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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 31, 2001.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 022003
US UNWIRED INC.
(Exact name of registrant as specified in its charter)
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Louisiana 72-1457316
(State or other jurisdiction of (I.R.S. Employer
incorporation or Organization) Identification Number)
70601
(Zip code)
901 Lakeshore Drive
Lake Charles, Louisiana 70601
(Address of principal executive offices)
(337) 436-9000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, par value $.01 per share Title of Each Class
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 and 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based upon the closing sale price on the NASDAQ Stock Market on
February 26, 2002 is approximately $128,495,319. (For purposes of determination
of the foregoing amount, only our directors and executive officers and holders
of our Class B Common Stock have been deemed affiliates). As of February 26,
2002, there were 27,933,765 shares of Class A common stock, $0.01 par value per
share, and 56,460,144 shares of Class B common stock, $0.01 par value per
share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the US Unwired Inc. Proxy Statement of Registrant for its 2001
annual meeting of shareholders.
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US UNWIRED INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
ITEM 1. Business...................................................... 1
ITEM 2. Properties.................................................... 26
ITEM 3. Legal Proceedings............................................. 26
ITEM 4. Submission of Matters to a Vote of Security Holders........... 26
ITEM 4A. Executive Officers of the Registrant.......................... 27
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder
Matters....................................................... 28
ITEM 6. Selected Financial Data....................................... 29
ITEM 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations..................................... 29
ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk.... 41
ITEM 8. Financial Statements.......................................... 42
ITEM 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure...................................... 42
PART III
ITEM 10. Directors And Executive Officers Of The Registrant............ 42
ITEM 11. Executive Compensation........................................ 42
ITEM 12. Security Ownership Of Certain Beneficial Owners And
Management.................................................... 42
ITEM 13. Certain Relationships And Related Transactions................ 42
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports On Form
8-K........................................................... 43
This report contains forward-looking statements, which are statements
about future business strategy, operations and capabilities, construction plan,
construction schedule, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-
looking statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the investment
considerations described elsewhere, specific factors that might cause such a
difference include, but are not limited to (i) our ability to integrate
operations and finance future growth opportunities; (ii) our dependence on
Sprint PCS; (iii) our ability to successfully complete the build-out of the
Sprint PCS network, to expand 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. For a
discussion of some of the factors discussed above as well as additional
factors, see "Investment Considerations" contained in this document.
PART I
ITEM 1. Business
General
We provide wireless personal communication services, commonly referred to
as PCS, in eastern Texas, southern Oklahoma, southern Arkansas, significant
portions of Louisiana, Alabama and Mississippi, the Florida panhandle and
southern Tennessee. 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 and Sprint PCS brand names in a
service area comprising approximately 9.9 million residents. Our service area
is among the largest in population and subscribers of the Sprint PCS network
partners and is contiguous with Sprint PCS's launched markets of Houston,
Dallas, Little Rock, New Orleans, Birmingham, Tallahassee and Memphis.
1
We currently provide Sprint PCS service to all 41 of our geographical
areas, known as basic trading areas, BTAs or markets in our service area. We
have completed the initial network build out plan and have met the Sprint PCS
management agreement requirement of providing network coverage to 65% of the
resident population in our service area. We are continuing to expand our
service by upgrading network equipment and adding cell sites in certain markets
that we believe will help us provide better service.
At December 31, 2001, we were providing PCS service to approximately
277,000 subscribers and network coverage of approximately 6.8 million residents
or 68.5% out of approximately 9.9 million total residents. 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.
In addition, we provide cellular and paging services in parts of southwest
Louisiana and as of December 31, 2001, we had approximately 34,200 cellular
subscribers and 13,400 paging subscribers.
Our Background
US Unwired is comprised of two wholly owned subsidiaries: Louisiana
Unwired, LLC and Unwired Telecom Corporation. Louisiana Unwired and its
subsidiary provide PCS telecommunication services, and Unwired Telecom provides
cellular and paging telecommunications service.
On February 28, 2001, we purchased from Cameron Communications Corporation
its 6.14% minority interest in Louisiana Unwired in exchange for 4,634,842
shares of our class A common stock. The market value of the class A common
stock associated with this transaction on February 28, 2001 was approximately
$36.5 million. Upon conclusion of the transaction, we owned 100% of Louisiana
Unwired. In February 2001, we also purchased the minority interest in Texas
Unwired, a Louisiana general partnership, for 310,664 shares of our class A
common stock. The market value of the class A common stock associated with this
transaction was $2.4 million. Upon conclusion of the transaction, we owned 100%
of Texas Unwired through Louisiana Unwired.
On December 19, 2001, we entered into an agreement to acquire, through a
plan of merger, IWO Holdings Inc. ("IWO") a Delaware corporation and Sprint PCS
network partner, for up to approximately 45.9 million shares of our common
stock. IWO has the exclusive right to provide digital PCS services under the
Sprint and Sprint PCS brand names in a service area comprising approximately
6.2 million residents in 20 contiguous markets in the northeastern United
States including upstate New York, New Hampshire, Vermont and portions of
Massachusetts and Pennsylvania. This acquisition is subject to shareholder
approval and to other conditions by both US Unwired and IWO shareholders.
Our Affiliation with Sprint PCS
Under our agreements with Sprint PCS, we market Sprint PCS products and
services in our service area using licenses that Sprint PCS acquired from the
FCC in 1994 and 1996. We will be the
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only provider of Sprint PCS products and services in our service area. Some key
points about these agreements are:
. each agreement lasts up to 50 years with an initial period of 20 years
and three successive 10-year renewal periods.
. each agreement requires revenue sharing of 8% to Sprint PCS and 92% to
US Unwired, except that US Unwired retains 100% of revenues from non-
US Unwired Sprint PCS customers traveling in our service area,
extraordinary income and equipment sales.
. if we terminate or breach the agreements, we may be required to sell
our PCS business and network to Sprint PCS or to purchase the Sprint
PCS licenses from Sprint PCS.
. if Sprint PCS terminates or breaches the agreements, we may be able to
sell our PCS business and network to Sprint PCS or to purchase the
Sprint PCS licenses from Sprint PCS.
Effective June 2001, Sprint PCS began providing billing and customer care
services for new PCS subscribers added in certain markets where we had
previously provided these services. We migrated a substantial portion of our
customer base to Sprint PCS's billing and customer care platform in August 2001
and completed the process in January 2002. We plan to continue to perform
network capacity monitoring and planning beyond that date. As a part of the
amendment, Sprint PCS has also agreed to not change the reciprocal Sprint
roaming rate of $.20 per minute through December 2002 for Sprint PCS
subscribers.
We believe that our service area is important to Sprint PCS's plan to
expand its PCS network. To date, Sprint PCS has made considerable investments
in the licenses covering our service area.
Our Service Area
Our Sprint PCS service area covers 41 markets spanning over 160,200 square
miles with a population of approximately 9.9 million. Our service area is one
of the largest in the United States by measure of population for all of the
territories assigned to Sprint PCS network partners. Even though our service
area comprises approximately 9.9 million residents, the number of residents in
our service area does not represent the number of PCS subscribers that we
expect to have in our service area.
Our service area is contiguous with Sprint PCS's launched markets of
Houston, Dallas, Little Rock, New Orleans, Birmingham, Tallahassee and Memphis.
Our network links these existing Sprint PCS markets. We are the only provider
of Sprint PCS products and services in the markets connecting these major
cities.
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The following table provides some key information about our 41 PCS markets
(population in thousands):
Basic Trading Market
Market (1) Area # Population
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Anniston, AL........................................... 17 163.2
Chilton Area Counties, AL (2).......................... 44 253.3
Decatur, AL............................................ 108 147.0
Florence, AL........................................... 146 192.4
Gadsden, AL............................................ 158 193.3
Huntsville, AL......................................... 198 515.7
Mobile, AL............................................. 302 668.5
Montgomery, AL......................................... 305 488.0
Selma, AL.............................................. 415 71.0
Tuscaloosa, AL......................................... 450 255.1
El Dorado, AR.......................................... 125 105.2
Hot Springs, AR........................................ 193 140.7
Nevada Area Counties, AR (3)........................... 257 59.6
Pine Bluff, AR......................................... 348 153.7
Fort Walton Beach, FL.................................. 154 214.1
Jackson Area County, FL................................ 439 47.1
Panama City, FL........................................ 340 203.2
Pensacola, FL.......................................... 343 417.1
Alexandria, LA......................................... 9 269.0
Houma, LA.............................................. 195 271.8
Lake Charles, LA....................................... 238 285.4
Monroe, LA............................................. 304 331.2
Shreveport, LA......................................... 419 607.2
Columbus, MS........................................... 94 175.4
Greenville, MS......................................... 175 208.8
Grenada Counties, MS (4)............................... 290 63.5
Hattiesburg, MS........................................ 186 183.7
Jackson, MS............................................ 210 682.3
Laurel, MS............................................. 246 83.3
McComb, MS............................................. 269 114.6
Meridian, MS........................................... 292 209.5
Tupelo, MS............................................. 449 325.7
Natchez, MS............................................ 315 72.6
Vicksburg, MS.......................................... 455 61.6
Marshall Area Counties, TN (5)......................... 314 56.9
Longview, TX........................................... 260 315.3
Paris, TX.............................................. 341 95.4
Texarkana, TX.......................................... 443 271.0
Tyler, TX.............................................. 452 316.3
Beaumont, TX........................................... 34 468.7
Lufkin, TX............................................. 265 163.2
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Subtotal............................................. 9,920.6
Minority Interest : (6)
Baton Rouge, LA........................................ 32 94.7
Hammond, LA............................................ 180 14.9
Lafayette, LA.......................................... 236 73.4
Biloxi, MS............................................. 42 53.4
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Sub-total............................................ 236.4
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Total.............................................. 10,157.0
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(1) Source: Report dated January 16, 2002 by Kagan World Media, Associates,
Inc. as compiled from U.S. Department of Census, U.S. Department of
Transportation and SRC, LLC data. Reprinted with permission of Kagan World
Media. Market population has been calculated as the market population form
the Kagan report times our ownership interest in the market. All markets
are reflected at 100% with the exception of our minority interests.
(2) Includes Nevada, Clark, Dallas, and Grant Counties.
(3) Includes Chilton, Cullman, Talladega, Coosa and Tallapoosa Counties.
(4) Includes Grenada, Yalobusha, Tallahatchie and Montgomery Counties.
(5) Includes Marshall and Giles Counties.
(6) Reflects our 13.28% ownership interest in these markets held through our
minority interest in Gulf Coast Wireless Limited Partnership.
Recent Developments
On February 18, 2002, we entered into an agreement, through a merger, to
acquire Sprint PCS network partner Georgia PCS Management, L.L.C. Under the
terms of the agreement, we will issue approximately 5.5 million shares of our
class A common stock, subject to adjustment based on the amount of Georgia
PCS's indebtedness at the completion of the merger. Additionally, we will use
some of our cash to pay off approximately $54.8 million of indebtedness of
Georgia PCS and will add a $40 million term loan B to our existing senior
credit facility. The loan, which will be funded at the closing of the Georgia
PCS transaction, will bear interest at LIBOR plus 4% with 96% of the loan
maturing in 2008.
The completion of the merger is subject to the approvals of Sprint PCS,
our lenders under our senior credit facility and federal antitrust authorities
as well as to other customary closing conditions. Georgia PCS has already
obtained the required approval of its members to complete the merger with us.
We are not required to obtain the approval of our stockholders to complete the
merger with Georgia PCS. We expect to complete this acquisition in March 2002.
Our completion of this acquisition is subject to various conditions, so we
cannot be certain it will occur.
Georgia PCS provides personal communications services in seven Georgia
markets in Brunswick, Dalton, Rome, Valdosta, Macon-Warner Robins, Waycross and
six counties surrounding Atlanta. It has the exclusive right to provide digital
PCS services under the Sprint and Sprint PCS brand names in a service area
comprising approximately 1.4 million residents. As of December 31, 2001,
Georgia PCS was providing PCS service to approximately 36,600 subscribers in
its seven markets and network coverage to approximately 984,000 residents out
of approximately 1.4 million total residents in its service area, or
approximately 69% of the total residents. Georgia PCS began providing Sprint
PCS service in March 1999.
PCS Services and Features
We offer Sprint PCS products and services in our service area. Our
products and services are designed to mirror those of Sprint PCS and to be a
part of the Sprint PCS nationwide network. Sprint PCS customers in our service
area may use Sprint PCS services throughout our contiguous markets and
seamlessly throughout the Sprint network.
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We support the Sprint PCS Wireless Web throughout our service area. The
Sprint Wireless Web allows subscribers with data-capable handsets to connect
their portable computers or personal digital assistants to the Internet. Sprint
PCS subscribers with web-browser enable handsets also have the ability to
receive periodic information updates such as stock prices, airline schedules
and weather reports directly on their handsets by connecting to and browsing
specially designed text-based Internet sites.
We offer Code Division Multiple Access (CDMA) handsets that weigh 2.3 to
7.3 ounces and can offer up to 12 days of standby time and up to five hours of
talk time. We also offer dual-mode handsets that allow customers to make and
receive calls on both PCS and cellular frequency bands. All handsets are
equipped with preprogrammed features and are sold under the Sprint PCS brand
name.
We provide roaming services to both Sprint PCS subscribers that are
traveling through our service area as well as non-Sprint subscribers traveling
through our service area. Sprint PCS and other affiliates provide a similar
service to our subscribers traveling outside of our market area.
PCS Marketing Strategy
Our marketing and sales strategy uses the advertising and marketing
programs that have been developed by Sprint PCS. We enhance this with
strategies that we have tailored specifically for our markets.
We benefit from the recognizable Sprint PCS brand names and logos and from
Sprint PCS's technological developments.
Pricing. We use the Sprint PCS pricing strategy. This offers our customers
a menu of service plans typically structured with monthly recurring charges,
large local calling areas, bundles of minutes and options and features such as
voicemail, enhanced caller identification, call waiting, three-way calling and
low per-minute rates.
Local focus and personalized customer care. Our regional focus enables us
to supplement Sprint PCS's marketing strategies with our own strategies
tailored to each of our specific markets. This includes attracting local
businesses to enhance our distribution and drawing on our management team's
local experience. Our local sales force executes our marketing strategy through
our retail stores and kiosks. Our outside sales force targets business sales.
Additionally, we staff our retail outlets with full-time customer care
representatives to communicate directly with customers concerning billing and
service issues.
Advertising. We use the Sprint PCS name and reputation to attract
customers and benefit from Sprint PCS's national advertising campaign to
promote its products at no additional cost to us. Sprint PCS also runs numerous
promotional campaigns that provide customers with benefits such as additional
features at the same rate or free ancillary services. We direct our media and
promotional efforts at the community level by advertising Sprint PCS's products
and services through television, radio, print advertisements, outdoor
advertising, billing inserts and promotional displays in our retail stores.
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Sponsorships. Sprint PCS sponsors numerous national and regional events.
These sponsorships provide Sprint PCS with brand name and product awareness.
Our regional marketing teams also sponsor local events to increase customer
awareness of the Sprint PCS network.
Sales and Distribution
We target a broad range of consumer and business markets through a sales
and distribution plan. We use traditional sales channels, like our retail
stores, mass merchandisers and other national retail outlets, independent
agents and an outside sales force. We also use lower-cost methods like direct
marketing and a corporate website.
Retail stores. We have 33 PCS retail stores, four cellular retail stores,
four PCS kiosks and six cellular kiosks. We plan additional PCS expansion in
2002. Our retail stores are located in the principal retail districts in each
market. Kiosks, which are located primarily in high traffic retail outlets,
maximize our retail presence in some of our markets and take advantage of high
traffic areas. We use our stores and kiosks for much of the distribution and
sale of our handsets and services. Sales representatives in these stores and
kiosks receive in-depth training that allows them to explain PCS service in an
informed manner. We believe that these representatives will foster effective
and enduring customer relationships.
Mass merchandisers and outlets. We target customers through our mass-
market retail outlets. We have negotiated distribution agreements based on
Sprint PCS's arrangements with national and regional mass merchandisers and
consumer electronic retailers, including Radio Shack, Office Depot, Circuit
City, Dillard's, Office Max and Best Buy and have a presence in 351 of the
total 413 national retail outlet locations in our market area.
Independent agents. We have a contracted network of 599 independent agents
that creates additional opportunities for local distribution. Most of these
businesses are family-owned consumer electronics dealers and wireless
telecommunication retailers.
Other Sprint PCS initiatives. We participate in Sprint PCS's national
accounts program, which targets Fortune 1000 companies, take advantage of
Sprint PCS's inbound telemarketing sales program and Sprint PCS's internet site
that allows customers in our service area who purchase products and services
over the Sprint PCS internet site become customers of our PCS network.
No single manufacturer has accounted for more than 10% of our sales in the
current reporting period or in the past three years.
Cellular and Paging Services
We provide cellular and paging service in southwest Louisiana. At December
31, 2001, we had approximately 34,200 cellular subscribers and approximately
13,400 paging subscribers.
We have experienced significant competition in our cellular markets from
digital technologies that has resulted in an erosion of our cellular and paging
customer base. In an effort to revitalize this part of our operation, we
elected to enhance our cellular network to include TDMA digital technology.
TDMA is one of three digital technologies in the United States and each uses a
different
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digital language to send calls. Several providers, such as AT&T Wireless,
Dobson Communications, CenturyTel and Triton PCS, have chosen TDMA. In August
2001, we completed the upgrade of our cellular network to include TDMA digital
and expanded service to our cellular subscribers to now include voice mail
notification, caller identification and text messaging. We anticipate this
upgrade will make us more competitive and provide increased service and roaming
capacity.
Suppliers and Equipment Vendors
We do not manufacture any of the handsets that we use in our operations.
We purchase our equipment pursuant to various Sprint PCS vendor arrangements
that provide us volume discounts. Under such arrangements, we purchase our
handsets directly from Sprint PCS and our accessories from certain other third
party vendors.
Competition
We compete in our service area with the current PCS and cellular
providers. The cellular providers in our service area serve different
geographic segments of our service area, but no one cellular carrier provides
complete coverage throughout our service area. Some of these cellular providers
offer a digital product also, but it typically covers only a small segment of
our service area.
Of our PCS competitors, only Verizon, SunCom, Cingular and Alltel provide
service comparable to ours in our service area. Verizon is licensed to offer
PCS services in all of our Louisiana and Texas markets but has not indicated
any intention to build out a network in these markets. SunCom, an AT&T wireless
network provider, operates in parts of the south-central and southeastern
United States and competes with us in our Louisiana, Alabama, Arkansas and
Mississippi markets. Alltel is a current PCS provider in several of our
markets.
Our ability to compete effectively with other PCS providers will depend
on:
. the continued success of CDMA technology in providing better call
quality and clarity than analog cellular systems.
. our competitive pricing with various options suiting individual
subscribers calling needs.
. the continued expansion and improvement of the Sprint PCS network,
customer care system and telephone handset options.
We also compete with paging, enhanced specialized mobile radio and
dispatch companies in our markets. Potential users of PCS systems may satisfy
their communications needs with other current and developing technologies. One
or two-way paging or beeper services that feature voice messaging and data
display as well as tone-only service may be adequate for potential subscribers
who do not need to speak to the caller.
Sprint PCS has chosen CDMA technology, which we believe offers significant
advantages in the marketplace. CDMA is one of three languages that wireless
telephones use to communicate with the phone network. The other two predominant
standards are TDMA and GSM.
CDMA offers superior call quality and clarity. CDMA also offers the
highest capacity of the three standards. This means that more simultaneous
calls can be handled on a CDMA network than
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on equivalent TDMA or GSM networks. CDMA also offers a high level of security,
giving customers confidence that their calls remain private. CDMA offers many
advanced features such as short text messaging, Internet access, call waiting,
call forwarding and three way calling. Several providers in the United States,
including Sprint PCS, Verizon and PrimeCo, have adopted CDMA.
TDMA is generally less expensive to deploy if a carrier seeks to overlay
an analog network, like a cellular carrier would be required to do. TDMA also
offers increased call security and advanced features like those available on a
CDMA network. Several providers in the United States, including SunCom use
TDMA.
GSM is the most widely adopted standard around the world. It originated
in Europe, where it continues to be the dominant standard. It has been widely
deployed for over ten years, which means that economies of scale for network
and handset equipment have been achieved. This has lowered the cost of
purchasing the equipment for a GSM system. GSM also offers increased call
security and advanced features like those available on a CDMA network. Several
providers in the United States, including Cingular, VoiceStream Wireless, and
Powertel, have adopted GSM.
We do not currently face competition from resellers on our facilities. A
reseller buys blocks of wireless telephone numbers and capacity from a
licensed carrier and resells service through its own distribution network to
the public but does not hold FCC licenses or own facilities. Thus, a reseller
is both a customer of a wireless licensee's services and also a competitor of
that and other licensees. We expect to continue to be subject to the FCC rule
that requires cellular and PCS licensees to permit resale of carrier service.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
PCS services. Based upon increased competition, we anticipate that market
prices for two-way wireless services generally will decline in the future. We
will compete to attract and retain subscribers principally on the basis of
services and features, the size and location of our service areas, network
coverage and reliability, customer care and pricing. Our ability to compete
successfully will also depend, in part, on our 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.
We have experienced significant competition in our cellular markets from
digital technologies that has resulted in an erosion of our cellular and
paging customer base. In an effort to revitalize this part of our operation,
we elected to enhance our cellular network to include TDMA digital technology.
TDMA is one of three digital technologies in the United States and each uses a
different digital language to send calls. Several providers, such as AT&T
Wireless, Dobson Communications, CenturyTel and Triton PCS, have chosen TDMA.
In August 2001, we completed the upgrade of our cellular network to include
TDMA digital and expanded service to our cellular subscribers to now include
voice mail notification, caller identification and text messaging. We
anticipate this upgrade will make us more competitive and provide increased
service and roaming capacity.
Network Build Out
We have completed the initial network build out plan for our 41 markets
and have met the Sprint PCS management agreement requirement of providing
network coverage to 65% of the
9
resident population in our service area. We are continuing to expand our
service by upgrading network equipment and adding cell sites in certain markets
that we believe will help us provide better service.
We focused our network construction first on the concentrated population
and business centers of the major metropolitan areas in our service area and
the adjoining interstate highways. We continued to build out the smaller
markets surrounding the existing built out areas, interstate and state
highways. We have only launched PCS service after we completed a significant
portion of the planned build out for a given area. Before we launch service, we
perform extensive field-testing to ensure comprehensive and reliable coverage
within a particular market. We provided overall project and construction
management of the design, site acquisition, installation and testing of our PCS
system.
We obtain cell sites in three ways: (1) co-location, (2) construction of a
tower by an independent build-to-suit company, or (3) construction of a tower
by us. Co-location describes the network strategy of leasing available space on
a tower or cell site owned by another company. We prefer to co-locate with
another wireless company by leasing space on an existing tower or building.
When we co-locate, we generally have lower construction costs, and it is likely
that any zoning difficulties have been resolved. Beginning in December 2000, we
have sold a substantial number of our cell site towers and executed co-location
agreements. As of December 31, 2001, we had 872 PCS cell sites, of which
approximately 95% were co-locations and 5% owned with network coverage of
approximately 6.8 million residents out of approximately 9.9 million total
residents. 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.
Microwave relocation. Fixed microwave operators previously used the
frequencies that are now allocated for PCS licenses. The FCC has established
procedures for PCS licensees to relocate these existing microwave paths,
generally at the PCS licensee's expense. With Sprint PCS's assistance, we have
relocated all microwave paths for the PCS licenses that we own.
Switching centers. We lease five switching centers for our service area.
These centers are located in our four markets of Shreveport and Lake Charles,
Louisiana, Jackson, Mississippi and Montgomery, Alabama. Each switching center
serves several purposes, including subscriber validation, call routing,
managing call hand off and managing access to landlines and access to landlines
and access to Sprint PCS national platforms.
Interconnection. We connect our digital PCS network to the landline
telephone system through interconnection agreements with local exchange
carriers. Before entering the Sprint PCS agreements, we entered into
interconnection agreements with BellSouth. Through our agreements with Sprint
PCS, we benefit from the interconnection agreements that Sprint PCS negotiates.
Long distance and back haul. We have a long distance agreement with our
affiliate, Cameron Communications Corporation, for long distance services. We
also buy long distance services from Sprint LD. We intend to migrate all of our
long distance to Sprint LD in mid-2002.
10
Network monitoring systems. We use Sprint PCS's Network Operations
Control as well as our network operations center in Lake Charles, Louisiana to
provide monitoring and maintenance of our entire network, including:
. the constant monitoring for blocked or dropped calls, call clarity and
signs of tampering, cloning or fraud.
. the recording of network traffic statistics.
. the overseeing of customer usage, data collected at switch facilities
and billing.
Effective June 2001, Sprint PCS began providing billing and customer care
services for new PCS subscribers added in certain markets where we had
previously provided these services. We migrated a substantial portion of our
customer base to Sprint PCS's billing and customer care platform in August
2001 and completed this process by January 2002. We plan to continue to
perform network capacity monitoring and planning beyond that date.
Government Regulation
The FCC and other state and local regulatory agencies regulate our PCS
and cellular systems.
Licensing of PCS systems. A broadband PCS system operates under a service
area license granted by the FCC for a particular market. These licenses
operate on one of six frequency blocks allocated for broadband PCS service.
Narrowband PCS is for non-voice applications such as paging and data service
and is separately licensed. The FCC awards all PCS licenses by auction.
All PCS licenses have a 10-year term and must be renewed at the end of
this term. The FCC generally will renew a PCS license if the licensee provided
substantial service during the past license term and substantially complied
with applicable law. The FCC may revoke a license for serious violations of
FCC rules. All PCS licensees must satisfy coverage requirements. Licensees
that fail to meet the coverage requirements may lose the service area that is
not covered, or the license.
For up to five years after a PCS license is granted, the licensee must
share spectrum with existing licensees that operate fixed microwave systems
within its license area. To operate our PCS systems efficiently and with
adequate population coverage, we must relocate many of these existing
licensees. The FCC has adopted a transition plan to relocate microwave
operators and a cost-sharing plan for relocation that benefits more than one
PCS licensee. These plans expire on April 4, 2005.
The FCC regulates PCS resale practices also.
Licensing of cellular telephone systems. The FCC awards licenses for
cellular telephone systems by auction. Cellular licenses generally last for 10
years and may be renewed for periods of up to 10 years. The FCC may revoke a
license for serious violations of FCC rules. The FCC may deny renewal if it
determines that the grant of an application would not serve the public
interest. In addition, at the renewal time, other parties may file competing
applications for the license. A license in good standing is entitled to
renewal expectancy. This gives the current license holder an advantage over
competing applicants.
The FCC regulates cellular service resale practices and the terms under
which ancillary services may be provided through cellular facilities.
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We use landline facilities to connect cell sites and to link them to the
main switching office. The FCC separately licenses and regulates these
landlines.
Other regulatory requirements. The FCC imposes additional regulatory
requirements on all commercial mobile radio service, or CMRS, operators, which
include PCS and cellular systems as well as some specialized mobile radio
systems. These requirements may change. Some of the current requirements
include:
. Resale. Most CMRS operators, including us, generally may not restrict
the resale of their services so that resellers may use the facilities
of the CMRS operator to introduce a competitive service.
. Roaming. CMRS carriers must provide service to all subscribers of a
compatible CMRS service in another geographic region.
. Number portability. CMRS carriers will soon be required to allow their
customers to take their phone numbers with them if they change to a
competitive service and must now be able to deliver calls to carried
numbers.
. Enhanced 911. CMRS carriers must transmit 911 calls from any qualified
handset without credit check or validation, must provide 911 service
to individuals with speech or hearing disabilities, and must provide
the approximate location of the 911 caller.
. Wiretaps. CMRS carriers must provide law enforcement personnel with
sufficient capacity to enable wiretaps on the CMRS network.
. Calling party pays. The FCC is considering rules to permit CMRS
operators to charge the party making the call. The new rules, if
adopted, would place consumer protection and uniform notification
requirements on the service.
. Customer information. The FCC has rules that protect the customer
against the use of customer proprietary information for marketing
purposes. A federal court struck down these rules, but the FCC has
stayed the effect of this decision by petitioning for rehearing.
. Interconnection. All telecommunications carriers, including CMRS
carriers, must interconnect directly or indirectly with other
telecommunications carriers.
. Universal service and other fees. The FCC imposes large universal
service support fees on telecommunications carriers, including CMRS
carriers. The FCC imposes smaller fees for telecommunications relay
service, number portability and the cost of FCC regulation.
. Spectrum cap. There are limitations on a person's ownership in
licenses for more than 45 MHz of PCS, cellular and some specialized
mobile radio services in metropolitan statistical areas and 55 MHz in
rural service areas where there is significant overlap in any
geographic area. Significant overlap means that at least ten percent
of the population of the PCS licensed service area is within the
cellular and/or SMR service area(s). We believe that we are in
compliance with these limits.
Transfers and assignments of PCS and cellular licenses. The FCC must
approve the assignment or transfer of control of a license for a PCS or
cellular system. In addition, the FCC requires licensees who transfer control
of a PCS license within the first three years of their license
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term to disclose the total consideration received for the transfer. FCC
approval is not required for the sale of an interest that does not transfer
control of a license. Any acquisition or sale of PCS or cellular interests may
also require the prior approval of the Federal Trade Commission, the Department
of Justice and state or local regulatory authorities.
Foreign ownership. The Communications Act of 1934 limits the non-U.S.
ownership of licensees. If foreign ownership exceeds the permitted level, the
FCC may revoke the PCS licenses or require an ownership restructuring.
Additional spectrum. In 2000, the FCC auctioned spectrum that could be
used to compete with our PCS system. On January 25, 2002, the FCC announced
that in June 2002 it will auction additional spectrum that could be used to
compete with our PCS systems. We have no way of knowing whether the new
spectrum in our service area will be used to offer a competitive service.
Intellectual Property
The Sprint(R) and Sprint PCS(R) brand names and logos are registered
service marks owned by Sprint. We have license agreements with Sprint that
allow us to use, without payment and only in our service area, the Sprint
design logo and diamond symbol and other Sprint service marks, like the phrases
The Clear Alternative to Cellular and Clear Across the Nation. We can use some
of Sprint's licensed marks on some wireless telephone handsets. The license
agreements have many restrictions on our use of their licensed marks. We are
the only person entitled to market Sprint PCS products and services in our
service area, except for the Sprint PCS national marketing programs.
Employees
As of December 31, 2001, we had approximately 900 employees. No union
represents our employees. We believe that we have good relations with our
employees.
Seasonality
Like the wireless communications industry in general, our subscribers
increase in the fourth quarter due to the holiday season. A greater number of
phones sold at holiday promotional prices increases our losses on merchandise
sales. Our sales and marketing expenses increase also with holiday promotional
activities. We generally have the most use and revenue per subscriber in the
summer because of an increase in revenues from fees charged to non-US Unwired,
non-Sprint PCS customers who use our network while traveling in our service
area. We believe that the increased traffic in our service area comes from
people traveling during summer vacation. We expect these trends to continue
based on historical operating results.
Investment Considerations
We provide wireless personal communication services, commonly called PCS,
as a network partner of Sprint PCS. In the discussion that follows, we use "we"
and "our" generally to refer to US Unwired and its subsidiaries, including IWO
and Georgia PCS following the completion of our pending mergers with those
companies, with two exceptions. When indebtedness or stock is referred to, we
use "we" or "our" to mean US Unwired as a corporate entity, without its
subsidiaries. As of February 28, 2002, we had entered into agreements to
acquire by merger IWO Holdings, Inc., and Georgia PCS Management, L.L.C.,
which, like us, are network partners of Sprint PCS. While we expect the
acquisitions to be completed by April 2002, they are subject to various
conditions and
13
therefore we cannot assure you they will be completed. The discussion that
follows assumes that we will complete these acquisitions.
Our stockholders and persons who are considering an investment in our
common stock should carefully consider the factors that are described below.
Our stock price may be volatile. The market price of our common stock
could be subject to wide fluctuations in response to factors, some of which are
beyond our control, such as the following: quarterly variations in operating
results; operating results that vary from the expectations of securities
analysts and investors; changes in expectations as to future financial
performance, including financial estimates by securities analysts and
investors; changes in the relationship with Sprint PCS; announcements by Sprint
PCS concerning developments or changes in its business, financial condition or
results of operations, or in its expectations as to future financial
performance; announcements of technological innovations or new products and
services by Sprint PCS or our competitors; changes in results of operations and
market valuations of other companies in the telecommunications industry in
general and the wireless industry in particular, including Sprint PCS and its
network partners and our competitors; departures of key personnel; changes in
laws and regulations; significant claims or lawsuits against us; announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments; and general economic and
competitive conditions.
Integration following the mergers will present significant challenges. We
entered into the merger agreements with the expectation that the mergers will
result in expanding our existing network and customer base and taking advantage
of the best operating practices of all three organizations. Achieving the
benefits of the mergers will depend in part on integrating the operations of
the companies in an efficient manner. We cannot assure you that this will
occur. To realize the anticipated benefits of this combination, our management
team must develop strategies and implement a business plan that will
successfully: manage the combined company's networks and markets; maintain
adequate focus on existing business and operations while working to integrate
the companies; combine companies that do not have extensive operating histories
in the PCS market; manage each company's cash and available credit lines for
use in financing future growth and working capital needs; manage the marketing
and sales of each of the companies; manage the geographic distance between the
territories of the companies; manage operational issues relating to IWO and
Georgia PCS that we do not face in our operations; manage the transition of
senior management expertise to US Unwired; and retain and attract key employees
during a period of transition.
The diversion of management's attention from ongoing operations and any
difficulties encountered in the transition and integration process could have a
material adverse effect on our financial condition and results of operations.
Our ability to operate as a combined company will be limited by US
Unwired's and IWO's separate public debt indentures and credit facilities. For
purposes of US Unwired's and IWO's respective public debt indentures, US
Unwired and IWO will operate as separate business entities following the
merger. Due to restrictions in US Unwired's indenture, US Unwired will be
unable to provide direct or indirect credit support to IWO. Likewise, IWO will
be restricted under its debt
14
instruments from paying dividends or freely transferring money to US Unwired.
These restrictions may hinder the combined company's ability to achieve the
anticipated benefits of the merger with IWO, react to developments in US
Unwired or IWO's business or take advantage of business opportunities.
We depend on the cash flows of our respective subsidiaries to satisfy our
debt obligations. We depend on our respective subsidiaries for cash flow and to
service our debt obligations. Existing or future credit agreements may restrict
or prohibit subsidiaries from paying dividends. State law may also limit the
amount of the dividends that our subsidiaries are permitted to pay.
The issuance of US Unwired common stock in the mergers may cause dilution
to US Unwired stockholders. We believe that certain benefits will result from
the mergers. We cannot assure you, however, that combining our business, even
if completed in an efficient, effective and timely manner, will result in
combined results of operations and financial condition superior to those that
we could have achieved independently. The issuance of our common stock in the
mergers could reduce the market price of our common stock. The success of the
transaction for us will depend on revenue growth or other benefits sufficient
to offset the dilutive effects of our issuing additional shares in the mergers.
We cannot assure you that we will achieve sufficient benefits.
Future sales of shares of US Unwired common stock may negatively affect
our stock price. As a result of our mergers we will issue over 50million shares
of US Unwired common stock. The shares of our common stock proposed to be
issued would represent approximately 37% of our common stock to be outstanding
immediately following the mergers. After certain lock up periods, the
stockholders who signed lock-up agreements will be able to sell all or a
portion of their shares in a proposed underwritten public offering, and we will
enter into other registration rights agreements with some of them. Sales of
substantial amounts of shares of US Unwired common stock, or even the potential
for such sales, could lower the market price of our common stock and impair our
ability to raise capital through the sale of equity securities.
We expect to incur significant costs associated with the mergers. We will
incur significant direct transaction, severance and integration costs
associated with the mergers.
Any unknown liabilities will be borne by us. If the companies we acquire
have obligations we do not know about, these liabilities will be borne by us.
We cannot assure you that any such liabilities will not materially and
adversely affect our results of operations and our financial condition.
If we do not successfully manage the operations and expected growth of the
combined company following the mergers, our operating performance may be
adversely impacted. We have limited operating history as a Sprint PCS
affiliate. We began operations as a Sprint PCS affiliate on June 8, 1998. Our
ability to achieve and sustain operating profitability will depend upon many
factors, including our abilities to market Sprint PCS services and manage
customer turnover rates, to manage growth through the expansion or completion
of our network build-outs and through implementing the combined company's best
practices to increase market penetration in its current and future markets. To
be successful, we will require continued development, construction, testing,
deployment and operation of our PCS networks. These activities are expected to
place demands on our managerial, operational and financial resources.
15
Our failure to timely expand or complete the build-out of our networks may
result in a decrease in the number of expected new PCS subscribers and
adversely affect results of operations or result in the loss of our licenses or
a breach of agreements with Sprint PCS. In order to expand or complete network
build-outs, we must successfully lease or otherwise retain rights to a
sufficient number of radio communications and network control sites, complete
the purchase and installation of equipment, build-out the physical
infrastructure and test the network. Regulatory changes, engineering design
changes and required technological upgrades could affect the number and
location of our towers as well as our ability to obtain sufficient rights to
meet our and their network build-out expansion goals or requirements. Some of
the radio communications and network control sites are likely to require zoning
variances or other local governmental or third party approvals. Any failure by
us to expand or complete our network build-out on a timely basis may limit our
network capacity and/or reduce the number of expected new PCS subscribers,
either of which could adversely affect our results of operations, result in a
breach of agreements with Sprint PCS or a loss of our licenses.
There is considerable demand for the communications equipment that we need
to expand or complete our 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 we cannot get this equipment, we may fail to expand or construct
our networks timely. This could limit our ability to compete effectively or to
meet the construction requirements of the FCC or the Sprint PCS agreements. If
we do not meet these construction requirements, we could lose our licenses or
breach agreements with Sprint PCS.
Our territory has limited amounts of licensed spectrum, which may
adversely affect the quality of our service and our results of operations. We
and Sprint PCS have licenses for limited spectrum in our territory. In the
future, as the number of customers in our territory increases, this limited
amount of licensed spectrum may not be able to accommodate increases in call
volume, may lead to increased dropped 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 we lose the right to install our equipment on certain wireless towers
or are unable to renew expiring leases for wireless towers on favorable terms
or at all, our business and results of operations could be adversely impacted.
Substantially all of our cell sites are installed on leased tower facilities
that are shared with one or more other wireless service providers. In addition,
a large portion of these leased tower sites are owned by a few tower companies.
If a master agreement with one of these tower companies were to terminate, or
if one of these tower companies were unable to support our use of its tower
sites, we would have to find new sites or may be required to rebuild the
affected portion of the network. In addition, the concentration of our cell
sites with a few tower companies could adversely affect our results of
operations and financial condition if we are unable to renew expiring leases
with these tower companies on favorable terms or at all.
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
16
retain these executive officers and to attract and retain highly qualified
technical and management personnel for the combined company. We may not be
successful in retaining key personnel or in attracting and retaining other
highly qualified technical and management personnel. We do not maintain
policies of life insurance on our key executives.
Expanding our territory may have a material adverse effect on our business
and reduce the market value of our securities. As part of our continuing
operating strategy, we may expand our territory through the grant of additional
markets from Sprint PCS or through acquisitions of other Sprint PCS network
partners. These transactions may require the approval of Sprint PCS and
commonly involve a number of risks, including the difficulty of assimilating
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, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In
connection with these transactions, we also may issue additional equity
securities, and we may incur additional debt or incur significant amortization
expenses related to certain intangible assets.
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 our service area
is on or near the Gulf of Mexico and could be damaged by bad weather like
hurricanes and excessive rain. In addition, the service area on the East Coast
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 network could disrupt our business. We will likely
incur costs associated with the unauthorized use of our PCS networks, including
administrative and capital costs associated with detecting, monitoring and
reducing the incidence of fraud. Fraud impacts interconnection costs, capacity
costs, administrative costs, fraud prevention costs and payments to other
carriers for unbillable fraudulent roaming.
Because IWO depends heavily on outsourcing, the inability of third parties
to fulfill their contractual obligations to IWO may materially disrupt its
services or the build-out of its portion of the Sprint PCS network. Because IWO
outsources portions of its business, it depends heavily on third-party vendors,
suppliers, consultants, contractors and local telephone and utility companies.
IWO has retained those persons to: design and engineer its systems; design and
construct retail stores; obtain permits for the construction of base stations,
switch facilities and towers; construct cell sites and switching facilities;
obtain cell site leases; install transmission lines; and deploy its wireless
personal communications services network systems. The failure by any of these
third parties to fulfill their contractual obligations to IWO could materially
disrupt the operations of IWO's portion of the Sprint PCS network or its build-
out.
17
Our projected build-out plan and our completed build-outs do not cover all
our territory, which could make it difficult to maintain profitable customer
bases. Our coverage may not adequately serve the needs of the potential
customers in the respective territories or attract enough subscribers to
operate our businesses successfully. To correct this potential problem, we may
have to cover a greater percentage of our territory than anticipated, which we
may not have the financial resources to complete or may be unable to do
profitably.
Our proposed acquisitions will reduce our cash that is available for other
purposes and will increase our indebtedness. When we complete our acquisition
of Georgia PCS, we will repay up to approximately $54.8 million of indebtedness
of Georgia PCS. At the same time, we will increase our senior credit facility
with a $40 million term loan B, 96% of which will become due in 2008. As a
result, we will decrease our existing cash and increase our indebtedness. The
decrease in our cash will reduce the amount of our cash that is available for
other purposes. In addition, we will be required to use cash flow from our
operations to pay increased interest and principal on our increased
indebtedness.
We have substantial debt that we may not be able to service; a failure to
service this debt may result in the lenders taking away our assets. Our
substantial debt will have a number of important consequences for our
operations and our investors following the mergers, including the need to
dedicate a substantial portion of any cash flow from operations to the payment
of interest, and principal, which will reduce funds available for other
purposes; possible inability to obtain additional financing for unanticipated
capital requirements, capital expenditures, working capital requirements and
other corporate purposes; potential higher interest expense in the event of
increases in market interest rates; and the contractual ability of our lenders
to control our assets or the assets of the subsidiaries in the event of a
default.
Our ability to make payments on our debt will depend upon our future
operating performance, which is subject to general economic and competitive
conditions and to financial, business and other factors, many of which we
cannot control. If the cash flow from operating activities is insufficient, we
may take actions, such as delaying or reducing capital expenditures, attempting
to restructure or refinance our debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations or may adversely affect our results of
operations. Further, we may be unable to take any of these actions on
satisfactory terms, in a timely manner or at all. The credit facilities and
indentures governing our debt will limit our ability to take several of these
actions, and may limit our ability to borrow more money. Our failure to
generate sufficient funds to pay our debts or to successfully undertake any of
these actions could, among other things, materially adversely affect the market
value of our common stock or result in our lenders controlling our assets.
If we do not meet all of the conditions required under our credit
facilities, we may not be able to draw down all of the funds we anticipate
receiving from such lenders and we may not be able to fund operating losses and
working capital needs. All of the funds borrowed and available under our credit
facilities are expected to be needed to fund our operations and business plans
and to complete network build-out. If we do not meet these conditions at each
funding date, senior lenders may not lend some or all of the remaining amounts
under our senior credit facilities. If other sources of funds
18
are not available, we may not be in a position to meet our operating cash needs
or meet obligations under agreements with Sprint PCS.
We will be in default under our indebtedness if we fail to pass financial
and business tests. Our senior credit facilities require us to maintain
specified financial ratios and to satisfy specified tests. If we fail to
satisfy any of the financial ratios and tests, we could be in default under our
senior credit facilities. In addition to making funds under the senior credit
facilities unavailable to us, an event of default may prohibit us from paying
our senior notes, which would cause a default under one or more indentures, or
may result in our lenders controlling substantially all our assets or
accelerating the maturity our debt.
If we need additional financing that we cannot obtain, we may have to
change our network construction plans. We expect to make significant capital
expenditures to expand or complete our networks. Actual expenditures may differ
significantly from our estimates. We would have to obtain additional financing
to fund our network construction or expansion plans if existing sources of
capital are unavailable or insufficient; we significantly depart from our
business plan; we experience unexpected delays or cost overruns in the
expansion or completion of our networks, including changes to the schedule or
scope of the network build-out or expansion; changes in technology or
governmental regulations create unanticipated costs; or we acquire additional
licenses or Sprint PCS grants us more service areas to build out and manage.
We cannot predict whether any additional financing will be available to us
or on what terms such financing will be available. If we need additional
financing that we cannot obtain, we will have to change our plans for the
remainder of the network, which would adversely affect our expected future
results of operations.
Our indebtedness places restrictions on us which will limit our operating
flexibility and our ability to engage in some transactions. The indenture
governing our senior notes and senior credit facilities impose material
operating and financial restrictions on us. These restrictions may limit our
ability to engage in some transactions, including: completing designated types
of mergers or consolidations; creating liens; paying dividends or other
distributions to our stockholders; making investments; selling assets;
repurchasing our common stock; changing lines of business; borrowing additional
money; and entering into transactions with affiliates. These restrictions could
also limit our ability to obtain debt financing, refinance or pay principal or
interest on our outstanding debt, consummate acquisitions for cash or debt or
react to changes in our operating environment. Moreover, these restrictions
could cause us to be at a competitive disadvantage to competitors who do not
have similar restrictions.
If a specified change in control of us occurs, we may not be able to buy
back our senior notes as required by our indenture. If we have a change of
control as defined in our indenture, we will be required to offer to buy back
all of our outstanding senior notes. We cannot assure you that we will have
sufficient funds at the time of a change of control of us to perform this
obligation or that restrictions in our credit facilities will allow us to do
so. Our requirement to buy back our notes upon a change in control could impair
the value of our common stock or could cause a default under our indenture
which, in turn, would cause a default under its senior credit facility. In
addition, a change in control as defined under our credit facilities would
cause us to default under our senior credit facility.
19
If we default under our senior credit facilities, our lenders may declare
the debt to be immediately due and payable and Sprints PCS may force us to
sell its assets without stockholder approval. If we default under our senior
credit facilities and our lenders accelerate the maturity of its debt, Sprint
PCS has the option to purchase our assets at a discount to market value and
assume our obligations under the senior credit facilities without further
stockholder approval. If Sprint PCS does not exercise this option, our lenders
may sell its assets to third parties without further stockholder approval.
If we fail to pay the debt under our respective credit facilities, Sprint
PCS has the option of purchasing our loans, giving Sprint PCS certain rights
of a creditor to foreclose on our assets. Sprint PCS has contractual rights,
triggered by an acceleration of the maturity of the debt under our senior
credit facilities, pursuant to which Sprint PCS may purchase our obligations
to our respective senior lenders and obtain the rights of a senior lender. To
the extent Sprint PCS purchases these obligations, Sprint PCS's interests as a
creditor could conflict with our interests. Sprint PCS's rights as a senior
lender would enable it to exercise rights with respect to our assets and its
continuing relationship with Sprint PCS in a manner not otherwise permitted
under our Sprint PCS agreements.
The termination of our affiliation with Sprint PCS or Sprint PCS's
failure to perform its obligations under the Sprint PCS agreements would
severely restrict our ability to conduct business. Our ability to offer Sprint
PCS products and operate a PCS network is dependent on our Sprint PCS
agreements remaining in effect and not being terminated. These agreements give
us the right to use the Sprint(R) and Sprint PCS(R) brand names and logos and
related rights, and if we lose these rights, our PCS operations will be
impaired; they impose strict requirements on the construction of our network
which, if not met, permits the agreements to be terminated with the loss of
the right to be the provider or sole provider of Sprint PCS products and
services in our service area. The agreements may also be terminated if any of
Sprint PCS's FCC licenses are lost or jeopardized, or if we become insolvent.
Moreover, the agreements give Sprint PCS a substantial amount of control over
the conduct of our business, and Sprint PCS may make decisions that adversely
affect our business, like setting the prices for its national plans at levels
that may not be economically sufficient for our business.
If the agreements with Sprint PCS are terminated or breached, we may be
required to sell our PCS assets to Sprint PCS or Sprint PCS may be required to
assign to us some of Sprint PCS's licensed spectrum. In addition, the
agreements are not perpetual. If Sprint PCS decides not to renew the
agreements at the expiration of the 20-year initial term or any 10-year
renewal term, we would no longer be a part of the Sprint PCS network. Even
with all renewals, our agreements terminate in 50 years, and each of these
agreements can be terminated for breach of any material term.
Sprint PCS may make business decisions that are not in our best
interests, which may adversely affect our relationships with customers in our
territory, increase our expenses and/or decrease our revenues. Sprint PCS,
under the Sprint PCS agreements, has a substantial amount of control over the
conduct of our business. Accordingly, Sprint PCS may make decisions that
adversely affect our business, such as pricing its national plans based on its
own objectives at price levels or other terms that may not be economically
sufficient for our business; raising the costs for Sprint PCS to perform back
office services for us or reduce levels of services; prohibiting us from
selling non-Sprint PCS approved equipment; altering its network and technical
requirements or requesting that we
20
build out additional areas within our territory, which could result in
increased equipment and build-out costs; making decisions which could adversely
affect the Sprint(R) and Sprint PCS(R) brand names, products or services; and
deciding not to renew the Sprint PCS agreements or to no longer perform its
obligations, which would severely restrict our ability to conduct business.
We deal with Sprint PCS weekly on a variety of issues. Sometimes we
disagree with Sprint PCS or oppose what Sprint PCS would like us to do. This
occurs particularly when Sprint PCS tells us we must adopt business methods or
pricing plans that we think will hurt our business. Because we rely so heavily
on our relationships with Sprint PCS, any deterioration of those relationships
or of Sprint PCS's desire to cooperate with us could adversely affect our
business.
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. We rely on Sprint
PCS's internal support systems, including customer care, billing and 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. The rapid expansion of Sprint PCS's business is expected 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. We will depend on Sprint PCS's
willingness to continue to offer these services and to provide these services
effectively and at competitive costs. Our agreements 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 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.
If Sprint PCS does not complete the construction of its nationwide PCS
network, we may not be able to attract and retain customers. Sprint PCS
currently intends to cover a significant portion of the population of the
United States, Puerto Rico and the U.S. Virgin Islands by creating a nationwide
PCS network through its own construction efforts and those of its network
partners like us. Sprint PCS is still constructing its nationwide network and
does not yet offer PCS services, either on its own network or through its
roaming agreements, in every city in the United States.
If one of our customers travels in an area where a Sprint PCS or
compatible system is not yet operational, the customer would not be able to
make a call on that area's system unless he or she has a telephone handset that
can make calls on both systems. Generally, these handsets are more costly.
Moreover, the Sprint PCS network does not allow for calls to be transferred
without interruption between the Sprint PCS network and another wireless
network. This means that a customer must end a call in progress and initiate a
new call when entering an area not served by the Sprint PCS network. The
quality of the service provided by another network may not be equal to that of
the Sprint PCS network, and our customers may not be able to use some of the
advanced features of its network. This could result in customer dissatisfaction
and loss of customers.
Sprint PCS has entered into agreements similar to ours with companies in
other markets under its nationwide PCS build-out strategy. Our results of
operations are dependent on Sprint PCS's
21
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 our ability to
attract and retain customers.
If Sprint PCS does not succeed, or if we do not maintain a good
relationship with Sprint PCS, our PCS business may not succeed. If Sprint PCS
has a significant disruption to its system, fails to develop its system, or
suffers a weakening of its brand name, our operations and profitability would
likely be impaired. We use our relationships with Sprint PCS to obtain, at
favorable prices, the equipment for the construction and operation of our
network. Any disruption in our relationship with Sprint PCS could make it much
more difficult to obtain this equipment.
Certain provisions of the Sprint PCS agreements may diminish the value of
our common stock and restrict the sale of our business. Under some
circumstances and without stockholder approval, Sprint PCS may purchase our
operating assets at a discount. In addition, Sprint PCS must approve any change
of control of the ownership of us and must consent to any assignment of our
Sprint PCS agreements. Sprint PCS also has a right of first refusal if we
decide to sell our operating assets to a third party. We also are subject to a
number of restrictions on the transfer of our business, including a prohibition
on the sale of us or our operating assets to competitors of Sprint or Sprint
PCS. These restrictions and other restrictions contained in the Sprint PCS
agreements could adversely affect the value of our common stock, may limit our
ability to sell our business, may reduce the value a buyer would be willing to
pay for our business and may reduce our entire business value.
We may have difficulty in obtaining an adequate supply of certain handsets
from Sprint PCS, which could adversely affect our results of operations. We
depend on our and their relationships with Sprint PCS to obtain handsets.
Sprint PCS orders handsets from various manufacturers. We 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; we do not adequately project our or its need
for handsets; Sprint PCS modifies its handset logistics and delivery plan in a
manner that restricts or delays our 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 our customer service
and/or result in a decrease in our subscribers, which could adversely affect
our results of operations.
Non-renewal or revocation by the FCC of our licenses or the Sprint PCS
licenses we use would significantly harm our business. PCS licenses are subject
to renewal and revocation by the FCC. Our and Sprint PCS's licenses in our
territories will begin to expire in 2005 but may be renewed for additional ten
year terms. There may be opposition to renewal of these licenses upon their
expiration, and the licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. Any failure by Sprint PCS or us to
comply with these standards could cause revocation or forfeiture of the
licenses for our territories. If we or Sprint PCS lose any of our licenses in
our territory, we would be severely restricted in the ability to conduct our
business.
If Sprint PCS does not maintain control over its licensed spectrum, the
Sprint PCS agreements may be terminated, which would result in our inability to
provide PCS service. The FCC requires that
22
license holders like Sprint PCS and us maintain control of their licensed
spectrum and not delegate control to third-party operators or managers.
Although the Sprint PCS agreements with us 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, we have agreed with Sprint PCS to use best efforts
to modify the Sprint PCS agreements to comply with applicable law. If we cannot
agree with Sprint PCS to modify the Sprint PCS agreements, they may be
terminated. If the Sprint PCS agreements are terminated, we would no longer be
a part of the Sprint PCS network and would be severely restricted in our
ability to conduct business.
Significant competition in the wireless communications services industry
may result in our competitors offering new or better products and services or
lower prices, which could prevent us from operating profitably or reduce our
profitability. Competition in the wireless communications industry is intense.
We anticipate that competition will cause the market prices for two-way
wireless products and services to decline in the future. Our ability to compete
will depend, in part, on our ability to anticipate and respond to various
competitive factors affecting the telecommunications industry.
Our dependence on Sprint PCS to develop competitive products and services
and the requirement that we obtain Sprint PCS's consent to sell non-Sprint PCS
approved equipment may limit our ability to keep pace with competitors on the
introduction of new products, services and equipment. Some of these competitors
are larger than us individually or combined, may have entered the wireless
communications services market before we 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 be more highly leveraged 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 we 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. We
and Sprint PCS use the standard known as CDMA. If another standard becomes
preferred in the industry, we may be at a competitive disadvantage. If Sprint
PCS changes its standard, we will need to change ours as well, which will be
costly and time consuming. If we cannot change the standard, we and 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, 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
23
preferences. Technological advances and industry changes could cause the
technology used on our network to become obsolete. Sprint PCS may not be able
to respond to such changes and implement new technology on a timely basis, or
at an acceptable cost.
If Sprint PCS is unable to keep pace with these technological changes or
changes in the wireless communications market based on the effects of
consolidation from the Telecommunications Act of 1996 or from the uncertainty
of future government regulation, the technology used on our network or our
business strategy may become obsolete. In addition, wireless carriers are
seeking to implement an upgrade to one times radio transmission technology, or
1XRTT, as well as third generation, or 3G, technology throughout the industry.
The 3G technology promises high-speed, always-on internet connectivity and
high-quality video and audio. We cannot assure you that we, can implement 1XRTT
or 3G technology successfully or on a cost-effective basis.
Regulation by government and taxing agencies may increase our costs of
providing service or require us to change our or its services, either of which
could impair our financial performance. The operations of Sprint PCS and us 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 us to alter the structure
of our or their current relationship with Sprint PCS.
The FCC may decline to renew licenses when they expire or revoke any of
our 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 may
also need to acquire additional licenses, which may require approval of
regulatory authorities, which may not grant approval in a timely manner, if at
all. The loss of any of our FCC licenses, or any of Sprint PCS's FCC licenses
in our service area, would impair our business and operating results. The FCC
regulates our relationship with Sprint PCS under our Sprint PCS agreements.
All PCS licenses, including our 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 we have developed a build-
out plan that meets these requirements, we may be unable to meet our or their
build-out schedule. If we or Sprint PCS do 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 imposes limitations on the foreign ownership of license holders.
If foreign ownership is too great, the FCC may revoke our PCS licenses or
require an ownership restructuring. The FCC may license additional spectrum for
new carriers, which would increase the competition we 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. We hold F-
block licenses and must meet special requirements to hold them. If we do not
meet these requirements, the FCC could fine us, revoke our licenses or require
us to restructure our ownership.
24
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
our prospects, remain uncertain. The future demand for wireless communications
services in general is uncertain.
Our PCS business may suffer because subscribers frequently disconnect
their service in the PCS industry. The PCS industry has experienced a high rate
of subscribers who disconnect their service. This rate, referred to as churn,
of PCS subscribers may be the result of limited network coverage, unreliable
performance of calls, costs, customer care or other competitive factors. We
plan to keep our PCS subscriber churn down by expanding network coverage,
improving network reliability, marketing affordable plans and enhancing
customer care. We cannot assure you that these strategies will be successful. A
high rate of PCS subscriber churn could harm our competitive position and the
results of operations of our PCS services, especially since we subsidize some
of the costs of initial purchases of handsets by customers.
Use of hand-held phones may pose health risks, which could result in the
reduced use of wireless services or liability for personal injury claims. Media
reports have suggested that certain radio frequency emissions from wireless
handsets may be linked to various health problems, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may discourage use of
wireless handsets or expose us to potential litigation. Any resulting decrease
in demand for wireless services, or costs of litigation and damage awards,
could impair our ability to achieve and sustain profitability.
We 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 while driving. 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.
25
A number of U.S. state and local governments are considering or have
recently enacted legislation that would restrict or prohibit the use of a
wireless handset while driving a vehicle or, alternatively, require the use of
a hands-free telephone. The State of New York has recently enacted legislation
that bans the use of handheld wireless handsets while driving a vehicle except
in the case of emergencies. 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.
Our board of directors is implementing additional anti-takeover provisions
that will make it difficult for anyone to acquire us without approval of our
board of directors. Our board of directors is implementing additional anti-
takeover provisions which 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.
ITEM 2. Properties
We own an 11-story, 115,300 square foot office building in downtown Lake
Charles that is used as our corporate headquarters.
We lease space for our switches in Lake Charles and Shreveport, Louisiana,
Jackson, Mississippi and Montgomery, Alabama. We lease space also for our
inventory warehouse and customer care center in Lake Charles, Louisiana. We own
two store sites, and we lease all of our other retail outlets and kiosk floor
space in Louisiana, Texas, Alabama, Arkansas, Florida and Mississippi. At
December 31, 2001, we owned 85 and leased space for 827 PCS, cellular, paging
and microwave towers.
ITEM 3. Legal Proceedings
We are from time to time involved in litigation that we believe ordinarily
accompanies the communications business. We do not believe that any of our
pending or threatened litigation will leave a material adverse effect on our
business or financial situation.
In 2000, we received an assessment for approximately $2.0 million for
certain sales and use taxes resulting from a local audit. Although management
is continuing to discuss and evaluate this assessment with local tax
authorities, we believe that any additional sales and use taxes that may result
from this assessment have been adequately provided for in the accompanying
financial statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
26
ITEM 4A. Executive Officers of the Registrant
The following table presents information with respect to our executive
officers:
Name Age Position
---- --- --------
William L. Henning, Jr........... 48 Chairman of the Board of Directors
Robert W. Piper.................. 43 President, Chief Executive Officer
Jerry E. Vaughn.................. 56 Chief Financial Officer
Thomas G. Henning................ 42 Secretary and General Counsel
Vice President and Chief Operating
Michael D. Bennett............... 37 Officer
Vice President and Chief Technical
Paul Clifton..................... 47 Officer
William L. Henning, Jr. is Chairman of our Board of Directors and has been
a director of US Unwired or our predecessor company since 1998. He has been the
Chief Executive Officer and Chairman of Xspedius Holding Corp. or its
predecessor company since 1998. From 1988 to 2000, he was our Chief Executive
Officer.
Robert W. Piper has been our President since 1995 and was named Chief
Executive Officer in 2000. He served as our Chief Operating Officer from 1995
to 2000.
Jerry E. Vaughn has served as our Chief Financial Officer since June 1999.
He has over 20 years of diversified financial management experience and focused
the last 11 of these years in the telecommunications industry. From 1994 until
he joined us, Mr. Vaughn was President of NTFC Capital Corporation, a
subsidiary of GE Capital. Before that, he was Treasurer of Northern Telecom
Finance Corporation and Vice President of Mellon Bank Corporation.
Thomas G. Henning has been General Counsel and Secretary since 1994.
Michael D. Bennett has served as Vice President and Chief Operating
Officer since August 2001. He was Vice President and General Manager of
Wireless Operations since joining us in January 2000. He has 16 years of
telecommunications experience and during the balance of the last five years
held various positions with PrimeCo, a telecommunication company, including
area director and sales and marketing director in Jacksonville, Florida, and
director of strategy and planning in Dallas, Texas. He has also worked in
various management positions with two other telecommunication companies, U.S.
Intelco Networks in Olympia, Washington and CenturyTel, Inc. in Monroe,
Louisiana.
Paul J. Clifton has served as our Vice President and Chief Technical
Officer since November 2001. He was Vice President of Research and Development
since 1998. From 1994 to 1998, he was our Vice President for Engineering and
Technical Services. From 1988 to 1994, he served us in various capacities such
as manager of network systems and traffic manager. He was first hired by
Cameron Telephone Company in 1977 and began to work for us in 1988. In those
capacities between 1980 and 1994, he was responsible for design and
implementation of projects associated with the operation of our cellular,
paging, voicemail, central office, personal computer, cable television and long
distance operations.
27
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Class A common stock has been traded on the NASDAQ National Market
under the symbol UNWR since May 23, 2000. Prior to that date, there was no
public market for our common stock. The following table sets forth, the periods
indicated, the range of high and low sales prices for our Class A common stock
as reported on the NASDAQ National Market:
Price Range
of Common
Stock
-------------
High Low
------ ------
Fiscal Year Ended December 31, 2001
Fourth Quarter............................................. $13.49 $ 9.72
Third Quarter.............................................. $12.20 $ 8.99
Second Quarter ............................................ $10.75 $ 6.00
First Quarter.............................................. $10.38 $ 4.50
Fiscal Year Ended December 31, 2000
Fourth Quarter............................................. $10.63 $ 4.00
Third Quarter.............................................. $17.94 $ 9.00
Second Quarter (From May 23, 2000)......................... $16.00 $10.13
On February 26, 2002, there were 177 holders of record of our class A
common stock.
We have not declared or paid any cash dividends on our common stock or any
other of our securities. We do not expect to pay cash dividends on our capital
stock in the foreseeable future. We currently intend to retain our future
earnings, if any, to fund the development and growth of our business. Our
future decisions concerning the payment of dividends on our common stock will
depend upon our results of operations, financial condition and capital
expenditure plans, as well as such other factors as the board of directors, in
its sole discretion, may consider relevant. In addition, our existing
indebtedness restricts, and we anticipate our future indebtedness may restrict,
our ability to pay dividends.
Recent Sales of Unregistered Securities and Use of Proceeds from Sales of
Registered Securities
On February 28, 2001, the Company purchased from Cameron Communications
Corporation its 6.14% minority interest in LA Unwired in exchange for 4,634,842
shares of our Class A common stock. In February 2001, the Company purchased the
minority interests in Texas Unwired for 310,664 shares of our Class A common
stock. The exemption claimed for these issuances is Section 4 (2) of the
Securities Act of 1933.
28
ITEM 6. Selected Financial Data
The following selected financial data are derived from the consolidated
financial statements of US Unwired Inc. and subsidiaries. The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included herein.
As of December 31,
----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- --------
(In thousands except for per share data)
Statement of Operation Data:
Revenues .................... $259,174 $113,051 $ 58,632 $71,711 $ 74,668
Cost of services and
merchandise sold.......... 147,453 69,419 31,591 29,363 29,054
Other operating expenses .... 185,010 121,527 52,299 37,873 36,053
-------- -------- -------- ------- --------
Operating income (loss)...... $(73,289) $(77,895) $(25,258) $ 4,475 $ 9,561
======== ======== ======== ======= ========
Income (loss) from continuing
operations................ $(97,611) $(77,555) $(17,634) $28,796 $ (1,509)
======== ======== ======== ======= ========
Income (loss) form continuing
operations per diluted
common share ............. $ (1.17) $ (1.08) $ (0.29) $ 0.48 $ (0.03)
======== ======== ======== ======= ========
As of December 31,
----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- --------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents ... $100,589 $ 15,136 $ 14,695 $32,475 $ 4,955
Marketable securities ....... -- 165,438 141,453 -- --
Property and equipment, net.. 255,761 212,382 106,067 22,565 38,891
Total assets ................ 474,534 456,980 318,970 87,629 142,133
Long-term debt and redeemable
preferred stock........... 339,368 305,533 266,080 29,067 100,066
Stockholders' equity ........ 39,638 100,054 28,585 51,479 23,929
ITEM 7. Management's Discussion and Analysis of Financial Condition And Results
of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes included elsewhere in
this Report. The discussion contains forward-looking statements that involve
risks and uncertainties. For a detailed discussion on this topic, refer to our
opening comments at the beginning of this Form 10-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, activation fee revenues and related expense,
revenue recognition of credit challenged customers, contract cancellation fees,
inventory reserves, intangible assets and contingencies. We base our estimates
on historical experience and various other assumptions that are believed to be
reasonable under the circumstances,
29
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our
significant judgments and estimates used in the preparation of our consolidated
financial statements. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of customers to make payments. If
the financial condition of our customers deteriorate, resulting from the
customers' inability to make payments, additional allowances will be required.
We provide additional allowances for economically challenged customers that
have been granted limited credit and recognize the revenue only after the
customer has made an initial payment. If these credit challenged customers fail
to make payments after making an initial payment, additional allowances may be
required. We recognize only a portion of contract cancellation fees billed to
customers that disconnect service prior to fulfilling the contractual length of
service as there is no assurance that all contract cancellation fees that are
billed will be collected. If the collections on contract cancellation fees be
less than that recognized, additional allowances may be required. We defer
revenues collected for activation fees over the estimated life of the
subscriber. We also defer an activation expense in an amount equal to
activation fee revenue and defer this expense in an amount equal to the
activation fee revenue over the life of the subscriber. If the estimated life
of the subscriber increases or decreases, the amounts of deferred revenue and
deferred expense will be adjusted over the revised estimated life of the
subscribers. We write down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be necessary. We
accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. Depending on the level of
sales and other factors, our estimates of the amounts accrued for commissions
and other costs owed to such retailers may require modification of our previous
estimates. We rely on Sprint PCS for much of our billing information and based
upon the timing of that information, make certain assumptions that the
information is accurate and that it is consistent with historical trends. While
we believe our basis for making such assumptions reasonable, actual results may
vary from these estimates.
Overview
Through our subsidiaries, Louisiana Unwired, LLC and Texas Unwired, a
Louisiana general partnership, we provide wireless personal communication
services, commonly referred to as PCS, in eastern Texas, southern Oklahoma,
southern Arkansas, significant portions of Louisiana, Alabama and Mississippi,
the Florida panhandle and southern Tennessee. 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 a service area comprising approximately 9.9 million
residents. Our service area is among the largest in population and subscribers
of the Sprint PCS network partners and is contiguous with Sprint PCS's launched
markets of Houston, Dallas, Little Rock, New Orleans, Birmingham, Tallahassee
and Memphis.
30
We currently provide Sprint PCS service to all 41 of the geographical
areas, known as basic trading areas, BTAs or markets, in our service area. We
have completed the initial network build-out plan for our 41 markets and have
met the Sprint PCS management agreement requirement of providing network
coverage to 65% of the resident population in our service area. We are
continuing to expand our service by upgrading network equipment and adding cell
sites in certain markets that we believe will help us provide better service.
Since December 31, 2000 we have increased our network coverage by over 800,000
residents, and our network covered approximately 6.8 million residents out of
approximately 9.9 million total residents, or 68.5% of the total residents, in
our 41 markets as of December 31, 2001. The number of residents in our service
area does not represent the number of Sprint PCS subscribers that we expect to
have in our service area.
We have added 151,000 PCS subscribers since December 31, 2000 and as of
December 31, 2001 had approximately 277,000 PCS subscribers within our launched
41 PCS markets.
In addition, we provide cellular and paging services in parts of Louisiana
through our wholly owned subsidiary, Unwired Telecom Corp. As of December 31,
2001, we had approximately 34,200 cellular and 13,400 paging subscribers.
We have experienced significant competition in our cellular markets from
digital technologies that has resulted in an erosion of our cellular and paging
customer base. In an effort to revitalize this part of our operation, we
elected to enhance our cellular network to include TDMA digital technology.
TDMA is one of three digital technologies in the United States and each uses a
different digital language to send calls. Several providers, such as AT&T
Wireless, Dobson Communications, CenturyTel and Triton PCS, have chosen TDMA.
In August 2001, we completed the upgrade of our cellular network to include
TDMA digital and expanded service to our cellular subscribers to now include
voice mail notification, caller identification and text messaging. We
anticipate this upgrade will make us more competitive and provide increased
service and roaming capacity.
In October 2000, we amended our management agreements with Sprint PCS.
Effective June 2001, Sprint PCS began providing billing and customer care
services for new PCS subscribers added in certain markets where we had
previously provided these services. We migrated a substantial portion of our
customer base to Sprint PCS's billing and customer care platform in August 2001
and completed this process in January 2002. We plan to continue to perform
network capacity monitoring and planning beyond that date. As a part of the
amendment, Sprint PCS has also agreed to not change the reciprocal Sprint
roaming rate of $0.20 per minute through December 2002 for Sprint PCS
subscribers.
We are now dependent on Sprint PCS for the reporting of a significant
portion of our PCS service and travel revenues and certain operating, selling
and administrative expenses and are required to make estimates based upon this
information. We continue to work with Sprint PCS to ensure the information is
timely and accurate and that adjustments, if any, are recorded in the proper
accounting period.
31
Results of Operations
2001 compared to 2000
Revenues
Years Ended
December 31,
-----------------
2001 2000
-------- --------
(In thousands)
Subscriber revenues....................................... $146,022 $ 68,345
Roaming revenues.......................................... 91,829 28,079
Merchandise revenues ..................................... 16,243 11,517
Other revenues ........................................... 5,080 5,110
-------- --------
Total revenues ......................................... $259,174 $113,051
======== ========
Total subscriber revenues were $146.0 million for 2001 as compared to
$68.3 million for 2000, representing an increase of $77.7 million. PCS
subscriber revenues were $128.9 million for 2001 as compared to $45.1 million
for 2000, representing an increase of $83.8 million and was primarily the
result of an increase in PCS subscribers to 277,000 at December 31, 2001 from
126,000 at December 31, 2000. Cellular and paging subscriber revenues were
$17.1 million for 2001 as compared to $23.2 million for 2000, representing a
$6.1 million decrease and was primarily the result of a decrease to 47,600
cellular and paging subscribers at December 31, 2001 from 69,000 cellular and
paging subscribers at December 31, 2000.
Roaming revenues were $91.8 million for 2001 as compared to $28.1 million
for 2000, representing an increase of $63.7 million. PCS roaming revenues were
$80.7 million for 2001 as compared to $20.1 million for 2000, representing an
increase of $60.6 million and was primarily the result of a higher volume of
Sprint PCS subscribers traveling through our markets and the expansion of our
network coverage. All of our 41 markets were commercially operational by mid-
2001 as compared to 2000 where we were in the process of building out 36 of our
markets. We are continuing to expand our service by upgrading network equipment
and adding cell sites in certain markets that we believe will help us provide
better service. Cellular roaming revenues were $11.1 million for 2001 as
compared to $8.0 million for 2000, representing an increase of $3.1 million and
was primarily the result of higher usage in our service area. We believe that
this is partially due to upgrading our cellular network to a TDMA technology.
Merchandise sales were $16.2 million for 2001 as compared to $11.5 million
for 2000, representing an increase of $4.7 million. PCS merchandise sales were
$15.7 million for 2001 as compared to $10.5 million for 2000, representing an
increase of $5.2 million and were due primarily to an increase in sales to new
PCS subscribers that increased to 277,000 at December 31, 2001 from 126,000 at
December 31, 2000. Cellular and paging merchandise sales were $.5 million for
2001 as compared to $1.0 million for 2000, representing a decrease of $.5
million due primarily to fewer new cellular and paging subscribers.
Other revenues were $5.2 million for 2001 as compared to $5.1 million for
2000, representing an increase of $.1 million. PCS other revenues were $1.3
million for 2001 as compared to $.7 million
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for 2000, representing an increase of $.6 million and is due to an increase in
access fees received from long distance carriers to use our network. Cellular
and paging other revenues were unchanged at $.1 million for 2001 and 2000.
Corporate management other revenues were $3.8 million for 2001 as compared to
$4.3 million for 2000, representing a decrease of $.5 million and related to a
decrease in management fees charged to our affiliates.
Operating Expenses