher J. O'Brien Director June 19, 2000
______________________________________
Christopher J. O'Brien
/s/ Alfred F. Boschulte Director June 19, 2000
______________________________________
Alfred F. Boschulte
/s/ Brian Kwait Director June 19, 2000
______________________________________
Brian Kwait
/s/ Harley Ruppert Director June 19, 2000
______________________________________
Harley Ruppert
</TABLE>
S-2
