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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________.
Commission file number ...000-22003...
US UNWIRED INC.
(Exact name of registrant as specified in its charter)
Louisiana 72-1457316
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Lakeshore Drive
Lake Charles, LA 70601
(Address of principal executive offices) (Zip code)
(337) 436-9000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
---
There were 128,831,535 shares of common stock, $0.01 par value per share,
outstanding at November 1, 2002.
1
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ................................ 3
Condensed Consolidated Statements of Operations ...................... 4
Condensed Consolidated Statements of Cash Flows ...................... 5
Notes to Condensed Consolidated Financial Statements ................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 18
Item 4. Controls and Procedures 29
Part II - OTHER INFORMATION
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K ..................................... 55
Signatures ........................................................................ 56
Certification by Chief Executive Officer .......................................... 57
Certification by Chief Financial Officer .......................................... 58
2
Part I Financial Information
Item 1. Financial Statements
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2002 2001
---- ----
(Unaudited) (Note 1)
Assets
------
Current assets:
Cash and cash equivalents $ 38,638 $ 100,589
Investment securities at amortized cost held to maturity 33,995 ---
Restricted cash 24,089 ---
Subscriber receivables, net 43,159 30,011
Other receivables 2,133 10,042
Inventory 8,026 7,691
Prepaid expenses and other assets 14,690 9,373
Receivables from related parties 856 705
Receivables from officers 149 138
---------- ---------
Total current assets 165,735 158,549
Property and equipment, net 484,532 255,761
Restricted cash 18,028 ---
Goodwill and other intangibles, net 544,569 32,840
Notes receivable from unconsolidated affiliates 1,791 1,735
Other assets 46,131 25,649
---------- ---------
Total assets $1,260,786 $ 474,534
========== =========
Liabilities and stockholders' equity
------------------------------------
Current liabilities:
Accounts payable $ 28,663 $ 26,602
Accrued expenses 70,370 27,156
Current maturities of long term obligations 3,578 693
---------- ---------
Total current liabilities 102,611 54,451
Long term obligations, net of current maturities 740,085 338,675
Deferred gain 34,751 38,216
Investments in and advances to unconsolidated affiliates 3,949 3,554
Stockholders' equity:
Common stock 1,288 844
Additional paid in capital 656,519 185,127
Retained deficit (278,243) (146,333)
Promissory note (174) ---
---------- ---------
Total stockholders' equity 379,390 39,638
---------- ---------
Total liabilities and stockholders' equity $1,260,786 $ 474,534
========== =========
See accompanying notes to condensed consolidated financial statements
3
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Subscriber $ 90,759 $ 39,910 $ 236,427 $ 100,662
Roaming 53,011 26,016 133,355 60,963
Merchandise sales 4,442 4,322 13,471 12,345
Other revenue 606 1,110 2,047 3,962
--------- --------- ---------- ----------
Total revenue 148,818 71,358 385,300 177,932
Expense:
Cost of service 67,570 30,273 172,406 77,320
Merchandise cost of sales 9,957 7,080 28,264 22,954
General and administrative 43,355 14,189 107,421 37,730
Sales and marketing 27,999 18,374 77,924 48,838
Non-cash stock compensation 1,400 1,089 3,802 3,721
Depreciation and amortization 32,731 12,318 78,566 42,339
--------- --------- ---------- ----------
Total operating expense 183,012 83,323 468,383 232,902
--------- --------- ---------- ----------
Operating loss (34,194) (11,965) (83,083) (54,970)
Other income (expense):
Interest expense (20,515) (8,521) (50,401) (23,265)
Gain on sale of assets 10 401 13 8,620
--------- --------- ---------- ----------
Total other expense (20,505) (8,120) (50,388) (14,645)
Loss before equity in income (loss) of unconsolidated
affiliates and income taxes (54,699) (20,085) (133,471) (69,615)
Equity in income (loss) of unconsolidated affiliates 115 (1,560) 780 (2,430)
--------- --------- ---------- ----------
Loss before income taxes (54,584) (21,645) (132,691) (72,045)
Income tax benefit 781 --- 781 ---
--------- --------- ---------- ----------
Net loss $ (53,803) $ (21,645) $ (131,910) $ (72,045)
========= ========= ========== ===========
Basic and diluted loss per share $ (0.42) $ (0.26) $ (1.15) $ (0.87)
========= ========= ========== ===========
Weighted average outstanding common shares 128,832 84,150 114,610 83,230
========= ========= ========== ===========
See accompanying notes to condensed consolidated financial statements
4
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
For the nine months ended
September 30,
2002 2001
---- ----
Cash flows from operating activities
------------------------------------
Net cash used in operating activities $ (25,764) $ (20,547)
Cash flows from investing activities
------------------------------------
Payments for the purchase of equipment (98,641) (80,985)
Acquisition of business, net of cash acquired (61,417) --
Proceeds from maturities of investments 33,167 --
Proceeds from sale of assets 10,319 44,924
Sale of marketable securities -- 176,705
Purchase of marketable securities -- (12,544)
Proceeds from restricted cash 10,682 5,753
Investments in unconsolidated affiliates 750 (527)
--------- ---------
Net cash (used in) provided by investing activities (105,140) 133,326
Cash flows from financing activities
------------------------------------
Proceeds from long-term debt 70,000 1,822
Proceeds from stock options exercised 212 1,392
Proceeds from promissory notes 20 --
Principal payments of long-term debt (517) (1,500)
Debt issuance costs (762) (149)
--------- ---------
Net cash provided by financing activities 68,953 1,565
--------- ---------
Net (decrease) increase in cash and cash equivalents (61,951) 114,344
Cash and cash equivalents at beginning of period 100,589 15,136
--------- ---------
Cash and cash equivalents at end of period $ 38,638 $ 129,480
========= =========
See accompanying notes to condensed consolidated financial statements.
5
US UNWIRED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three and
nine-month periods ended September 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002.
The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The condensed consolidated financial statements contained
herein should be read in conjunction with the financial statements and
notes included in the Form 10-K for US Unwired Inc. for the year ended
December 31, 2001, filed on March 5, 2002 with the Securities and Exchange
Commission and with the Risk Factors included in the Form 8-K filed with
the Securities and Exchange Commission on August 16, 2002.
2. Description of the Organization
US Unwired Inc. ("the Company") is principally engaged in the ownership and
operation of wireless communications systems, consisting of personal
communications systems ("PCS"), cellular and paging communication systems
in the southern and northeastern regions of the United States.
3. Acquisitions
On March 8, 2002, the Company acquired 100% of the ownership interests of
Georgia PCS Management, LLC (Georgia PCS) for approximately $84.5 million
in Company stock and cash. Georgia PCS provides PCS services and related
products to customers in the northeastern United States as part of Sprint
PCS's network The service area of Georgia PCS is adjacent to the Company's
existing markets and is also adjacent on the north and the south to
Atlanta, where service is provided by Sprint PCS. Georgia PCS has completed
its initial build out, and as of September 30, 2002 provided network
coverage to approximately 70% of the 1.4 million residents in its service
area. As a result, management believes that it has access to some of the
most attractive and fastest growing markets in the southern United States,
which allow the Company to leverage its existing operations and experience
with other markets in the Company's territory.
An aggregate 5.4 million common shares of the Company's stock valued at
$28.4 million were exchanged for the outstanding membership units of
Georgia PCS. The value of the 5.4 million shares issued was based on the
average market price of the Company's common shares over the period
including the five days before and after the first day the number of common
shares to be issued became fixed. Of the Company's 5.4 million common
shares issued, 1.1 million shares are being held in escrow pending
resolution of certain post-closing adjustments that we anticipate will be
concluded by December 31, 2002. Additionally, the Company repaid
approximately $54.3 million of Georgia PCS's indebtedness and other
obligations. The Company has incurred approximately $1.8 million in closing
costs associated with the acquisition.
The acquisition has been accounted for using the purchase method of
accounting. The aggregate
6
purchase price has been allocated to the assets acquired and liabilities
assumed based on the Company's initial estimate of their fair values. The
excess of the purchase price over the fair value of the net identifiable
assets has been allocated to goodwill. The Company's operating results
include the operating results of Georgia PCS since the date of acquisition,
March 8, 2002.
On April 1, 2002, the Company acquired 100% of the ownership interest in
IWO Holdings, Inc. ("IWO") for approximately $446.3 million in Company
stock and related merger costs. IWO provides PCS services and related
products to customers in the northeastern United States as part of Sprint
PCS's network. IWO's service area consists of a large portion of upstate
New York, New Hampshire, Vermont and portions of Massachusetts and
Pennsylvania with a total population of approximately 6.3 million
residents. As consideration for the acquisition, the Company issued to the
former stockholders of IWO approximately 39.0 million shares of the
Company's common stock and reserved approximately 6.9 million additional
shares of its common stock for issuance upon the exercise of options and
warrants that the Company assumed or exchanged in connection with the
acquisition. The value of the common shares issued was based on the market
price of the common stock of $10.00 per share at the close of business on
December 19, 2001, the date the terms of the acquisition were agreed to and
announced.
The acquisition has been accounted for using the purchase method of
accounting. The aggregate purchase price has been allocated to the assets
acquired and liabilities assumed based on the Company's initial estimate of
their fair values. The excess of the purchase price over the fair value of
the net identifiable assets has been allocated to goodwill. The Company's
operating results include the operating results of IWO from the date of the
acquisition, April 1, 2002.
During the three months period ended September 30, 2002, the Company
adjusted its initial purchase price allocation for IWO by $1.5 million for
reductions in certain estimates related to the overall costs of the
acquisition and $8.7 million for changes in the Company's initial estimates
of working capital acquired that included reductions of estimated
liabilities for circuits, long distance, commissions and rebates. These
changes resulted in a decrease to goodwill of $5.9 million.
The Company is in the process of obtaining independent valuations from a
national valuation firm to assist in the allocation of the purchase price
for Georgia PCS and IWO. The Company expects to receive final valuation
reports from the independent national valuation firm before December 31,
2002.
The following represents the Company's initial allocation of the purchase
prices:
Georgia PCS IWO Total
----------- --- -----
(In thousands)
Consideration:
Common stock $ 28,391 $ 389,828 $ 418,219
Stock options and warrants --- 49,410 49,410
Debt retired of acquired company 52,982 --- 52,982
Cash, including merger related costs 3,080 7,019 10,099
--------- --------- ---------
Total purchase price $ 84,453 $ 446,257 $ 530,710
========= ========= =========
Allocated to:
Working capital $ (3,596) $ 51,994 $ 48,398
Restricted cash and US Treasury obligations --- 28,100 28,100
Investment securities --- 3,103 3,103
Property and equipment 35,298 159,919 195,217
Deferred financing costs and other assets --- 21,768 21,768
Long-term debt --- (306,000) (306,000)
Acquired customer base 12,300 57,500 69,800
Sprint affiliation agreement 15,500 215,000 230,500
Goodwill 24,951 214,873 239,824
--------- --------- ---------
Total $ 84,453 $ 446,257 $ 530,710
========= ========= =========
7
The Company is amortizing the acquired customer base over a period of 24
months and the Sprint affiliation agreements over the remaining life of the
agreements - approximately 18 years. None of the above goodwill is expected
to be tax deductible.
The following unaudited supplemental pro forma information for the three
and nine-month periods ended September 30, 2002 and 2001 presents the
results of operations as if the IWO acquisition had occurred at the
beginning of the period and are not necessarily indicative of future
results or actual results that would have been achieved had these
acquisitions occurred as of the beginning of the period.
Three months ended Sept 30, Nine months ended Sept 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands except earnings per share)
Revenues $148,818 $103,891 $ 420,836 $ 255,678
========= ========= ========== ==========
Net loss $(53,803) $(39,731) $(158,747) $(121,558)
========= ========= ========== ==========
Loss per share $ (.42) $ (.47) $ (1.39) $ (1.46)
========= ========= ========== ==========
4. Details of Certain Balance Sheet Accounts
Major categories of property and equipment consisted of the following:
September 30, December 31,
2002 2001
---- ----
(In thousands)
Land $ 890 $ 656
Buildings and leasehold improvements 22,601 11,418
Facilities and equipment 580,922 337,955
Furniture, fixtures and vehicles 9,588 6,447
Construction in progress 36,496 15,750
--------- ---------
650,497 372,226
Less accumulated depreciation an amortization 165,965 116,465
--------- ---------
$ 484,532 $ 255,761
========= =========
Goodwill and other intangibles consisted of the following:
September 30, December 31,
2002 2001
---- ----
(In thousands)
Goodwill $ 266,396 $ 31,032
Sprint affiliation agreement 230,500 ---
Subscriber base 81,824 12,024
---------- --------
578,720 43,056
Less: accumulated amortization 34,151 10,216
---------- --------
$ 544,569 $ 32,840
========== ========
8
5. Long-Term Obligations
Long-term debt reflects the inclusion of the IWO long-term debt on April
1, 2002 and consisted of the following:
September 30, December 31,
-------------
2002 2001
---- ----
Debt outstanding under senior credit facilities:
Senior subordinated discount notes $ 442,182 $ 277,369
Bank credit facilities 290,000 50,000
Capital leases 7,376 7,691
Other financing 4,105 4,308
--------- ---------
Total long-term obligations 743,663 339,368
Less current maturities 3,578 693
--------- ---------
Long-term obligations, excluding current maturities $ 740,085 $ 338,675
========= =========
As of September 30, 2002, $115.3 million remained available for borrowing
under the senior bank credit facilities that included $76.9 million
available under the US Unwired senior bank credit facility and $38.4
million available under the IWO senior bank credit facility. IWO is an
unrestricted subsidiary of US Unwired. Funds available under the IWO
senior bank credit facility can only be used by IWO, and, respectively,
funds available under US Unwired's senior bank credit facility can only
be used by US Unwired.
US Unwired Senior Subordinated Discount Notes - 13 3/8%
In October 1999, the Company issued $400 million in aggregate principal
amount of its 13 3/8% Senior Subordinated Discount Notes due November 1,
2009 ("the US Unwired Notes"). The US Unwired Notes were issued at a
substantial discount such that the Company received gross proceeds of
approximately $209.2 million. The US Unwired Notes increase in value
daily, compounded twice per year, at the rate of 13 3/8% per year until
November 1, 2004. On that date, the value of the US Unwired Notes will be
equal to the face amount of the US Unwired Notes and interest will begin
to accrue at the rate of 13 3/8% per year. The Company will be required
to pay the accrued interest beginning May 1, 2005, and on each November 1
and May 1 thereafter. The US Unwired Notes are a general unsecured
obligation of the Company, except for the limited security provided by a
pledge agreement by the Company's wholly owned subsidiary, Louisiana
Unwired LLC ("LA Unwired"). The US Unwired Notes rank junior to all
existing and future senior debt of the Company and equal in right of
payment of any future senior subordinated indebtedness of the Company.
The US Unwired Notes are fully, unconditionally, and jointly and
severally guaranteed by two of the Company's wholly owned subsidiaries:
LA Unwired and Unwired Telecom Corp. ("Unwired Telecom"). Each of the
guarantees is a general unsecured obligation of the guarantor except for
a pledge by LA Unwired of its interest in Texas Unwired and any notes
payable to it by Texas Unwired as security for the guarantee. Each of the
guarantees ranks equally in right of payment with the guarantor's future
senior subordinated indebtedness and is subordinated in right of payment
to all existing and future senior debt of the guarantor. The US Unwired
Notes are not guaranteed by IWO.
IWO Senior Subordinated Discount Notes - 14%
In February 2001, IWO issued 160,000 units, each consisting of $1,000
principal amount of 14% Senior Notes ("the IWO Notes") due January 15,
2011 and one warrant to purchase 12.50025 shares of IWO's class C common
stock at an exercise price of $7.00 per share. As a result of the
acquisition, this warrant was converted to a US Unwired warrant to
purchase 12.96401 shares of the Company's common stock at $6.75 per
share. Interest is payable semi-annually on January 15 and July 15 of
each year. Independent Wireless One Corporation, a wholly owned
subsidiary of IWO, is the sole guarantor of the IWO Notes. All of IWO's
9
restricted subsidiaries formed or acquired after the issuance of the IWO
Notes that guarantee IWO's senior bank credit facility will also be
required to guarantee the IWO Notes. The IWO Notes are not guaranteed by
Independent Wireless One Realty Corporation, a wholly owned subsidiary of
the Company or its subsidiaries - LA Unwired and Unwired Telecom.
A portion of the original proceeds of the IWO Notes were used to purchase
a portfolio of U.S. government securities which will generate sufficient
proceeds to make the first six scheduled interest payments on the IWO
Notes through January 2004. The account holding the investment securities
and all of the securities and other items contained in the account have
been pledged to the trustee for the benefit of the holders of the IWO
Notes.
US Unwired Senior Bank Credit Facility - $170 million
The $170 million senior bank credit facility consists of a $77.3 million
reducing revolving credit facility and $90 million in term loans. The
reducing revolver is permanently reduced in quarterly installments
beginning June 2002 with the first installment of $1.3 million. The
senior bank credit facility matures in 2008. Effective June 6, 2002, the
Company amended its $170 million senior bank credit facility to allow for
letters of credit. Any letters of credit issued by the Company reduce the
amount available under the reducing revolving credit facility. The term
loans will be repaid in quarterly installments beginning in June 2003.
All loans under the senior bank credit facility bear interest at variable
rates tied to the federal funds rate or LIBOR. The credit facility is
secured by all of the assets of the Company and its subsidiaries (other
than property owned by IWO which the Company acquired on April 1, 2002).
At September 30, 2002, the Company had $76.9 million available under this
facility. The proceeds from the US Unwired senior bank credit facility
are available for use only by US Unwired and its subsidiaries other than
IWO.
The Company must comply with certain financial and operating covenants
for subordinated discount notes and the senior credit facilities, and at
September 30, 2002, the Company was in compliance with these restrictive
covenants.
IWO Senior Bank Credit Facility - $240 million
Effective December 2000, Independent Wireless One Corporation, a wholly
owned subsidiary IWO, entered into an amended and restated a secured
credit facility ("the IWO Credit Facility") under which it may borrow up
to $240 million in the aggregate consisting of up to $70 million in
revolving loans and $170 million in term loans. The IWO Credit Facility
matures in 2008. The term loans will be repaid in quarterly installments
beginning in March 2004 and the reducing revolver matures in March 2008.
All loans under the IWO Credit Facility bear interest at variable rates
tied to the prime rate, the federal funds rate or LIBOR. The IWO Credit
Facility is secured by all of the assets of IWO and its subsidiaries. At
September 30, 2002, the Company had $38.4 million available under the IWO
Credit Facility. The IWO credit facility is available only to IWO and its
subsidiaries.
The Company must comply with certain financial and operating covenants
for subordinated discount notes and the senior credit facilities, and at
September 30, 2002, the Company was in compliance with these restrictive
covenants.
6. Goodwill and Other Intangible Assets - Adoption of Statement 142
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for years beginning
after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but
will be subject to annual impairment tests in accordance with the
Statement. Other intangible assets will continue to be amortized over
their estimated useful lives.
10
The Company adopted these new rules on accounting for goodwill and other
intangible assets on January 1, 2002. During the second quarter of 2002,
the Company completed the first of the required impairment tests of
goodwill and indefinite lived assets as of January 1, 2002 and determined
that the adoption of this provision of the new rules had no impact on the
Company's financial statements. The Company intends to perform the first
of the required annual impairment tests of goodwill and indefinite lived
assets in the fourth quarter of 2002.
The following information provides net loss and net loss per share
information for the three and nine-month periods ended September 30, 2001
adjusted to exclude amortization expense recognized in these periods
related to goodwill.
Three months ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
(In thousands)
Reported net loss $(21,645) $(72,045)
Add back: Goodwill amortization 1,108 2,713
-------- --------
Adjusted net loss $(20,537) $(69,332)
======== ========
Basis and diluted loss per share:
Three months ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Reported net loss $(.26) $(.87)
Add back: Goodwill amortization .01 .03
-------- --------
Adjusted net loss $(.25) $(.84)
======== ========
7. Change in Accounting Estimate
Effective July 1, 2001, the Company revised its estimated lives for
certain depreciable assets. The estimated lives of network switch
equipment was increased from five to seven years, cell site towers from
five to 10 years and related cell site equipment from five to seven
years. The Company revised these estimates after considering the impact
of certain upgrades to its network that management believes extends the
useful lives of these assets. This change resulted in a reduction of
depreciation expense of approximately $12.5 million for the nine-month
period ended September 30, 2002 as compared to the nine-month period
ended September 30, 2001.
8. Commitments and Contingencies
The Company's PCS licenses and the PCS licenses that the Company operates
for Sprint PCS are subject to a requirement that the Company construct
network facilities that offer coverage to 25% of the population or have
substantial service in each of its Basic Trading Areas ("BTAs") within
five years from the grant of the licenses. As of September 30, 2002,
management believes that Sprint PCS has met the requirements necessary
for the licenses that the Company operates for Sprint PCS under the
Sprint PCS management agreements and that the Company has met the
requirements necessary for the licenses that it owns.
The Company uses Sprint PCS to process all PCS subscriber billings
including monthly recurring charges, airtime and other charges such as
interconnect fees. The Company pays various fees to Sprint PCS for new
subscribers as well as recurring monthly fees for services performed for
existing customers including billing and management of customer accounts.
Sprint's billing for these services is based upon an estimate of the
actual costs incurred by Sprint PCS to provide such services. At the end
of each calendar year, Sprint PCS compares its actual costs to provide
such services to remittances by the Company for estimated billings and
either refunds overpayments or bills for costs in excess of the payments
made. Based upon information as provided by Sprint PCS, the Company
believes it has adequately provided for the above-mentioned costs in the
accompanying consolidated financial
11
statements. Additionally, Sprint PCS has contracted with national
retailers that sell handsets and service to new PCS subscribers in the
Company's markets. Sprint PCS pays these national retailers a new
subscriber commission and provides handsets to such retailers below cost.
Sprint PCS passes these costs of commissions and the handset subsidies to
the Company.
The Company periodically reviews all charges from Sprint PCS and from
time to time, the Company may dispute certain of these charges. Based
upon the information provided to the Company by Sprint PCS to date, the
Company believes the accompanying condensed consolidated balance sheet
adequately reflects its obligation to Sprint PCS for these charges.
On July 3, 2002, the FCC issued an order, involving Sprint PCS, that PCS
wireless carriers could not unilaterally impose terminating long distance
access charges pursuant to FCC commission rules. This FCC order did not
preclude such charges when a contractual basis existed for such. The
Company has previously recognized only a portion of the terminating long
distance access revenues billed by Sprint PCS and passed to the Company.
The Company believes the accompanying consolidated financial statements
adequately provides for any amounts that may ultimately be determined to
be not collectible in connection with this matter.
9. Income Taxes
The Company's effective income tax rate for the interim periods presented
is based on management's estimate of the Company's effective tax rate for
the applicable year and differs from the federal statutory income tax
rate primarily due to nondeductible permanent differences, state income
taxes and changes in the valuation allowance for deferred tax assets.
During the three-month period ended September 30, 2002, the Company
completed its evaluation of a 2002 change in the U. S. tax law that
provides for more liberalized tax loss carry back rules. As a result, the
Company recorded a $781,000 tax benefit for an alternative minimum tax
refund.
10. Condensed Consolidating Financial Information
As discussed in Note 5, the US Unwired Notes are guaranteed by certain of
the Company's subsidiaries. The following information presents the
condensed consolidating balance sheets as of September 30, 2002 and
December 31, 2001 and the condensed consolidating statements of
operations and cash flows for the three and nine-month periods ended
September 30, 2002 and September 30, 2001 of (a) the "Parent" Company, US
Unwired Inc., (b) the "Guarantors", Unwired Telecom Corporation and
Louisiana Unwired, and (c) the "Non-Guarantor", IWO Holding Inc. and
includes eliminating entries and the Company on a consolidated basis.
The separate consolidated financial statements of IWO, including
disclosure of condensed consolidating financial information for IWO, are
included in a separate Form 10-Q filing.
12
Condensed Consolidating Balance Sheet
September 30, 2002
------------------
IWO
Unwired Louisiana Holding
US Unwired Telecom Unwired Corporation
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantors Entries Consolidated
------- ---------- ---------- ---------- ------- ------------
(In thousands)
ASSETS:
- ------
Current Assets
- --------------
Cash and cash equivalents $ 29,320 $ 2,476 $ 3,147 $ 5,623 $ 3,695 $ -- $ 38,638
Investment securities at amortized
cost held to maturity -- -- -- -- 33,995 -- 33,995
Restricted cash 1,132 -- -- -- 22,957 -- 24,089
Subscriber receivables, net -- 1,647 30,995 32,642 10,517 -- 43,159
Other receivables 839 -- 511 511 783 -- 2,133
Inventory -- 141 4,273 4,414 3,612 -- 8,026
Prepaid expenses and other assets 978 76 10,444 10,520 3,192 -- 14,690
Receivables from (payables to)
related parties 621 (298) 1,042 744 (555) 46 856
Receivables from officers 149 -- -- -- -- -- 149
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total current assets 33,039 4,042 50,412 54,454 78,196 46 165,735
Property and equipment, net 12,525 9,548 277,800 287,348 184,659 -- 484,532
Restricted cash -- -- -- -- 18,028 -- 18,028
Goodwill and other intangible
assets, net -- -- 77,488 77,488 491,426 (24,345) 544,569
Notes receivable from
unconsolidated affiliates 178,765 26,159 -- 26,159 174 (203,307) 1,791
Other assets 11,814 95 11,939 12,034 22,283 -- 46,131
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 236,143 $ 39,844 $ 417,639 $ 457,483 $ 794,766 $ (227,606) $ 1,260,786
=========== =========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,082 $ 1,078 $ 16,094 $ 17,172 $ 10,409 $ -- $ 28,663
Accrued expenses 5,017 887 33,478 34,365 30,988 -- 70,370
Current maturities of long term
obligations 27,449 58 179,203 179,261 -- (203,132) 3,578
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities 33,548 2,023 228,775 230,798 41,397 (203,132) 102,611
Long term obligations, net of
current maturities 396,128 326 6,937 7,263 336,694 -- 740,085
Deferred tax liability -- -- -- -- 19,841 (19,841) --
Deferred gain -- 93 34,658 34,751 -- -- 34,751
Investments in and advance to
unconsolidated affiliates (531,268) 3,549 (396,641) (393,092) -- 928,309 3,949
-----------
Stockholders' equity:
Common stock 1,288 600 -- 600 1 (601) 1,288
Additional paid in capital 658,240 1,347 809,069 810,416 446,449 (1,258,586) 656,519
Retained deficit (321,793) 31,906 (265,159) (233,253) (49,616) 326,419 (278,243)
Promissory note -- -- -- -- -- (174) (174)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total stockholder's equity 337,735 33,853 543,910 577,763 396,834 (932,942) 379,390
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity $ 236,143 $ 39,844 $ 417,639 $ 457,483 $ 794,766 $ (227,606) $ 1,260,786
=========== =========== =========== =========== =========== =========== ===========
13
Condensed Consolidating Balance Sheet
December 31, 2001
-----------------
Unwired Louisiana
US Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Entries Consolidated
-------- ----------- ----------- ---------- ------- ------------
(In thousands)
ASSETS:
- ------
Current Assets
- --------------
Cash and cash equivalents $ 79,184 $ 4,419 $ 16,986 $ 21,405 $ -- $ 100,589
Subscriber receivables, net -- 4,809 25,202 30,011 -- 30,011
Other receivables 203 88 9,751 9,839 -- 10,042
Inventory -- 630 7,061 7,691 -- 7,691
Prepaid expenses and other assets 608 74 8,691 8,765 -- 9,373
Receivables from (payables to) related parties 5,039 5,404 (9,359) (3,955) (379) 705
Receivables from officers 138 -- -- -- -- 138
--------- --------- --------- --------- --------- ---------
Total current assets 85,172 15,424 58,332 73,756 (379) 158,549
Property and equipment, net 13,603 10,188 231,970 242,158 -- 255,761
Goodwill and other intangible assets, net 27,060 -- 5,780 5,780 -- 32,840
Notes receivable from unconsolidated affiliates 127,830 7,735 -- 7,735 (133,830) 1,735
Other assets 12,169 57 13,423 13,480 -- 25,649
--------- --------- --------- --------- --------- ---------
Total assets $ 265,834 $ 33,404 $ 309,505 $ 342,909 $(134,209) $ 474,534
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,339 $ 1,569 $ 23,694 $ 25,263 -- $ 26,602
Accrued expenses 2,175 810 24,171 24,981 -- 27,156
Current maturities of long term obligations 6,215 56 128,252 128,308 (133,830) 693
--------- --------- --------- --------- --------- ---------
Total current liabilities 9,729 2,435 176,117 178,552 (133,830) 54,451
Long term obligations, net of current maturities 331,036 370 7,269 7,639 -- 338,675
Deferred gain -- 43 38,173 38,216 -- 38,216
Investments in and advance to unconsolidated affiliates (76,318) 3,153 -- 3,153 76,719 3,554
---------
Stockholders' equity:
Common stock 844 600 -- 600 (600) 844
Additional paid in capital 187,041 1,347 -- 1,347 (3,261) 185,127
Retained deficit (186,498) 25,456 87,946 113,402 (73,237) (146,333)
--------- --------- --------- --------- --------- ---------
Total stockholder's equity 1,387 27,403 87,946 115,349 (77,098) 39,638
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 265,834 $ 33,404 $ 309,505 $ 342,909 $(134,209) $ 474,534
========= ========= ========= ========= ========= =========
14
Condensed Consolidating Statement of Operations
Three-month period ended September 30, 2002
-------------------------------------------
IWO
Unwired Louisiana Holding
US Unwired Telecom Unwired Total Corp
Inc. Corporation LLC Guarantors (Non- Consolidating
(Parent) (Guarantor) (Guarantor) ---------- Guarantor Entries Consolidated
-------- ---------- ----------- --------- ------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 3,093 $ 58,696 $ 61,789 $ 28,970 $ --- $ 90,759
Roaming --- 1,873 39,332 41,205 11,806 --- 53,011
Merchandise sales --- 169 2,392 2,561 1,881 --- 4,442
Other revenue 8,556 119 371 490 11 (8,451) 606
--------- ---------- --------- --------- --------- -------- ---------
Total revenues 8,556 5,254 100,791 106,045 42,668 (8,451) 148,818
Expenses:
Cost of service --- 1,214 48,123 49,337 18,325 (92) 67,570
Merchandise cost sales --- 301 6,915 7,216 2,741 --- 9,957
General and administrative 8,556 1,176 27,635 28,811 14,347 (8,359) 43,355
Sales and marketing --- 1,009 15,569 16,578 11,421 --- 27,999
Non-cash stock compensation 1,268 81 51 132 --- --- 1,400
Depreciation and amortization 801 559 16,045 16,604 15,326 --- 32,731
--------- ---------- --------- --------- --------- -------- ---------
Total operating expense 10,625 4,340 114,338 118,678 62,160 (8,451) 183,012
--------- ---------- --------- --------- --------- -------- ---------
Operating income (loss) (2,069) 914 (13,547) (12,633) (19,492) --- (34,194)
Other income (expense)
Interest income (expense), net (9,615) 275 (2,286) (2,011) (8,889) --- (20,515)
Gain on sale of assets 8 --- 2 2 --- --- 10
--------- ---------- --------- --------- --------- -------- ---------
Total other income (expense) (9,607) 275 (2,284) (2,009) (8,889) --- (20,505)
Equity in income (losses) of
unconsolidated subsidiaries (42,764) 47 (26,499) (26,452) --- 69,331 115
--------- ---------- --------- ---------- --------- -------- ---------
Income (loss) before income tax benefit (54,440) 1,236 (42,330) (41,094) (28,381) 69,331 (54,584)
Income tax benefit 781 --- --- --- 1,882 (1,882) 781
--------- ---------- --------- --------- --------- -------- ---------
Net income (loss) $ (53,659) $ 1,236 $ (42,330) $ (41,094) $ (26,499) $ 67,449 $ (53,803)
========= ========== ========= ========= ========= ======== =========
Condensed Consolidating Statement of Operations
Three-month period ended September 30,2001
------------------------------------------
Unwired Louisiana
US Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Entries Consolidated
-------- ----------- ----------- ---------- ------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 3,962 $ 35,948 $ 39,910 $ --- $ 39,910
Roaming --- 3,157 22,859 26,016 --- 26,016
Merchandise sales --- 117 4,205 4,322 --- 4,322
Other revenue 6,607 129 264 393 (5,890) 1,110
--------- -------- --------- ---------- -------- ---------
Total revenues 6,607 7,365 63,276 70,641 (5,890) 71,358
Expenses:
Cost of service --- 2,015 28,353 30,368 (95) 30,273
Merchandise cost of sales --- 460 6,620 7,080 --- 7,080
General and administrative 6,607 1,750 11,627 13,377 (5,795) 14,189
Sales and marketing --- 800 17,574 18,374 --- 18,374
Non-cash stock compensation --- --- (12) (12) 1,101 1,089
Depreciation and amortization 2,455 647 9,216 9,863 --- 12,318
--------- -------- --------- ---------- -------- ---------
Total operating expense 9,062 5,672 73,378 79,050 (4,789) 83,323
--------- -------- --------- ---------- -------- ---------
Operating loss (2,455) 1,693 (10,102) (8,409) (1,101) (11,965)
Other income (expense)
Interest income (expense), net (7,940) 28 (1,710) (1,682) 1,101 (8,521)
Gain on sale of assets 400 (1) 2 1 --- 401
--------- -------- --------- ---------- -------- ---------
Total other (income) expense (7,540) 27 (1,708) (1,681) 1,101 (8,120)
Equity in income (losses) of
unconsolidated subsidiaries (12,111) (151) --- (151) 10,702 (1,560)
--------- -------- --- ---------- -------- ---------
Net income (loss) $ (22,106) $ 1,569 $ (11,810) $ (10,241) $ 10,702 $ (21,645)
========= ======== ========= ========== ======== ==========
15
Condensed Consolidating Statement of Operations
Nine-month period ended September 30, 2002
------------------------------------------
Unwired Louisiana IWO
US Unwired Telecom Unwired Holding
Inc. Corporation LLC Total Corp (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
---------- ---------- ---------- ---------- ---------- ------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 9,926 $ 169,104 $ 179,030 $ 57,397 $ --- $ 236,427
Roaming --- 7,744 104,697 112,441 20,914 --- 133,355
Merchandise sales --- 459 9,097 9,556 3,915 --- 13,471
Other revenue 22,208 364 1,159 1,523 18 (21,702) 2,047
---------- ---------- ---------- ---------- ---------- ------------- ------------
Total revenues 22,208 18,493 284,057 302,550 82,244 (21,702) 385,300
Expenses:
Cost of service --- 3,876 131,647 135,523 37,162 (279) 172,406
Merchandise cost of sales --- 1,057 21,758 22,815 5,449 --- 28,264
General and administrative 22,208 3,106 77,217 80,323 26,313 (21,423) 107,421
Sales and marketing --- 3,034 54,831 57,865 20,059 --- 77,924
Non-cash stock compensation 3,405 243 154 397 --- --- 3,802
Depreciation and amortization 3,933 1,668 42,934 44,602 30,031 --- 78,566
---------- ---------- ---------- ---------- ---------- ------------- ------------
Total operating expense 29,546 12,984 328,541 341,525 119,014 (21,702) 468,383
---------- ---------- ---------- ---------- ---------- ------------- ------------
Operating loss (7,338) 5,509 (44,484) (38,975) (36,770) --- (83,083)
Other income (expense)
Interest income (expense), net (27,383) 586 (6,254) (5,668) (17,350) --- (50,401)
Gain on sale of assets 8 --- 5 5 --- --- 13
---------- ---------- ---------- ---------- ---------- ------------- ------------
Total other (income) expense (27,375) 586 (6,249) (5,663) (17,350) --- (50,388)
Equity in income (losses) of
unconsolidated subsidiaries (101,363) 355 (49,616) (49,261) --- 151,404 780
---------- ---------- ---------- ---------- ---------- ------------- ------------
Income (loss) before income tax benefit (136,076) 6,450 (100,349) (93,899) (54,120) 151,404 (132,691)
Income tax benefit 781 --- --- --- 4,504 (4,504) 781
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net income (loss) $ (135,295) $ 6,450 $ (100,349) $ (93,899) $ (49,616) $ 146,900 $ (131,910)
========== ========== ========== ========== ========== ============= ============
Condensed Consolidating Statement of Operations
Nine-month period ended September 30, 2001
------------------------------------------
Unwired Louisiana
US Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Entries Consolidated
-------- ----------- ----------- ---------- ------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 13,496 $ 87,166 $ 100,662 $ --- $ 100,662
Roaming --- 8,085 52,878 60,963 --- 60,963
Merchandise sales --- 386 11,959 12,345 --- 12,345
Other revenue 22,761 381 744 1,125 (19,924) 3,962
---------- ----------- ----------- ---------- ------------- ------------
Total revenues 22,761 22,348 152,747 175,095 (19,924) 177,932
Expenses:
Cost of service --- 5,656 71,948 77,604 (284) 77,320
Merchandise cost of sales --- 1,333 21,621 22,954 --- 22,954
General and administrative 22,761 5,055 29,555 34,610 (19,641) 37,730
Sales and marketing --- 2,741 46,097 48,838 --- 48,838
Non-cash stock compensation --- --- 166 166 3,555 3,721
Depreciation and amortization 6,182 2,625 33,532 36,157 --- 42,339
---------- ----------- ----------- ---------- ------------- ------------
Total operating expense 28,943 17,410 202,919 220,329 (16,370) 232,902
---------- ----------- ----------- ---------- ------------- ------------
Operating loss (6,182) 4,938 (50,172) (45,234) (3,554) (54,970)
Other income (expense)
Interest income (expense), net (22,316) 9 (4,513) (4,504) 3,555 (23,265)
Gain on sale of assets 400 (1) 8,221 8,220 --- 8,620
---------- ----------- ----------- ---------- ------------- ------------
Total other (income) expense (21,916) 8 3,708 3,716 3,555 (14,645)
Equity in income (losses) of
unconsolidated subsidiaries (46,606) 312 --- 312 43,864 (2,430)
---------- ----------- ----------- ---------- ------------- ------------
Net income (loss) $ (74,704) $ 5,258 $ (46,464) $ (41,206) $ 43,865 $ (72,045)
========== =========== =========== ========== ============= ============
16
Condensed Consolidating Statement of Cash Flows
Nine-month period ended September 30, 2002
------------------------------------------
IWO
US Unwired Louisiana Holding
Unwired Telecom Unwired Corp
Inc. Corporation LLC Total (Non- Consolidating Consolidated
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries ------------
-------- ---------- ----------- ---------- ---------- -------
(In thousands)
Cash flows from operating activities:
- -------------------------------------
Net cash provided by (used in) operating
activities $ 6,954 $ 16,764 $ (21,510) $ (4,746) $(30,536) $ 2,564 $ (25,764)
Cash flows from investing activities:
- -------------------------------------
Payments for the purchase of equipment (1,853) (1,047) (55,004) (56,051) (40,737) --- (98,641)
Acquisition of business, net of cash
acquired (61,990) --- 3,137 3,137 --- (2,564) (61,417)
Proceeds from maturities of investments --- --- --- --- 33,167 --- 33,167
Proceeds from the sale of assets 303 --- 10,016 10,016 --- --- 10,319
Proceeds from restricted cash --- --- --- --- 10,682 --- 10,682
Investments in unconsolidated affiliates --- 750 --- 750 --- --- 750
Disbursement of intercompany note (50,935) (18,368) --- (18,368) --- 69,303 ---
-------- -------- --------- -------- -------- -------- ---------
Net cash provided by (used in) investing
activities (114,475) (18,665) (41,851) (60,516) 3,112 66,739 (105,140)
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt 58,368 --- 78,701 78,701 30,000 (97,069) 70,000
Proceeds from stock options exercised 212 --- --- --- --- --- 212
Proceeds from promissory notes --- --- --- --- 20 --- 20
Principal payments of long-term debt (161) (41) (28,081) (28,122) --- 27,766 (517)
Debt issuance costs (762) --- --- --- --- --- (762)
-------- -------- --------- -------- -------- -------- ---------
Net cash provided by (used in) activities 57,657 (41) 50,620 50,579 30,020 (69,303) 68,953
-------- -------- --------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents (49,864) (1,942) (12,741) (14,683) 2,596 --- (61,951)
Cash and cash equivalents at beginning of
period 79,184 4,418 15,888 20,306 1,099 --- 100,589
-------- -------- --------- -------- -------- -------- ---------
Cash and cash equivalents at end of period $ 29,320 $ 2,476 $ 3,147 $ 5,623 $ 3,695 $ --- $ 38,638
======== ======== ========= ======== ======== ======== =========
Condensed Consolidating Statement of Cash Flows
Nine-month period ended September 30, 2001
------------------------------------------
US Unwired Louisiana
Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating Consolidated
(Parent) (Guarantor) (Guarantor) Guarantors Entries ------------
-------- ----------- ----------- ---------- -------
(In thousands)
Cash flows from operating activities:
- -------------------------------------
Net cash provided by (used in) operating
activities $ 11,206 $ (1,803) $ (29,950) $(31,753) $ --- $ (20,547)
Cash flows from investing activities:
- -------------------------------------
Payments for the purchase of equipment (5,656) (3,127) (72,202) (75,329) --- (80,985)
Proceeds from the sale of assets 791 --- 44,133 44,133 --- 44,924
Sale of marketable securities 137,382 --- 39,323 39,323 --- 176,705
Purchase of marketable securities (12,544) --- --- --- --- (12,544)
Proceeds from restricted cash --- 5,753 --- 5,753 --- 5,753
Investments in unconsolidated affiliates --- (527) --- (527) --- (527)
Disbursement of intercompany note (58,528) --- --- --- 58,528 ---
-------- -------- --------- -------- -------- ---------
Net cash provided by (used in) investing
activities 61,445 2,099 11,254 13,353 58,528 133,326
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term debt 1,840 --- 108,527 108,527 (108,545) 1,822
Proceeds from stock options exercised 1,392 --- --- --- --- 1,392
Principal payments of long-term debt (94) (38) (51,385) (51,423) 50,017 (1,500)
Debt issuance costs (149) --- --- --- --- (149)
-------- -------- --------- -------- -------- ---------
Net cash provided by (used in) activities 2,989 (38) 57,142 57,104 (58,528) 1,565
-------- -------- --------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents 75,640 258 38,446 38,704 --- 114,344
Cash and cash equivalents at beginning of
period 3,642 7,073 4,421 11,494 --- 15,136
-------- -------- --------- -------- -------- ---------
Cash and cash equivalents at end of period $ 79,282 $ 7,331 $ 42,867 $ 50,198 $ --- $ 129,480
======== ======== ========= ======== ======== =========
17
11. Subsequent Events
Under the Company's agreements with Sprint PCS, Sprint PCS can change the
current fee ("Travel Rate") that the Company receives and pays for each Sprint
PCS travel minute after December 31, 2002. The Company has received notice from
Sprint PCS that the reciprocal Travel Rate will change for Louisiana Unwired
from $0.20 per minute in 2002 to $0.058 per minute in 2003 and for IWO, Texas
Unwired and Georgia PCS from $0.10 per minute in 2002 to $0.058 per minute in
2003. Currently the fees that the Company receives from Sprint PCS for Sprint
PCS's customers using the Company's networks exceed those that the Company pays
to Sprint PCS for the Company's customers using Sprint PCS's network. The change
in Travel Rate will likely decrease the Company's revenues, expenses and the
Company's net travel position, which is the difference between travel revenue
and travel expense, increase the Company's net loss and decrease cash flow from
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plans,
construction schedules, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-looking
statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the investment
considerations described elsewhere, specific factors that might cause such a
difference include, but are not limited to (i) our ability to integrate
operations and finance future growth opportunities; (ii) our dependence on
Sprint PCS; (iii) our ability to expand our Sprint PCS network or to upgrade the
Sprint PCS network to accommodate new technologies; (iv) limited operating
history in the PCS market and anticipation of future losses; (v) potential
fluctuations in operating results; (vi) changes or advances in technology; (vii)
changes in law or government regulation; (viii) competition in the industry and
markets in which we operate; (ix) future acquisitions; (x) our ability to
attract and retain skilled personnel; (xi) our dependence on contractor and
consultant services, network implementation and information technology support;
(xii) our potential inability to expand the services and related products we
provide in the event of substantial increases in demand in excess of supply for
network and handset equipment and related services and products; (xiii) the
availability at acceptable terms of sufficient funds to pay for our business
plans; (xiv) changes in labor, equipment and capital costs; (xv) any inability
to comply with the indentures that govern our senior notes or credit agreements;
(xvi) changes in management; and (xvii) general economic and business
conditions.
You should not rely too heavily on any forward-looking statement. We cannot
assure you that our forward-looking statements will prove to be correct. We have
no obligation to update or revise publicly any forward-looking statement based
on new information, future events or otherwise. This discussion should be read
in conjunction with our financial statements included in this report and with
the Risk Factors included in this report under Item 5 Other Information, and
with the financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations that are included in the Form 10-K
for US Unwired Inc. for the year ended December 31, 2001, filed on March 5, 2002
with the Securities and Exchange Commission ("SEC") and with the financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Form 10-K for IWO Holdings, Inc. for the year ended
December 31, 2001, filed on March 26, 2002 with the SEC.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related 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
18
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, 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 conditions of our
customers deteriorate, resulting in 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 are less
than that recognized, additional allowances may be required.
We recognize only a portion of late fees billed to customers that fail to pay
their bills within the required payment period, as there is no assurance that
all late fees that are billed will be collected. If the collections on late fees
are less than that recognized, additional allowances may be required.
We defer revenues collected for activation fees over the estimated life of the
subscriber relationship, which we believe to be 15-24 months, based upon our
historical trends of average customer lives and discussions with Sprint PCS. We
also defer an activation expense in an amount equal to the activation fee
revenue and amortize this expense in an amount equal to the activation fee
revenue over the life of the subscriber relationship. If the estimated life of
the subscriber relationship increases or decreases, the amounts of deferred
revenue and deferred expense will be adjusted over the revised estimated life of
the subscriber relationship.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be necessary.
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 are reasonable, actual
results may vary from these estimates.
Overview
Through our subsidiaries, Louisiana Unwired, LLC ("LA Unwired") and IWO Holdings
Inc. ("IWO), we provide wireless personal communication services, commonly
referred to as PCS in all or some portion of
19
Louisiana, Texas, Florida, Arkansas, Mississippi, Georgia, Alabama, New York,
New Hampshire, Vermont and portions of Massachusetts and Pennsylvania. We are a
network partner of Sprint PCS, the personal communications services group of
Sprint Corporation. Sprint PCS, directly and through affiliates like us,
provides wireless services in more than 4,000 cities and communities across the
country. We have the exclusive right to provide digital PCS services under the
Sprint(R) and Sprint PCS(R) brand names in our service area which is among the
largest in population and subscribers of all of the Sprint PCS network partners
and is contiguous with Sprint PCS's launched markets.
On April 1, 2002, we acquired 100% of the ownership interest in IWO for
approximately $447.8 million in Company stock. IWO's service area consists of a
total population of approximately 6.3 million residents. The Company has
incurred approximately $7.0 million in closing costs associated with the
acquisition. The acquisition has been accounted for using the purchase method of
accounting. The aggregate purchase price has been allocated to the assets
acquired and liabilities assumed based the Company's initial estimate of their
fair values. The excess of the purchase price over the fair value of the net
identifiable assets has been allocated to goodwill. The Company's operating
results include the operating results of IWO from date of acquisition, April 1,
2002.
Results of Operations
The wireless telecommunications industry uses terms such as subscriber
additions, average revenue per user, churn and cost per gross addition as
performance measurements or metrics. None of these terms are measures of
financial performance under accounting principles generally accepted in the
United States. When we use these terms, they may not be comparable to similar
terms used by other wireless telecommunications companies.
Three-Month Period Ended September 30, 2002 Compared to the Three-Month Period
Ended September 30, 2001
Subscriber Additions
As of September 30, 2002, we provided personal communication services to 541,300
customers as compared to 236,000 customers at September 30, 2001, an increase of
305,300 subscribers. The number of new subscribers includes 169,200 subscribers
that joined us on April 1, 2002 as a result of our acquisition of IWO and 41,100
new subscribers that joined us on March 8, 2002 as a result of our acquisition
of Georgia PCS. In addition, during the three-month period ended September 30,
2002, we added an additional 2,200 subscribers in all markets. We do not include
in our customer base an estimate of customers who we anticipate will never make
their initial payment.
Inclusive of IWO and Georgia PCS, we provided network coverage in an area
comprising approximately 12.6 million residents out of approximately 17.6
million total residents or 72% of the people in our service area. The number of
people in our service area does not represent the number of Sprint PCS
subscribers that we expect to have in our service area.
We also provide cellular and paging services in parts of Louisiana through our
wholly owned subsidiary, Unwired Telecom Corporation ("Unwired Telecom"). As of
September 30, 2002, we had approximately 27,400 cellular and 9,700 paging
subscribers as compared to 37,100 cellular and 15,100 paging subscribers at
September 30, 2001. We expect our cellular and paging services to continue to
decline.
Subscriber and Roaming Revenue
Subscriber revenue consists primarily of a basic service plan (where the
customer purchases a pre-allotted number of minutes for voice and/or data
transmission); airtime (which consists of billings for minutes that either
exceed or are not covered by the basic service plan); long distance; and charges
associated with travel outside our service area. We do not include subscriber
revenue for an estimate of customers who we anticipate will never make their
initial payment.
20
Roaming revenue consists primarily of Sprint PCS travel revenue and foreign
roaming revenue. Sprint PCS travel revenue is generated on a per minute basis
when a Sprint PCS subscriber outside of our markets uses our service when
traveling through our markets. Foreign roaming revenue is generated when a
non-Sprint PCS customer uses our service when traveling through our markets.
Average Revenue per User
Average revenue per user ("ARPU") is the average monthly service revenue per
user (subscriber) and is calculated by dividing total subscriber revenue for the
period by the average number of subscribers during the period adjusted for an
estimate of customers who we anticipate will never make an initial payment. ARPU
not including roaming was $54.30 per month for the three-month period ended
September 30, 2002 was comparable to the $54.47 per month for the three-month
period ended September 30, 2001.
Churn
Churn is the monthly rate of customer turnover expressed as a percentage of our
overall average customers for the reporting period. Customer turnover includes
both customers that elected voluntarily to not continue using our service and
customers that were involuntarily terminated from using our service because of
non-payment. Churn is calculated by dividing the sum of (i) the number of
customers that discontinue service; (ii) less those customers discontinuing
their service within a 30-day period of their original activation date; and,
(iii) adding back those customers that reactivate their service, by our overall
average customers for the reporting period. We exclude from the calculation an
estimate of customers who we anticipate will not make their initial payment.
Churn was 4.7% for the three-month period ended September 30, 2002 as compared
to 1.8% for the three-month period ended September 30, 2001. The increase is due
to adding a higher number of credit challenged subscribers in 2002 that were
involuntarily terminated from using our service because of non-payment. We are
also evaluating the impact of customer fraud on Churn that occurred by customers
entering incorrect bank information into Sprint PCS's electronic payment system
Cost per Gross Addition
Cost per gross addition ("CPGA") summarizes the average cost to acquire all
customers during the reporting period, including those customers who we estimate
will not make an initial payment. CPGA is computed by adding selling and
marketing expenses, cost of equipment and activation costs and reducing the
amount by the revenue from handset and accessory sales. The net amount is
divided by the number of total new subscribers added for the period. CPGA was
$378 for the three-month period ended September 30, 2002 as compared to $340 for
the three-month period ended September 30, 2001. The increase in CPGA was
primarily the result of increases in handset subsidies.
Revenues
Three-month period ended September 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $ 90,759 $39,910
Roaming revenues 53,011 26,016
Merchandise sales 4,442 4,322
Other revenues 606 1,110
-------- -------
Total revenues $148,818 $71,358
======== =======
Subscriber revenues
Total subscriber revenues were $90.8 million for the three-month period ended
September 30, 2002 as compared to $39.9 million for the three-month period ended
September 30, 2001, representing an increase
21
of $50.9 million and was primarily the result of an increase in subscribers as
discussed in Subscriber Additions above.
Roaming revenues
Roaming revenues were $53.0 million for the three-month period ended September
30, 2002 as compared to $26.0 million for the three-month period ended September
30, 2001, representing an increase of $27.0 million and was primarily the result
of a higher volume of Sprint PCS(R) subscribers traveling through our markets,
the expansion of our network coverage that included the build out of the
remaining markets in the Southern service area and the acquisition of IWO and
Georgia PCS. Our April 1, 2002 acquisition of IWO added $11.8 million of roaming
revenue in the three-month period ended September 30, 2002. We provided service
in 68 PCS markets at September 30, 2002 (including 26 markets added as a result
of the IWO and Georgia PCS acquisitions) as compared to 41 PCS markets at
September 30, 2001 and 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.
Merchandise sales
Merchandise sales were $4.4 million for the three-month period ended September
30, 2002 as compared to $4.3 million for the three-month period ended September
30, 2001, representing an increase of $.1 million and related to subscriber
additions. The cost of handsets typically exceeds the amount received from our
subscribers because we subsidize the price of handsets to remain competitive in
the marketplace.
Other revenues
Other revenues were $.6 million for the three-month period ended September 30,
2002 as compared to $1.1 million for the three-month period ended September 30,
2001, representing a decrease of $.5 million and was primarily attributable to a
decrease in management services provided to related companies and a decrease in
access fee revenues.
Operating Expenses
Three-month period ended September 30,
2002 2001
---- ----
(In thousands)
Cost of service $ 67,570 $30,273
Merchandise cost of sales 9,957 7,080
General & administrative 43,355 14,189
Sales & marketing 27,999 18,374
Non-cash stock compensation 1,400 1,089
Depreciation & amortization 32,731 12,318
-------- -------
Total operating expenses $183,012 $83,323
======== =======
Cost of service
Cost of service was $67.6 million for the three-month period ended September 30,
2002 as compared to $30.3 million for the three-month period ended September 30,
2001, representing an increase of $37.3 million, which primarily related to an
increase of $16.0 million in carrier roaming expenses and an increase of $1.9
million in circuit and usage costs as a result of our larger subscriber base and
market coverage. Our April 1, 2002 acquisition of IWO added $18.3 million of
service costs in the three-month period ended September 30, 2002.
22
Merchandise cost of sales
Merchandise cost of sales was $10.0 million for the three-month period ended
September 30, 2002 as compared to $7.1 million for the three-month period ended
September 30, 2001, representing an increase of $2.9 million and primarily
related to our April 1, 2002 acquisition of IWO that added $2.7 million of
merchandise cost of sales. The cost of handsets typically exceeds the amount
received from our subscribers because we subsidize the price of handsets to
remain competitive in the marketplace. This subsidy continues to increase to
remain competitive.
General and administrative expenses
General and administrative expenses were $43.4 million for the three-month
period ended September 30, 2002 as compared to $14.2 million for the three-month
period ended September 30, 2001, representing an increase of $29.2 million that
was primarily related to $5.5 million in increases for billing, customer service
costs and Sprint PCS affiliation fees associated with our subscriber base
increase; $5.6 million in increased bad debts associated primarily with Sprint
PCS rate plans that extended credit to credit challenged subscribers; and, $3.2
million in expenses associated with handset upgrades provided to existing
subscribers in subscriber retention initiatives. We are also evaluating the
impact of customer fraud on bad debt expense that occurred by customers entering
incorrect bank information into Sprint PCS's electronic payment system. Our
April 1, 2002 acquisition of IWO added $14.3 million of general and
administrative expense in the three-month period ended September 30, 2002.
Sales and marketing expenses
Sales and marketing expenses were $28.0 million for the three-month period ended
September 30, 2002 as compared to $18.4 million for the three-month period ended
September 30, 2001, representing an increase of $9.6 million that primarily
related to our April 1, 2002 acquisition of IWO added $11.4 million of selling
and marketing expense in the three-month period ended September 30, 2002 offset
by a decrease advertising expenses.
Non-cash stock compensation
Non-cash compensation was $1.4 million for the three-month period ended
September 30, 2002 as compared to $1.1 million for the three-month period ended
September 30, 2001, representing an increase of $0.3 million which was primarily
related to stock options granted in connection with the IWO acquisition. The
non-cash stock compensation consists of compensation expense related to the
granting of certain stock options for the Company's stock in July 1999 and
January 2000 with exercise prices less than the market value of the Company's
stock at the date of the grant and the impact of the stock options granted in
connection with the IWO acquisition. The non-cash stock compensation expense is
generally being amortized over a four-year period representing the vesting
periods of the options.
Depreciation and amortization expense
Depreciation and amortization expense was $32.7 million for the three-month
period ended September 30, 2002 as compared to $12.3 million for the three-month
period ended September 30, 2001, representing an increase of $20.4 million. Net
property and equipment increased to $484.5 million at September 30, 2002, which
includes $184.7 million from our April 1, 2002 acquisition of IWO, from $216.9
million at September 30, 2001. Our April 1, 2002 acquisition of IWO added $5.2
million of depreciation and $10.1 million of amortization expense related to the
Sprint management agreement and subscriber base in the three-month period ended
September 30, 2002.
Operating loss
The operating loss was $34.2 million for the three-month period ended September
30, 2002 as compared to $12.0 million for the three-month period ended September
30, 2001, representing an increase of $22.2 million that was primarily due to
our April 1, 2002 acquisition of IWO that added $19.5 million of
23
operating losses in the three-month period ended September 30, 2002, offset by
increased revenues associated with our subscriber base and roaming revenue
resulting from the completion of our network build out.
Other Income/(Expense)
Three-month period ended September 30,
2002 2001
---- ----
(In thousands)
Interest expense $(21,295) $(9,835)
Interest income 780 1,314
Gain on sale of assets 10 401
-------- -------
Total other expense $(20,505) $(8,120)
======== =======
Interest expense was $21.3 million for the three-month period ended September
30, 2002 as compared to $9.8 million for the three-month period ended September
30, 2001, representing an increase of $11.5 million. The increase in interest
expense resulted from the increase in outstanding debt. Our outstanding debt,
including current maturities, was $743.7 million at September 30, 2002, which
includes $336.7 million from our April 1, 2002 acquisition of IWO, as compared
to $346.6 million at September 30, 2001.
Interest income was $.8 million for the three-month period ended September 30,
2002 as compared to $1.3 million for the three-month period ended September 30,
2001, representing a decrease of $.5 million. The decrease was primarily due to
less cash and cash equivalents available for investment.
Gain on sale of assets was $10,000 for the three-month period ended September 30
2002 as compared to $.4 million for the three-month period ended September 30,
2001. The three-month period ended September 30, 2001 gain relates to tower
sales.
Nine-month period Ended September 30, 2002 Compared to the Nine-month period
Ended September 30, 2001
Subscriber Additions
As previously discussed, as of September 30, 2002, we provided personal
communication services to 541,300 customers compared to 236,000 customers at
September 30, 2001, an increase of 305,300 subscribers. The number of new
subscribers includes 169,200 subscribers that joined us on April 1, 2002 as a
result of our acquisition of IWO and 41,100 new subscribers that joined us on
March 8, 2002 as a result of our acquisition of Georgia PCS. In addition, during
the nine-month period ended September 30, 2002, we added an additional 53,900
subscribers in all markets. We do not include in our customer base an estimate
of customers that will not make their initial payment.
Revenues
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Subscriber revenues $236,427 $100,662
Roaming revenues 133,355 60,963
Merchandise sales 13,471 12,345
Other revenues 2,047 3,962
-------- --------
Total revenues $385,300 $177,932
======== ========
24
Subscriber revenues
Total subscriber revenues were $236.4 million for the nine-month period ended
September 30, 2002 as compared to $100.6 million for the nine-month period ended
September 30, 2001, representing an increase of $135.8 million and was primarily
the result of an increase in subscribers.
Roaming revenues
Roaming revenues were $133.3 million for the nine-month period ended September
30, 2002 as compared to $61.0 million for the nine-month period ended September
30, 2001, representing an increase of $72.3 million and was primarily the result
of a higher volume of Sprint PCS(R) subscribers traveling through our markets
and the expansion of our network coverage that included the build out of the
remaining markets in our service area and the acquisition of IWO and Georgia
PCS. Our April 1, 2002 acquisition of IWO added $20.9 million of roaming revenue
during the nine-month period ended September 30, 2002. We provided service in 68
PCS markets at September 30, 2002 (including 26 markets added as a result of the
IWO and Georgia PCS acquisitions) as compared to 41 PCS markets at September 30,
2001 and 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.
Merchandise sales
Merchandise sales were $13.5 million for the nine-month period ended September
30, 2002 as compared to $12.3 million for the nine-month period ended September
30, 2001, representing an increase of $1.2 million and related to subscriber
additions. The cost of handsets typically exceeds the amount received from our
subscribers because we subsidize the price of handsets to remain competitive in
the marketplace.
Other revenues
Other revenues were $2.0 million for the nine-month period ended September 30,
2002 as compared to $4.0 million for the nine-month period ended September 30,
2001, representing a decrease of $2.0 million and was primarily attributable to
a decrease in access fee revenue.
Operating Expenses
Nine-month period ended September 30,
2002 2001
---- ----
(In thousands)
Cost of service $172,406 $77,320
Merchandise cost of sales 28,264 22,954
General & administrative 107,421 37,730
Sales & marketing 77,924 48,838
Non-cash stock compensation 3,802 3,721
Depreciation & amortization 78,566 42,339
-------- --------
Total operating expenses $468,383 $232,902
======== ========
Cost of service
Cost of service was $172.4 million for the nine-month period ended September 30,
2002 as compared to $77.3 million for the nine-month period ended September 30,
2001, representing an increase of $95.1 million, that was primarily related to
an increase of $47.8 million in carrier roaming expenses and an increase of $7.9
million in circuit and usage costs as a result of our larger subscriber base and
market coverage. Our April 1, 2002 acquisition of IWO added $37.2 million of
service costs in the nine-month period ended September 30, 2002.
25
Merchandise cost of sales
Merchandise cost of sales was $28.2 million for the nine-month period ended
September 30, 2002 as compared to $23.0 million for the nine-month period ended
September 30, 2001, representing an increase of $5.2 million that was primarily
related to our April 1, 2002 acquisition of IWO. The cost of handsets typically
exceeds the amount received from our subscribers because we subsidize the price
of handsets to remain competitive in the marketplace. This subsidy continues to
increase due to the competitive nature of our business.
General and administrative expenses
General and administrative expenses were $107.4 million for the nine-month
period ended September 30, 2002 as compared to $37.7 million for the nine-month
period ended September 30, 2001, representing an increase of $69.7 million that
was primarily related to $20.0 million in increases for billing, customer
service costs and Sprint PCS affiliation fees associated with our subscriber
base increase; $14.4 million in increased bad debts associated primarily with
Sprint PCS rate plans that extended credit to credit challenged subscribers;
and, $6.4 million in expenses associated with handset upgrades provided to
existing subscribers in subscriber retention initiatives. We are also evaluating
the impact of customer fraud on bad debt expense that occurred by customers
entering incorrect bank information into Sprint PCS's electronic payment system.
Our April 1, 2002 acquisition of IWO added $26.3 million of general and
administrative expenses in the nine-month period ended September 30, 2002.
Sales and marketing expenses were $77.9 million for the nine-month period ended
September 30, 2002 as compared to $48.8 million for the nine-month period ended
September 30, 2001, representing an increase of $29.1 million that primarily
relates to increases in commissions and subsidies paid to local and national
third party retailers contracted to sell