Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission file number 000-22003

US UNWIRED INC.

(Exact name of registrant as specified in its charter)

(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 128,920,585 shares of common stock, $0.01 par value per share, outstanding at May 1, 2004.

Table of Contents

2

Table of Contents

Part I      Financial Information

Item 1.    Financial Statements

US UNWIRED INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes to condensed consolidated financial statements

3

Table of Contents

US UNWIRED INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

4

Table of Contents

UNWIRED INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements

5

Table of Contents

US UNWIRED INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(UNAUDITED)

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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The condensed consolidated balance sheet at December 31, 2003 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, 2003, filed on March 2, 2004 with the Securities and Exchange Commission.

Certain reclassifications have been made to the financial statements for the three-month period ended March 31, 2003 to conform to the presentation of the financial statements for the three-month period ended March 31, 2004.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities—An Interpretation of Accounting Research Bulletin (ARB) No. 51” (“FIN 46”). This interpretation clarifies how to identify variable interest entities and how a company should assess its interests in a variable interest entity to decide whether to consolidate the entity. FIN 46 applies to variable interest entities created after January 31, 2003, in which a company obtains an interest after that date. Also, FIN 46 applies at the end of the first reporting period after March 15, 2004, to variable interest entities in which a company holds a variable interest that it acquired before February 1, 2003. The adoption of this interpretation did not have a material effect on the Company’s financial position, results of operations or cash flows.

In May 2003, the Emerging Issues Task Force (“EITF”) modified its previous consensus to EITF 00-21 to clarify the scope of Issue 00-21 and its interaction with other authoritative literature. As permitted under the modified consensus, the Company adopted this modified consensus effective July 1, 2003 for all revenue arrangements entered into subsequent to June 30, 2003. EITF 00-21 addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the related revenues should be measured and allocated to the separate units of accounting. In applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a package, and the consideration will be measured and allocated to the separate units based on their relative fair values. The Company has reviewed EITF 00-21 and determined that the sale of handsets and future service under contract should be accounted for as separate units under EITF 00-21. As a result, the total consideration under these arrangements, including any related activation fees, is allocated between these separate units based on their relative fair values.

6

Table of Contents

US Unwired Inc. (the Company) is principally engaged in the ownership and operation of wireless communications systems in the Gulf States and Northeast regions of the United States. The Company is a network partner of Sprint PCS and has the exclusive right to provide digital PCS services under the Sprint and Sprint PCS brand names within the Company’s service areas.

The Company provides digital PCS services through its wholly owned subsidiaries: Louisiana Unwired LLC (“Louisiana Unwired”) and IWO Holdings, Inc. (“IWO”). Through January 2004, the Company provided regional cellular service in southwest Louisiana through Unwired Telecom Corporation (“Unwired Telecom”).

In February 2004, the Company consummated the sale of its cellular operations, which included certain cellular towers, for $21.5 million and recognized a gain of $16.2 million that has been recorded as a gain on the disposal of discontinued operations. In March 2004, the Company sold 81 cellular and PCS cell site towers for $9.8 million. Concurrent with the sale, the Company entered into operating leases for a portion of the antenna space on the sold towers from the buyer for an initial term of 10 years, renewable at the option of the Company for two additional ten-year terms at an initial rental of $1.4 million per year, increasing each year by 4% of the previous year’s rental. The Company recorded a deferred gain of approximately $1.8 million that will be recognized ratably over the initial 10-year term of the operating lease. Also during the three-month period ended March 31, 2004, the Company divested of other non-core assets including certain PCS licenses and a minority interest in an unconsolidated affiliate for $10.3 million and recorded a loss of $.5 million. The Company used $11.0 million of the $41.6 million in proceeds to partially repay the US Unwired senior bank credit facility. The accompanying consolidated financial statements reflect the Company’s cellular operations as a discontinued operation.

US Unwired has a senior bank credit facility and senior subordinated discount notes. IWO has a senior bank credit facility and senior notes. 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, 2004, US Unwired had $108.1 million in cash and cash equivalents; availability under the US Unwired senior bank credit facility of $38.3 million; and indebtedness that consisted of $62.4 million related to the US Unwired senior bank credit facility, $371.1 million related to the US Unwired senior subordinated discount notes and $10.4 million in capital leases, promissory notes and vendor financing for a total of $443.9 million. See Note 6 for commitments and contingencies that may affect US Unwired’s liquidity. US Unwired must comply with certain financial covenants of the US Unwired senior bank credit facility and the US Unwired senior subordinated discount notes, and as of March 31, 2004, was in compliance with these financial covenants.

Based on its operating forecasts, the Company believes that US Unwired will be able to comply with the financial covenants of the US Unwired senior bank credit facility and senior subordinated discount notes and have sufficient cash to fund its operations, debt service and capital requirements over the next twelve months. However, US Unwired’s liquidity and ability to comply with these financial covenants is dependent upon a number of factors influencing forecasts of earnings and operating cash flows. These factors include subscriber growth, average monthly revenue per user (“ARPU”), customer turnover or “churn” and cost per gross addition (“CPGA”). These performance metrics are explained in the Management Discussion and Analysis section of this filing.

7

Table of Contents

IWO Liquidity

The Company has been unable to develop a business plan for IWO that provides sufficient cash to fund operations, debt service and capital requirements in 2004. The Company has been in discussions with the IWO creditors to arrive at an acceptable restructuring to preserve liquidity but has been unable to arrive at an acceptable plan. The Company anticipates seeking protection under bankruptcy in 2004.

As of March 31, 2004, IWO had $36.2 million in cash and cash equivalents and $8.2 million in restricted cash set aside for the IWO senior bank credit facility; and indebtedness that consisted of $213.2 million related to the IWO senior bank credit facility and $138.9 million related to the IWO senior notes for a total of $352.1 million. A portion of the original proceeds of the IWO senior notes offering was set aside as restricted cash and used to make the first six scheduled interest payments on the IWO senior notes through January 2004.

In March 2004, IWO failed to make the initial $2.3 million principal payment on the IWO senior bank credit facility and since March 31, 2003, IWO has failed to make $14.2 million in interest payments on the IWO senior bank credit facility. IWO was also not in compliance with its restrictive covenants under the IWO senior bank credit facility at March 31, 2004. As a result of IWO’s failure to make scheduled principal and interest payments and the covenant violations, IWO was in default of the IWO senior bank credit facility at March 31, 2004 and the holders of the senior bank credit facility have denied IWO access to the remaining $25.2 million of availability. As a result, the Company has classified all outstanding indebtedness of both the IWO senior bank credit facility and the IWO senior notes as a current liability.

As a result of liquidity challenges, IWO has made the decision to reduce capital expenditures for network expansion. Included in this reduction 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, 2004, IWO’s construction in progress included $5.6 million primarily related to cell sites that IWO plans to complete and management estimates that completion of these cell sites will require approximately $11.1 million in additional costs to complete construction and place these sites in operation. IWO anticipates that only a portion of these sites will be completed in 2004.

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, possibly subject to the approval by Sprint PCS, to no involvement with IWO at all.

Considering IWO’s default of the IWO loan agreements and its liquidity as discussed above, there is substantial doubt about IWO’s ability to continue as a going concern.

8

Table of Contents

Major categories of property and equipment consisted of the following:

Intangible assets consisted of the following:

Long-term debt, including capital lease obligations, consisted of the following:

As of March 31, 2004, 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.

In March 2004, IWO failed to make the initial $2.3 million principal payment on the IWO senior credit facility and since March 31, 2003, IWO has failed to make $14.2 million in interest payments on the IWO million senior bank credit facility. As a result of the failure to make scheduled principal and interest payments and the covenant violations, IWO was in default of its senior bank credit facility at

9

Table of Contents

March 31, 2004 and the holders of the senior bank credit facility have denied the Company access to the remaining $25.2 million of availability. As a result of this and those issues as discussed in Note 3 above, 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.

The US Unwired senior subordinated discount notes are fully, unconditionally, and jointly and severally guaranteed by Louisiana Unwired, the Company’s wholly owned subsidiary. The guaranty 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. The guaranty 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

The US Unwired senior bank credit facility, as amended in October 2003, consists of $90 million in term loans and a $40 million reducing revolving credit facility. The term loans are being repaid in quarterly installments that began in June 2003, and as a result of these quarterly installments and other payments, the Company has reduced its outstanding term loans to $62.4 million as of March 31, 2004. The $40 million reducing revolving credit facility is subject to certain cash balance requirements and will be permanently reduced by reductions of $4.0 million to $6.0 million per quarter beginning in September 2005. As of March 31, 2004, $38.3 million was available. The US Unwired senior bank credit facility matures in 2008. The US Unwired senior bank credit facility allows for up to $2.0 million in letters of credit and any letters of credit issued by the Company reduce the amount available under the reducing revolving credit facility. 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). Such collateral also secures certain interest rate protection and other hedging agreements permitted by the credit agreement that may be entered into from time to time by the Company. Lucent Technologies, Inc, is also a guarantor of a portion of the senior secured credit 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

10

Table of Contents

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 was set aside as restricted cash and used to make the first six scheduled interest payments on the IWO senior notes through January 2004.

IWO Senior Bank Credit Facility

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 are due to be repaid in quarterly installments that began in March 2004 and the reducing revolver matures in March 2008. All loans under the senior bank credit facility, effective with the date of the default, bear interest at a rate of 4.25-4.75 percent above the agent bank’s prime rate. The IWO senior bank credit facility is secured by all of the assets of IWO and its subsidiaries. As discussed above, the holders of the IWO senior bank credit facility have denied IWO access to the remaining $25.2 million of availability as a result of IWO’s failure to make scheduled principal and interest payments and the covenant violations. The IWO credit facility is available for use only by IWO and its subsidiaries.

The Company uses Sprint PCS to process all post-pay 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. In March 2004, Sprint PCS remitted to the Company approximately $5.5 million for 2003 billings related to these services consisting of $1.1 million in cash and $4.3 million in credits to previously disputed charges. 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 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. As of March 31, 2004, the Company had disputed approximately $19.8 million of charges to US Unwired and $10.1 million of charges to IWO. 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 that may be due to Sprint PCS for these charges.

The Company’s PCS licenses and the PCS licenses that the Company operates for Sprint PCS are subject to a requirement that Sprint PCS 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, 2004, management believes that Sprint PCS has met the requirements necessary for the licenses that the Company operates for Sprint PCS under the Sprint

11

Table of Contents

PCS affiliation agreements and that the Company has met the requirements necessary for the licenses that it owns.

On July 11, 2003, the Company and two of its subsidiaries, Louisiana Unwired LLC and Texas Unwired (“the Company”), filed suit in U.S. District Court for the Western District of Louisiana, against Sprint Corporation, Sprint Spectrum, L.P., Wireless, L.P. and Sprintcom, Inc. (collectively, “Sprint”) and on September 25, 2003, the Company filed an amended complaint. The suit alleges violations of the Racketeer Influenced and Corrupt Organizations Act, breach of fiduciary duty, breach of contract, and fraud arising out of Sprint’s conduct in its dealings with the plaintiff companies. It seeks treble actual damages in unspecified amounts and appointment of a receiver or fiscal agent over property and assets controlled by Sprint. On February 5, 2004, the U.S. District Court denied in all respects Sprint’s previously-filed motion for judgment on the pleadings, stated that it was amenable to allowing the Company to hire an outside accounting company or other expert to monitor monies received by Sprint, and agreed with the Company’s position that certain claims are subject to trial by jury in Louisiana. On March 8, 2004, the Company filed its Second Amended Complaint against Sprint to include certain additional factual allegations related to its claims, as requested by the Court’s February 5 Order. On April 8, 2004, Sprint filed its Answer, Defenses, and Counterclaim to the Company’s Second Amended Complaint, which included a claim that the Company owed Sprint approximately $16.3 million related to contractual disputes between the parties. On March 25, 2004, the Company filed Plaintiffs’ Application to Appoint an Outside Accounting Company or Other Expert to Contemporaneously Monitor Monies Paid to Sprint From US Unwired Affiliate Customers. Sprint has filed an objection to the Company’s application. The Company anticipates that the Court will rule on its application in the coming weeks. The Company and Sprint also have submitted to the Court an agreed upon schedule to complete the discovery process during 2004 and the Company anticipates an early 2005 trial date. The Company does not believe that a negative outcome on Sprint’s counterclaim will have a material adverse effect on the Company.

The Company’s effective income tax rate for the interim periods presented is based on management’s estimate of the Company’s effective tax rate for the applicable year and differs from the federal statutory income tax rate primarily due to nondeductible permanent differences, state income taxes and changes in the valuation allowance for deferred tax assets.

The Company 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-month periods ended March 31, 2004 and 2003 would have been:

12

Table of Contents

As discussed in Note 5, the US Unwired Senior Subordinated Discount Notes are guaranteed by certain of the Company’s subsidiaries. The following information presents the condensed consolidating balance sheets as of March 31, 2004 and December 31, 2003 and the condensed consolidating statements of operations and cash flows for the three-month periods ended March 31, 2004 and March 31, 2003 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.

Condensed Consolidating Balance Sheet

13

Table of Contents

Condensed Consolidating Balance Sheet