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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________.
Commission file number ...000-22003...
US UNWIRED INC.
(Exact name of registrant as specified in its charter)
Louisiana 72-1457316
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Lakeshore Drive
Lake Charles, LA 70601
(Address of principal executive offices) (Zip code)
(337) 436-9000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No. __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
There were 128,831,535 shares of common stock, $0.01 par value per share,
outstanding at April 30, 2003.
Page
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets............................... 3
Condensed Consolidated Statements of Operations..................... 4
Condensed Consolidated Statements of Cash Flows..................... 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 19
Item 4. Controls and Procedures ............................................ 28
Part II - OTHER INFORMATION
Item 5. Other Information .................................................. 28
Item 6. Exhibits and Reports on Form 8-K.................................... 52
Signatures................................................................... 53
Certification by Chief Executive Officer..................................... 54
Certification by Chief Financial Officer..................................... 55
2
Part I Financial Information
Item 1. Financial Statements
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
------------ ------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 73,328 $ 61,985
Restricted cash 30,182 33,218
Subscriber receivables, net 34,779 47,727
Other receivables 2,471 2,661
Inventory 8,162 5,315
Prepaid expenses and other assets 18,125 15,077
Receivables from related parties 710 681
Receivables from officers 86 101
------------ ------------
Total current assets 167,843 166,765
Property and equipment, net 463,114 484,014
Restricted cash --- 8,000
Goodwill 51,965 51,961
Intangibles, net 68,441 78,292
Notes receivable from unconsolidated affiliates 1,815 1,811
Other assets 40,146 40,587
------------ ------------
Total assets $ 793,324 $ 831,430
============ ============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 24,667 $ 28,301
Accrued expenses 80,465 67,665
Current maturities of long term obligations 7,624 5,018
Current maturities of long term obligations in default 350,564 ---
------------ ------------
Total current liabilities 463,320 100,984
Long term obligations, net of current maturities 419,483 411,995
Long term obligations in default, net of current maturities --- 350,207
Deferred gain 33,425 34,581
Investments in and advances to unconsolidated affiliates 3,737 3,901
Stockholders' deficit:
Common stock 1,288 1,288
Additional paid in capital 658,527 657,459
Retained deficit (786,282) (728,811)
Promissory note (174) (174)
------------ ------------
Total stockholders' deficit (126,641) (70,238)
------------ ------------
Total liabilities and stockholders' deficit $ 793,324 $ 831,430
============ ============
See accompanying notes to condensed consolidated financial statements
3
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
For the three months ended
March 31,
2003 2002
----------- -----------
Revenues:
Subscriber $ 94,273 $ 56,115
Roaming 27,491 30,743
Merchandise sales 6,370 4,287
Other revenue 613 925
----------- -----------
Total revenue 128,747 92,070
Expenses:
Cost of service 51,846 39,975
Merchandise cost of sales 9,490 7,990
General and administrative 35,277 25,969
Sales and marketing 25,546 21,544
Non-cash stock compensation 1,067 1,166
Depreciation and amortization 30,161 14,185
IWO asset abandonment charge 12,403 ---
----------- -----------
Total operating expense 165,790 110,829
----------- -----------
Operating loss (37,043) (18,759)
Other income (expense):
Interest expense (20,690) (10,107)
Gain on sale of assets 81 ---
----------- -----------
Total other expense (20,609) (10,107)
----------- -----------
Loss before equity in income of unconsolidated affiliates
(57,652) (28,866)
Equity in income of unconsolidated affiliates 180 505
----------- -----------
Net loss $ (57,472) $ (28,361)
=========== ===========
Basic and diluted loss per share $ (0.45) $ (0.33)
=========== ===========
Weighted average outstanding common shares 128,832 84,856
=========== ===========
See accompanying notes to condensed consolidated financial statements
4
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the three months ended
March 31,
2003 2002
----------- -----------
Cash flows from operating activities
Net cash provided by operating activities $ 9,959 $ 3,413
Cash flows from investing activities
Proceeds from restricted cash 11,035 ---
Proceeds from sale of assets 350 ---
Payments for the purchase of equipment (9,829) (39,258)
Acquisition of business, net of cash acquired --- (55,265)
Sale of marketable securities --- 10,016
----------- -----------
Net cash provided by (used in) investing activities 1,556 (84,507)
Cash flows from financing activities
Principal payments of long-term debt (172) (171)
Proceeds from long-term debt --- 40,000
Proceeds from stock options exercised --- 167
Debt issuance costs --- (763)
----------- -----------
Net cash (used in) provided by financing activities (172) 39,233
----------- -----------
Net change in cash and cash equivalents 11,343 (41,861)
Cash and cash equivalents at beginning of period 61,985 100,589
----------- -----------
Cash and cash equivalents at end of period $ 73,328 $ 58,728
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
US UNWIRED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three-month
period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
The condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The condensed consolidated financial statements contained
herein should be read in conjunction with the financial statements and
notes included in the Form 10-K for US Unwired Inc. for the year ended
December 31, 2002, filed on March 31, 2003 with the Securities and Exchange
Commission.
2. Description of the Organization
US Unwired Inc. ("the Company" or "US Unwired") is principally engaged in
the ownership and operation of wireless communications systems, consisting
of personal communications systems ("PCS"), cellular and paging
communication systems in the southern and northeastern regions of the
United States.
US Unwired acquired IWO Holdings, Inc. ("IWO") on April 1, 2002.
3. Liquidity and Capital Resources
US Unwired has a senior bank credit facility and senior subordinated
discount notes. IWO has a senior bank credit facility and senior notes. US
Unwired and IWO entered into these prior to the acquisition of IWO. Under
the terms of these debt instruments, funds available under the US Unwired
debt can only be used by US Unwired, and funds available under the IWO debt
can only be used by IWO. US Unwired is not obligated for the payment of
IWO's debt, and IWO is not obligated for the payment of US Unwired's debt.
US Unwired Liquidity
As of March 31, 2003, US Unwired had $47.3 million in cash and cash
equivalents; availability under the US Unwired senior bank credit facility
of $73.2 million; and, indebtedness that consisted of $90.0 million related
to the US Unwired senior bank credit facility, $326.0 million related to
the US Unwired senior subordinated discount notes and $11.1 million in
capital leases, promissory notes and vendor financing for a total of $427.1
million.
Given US Unwired's current business model, the Company believes US Unwired
will have sufficient cash to funds its operations, debt service and capital
requirements in 2003. US Unwired must comply with certain financial and
operating covenants of the US Unwired senior bank credit facility and the
US Unwired senior subordinated discount notes, and as of March 31, 2003,
was in compliance with these restrictive covenants. However, the Company's
current business model indicates that it will fail
6
to comply with certain financial covenants of the US Unwired senior bank
credit facility in 2003. The Company has initiated discussions with the US
Unwired banking group to amend these financial covenants. However, there
can be no assurance that the Company will be able to successfully negotiate
these amendments on terms acceptable to the Company. Should acceptable
amendments not be made, the banking group may elect to deny the Company
access to the remaining available funds under the US Unwired senior bank
credit facility. Under such circumstances, the Company believes that it
will have sufficient cash to fund operations, debt service and capital
requirements in 2003 without additional borrowing. The banking group may
also elect to accelerate repayment of the US Unwired senior bank credit
facility. Under such circumstances, this acceleration will serve to trigger
a default in the US Unwired senior subordinated discount notes. Should this
occur, both the holders of the US Unwired senior bank credit facility and
US Unwired senior subordinated discount notes may demand immediate payment
for all outstanding indebtedness, and the Company would be unable to pay
the accelerated amount.
As of the date of this filing, the Company is unable to express a belief on
whether it will have sufficient liquidity in 2004 and beyond, which will
depend on a number of factors including results of 2003 operations; its
relationship with Sprint PCS, major vendors and lenders; and the amended
terms of the US Unwired senior bank credit facility.
Considering the expected covenant violations in 2003 and the actions that
may result from such covenant violations and the operating losses incurred
to date, there is substantial doubt about US Unwired's ability to continue
as a going concern.
IWO Liquidity
The Company has been unable to develop a business plan for IWO that
provides sufficient liquidity in 2003, and has engaged in discussions with
the holders of the IWO senior bank credit facility and the holders of the
IWO senior notes regarding the restructuring of IWO.
As of March 31, 2003, IWO had $26.1 million in cash and cash equivalents
and $30.2 million in restricted cash; availability in revolving loans under
the IWO senior bank credit facility of $25.2 million; and indebtedness that
consisted of $213.2 million related to the IWO senior bank credit facility
and $137.4 million related to the IWO senior notes for a total of $350.6
million. A portion of the original proceeds of the IWO senior notes
offering was set aside as restricted cash to make the first six scheduled
interest payments on the IWO senior notes through January 2004. Repayment
of the IWO senior bank credit facility commences in March 2004.
IWO was not in compliance with its restrictive covenants under the IWO
senior bank credit facility at March 31, 2003, and as a result of these
covenant violations, the Company was in default of the IWO senior bank
credit facility at March 31, 2003. The holders of the IWO senior bank
credit facility have the right to deny IWO access to the remaining $25.2
million of availability. Without the remaining $25.2 million, IWO will not
have sufficient liquidity through 2003. The Company is in discussions with
the IWO banking group and IWO note holders to arrive at an acceptable
restructuring to preserve IWO liquidity. IWO, holders of the IWO senior
bank credit facility and holders of the IWO senior notes have all retained
advisors to assist in evaluating alternatives for IWO.
A default under the IWO senior bank credit facility does not result in IWO
being in default under the IWO senior notes. Should IWO be unable to amend
the IWO senior bank credit facility or obtain waivers for the violated
restricted covenants, the holders of IWO senior bank credit facility can
restrict any remaining future IWO borrowing capacity and accelerate
repayment of the IWO senior bank credit facility. Should the holders of IWO
senior bank credit facility accelerate repayment, that acceleration will
serve to trigger a default in the IWO senior notes. Should this occur, both
the holders of the IWO senior bank credit facility and the holders of the
IWO senior notes may demand immediate payment of all outstanding
indebtedness. If the indebtedness is accelerated, IWO does not have
sufficient cash to repay its indebtedness. As a result, IWO would be forced
to seek protection under bankruptcy.
7
As a result of liquidity challenges, IWO has made the decision to reduce
capital expenditures for network expansion. With the assistance of IWO's
advisors, IWO believed that it did not have sufficient liquidity, at this
time, to complete all cell sites under construction as of March 31, 2003.
As a result, IWO has elected to abandon the construction of cell sites that
do not provide a sufficient level of enhanced coverage. IWO recorded an
asset abandonment charge of $12.4 million during the three-month period
ended March 31, 2003 for the cell sites and the related property leases of
these abandoned cell sites. Included in this asset abandonment charge are
cell sites that IWO is required to construct to meet the build out
requirements under the IWO Sprint management agreement. Failure to complete
the build out of the IWO service area will place IWO in violation of the
IWO Sprint management agreement. As a result, Sprint PCS could declare IWO
in default and take action up to and including termination of the IWO
Sprint management agreement. At March 31, 2003, IWO's construction in
progress included $13.6 million primarily related to cell sites that IWO
plans to complete and management estimates that completion of these cell
sites will require approximately $10.9 million in additional construction
costs to complete construction and place these sites in operation. IWO
anticipates that only a portion of these sites will be completed in 2003.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to IWO. Further, IWO
creditors, IWO lenders and IWO note holders cannot place any liens or
encumbrances on the assets of US Unwired. Should the holders of the IWO
senior bank credit facility place IWO in default, US Unwired's relationship
with IWO may change and several alternatives exist ranging from working for
the holders of the IWO senior bank credit facility and the holders of the
IWO senior notes as a manager of the IWO territory, subject to the approval
by Sprint PCS, to no involvement with IWO at all.
Considering the covenant violations and the actions that may result from
such covenant violations and the operating losses incurred to date, there
is substantial doubt about IWO's ability to continue as a going concern.
The Company's Business Strategy
The Company is undertaking a number of key initiatives designed to enable
US Unwired to continue as a going concern. The Company has:
. reinstated the deposit requirement for higher credit risk subscribers
and will request not to participate in any Sprint PCS programs where
the Company's analysis indicates adversely impacted levels of customer
turnover or unsatisfactory economic returns.
. restructured sales employees' programs to pay higher commissions on
subscribers with better credit ratings.
. revised the local agent commission structure. The Company no longer
offers handset discounts to its local agents and instead pays higher
commissions for subscribers with good credit ratings. The Company has
cancelled and continues to cancel agreements with local agents that
continue to target higher risk subscribers or provide low economic
value.
. reintroduced the pre-pay program, which requires advance payment for
minutes of use. The Company believes that this program offers higher
credit risk subscribers a less stressful environment in which to
subscribe to the Company's service. The Company believes that there is
a lower susceptibility for this credit class of subscribers to churn
than with a post-pay program, and this service allows these
subscribers to better manage their expenditures for the service
provided.
. supplemented Sprint PCS's customer service function with certain of
its own staff that focuses on subscriber retention.
. limited its capital expenditures to: (1) capacity and required
technical upgrades of existing equipment, and (2) only adding
additional cell site coverage in areas that we expect will produce
positive cash returns as a result of either new subscriber growth or
decreases in subscriber turnover.
8
. continued to divest of certain non-core assets.
. undertaken a corporate wide evaluation of expenses. This includes the
consolidation of functions, divesting of unused and under utilized
facilities, renegotiation of vendor contracts, extension of vendor
payment terms and other cost cutting measures.
. evaluated and continues to evaluate its markets and is reducing sales
staffing levels and closing retail outlets that do not meet its
minimum internal rates of returns.
. continued to work with Sprint PCS to improve the detail, timeliness
and accuracy of information processed by Sprint PCS on the Company's
behalf.
While the Company believes that these initiatives will have a positive
impact on operating results, the Company cannot state with certainty that
these initiatives will result in its ability to sustain operations beyond
or even to the end of 2003, given the information as discussed above
regarding the Company's indebtedness.
4. Details of Certain Balance Sheet Accounts
Major categories of property and equipment consisted of the following:
March 31, December 31,
2003 2002
---------- ------------
(In thousands)
Land $ 890 $ 890
Buildings and leasehold improvements 22,415 22,713
Facilities and equipment 612,043 603,085
Furniture, fixtures and vehicles 10,112 9,744
Construction in progress 24,079 34,004
---------- ------------
669,539 670,436
Less accumulated depreciation an amortization 206,425 186,422
---------- ------------
$ 463,114 $ 484,014
========== ============
Intangibles consisted of the following:
March 31, December 31,
2003 2002
---------- ------------
(In thousands)
Intangible Assets:
Sprint affiliation agreement $ 35,266 $ 35,266
Subscriber base 81,824 81,824
---------- ------------
117,090 117,090
Less: accumulated amortization 48,649 38,798
---------- ------------
Intangible assets, net $ 68,441 $ 78,292
========== ============
9
5. Long-Term Obligations
Long-term debt, including capital lease obligations, consisted of the
following:
March 31, December 31,
2003 2002
------------ ------------
(In thousands)
US Unwired Inc. senior subordinated discount notes $ 325,975 $ 315,707
US Unwired Inc. senior bank credit facility 90,000 90,000
Capital leases 7,160 7,269
Promissory note 3,613 3,667
Vendor financing 359 370
------------ ------------
Total long-term obligations, US Unwired Inc. 427,107 417,013
IWO Holdings, Inc. senior notes 137,380 137,023
IWO Holdings, Inc. senior bank credit facility, in default 213,184 213,184
------------ ------------
Total long-term obligations, IWO Holdings Inc. 350,564 350,207
Less current maturities 358,188 5,018
------------ ------------
Long-term obligations, excluding current maturities $ 419,483 $ 762,202
============ ============
As of March 31, 2003, $73.2 million remained available for borrowing under
the US Unwired senior bank credit facility. As of March 31, 2003, US
Unwired was in compliance with all financial covenants under the US Unwired
senior bank credit facility and the US Unwired senior subordinated discount
notes.
As of March 31, 2003, $25.2 million was available under the IWO senior bank
credit facility. IWO was not in compliance with its restrictive covenants
under the IWO senior bank credit facility at March 31, 2003, and as a
result of these covenant violations, the Company was in default of the IWO
senior bank credit facility at March 31, 2003. The holders of the IWO
senior bank credit facility have the right to deny IWO access to the
remaining $25.2 million of availability as a result of the covenant
violations. As a result of the covenant violations and the impact of these
covenant violations on the IWO senior bank credit facility as discussed in
Note 3, the Company has classified all outstanding indebtedness of both the
IWO senior bank credit facility and the IWO senior notes as a current
liability.
US Unwired Senior Subordinated Discount Notes - 13 3/8%
In October 1999, US Unwired issued $400 million in aggregate principal
amount of 13 3/8% Senior Subordinated Discount Notes due November 1, 2009
("the US Unwired senior subordinated discount notes"). The US Unwired
senior subordinated discount notes were issued at a substantial discount
such that the Company received gross proceeds of approximately $209.2
million. The US Unwired senior subordinated discount notes increase in
value daily, compounded twice per year, at the rate of 13 3/8% per year
until November 1, 2004. On that date, the value of the US Unwired senior
subordinated discount notes will be equal to the face amount of the US
Unwired senior subordinated discount notes and interest will begin to
accrue at the rate of 13 3/8% per year. The Company will be required to pay
the accrued interest beginning May 1, 2005, and on each November 1 and May
1 thereafter. The US Unwired senior subordinated discount notes are a
general unsecured obligation of the Company, except for the limited
security provided by a pledge agreement by the Company's wholly owned
subsidiary, Louisiana Unwired LLC ("LA Unwired"). The US Unwired senior
subordinated discount notes rank junior to all existing and future senior
debt of the Company and equal in right of payment of any future senior
subordinated indebtedness of the Company.
10
The US Unwired senior subordinated discount notes are fully,
unconditionally, and jointly and severally guaranteed by two of the
Company's wholly owned subsidiaries: LA Unwired and Unwired Telecom Corp.
("Unwired Telecom"). Each of the guarantees is a general unsecured
obligation of the guarantor, except for a pledge by LA Unwired of its
interest in Texas Unwired and any notes payable to it by Texas Unwired as
security for the guarantee. Each of the guarantees ranks equally in right
of payment with the guarantor's future senior subordinated indebtedness and
is subordinated in right of payment to all existing and future senior debt
of the guarantor. The US Unwired senior subordinated discount notes are not
guaranteed by IWO.
US Unwired Senior Bank Credit Facility - $170 million
The $170 million US Unwired senior bank credit facility consists of an $80
million reducing revolving credit facility and $90 million in term loans.
The $80 million reducing revolving credit facility has been reduced by $6.0
million as a result of permanent reductions of $1.3 million and $2.0
million per quarter that began in June 2002. The US Unwired senior bank
credit facility matures in 2008. Effective June 6, 2002, the Company
amended the $170 million US Unwired senior bank credit facility to allow
for letters of credit. Any letters of credit issued by the Company reduce
the amount available under the reducing revolving credit facility. The term
loans will be repaid in quarterly installments beginning in June 2003. All
loans under the US Unwired senior bank credit facility bear interest at
variable rates tied to the federal funds rate or LIBOR. The US Unwired
senior bank credit facility is secured by all of the assets of the Company
and its subsidiaries (other than property owned by IWO which the Company
acquired on April 1, 2002). Such collateral also secures certain interest
rate protection and other hedging agreements permitted by our credit
agreement that may be entered into from time to time by us. Lucent
Technologies, Inc. is also a guarantor of a portion of our senior secured
credit facility. At March 31, 2003, the Company had $73.2 million available
under this facility. The proceeds from the US Unwired senior bank credit
facility are available for use only by US Unwired and its subsidiaries
other than IWO.
IWO Senior Notes - 14%
In February 2001, IWO issued 160,000 units, each consisting of $1,000
principal amount of 14% Senior Notes ("the IWO senior notes") due January
15, 2011 and one warrant to purchase 12.50025 shares of IWO's class C
common stock at an exercise price of $7.00 per share. As a result of US
Unwired's acquisition of IWO in April 2002, this warrant was converted to a
US Unwired warrant to purchase 12.96401 shares of US Unwired's common stock
at $6.75 per share. Interest is payable semi-annually on January 15 and
July 15 of each year. Independent Wireless One Corporation, a wholly owned
subsidiary of IWO, is the sole guarantor of the IWO senior notes. All of
IWO's restricted subsidiaries formed or acquired after the issuance of the
IWO senior notes that guarantee the IWO senior bank credit facility will
also be required to guarantee the IWO senior notes. The IWO senior notes
are not guaranteed by Independent Wireless One Realty Corporation, a wholly
owned subsidiary of IWO, or US Unwired and its subsidiaries.
A portion of the original proceeds of the IWO senior notes were used to
purchase a portfolio of U.S. government securities which will generate
sufficient proceeds to make the first six scheduled interest payments on
the IWO Notes through January 2004. The account holding the investment
securities and all of the securities and other items contained in the
account have been pledged to the trustee for the benefit of the holders of
the IWO senior notes.
IWO Senior Bank Credit Facility - $240 million
Effective December 2000, Independent Wireless One Corporation, a wholly
owned subsidiary of IWO, entered into an amended and restated secured
credit facility ("the IWO senior bank credit facility") under which it may
borrow up to $240 million in the aggregate consisting of up to $70 million
in revolving loans and $170 million in term loans. The IWO senior bank
credit facility matures in 2008. The term loans will be repaid in quarterly
installments beginning in March 2004 and the reducing revolver matures in
March 2008. All loans under the IWO senior bank credit facility bear
interest at variable rates tied to the prime rate, the federal funds rate
or LIBOR. The IWO senior bank credit facility is secured by all of the
assets of IWO and its subsidiaries. At March 31, 2003, the Company
11
had $25.2 million of availability under the IWO senior bank credit
facility. However, as mentioned above, the holders of the IWO senior bank
credit facility have a right to deny IWO access to the remaining $25.2
million of availability as a result of the covenant violations. The IWO
credit facility is available for use only by IWO and its subsidiaries.
6. Commitments and Contingencies
The Company's PCS licenses and the PCS licenses that the Company operates
for Sprint PCS are subject to a requirement that the Company construct
network facilities that offer coverage to 25% of the population or have
substantial service in each of its Basic Trading Areas ("BTAs") within five
years from the grant of the licenses. As of March 31, 2003, management
believes that Sprint PCS has met the requirements necessary for the
licenses that the Company operates for Sprint PCS under the Sprint PCS
management agreements and that the Company has met the requirements
necessary for the licenses that it owns.
The Company uses Sprint PCS to process all PCS subscriber billings
including monthly recurring charges, airtime and other charges such as
interconnect fees. The Company pays various fees to Sprint PCS for new
subscribers as well as recurring monthly fees for services performed for
existing customers including billing and management of customer accounts.
Sprint PCS's billing for these services is based upon an estimate of the
actual costs incurred by Sprint PCS to provide such services. At the end of
each calendar year, Sprint PCS compares its actual costs to provide such
services to remittances by the Company for estimated billings and either
refunds overpayments or bills for costs in excess of the payments made.
Based upon information as provided by Sprint PCS, the Company believes it
has adequately provided for the above-mentioned costs in the accompanying
consolidated financial statements. Additionally, Sprint PCS has contracted
with national retailers that sell handsets and service to new PCS
subscribers in the Company's markets. Sprint PCS pays these national
retailers a new subscriber commission and provides handsets to such
retailers below cost. Sprint PCS passes these costs of commissions and the
handset subsidies to the Company.
The Company periodically reviews all charges from Sprint PCS and from time
to time, the Company may dispute certain of these charges. Based upon the
information provided to the Company by Sprint PCS to date, the Company
believes the accompanying condensed consolidated balance sheet adequately
reflects its obligation to Sprint PCS for these charges.
7. Income Taxes
The Company's effective income tax rate for the interim periods presented
is based on management's estimate of the Company's effective tax rate for
the applicable year and differs from the federal statutory income tax rate
primarily due to nondeductible permanent differences, state income taxes
and changes in the valuation allowance for deferred tax assets.
12
8. Stock Compensation
The Company accounts for its stock compensation arrangements under the
provision of APB 25, accounting for stock issued to employees.
Had compensation expense for the Company's stock option plan been
determined in accordance with SFAS No. 123, the company's net loss and
basic and diluted net loss per share of common stock for the three months
ended March 31, 2003 and 2002 would have been:
Three months ended
March 31, 2003 March 31, 2002
-------------- --------------
Net loss:
As reported $ (57,472) $ (28,361)
Add recorded non-cash stock compensation 1,067 1,166
Less non-cash compensation in accordance
with SFAS No. 123 (1,871) (2,200)
-------------- --------------
Pro forma $ (58,276) $ (29,395)
============== ==============
Basic and diluted loss per share:
As reported $ (0.45) $ (0.33)
============== ==============
Pro forma $ (0.45) $ (0.35)
============== ==============
9. Condensed Consolidating Financial Information
As discussed in Note 5, the US Unwired Notes are guaranteed by certain of
the Company's subsidiaries. The following information presents the
condensed consolidating balance sheets as of March 31, 2003 and December
31, 2002 and the condensed consolidating statements of operations and cash
flows for the three ended March 31, 2003 and March 31, 2002 of (a) the
"Parent" Company, US Unwired Inc., (b) the "Guarantors", Unwired Telecom
Corporation and Louisiana Unwired, and (c) the "Non-Guarantor", IWO, and
includes eliminating entries and the Company on a consolidated basis.
The separate consolidated financial statements of IWO, including disclosure
of condensed consolidating financial information for IWO, are included in
IWO's separate Form 10-Q filing.
13
Condensed Consolidating Balance Sheet
As of March 31, 2003
--------------------
US Unwired Louisiana IWO Holdings,
Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
--------- ----------- ----------- ---------- --------------- ------------- ------------
(In thousands)
ASSETS:
Current Assets
Cash and cash equivalents $ 44,343 $ 426 $ 2,487 $ 2,913 $ 26,072 $ --- $ 73,328
Restricted cash --- --- --- --- 30,182 --- 30,182
Subscriber receivables, net --- 1,212 23,195 24,407 10,372 --- 34,779
Other receivables 49 --- 1,801 1,801 621 --- 2,471
Inventory --- 297 4,190 4,487 3,675 --- 8,162
Prepaid expenses and other assets 1,050 140 11,335 11,475 5,600 --- 18,125
Receivables from (payables to)
related parties 1,177 194 (727) (533) 25 41 710
Receivables from officers 86 --- --- --- --- --- 86
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current assets 46,705 2,269 42,281 44,550 76,547 41 167,843
Property and equipment, net 11,235 8,282 265,820 274,102 177,777 --- 463,114
Goodwill and other intangible
assets, net --- --- 72,358 72,358 48,048 --- 120,406
Notes receivable from
unconsolidated affiliates 168,346 29,192 --- 29,192 160 (195,883) 1,815
Other assets 11,119 132 12,026 12,158 16,869 --- 40,146
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total assets $ 237,405 $ 39,875 $ 392,485 $ 432,360 $ 319,401 $ (195,842) $ 793,324
========= =========== =========== ========== =============== ============= ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,057 $ 580 $ 12,147 $ 12,727 $ 10,883 $ --- $ 24,667
Accrued expenses 4,385 800 45,928 46,728 29,352 --- 80,465
Current maturities of long term
debt 34,477 61 168,795 168,856 350,564 (195,709) 358,188
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current liabilities 39,919 1,441 226,870 228,311 390,799 (195,709) 463,320
Long term debt, net of current
maturities 412,473 299 6,711 7,010 --- --- 419,483
Deferred gain --- 132 32,517 32,649 776 --- 33,425
Investments in and advances to
unconsolidated affiliates (41,125) 1,845 72,368 74,213 --- (29,351) 3,737
Stockholders' equity (deficit):
Common stock 1,288 600 --- 600 1 (601) 1,288
Additional paid in capital 660,247 1,347 809,068 810,415 446,449 (1,258,584) 658,527
Retained deficit (835,397) 34,211 (755,049) (720,838) (518,624) 1,288,577 (786,282)
Promissory note --- --- --- --- --- (174) (174)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total stockholder's equity
(deficit) (173,862) 36,158 54,019 90,177 (72,174) 29,218 (126,641)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total liabilities and
stockholders' equity (deficit) $ 237,405 $ 39,875 $ 392,485 $ 432,360 $ 319,401 $ (195,842) $ 793,324
========= =========== =========== ========== =============== ============= ============
14
Condensed Consolidating Balance Sheet
As of December 31, 2002
-----------------------
US Unwired Louisiana IWO Holdings,
Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
--------- ----------- ----------- ---------- --------------- ------------- ------------
(In thousands)
ASSETS:
Current Assets
Cash and cash equivalents $ 23,025 $ 2,605 $ 1,347 $ 3,952 $ 35,008 $ --- $ 61,985
Restricted cash and US
Treasury securities at
amortized cost-held to maturity --- --- --- --- 33,218 --- 33,218
Subscriber receivables, net --- 1,403 34,481 35,884 11,843 --- 47,727
Other receivables 33 1 1,030 1,031 1,597 --- 2,661
Inventory --- 99 2,637 2,736 2,579 --- 5,315
Prepaid expenses and other assets 1,012 63 9,323 9,386 4,679 --- 15,077
Receivables from (payables to)
related parties (1,362) 402 1,307 1,709 320 14 681
Receivables from officers 101 --- --- --- --- --- 101
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current assets 22,809 4,573 50,125 54,698 89,244 14 166,765
Property and equipment, net 11,844 9,031 273,261 282,292 189,878 --- 484,014
Restricted cash --- --- --- --- 8,000 --- 8,000
Goodwill and other intangible
assets, net --- --- 74,736 74,736 55,517 --- 130,253
Notes receivable from
unconsolidated affiliates 187,600 25,609 --- 25,609 174 (211,572) 1,811
Other assets 11,572 108 11,295 11,403 17,612 --- 40,587
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total assets $ 233,825 $ 39,321 $ 409,417 $ 448,738 $ 360,425 $ (211,558) $ 831,430
========= =========== =========== ========== =============== ============= ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,164 $ 1,054 $ 11,089 $ 12,143 $ 14,994 $ --- $ 28,301
Accrued expenses 3,803 816 33,726 34,542 29,320 --- 67,665
Current maturities of long term
debt 28,313 59 188,044 188,103 --- (211,398) 5,018
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current liabilities 33,280 1,929 232,859 234,788 44,314 (211,398) 100,984
Long term debt, net of current
maturities 404,860 310 6,825 7,135 350,207 --- 762,202
Deferred gain --- 107 33,523 33,630 951 --- 34,581
Investments in and advance to
unconsolidated affiliates (88,013) 2,009 35,240 37,249 --- 54,665 3,901
Stockholders' equity (deficit):
Common stock 1,288 600 --- 600 1 (601) 1,288
Additional paid in capital 659,180 1,347 809,067 810,414 446,449 (1,258,584) 657,459
Retained deficit (776,770) 33,019 (708,097) (675,078) (481,497) 1,204,534 (728,811)
Promissory note --- --- --- --- --- (174) (174)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total stockholder's equity
(deficit) (116,302) 34,966 100,970 135,936 (35,047) (54,825) (70,238)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total liabilities and
stockholders' equity (deficit) $ 233,825 $ 39,321 $ 409,417 $ 448,738 $ 360,425 $ (211,558) $ 831,430
========= =========== =========== ========== =============== ============= ============
15
Condensed Consolidating Statement of Operations
Three-month period ended March 31, 2003
---------------------------------------
IWO
Unwired Louisiana Holdings,
US Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
---------- ----------- ----------- ---------- ---------- ------------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 2,925 $ 61,275 $ 64,200 $ 30,073 $ --- $ 94,273
Roaming --- 884 19,676 20,560 7,081 (150) 27,491
Merchandise sales --- 184 4,435 4,619 1,751 --- 6,370
Other revenue 6,550 118 286 404 115 (6,456) 613
---------- ----------- ----------- ---------- ---------- ------------- ------------
Total revenues 6,550 4,111 85,672 89,783 39,020 (6,606) 128,747
Expenses:
Cost of service --- 1,100 33,511 34,611 17,478 (243) 51,846
Merchandise cost sales --- 305 6,674 6,979 2,511 --- 9,490
General and administrative 6,550 596 21,516 22,112 12,978 (6,363) 35,277
Sales and marketing --- 893 16,121 17,014 8,532 --- 25,546
Non-cash stock compensation 935 81 51 132 --- --- 1,067
Depreciation and amortization 654 503 15,630 16,133 13,374 --- 30,161
IWO asset abandonment charge --- --- --- --- 12,403 12,403
---------- ----------- ----------- ---------- ---------- ------------- ------------
Total operating expense 8,139 3,478 93,503 96,981 67,276 (6,606) 165,790
---------- ----------- ----------- ---------- ---------- ------------- ------------
Operating income (loss) (1,589) 633 (7,831) (7,198) (28,256) --- (37,043)
Other income (expense)
Interest income (expense), net (10,149) 325 (1,995) (1,670) (8,871) --- (20,690)
Gain on sale of assets --- 79 2 81 --- --- 81
---------- ----------- ----------- ---------- ---------- ------------- ------------
Total other income (expense) (10,149) 404 (1,993) (1,589) (8,871) --- (20,609)
Equity in income (losses) of
unconsolidated subsidiaries (46,888) 154 (37,127) (36,973) --- 84,041 180
---------- ----------- ----------- ---------- ---------- ------------- ------------
Net income (loss) $ (58,626) $ 1,191 $ (46,951) $ (45,760) (37,127) $ 84,041 $ (57,472)
========== =========== =========== ========== ========== ============= ============
Condensed Consolidating Statement of Operations
Three-month period ended March 31,2002
--------------------------------------
US Unwired Louisiana
Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Entries Consolidated
--------- ----------- ----------- ---------- ------------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 3,415 $ 52,700 $ 56,115 $ --- $ 56,115
Roaming --- 2,913 27,830 30,743 --- 30,743
Merchandise sales --- 143 4,144 4,287 --- 4,287
Other revenue 6,927 124 565 689 (6,691) 925
--------- ----------- ----------- ---------- ------------- ------------
Total revenues 6,927 6,595 85,239 91,834 (6,691) 92,070
Expenses:
Cost of service --- 1,371 38,694 40,065 (90) 39,975
Merchandise cost of sales --- 454 7,536 7,990 --- 7,990
General and administrative 6,927 1,029 24,614 25,643 (6,601) 25,969
Sales and marketing --- 973 20,571 21,544 --- 21,544
Non-cash stock compensation 1,029 82 55 137 --- 1,166
Depreciation and amortization 2,113 557 11,515 12,072 --- 14,185
--------- ----------- ----------- ---------- ------------- ------------
Total operating expense 10,069 4,466 102,985 107,451 (6,691) 110,829
--------- ----------- ----------- ---------- ------------- ------------
Operating loss (3,142) 2,129 (17,746) (15,617) --- (18,759)
Other income (expense)
Interest income (expense), net (8,324) 119 (1,902) (1,783) --- (10,107)
Gain on sale of assets --- --- --- --- --- ---
--------- ----------- ----------- ---------- ------------- ------------
Total other (income) expense (8,324) 119 (1,902) (1,783) --- (10,107)
Equity in income (losses) of
unconsolidated subsidiaries (19,961) 178 --- 178 20,288 505
--------- ----------- ----------- ---------- ------------- ------------
Net income (loss) $ (31,427) $ 2,426 $ (19,648) $ (17,222) $ 20,288 $ (28,361)
========= =========== =========== ========== ============= ============
16
Condensed Consolidating Statement of Cash Flows
Three-month period ended March 31, 2003
---------------------------------------
IWO
US Unwired Louisiana Holdings,
Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
--------- ----------- ----------- ---------- --------- ------------- ------------
(In thousands)
Cash flows from operating activities:
Net cash provided by (used in) operating
activities $ (1,395) $ 1,077 $ 25,669 $ 26,746 $ (15,392) $ --- $ 9,959
Cash flows from investing activities:
Proceeds from restricted cash --- --- --- --- 11,035 --- 11,035
Proceeds from the sale of assets --- 350 --- 350 --- --- 350
Payments for the purchase of equipment (52) (31) (5,167) (5,198) (4,579) --- (9,829)
Disbursement of intercompany note 19,254 (3,565) --- (3,565) --- (15,689) ---
--------- ----------- ----------- ---------- --------- ------------- ------------
Net cash provided by (used in) investing
activities 19,202 (3,246) (5,167) (8,413) 6,456 (15,689) 1,556
Cash flows from financing activities:
Principal payments of long-term debt (833) (10) (31,363) (31,373) --- 32,034 (172)
Proceeds from long-term debt 4,345 --- 12,000 12,000 --- (16,345) ---
--------- ----------- ----------- ---------- --------- ------------- ------------
Net cash provided by (used in) activities 3,512 (10) (19,363) (19,373) --- 15,689 (172)
--------- ----------- ----------- ---------- --------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents 21,319 (2,179) 1,139 (1,040) (8,936) --- 11,343
Cash and cash equivalents at beginning of
period 23,025 2,605 1,347 3,952 35,008 --- 61,985
--------- ----------- ----------- ---------- --------- ------------- ------------
Cash and cash equivalents at end of period $ 44,344 $ 426 $ 2,486 $ 2,912 $ 26,072 $ --- $ 73,328
========= =========== =========== ========== ========= ============= ============
17
Condensed Consolidating Statement of Cash Flows
Three-month period ended March 31, 2002
---------------------------------------
US Unwired Louisiana
Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Entries Consolidated
--------- ----------- ----------- ---------- ------------- ------------
(In thousands)
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $ 56 $ 3,965 $ (3,172) $ 793 $ 2,564 $ 3,413
Cash flow from investing
activities:
Payments for the purchase of
equipment
(1,113) (531) (37,614) (38,145) --- (39,258)
Acquisition of business, net of
cash acquired (55,437) --- 2,736 2,736 (2,564) (55,265)
Proceeds from the sale of assets --- --- 10,016 10,016 --- 10,016
Disbursement of intercompany note (37,900) (4,250) --- (4,250) 42,150 ---
--------- ----------- ----------- ---------- ------------- ------------
Net cash provided by (used in)
investing activities (94,450) (4,781) (24,862) (29,643) 39,586 (84,507)
Cash flows from financing activities:
Proceeds from long-term debt 44,250 --- 37,900 37,900 (42,150) 40,000
Proceeds from stock options
exercised 167 --- --- --- --- 167
Principal payments of long-term
debt (53) (14) (104) (118) --- (171)
Debt issuance costs (763) --- --- --- --- (763)
--------- ----------- ----------- ---------- ------------- ------------
Net cash provided by (used in)
activities 43,601 (14) 37,796 37,782 (42,150) 39,233
--------- ----------- ----------- ---------- ------------- ------------
Net increase (decrease) in cash
and cash equivalents (50,793) (830) 9,762 8,932 --- (41,861)
Cash and cash equivalents at
beginning of period 79,184 4,418 16,987 21,405 --- 100,589
--------- ----------- ----------- ---------- ------------- ------------
Cash and cash equivalents at end
of period $ 28,391 $ 3,588 $ 26,749 $ 30,337 $ --- $ 58,728
========= =========== =========== ========== ============= ============
10. Subsequent Events
The Company announced on May 15, 2003 that it intends to offer to exchange
any and all of its existing US Unwired 13.375% $400 million senior
subordinated discount notes due November 1, 2009 for $187.50 in cash and
$185 in new senior notes per $1,000 principal amount of its existing US
Unwired notes. The new notes to be issued in the offer will be 13.375%
senior notes due on November 3, 2009 (or, in certain circumstances, on
November 1, 2008).
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plans,
construction schedules, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-looking
statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the risk factors
described elsewhere, specific factors that might cause such a difference
include, but are not limited to (i) our ability to integrate operations and
finance future growth opportunities; (ii) our dependence on Sprint PCS; (iii)
our ability to expand our Sprint PCS network or to upgrade the Sprint PCS
network to accommodate new technologies; (iv) limited operating history in the
PCS market and anticipation of future losses; (v) potential fluctuations in
operating results; (vi) changes or advances in technology; (vii) changes in law
or government regulation; (viii) competition in the industry and markets in
which we operate; (ix) future acquisitions; (x) our ability to attract and
retain skilled personnel; (xi) our dependence on contractor and consultant
services, network implementation and information technology support; (xii) our
potential inability to expand the services and related products we provide in
the event of substantial increases in demand in excess of supply for network and
handset equipment and related services and products; (xiii) the availability at
acceptable terms of sufficient funds to pay for our business plans; (xiv)
changes in labor, equipment and capital costs; (xv) any inability to comply with
the indentures that govern our senior notes or credit agreements; (xvi) changes
in management; and (xvii) general economic and business conditions.
You should not rely too heavily on any forward-looking statement. We cannot
assure you that our forward-looking statements will prove to be correct. We have
no obligation to update or revise publicly any forward-looking statement based
on new information, future events or otherwise. This discussion should be read
in conjunction with our financial statements included in this report and with
the Risk Factors included in this report under Item 5 Other Information, and
with the financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations that are included in the Form 10-K
for US Unwired Inc. for the year ended December 31, 2002, filed on March 31,
2003 with the Securities and Exchange Commission ("SEC") and with the financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Form 10-K for IWO Holdings, Inc. for the year ended
December 31, 2002, filed on March 31, 2003 with the SEC.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
activation fee revenues and related expense, revenue recognition of credit
challenged subscribers, contract cancellation fees, inventory reserves,
intangible assets and contingencies. We base our estimates on our historical
experience, the historical experience of Sprint PCS and the historical
experience of other Sprint PCS affiliates and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may vary from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements.
19
Reliance on Sprint PCS Processing
We rely on Sprint PCS for much of our financial reporting information including:
revenues; commissions paid to national retailers; fees paid for customer care
and billing; roaming revenue and roaming expense on the Sprint PCS and Sprint
PCS affiliate network; and, the maintenance of accounts receivable, including
cash collections and the write off of customer balances that are not collectible
and the accuracy of our accounts receivable balance. Based upon the timing of
the information received from Sprint PCS, we make certain assumptions that the
information is accurate and that it is consistent with historical trends. We
also rely upon the evaluation of internal controls as performed by Sprint PCS's
external auditors that were performed in accordance with AICPA Statement on
Auditing Standards (SAS) No. 70.
Bad Debt Expense
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of subscribers to make payments. If the financial conditions of
our subscribers deteriorate, resulting in the subscribers' inability to make
payments, additional allowances will be required.
We estimate our allowance by examining the components of our revenue. We
establish a general reserve of all accounts receivable that are estimated to be
uncollectible. In addition, we do not recognize 100% of our late fees or
cancellation fees as revenue because of high uncertainty of the collectibility
of these amounts. Reserves for these amounts are recorded to our allowance for
doubtful accounts. Our evaluation of the adequacy of these amounts includes our
own historical experience and discussions with Sprint PCS and other Sprint PCS
affiliates.
Revenue Recognition
We recognize only a portion of contract cancellation fees billed to subscribers
that disconnect service prior to fulfilling the contractual length of service,
as there is significant uncertainty that all contract cancellation fees that are
billed will be collected. We have very limited information at a detail level
sufficient to perform our own evaluation and rely on Sprint PCS historical
trending to make our estimates. If the collections on contract cancellation fees
are less than that recognized, additional allowances may be required.
We recognize only a portion of late fees billed to subscribers that fail to pay
their bills within the required payment period, as there is no assurance that
all late fees that are billed will be collected. We have very limited
information at a detail level sufficient to perform our own evaluation and rely
on Sprint PCS historical trending to make our estimates. If the collections on
late fees are less than that recognized, additional allowances may be required.
We defer revenues collected for activation fees over the estimated life of the
subscriber relationship, which we believe to be 15-24 months, based upon our
historical trends of average customer lives and discussions with Sprint PCS. We
also defer an activation expense in an amount equal to the activation fee
revenue and amortize this expense in an amount equal to the activation fee
revenue over the life of the subscriber relationship. If the estimated life of
the subscriber relationship increases or decreases, the amounts of deferred
revenue and deferred expense will be adjusted over the revised estimated life of
the subscriber relationship.
Inventory Reserves
We review our inventory quarterly and write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
necessary.
20
Accrued Commissions
We accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both a commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. We base our accruals on
information provided by Sprint PCS on subscriber additions and recognize that
there are typically timing differences between the point of subscriber
activation and the time that we are invoiced for commissions by Sprint PCS. We
periodically and annually evaluate the adequacy of our accruals through analysis
of historical information and discussions with Sprint PCS. Depending on the
level of sales and other factors, our estimates of the amounts accrued for
commissions and other costs owed to such retailers may require modification of
our previous estimates.
Goodwill and Intangible Assets Impairment Analysis
We perform impairment tests of goodwill and indefinite lived assets as required
by Statements of Financial Accounting Standards No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. The impairment analysis
requires numerous subjective assumptions and estimates to determine fair value
of the respective reporting units as required by FAS No. 142. Depending on level
of sales, our liquidity and other factors, we may be required to recognize
impairment charges in the future.
Overview
Through our subsidiaries, Louisiana Unwired LLC ("LA Unwired") and IWO Holdings,
Inc. ("IWO), we provide wireless personal communication services, commonly
referred to as PCS in all or some portion of Louisiana, Texas, Florida,
Arkansas, Mississippi, Georgia, Alabama, New York, New Hampshire, Vermont and
portions of Massachusetts and Pennsylvania. We are a network partner of Sprint
PCS, the personal communications services group of Sprint Corporation. Sprint
PCS, directly and through affiliates like us, provides wireless services in more
than 4,000 cities and communities across the country. We have the exclusive
right to provide digital PCS services under the Sprint(R) and Sprint PCS(R)
brand names in our service area which is among the largest in population and
subscribers of all of the Sprint PCS network partners and is contiguous with
Sprint PCS's launched markets.
Liquidity and Capital Resources
US Unwired Inc. ("US Unwired" or "us" or "we" or "our") has a senior bank credit
facility and senior subordinated discount notes. IWO has a senior bank credit
facility and senior notes. US Unwired and IWO entered into these prior to our
acquisition of IWO on April 1, 2002. Under the terms of these debt instruments,
funds available under the US Unwired debt can only be used by US Unwired, and
funds available under the IWO debt can only be used by IWO. US Unwired is not
obligated for the payment of IWO's debt, and IWO is not obligated for the
payment of US Unwired's debt.
US Unwired Liquidity
As of March 31, 2003, US Unwired had $47.3 million in cash and cash equivalents;
availability under the US Unwired senior bank credit facility of $73.2 million:
and, indebtedness that consisted of $90.0 million related to the US Unwired
senior bank credit facility, $326.0 million related to the US Unwired senior
subordinated discount notes and $11.1 million in capital leases, promissory
notes and vendor financing for a total of $427.1 million.
Given US Unwired's current business model, we believe US Unwired will have
sufficient cash to funds its operations, debt service and capital requirements
in 2003. US Unwired must comply with certain financial and operating covenants
of the US Unwired senior bank credit facility and the US Unwired senior
subordinated discount notes, and as of March 31, 2003, was in compliance with
these restrictive covenants. However, our current business model indicates that
we will fail to comply certain financial covenants of the US Unwired senior bank
credit facility in 2003. We have initiated discussions with the US Unwired
banking group to amend these financial covenants. However, there can be no
assurance that we will be
21
able to successfully negotiate these amendments on terms acceptable to us.
Should acceptable amendments not be made, the banking group may elect to deny us
access to the remaining available funds under the US Unwired senior bank credit
facility. Under such circumstances, we believe that we will have sufficient cash
to fund operations, debt service and capital requirements in 2003 without
additional borrowing. The banking group may also elect to accelerate repayment
of the US Unwired senior bank credit facility. Under such circumstances, this
acceleration will serve to trigger a default in the US Unwired senior
subordinated discount notes. Should this occur, both the holders of the US
Unwired senior bank credit facility and US Unwired senior subordinated discount
notes may demand immediate payment for all outstanding indebtedness, and we
would be unable to pay the accelerated amount.
We have received notice from Nasdaq that our common stock was delisted from the
Nasdaq National Market effective with the open of business on May 8, 2003 and
immediately eligible for quotation on the Nasdaq Over the Counter Bulletin Board
with the open of business on May 8, 2003.
We announced on May 15, 2003 that we intend to offer to exchange any and all of
our existing US Unwired 13.375% $400 million senior subordinated notes due
November 9, 2009 for $187.50 in cash and $185 in new senior notes per $1000
principal amount of our existing US Unwired notes. The new notes to be issued in
the offer will be 13.375% senior notes due on November 3, 2009 (or, in certain
circumstances, on November 1, 2008).
IWO Liquidity
We have been unable to develop a business plan for IWO that provides sufficient
liquidity in 2003, and we have engaged in discussions with the holders of the
IWO senior bank credit facility and the holders of the IWO senior notes
regarding the restructuring of IWO.
As of March 31, 2003, IWO had $26.1 million in cash and cash equivalents and
$30.2 million in restricted cash; availability in revolving loans under our
senior bank credit facility was $25.2 million; and indebtedness that consisted
of $213.2 million related to the IWO senior bank credit facility and $137.4
million related to the IWO senior notes for a total of $350.6 million. A portion
of the original proceeds of the IWO senior notes offering was set aside as
restricted cash to make the first six scheduled interest payments on the IWO
senior notes through January 2004. Repayment of the IWO senior bank credit
facility commences in March 2004.
IWO was not in compliance with all restrictive covenants under the IWO senior
bank credit facility at March 31, 2003, and as a result of these covenant
violations, was in default of the IWO senior bank credit facility at March 31,
2003. The holders of the IWO senior bank credit facility have the right to deny
IWO access to the remaining $25.2 million of availability. Without the remaining
$25.2 million, IWO will not have sufficient liquidity through 2003. We are in
discussions with the IWO banking group and IWO note holders to arrive at an
acceptable restructuring to preserve IWO liquidity. IWO, holders of the IWO
senior bank credit facility and holders of the IWO senior notes have all
retained advisors to assist in evaluating alternatives for IWO.
A default under the IWO senior bank credit facility does not result in IWO being
in default under the IWO senior notes. Should IWO be unable to amend the IWO
senior bank credit facility or obtain waivers for any violated restricted
covenants, the holders of IWO senior bank credit facility can in restrict any
remaining future borrowing capacity and accelerate repayment of the IWO senior
bank credit facility. Should the holders of IWO senior bank credit facility
accelerate repayment, that acceleration will serve to trigger a default in the
IWO senior notes. Should this occur, both the holders of the IWO senior bank
credit facility and the holders of the IWO senior notes may demand immediate
payment of all outstanding indebtedness. If the indebtedness is accelerated, IWO
does not have sufficient cash to repay its indebtedness. As a result, IWO would
be forced to seek protection under bankruptcy.
As a result of liquidity challenges, IWO has made the decision to reduce capital
expenditures for network expansion. With the assistance of IWO's advisors, IWO
believed that it did not have sufficient liquidity, at this time, to complete
all cell sites under construction as of March 31, 2003. As a result, IWO has
elected
22
to abandon the construction of cell sites that do not provide a sufficient level
of enhanced coverage. IWO recorded an asset abandonment charge of $12.4 million
during the three-month period ended March 31, 2003 for the cell sites and the
related property leases of these abandoned cell sites. Included in this asset
abandonment charge are cell sites that IWO is required to construct to meet the
build out requirements under the IWO Sprint management agreement. Failure to
complete the build out of the IWO service area will place IWO in violation of
the IWO Sprint management agreement. As a result, Sprint PCS could declare IWO
in default and take action up to and including termination of the IWO Sprint PCS
management agreement. At March 31, 2003, IWO construction in progress included
$13.6 million related to cell sites that IWO plans to complete, and we estimate
that completion of these cell sites will require approximately $10.9 million in
additional construction costs to complete construction and place these sites in
operation. IWO anticipates that only a portion of these sites will be completed
in 2003.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to IWO. Further, IWO creditors,
IWO lenders and IWO note holders cannot place any liens or encumbrances on the
assets of US Unwired. Should the holders of the IWO's senior bank credit
facility place IWO in default, US Unwired's relationship with IWO may change and
several alternatives exist ranging from working for the holders of the IWO
senior bank credit facility and the holders of the IWO senior notes as a manager
of the IWO territory, subject to the approval by Sprint PCS, to no involvement
with IWO at all.
Considering the covenant violations and the actions that may result from such
covenant violations and the operating losses incurred to date, there is
substantial doubt about IWO's ability to continue as a going concern.
Our Business Strategy
We are undertaking a number of key initiatives designed to enable US Unwired to
continue as a going concern. The following represents some of our key strategic
initiatives for 2003:
. We have reinstated a deposit requirement for higher credit risk
subscribers and will request not to participate in any Sprint PCS
programs where our analysis indicates adversely impacted levels of
customer turnover or unsatisfactory economic returns.
. We have restructured our sales employees' programs to pay higher
commissions on subscribers with better credit ratings.
. We have revised our local agent commission structure. We no longer
offer handset discounts to local agents and instead pay higher
commissions for subscribers with good credit ratings. We have
cancelled and continue to cancel agreements with local agents that
continue to target higher risk subscribers or provide low economic
value.
. We have reintroduced our pre-pay program, which requires advance
payment for minutes of use. We believe that this program offers higher
credit risk subscribers a less stressful environment in which to
subscribe to our service. We believe that there is a lower
susceptibility for this credit class of subscribers to churn than with
a post-pay program, and this service allows these subscribers to
better manage their expenditures for the service provided.
. We now supplement Sprint PCS's customer service function with certain
of our own staff that focuses on subscriber retention.
. We are continuing to limit capital expenditures to: (1) capacity and
required technical upgrades of existing equipment, and (2) only adding
additional cell site coverage in areas that we expect will produce
ositive cash returns as a result of either new subscriber growth or
decreases in subscriber turnover.
. We are continuing to divest of certain non-core assets.
. We have undertaken a corporate wide evaluation of expenses. This
includes the consolidation of functions, divesting of unused and under
utilized facilities, renegotiation of vendor contracts, extension of
vendor payment terms and other cost cutting measures.
23
. We have evaluated and continue to evaluate our markets and reduce
sales staffing levels and closing retail outlets that do not meet
minimum internal rates of returns.
. We continue to work with Sprint PCS to improve the detail, timeliness
and accuracy of information processed by Sprint PCS on our behalf.
While we believe that these initiatives will have a positive impact on operating
results, we cannot state with certainty that these initiatives will result in
our ability to sustain operations beyond or even to the end of 2003, given the
information as discussed above regarding our indebtedness.
Cash Flows
Net cash provided by operating activities during the three-month period ended
March 31, 2003 was $10.0 million. Net cash provided by investing activities
during the three-month period ended March 31, 2003 was $1.6 million and included
$11.0 million in proceeds of restricted cash and $350,000 in proceeds from the
sale of assets offset by $9.8 million for capital expenditures. Cash used in
financing activities during the three-month period ended March 31, 2003 was
$172,000 and represented principal repayment of long-term debt.
Three-Month Period Ended March 31, 2003 Compared to the Three-Month Period Ended
March 31, 2002
Results of Operations
The wireless telecommunications industry uses terms such as subscriber
additions, average revenue per user, churn and cost per gross addition as
performance measurements or metrics. None of these terms are measures of
financial performance under accounting principles generally accepted in the
United States. When we use these terms, they may not be comparable to similar
terms used by other wireless telecommunications companies.
Subscriber Additions
As of March 31, 2003, we provided personal communication services to 584,200
customers as compared to 350,300 customers at March 31, 2002, an increase of
233,900 subscribers. The number of new subscribers includes 169,200 subscribers
that joined us on April 1, 2002 as a result of our acquisition of IWO. In the
three-month period ended March 31, 2003, we added an additional 25,600
subscribers in all markets. We provided network coverage in an area comprising
approximately 12.7 million residents out of approximately 17.6 million total
residents or 72% of the people in our service area. The number of people in our
service area does not represent the number of Sprint PCS subscribers that we
expect to have in our service area.
We also provide cellular and paging services in parts of Louisiana through our
wholly owned subsidiary, Unwired Telecom Corporation ("Unwired Telecom"). As of
March 31, 2003, we had approximately 26,400 cellular and 7,700 paging
subscribers as compared to 32,000 cellular and 12,000 paging subscribers at
March 31, 2002. We expect our cellular and paging subscribers to decline.
Subscriber and Roaming Revenue
Subscriber revenue consists primarily of a basic service plan (where the
customer purchases a pre-allotted number of minutes for voice and/or data
transmission); airtime (which consists of billings for minutes that either
exceed or are not covered by the basic service plan); long distance; and charges
associated with travel outside our service area.
Roaming revenue consists primarily of Sprint PCS travel revenue and foreign
roaming revenue. Sprint PCS travel revenue is generated on a per minute basis
when a Sprint PCS subscriber outside of our markets uses our service when
traveling through our markets. Foreign roaming revenue is generated when a
non-Sprint PCS customer uses our service when traveling through our markets.
24
Under our agreements with Sprint PCS, we believe that Sprint PCS can change the
travel rate within certain limitations that we receive and pay for each Sprint
PCS travel minute after December 31, 2002. Effective January 1, 2003, Sprint PCS
reduced the reciprocal travel rate for Louisiana Unwired from $0.20 per minute
in 2002 to $0.058 per minute in 2003 and for Texas Unwired and Georgia PCS
Management Inc. ("Georgia PCS"), both subsidiaries of LA Unwired, and IWO from
$0.10 per minute in 2002 to $0.058 per minute in 2003. While we believe that
this reduction is not in accordance with our management agreements with Sprint
PCS, we are reviewing our options, but our recourses against Sprint PCS for this
reduction may be limited. Currently the fees that we receive from Sprint PCS for
Sprint PCS's subscribers using our network exceeds those that we pay to Sprint
PCS for our subscribers using Sprint PCS's network. For the three-month period
ended March 31, 2003, the change in the travel rate has resulted in
approximately a $29.6 million decrease to our revenues, a $23.5 million decrease
to our expenses and a $6.1 decrease to our net travel position, which is the
difference between travel revenue and travel expense, increased our net loss by
$6.1 million and decreased our cash flow from operations by $6.1 million.
Average Revenue per User
Average revenue per user ("ARPU") is the average monthly service revenue per
user (subscriber) and is calculated by dividing total subscriber revenue for the
period by the average number of subscribers during the period. ARPU not
including roaming was $53.68 for the three-month period ended March 31, 2003 as
compared to $59.10 for the three-month period ended March 31, 2002. The decrease
was primarily due to a decrease in charges for minutes over plan caused by the
increase in the number of minutes that are included in basic service plans.
Churn
Churn is the monthly rate of customer turnover expressed as a percentage of our
overall average customers for the reporting period. Customer turnover includes
both customers that elected voluntarily to not continue using our service and
customers that were involuntarily terminated from using our service because of
non-payment. Churn is calculated by dividing the sum of (i) the number of
customers that discontinue service; (ii) less those customers discontinuing
their service within 30 days of their original activation date; and, (iii)
adding back those customers that reactivate their service, by our overall
average customers for the reporting period. Churn was unchanged at 3.7% for the
three-month periods ended March 31, 2003 and March 31, 2002.
Cost per Gross Addition
Cost per gross addition ("CPGA") summarizes the average cost to acquire all
customers during the reporting period. CPGA is computed by adding selling and
marketing expenses, cost of equipment and activation costs and reducing the
amount by the revenue from handset and accessory sales. The net amount is
divided by the number of total new subscribers added for the period. CPGA was
$297 for the three-month period ended March 31, 2003 as compared to $336 for the
three-month period ended March 31, 2002. The decrease in CPGA was primarily due
to a decrease in commissions and handset subsidies.
Revenues
Three-month period ended March 31,
2003 2002
--------- ---------
(In thousands)
Subscriber revenues $ 94,273 $ 56,115
Roaming revenues 27,491 30,743
Merchandise sales 6,370 4,287
Other revenues 613 925
--------- ---------
Total revenues $ 128,747 $ 92,070
========= =========
25
Subscriber revenues
Total subscriber revenues were $94.3 million for the three-month period ended
March 31, 2003 as compared to $56.1 million for the three-month period ended
March 31, 2002, representing an increase of $38.2 million and was primarily the
result of an increase in subscribers as discussed in Subscriber Additions above.
Roaming revenues
Roaming revenues were $27.5 million for the three-month period ended March 31,
2003 as compared to $30.7 million for the three-month period ended March 31,
2002, representing a decrease of $3.2 million and was primarily the result of
our April 1, 2002 acquisition of IWO that added $7.1 million in roaming revenue,
an increase of $12.4 million related to a higher volume of PCS subscribers
traveling though our service area and an increase of $2.6 million related to
non-Sprint PCS subscribers traveling through our service area offset by a
decrease of $25.3 million related to our decrease in the reciprocal roaming rate
as discussed in Subscriber and Roaming Revenue above. We provided service in 68
PCS markets at March 31, 2003 as compared to 49 PCS markets at March 31, 2002.
We continue to add cell sites in locations that we believe will enhance service
and increase roaming revenue.
Merchandise sales
Merchandise sales were $6.4 million for the three-month period ended March 31,
2003 as compared to $4.3 million for the three-month period ended March 31,
2002, representing an increase of $2.1 million of which $1.8 million related to
our IWO acquisition. The cost of handsets typically exceeds the amount received
from our subscribers because we subsidize the price of handsets to remain
competitive in the marketplace.
Other revenues
Other revenues were $.6 million for the three-month period ended March 31, 2003
as compared to $.9 million for the three-month period ended March 31, 2002,
representing a decrease of $.3 million and was primarily attributable to a
decrease in management services provided to related companies and a decrease in
interconnect revenues.
Operating Expenses
Three-month period ended March 31,
2003 2002
---------- ----------
(In thousands)
Cost of service $ 51,846 $ 39,975
Merchandise cost of sales 9,490 7,990
General & administrative 35,277 25,969
Sales & marketing 25,546 21,544
Non-cash stock compensation 1,067 1,166
Depreciation & amortization 30,161 14,185
IWO asset abandonment charge 12,403 ---
---------- ----------
Total operating expenses $ 165,790 $ 110,829
========== ==========
Cost of service
Cost of service was $51.8 million for the three-month period ended March 31,
2003 as compared to $40.0 million for the three-month period ended March 31,
2002, representing an increase of $11.8 million, that was primarily related to
our April 1, 2002 acquisition of IWO that added $17.5 million in cost of service
and a $1.5 million increase in new cell site lease expenses and escalators of
existing leases, offset by an $8.0 million decrease in roaming expense. The
overall decrease in roaming expense consisted of an
26
increase of $10.5 million related to a higher volume of our subscribers
traveling though other Sprint PCS and Sprint PCS affiliate service areas and an
increase of $1.3 million related to our subscribers using non-Sprint PCS service
area, offset by a decrease of $19.8 million related to our decrease in the
roaming revenue rate as discussed in Subscriber and Roaming Revenue above.
Merchandise cost of sales
Merchandise cost of sales was $9.5 million for the three-month period ended
March 31, 2003 as compared to $8.0 million for the three-month period ended
March 31, 2002, representing an increase of $1.5 million and primarily related
to our April 1, 2002 acquisition of IWO that added $1.8 million of merchandise
cost of sales. The cost of handsets typically exceeds the amount received from
our subscribers because we subsidize the price of handsets to remain competitive
in the marketplace. This subsidy continues to increase to remain competitive.
General and administrative expenses
General and administrative expenses were $35.3 million for the three-month
period ended March 31, 2003 as compared to $26.0 million for the three-month
period ended March 31, 2002, representing an increase of $9.3 million that was
primarily related to our April 1, 2002 acquisition of IWO that added $13.0
million of general and administrative expense in the three-month period ended
March 31, 2003 offset by a $3.7 million decrease in bad debt expense.
Sales and marketing expenses
Sales and marketing expenses were $25.5 million for the three-month period ended
March 31, 2003 as compared to $21.5 million for the three-month period ended
March 31, 2002, representing an increase of $4.0 million that primarily related
to our April 1, 2002 acquisition of IWO that added $8.5 million of selling and
marketing expense in the three-month period ended March 31, 2003 offset by
decreases in advertising of $1.3 million, agent commissions of $1.9 million and
handset subsidies of $1.7 million. We have revised our local agent commission
structure and no longer offer handset discounts to our local agents but instead
pay higher commissions for subscribers with good credit ratings.
Non-cash stock compensation
Non-cash compensation was $1.1 million for the three-month period ended March
31, 2003 as compared to $1.2 million for the three-month period ended March 31,
2002, representing a decrease of $0.1 million. The non-cash stock compensation
consists of compensation expense related to the granting of certain stock
options for the Company's stock in July 1999 and January 2000 with exercise
prices less than the market value of the Company's stock at the date of the
grant and the impact of the stock options granted in connection with the IWO
acquisition. The non-cash stock compensation expense is generally being
amortized over a four-year period representing the vesting periods of the
options.
Depreciation and amortization expense
Depreciation and amortization expense was $30.2 million for the three-month
period ended March 31, 2003 as compared to $14.2 million for the three-month
period ended March 31, 2002, representing an increase of $16.0 million. Net
property and equipment increased to $463.1 million at March 31, 2003, which
includes $184.7 million from our April 1, 2002 acquisition of IWO, from $286.6
million at March 31, 2002. Our April 1, 2002 acquisition of IWO added $5.9
million of depreciation and $7.5 million of amortization expense related to the
Sprint management agreement and subscriber base in the three-month period ended
March 31, 2003. The remaining $2.6 million related to increased depreciation
related to capital asset additions at LA Unwired and amortization related to the
Sprint management agreement and subscriber base of our March 8, 2002 acquisition
of Georgia PCS.
27
IWO asset abandonment charge
As discussed in Liquidity above, we recorded a $12.4 million write off of
construction in progress and related lease expense due to abandoned cell site
construction at IWO.
Other Income/(Expense)
Three-month period ended March 31,
2003 2002
--------- ----------
(In thousands)
Interest expense $ (21,313) $ (10,512)
Interest income 623 405
Gain on sale of assets 81 ---
-- ---
---------- ----------
Total other expense $ (20,609) $ (10,107)
========== ==========
Interest expense was $21.3 million for the three-month period ended March 31,
2003 as compared to $10.5 million for the three-month period ended March 31,
2002, representing an increase of $10.8 million. The increase in interest
expense resulted from the increase in outstanding debt. Our outstanding debt,
including current maturities, was $777.7 million at March 31, 2003, which
includes $350.6 million from our April 1, 2002 acquisition of IWO, as compared
to $388.2 million at March 31, 2002.
Interest income was $.6 million for the three-month period ended March 31, 2003
as compared to $.4 million for the three-month period ended March 31, 2002,
representing an increase of $.2 million. The increase was primarily due more
cash and cash equivalents available for investment.
Gain on sale of assets was $81,000 for the three-month period ended March 31
2003 as compared to $0 for the three-month period ended March 31, 2002. The
three-month period ended March 31, 2003 gain relates to a real estate sale.
Seasonality
Like the wireless communications industry in general, there is an increase in
subscriber additions in the fourth quarter due to the holiday season. A greater
number of phones sold at holiday promotional prices causes our losses on
merchandise sales to increase. Our sales and marketing expenses increase also
with holiday promotional activities. We generally have the weakest demand for
new wireless services during the summer. We expect these trends to continue
based on historical operating results.
Item 4. Controls and Procedures
In March 2003, an evaluation was performed under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as the evaluation date. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation date.
Part II
Item 5. Other Information
OUR SECURITY HOLDERS AND PERSONS WHO ARE CONSIDERING AN INVESTMENT IN OUR
SECURITIES SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, IN ADDITION TO THE
FACTORS DESCRIBED ELSEWHERE.
The risk factors described below are qualified and supplemented in their
entirety by the discussions in Note 3 to the condensed consolidated financial
statements included herein and in Item 2 (Management's
28
Discussion and Analysis of Financial Condition and Results of Operations) under
the captions "Overview" and "Liquidity." These items contain important
disclosures related to our and IWO Holdings, Inc.'s current liquidity, debt,
relationship with Sprint PCS and constraints on our business in the current
environment. An adequate understanding of near term risks facing us requires
consideration of the referenced discussions.
Introduction
In this section, "we" and "our" and the noun "combined company" refer
collectively to US Unwired and all of its subsidiaries. We use "US Unwired" to
refer just to our parent company without reference to its subsidiaries. "LA
Unwired" refers collectively to our subsidiaries Louisiana Unwired, LLC, Texas
Unwired general partnership, and Georgia PCS Management, L.L.C., unless the
context of the reference indicates otherwise.
An extremely brief overview introduces each of the subsections below. We think
the overview captures the gist of the subsection, but it is not a substitute for
reading the entire subsection.
Risks Related to Our Stock Price
Overview of this subsection:
Overview of this subsection: Our stock price has not been stable. Many
additional shares have become freely tradable in the public market. This may
cause our stock price to continue to fall. Our common stock was delisted from
the Nasdaq National Market effective May 8, 2003 and since then it has been
traded on the Nasdaq Over the Counter ("OTC") Bulletin Board.
The stock price of US Unwired may continue to be volatile.
The market price of our common stock could be subject to wide fluctuations in
response to factors such as the following, some of which are beyond our control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities
analysts and investors;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
. changes in our relationship and that of other Sprint PCS affiliates
with Sprint PCS;
. announcements by Sprint PCS or Sprint PCS affiliates concerning
developments or changes in its business, financial condition or
results of operations, or in its expectations as to future financial
performance;
. actual or potential defaults in bank covenants by Sprint PCS or Sprint
PCS affiliates, which may result in a perception that we are unable to
comply with our bank covenants;
. announcements of technological innovations or new products and
services by Sprint PCS or our competitors;
. changes in results of operations, market valuations and investor
perceptions of Sprint PCS, Sprint PCS affiliates or of other companies
in the telecommunications industry in general and the wireless
industry in particular, including our competitors;
. departures of key personnel;
. changes in laws and regulations;
. significant claims or lawsuits;
29
. the large number of US Unwired shares that can freely be sold in the
public market, as described under the following italicized heading;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
. general economic and competitive conditions.
The number of shares of our common stock that is freely tradable in the public
market increased substantially after November 22, 2002. Sales of unusually large
numbers of shares of our common stock in the public market, or the perception
that such sales could occur, could further depress our stock price.
We issued approximately 44,400,000 additional shares of our common stock when we
acquired Georgia PCS and IWO in March and April 2002 through two mergers, and we
agreed to issue about another 6,900,000 shares upon the exercise of warrants and
options that we assumed from IWO. Before November 22, 2002, most of these shares
were not freely tradable in the public market because of the combined effect of
restrictions under federal securities laws and of agreements, called lock up
agreements that we obtained from the holders not to sell shares before specified
dates. The restrictions imposed by federal securities laws on sales of these
shares terminated on November 22, 2002, which was the effective date of the
registration statement that we were required to file to register certain of
those shares for resale. On March 28, 2003, all remaining shares that were then
still subject to the lock up agreements, equal to about 1,080,000, shares became
freely tradable.
The market price of our common stock could be depressed if the holders of shares
that have become freely tradable sell them or if the market perceives that they
intend to sell them. We cannot predict whether future sales of our common stock
or the availability of our common stock for sale will adversely affect the
market price for our common stock.
We rely on Sprint PCS for a substantial amount of our financial information. If
that information is not accurate, the investment community could lose confidence
in us.
Under our agreements with Sprint PCS, it performs our billing, manages our
accounts receivable and provides a substantial amount of financial data about
our accounts. We use that information to calculate our financial results and to
prepare our financial statements. If we later find errors in that information,
we may be required to restate our financial statements. If that occurs with
respect to us or any other Sprint PCS affiliate, investors and securities
analysts may lose confidence in us. In fact, we and Sprint PCS have discovered
billing and other errors or inaccuracies that could be material to us. If we are
required to make adjustments to our financial statements as a result of these
inaccuracies that could negatively affect the investment community's perception
of us. For more information about these inaccuracies, please see the section of
these Risk Factors entitled "Risks Particular to the Our Relationship with
Sprint PCS."
We have received notice from Nasdaq that our common stock was delisted from the
Nasdaq National Market effective with the open of business on May 8, 2003 and is
now quoted on the Over the Counter ("OTC") Bulletin Board with the open of
business on May 8, 2003.
Our common stock was delisted from the Nasdaq National Market effective May 8,
2003 and is now quoted on the Nasdaq OTC Bulletin Board. The stock was delisted
because we currently do not meet Nasdaq's requirements for continued listing
related to our stock price and stockholders' equity. We expect that it will
become more difficult to buy and sell our shares and that securities analysts
and news media will lose much of their interest in us. Additionally, we may
become subject to SEC rules that affect "penny stocks," which are stocks priced
below $5.00 per share that are not quoted on a Nasdaq market. These rules would
make it more difficult for brokers to find buyers for our shares and could lower
the net sales prices that our stockholders are able to obtain.
If our common stock price remains low, we may not be willing or able to raise
equity capital.
Our business is capital intensive, and we may contemplate raising equity capital
in the future. A low stock price may frustrate our doing so, for two reasons:
. We may be unwilling to sell our shares at such prices.
. Investors may not be interested in a company whose shares are priced
so low.
30
Risks Related to the Our Business, Strategy and Operations
Overview of this subsection:
None of our PCS operating subsidiaries has ever operated profitably or achieved
consistent positive cash flow. If that doesn't change, we will not have enough
cash to run our business, as more fully discussed in the Management's Discussion
section of this report. Timely expansion or completion of the PCS networks of
our operating subsidiaries is a key to our success, but we face numerous
challenges in doing that. Revenues we receive from travelers in our territories
likely will likely not meet our expectations.
Our PCS operating subsidiaries have not yet operated their PCS businesses
profitably or achieved consistent positive cash flow.
We expect to continue to incur significant operating losses and to continue to
generate negative cash flow while we complete and/or expand our PCS networks and
build our customer base. Our ultimate profitability will depend upon many
factors, including our ability to market our services successfully and operate
our networks efficiently, in addition to numerous other factors that are
described in this "Risk Factors" section. If we fail to achieve at least
positive cash flow within a reasonable period of time, we may not be able to
service our debt and an investment in our securities may not have much value.
If our business strategies are not implemented or are unsuccessful, our business
could be adversely affected.
Our strategies seek to (1) limit capital expenditures to required technical
upgrades and only adding cell site coverage in areas that are expected to
produce positive cash returns, (2) divest certain non core assets, (3) reduce
workforce size and corporate overhead, (4) evaluate, and in certain cases
renegotiate, certain expenses, (5) reduce customer turnover or churn rate and
improve customer credit quality, (6) improve US Unwired's relationship with
Sprint and (7) increase our market share among higher credit quality customers.
We may not be successful in implementing some or all of these strategies or may
be harmed by their implementation. In particular:
. Because technology in our business continually evolves, we may be
required to spend significant amounts of money on capital expenditures
or risk obsolescence.
. We may lose customers if they are not satisfied with cell site
coverage.
. Although we have had discussions concerning divestitures of certain
non-core assets, we cannot assure you as to if or when we will be able
to realize proceeds from such divestitures, or that the amounts
realized will be significant.
. Our reduced workforce may not be sufficient and our service may suffer
because of it.
. We may not be able to improve our cost structure because we cannot
control the outcome of negotiations with counter parties, including
Sprint.
. Our relationship with Sprint could deteriorate if either of us
escalated the disputes we have with each other.
. We may not be able to reduce customer churn, and future developments
such as number portability may cause it to increase.
. We may not be able to improve customer quality without restricting
overall subscriber growth.
Potential Loss of Management Fees from IWO Would Result in Material Loss of
Revenue and Income and Have a Material Adverse Effect on Our Liquidity and
Financial Condition.
US Unwired currently receives management fees from IWO in an estimated amount of
$10 million per year. There is a risk that this arrangement could be terminated
due to the uncertainties surrounding IWO. This result could occur if IWO were to
file for bankruptcy, which may be imminent. US Unwired's senior secured credit
facility currently prohibits us from acting in the capacity of manager of any
affiliate, including IWO, unless such affiliate is our subsidiary. If a
bankruptcy of IWO were to occur, it is highly likely that IWO would not remain a
subsidiary of ours. Even if our credit facility were amended, there is a
significant risk that IWO may elect to terminate this arrangement. Moreover,
IWO's lenders are entitled to designate a manager for the IWO business and may
not choose us. If the management arrangement with IWO is terminated for any
reason, we would lose an estimated $10 million of revenue annually. Moreover, we
believe the cost savings related to such a termination would amount to only
about $2 million per year. As a result, our cash flow would be reduced by an
estimated $8 million per year. These circumstances would have a material adverse
effect upon our liquidity and financial condition. In addition, we believe our
equity position in IWO currently has negligible value.
We will not receive as much Sprint PCS net travel, or roaming, revenue as we
anticipated.
We are paid a fee from Sprint PCS for every minute that a Sprint PCS subscriber
based outside of our markets uses the Sprint PCS network in our markets.
Similarly, we pay a fee to Sprint PCS for every minute that a Sprint PCS
subscriber based in our markets uses the Sprint PCS network outside our markets.
Sprint PCS subscribers from our markets may spend more time in other Sprint PCS
coverage areas than we anticipate and Sprint PCS subscribers from outside our
markets may spend less time in our markets or may use our services less than we
anticipate. As a result, we may receive less Sprint PCS travel revenue than we
anticipate or we may have to pay more Sprint PCS travel fees than the travel
revenue we collect.
Under our agreements with Sprint PCS, we believe that Sprint PCS can change the
fee, called a travel rate, within certain limitations, that we receive and pay
for each Sprint PCS travel minute. Sprint PCS has changed the reciprocal travel
rate for Louisiana Unwired
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from $0.20 per minute in 2002 to $0.058 per minute in 2003 and for IWO, Georgia
PCS and Texas Unwired from $0.10 per minute in 2002 to $0.058 per minute in
2003. While we believe this reduction is not in accordance with our agreements
with Sprint PCS, we are reviewing our options, but our recourse against Sprint
PCS for this reduction may be limited. Currently the revenues we receive for
subscribers of Sprint PCS and its other network partners using our networks
exceed the expenses that we pay for our subscribers using their networks. The
change in the travel rate will materially decrease our revenues, expenses and
our net travel position, which is the difference between travel revenue and
travel expense, and will materially decrease our cash flow from operations.
If we do not successfully manage our operations and expected growth, our
operating performance may be adversely impacted.
Our PCS operating subsidiaries have limited operating histories as Sprint PCS
affiliates. Louisiana Unwired began operations as a Sprint PCS affiliate on June
8, 1998, IWO on January 5, 2000, Texas Unwired on January 7, 2000 and Georgia
PCS on June 8, 1998. The combined company's ability to achieve and sustain
operating profitability will depend upon many factors, including our PCS
operating subsidiaries' abilities to effectively market Sprint PCS services and
manage customer turnover rates in their respective markets. In addition, a key
factor the combined company's operational performance will depend upon is our
ability to manage growth of the combined company through the expansion or
completion of IWO's network build-out, which appears unlikely at present, and
through implementing the combined company's best practices to increase market
penetration in our current and future markets. Market penetration means the
number of people in our PCS operating subsidiaries' markets who use our Sprint
PCS services. To be successful, our PCS operating subsidiaries will require
continued development, construction, testing, deployment and operation of their
respective networks. These activities are expected to place demands on our
managerial, operational and financial resources.
The failure of any of our PCS operating subsidiaries to timely expand or
complete the build-out of its network, or to obtain the equipment needed for
completion on a timely basis, may result in a decrease in the number of expected
new PCS subscribers and adversely affect its and the combined company's results
of operations or, in the case of IWO, result in a breach of its agreements with
Sprint PCS or, in the case of LA Unwired, result in the loss of the FCC licenses
that it owns.
LA Unwired has completed the network build-out that is required by its
agreements with Sprint PCS. Nevertheless, we may decide from time to time to
build out additional portions of its markets to increase the population that is
covered by its Sprint PCS service or we may acquire additional territory to be
built out by acquiring additional markets from Sprint PCS or by acquiring other
Sprint PCS network partners that have not completed their build-out
requirements. Due to liquidity issues as described in Note 3 above, IWO has not
yet completed its required build-out and it is unlikely that it will have
sufficient cash to do so. At March 31, 2003, IWO recorded an asset abandonment
charge of $12.4 million for the cell sites and related property leases of these
abandoned cell sites. Included in this asset abandonment are cell sites that IWO
is required to construct to meet the build out requirements under the IWO Sprint
Management Agreement. Failure to complete the build-out of the IWO service area
may place IWO in default of its Sprint PCS Management Agreement, and Sprint PCS
may take actions up to and including termination of the Management Agreement.
In order to expand or complete network build-outs, our PCS operating
subsidiaries must successfully lease or otherwise retain rights to a sufficient
number of radio communications and network control sites, complete the purchase
and installation of equipment, build-out the physical infrastructure and test
the network. The applicable company must also meet all requirements of its
agreements with Sprint PCS and all FCC requirements. One of these FCC
requirements is that our networks not interfere with microwave radio systems.
Compliance with that requirement could delay or impede expansion or build-out of
our networks. Regulatory changes, engineering design changes and required
technological upgrades could affect the number and location of our PCS operating
subsidiaries' towers as well as their ability to obtain sufficient rights to
meet their network build-out expansion goals or requirements. Some of the radio
communications and network control sites required for IWO to complete its
required build-out are likely to require zoning variances or other local
governmental or third party approvals. The local governmental authorities in
various locations in IWO's markets have, at times, placed moratoriums on the
construction of additional cell sites. Any failure by IWO to complete its
network build-out on a timely basis may limit its network capacity and/or reduce
the number of its expected new PCS subscribers, either of which could adversely
affect our or IWO's results of operations and financial condition or result in
IWO's breach of its agreements with Sprint PCS. Any failure by LA Unwired to
expand its network on a timely basis may limit its network capacity and/or
reduce the number of its expected new PCS subscribers, either of which could
adversely affect our results of operations and financial condition or result in
a loss of LA Unwired's licenses.
The foregoing expansion, as well as maintenance, capacity enhancements and
coverage improvements, could require additional capital expenditures that we may
not be able to fund. Additional funds could be required for a variety of
reasons, including unanticipated expenses or operating losses. We may face
significant limitations on our ability to obtain additional funds. Even if those
funds are available, we may not be able to obtain them on a timely basis, or on
terms acceptable to us or within limitations permitted by our debt agreements.
Failure to obtain additional funds, should the need for them develop, would
result in the delay or abandonment of our development and expansion plans.
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Our liquidity situation may force us to sell assets in the near future without
any certainty of improvement in our long-term financial condition.
Because our cash flow from operations may, and in the case of IWO will, be
insufficient to fund our capital requirements and our access to capital markets
may be limited, we may be forced to sell certain assets that we consider
non-core to our business. The timing of and the net cash proceeds realized from
such sales are dependent on locating and successfully negotiating sales with
prospective buyers, regulatory approvals, industry conditions, and lender
consents. Our liquidity constraints may reduce our negotiating leverage with
prospective buyers, and thus impede our ability to realize the best value for
these assets. Moreover, while we currently consider theses assets non-core, they
may be important to our future operations.
Our ability to sell assets is also subject to several restrictions under the
Sprint PCS agreement. Our operating PCS subsidiaries are subject to a
prohibition on the sale of certain of its assets to competitors of Sprint or
Sprint PCS. Also, Sprint PCS has the right of first refusal on certain sale of
our PCS operating subsidiaries' operating assets to a third party, and under
certain circumstances Sprint PCS could purchase our PCS operating subsidiaries'
operating assets at a discount. See "Risks Particular to the Company's
Relationship with Sprint PCS." These and other restrictions may limit our
ability to sell assets and may also reduce the value a buyer would be willing to
pay for such assets. Also, we cannot assure you that our assets will be sold
quickly enough or for sufficient amounts to enable us to meet our obligations.
Sales of assets may lead to loss of revenues generated by these assets and/or an
increase in operating expenses and may materially reduce our capacity to
generate cash flows.
We May Not Be Able to Obtain the Communications Equipment That We Need to Expand
Our Network.
From time to time, there is considerable demand for the communications equipment
that our PCS operating subsidiaries need to expand or complete their networks,
and manufacturers of this equipment could have substantial backlogs of orders.
Competitors who purchase large quantities of communications equipment may
receive priority in the delivery of this equipment. If our PCS operating
subsidiaries cannot get this equipment, they may fail to expand or construct
their networks timely.
We obtain most of our network equipment from two suppliers. This equipment is
not interchangeable, and we would be materially adversely affected if we could
not obtain this network equipment timely or at all.
Our PCS networks are either Lucent networks, meaning that the network equipment
is supplied by Lucent, or Nortel networks, meaning that the network equipment is
supplied by Nortel. If additional equipment is needed for expansion or repair of
a network, it must come from Lucent, if the network is a Lucent network, or
Nortel, if the network is a Nortel network, for compatibility with our existing
network equipment. If either of these suppliers should cease or delay to supply
its equipment, we would be prevented or delayed in expanding or repairing the
affected network or completing the IWO build-out.
Any inability to expand our networks, or to keep them repaired or to complete
the IWO build-out, could have a material adverse effect on us.
Our territory has limited amounts of licensed spectrum, which may adversely
affect the quality of our service and our results of operations.
LA Unwired and Sprint PCS have 13 licenses covering 10 MHz of spectrum covering
a population of 3.3 million people in LA Unwired's territory. Sprint PCS has
licenses for 10 to 30 MHz of spectrum in all of our territories, that we have an
agreement to use. In the future, as the number of subscribers in our territories
increases, this limited amount of licensed spectrum may not be able to
accommodate increases in call volume, may lead to increased dropped or blocked
calls and may limit our ability to offer enhanced services, all of which could
result in increased customer turnover and adversely affect the combined
company's results of operations and financial condition.
If any of our PCS operating subsidiaries loses the right to install its
equipment on wireless towers or is unable to renew expiring leases for wireless
towers on favorable terms or at all, our business and results of operations
could be adversely impacted and we may not comply with our agreements with
Sprint PCS.
Substantially all of the cell sites of our PCS operating subsidiaries are
installed on leased tower facilities that are shared with one or more other
wireless service providers. In addition, a large portion of these leased tower
sites are owned by a few tower companies. If a master agreement with one of
these tower companies were to terminate, or if one of these tower companies were
unable to support use of its tower sites by any of our PCS operating
subsidiaries, the affected subsidiaries would have to find new sites or may be
required to rebuild the affected portion of their networks. In addition, the
concentration of our PCS operating subsidiaries' cell sites with a few tower
companies could adversely affect our results of operations and financial
condition if any of our PCS operating subsidiaries is unable to renew its
expiring leases with these tower companies on favorable terms or at all. If any
of the tower leasing companies that we do business with should experience severe
financial difficulties, or file for bankruptcy protection, our ability to use
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our towers could be adversely affected. That, in turn, would aversely affect our
revenues and financial condition if a material number of towers were involved
and may result in non-compliance with our Sprint PCS management agreements.
The loss of the officers and skilled employees upon whom we depend to operate
our business or the inability to attract additional personnel for the combined
company's growth could adversely affect the combined company's results of
operations.
Our business is managed by a small number of executive officers. We believe that
our future success will depend in part on our continued ability to retain these
executive officers and to attract and retain highly qualified technical and
management personnel for the combined company. We may not be successful in
retaining key personnel or in attracting and retaining other highly qualified
technical and management personnel. We do not maintain policies of life
insurance on our key executives. In addition, we grant stock options as a method
of attracting and retaining employees, to motivate performance and to align the
interests of management with those of our stockholders. Due to the decline in
the trading price of our common stock, the stock options held by our employees
have an exercise price that is higher than the current trading price of our
common stock, and therefore these stock options may not be effective in helping
us to retain valuable employees.
Expanding LA Unwired's or IWO's territory may have a material adverse effect on
its business and reduce the market value of our securities.
As part of LA Unwired's and IWO's continuing operating strategy, it may expand
its territory through the grant of additional markets from Sprint PCS or through
acquisitions of other Sprint PCS network partners. These transactions may
require the approval of Sprint PCS and commonly involve a number of risks,
including the:
. difficulty of integrating acquired operations and personnel;
. diversion of management's attention;
. disruption of ongoing business;
. impact on our cash and available credit lines for use in financing
future growth and working capital needs;
. inability to retain key personnel;
. inability to successfully incorporate acquired assets and rights into
our service offerings;
. inability to maintain uniform standards, controls, procedures and
policies; and
. impairment of relationships with employees, subscribers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on the combined company's
business. In connection with these transactions, we may issue additional equity
securities, and we may incur additional debt or incur significant amortization
expenses related to certain intangible assets connected with a newly acquired
Sprint PCS management agreement or a newly acquired subscriber base.
Our service area will be threatened by bad weather, including hurricanes and
severe winter weather, which could cause interruptions in service resulting in
increased expenses and reduced operating results.
Much of LA Unwired's service area is on or near the Gulf of Mexico or the
Atlantic Ocean and could be damaged by bad weather like hurricanes and excessive
rain. In addition, the IWO service area could be adversely affected by severe
winter storms. We may face service interruptions for indefinite periods if a
major hurricane or winter storm strikes one or more of our service areas,
resulting in increased expenses and reduced operating results.
Unauthorized use of our networks could disrupt our business.
We will likely incur costs associated with the unauthorized use of our networks,
including administrative and capital costs associated with detecting, monitoring
and reducing the incidence of fraud. Fraud impacts interconnection costs,
capacity costs, administrative costs, fraud prevention costs and payments to
other carriers for unbillable fraudulent roaming.
IWO's projected build-out plan and LA Unwired's completed build-out do not cover
all of their territories, which could make it difficult to maintain profitable
customer bases.
As of March 31, 2003, LA Unwired covered approximately 71% of the resident
population in its territory and IWO covered 75% of residents in its territory.
IWO's projected build-out plan and LA Unwired's build-out do not cover all their
service areas. The coverage
34
may not adequately serve the needs of the potential subscribers in the
respective territories or attract enough subscribers to operate our business
successfully. To correct this potential problem, LA Unwired or IWO may have to
cover a greater percentage of its territory than anticipated, which it may not
have the financial resources to complete or may be unable to do profitably.
Sprint PCS's roaming arrangements may not be competitive with other wireless
service providers, which may restrict our ability to attract and retain
subscribers and create other risks for us.
We rely on Sprint PCS's roaming arrangements with other wireless service
providers for coverage in some areas where Sprint PCS service is not yet
available. The risks related to these arrangements include:
. the quality of the service provided by another provider during a
roaming call may not approximate the quality of the service provided
by the Sprint PCS network;
. the price of a roaming call off our network may not be competitive
with prices of other wireless companies for roaming calls;
. subscribers must end a call in progress and initiate a new call when
leaving the Sprint PCS network and entering another wireless network;
. Sprint PCS subscribers may not be able to use Sprint PCS's advanced
features, such as high speed Internet access and voicemail
notification, while roaming; and
. Sprint PCS or the carriers providing the service may not be able to
provide us with accurate billing information on a timely basis.
If Sprint PCS subscribers 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 subscribers.
Sales of Sprint PCS products and services in our territory by a "reseller" that
is 50% owned by Sprint PCS could reduce our number of subscribers and our
margins.
We allow a company, called a reseller, to sell Sprint PCS products and services
in our territories. Our networks provide the Sprint PCS services that are sold
by the reseller in our territories. We receive income from the reseller that we
consider to be a fair return for this use of our networks, but our margins are
greater when we generate our own subscribers. The reseller is 50% owned by
Sprint PCS.
Risks Particular to the Indebtedness of the Combined Company
Note: We have two separate debt structures. Each of US Unwired and IWO has
issued senior notes under agreements called indentures, and each of them has
senior credit facilities with banks. Because of restrictions in the indentures
governing the senior notes and the credit agreements governing the senior credit
facilities, funds borrowed by US Unwired may not be used to finance IWO and
IWO's subsidiaries but are available for all of US Unwired's other subsidiaries.
Because of the same restrictions, funds borrowed by IWO may be used only to
finance IWO and IWO's subsidiaries.
Overview of this subsection:
US Unwired and IWO have a substantial amount of debt. They cannot borrow from
their banks unless they meet the banks' requirements for borrowing. Our current
economic downturn is making it more difficult to meet these requirements. If we
fail to repay our debt on time, our lenders may foreclose on our assets and, if
that occurs, our stock will probably be worthless.
Both US Unwired and IWO have substantial debt that neither of them may be able
to service; a failure to service this debt may result in the lenders under this
debt taking away assets of ours (other than IWO's) if US Unwired fails to
service its debt, or assets of IWO if IWO fails to service its debt.
The substantial debt of US Unwired and IWO will have a number of important
consequences for our operations and our investors, including the following:
. each company will have to dedicate a substantial portion of any cash
flow from its operations to the payment of interest on, and principal
of, its debt, which will reduce funds available for other purposes;
. neither company may be able to obtain additional financing for capital
requirements, capital expenditures, working capital requirements and
other corporate purposes;
35
. some of each company's debt, including financing under each company's
senior credit facility, will be at variable rates of interest, which
could result in higher interest expense in the event of increases in
market interest rates; and
. due to the liens on substantially all of each company's assets and the
pledges of stock of each company's existing and future subsidiaries as
collateral for such company's senior debt, lenders may control US
Unwired's or IWO's assets or the assets of the subsidiaries of US
Unwired or IWO in the event of a default.
US Unwired's and IWO's ability to make payments on their respective debt will
depend upon their future operating performance, which is subject to general
economic and competitive conditions and to financial, business and other
factors, many of which neither of them can control. If the cash flow from either
company's operating activities is insufficient, US Unwired or IWO may take
actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance its debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow US Unwired or IWO to service its debt obligations or may adversely affect
its results of operations. Further, US Unwired or IWO may be unable to take any
of these actions on satisfactory terms, in a timely manner or at all. The credit
facilities and indentures governing US Unwired's and IWO's respective debt limit
their ability to take several of these actions, and limit their ability to
borrow more money. Their failure to generate sufficient funds to pay their debts
or to successfully undertake any of these actions could, among other things,
materially adversely affect the market value of US Unwired common stock or other
securities or result in lenders controlling the assets of each of them and their
subsidiaries (other than unrestricted subsidiaries).
If either US Unwired or IWO does not meet all of the conditions required under
their respective credit facilities, they may not be able to draw down all of the
funds they anticipate receiving from the lenders and they may not be able to
fund operating losses and working capital needs.
As of March 31, 2003, US Unwired had approximately $90.0 million outstanding
under its senior credit facility and IWO had approximately $213.2 million
outstanding under its senior credit facility. Also, as of March 31, 2003, US
Unwired had $47.3 million in unrestricted cash, and IWO had $26.1 million in
unrestricted cash, including investments. As of March 31, 2003, US Unwired had
$73.2 million of availability and IWO had $25.2 million of availability under
their respective credit facilities. The availability of the remaining amounts
under US Unwired's and IWO's senior credit facilities is subject to the
applicable company meeting all of the conditions specified by the respective
financing documents and, in addition, is subject at each funding date to
specific conditions, including the following:
. that the representations and warranties in such company's loan
documents are true and correct;
. that such company's financial and operating covenant tests are
satisfied, including leverage and operating performance covenants and
covenants relating to earnings and cash flow;
. that we are solvent; and
. the absence of a default under such company's loan documents,
including its indenture.
US Unwired was in compliance with the restrictive covenants of our senior
secured credit facility at March 31, 2003. However, we expect to violate the
covenants in the US Unwired $170 million senior credit facility in 2003. We will
need portions of the funding available under our senior secured credit facility
to fund continuing operations. If the assumptions underlying our business plan
are not correct with respect to market growth, subscriber additions, churn,
revenue from subsidiaries, roaming revenue, operating expenses (including bad
debt losses), unanticipated capital requirements, capital expenditures, charges
for Sprint PCS provided services, working capital requirements or other
corporate charges, we may not meet the conditions at each funding date, and our
lenders may not lend some or all of the remaining amounts under our senior
secured credit facility. If other sources of funds are not available, we may not
be in a position to meet our operating cash needs or meet our obligations under
our agreements with Sprint PCS.
IWO was not in compliance the restrictive covenants of the IWO senior bank
credit facility at March 31, 2003. The holders of the IWO senior bank credit
facility have the right to deny IWO access to the remaining $25.2 million of
availability as a result of covenant violations. IWO will need all of the
funding available under its senior credit facility to fund continuing
operations. If the assumptions underlying the business plan of IWO is not
correct for market growth, subscriber additions, churn, revenue from
subsidiaries, roaming revenue, operating expenses (including bad debt losses),
unanticipated capital requirements, capital expenditures, charges for Sprint PCS
provided services, working capital requirements or other corporate charges, IWO
may not meet other conditions at future funding dates. It has already been noted
that the holders of IWO's senior credit facility already have the right to deny
IWO access to remaining availability. If other sources of funds are not
available, IWO may not be in a position to meet its operating cash needs or meet
its obligations under its agreements with Sprint PCS.
Please see the discussion under "Risks Related to Factors Currently Affecting
Our Business," below.
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US Unwired may fail and IWO has failed to pass financial and business tests
under its separate senior credit facilities.
US Unwired's and IWO's senior credit facilities require US Unwired and IWO to
maintain specified financial ratios and to satisfy specified tests. Depending on
the company, these tests may relate to:
. minimum covered population;
. minimum number of subscribers and/or average revenue per subscriber;
. minimum annualized revenues;
. maximum dollar amounts for capital expenditures;
. various leverage tests;
. minimum earnings before interest, taxes, depreciation and
amortization, or EBITDA; and
. maximum EBITDA loss.
As a result of covenant violations, the holders of the IWO senior bank credit
facility have the right to deny IWO access to the remaining availability. We
believe that US Unwired is currently in compliance with all financial and
operating covenants relating its senior secured credit facility. However, there
is significant doubt as to our ability to continue to comply with such financial
and operating covenants prior to becoming free cash flow positive. If our
business does not generate the results required by the covenants in the senior
secured credit facility, our ability to make borrowings under the revolving line
of credit required to operate our business would be restricted or terminated and
the credit facility could be declared in default. Such a restriction,
termination or declaration of default would have a material adverse affect on
our liquidity. In addition to making funds under the senior credit facilities
unavailable to US Unwired or IWO, an event of default under its senior credit
facilities would prohibit it from paying its senior notes, which would cause a
default under the affected company's indenture, or may result in the affected
company's lenders controlling substantially all of the affected company's assets
or accelerating the maturity of the affected company's debt. Should this occur,
the common stock and other securities of US Unwired may have little or no value.
Please see the discussion under "Risks Related to Factors Currently Affecting
Our Business," below.
If US Unwired or IWO needs additional financing that it cannot obtain, it may
have to change its network construction plans and modify its business plans. If
the affected company is US Unwired, the network construction plans of LA Unwired
may also have to be changed.
US Unwired expects to make significant capital expenditures to expand the PCS
networks of LA Unwired. Actual expenditures may differ significantly from
estimates. US Unwired would have to obtain additional financing to fund LA
Unwired's network expansion plans, and IWO would have to obtain additional
financing to fund its network construction or expansion plans, if:
. existing sources of capital are unavailable or insufficient;
. LA Unwired or IWO significantly departs from or changes its business
plan;
. LA Unwired or IWO experiences unexpected delays or cost overruns in
the expansion or completion of its network, including changes to the
schedule or scope of the network build-out or expansion;
. changes in technology or governmental regulations create unanticipated
costs; or
. LA Unwired or IWO acquires additional licenses or Sprint PCS grants
any of them more service areas to build out and manage.
IWO needs to make significant capital expenditures to complete or expand its PCS
network and has abandoned cell sites required to complete its build out due to
liquidity issues. IWO will be required to obtain additional financing to fund
its network completion or expansion.
We cannot predict whether any additional financing will be available to US
Unwired or IWO or on what terms such financing would be available. If either US
Unwired or IWO needs additional financing that it cannot obtain, the affected
company will have to change its plans for the remainder of its network, which
would adversely affect such company's expected future results of operations.
37
US Unwired's and IWO's indebtedness place restrictions on them which will limit
their operating flexibility and US Unwired's and IWO's ability to engage in some
transactions.
The respective indentures governing US Unwired's and IWO's senior notes and
their respective senior credit facilities impose material operating and
financial restrictions on US Unwired and its subsidiaries (other than IWO), on
the one hand, and on IWO and its subsidiaries, on the other hand. These
restrictions may limit their ability to engage in some transactions, including
the following:
. completing designated types of mergers or consolidations;
. creating liens;
. paying dividends or other distributions to their stockholders;
. making investments;
. selling assets;
. repurchasing their common stock or debt instruments like their senior
notes;
. changing lines of business;
. borrowing additional money;
. entering into transactions with their affiliates; and
. issuing additional shares of common stock.
These restrictions could also limit their ability to obtain financing by
borrowing money or issuing common stock, refinance or pay principal or interest
on US Unwired's or IWO's outstanding debt, consummate acquisitions for cash or
debt or react to changes in their operating environment. Moreover, these
restrictions could cause the combined company to be at a competitive
disadvantage to competitors who do not have similar restrictions.
If a specified change in control of US Unwired or IWO occurs, the affected
company may not be able to buy back its senior notes as required by its
indenture.
If US Unwired or IWO has a change in control as defined under its indenture, the
applicable company will be required to offer to buy back all of its outstanding
senior notes. We cannot assure you that US Unwired or IWO will have sufficient
funds at the time of a change in control to perform this obligation or that
restrictions in its credit facilities would allow it to do so. US Unwired's or
IWO's requirement to buy back its notes upon a change in control could impair
the value of US Unwired common stock and other securities or could cause a
default under the affected company's indenture which, in turn, would cause a
default under its senior credit facility. In addition, a change in control as
defined under US Unwired's or IWO's respective credit facilities would cause the
affected company to default under its senior credit facility.
If US Unwired or IWO defaults under its senior credit facilities, the affected
company's lenders may declare its debt to be immediately due and payable and
Sprint PCS may force the affected company to sell its assets to Sprint PCS
without stockholder approval.
If US Unwired or IWO defaults under its senior credit facilities and the
affected company's lenders accelerate the maturity of the affected company's
debt, Sprint PCS has the option to purchase the affected company's assets at a
discount to market value and assume the affected company's obligations under its
senior credit facility without further approval of the stockholders of the
affected company. If Sprint PCS does not exercise this option, the affected
company's lenders may sell its assets to third parties without further approval
of the stockholders of the affected company.
If either US Unwired or IWO fails to pay the debt under its credit facility,
Sprint PCS has the option of purchasing the affected company's loans, giving
Sprint PCS certain rights of a creditor to foreclose on that company's assets.
Sprint PCS has contractual rights, triggered by an acceleration of the maturity
of the debt under US Unwired's or IWO's respective senior credit facility,
pursuant to which Sprint PCS may purchase US Unwired's or IWO's obligations to
its senior lenders and obtain the rights of a senior lender. To the extent
Sprint PCS purchases these obligations, Sprint PCS's interests as a creditor
would likely conflict with our interests. Sprint PCS's rights as a senior lender
would enable it to exercise rights with respect to the affected company's assets
and its continuing relationship with Sprint PCS in a manner not otherwise
permitted under US Unwired's or IWO's Sprint PCS agreements.
38
Risks Particular to the Combined Company's Relationship with Sprint PCS
Overview of this subsection:
We depend heavily on Sprint PCS. It performs our billing, designs and advertises
the products and services we sell, and provides our customer service, in
addition to a wide variety of other services. If Sprint PCS does not succeed, it
is highly unlikely that we will succeed. We have little influence with Sprint
PCS under our agreements with it.
The termination of LA Unwired's or IWO's affiliation with Sprint PCS or Sprint
PCS's failure to perform its obligations under the Sprint PCS agreements would
severely restrict the affected company's ability to conduct its business.
LA Unwired owns few of the FCC licenses that we operate. IWO does not own any
FCC licenses. Each of our PCS operating subsidiaries operates under the FCC
licenses of Sprint PCS and LA Unwired that are applicable to its territory. .
The ability of each of our PCS operating subsidiaries to offer Sprint PCS
products and operate a PCS network is almost entirely dependent on its Sprint
PCS agreements remaining in effect and not being terminated. Other than
performing its contractual obligations under the management agreement and other
related agreements between us, Sprint PCS is not obligated to provide us with
any support in connection with our business or otherwise.
. These agreements give it the right to use the Sprint(R) and Sprint
PCS(R) brand names and logos and related rights. If it loses these
rights, our operations will be impaired.
. These agreements impose strict requirements on the construction of
each company's network. IWO has not yet completed construction of its
network. If IWO does not meet these requirements, these agreements may
be terminated and IWO could lose the right to be the provider or sole
provider of Sprint PCS products and services in IWO's service area.
. These agreements require our PCS operating subsidiaries to meet strict
technical requirements such as the percentage of time the network is
operative, the percentage of dropped calls, the ratio of blocked call
attempts to total call attempts, the ratio of call origination to
termination failures, and call transport requirements for links
between cell sites, switches and outside telephone systems. If these
and other requirements are not met, Sprint PCS can terminate the
affected agreements.
. The Sprint PCS agreements of any of our PCS operating subsidiaries may
be terminated also if any of Sprint PCS's FCC licenses are lost or
jeopardized, or if the subsidiary becomes insolvent.
. These agreements give Sprint PCS a substantial amount of influence and
control over the conduct of each company's business. Sprint PCS may
make decisions that adversely affect our PCS operating subsidiaries'
business, like introducing costly new products that fail in the
marketplace or setting the prices for its national plans at levels
that may not be economically sufficient for our PCS operating
subsidiaries' business.
. If any of our management agreements are terminated, we may be required
to sell our PCS operating assets to Sprint PCS. This sale may take
place for a price equal to 72% of our entire business value, subject
to the valuation criteria and procedures described under "Certain of
Our Agreements with Sprint PCS." The provisions of our management
agreement that allow Sprint PCS to purchase our operating assets at a
discount may limit our ability to sell our business, reduce the value
a buyer would be willing to pay for our business and limit our ability
to obtain new investment or support from any source. If we were to
file for bankruptcy, the management agreement would provide Sprint PCS
with various remedies, including purchase rights at a discount to
market value, though we cannot predict if or to what extent such
remedies would be enforceable. In addition, we may be very reluctant
to reject the management agreement under Section 365 of the federal
Bankruptcy Code because our ability to conduct our business without it
would be severely restricted. If Sprint PCS were to file for
bankruptcy, Sprint PCS may be able to reject the management agreement
under Section 365 of the federal Bankruptcy Code. In addition, in the
event of a Sprint PCS bankruptcy, the management agreement would
provide us various remedies, including purchase and put rights, though
we cannot predict if or to what extent our remedies would be
enforceable. In any event, a bankruptcy by Sprint PCS could severely
restrict our ability to conduct our business for the reasons set forth
above. For additional information concerning the remedies available
under the management agreement, see "Certain of Our Agreements with
Sprint PCS."
. The management agreements are not perpetual. If Sprint PCS decides not
to renew the management agreements at the expiration of the 20-year
initial term or any 10-year renewal term, the affected subsidiaries
would no longer be a part of the Sprint PCS network. Moreover, each of
these agreements can be terminated at any time for breach of any
material term.
. Sprint PCS is permitted to terminate the management agreements for
breach of any of the material terms of the agreements. These terms
include operational and network requirements that are extremely
technical and detailed and apply to each retail store, cell site and
switch site. Many of these operational and network requirements can be
changed
39
by Sprint PCS with little notice. As a result, our PCS operating
subsidiaries may not always be in compliance with all requirements of
the Sprint PCS agreements. Sprint PCS conducts periodic audits of
compliance with various aspects of its program guidelines and
identifies issues it believes need to be addressed. There may be
substantial costs associated with remedying any non-compliance, and
such costs may adversely affect our operating results and cash flow.
Sprint PCS may make business decisions that are not in the best interests of our
PCS operating subsidiaries, which may adversely affect the relationships of our
PCS operating subsidiaries with subscribers in their territories, increase their
expenses and/or decrease their revenues.
Sprint PCS, under the Sprint PCS agreements, has a substantial amount of
influence and control over the conduct of the businesses of our PCS operating
subsidiaries. Accordingly, Sprint PCS may make decisions that adversely affect
LA Unwired's or IWO's business, such as the following:
. Sprint PCS could price its national plans based on its own objectives
and could set price levels or other terms that may not be economically
sufficient for LA Unwired's or IWO's business;
. Sprint PCS could raise the costs for Sprint PCS to perform back office
services for LA Unwired and IWO or otherwise seek to increase what we
pay Sprint PCS, or it could reduce levels of services it provides our
PCS operating subsidiaries;
. Sprint PCS may elect, with little or no notification, to upgrade or
convert its financial reporting, billing or inventory software or
change third party service organizations that can adversely affect our
ability to determine or report our operating results, adversely affect
our ability to obtain handsets or adversely affect our subscriber
relationships.
. Sprint PCS has sought to charge us more as a result of launching the
new "third generation," or 3G, technology called "one times radio
transmission technology," or IXRTT;
. Sprint PCS prohibits LA Unwired or IWO from selling non-Sprint PCS
approved equipment;
. Sprint PCS could develop products and services, or establish credit
policies such as the NDASL program that is described below, that
adversely affect our business;
. Sprint PCS could make it very expensive for us to migrate in-house or
to other vendors services that they currently perform;
. Sprint PCS introduced a payment method for subscribers to pay the cost
of service with us. This payment method did not initially have
adequate controls or limitations, and we have discovered that some
fraudulent payments were made to accounts using this payment method.
The controls and limitations have now been strengthened. If the other
types of fraud become widespread, it could have a material adverse
impact on our results of operations and financial condition;
. Sprint PCS could keep us from developing our own promotional plans
that we may believe to be necessary to attract new subscribers or from
selling equipment selected by us;
. Sprint PCS could, subject to limitations under LA Unwired's and IWO's
Sprint PCS agreements, alter its network and technical requirements or
request that LA Unwired or IWO build out additional areas within LA
Unwired's or IWO's territories, which could result in increased
equipment and build-out costs;
. Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint(R) and Sprint PCS(R) brand names, products or services; and
. Sprint PCS could decide not to renew the Sprint PCS agreements or to
no longer perform its obligations, which would severely restrict LA
Unwired's and IWO's ability to conduct business.
Decisions such as those referred to above could adversely affect our operating
subsidiaries' relationships with their subscribers by changing products,
services and price plans to which those subscribers had become accustomed.
Should Sprint PCS have a change of control, or should management of Sprint PCS
change, the pace at which decisions such as the foregoing occur could
accelerate, increasing the risk of disfavor from subscribers of our operating
subsidiaries. In fact, Sprint is making changes to its senior management,
including replacing its chairman and chief executive officer and its president
and chief operating officer.
We deal with Sprint PCS daily on a variety of issues. Sometimes we disagree with
Sprint PCS or oppose what Sprint PCS would like us to do or require us to pay,
and we have numerous disputes with Sprint PCS that we have as yet been unable to
resolve, many of which we have described elsewhere in the Risk Factors. This
occurs particularly when Sprint PCS tells us we must adopt business methods or
pricing plans that we think will hurt our business. Because we rely so heavily
on our relationship with Sprint PCS, any deterioration of that relationship or
of Sprint PCS's desire to cooperate with LA Unwired or IWO could adversely
affect the combined
40
company's business. In addition, Sprint PCS's level of control and influence
over us would make it difficult for us to sell our business to anyone other than
Sprint PCS.
In the future, we may approach Sprint PCS and seek to modify our management
agreements, the consent and agreement and our other agreements with Sprint PCS
and take other actions consistent with such objective, including formally
bringing certain claims or proceedings under such arrangements that we believe
we may have against Sprint PCS. We have not determined whether we will approach
Sprint PCS or bring such claims or proceedings or take such other actions. In
the event we do, we can provide no assurance that any such modifications will be
made or that, if any such claims are brought or other such actions taken, they
will be resolved in our favor.
Our dependence on Sprint PCS may adversely affect our ability to predict our
results of operations.
Our dependence on Sprint PCS injects a great degree of uncertainty into our
business and financial planning. Unanticipated expenses and reductions in
revenue have had and, if they occur in the future, will have a negative impact
on our liquidity and make it more difficult to predict with reliability our
future performance. Inaccuracies in data provided by Sprint PCS could understate
our expenses or overstate our revenues, result in out-of-period adjustments or
lead us to make bad business decisions that may materially adversely affect our
financial results. A significant portion of cost of service and roaming in our
financial statements relates to charges from Sprint PCS. In addition, because
Sprint PCS provides billing and collection services for us, it collects cash
from our subscribers on our behalf and remits that cash to us. As a result, we
rely on Sprint PCS to provide accurate, timely and sufficient data and
information to properly record our revenues, expenses and accounts receivable
that underlie a substantial portion of our periodic financial statements and
other financial disclosures.
We and Sprint PCS have disputes concerning billing and other errors or
inaccuracies. If we are required in the future to make additional adjustments or
charges as a result of errors or inaccuracies in data provided to us by Sprint
PCS, such adjustments or charges may have a material adverse effect on our
financial results in the period that the adjustments or charges are made, on our
ability to satisfy covenants contained in our credit facilities, and our ability
to make fully informed business decisions.
The Inability of Sprint PCS to Maintain High Quality Back Office Services or Our
Inability to Use Sprint PCS's Back Office Services and Third Party Vendors' Back
Office Systems Could Lead to Customer Dissatisfaction, Increase the Loss of
Subscribers or Otherwise Increase Our Costs or Adversely Affect Our Businesses.
We rely on Sprint PCS's internal support systems, including customer care,
billing and other back office support. Our operations could be disrupted if
Sprint PCS is unable to maintain and expand its internal support systems in a
high quality manner, or to efficiently outsource those services and systems
through third party vendors. We expect the rapid expansion of Sprint PCS's
business and the consolidation of back office services by Sprint PCS to continue
to pose a significant challenge to its internal support systems. Additionally,
Sprint PCS has relied on third party vendors for a significant number of
important functions and components of its internal support systems and may
continue to rely on these vendors in the future. Our PCS operating subsidiaries
depend on Sprint PCS's willingness to offer and provide back office services
effectively and at competitive costs. Our agreements with Sprint PCS provide
that, upon nine months' prior written notice, Sprint PCS may elect to terminate
any of these services. The inability of Sprint PCS to maintain high quality back
office services, or provide us with adequate notification of our inability to
continue to provide those services or our inability to use Sprint PCS's back
office services and third party vendors' back office systems could lead to
customer dissatisfaction, increase the loss of subscribers or otherwise disrupt
our business and increase our costs. Additionally, we are dependent on Sprint
PCS to assist us in transferring our back office services from Sprint PCS to a
third party if we choose to do that, and any failure by Sprint PCS to cooperate
in this effort, such as by making a transfer cost prohibitive, could have a
similar adverse effect on us.
We rely on Sprint PCS for providing timely and accurate information to allow us
to meet our financial reporting obligations. If material internal control
weaknesses exist at Sprint PCS, we may not be able to provide timely and
accurate information.
Inaccuracies in data provided by Sprint PCS could understate our expenses or
overstate our revenues, result in out-of-period adjustments or lead us to make
bad business decisions that may materially adversely affect our financial
results.
A significant portion of cost of service and roaming in our financial statements
relates to charges from Sprint PCS. In addition, because Sprint PCS provides
billing and collection services for us, it collects cash from our subscribers on
our behalf and remits that cash to us. As a result, we rely on Sprint PCS to
provide accurate, timely and sufficient data and information to properly record
our revenues, expenses and accounts receivables that underlie a substantial
portion of our periodic financial statements and other financial disclosures.
We and Sprint PCS have discovered billing and other errors or inaccuracies that
could be material to us. If we are required in the future to make additional
adjustments or charges as a result of errors or inaccuracies in data provided to
us by Sprint PCS, such
41
adjustments or charges may have a material adverse affect on our financial
results in the period that the adjustments or charges are made, on our ability
to satisfy covenants contained in our credit facility, and our ability to make
fully informed business decisions.
Change in Sprint PCS Products and Services May Reduce Customer Addition and May
Be Otherwise Economically Adverse.
The competitiveness and effective promotion of Sprint PCS products and services
are key factors in our ability to attract and retain subscribers. For example,
under the Sprint PCS service plans, subscribers who do not meet certain credit
criteria can nevertheless select any plan offered subject to an account spending
limit, referred to as ASL, to control credit exposure. Account spending limits
range from $125 to $200 depending on the credit quality of the customer. Prior
to May 2001, all of these subscribers were required to make a deposit ranging
from $125 to $250 that could be credited against future billings. In May 2001, a
new Sprint PCS program, called NDASL for no deposit account spending limit,
eliminated the deposit requirement on certain, but not all, credit classes. A
significant amount of our new customer additions occurred in 2002 under the
NDASL program. Sprint PCS has replaced the NDASL program with the "Clear Pay
Program" without reinstating the deposit requirement. The Clear Pay Program is
substantially similar to the NDASL program but with an increased emphasis on
payment of outstanding amounts. Under the Clear Pay Program, subscribers who do
not meet certain credit criteria can select any plan offered, subject to an
account spending limit.
The NDASL program has had the effect of increasing churn and bad debt expense.
Sprint PCS has the right to end or materially change the terms of the Clear Pay
Program. If Sprint PCS chooses to eliminate the Clear Pay Program or alter its
features, the growth rate we expect to achieve may decrease. Our PCS operating
subsidiaries requested and received, effective February 24, 2002, the ability to
reinstate deposits in their territories for subscribers with poor or inadequate
payment histories. We believe that reinstatement of the deposit has reduced the
number of potential new subscribers in these markets. While deposits for Clear
Pay customers provide us with protection against bad debt expense for sub-prime
customers, it has and may continue to deter some people with sub-prime credit
from becoming subscribers. As a result, our gross additions have declined and
may continue to do so, which may further result in lower cash flows and impair
our ability to service our debt. As of March 31, 2003, approximately 40% of our
subscribers had a credit rating placing them in the sub-prime category.
Sprint PCS may elect to offer additional programs that may attract high credit
risk subscribers. Sprint PCS may not offer relief in any of such programs.
If Sprint PCS does not complete the construction of its nationwide PCS network,
our PCS operating subsidiaries may not be able to attract and retain
subscribers.
Sprint PCS and its affiliates currently intend to cover a significant portion of
the population of the United States, Puerto Rico and the U.S. Virgin Islands by
creating a nationwide PCS network through Sprint PCS's own construction efforts
and those of its network partners like LA Unwired and IWO. Sprint PCS and its
affiliates are still constructing the nationwide network and do not yet offer
PCS services, either on Sprint PCS's own network or through its roaming
agreements, everywhere in the United States.
If one of LA Unwired's or IWO's subscribers travels in an area where a Sprint
PCS or compatible system is not yet operational, the customer would not be able
to make a call on that area's system unless he or she has a telephone handset
that can make calls on both systems. Generally, these handsets are more costly.
Moreover, the Sprint PCS network does not allow for calls to be transferred
without interruption between the Sprint PCS network and another wireless
network. This means that a customer must end a call in progress and initiate a
new call when entering an area not served by the Sprint PCS network. The quality
of the service provided by another network may not be equal to that of the
Sprint PCS network, and LA Unwired's or IWO's subscribers may not be able to use
some of the advanced features of its network. This could result in customer
dissatisfaction and loss of subscribers.
Sprint PCS has entered into management agreements similar to LA Unwired's and
IWO's with companies in other markets under its nationwide PCS build-out
strategy. LA Unwired's and IWO's results of operations are dependent on Sprint
PCS's national network and, to a lesser extent, on the networks of Sprint PCS's
other network partners. Sprint PCS's network may not provide nationwide coverage
to the same extent as its competitors, which could adversely affect LA Unwired's
and IWO's ability to attract and retain subscribers.
If Sprint PCS does not succeed, or if LA Unwired or IWO does not maintain a good
relationship with Sprint PCS, LA Unwired's or IWO's business may not succeed.
If Sprint PCS has a significant disruption to its business plan or network,
fails to operate its business in an efficient manner, or suffers a weakening of
its brand name, LA Unwired's and IWO's operations and profitability would likely
be impaired. LA Unwired and IWO use their relationships with Sprint PCS to
obtain, at favorable prices, handsets and the equipment for the construction or
expansion and operation of their networks. Any disruption in their relationships
with Sprint PCS could make it much more difficult for them to obtain this
equipment.
If Sprint PCS should have significant financial problems, including bankruptcy,
our PCS business would suffer material adverse consequences that could include
termination or revision of our Sprint PCS agreements.
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If Sprint PCS or other Sprint PCS network partners have financial difficulties,
the Sprint PCS network could be disrupted.
Sprint PCS's national network is a combination of networks. The large
metropolitan areas are owned and operated by Sprint PCS, and the areas in
between them are owned and operated by Sprint PCS network partners, all of which
are independent companies like we are. We believe that most, if not all, of
these companies have incurred substantial debt to pay the large cost of building
out their networks.
If other network partners experience financial difficulties, the Sprint PCS
network could be disrupted in the territories of those partners. If the Sprint
PCS agreements of those partners are like ours, Sprint PCS would have the right
to step in and operate the affected territory. Of course this right could be
delayed or hindered by legal proceedings, including any bankruptcy proceeding
relating to the affected network partner. A Sprint PCS network partner, iPCS,
Inc., recently filed bankruptcy and other network partners may follow iPCS. The
impact of these developments on the Sprint PCS network, on our funding and our
relationship with Sprint PCS, and on our travel revenue from subscribers roaming
in iPCS markets may be materially adverse.
Material disruptions in the Sprint PCS network would have a material adverse
effect on our ability to attract and retain subscribers.
Certain provisions of the Sprint PCS agreements may diminish the value of US
Unwired common stock and other securities and restrict the sale of our business.
Under some circumstances and without further stockholder approval, Sprint PCS
may purchase LA Unwired's or IWO's operating assets at a discount. In addition,
Sprint PCS must approve any change of control of the ownership of LA Unwired or
IWO and must consent to any assignment of LA Unwired's or IWO's Sprint PCS
agreements.
Sprint PCS also has a right of first refusal if LA Unwired or IWO decides to
sell its operating assets to a third party. LA Unwired and IWO also are subject
to a number of restrictions on the transfer of their businesses, including a
prohibition on the sale of LA Unwired or IWO or their operating assets to
competitors of Sprint or Sprint PCS. These restrictions and other restrictions
contained in the Sprint PCS agreements could adversely affect the value of US
Unwired common stock and other securities, may limit our ability to sell LA
Unwired's and IWO's business, may reduce the value a buyer would be willing to
pay for LA Unwired's or IWO's business and may reduce LA Unwired's or IWO's or
the combined company's entire business value.
LA Unwired or IWO may have difficulty in obtaining an adequate supply of certain
handsets from Sprint PCS, which could adversely affect LA Unwired's or IWO's
results of operations.
LA Unwired and IWO depend on our and their relationships with Sprint PCS to
obtain handsets. Sprint PCS orders handsets from various manufacturers. LA
Unwired or IWO could have difficulty obtaining specific types of handsets in a
timely manner if:
. Sprint PCS does not adequately project the need for handsets for
itself, its Sprint PCS network partners and its other third party
distribution channels, particularly in transition to new technologies
such as 3G;
. Sprint PCS gives preference to other distribution channels;
. LA Unwired or IWO does not adequately project our need for handsets;
. Sprint PCS modifies its handset logistics and delivery plan in a
manner that restricts or delays LA Unwired's or IWO's access to
handsets; or
. there is an adverse development in the relationship between Sprint PCS
and its suppliers or vendors.
The occurrence of any of the foregoing could disrupt LA Unwired's or IWO's
customer service and/or result in a decrease in LA Unwired's or IWO's
subscribers, which could adversely affect its results of operations.
Non-renewal or revocation by the FCC of LA Unwired's licenses or the Sprint PCS
licenses LA Unwired or IWO uses would significantly harm the affected company's
business.
PCS licenses are subject to renewal and revocation by the FCC. LA Unwired's and
Sprint PCS's licenses in LA Unwired's and IWO's territories will begin to expire
in 2005 but may be renewed for additional ten-year terms. There may be
opposition to renewal of these licenses upon their expiration, and the licenses
may not be renewed. The FCC has adopted specific standards to apply to PCS
license renewals. Any failure by Sprint PCS, LA Unwired or IWO to comply with
these standards could cause revocation or forfeiture of the licenses for its
territories. If any of the licenses of Sprint PCS that our PCS operating
subsidiaries are using should be lost, the affected subsidiary would be severely
restricted in its ability to conduct its business. If we were to lose any of the
licenses we own, we could replace it with a Sprint PCS license in the affected
territory, but at a greater cost to us than the use of our own license.
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If Sprint PCS does not maintain control over its licensed spectrum, the Sprint
PCS agreements may be terminated, which would result in LA Unwired's and IWO's
inability to provide PCS service.
The FCC requires that license holders like Sprint PCS and LA Unwired maintain
control of their licensed spectrum and not delegate control to third-party
operators or managers. Although the Sprint PCS agreements with LA Unwired and
IWO reflect an arrangement that the parties believe meets the FCC requirements
for licensee control of licensed spectrum, we cannot assure you that the FCC
will agree. If the FCC were to determine that the Sprint PCS agreements need to
be modified to increase the level of licensee control, LA Unwired and IWO have
agreed with Sprint PCS to use best efforts to modify the Sprint PCS agreements
to comply with applicable law. If LA Unwired and IWO cannot agree with Sprint
PCS to modify the Sprint PCS agreements, the agreements may be terminated. If
the Sprint PCS agreements are terminated, LA Unwired and IWO would no longer be
a part of the Sprint PCS network and the combined company would be severely
restricted in its ability to conduct business.
We have limited rights if Sprint PCS fails to perform its obligations to our PCS
operating subsidiaries under their agreements with Sprint PCS. Should that
occur, the consequences to us would be severe.
If Sprint PCS fails to perform its obligations to our PCS operating
subsidiaries, the consequences to us would be severe. Our PCS operating
subsidiary could terminate its Sprint PCS agreements, but in that case it may
have to discontinue its PCS business or to conduct it on a reduced scale. It
would not be permitted to offer Sprint PCS products and services. We would in
these events suffer material adverse consequences to our results of operations
and financial condition. The only remedy of our PCS operating subsidiary would
be to require Sprint PCS either to purchase its operating assets at a price that
would be unfavorable to us, or to assign to our PCS operating subsidiary limited
amounts of Sprint PCS's licensed spectrum for a price equal to the greater of
10% of the business value of our PCS operating subsidiary or Sprint PCS's
original cost for the spectrum plus any costs incurred in relocating microwave
radio systems.
Sprint PCS has notified us of charges and fees that it intends to pass on to us.
We did not anticipate these charges and fees when we formulated our business
plan. We believe these charges and fees are material, and if Sprint PCS is
entitled to collect them, they could materially and adversely affect our results
of operations and financial condition.
Sprint PCS has presented us with a number of charges and fees that we did not
expect when we formulated our business plan, including:
. New development costs and fees to upgrade Sprint PCS's systems to
cover new third generation technology services, such as one time radio
transmission technology or 1XRTT, offered to our subscribers. In
addition, Sprint PCS has begun billing us for back office services
related to new technology that we believe are provided for under our
existing billing arrangements.
. Charges resulting from the objection by long distance carriers,
including Sprint, to charges they paid to Sprint PCS for the
"termination" of long distance calls in our service territory. Sprint
PCS has paid us what they estimated they would collect from those long
distance carriers, but the long distance carriers are now contesting
whether they were obligated to pay those charges. Sprint PCS has
indicated that it will seek to recover the charges it paid us that it
cannot collect from the long distance carriers.
If we disagree with Sprint PCS on the validity of these (or any other) charges
or fees, we have the right to formally dispute the charges or fees. We are
disputing the charges for back office services related to new technologies. In
addition, we are discussing with Sprint PCS whether there is a basis for the
other charges and fees under our management agreements and service agreements
with Sprint PCS. We believe that these charges and fees are material, and if
Sprint PCS is entitled to collect them, they could have a material adverse
effect on our results of operations or financial condition or both.
Sprint PCS has invoked certain dispute resolution provisions of our agreements
with respect to several ongoing disputes between our companies. The process
requires senior management officials of the companies to attempt to resolve the
disputes, following which, as to any dispute not resolved through the dispute
resolution process, the parties are free to proceed with litigation or, in
certain specified cases, to arbitration. We have also invoked certain dispute
resolution provisions under the agreement and notified Sprint PCS that there are
disputes that we have outside the scope of the agreement dispute resolution
provisions in addition to those that they and we have subjected to the dispute
resolution provisions.
Risks Particular to the Combined Company's Industry
Overview of this subsection:
We face significant competition in our service areas from a number of
competitors. There are five other national operators that offer service in at
least some portion of our service areas in addition to many local and regional
carriers. Approximately 94% of the population has three or more different
operators offering mobile telephone service in the counties in which they live.
The result is that prices of wireless services have dramatically dropped.
Providers are offering larger bundles of minutes at lower prices and this has
resulted in a decrease in airtime revenue, which is the price a customer pays
for using the service in excess of allotted minutes. In
44
addition, other factors affecting our industry are changing rapidly. If we
cannot effectively meet the challenges of these conditions, we probably will not
succeed. Activists are seeking new laws that would restrict use of telephones by
drivers, our placement of the towers that carry our transmissions and disposal
of wireless phones. Such laws could adversely impact our business.
Our PCS Operating Subsidiaries' Business May Suffer Because Subscribers
Frequently Disconnect Their Service in the PCS Industry. The Rate at Which These
Disconnections Occur, or Churn, May Be Even Higher in the Future.
The PCS industry in general and Sprint PCS in particular have experienced a high
rate of subscribers who disconnect their service. This rate is referred to as
churn. We have experienced even higher churn in 2002 due in large part, we
believe, to the NDASL program that Sprint PCS introduced in May 2001 and the
Clear Pay program that replaced NDASL. These programs are described under "Risks
Particular to Our Relationship with Sprint PCS." Our future churn rate may be
higher than our historical rate due to intense competition and general economic
conditions, among other factors. Factors that tend to contribute to higher churn
include:
. inability of subscribers to pay, which caused a significant percentage
of our churn in 2002. We believe that a large portion of this churn is
attributable to the NDASL and Clear Pay Program, which resulted in
subscriber accounts with greater than normal credit risks.
. our generous handset return policy, which makes it easier to cancel an
account.
. intense competition in our industry.
. performance and coverage of our networks.
. ineffective customer service.
. increase in prices.
. performance and reliability of handsets.
. changes in our products and services.
A high rate of PCS subscriber churn could harm the competitive position of our
PCS operating subsidiaries and their results of operations. We subsidize some of
the costs of handsets for our new subscribers, pay commissions for new accounts
and incur expenses to advertise and maintain a distribution network. When we
experience a high rate of churn, we may not receive sufficient revenue to offset
these costs. Sprint PCS may elect to offer additional programs that may attract
high credit risk subscribers.
Sprint PCS and we face intense competition that may reduce its and our market
share and harm its and our financial performance.
There is substantial competition in the telecommunications industry. According
to information it has filed with the SEC, Sprint PCS believes that the
traditional dividing lines between long distance, local, wireless, and Internet
services are increasingly becoming blurred. Through mergers and various service
integration strategies, major providers, including Sprint PCS, are striving to
provide integrated solutions both within and across all geographical markets.
Sprint PCS expects competition to intensify as a result of the entrance of new
competitors and the rapid development of new technologies, products, and
services. Sprint PCS cannot predict which of many possible future technologies,
products, or services will be important to maintain its competitive position or
what expenditures will be required to develop and provide these technologies,
products or services. Sprint PCS's ability to compete successfully will depend
on marketing and on its ability to anticipate and respond to various competitive
factors affecting the industry, including new services that may be introduced,
changes in consumer preferences, demographic trends, economic conditions, and
discount pricing strategies by competitors. To the extent Sprint PCS does not
keep pace with technological advances or fails to respond timely to changes in
competitive factors in its industry, it could lose market shares or experience a
decline in revenue and net income.
Each of the markets in which Sprint PCS competes is served by other wireless
service providers, including cellular, enhanced specialized mobile radio, called
ESMR, and PCS operators and resellers. A majority of markets have five or more
CMRS providers. Each of the top 50 metropolitan markets has at least two other
PCS competitors in addition to one ESMR competitor and two cellular incumbents.
Some of these competitors have been operating for a number of years and
currently serve a substantial subscriber base. The FCC has decided to allow CMRS
providers to own more spectrum, up to 55 MHz, in urban markets and to eliminate
in January 2003 its rule imposing spectrum limits. However, the FCC plans to
continue to review proposed mergers and combinations involving spectrum after
the spectrum limits are eliminated. Competition may continue to increase to the
extent that licenses are transferred from smaller stand-alone operators to
larger, better capitalized, and more experienced wireless communications
operators. These larger wireless communications operators may be able to offer
subscribers network features not offered by Sprint PCS. The actions of these
45
larger wireless communications operators could negatively affect Sprint PCS's
and our customer churn, ability to attract new subscribers, average revenue per
user, cost to acquire subscribers, and operating costs per customer.
Sprint PCS relies on agreements with competitors to provide automatic roaming
capability to Sprint PCS subscribers in many of the areas of the United States
not covered by the Sprint PCS network, which primarily serves metropolitan
areas. Certain competitors may be able to offer coverage in areas not served by
Sprint PCS's network or may be able to offer roaming rates that are lower than
those offered by Sprint PCS. Certain of Sprint PCS's competitors are seeking to
reduce access to their networks through actions pending with the FCC. Moreover,
the engineering standard, called AMPS, for the dominant air interface on which
PCS subscribers roam is currently being considered for elimination by the FCC as
part of a streamlining proceeding. If the FCC eliminates this mandatory standard
and cellular operators cease to offer their AMPS networks for roaming, some
Sprint PCS subscribers may have difficulty roaming in certain markets.
Some wireless providers, some of which have an infrastructure in place and have
been operating for a number of years, have been upgrading their systems and
provide expanded and digital services to compete with Sprint PCS's services.
Some of these wireless providers require their subscribers to enter into long
term contracts, which may make it more difficult for Sprint PCS to attract
subscribers away from these wireless providers.
Significant competition in the wireless communications services industry may
result in LA Unwired's or IWO's competitors offering new or better products and
services or lower prices, which could prevent the affected company from
operating profitably or reduce its profitability.
Competition in the wireless communications industry is intense. We anticipate
that competition will continue to cause the market prices for two-way wireless
products and services to decline in the future. Providers are offering larger
bundles of minutes at lower prices and this has resulted in a decrease in
airtime revenue, which is the price a customer pays for using the service in
excess of allotted minutes. LA Unwired's and IWO's ability to compete will
depend, in part, on their ability to anticipate and respond to various
competitive factors affecting the telecommunications industry. Our major
competitors include such wireless companies as Verizon, T-Mobile, Cingular, AT&T
Wireless, and Nextel.
Our PCS operating subsidiaries' dependence on Sprint PCS to develop competitive
products and services and the requirement that they obtain Sprint PCS's consent
to sell local pricing plans and equipment that Sprint PCS has not approved may
limit their ability to keep pace with competitors on the introduction of new
products, services and equipment. Many of these competitors are larger than our
PCS operating subsidiaries individually or combined, may have entered the
wireless communications services market before our PCS operating subsidiaries
did, possess greater resources and more extensive coverage areas, may offer
lower rates, and may market other services, such as landline telephone service,
cable television and internet access, with their wireless communications
services. In addition, we may be at a competitive disadvantage since we may have
more debt than some of our competitors.
Furthermore, there has been a recent trend in the wireless communications
industry towards consolidation of wireless service providers through joint
ventures, reorganizations and acquisitions. We expect this consolidation to lead
to larger competitors over time. We may be unable to compete successfully with
larger companies that have substantially greater resources or that offer more
services than LA Unwired and IWO do.
Alternative technologies and current uncertainties in the wireless market may
reduce demand for PCS.
PCS providers in the United States use one of three technological standards.
Even though the three standards share basic characteristics, they are not
compatible or interchangeable with each other. Our PCS operating subsidiaries
and Sprint PCS use the standard known as CDMA. If another standard becomes
preferred in the industry, our PCS operating subsidiaries may be at a
competitive disadvantage. If Sprint PCS changes its standard, our PCS operating
subsidiaries will need to change theirs as well, which will be costly and time
consuming. If our PCS operating subsidiaries cannot change the standard, they
may not be able to compete with other systems.
The wireless communications industry is experiencing significant technological
change, as evidenced by the increasing pace of digital upgrades in existing
analog wireless systems, satellite coverage, evolving industry standards,
ongoing improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences. Technological advances and industry changes could
cause the technology used on our PCS operating subsidiaries' networks to become
obsolete. Sprint PCS may not be able to respond to such changes and implement
new technology on a timely basis, or at an acceptable cost.
If Sprint PCS is unable to keep pace with these technological changes or changes
in the wireless communications market based on the effects of consolidation from
the Telecommunications Act of 1996 or from the uncertainty of future government
regulation, the technology used on our PCS operating subsidiaries' networks, or
their business strategy, may become obsolete. In addition, wireless carriers
have implemented an upgrade to one times radio transmission technology, or
1XRTT, which is also broadly known as third generation, or 3G, technology
throughout the industry. The 3G technology promises high-speed, always-on
Internet connectivity and
46
high-quality video and audio. We cannot assure you that our PCS operating
subsidiaries or Sprint PCS can implement 1XRTT or 3G technology successfully or
on a cost-effective basis.
Regulation by government and taxing agencies may increase our PCS operating
subsidiaries' costs of providing service or require them to change their
services, either of which could impair the combined company's financial
performance.
Our operations and the operations of Sprint PCS are subject to varying degrees
of regulation by the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the Occupational Safety and
Health Administration and state and local regulatory agencies and legislative
bodies. Adverse decisions or regulation of these regulatory bodies could
negatively impact operations and costs of doing business. For example, changes
in tax laws or the interpretation of existing tax laws by state and local
authorities could subject us to increased income, sales, gross receipts or other
tax costs or require LA Unwired or IWO to alter the structure of its current
relationship with Sprint PCS. In addition:
. The loss of any of LA Unwired's FCC licenses, or any of Sprint PCS's
FCC licenses in LA Unwired's or IWO's service area, may impair the
affected company's business and operating results.
. The FCC may revoke any of LA Unwired's or Sprint PCS's PCS licenses at
any time for cause. Cause could be a failure to comply with terms of
the licenses or applicable FCC rules. We cannot ensure that LA
Unwired's and Sprint PCS's PCS licenses will not be revoked or will be
renewed when they expire.
. The FCC regulates LA Unwired's and IWO's relationship with Sprint PCS
under each company's Sprint PCS agreements.
. The combined company may need to acquire additional licenses, which
may require approval of regulatory authorities. These regulatory
authorities may not grant approval in a timely manner, if at all.
. All PCS licenses, including LA Unwired's own licenses and Sprint PCS's
licenses, are subject to the FCC's build-out regulations. These
regulations require license holders to offer specified levels of
service to the population in their service areas within set time
periods. Even though our PCS operating subsidiaries have developed a
build-out plan that meets these requirements, they may be unable to
meet their build-out schedules. If LA Unwired or IWO or Sprint PCS
does not meet these requirements, the FCC could take back the portions
of the service area that are not being served, impose fines, or even
revoke the related licenses.
. The FCC may license additional spectrum for new carriers, which would
increase the competition our PCS operating subsidiaries face.
. The FCC imposes additional requirements on holders of PCS licenses
reserved for small businesses. These licenses are called C-block and
F-block licenses. LA Unwired holds F-block licenses and must meet
special requirements to hold them. If it does not meet these
requirements, the FCC could fine it, revoke its licenses or require it
to restructure its ownership.
. The FCC has mandated that wireless carriers implement portability for
wireless subscribers. This will permit users of wireless services the
opportunity to retain the same phone number as they change local
wireless carriers. Prior to implementation, subscribers that changed
carriers were also required to change phone numbers. We believe that
this will make it easier for subscribers to switch wireless carriers
resulting in increased subscriber churn and increased cost associated
with retaining our overall subscriber base. The manner in which
wireline carriers implement this program may also adversely affect us.
In preparation of wireless local number portability BellSouth has
implemented intralata dialing pattern changes for wireless providers
who use reverse toll billing. This change will now require wireline
carriers to dial 1+ to reach wireless customers that are not within
the local calling area regardless of their reverse toll billing
status. We believe that this process will be very confusing to our
subscribers and is likely result in a higher level of subscriber
churn.
The Introduction of Wireless Number Portability Could Lead to an Increase in
Subscriber Churn.
The FCC has mandated that wireless carriers implement portability for wireless
subscribers. This will permit users of wireless services the opportunity to
retain the same phone number as they change local wireless carriers. Prior to
implementation, subscribers that changed carriers were also required to change
phone numbers. We believe that this will make it easier for subscribers to
switch wireless carriers, resulting in increased subscriber churn and increased
cost associated with retaining our overall subscriber base. The manner in which
wireless carriers implement this program may also adversely affect us.
In preparation for wireless local number portability BellSouth has implemented
dialing pattern changes for wireless providers who use reverse toll billing.
This change will now require wire line carriers to dial 1+ to reach wireless
customers that are not within the local calling area regardless of their reverse
toll billing status. We believe that this process will be very confusing to our
subscribers and is likely to result in a higher level of subscriber churn.
An increase in the amount of our foreign ownership could cause us to lose our
FCC licenses or restructure our ownership.
47
Ownership of US Unwired capital stock by non-U.S. citizens is subject to
limitations under the Communications Act of 1934 and FCC regulations. In the
absence of FCC consent, not more than 25% of US Unwired capital stock may be
owned or voted by non-U.S. citizens or their representatives, by a foreign
government or its representatives, or by a foreign corporation. We believe the
level of foreign ownership in US Unwired common stock to be approximately 25%.
Because US Unwired common stock is publicly traded, the level of foreign
ownership may fluctuate.
The FCC has granted us the authority to permit US Unwired's foreign ownership to
exceed 25%, subject to specific limitations. If US Unwired exceeds the permitted
levels or does not comply with the applicable limitations, it may have to
restructure its ownership to come within the permitted ownership limit or else
we may lose our FCC licenses. In that case, the articles of incorporation of US
Unwired permit it to force foreign shareholders to sell their shares to US
Unwired, whether they wish to do so or not, so as to reduce the foreign
ownership of US Unwired to slightly lower than permitted levels.
Our future prospects are uncertain because the future prospects of the PCS
industry are uncertain.
PCS systems have not operated in the United States for very long, and we cannot
assure you that the operation of these systems in our markets will become
profitable. In addition, we cannot estimate how much demand there will be for
PCS in our markets or how much competitive pricing pressure there will be. As a
result, the future prospects of the PCS industry, including LA Unwired's and
IWO's prospects, remain uncertain. The future demand for wireless communications
services in general is uncertain. We also cannot predict what new challenges we
may face in this changing industry environment. If we cannot react promptly and
effectively to these challenges, our business could be materially and adversely
affected.
Use of hand-held phones may pose health risks, which could result in the reduced
use of wireless services or liability for personal injury claims.
Some media reports and some studies have suggested that certain radio frequency
emissions from wireless handsets may be linked to various health problems,
including cancer, and may interfere with various electronic medical devices,
including hearing aids and pacemakers. Concerns over radio frequency emissions
may discourage use of wireless handsets or expose the combined company to
potential litigation. Any resulting decrease in demand for wireless services, or
costs of litigation and damage awards, could impair the combined company's
ability to achieve and sustain profitability.
Our PCS operating subsidiaries may be subject to potential litigation relating
to the use of wireless phones while driving. In addition, several state and
local governments are considering, or have recently adopted, legislation that
restricts the use of wireless handsets by drivers.
Some studies have indicated that some aspects of using wireless phones while
driving may impair drivers' attention in certain circumstances, making accidents
more likely. These concerns could lead to potential litigation relating to
accidents, deaths or serious bodily injuries, or to new restrictions or
regulations on wireless phone use, any of which also could have material adverse
effects on our results of operations.
A number of U.S. state and local governments are considering or have recently
enacted legislation that would restrict or prohibit the use of a wireless
handset while driving a vehicle or, alternatively, require the use of a
hands-free telephone. Legislation of this sort, if continued to be enacted,
would require wireless service providers to provide hands-free enhanced services
such as voice activated dialing and hands-free speaker phones and headsets so
that they can keep generating revenue from their subscribers, who make many of
their calls while on the road. If we are unable to provide hands-free services
and products to our subscribers in a timely and adequate fashion, the volume of
wireless phone usage would likely decrease, and our ability to generate revenues
would suffer. Moreover, a study released in January 2003 found that driver
distractions due to cell phone use can occur regardless of whether hand-held or
hands-free cell phones are used, and that cell phone conversations create much
higher levels of driver distractions than listening to the radio. If legislation
is adopted in our service areas banning all cell phone use while driving, our
revenues would be even more significantly impacted.
Environmentalists have asked the FCC to halt the building of towers used for
transmission of wireless signals.
Three environmental groups claim that towers used for transmission of wireless
signals kill migratory birds. They have petitioned the FCC to study how many
birds die from flying into towers, and have asked the FCC to halt tower
construction until the study is completed. In February 2003, environmental
groups filed suit against the FCC to force it to protect migratory birds from
communication towers. If we cannot build new towers, we cannot complete or
expand our networks.
At least one environmental group and one state believe that the disposal of
wireless phones could pose a threat to public health. If new regulations
governing wireless phone disposal are passed, or if our industry does not
develop an efficient disposal or recycling program, our operating costs could
increase.
48
An environmental research group has argued that the disposal of used wireless
phones could pose a threat to public health because the phones contain small
amounts of toxic chemicals that may leak into the soil and water supply when
they are deposited in landfills. At least one state has begun a study of the
environmental effects of wireless phone disposal and has announced that it will
issue appropriate regulations if the study concludes that those effects could be
harmful. If new and burdensome regulations governing the disposal of wireless
phones are passed in the states covered by our network, or if the PCS industry
cannot develop a cost-effective disposal or recycling program for wireless
phones, our operating costs could increase.
General Risks Currently Affecting our Business
Overview of this subsection
Our business has recently been challenged by a number of adverse factors that
have resulted in IWO in default of the IWO senior bank credit facility as a
result of restrictive covenant violations. The holders of the IWO senior bank
credit facility have the right to deny IWO access to remaining availability. If
these factors do not improve, it is likely that US Unwired business will suffer
to the point that US Unwired will not meet some of the covenants in the US
Unwired bank debt agreements. If that occurs and the US Unwired banks do not
agree to revise the US Unwired covenants, they would be able to declare a
default under the US Unwired bank debt and to refuse to advance funds to us.
Our business is being adversely affected by increased competition, slower
subscriber growth than we anticipated, increased churn, higher uncollectible
receivables due primarily to Sprint PCS marketing programs designed to attract
high credit risk subscribers, general economic conditions and other factors. If
these events occur, it is likely that we will not have enough cash to operate
our business. IWO is already in default of its senior bank credit facility due
to covenant violations of its senior bank credit facility and we will have to
ask our bank lenders to waive compliance with covenants in the IWO current
senior secured credit facility. If they refuse, the IWO bank lenders could
refuse to advance more loans and demand payment of what we owe them. If payment
were demanded, we would also be in default under the IWO senior notes and their
indentures. It is likely that US Unwired will fail to comply with certain
covenants of the US Unwired senior bank credit facility in 2003. If our business
does not improve it is likely that we will have to ask our bank lenders to waive
compliance with covenants in the US Unwired current senior secured credit
facility. If they refuse, we would be in default on the US Unwired bank debt and
our bank lenders could refuse to advance more loans and demand payment of what
we owe them. If payment were demanded, we would also be in default under our
senior notes and their indentures. If these events occur it is likely that we
will not have enough cash to operate.
Our business has been adversely affected in recent months particularly by the
following factors:
. Our subscriber growth has slowed from what we had expected.
. Competition has increased.
. Our churn has increased.
. Our uncollectible accounts have increased.
. General economic conditions in our markets have not been good, further
adversely affecting subscriber growth and churn.
In addition, these are other factors that could contribute to a continuation of
poor business conditions for us. These include:
. Uncertainty whether our expected level of capital expenditures will be
sufficient to support our networks.
. Uncertainty about charges that Sprint PCS is seeking to impose on us,
as described above.
As a result of our adverse business conditions, due to the above and other
factors, IWO has failed and, if our adverse business conditions continue, due to
the above or other factors, US Unwired likely will fail during 2003 to meet some
of the loan covenants with our banks.
Loan covenants are promises that borrowers make either to do or not to do
specified things or not to allow specified things to happen.
A failure to meet a loan covenant has three principal consequences. First, it
permits the lender to refuse to advance additional borrowings. US Unwired and
IWO would not have sufficient cash to operate if they are unable to obtain the
proceeds under their bank loan agreements or comparable amounts from alternative
financing sources. Alternative financing would probably not be available on
terms that we would normally accept. Second, failure to meet a loan covenant
allows the lender to declare the loan to be in default and to insist on payment
of all amounts due under the loan. US Unwired and IWO would not have sufficient
cash to repay these loans, and their failure to repay them, if repayment is
demanded by the banks, would allow their note holders to declare a default under
the indentures that govern the senior notes and to insist on payment of all
amounts due under the senior notes. If these things happen and
49
we were unable to work out a debt restructure with our banks and note holders on
mutually acceptable terms, we likely would have no other alternative than to
seek protection under bankruptcy laws. Third, during any time that a default
exists, even if the lenders do not insist on payment, our debt would be
classified as a current liability on our balance sheet and our outside auditors
would place a going concern qualification on their opinion on our financial
statements.
Because of the potentially material adverse consequences of any default on US
Unwired's or IWO's bank loans or indentures, US Unwired and IWO have begun
meeting with their bank groups in preliminary discussions that may result in the
revision of the bank loan covenants as necessary to keep US Unwired and IWO in
compliance with them. We cannot assure you that our banks will cooperate with
us.
The economic downturn in the United States has caused a general weakening of our
business. If our business in general, and our sales and churn in particular, do
not improve, we may not have the financial and operational performance that we
were expecting.
In recent months, we have not achieved the number of new subscribers that we
expected in our business plan. We attribute this to weak economic conditions,
churn associated with high credit risk subscribers and intense price
competition. If the economic downturn continues, we may have an even lower
number of new subscribers and may not be able to add subscribers on terms we
expected. In addition, the weak economy may hurt our existing subscribers'
ability to pay us on time, which may force us to terminate their service. If
these things happen, our financial and operational performance may will likely
suffer.
The number of our cellular subscribers and the roaming revenues of our cellular
operations have declined, which has reduced the cash flow from our cellular
business.
Our cellular operations are a single market property. The number of our cellular
subscribers has continued to decline as our subscribers switch to carriers with
national roaming plans, including our PCS operations. Additionally, our cellular
roaming revenue has recently decreased because both Cingular and Verizon have
launched networks covering a portion of our cellular market. The decline in
cellular subscribers and roaming revenues has reduced the cash flow from our
cellular business. The decrease in cash flow means we have less cash to support
our PCS operations and the value of our cellular business has declined, should
we decide to sell it.
A recession in the United States involving significantly lowered spending could
continue to negatively affect our results of operations.
Our primary customer base is individual consumers and our accounts receivable
represent unsecured credit. If the economic downturn that the United States and
our territories have recently experienced becomes more pronounced or lasts
longer than currently expected and spending by individual consumers drops
significantly, our business would continue to be negatively affected.
Our allowance for doubtful accounts may not be sufficient to cover uncollectible
accounts.
On an ongoing basis, we estimate the amount of customer receivables that we will
not be able to collect. This allows us to calculate the expected loss on our
receivables for the period we are reporting. Our allowance for doubtful accounts
may underestimate actual unpaid receivables for various reasons, including:
. adverse changes in our churn rate exceeding our estimates;
. adverse changes in the economy generally exceeding our expectations;
or
. unanticipated changes in Sprint PCS's products and services.
If our allowance for doubtful accounts is insufficient to cover losses on our
receivables, our business, financial position or results of operations could be
materially adversely affected.
Demand for some of Sprint PCS's communications products and services has been
adversely affected by a downturn in the United States economy as well as changes
in the global economy.
Demand for some of Sprint PCS's communications products and services has been
adversely affected by a downturn in the United States economy as well as changes
in the global economy. According to Sprint PCS, a number of its suppliers have
recently experienced financial challenges. If these suppliers cannot meet their
commitments, Sprint PCS states that it would have to use different vendors and
this could result in delays, interruptions, or additional expenses associated
with the upgrade and expansion of Sprint PCS's networks and the offering of its
products and services. If current general economic conditions continue or
worsen, the revenues, cash flow, and operating results of Sprint PCS could be
adversely affected. Any of these developments could adversely affect our
business, financial position or results of operations.
Risks Related to Anti-Takeover Provisions
50
Overview of this subsection:
Our anti-takeover provisions may permit our board of directors to turn down a
proposal that our stockholders would like us to accept.
Anti-takeover provisions in US Unwired's charter and by-laws will make it
difficult for anyone to acquire US Unwired without approval of its board of
directors.
Prior to acquiring IWO, US Unwired had little concern about being acquired
against the will of its board of directors because the voting power of its
founding family and their related interests, even if not completely united,
could prevent an unfriendly acquisition of it. That voting power decreased to
about 33% after the IWO acquisition as a result of that acquisition and the
amendments to US Unwired's articles of incorporation that converted its class B
common stock, which had 10 votes per share, to class A common stock (later
renamed "common stock"), which has one vote per share. Because of this, US
Unwired's board of directors has implemented additional anti-takeover
provisions. These anti takeover provisions, and others, including a "poison
pill" that our board of directors may adopt hereafter, may discourage offers to
acquire us and may permit our board of directors to choose not to entertain
offers to purchase us, even offers that are at a substantial premium to the
market price of our stock. Our stockholders may therefore be deprived of
opportunities to profit from a sale of control.
51
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
(a) The following exhibits are filed as part of this report:
(3)(i) Third Restated Articles of Incorporation of US Unwired Inc.
(Incorporated by reference to Exhibit 3.1 of Form 10-Q filed
by the Registrant on May 9, 2002)
3(ii) By-laws of US Unwired Inc. as Amended on March 29, 2002
(Incorporated by reference to By-laws of US Unwired Inc. as
Amended on March 29, 2002 Exhibit 3.2 of Form 10-Q filed by
the Registrant on May 9, 2002)
(4)(i)(a) Amended and Restated Agreement Credit Agreement dated March
8, 2002 between US Unwired Inc. and lenders. (Incorporated
by reference to Exhibit 4.1 of Form 8-K filed by the
Registrant on March 21, 2002)
(4)(i)(b) Waiver and Amendment dated May 1, 2002 to the Amended and
Restated Agreement Credit Agreement dated March 8, 2002
between US Unwired Inc. and lenders. (Incorporated by
reference to Exhibit 4.i.b. of Form 10-Q filed by the
Registrant on August 14, 2002)
(4)(i)(c) Second Agreement Regarding Amendments to Loan Documents
dated June 6, 2002 between US Unwired Inc. and lenders.
(Incorporated by reference to Exhibit 4.i.c. of Form 10-Q
filed by the Registrant on May 9, 2002)
(4)(i)(d) Supplemental Indenture dated as of March 11, 2002, among
Georgia PCS Management, LLC and Georgia PCS Leasing, LLC,
both Georgia limited liability companies and subsidiaries of
US Unwired Inc., the other Guarantors and State Street Bank
and Trust Company, as trustee under the indenture.
(Incorporated by reference to Exhibit 4.i.d. of Form 10-Q
filed by the Registrant on August 14, 2002)
(4)(i)(e) Registration Rights Agreement, dated April 1, 2002, by and
among Issuer, Northeast Unwired Inc. and IWO Holdings Inc.
for certain registration rights of US Unwired common stock
(Incorporated by reference to Exhibit 4.i.e. of Form 10-Q
filed by the Registrant on August 14, 2002)
(99.1) Certification by President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(99.2) Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
----------
Registrant agrees to furnish to the Commission on request copies of any
instrument defining the rights of holders of long-term debt the total amount of
which does not exceed 10% of the total consolidated assets of the registrant and
which is otherwise not filed as an exhibit.
b. Reports on Form 8-K
On January 3, 2003, we filed a Current Report on Form 8-K containing a
press release announcing that the Company's chief operating officer
resigned to accept a senior finance position with Sprint.
On February 5, 2003, we filed a Current Report on Form 8-K containing
a press release announcing that the Company received notice from the
Nasdaq Stock Market that the Company had failed to comply with the
Nasdaq's minimum bid price requirement for continued listing.
52
On March 31, 2003, we filed a Current Report on Form 8-K containing a
press release announcing the Company's 2002 earnings.
On April 1, 2003, we filed a Current Report on Form 8-K containing a
press release announcing the Company held a conference call to discuss
its fourth quarter and year-end 2002 earnings
On May 7, 2003, we filed a Current Report on Form 8-K containing a
press release announcing the Company reported that effective November
8, 2003, our common stock was delisted from the Nasdaq National Market
and immediately became eligible for quotation on the Nasdaq Over the
Counter Bulletin Board.
On May 15, 2003, we filed a Current Report on Form 8-K containing a
press release announcing the Company intends to offer to exchange any
and all of our existing US Unwired 13.375% $400 million senior
subordinated notes due November 9, 2009 for $187.50 in cash and $185
in new senior notes per $1000 principal amount of our existing US
Unwired notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
May 13, 2003 US UNWIRED INC.
By: /s/ Jerry E. Vaughn
-----------------------
Jerry E. Vaughn
Chief Financial Officer
53
CERTIFICATION
I, Robert W. Piper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of US Unwired Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 13, 2003 US Unwired Inc.
By: /s/ Robert W. Piper
------------------------
Robert W. Piper
President, Chief Executive Officer and
Director (Principal Executive Officer)
54
CERTIFICATION
I, Jerry E. Vaughn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of US Unwired Inc.:
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 13, 2003 US Unwired Inc.
By: /s/ Jerry E. Vaughn
-----------------------
Jerry E. Vaughn
Chief Financial Officer
55