Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
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, 2002.
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)
-----------------
Louisiana 72-1457316
(State or other
jurisdiction of
incorporation or (I.R.S. Employer
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)
-----------------
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. [_]
There were 128,831,535 shares of common stock, $0.01 par value per share,
outstanding at March 15, 2003. The aggregate market value of the common equity
held by non-affiliates on June 30, 2002 was $250,243,574.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the US Unwired Inc. Proxy Statement pursuant to Regulation 14A
of the Exchange Act for its 2003 annual meeting of shareholders are
incorporated by reference.
================================================================================
US UNWIRED INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business.................................................................. 1
ITEM 2. Properties................................................................ 45
ITEM 3. Legal Proceedings......................................................... 45
ITEM 4. Submission of Matters to a Vote of Security Holders....................... 45
ITEM 4A. Executive Officers of the Registrant...................................... 46
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters..... 47
ITEM 6. Selected Financial Data................................................... 48
ITEM 7 Management's Discussion And Analysis Of Financial Condition And Results Of
Operations................................................................ 49
ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk................ 67
ITEM 8. Financial Statements...................................................... 67
ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure................................................................ 67
PART III
ITEM 10. Directors And Executive Officers Of The Registrant........................ 68
ITEM 11. Executive Compensation.................................................... 68
ITEM 12. Security Ownership Of Certain Beneficial Owners And Management............ 68
ITEM 13. Certain Relationships And Related Transactions............................ 68
ITEM 14. Controls and Procedures................................................... 68
PART IV
ITEM 15. Exhibits, Financial Statements, Schedules, and Reports On Form 8-K........ 69
Signatures......................................................................... 75
Certification Chief Executive Officer.............................................. 76
Certification Chief Financial Officer.............................................. 77
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are statements
about future business strategy, operations and capabilities, construction
plans, construction schedules, financial projections, plans and objectives of
management, expected actions of third parties and other matters.
Forward-looking statements often include words like believes, belief, expects,
plans, anticipates, intends, projects, estimates, may, might, would or similar
words. Forward-looking statements speak only as of the date of this report.
They involve known and unknown risks, uncertainties and other factors that may
cause actual results to be materially different. In addition to the risk
factors described elsewhere, specific factors that might cause such a
difference include, but are not limited to (i) our ability to integrate
operations and finance future growth opportunities; (ii) our dependence on
Sprint PCS; (iii) our ability to expand our Sprint PCS network or to upgrade
the Sprint PCS network to accommodate new technologies; (iv) limited operating
history in the PCS market and anticipation of future losses; (v) potential
fluctuations in operating results; (vi) changes or advances in technology;
(vii) changes in law or government regulation; (viii) competition in the
industry and markets in which we operate; (ix) future acquisitions; (x) our
ability to attract and retain skilled personnel; (xi) our dependence on
contractor and consultant services, network implementation and information
technology support; (xii) our potential inability to expand the services and
related products we provide in the event of substantial increases in demand in
excess of supply for network and handset equipment and related services and
products; (xiii) the availability at acceptable terms of sufficient funds to
pay for our business plans; (xiv) changes in labor, equipment and capital
costs; (xv) any inability to comply with the indentures that govern our senior
notes or credit agreements and to obtain any necessary waivers thereunder;
(xvi) changes in management; (xvii) terrorism and war and (xviii) 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 "RISK FACTORS" contained in this document.
PART I
ITEM 1. Business
General
US Unwired Inc. ("US Unwired") through our wholly owned subsidiaries, we
provide wireless personal communication services, commonly referred to as PCS,
in eastern Texas, southern Oklahoma, southern Arkansas, the Florida panhandle,
southern Tennessee, upstate New York, New Hampshire (other than the Nashua
market) and Vermont; significant portions of Louisiana, Alabama, Georgia and
Mississippi; 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 network partners 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 service areas that had approximately
17.6 million residents as of December 31, 2002. Our combined service areas are
among the largest in population and subscribers of the Sprint PCS network
partners and are contiguous with Sprint PCS's launched markets of Houston,
Dallas, Little Rock, New Orleans, Birmingham, Jacksonville, Memphis, Atlanta,
New York and Boston.
1
At December 31, 2002, we were providing PCS service to approximately
561,200 subscribers and network coverage to approximately 12.6 million
residents or 72% out of approximately 17.6 million total residents. 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.
In addition, we provide cellular and paging services in parts of
southwest Louisiana. As of December 31, 2002, we had approximately 35,300
cellular and paging subscribers.
Our Background
Our principal wholly owned subsidiaries through which we conduct
operations are Louisiana Unwired, LLC ("Louisiana Unwired"), IWO Holdings, Inc.
("IWO") and Unwired Telecom Corporation ("Unwired Telecom"). Louisiana Unwired
and IWO provide PCS telecommunication services, and Unwired Telecom provides
cellular and paging telecommunications service.
On March 8, 2002, we acquired 100% of the ownership interests of Georgia
PCS Management, LLC (Georgia PCS). Georgia PCS's service area consists of a
total population of approximately 1.4 million residents. The service area of
Georgia PCS is adjacent to our existing markets and is also adjacent on the
north and the south to Atlanta, where service is provided by Sprint PCS. On
April 1, 2002, we acquired 100% of the ownership interest in IWO. IWO's service
area consists of a total population of approximately 6.3 million residents and
is contiguous with Sprint PCS's markets of New York City and Boston.
Recent Developments
Our operating and financial results have been adversely affected by (i) a
highly competitive wireless market, (ii) further increased penetration of the
potential customer universe, (iii) decreases in wireless pricing, (iv) a
general weakening of the economy, and (v) challenges in our affiliate
relationship with Sprint PCS. These changes have had, and if they continue will
have, an adverse impact on our ability to meet future obligations under our
highly leveraged capital structure. These changes have also caused us to review
our business plans for US Unwired and IWO.
Changes in the Wireless Market
. Subscriber growth has declined in the United States due to what we
believe is a general decline in the economy. This decline has resulted
in lowering overall estimated penetration and possible near market
saturation of subscribers whose credit is in good standing. Penetration
refers to the percentage of the total population that is estimated to
become wireless subscribers.
. Average monthly revenue per subscriber continues to decline and handset
subsidies continue to increase as wireless carriers compete for
subscribers by offering increased allotments of minutes and free or
reduced price features like wireless web. When the handset is sold
below cost, the discount is referred to as a handset subsidy.
. Churn, or the subscriber turnover rate, continues to increase as
subscribers abandon brand loyalty in favor of pricing considerations
and as service is offered to people who are considered high risk due to
a sub-standard credit rating.
2
Our Relationship with Sprint PCS
We have entered into long-term agreements with Sprint PCS and 2002 was
the first full year that Sprint PCS provided services to all of our subscribers
such as billing, customer care, cash collections and maintenance of our
subscriber accounts receivable balances. We rely on Sprint PCS's system of
internal controls to capture information such as subscriber minutes of use,
long distance, national sales commissions, the time that our subscribers use
the network outside our service area and the time that Sprint PCS and other
affiliate subscribers use the network within our service area.
We also rely on Sprint PCS:
. For national pricing plans, marketing and advertising. Unless we
request from Sprint PCS, and are granted permission, Sprint PCS
believes that we are required to participate in the programs offered by
Sprint PCS. One such program was designed to attract higher credit risk
subscribers that for a period of time waived the normal deposit
requirement. We believe that a significant portion of our subscriber
turnover, bad debt expense, commission expense and handset subsidies in
2002 was the result of this program.
. For customer care. This limits our ability to interact with our
subscribers and implement programs to reduce subscriber turnover.
. To manage subscriber fraud. During 2002, Sprint PCS implemented a
program that we believe increased the level of customer fraud resulting
in increased financial loss to us.
. For cash collections on our subscriber billing. Sprint PCS is required
to remit to us 92% of collected revenue. Because a subscriber billing
typically includes revenue that belongs to us and revenue that belongs
to Sprint PCS, Sprint PCS developed a formula based on historical
information of these relationships to distribute cash collections. As a
result of our review of the formula and its application to our
collected revenues, we received an adjustment to our collections of
$9.4 million in January and February 2003.
At various times during 2002 Sprint PCS notified us of unanticipated
expenses due to a lag between the time the charges have been incurred and the
time that Sprint PCS has notified us of the charges. At times, we have been
invoiced by Sprint PCS for charges that we believe cannot be charged to us. We
review all charges from Sprint PCS and dispute certain of these charges based
upon our interpretation of the management agreement and are attempting to work
with Sprint PCS to improve the process. We believe that these items have
affected our liquidity and our ability to accurately forecast our cash flows
from operations.
Under our agreements with Sprint PCS, we believe that Sprint PCS can
change the travel rate within certain limitations that we receive and pay for
each Sprint PCS travel minute after December 31, 2002. We 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. While we believe that this reduction is not in accordance with our
management agreement with Sprint PCS, we are reviewing our options, but our
recourses against Sprint PCS for this reduction may be limited. Currently the
fees that we receive from Sprint PCS for Sprint PCS's subscribers using our
network exceeds those that we pay to Sprint PCS for our subscribers using
Sprint PCS's network. The change in the travel rate will likely decrease the
our revenues, expenses and our net travel position, which is the difference
between travel revenue and travel expense, increase our net loss and decrease
cash flow from operations.
3
Our Highly Leveraged Capital Structures
US Unwired has a senior bank credit facility and senior subordinated
discount notes. IWO has senior bank credit facility and senior notes. US
Unwired and IWO entered into these prior to the acquisition. Under the terms of
these debt instruments, funds available under the US Unwired debt can only be
used by US Unwired, and funds available under the IWO debt can only be used by
IWO. US Unwired is not obligated for the payment of IWO's debt, and IWO is not
obligated for the payment of US Unwired's debt.
US Unwired Liquidity
We continue to analyze and update US Unwired's business plan based on
constantly changing wireless market conditions and our Sprint PCS relationship.
We believe that US Unwired will have sufficient cash to satisfy US Unwired's
working capital needs and capital expenditures through 2003.
As of December 31, 2002, US Unwired had $27.0 million in cash and cash
equivalents. At December 31, 2002, we had additional borrowing availability
under the US Unwired senior bank credit facility of $75.3 million.
As of December 31, 2002, US Unwired's indebtedness consisted of $90.0
million related to the US Unwired senior bank credit facility, $315.7 million
under the US Unwired senior subordinated discount notes and $11.3 million in
capital leases, promissory notes and vendor financing, for a total of $417.0
million. US Unwired is scheduled to make the first of its quarterly
installments on the US Unwired senior bank credit facility in June 2003 and to
make payments of accrued interest on the US Unwired senior subordinated
discount notes in May 2005.
The current US Unwired business model indicates that we will fail to
comply with certain financial covenants of the US Unwired senior bank credit
facility in 2003, and we have initiated discussions with our banking group to
amend these covenants. However, there can be no assurance that we will be able
to successfully negotiate amendments on terms acceptable to the banking group
and us. Should acceptable amendments not be made, the banking group may elect
to deny us access to the remaining available funds under the US Unwired senior
bank credit facility. Under such circumstances, we believe that we will have
sufficient cash to fund operations, debt service and capital requirements in
2003 without additional borrowing. The banking group may also elect to
accelerate repayment of the US Unwired senior bank credit facility. Under such
circumstances, this acceleration will serve to trigger a default in the US
Unwired senior subordinated discount notes. Should this occur, both the holders
of the US Unwired senior bank credit facility and US Unwired senior
subordinated discount notes may demand immediate payment for all outstanding
indebtedness, and we would not have sufficient cash to pay the accelerated
amount.
As of the date of this filing, we are unable to express a belief on
whether we will have sufficient liquidity in 2004 and beyond, which will depend
on a number of factors including changes in the wireless market; results of
2003 operations; our relationships with Sprint PCS, major vendors and our
lenders; and acceptable amended terms of the US Unwired senior bank credit
facility.
IWO Liquidity
We have been unable to develop a business plan for IWO that provides
sufficient liquidity in 2003, and we have engaged in discussions with the
holders of the IWO senior bank credit facility and the holders of the IWO
senior notes regarding restructuring of IWO.
4
As of December 31, 2002, IWO had $35.0 million in cash and cash
equivalents and $41.2 million in restricted cash. Total availability in
revolving loans under our senior bank credit facilities was $25.2 million. As
of December 31, 2002, IWO indebtedness consisted of $213.2 million related to
the IWO senior bank credit facility and $137.0 million related to the IWO
senior notes for a total of $350.2 million. A portion of the original proceeds
of the IWO senior notes offering was set aside as restricted cash to make the
first six scheduled interest payments on IWO senior notes through January 2004.
Repayment of the IWO senior bank credit facility commences in March 2004.
Although IWO was in compliance with all financial covenants under the IWO
senior bank credit facility at December 31, 2002, we believe that IWO will
violate certain covenants of the IWO senior bank credit facility in 2003.
Moreover, because of the developments in IWO's business referred to above, we
believe it is likely the IWO bank group will elect not to make the remaining
$25.2 million of our revolving credit facility available to us. Without the
remaining $25.2 million, IWO will not have sufficient liquidity through 2003.
We are in discussions with the IWO banking group and note holders to arrive at
an acceptable restructuring to preserve IWO liquidity. IWO, holders of the IWO
senior bank credit facility and holders of the IWO senior notes have all
retained advisors to assist in evaluating alternatives for IWO liquidity.
Without sufficient liquidity, IWO will reduce capital expenditures for
network expansion required for compliance under the IWO management agreement.
Failure to complete the build-out of the IWO service area will place us in
violation of the IWO management agreement. As a result, Sprint PCS could
declare IWO in default and take action up to and including termination of the
IWO management agreement.
A default under the IWO senior bank credit facility does not result in
IWO being in default under the IWO senior notes. Should IWO be unable to amend
the senior bank credit facility or obtain waivers for any violated restricted
covenants, the holders of IWO senior bank credit facility can place IWO in
default, restrict any remaining future borrowing capacity and accelerate
repayment of the senior bank credit facility. Should the holders of IWO senior
bank credit facility place us in default and accelerate repayment, that
acceleration will serve to trigger a default in the IWO senior notes. Should
this occur, both the holders of the IWO senior bank credit facility and the
holders of the IWO senior notes may demand immediate payment of all outstanding
indebtedness. If the indebtedness is accelerated, IWO does not have sufficient
cash to repay its indebtedness. As a result, IWO would be forced to seek
protection under bankruptcy.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to IWO. Further, IWO creditors,
IWO lenders and IWO note holders cannot place any liens or encumbrances on the
assets of US Unwired. Should the holders of the IWO's senior bank credit
facility place IWO in default, US Unwired's relationship with IWO may change
and several alternatives exist ranging from working for the holders of the
senior bank credit facility and the holders of the senior notes as a manager of
the IWO territory, subject to the approval by Sprint PCS, to no involvement
with IWO at all.
Due to the indicators of impairment as discussed above, during the fourth
quarter of 2002, we engaged a nationally recognized valuation firm to assist us
in performing a fair value assessment of goodwill and other long-lived assets
of US Unwired and IWO. Based on the results of these
5
impairment analyses, we recorded impairment charges totaling $402.5 million for
the impairment of goodwill and an intangible asset that resulted from the
acquisition of IWO. This is further discussed in Note 3 in our consolidated
financials statements that are included in this filing.
Considering the expected covenant violations in 2003 and the actions that
may result from such covenant violations and the operating losses incurred to
date, there is substantial doubt about IWO's ability to continue as a going
concern.
Our Business Strategy
We have already identified and undertaken several initiatives that we
believe will help us meet our operational and financial objectives and move us
toward our goal of profitability and positive cash flow for US Unwired and
enhance liquidity at IWO. The following represents some of our key strategic
initiatives for 2003:
We must reduce our customer turnover or churn rate:
. In 2002, we opted out of Sprint PCS's program that attracted higher
credit risk subscribers, and we will request not to participate in any
Sprint PCS programs where our analysis indicates adversely impacted
levels of customer turnover or unsatisfactory economic returns.
. We have restructured our sales employees' programs to pay higher
commissions on subscribers with better credit ratings.
. We have revised our local agent commission structure. We no longer
offer handset discounts to our local agents and instead pay higher
commissions for subscribers with good credit ratings. We are also
canceling agreements with local agents that continue to target higher
risk subscribers or provide low economic value.
. We have reintroduced our pre-pay program, which requires advance
payment for minutes of use. We believe that this program offers higher
credit risk subscribers a less stressful environment in which to
subscribe to our service. We believe that there is a lower
susceptibility for this credit class of subscribers to churn than with
a post-pay program, and this service allows these subscribers to better
manage their expenditures for the service provided.
. We now supplement Sprint PCS's customer service function with our own
staff that focuses on subscriber retention.
We must continue to focus on cash flow:
. The build out of our markets is complete, except for certain IWO
markets. For US Unwired, we are continuing to limit our capital
expenditures to: (1) required technical upgrades of existing equipment,
and (2) only adding additional cell site coverage in areas that will
produce positive cash returns as a result of either new subscriber
growth or decreases in subscriber turnover.
. We intend to divest certain non-revenue producing properties and,
depending on market conditions, will divest most of the remaining cell
site towers that we own.
6
. We have already taken steps to reduce our work force. This included
reductions in our corporate overhead as a result of the IWO and Georgia
PCS integrations and other additional headcount reductions to reduce
overall expenses.
. We have undertaken a corporate wide evaluation of expenses. This
includes the consolidation of functions, divesting of unused and under
utilized facilities, renegotiation of vendor contracts, extension of
vendor payment terms and other cost cutting measures.
. We have begun an evaluation of our markets and are reducing sales
staffing levels and closing retail outlets and other distribution
points that do not meet our minimum internal rates of returns.
We must improve our relationship with Sprint PCS:
We believe that our ability to market ourselves as Sprint PCS creates
value. We believe that Sprint PCS's brand name recognition, national
advertising programs and national coverage helps us attract and grow our
subscribers. We also believe that the Sprint PCS affiliate program is important
to Sprint PCS.
. We must continue to work with Sprint PCS to improve the timeliness and
accuracy of information processed by Sprint PCS on our behalf.
. We must continue to work with Sprint PCS to provide more detailed
information to improve our business decisions relative to our
subscribers and our service area.
. We must ensure that Sprint PCS provides us with the same advantages
that Sprint PCS has from its nationally negotiated contracts to help us
to reduce our expenses.
. We must ensure that products/programs that Sprint PCS develops meet our
minimum acceptable return requirements.
While we believe that these initiatives will be sufficient, we cannot
state with certainty that these initiatives will result in our ability to
sustain operations beyond or even to the end of 2003, given the information as
discussed above regarding our indebtedness.
Our Affiliation with Sprint PCS
Sprint PCS has adopted a strategy to extend its 100% digital, 100% PCS
network by entering into agreements with independent wireless companies such as
us, which we refer to as affiliates, to construct and manage Sprint PCS markets
and market Sprint PCS services. Through these affiliations, Sprint PCS services
are available in key cities contiguous to current and future Sprint PCS
markets. The Sprint PCS network uses code division multiple access, or CDMA,
technology nationwide.
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 are the 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.
7
. Each agreement requires revenue sharing of 8% to Sprint PCS and 92% to
US Unwired, except that US Unwired retains 100% of the revenues from
non-US Unwired Sprint PCS subscribers traveling in our service area,
merchandise sales and other revenues as defined in the Sprint PCS
Management Agreement.
. 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.
We believe that our service area is important to the Sprint 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 includes all or portions of 68 markets
spanning over 237,000 square miles with a population of approximately 17.6
million people in eastern Texas, southern Oklahoma, southern Arkansas, the
Florida panhandle, southern Tennessee, upstate New York, New Hampshire (other
than the Nashua market) and Vermont; significant portions of Louisiana,
Alabama, Georgia and Mississippi; and portions of Massachusetts and
Pennsylvania as a network partner of Sprint PCS. 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.
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 subscribers in our
service area may use Sprint PCS services throughout our contiguous markets and
seamlessly throughout the Sprint network.
We support Sprint PCS's newest technology, PCS Vision(TM), throughout our
service area. PCS Vision(TM) allows subscribers that purchase handsets with the
appropriate features the ability to access the Internet, receive and send
email, download pictures and sounds, and take digital pictures either with a
built-in or attachable camera.
We offer Code Division Multiple Access (CDMA) handsets that weigh 2.7 to
7.0 ounces and can offer up to 16 days of standby time and up to 3.8 hours of
talk time. Many of these models are dual-mode handsets that allow subscribers
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 service 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. Roaming allows
a person to make a phone call outside the service are where they purchased the
service.
PCS Marketing Strategy
We benefit from the recognizable Sprint PCS brand names and logos and
from Sprint PCS's technological developments. We enhance the national effort
with local marketing managers and
8
coordinators who develop strategies specifically tailored to our local markets.
They assist the sales force in driving traffic to the stores through
promotions, contests and community relations programs and assist the outside
sales force in targeting business sales.
Pricing
We use the Sprint PCS pricing strategy to offer our subscribers 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 wireless
web. In order to meet the competitive needs of our specific local markets, we
occasionally alter Sprint PCS's pricing plans. In addition, we offer a pre-paid
service called Chat Pak in certain markets where we believe that it will
provide a competitive advantage.
Advertising
We capitalize on the Sprint PCS name and reputation to attract
subscribers. We benefit from Sprint PCS's national advertising campaign at no
additional cost. Sprint PCS also runs numerous promotional campaigns that
provide subscribers 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
radio, print, outdoor, billing inserts, direct mail and promotional displays in
our retail stores.
Sponsorships
Sprint PCS sponsors numerous national and regional events. These
sponsorships provide Sprint PCS with brand name and product awareness. Our
regional marketing teams sponsor local events, teams and projects to increase
consumer awareness of the Sprint PCS brand in the local community and to
provide occasions to develop positive community relationships in our markets.
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 61 PCS retail outlets. Our PCS retail outlets are located in
principal retail districts in each market, designed in accordance with Sprint
PCS specifications and branded as Sprint PCS stores. We have 10 cellular retail
outlets. We use our stores for the distribution and sale of our handsets and
services. Sales representatives in these outlets receive in-depth training that
allows them to explain our service in an informed manner. We believe that these
representatives foster effective and enduring customer relationships.
Mass merchandisers and outlets
We target subscribers 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, Wal-Mart, Best Buy and Office Depot and have a presence
in over 800 national retail outlet locations in our market area.
9
Independent agents.
We have a contracted network of independent agents with over 400 outlets
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 subscribers in our
service area who purchase products and services over the Sprint PCS internet
site become subscribers 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, 2002, we had approximately 35,300 cellular and paging subscribers.
We expect our cellular and paging services to continue to decline as these
subscribers continue to migrate to newer technologies.
Suppliers and Equipment Vendors
We do not manufacture any of the handsets that we use in our operations.
We purchase our handsets directly from Sprint PCS and our accessories from
certain other third party vendors.
Competition
We face significant competition in our service area from a number of
competitors. There are five other national mobile telephony operators that
offer service in at least some portion of our service area--AT&T Wireless,
Verizon, Cingular, Nextel and T-Mobile. In addition, there are many local and
regional carriers that offer PCS and cellular services in our service area.
According to the FCC's Seventh Annual Commercial Mobile Services Competition
("CDMR") Report, released July 3, 2002, "...268 million people, or 94% of the
total population, have three or more different operators offering mobile
telephone service in the counties in which they live."
This competition has resulted in higher subscriber turnover as wireless
users move between carriers with more frequency than experienced in prior
years. In order to attract new subscribers, we have offered steeper discounts
on handsets and more generous service plans that include more minutes and/or
more anytime time minutes and other ancillary enhancements such as free long
distance. Based upon increased competition, we anticipate that market prices
for two-way wireless services will continue to decline in the future. We
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
depends, 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.
10
We believe that our ability to compete effectively with other PCS
providers will depend on:
. the continued expansion and improvement of the Sprint PCS network,
customer care system and telephone handset options.
. the continued success of CDMA technology in providing better call
quality and clarity than other systems.
. our competitive pricing with various options suiting individual
subscribers calling needs.
The main wireless technologies used in the United States are: Code
Division Multiple Access ("CDMA"), Global System Mobile Communications ("GSM")
and Time Division Multiple Access ("TDMA").
Sprint PCS has chosen CDMA technology, which we believe offers
significant advantages in the marketplace.
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 on equivalent TDMA or GSM networks.
CDMA also offers a high level of security, giving subscribers 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, T-Mobile
and Verizon use CDMA technology.
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 AT&T and
Cingular use TDMA but have announced intentions to overlay their existing TDMA
networks with GSM technology.
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.
We do not currently face significant 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.
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. We anticipate that this trend will continue.
11
Network Operations
We have completed the initial network build out plan for all of our
markets, except for certain IWO markets. The Sprint PCS Management Agreement
requires us to provide network coverage to 65% of the resident population in
our service area.
We have met this requirement in all of our service areas except for IWO's
service area, and we cannot state with certainty that we will have sufficient
liquidity to complete our build-out in our IWO service area. Should we be
unable to complete the IWO build-out, Sprint PCS has the right to place the IWO
Sprint PCS management agreement in default and take actions up to and including
termination of the IWO Sprint PCS Management Agreement.
We believe that our inability to complete the build-out of our IWO
service area will have no effect on the our non-IWO service area. In our
non-IWO service area, we are continuing to expand our service by selectively by
upgrading network equipment and adding cell sites in only certain markets that
we believe will help us provide increased subscriber growth or enhanced
coverage that we believe will reduce subscriber turnover.
Cell sites
Our preference is to selectively add cell sites through co-location,
which is leasing available space on a tower or cell site owned by another
company. When we co-locate, we generally have lower construction costs, and it
is likely that any zoning difficulties have been resolved. As of December 31,
2002, we had 1,796 PCS cell sites, of which approximately 94% were co-locations
and 6% owned with network coverage of approximately 12.6 million residents out
of approximately 17.6 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 own or lease property for our eight switching centers for our service
area. These centers are located in Albany, New York, Shreveport, Louisiana,
Macon, Georgia, 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 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
12
interconnection agreements with BellSouth. Through our agreements with Sprint
PCS, we benefit from the interconnection agreements that Sprint PCS negotiates.
Network monitoring systems
We use Sprint PCS's Network Operations Control 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 and the overseeing of
customer usage, data collected at switch facilities and billing.
Government Regulation
The FCC and other federal, 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.
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 the terms under which ancillary services may be
provided through cellular facilities.
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.
13
Other regulatory requirements. The Communications Act preempts state and
local regulation of the entry of, or the rates charged by, any provider of
private mobile radio service or of commercial mobile radio service ("CMRS"),
which includes PCS and cellular service. The FCC does not regulate CMRS or
private mobile radio service rates. However, CMRS providers are common carriers
and are required under the Communications Act to offer their services to the
public without unreasonable discrimination.
The FCC imposes additional regulatory requirements on all 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:
. 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
subscribers 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.
. Customer information. The FCC has rules that protect the customer
against the use of customer proprietary information for marketing
purposes.
. 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.
. Tower Construction, Marking and Lighting. The FCC and FAA regulate the
location, height, and marking of proposed towers.
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 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.
State and Local Regulation. State governments can regulate other terms
and conditions of wireless service and several states have imposed, or have
proposed legislation that will impose, various consumer protection regulations
on the wireless industry. States also may impose their own universal
14
service support regimes on wireless carriers, similar to the requirements that
have been established by the FCC. At the local level, wireless facilities
typically are subject to zoning and land use regulation, although the
Communications Act preempts both state and local governments from categorically
prohibiting the construction of wireless facilities in any community or
unreasonably discriminating against a carrier. Numerous state and local
jurisdictions have considered imposing conditions on a driver's use of wireless
technology while operating a motor vehicle, and a few have actually done so.
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. From time to time, the FCC conducts auctions of
additional spectrum. We have no way of knowing whether the new spectrum in our
service area will be used to compete with our PCS systems.
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
Vision(TM). 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, 2002, we had approximately 1,100 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 subscribers 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.
15
RISK FACTORS
OUR SECURITY HOLDERS AND PERSONS WHO ARE CONSIDERING AN INVESTMENT IN OUR
SECURITIES SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, IN ADDITION TO THE
FACTORS DESCRIBED ELSEWHERE.
The risk factors described below are qualified and supplemented in their
entirety by the discussions in Item 1 of this annual report (Business) under
the caption "Recent Developments" and in Item 7 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) under the captions
"Overview" and "Liquidity and Capital Resources." These items contain important
disclosures related to our and IWO Holdings, Inc.'s current liquidity, debt,
relationship with Sprint PCS and constraints on our business in the current
environment. An adequate understanding of near term risks facing us requires
consideration of the referenced discussions.
Introduction
In this section, "we" and "our" and the noun "combined company" refer
collectively to US Unwired and all of its subsidiaries. We use "US Unwired" to
refer just to our parent company without reference to its subsidiaries. "LA
Unwired" refers collectively to our subsidiaries Louisiana Unwired, LLC, Texas
Unwired general partnership, and Georgia PCS Management, L.L.C., unless the
context of the reference indicates otherwise.
An extremely brief overview introduces each of the subsections below. We
think the overview captures the gist of the subsection, but it is not a
substitute for reading the entire subsection.
Risks Related to Our Stock Price
Overview of this subsection:
Overview of this subsection: Our stock price has not been stable.
Many additional shares have become freely tradable in the public market.
This may cause our stock price to continue to fall. Nasdaq has notified
us that unless the bid price of our common stock closes at at least $1.00
for ten consecutive trading days by April 29, 2003, our common stock will
be subject to delisting from the Nasdaq National Market. We also do not
meet Nasdaq's requirements for continued listing related to stockholders'
equity and market value of publicly held shares.
The stock price of US Unwired may continue to be volatile. Even if our
stock is not delisted, the market price of our common stock could be subject to
wide fluctuations in response to factors such as the following, some of which
are beyond our control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities
analysts and investors;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
16
. changes in our relationship and that of other Sprint PCS affiliates
with Sprint PCS;
. announcements by Sprint PCS or Sprint PCS affiliates concerning
developments or changes in its business, financial condition or results
of operations, or in its expectations as to future financial
performance;
. actual or potential defaults in bank covenants by Sprint PCS or Sprint
PCS affiliates, which may result in a perception that we are unable to
comply with our bank covenants;
. announcements of technological innovations or new products and services
by Sprint PCS or our competitors;
. changes in results of operations, market valuations and investor
perceptions of Sprint PCS, Sprint PCS affiliates or of other companies
in the telecommunications industry in general and the wireless industry
in particular, including our competitors;
. departures of key personnel;
. changes in laws and regulations;
. significant claims or lawsuits against us;
. the large number of US Unwired shares that can freely be sold in the
public market, as described under the following italicized heading;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
. general economic and competitive conditions.
The number of shares of our common stock that is freely tradable in the
public market increased substantially on November 22, 2002, and has continued
to increase thereafter. Sales of unusually large numbers of shares of our
common stock in the public market, or the perception that such sales could
occur, could further depress our stock price. We issued approximately
44,400,000 additional shares of our common stock when we acquired Georgia PCS
and IWO in March and April 2002 through two mergers, and we agreed to issue
about another 6,900,000 shares upon the exercise of warrants and options that
we assumed from IWO. Prior to November 22, 2002, most of these shares were not
freely tradable in the public market because of the combined effect of
restrictions under federal securities laws and of agreements, called lock up
agreements that we obtained from the holders not to sell shares before
specified dates. The restrictions imposed by federal securities laws on sales
of these shares terminated on November 22, 2002, which was the effective date
of the registration statement that we were required to file to register certain
of those shares for resale. On March 28, 2003, all remaining shares that were
then still subject to the lock up agreements, equal to about 1,080,000 shares
became freely tradable.
We have asserted claims against 1,000,000 shares held in escrow as
permitted under our Georgia PCS acquisition agreement, and those shares
continue to be held in escrow. The market price of our common stock could be
depressed if the holders of shares that have become freely tradable sell them
or if the market perceives that they intend to sell them. We cannot predict
whether future sales of our common stock or the availability of our common
stock for sale will adversely affect the market price for our common stock.
17
We rely on Sprint PCS for a substantial amount of our financial
information. If that information is not accurate, the investment community
could lose confidence in us. Under our agreements with Sprint PCS, it performs
our billing, manages our accounts receivable and provides a substantial amount
of financial data about our accounts. We use that information to calculate our
financial results and to prepare our financial statements. If we later find
errors in that information, we may be required to restate our financial
statements. If that occurs with respect to us or any other Sprint PCS
affiliate, investors and securities analysts may lose confidence in us. In
fact, we and Sprint PCS have discovered billing and other errors or
inaccuracies that could be material to us. If we are required to make
adjustments to our financial statements as a result of these inaccuracies that
could negatively affect the investment community's perception of us. For more
information about these inaccuracies, please see the section of these Risk
Factors entitled "Risks Particular to the Combined Company's Relationship with
Sprint PCS."
We have received notice from Nasdaq that unless the price of our common
stock improves, it will be subject to delisting from the Nasdaq National
Market. Our common stock is listed on the Nasdaq National Market. The closing
bid price of our stock has remained below the minimum $1.00 bid price required
by Nasdaq for some time. Nasdaq previously advised us that we had until January
29, 2003 to regain compliance with minimum requirement. Under new rules
recently adopted by Nasdaq, however, the bid price of our common stock must
close at $1.00 or more for ten consecutive trading days by April 29, 2003. If
that does not happen, our common stock will be subject to delisting from the
Nasdaq National Market. We have already asked Nasdaq to hold a hearing to
consider any determination by the Nasdaq staff after April 29, 2003 that our
stock is subject to delisting. If such a hearing is necessary, we will ask the
hearing panel to grant us an additional six months in which to comply with the
bid price requirement. There can be no assurance that the panel will grant any
such request. We also currently do not meet Nasdaq's requirements for continued
listing related to our stockholders' equity and market value of publicly held
shares, and Nasdaq may determine that our common stock is also subject to
delisting because of our failure to meet those requirements in addition to the
bid price requirement. If we cannot maintain our listing on the Nasdaq National
Market, we will consider alternatives.
If our common stock price remains low, we may not be willing or able to
raise equity capital. Our business is capital intensive, and we may
contemplate raising equity capital in the future. A low stock price may
frustrate our doing so, for two reasons:
. We may be unwilling to sell our shares at such prices.
. Investors may not be interested in a company whose shares are priced so
low.
Risks Related to the Combined Company's Business, Strategy and Operations
Overview of this subsection:
None of our PCS operating subsidiaries has ever operated profitably or
achieved consistent positive cash flow. If that doesn't change, we will not
have enough cash to run our business, as more fully discussed in the
Management's Discussion section of this report. Timely expansion or completion
of the PCS networks of our operating subsidiaries is a key to our success, but
we face numerous challenges in doing that. Revenues we receive from travelers
in our territories likely will not meet our expectations.
18
Our PCS operating subsidiaries have not yet operated their PCS businesses
profitably or achieved consistent positive cash flow. We expect to continue to
incur significant operating losses and to continue to generate negative cash
flow while we complete and/or expand our PCS networks and build our customer
base. Our ultimate profitability will depend upon many factors, including our
ability to market our services successfully and operate our networks
efficiently, in addition to numerous other factors that are described in this
"Risk Factors" section. If we fail to achieve at least positive cash flow
within a reasonable period of time, we may not be able to service our debt and
an investment in our securities may not have much value.
If we do not successfully manage the operations and expected growth of
the combined company following the mergers, our operating performance may be
adversely impacted. Our PCS operating subsidiaries have limited operating
histories as Sprint PCS affiliates. Louisiana Unwired began operations as a
Sprint PCS affiliate on June 8, 1998. IWO began operations as a Sprint PCS
affiliate on January 5, 2000. Texas Unwired began operations as a Sprint PCS
affiliate on January 7, 2000. Georgia PCS began operations as a Sprint PCS
affiliate on June 8, 1998. The combined company's ability to achieve and
sustain operating profitability will depend upon many factors, including our
PCS operating subsidiaries' abilities to effectively market Sprint PCS services
and manage customer turnover rates in their respective markets. In addition, a
key factor the combined company's operational performance will depend upon is
our ability to manage growth of the combined company through the expansion or
completion of IWO's network build-out and through implementing the combined
company's best practices to increase market penetration in our current and
future markets. Market penetration means the number of people in our PCS
operating subsidiaries' markets who use our Sprint PCS services. To be
successful, our PCS operating subsidiaries will require continued development,
construction, testing, deployment and operation of their respective networks.
These activities are expected to place demands on our managerial, operational
and financial resources.
The failure of any of our PCS operating subsidiaries to timely expand or
complete the build-out of its network, or to obtain the equipment needed for
completion on a timely basis, may result in a decrease in the number of
expected new PCS subscribers and adversely affect its and the combined
company's results of operations or, in the case of IWO, result in a breach of
its agreements with Sprint PCS or, in the case of LA Unwired, result in the
loss of the FCC licenses that it owns. LA Unwired has completed the network
build-out that is required by its agreements with Sprint PCS. Nevertheless, we
may decide from time to time to build out additional portions of its markets to
increase the population that is covered by its Sprint PCS service or we may
acquire additional territory to be built out by acquiring additional markets
from Sprint PCS or by acquiring other Sprint PCS network partners that have not
completed their build-out requirements. IWO has not yet completed its required
build-out and it is unlikely that it will have sufficient cash to do so.
Because of US Unwired's and IWO's separate capital structures, we have been
unable to develop a business plan for IWO that provides sufficient liquidity in
2003 without making significant operational changes that may adversely affect
ongoing operations and eliminate most or all of IWO's capital expenditures,
some of which are related to the completion of the build-out of the IWO service
area. Failure to complete the build-out of the IWO service area may place IWO
in default of its Sprint PCS Management Agreement, and Sprint PCS may take
actions up to and including termination of the Management Agreement.
In order to expand or complete network build-outs, our PCS operating
subsidiaries must successfully lease or otherwise retain rights to a sufficient
number of radio communications and
19
network control sites, complete the purchase and installation of equipment,
build-out the physical infrastructure and test the network. The applicable
company must also meet all requirements of its agreements with Sprint PCS and
all FCC requirements. One of these FCC requirements is that our networks not
interfere with microwave radio systems. Compliance with that requirement could
delay or impede expansion or build-out of our networks. Regulatory changes,
engineering design changes and required technological upgrades could affect the
number and location of our PCS operating subsidiaries' towers as well as their
ability to obtain sufficient rights to meet their network build-out expansion
goals or requirements. Some of the radio communications and network control
sites required for IWO to complete its required build-out are likely to require
zoning variances or other local governmental or third party approvals. The
local governmental authorities in various locations in IWO's markets have, at
times, placed moratoriums on the construction of additional cell sites. Any
failure by IWO to complete its network build-out on a timely basis may limit
its network capacity and/or reduce the number of its expected new PCS
subscribers, either of which could adversely affect our or IWO's results of
operations and financial condition or result in IWO's breach of its agreements
with Sprint PCS. Any failure by LA Unwired to expand its network on a timely
basis may limit its network capacity and/or reduce the number of its expected
new PCS subscribers, either of which could adversely affect our results of
operations and financial condition or result in a loss of LA Unwired's licenses.
From time to time, there is considerable demand for the communications
equipment that our PCS operating subsidiaries need to expand or complete their
networks, and manufacturers of this equipment could have substantial backlogs
of orders. Competitors who purchase large quantities of communications
equipment may receive priority in the delivery of this equipment. If our PCS
operating subsidiaries cannot get this equipment, they may fail to expand or
construct their networks timely. This could limit our ability to compete
effectively or to meet the construction requirements of the FCC or our PCS
operating subsidiaries' Sprint PCS agreements. If LA Unwired or IWO does not
meet these construction requirements, LA Unwired could lose its licenses or IWO
could breach its agreements with Sprint PCS.
We obtain most of our network equipment from two suppliers. This
equipment is not interchangeable, and we would be materially adversely affected
if we could not obtain this network equipment timely or at all. Our PCS
networks are either Lucent networks, meaning that the network equipment is
supplied by Lucent, or Nortel networks, meaning that the network equipment is
supplied by Nortel. If additional equipment is needed for expansion or repair
of a network, it must come from Lucent, if the network is a Lucent network, or
Nortel, if the network is a Nortel network, for compatibility with our existing
network equipment. If either of these suppliers should cease or delay to supply
its equipment, we would be prevented or delayed in expanding or repairing the
affected network or completing the IWO build-out.
Any inability to expand our networks, or to keep them repaired or to
complete the IWO build-out, could have a material adverse effect on us.
Our territory has limited amounts of licensed spectrum, which may
adversely affect the quality of our service and our results of operations. LA
Unwired and Sprint PCS have licenses covering 10 to 40 MHz of spectrum in LA
Unwired's territory. Sprint PCS has licenses covering 30 MHz of spectrum
throughout IWO's territory and licenses covering 10 MHz in our other
territories. In the
20
future, as the number of subscribers in our territories increases, this limited
amount of licensed spectrum may not be able to accommodate increases in call
volume, may lead to increased dropped or blocked calls and may limit our
ability to offer enhanced services, all of which could result in increased
customer turnover and adversely affect the combined company's results of
operations and financial condition.
If any of our PCS operating subsidiaries loses the right to install its
equipment on wireless towers or is unable to renew expiring leases for wireless
towers on favorable terms or at all, our business and results of operations
could be adversely impacted and we may not comply with our agreements with
Sprint PCS. Substantially all of the cell sites of our PCS operating
subsidiaries are installed on leased tower facilities that are shared with one
or more other wireless service providers. In addition, a large portion of these
leased tower sites are owned by a few tower companies. If a master agreement
with one of these tower companies were to terminate, or if one of these tower
companies were unable to support use of its tower sites by any of our PCS
operating subsidiaries, the affected subsidiaries would have to find new sites
or may be required to rebuild the affected portion of their networks. In
addition, the concentration of our PCS operating subsidiaries' cell sites with
a few tower companies could adversely affect our results of operations and
financial condition if any of our PCS operating subsidiaries is unable to renew
its expiring leases with these tower companies on favorable terms or at all. If
any of the tower leasing companies that we do business with should experience
severe financial difficulties, or file for bankruptcy protection, our ability
to use our towers could be adversely affected. That, in turn, would adversely
affect our revenues and financial condition if a material number of towers were
involved and may result in non-compliance with our Sprint PCS management
agreements.
The loss of the officers and skilled employees upon whom we depend to
operate our business or the inability to attract additional personnel for the
combined company's growth could adversely affect the combined company's results
of operations. The combined company's business is managed by a small number of
executive officers. We believe that our future success will depend in part on
our continued ability to retain these executive officers and to attract and
retain highly qualified technical and management personnel for the combined
company. We may not be successful in retaining key personnel or in attracting
and retaining other highly qualified technical and management personnel. We do
not maintain policies of life insurance on our key executives. In addition, we
grant stock options as a method of attracting and retaining employees, to
motivate performance and to align the interests of management with those of our
stockholders. Due to the decline in the trading price of our common stock, the
stock options held by our employees have an exercise price that is higher than
the current trading price of our common stock, and therefore these stock
options may not be effective in helping us to retain valuable employees.
Expanding LA Unwired's or IWO's territory may have a material adverse
effect on its business and reduce the market value of our securities. As part
of LA Unwired's and IWO's continuing operating strategy, it may expand its
territory through the grant of additional markets from Sprint PCS or through
acquisitions of other Sprint PCS network partners. These transactions may
require the approval of Sprint PCS and commonly involve a number of risks,
including the:
. difficulty of integrating acquired operations and personnel;
. diversion of management's attention;
21
. disruption of ongoing business;
. impact on our cash and available credit lines for use in financing
future growth and working capital needs;
. inability to retain key personnel;
. inability to successfully incorporate acquired assets and rights into
our service offerings;
. inability to maintain uniform standards, controls, procedures and
policies; and
. impairment of relationships with employees, subscribers or vendors.
Failure to overcome these risks or any other problems encountered in
these transactions could have a material adverse effect on the combined
company's business. In connection with these transactions, US Unwired may issue
additional equity securities, and we may incur additional debt or incur
significant amortization expenses related to certain intangible assets
connected with a newly acquired Sprint PCS management agreement or a newly
acquired subscriber base.
Our service area will be threatened by bad weather, including hurricanes
and severe winter weather, which could cause interruptions in service resulting
in increased expenses and reduced operating results. Much of LA Unwired's
service area is on or near the Gulf of Mexico or the Atlantic Ocean and could
be damaged by bad weather like hurricanes and excessive rain. In addition, the
IWO service area could be adversely affected by severe winter storms. We may
face service interruptions for indefinite periods if a major hurricane or
winter storm strikes one or more of our service areas, resulting in increased
expenses and reduced operating results.
Unauthorized use of our networks could disrupt our business. We will
likely incur costs associated with the unauthorized use of our networks,
including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and
payments to other carriers for unbillable fraudulent roaming.
IWO's projected build-out plan and LA Unwired's completed build-out do
not cover all of their territories, which could make it difficult to maintain
profitable customer bases. As of December 31, 2002, LA Unwired covered
approximately 71% of the resident population in its territory and IWO covered
73% of residents in its territory. IWO's projected build-out plan and LA
Unwired's build-out do not cover all their service areas. The coverage may not
adequately serve the needs of the potential subscribers in the respective
territories or attract enough subscribers to operate our business successfully.
To correct this potential problem, LA Unwired or IWO may have to cover a
greater percentage of its territory than anticipated, which it may not have the
financial resources to complete or may be unable to do profitably.
We will not receive as much Sprint PCS net travel, or roaming, revenue as
we anticipated. We are paid a fee from Sprint PCS for every minute that a
Sprint PCS subscriber based outside of our markets uses the Sprint PCS network
in our markets. Similarly, we pay a fee to Sprint PCS for every minute that a
Sprint PCS subscriber based in our markets uses the Sprint PCS network outside
our markets. Sprint PCS subscribers from our markets may spend more time in
other Sprint PCS coverage
22
areas than we anticipate and Sprint PCS subscribers from outside our markets
may spend less time in our markets or may use our services less than we
anticipate. As a result, we may receive less Sprint PCS travel revenue than we
anticipate or we may have to pay more Sprint PCS travel fees than the travel
revenue we collect.
Under our agreements with Sprint PCS, we believe that Sprint PCS can
change the fee within certain limitations, called the travel rate that we
receive and pay for each Sprint PCS travel minute. Sprint PCS has notified us
that the reciprocal travel rate has changed for Louisiana Unwired from $0.20
per minute in 2002 to $0.058 per minute in 2003 and for IWO and Texas Unwired
from $0.10 per minute in 2002 to $0.058 per minute in 2003. While we believe
this reduction is not in accordance with our agreements with Sprint PCS, we are
reviewing our options, but our recourse against Sprint PCS for this reduction
may be limited. Currently the revenues we receive for subscribers of Sprint PCS
and its other network partners using our networks exceed the expenses that we
pay for our subscribers using their networks. The change in the travel rate
will materially decrease our revenues, expenses and our net travel position,
which is the difference between travel revenue and travel expense, and will
materially decrease our cash flow from operations and our earnings before
interest, taxes, depreciation and amortization, or EBITDA.
Sprint PCS's roaming arrangements may not be competitive with other
wireless service providers, which may restrict our ability to attract and
retain subscribers and create other risks for us. We rely on Sprint PCS's
roaming arrangements with other wireless service providers for coverage in some
areas where Sprint PCS service is not yet available. The risks related to these
arrangements include:
. the quality of the service provided by another provider during a
roaming call may not approximate the quality of the service provided by
the Sprint PCS network;
. the price of a roaming call off our network may not be competitive with
prices of other wireless companies for roaming calls;
. subscribers must end a call in progress and initiate a new call when
leaving the Sprint PCS network and entering another wireless network;
. Sprint PCS subscribers may not be able to use Sprint PCS's advanced
features, such as high speed Internet access and voicemail
notification, while roaming; and
. Sprint PCS or the carriers providing the service may not be able to
provide us with accurate billing information on a timely basis.
If Sprint PCS subscribers are not able to roam instantaneously or
efficiently onto other wireless networks, we may lose current Sprint PCS
subscribers and our Sprint PCS services will be less attractive to new
subscribers.
Sales of Sprint PCS products and services in our territory by a
"reseller" that is 50% owned by Sprint PCS could reduce our number of
subscribers and our margins. We allow a company, called a reseller, to sell
Sprint PCS products and services in our territories. Our networks provide the
Sprint PCS services that are sold by the reseller in our territories. We
receive income from the reseller that we consider to be a fair return for this
use of our networks, but our margins are greater when we generate our own
subscribers. The reseller is 50% owned by Sprint PCS.
23
Risks Particular to the Indebtedness of the Combined Company
Note: We have two separate debt structures. Each of US Unwired and IWO
has issued senior notes under agreements called indentures, and each of them
has senior credit facilities with banks. Because of restrictions in the
indentures governing the senior notes and the credit agreements governing the
senior credit facilities, funds borrowed by US Unwired may not be used to
finance IWO and IWO's subsidiaries but are available for all of US Unwired's
other subsidiaries. Because of the same restrictions, funds borrowed by IWO may
be used only to finance IWO and IWO's subsidiaries.
Overview of this subsection:
US Unwired and IWO have a substantial amount of debt. They cannot borrow
from their banks unless they meet the banks' requirements for borrowing. The
economic downturn is making it more difficult to meet these requirements. If we
fail to repay our debt on time, our lenders may foreclose on our assets and, if
that occurs, our stock will probably be worthless.
Both US Unwired and IWO have substantial debt that neither of them may be
able to service; a failure to service this debt may result in the lenders under
this debt taking away assets of ours (other than IWO's) if US Unwired fails to
service its debt, or assets of IWO if IWO fails to service its debt. The
substantial debt of US Unwired and IWO will have a number of important
consequences for our operations and our investors, including the following:
. each company will have to dedicate a substantial portion of any cash
flow from its operations to the payment of interest on, and principal
of, its debt, which will reduce funds available for other purposes;
. neither company may be able to obtain additional financing for
unanticipated capital requirements, capital expenditures, working
capital requirements and other corporate purposes;
. some of each company's debt, including financing under each company's
senior credit facility, will be at variable rates of interest, which
could result in higher interest expense in the event of increases in
market interest rates; and
. due to the liens on substantially all of each company's assets and the
pledges of stock of each company's existing and future subsidiaries as
collateral for such company's senior debt, lenders may control US
Unwired's or IWO's assets or the assets of the subsidiaries of US
Unwired or IWO in the event of a default.
US Unwired's and IWO's ability to make payments on their respective debt
will depend upon their future operating performance, which is subject to
general economic and competitive conditions and to financial, business and
other factors, many of which neither of them can control. If the cash flow from
either company's operating activities is insufficient, US Unwired or IWO may
take actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance its debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow US Unwired or IWO to service its debt obligations or may adversely affect
its results of operations. Further, US Unwired or IWO may be unable to take any
of these actions on satisfactory terms, in a timely manner or at all. The
credit facilities and indentures governing US
24
Unwired's and IWO's respective debt limit their ability to take several of
these actions, and limit their ability to borrow more money. Their failure to
generate sufficient funds to pay their debts or to successfully undertake any
of these actions could, among other things, materially adversely affect the
market value of US Unwired common stock or other securities or result in
lenders controlling the assets of each of them and their subsidiaries (other
than unrestricted subsidiaries).
If either US Unwired or IWO does not meet all of the conditions required
under their respective credit facilities, they may not be able to draw down all
of the funds they anticipate receiving from the lenders and they may not be
able to fund operating losses and working capital needs. As of December 31,
2002, US Unwired had borrowed $90.0 million under its senior credit facility
and IWO had borrowed $213.2 million under its senior credit facility. Also, as
of December 31, 2002, US Unwired had $27.0 million in unrestricted cash, and
IWO had $35.0 million in unrestricted cash, including investments. As of
December 31, 2002, US Unwired had $75.3 million available and IWO had $25.2
million available under their respective credit facilities. The availability of
the remaining amounts under US Unwired's and IWO's senior credit facilities is
subject to the applicable company meeting all of the conditions specified by
the respective financing documents and, in addition, is subject at each funding
date to specific conditions, including the following:
. that the representations and warranties in such company's loan
documents are true and correct;
. that such company's financial and operating covenant tests are
satisfied, including leverage and operating performance covenants and
covenants relating to earnings before interest, taxes, depreciation and
amortization, referred to as EBITDA; and
. the absence of a default under such company's loan documents, including
its indenture.
US Unwired will need portions of the funding available under its senior
credit facility and IWO will need all of the funding available under its senior
credit facility to fund continuing operations. If the assumptions underlying
the business plans of each company are not correct for market growth,
subscriber additions, churn, revenue from subsidiaries, roaming revenue,
operating expenses (including bad debt losses), unanticipated capital
requirements, capital expenditures, charges for Sprint PCS provided services,
working capital requirements or other corporate charges, such company may not
meet the conditions at each funding date, and such company's senior lenders may
not lend some or all of the remaining amounts under such company's senior
credit facility. If other sources of funds are not available, the affected
company may not be in a position to meet its operating cash needs or meet its
obligations under its agreements with Sprint PCS. If US Unwired is the affected
company, these consequences could affect LA Unwired as well as us.
Please see the discussion under "Risks Related to Factors Currently
Affecting Our Business," below.
US Unwired or IWO will be in default under its indebtedness if it fails
to pass financial and business tests. US Unwired's and IWO's senior credit
facilities require US Unwired and IWO to maintain specified financial ratios
and to satisfy specified tests. Depending on the company, these tests may
relate to:
. minimum covered population;
. minimum number of subscribers and/or average revenue per subscriber;
25
. minimum annualized revenues;
. maximum dollar amounts for capital expenditures;
. various leverage tests;
. minimum earnings before interest, taxes, depreciation and amortization,
or EBITDA; and
. maximum EBITDA loss.
If US Unwired or IWO fails to satisfy any of the financial ratios and
tests, its lenders would be permitted to declare a default under its senior
credit facilities. In addition to making funds under the senior credit
facilities unavailable to US Unwired or IWO, an event of default under its
senior credit facilities would prohibit it from paying its senior notes, which
would cause a default under the affected company's indenture, or may result in
the affected company's lenders controlling substantially all of the affected
company's assets or accelerating the maturity of the affected company's debt.
Should this occur, the common stock and other securities of US Unwired may have
little or no value.
Please see the discussion under "Risks Related to Factors Currently
Affecting Our Business," below.
If US Unwired or IWO needs additional financing that it cannot obtain, it
may have to change its network construction plans and modify its business
plans. If the affected company is US Unwired, the network construction plans of
LA Unwired may also have to be changed. US Unwired expects to make significant
capital expenditures to expand the PCS networks of LA Unwired. IWO expects to
make significant capital expenditures to complete or expand its PCS network.
Actual expenditures may differ significantly from estimates. US Unwired would
have to obtain additional financing to fund LA Unwired's network expansion
plans, and IWO would have to obtain additional financing to fund its network
construction or expansion plans, if:
. existing sources of capital are unavailable or insufficient;
. LA Unwired or IWO significantly departs from or changes its business
plan;
. LA Unwired or IWO experiences unexpected delays or cost overruns in the
expansion or completion of its network, including changes to the
schedule or scope of the network build-out or expansion;
. changes in technology or governmental regulations create unanticipated
costs; or
. LA Unwired or IWO acquires additional licenses or Sprint PCS grants any
of them more service areas to build out and manage.
We cannot predict whether any additional financing will be available to
US Unwired or IWO or on what terms such financing would be available. If either
US Unwired or IWO needs additional financing that it cannot obtain, the
affected company will have to change its plans for the remainder of its
network, which would adversely affect such company's expected future results of
operations.
US Unwired's and IWO's indebtedness place restrictions on them which will
limit their operating flexibility and US Unwired's and IWO's ability to engage
in some transactions. The respective indentures governing US Unwired's and
IWO's senior notes and their respective senior credit facilities impose
material operating and financial restrictions on US Unwired and its subsidiaries
26
(other than IWO), on the one hand, and on IWO and its subsidiaries, on the
other hand. These restrictions may limit their ability to engage in some
transactions, including the following:
. completing designated types of mergers or consolidations;
. creating liens;
. paying dividends or other distributions to their stockholders;
. making investments;
. selling assets;
. repurchasing their common stock or debt instruments like their senior
notes;
. changing lines of business;
. borrowing additional money;
. entering into transactions with their affiliates; and
. issuing additional shares of common stock.
These restrictions could also limit their ability to obtain financing by
borrowing money or issuing common stock, refinance or pay principal or interest
on US Unwired's or IWO's outstanding debt, consummate acquisitions for cash or
debt or react to changes in their operating environment. Moreover, these
restrictions could cause the combined company to be at a competitive
disadvantage to competitors who do not have similar restrictions.
If a specified change in control of US Unwired or IWO occurs, the
affected company may not be able to buy back its senior notes as required by
its indenture. If US Unwired or IWO has a change in control as defined under
its indenture, the applicable company will be required to offer to buy back all
of its outstanding senior notes. We cannot assure you that US Unwired or IWO
will have sufficient funds at the time of a change in control to perform this
obligation or that restrictions in its credit facilities would allow it to do
so. US Unwired's or IWO's requirement to buy back its notes upon a change in
control could impair the value of US Unwired common stock and other securities
or could cause a default under the affected company's indenture which, in turn,
would cause a default under its senior credit facility. In addition, a change
in control as defined under US Unwired's or IWO's respective credit facilities
would cause the affected company to default under its senior credit facility.
If US Unwired or IWO defaults under its senior credit facilities, the
affected company's lenders may declare its debt to be immediately due and
payable and Sprint PCS may force the affected company to sell its assets to
Sprint PCS without stockholder approval. If US Unwired or IWO defaults under
its senior credit facilities and the affected company's lenders accelerate the
maturity of the affected company's debt, Sprint PCS has the option to purchase
the affected company's assets at a discount to market value and assume the
affected company's obligations under its senior credit facility without further
approval of the stockholders of the affected company. If Sprint PCS does not
exercise this option, the affected company's lenders may sell its assets to
third parties without further approval of the stockholders of the affected
company.
27
If either US Unwired or IWO fails to pay the debt under its credit
facilities, Sprint PCS has the option of purchasing the affected company's
loans, giving Sprint PCS certain rights of a creditor to foreclose on that
company's assets. Sprint PCS has contractual rights, triggered by an
acceleration of the maturity of the debt under US Unwired's or IWO's respective
senior credit facilities, pursuant to which Sprint PCS may purchase US
Unwired's or IWO's obligations to its senior lenders and obtain the rights of a
senior lender. To the extent Sprint PCS purchases these obligations, Sprint
PCS's interests as a creditor would likely conflict with our interests. Sprint
PCS's rights as a senior lender would enable it to exercise rights with respect
to the affected company's assets and its continuing relationship with Sprint
PCS in a manner not otherwise permitted under US Unwired's or IWO's Sprint PCS
agreements.
Risks Particular to the Combined Company's Relationship with Sprint PCS
Overview of this subsection:
We depend heavily on Sprint PCS. It performs our billing, designs and
advertises the products and services we sell, and provides our customer
service, in addition to a wide variety of other services. If Sprint PCS does
not succeed, it is highly unlikely that we will succeed. We have little
influence with Sprint PCS under our agreements with it.
The termination of LA Unwired's or IWO's affiliation with Sprint PCS or
Sprint PCS's failure to perform its obligations under the Sprint PCS agreements
would severely restrict the affected company's ability to conduct its
business. LA Unwired owns some of its FCC licenses, but not enough to operate
its entire wireless network. IWO does not own any FCC licenses. Each of our PCS
operating subsidiaries operates under the FCC licenses of Sprint PCS and LA
Unwired that are applicable to its territory. The ability of each of our PCS
operating subsidiaries to offer Sprint PCS products and operate a PCS network
is dependent on its Sprint PCS agreements remaining in effect and not being
terminated.
. These agreements give it the right to use the Sprint(R) and Sprint
PCS(R) brand names and logos and related rights. If it loses these
rights, our operations will be impaired.
. These agreements impose strict requirements on the construction of each
company's network. IWO has not yet completed construction of its
network. If IWO does not meet these requirements, these agreements may
be terminated and IWO could lose the right to be the provider or sole
provider of Sprint PCS products and services in IWO's service area.
. These agreements require our PCS operating subsidiaries to meet strict
technical requirements such as the percentage of time the network is
operative, the percentage of dropped calls, the ratio of blocked call
attempts to total call attempts, the ratio of call origination to
termination failures, and call transport requirements for links between
cell sites, switches and outside telephone systems. If these and other
requirements are not met, Sprint PCS can terminate the affected
agreements.
. The Sprint PCS agreements of any of our PCS operating subsidiaries may
be terminated also if any of Sprint PCS's FCC licenses are lost or
jeopardized, or if the subsidiary becomes insolvent.
28
. These agreements give Sprint PCS a substantial amount of influence and
control over the conduct of each company's business. Sprint PCS may
make decisions that adversely affect our PCS operating subsidiaries'
business, like introducing costly new products that fail in the
marketplace or setting the prices for its national plans at levels that
may not be economically sufficient for our PCS operating subsidiaries'
business.
. If the management agreements of any of our PCS operating subsidiaries
with Sprint PCS are terminated or breached, the affected subsidiary may
be required to sell its PCS assets to Sprint PCS at prices that are
unfavorable to us or Sprint PCS may be required to assign to the
affected subsidiary some of Sprint PCS's licensed spectrum.
. The management agreements are not perpetual. If Sprint PCS decides not
to renew the management agreements at the expiration of the 20-year
initial term or any 10-year renewal term, the affected subsidiaries
would no longer be a part of the Sprint PCS network. Even with all
renewals, the management agreements of our PCS operating subsidiaries
terminate in 50 years, and each of these agreements can be terminated
at any time for breach of any material term.
. Sprint PCS is permitted to terminate the management agreements for
breach of any of the material terms of the agreements. These terms
include operational and network requirements that are extremely
technical and detailed and apply to each retail store, cell site and
switch site. Many of these operational and network requirements can be
changed by Sprint PCS with little notice. As a result, our PCS
operating subsidiaries may not always be in compliance with all
requirements of the Sprint PCS agreements. Sprint PCS conducts periodic
audits of compliance with various aspects of its program guidelines and
identifies issues it believes need to be addressed. There may be
substantial costs associated with remedying any non-compliance, and
such costs may adversely affect our operating results and cash flow.
Sprint PCS may make business decisions that are not in the best interests
of our PCS operating subsidiaries, which may adversely affect the relationships
of our PCS operating subsidiaries with subscribers in their territories,
increase their expenses and/or decrease their revenues. Sprint PCS, under the
Sprint PCS agreements, has a substantial amount of influence and control over
the conduct of the businesses of our PCS operating subsidiaries. Accordingly,
Sprint PCS may make decisions that adversely affect LA Unwired's or IWO's
business, such as the following:
. Sprint PCS could price its national plans based on its own objectives
and could set price levels or other terms that may not be economically
sufficient for LA Unwired's or IWO's business;
. Sprint PCS could raise the costs for Sprint PCS to perform back office
services for LA Unwired and IWO or otherwise seek to increase what we
pay Sprint PCS, or it could reduce levels of services it provides our
PCS operating subsidiaries;
. Sprint PCS may elect with little or no notification, to upgrade or
convert its financial reporting, billing or inventory software or
change third party service organizations that can adversely affect our
ability to determine or report our operating results, adversely affect
our ability to obtain handsets or adversely affect our subscriber
relationships.
29
. Sprint PCS has sought to charge us more as a result of launching the
new "third generation," or 3G, technology called "one times radio
transmission technology," or 1XRTT;
. Sprint PCS believes that it can further reduce the travel rate for LA
Unwired and IWO at any time;
. Sprint PCS prohibits LA Unwired or IWO from selling non-Sprint PCS
approved equipment;
. Sprint PCS could develop products and services, or establish credit
policies such as the NDASL program that is described below, that
adversely affect our business;
. Sprint PCS introduced a payment method for subscribers to pay the cost
of service with us. This payment method did not initially have adequate
controls or limitations, and we have discovered that some fraudulent
payments were made to accounts using this payment method. The controls
and limitations have now been strengthened. If the other types of fraud
become widespread, it could have a material adverse impact on our
results of operations and financial condition;
. Sprint PCS could keep us from developing our own promotional plans that
we may believe to be necessary to attract new subscribers or from
selling equipment selected by us;
. Sprint PCS could, subject to limitations under LA Unwired's and IWO's
Sprint PCS agreements, alter its network and technical requirements or
request that LA Unwired or IWO build out additional areas within LA
Unwired's or IWO's territories, which could result in increased
equipment and build-out costs;
. Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint(R) and Sprint PCS(R) brand names, products or services; and
. Sprint PCS could decide not to renew the Sprint PCS agreements or to no
longer perform its obligations, which would severely restrict LA
Unwired's and IWO's ability to conduct business.
Decisions such as those referred to above could adversely affect our
operating subsidiaries' relationships with their subscribers by changing
products, services and price plans to which those subscribers had become
accustomed. Should Sprint PCS have a change of control, or should management of
Sprint PCS change, the pace at which decisions such as the foregoing occur
could accelerate, increasing the risk of disfavor from subscribers of our
operating subsidiaries. In fact, Sprint is making changes to its senior
management, including replacing its chairman and chief executive officer and
its president and chief operating officer.
We deal with Sprint PCS 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 relationship with Sprint PCS, any deterioration of that relationship or
of Sprint PCS's desire to cooperate with LA Unwired or IWO could adversely
affect the combined company's business. In addition, Sprint PCS's level of
control and influence over us would make it difficult for us to sell our
business to anyone other than Sprint PCS.
30
Our dependence on Sprint PCS may adversely affect our ability to predict
our results of operations. Over the past year, our dependence on Sprint PCS
has interjected a greater degree of uncertainty to our business and financial
planning. Unanticipated expenses and reductions in revenue have had and, if
they occur in the future, will have a negative impact on our liquidity and make
it more difficult to predict with reliability our future performance.
Inaccuracies in data provided by Sprint PCS could understate our expenses
or overstate our revenues, result in out-of-period adjustments or lead us to
make bad business decisions that may materially adversely affect our financial
results. A significant portion of cost of service and roaming in our financial
statements relates to charges from Sprint PCS. In addition, because Sprint PCS
provides billing and collection services for us, it collects cash from our
subscribers on our behalf and remits that cash to us. As a result, we rely on
Sprint PCS to provide accurate, timely and sufficient data and information to
properly record our revenues, expenses and accounts receivables that underlie a
substantial portion of our periodic financial statements and other financial
disclosures.
We and Sprint PCS have discovered billing and other errors or
inaccuracies that could be material to us. If we are required in the future to
make additional adjustments or charges as a result of errors or inaccuracies in
data provided to us by Sprint PCS, such adjustments or charges may have a
material adverse affect on our financial results in the period that the
adjustments or charges are made, on our ability to satisfy covenants contained
in our credit facilities, and our ability to make fully informed business
decisions.
The inability of Sprint PCS to maintain high quality back office services
could lead to customer dissatisfaction, impair the ability of US Unwired to
make necessary adjustments to its business plan, increase the loss of
subscribers or otherwise increase LA Unwired's or IWO's costs or adversely
affect their businesses. LA Unwired and IWO rely on Sprint PCS's internal
support systems, including customer care, billing and other back office
support. LA Unwired's and IWO's operations could be disrupted if Sprint PCS is
unable to maintain and expand its internal support systems in a high quality
manner, or to efficiently outsource those services and systems through third
party vendors. We expect the rapid expansion of Sprint PCS's business and the
consolidation of back office services by Sprint PCS to continue to pose a
significant challenge to its internal support systems. Additionally, Sprint PCS
has relied on third party vendors for a significant number of important
functions and components of its internal support systems and may continue to
rely on these vendors in the future.
Our PCS operating subsidiaries depend on Sprint PCS's willingness to
offer and provide back office services effectively and at competitive costs. LA
Unwired's and IWO's agreements with Sprint PCS provide that, upon nine months'
prior written notice, Sprint PCS may elect to terminate any of these services.
The inability of Sprint PCS to maintain high quality back office services, or
provide adequate notification to LA Unwired or IWO of its inability to continue
to provide those services could lead to customer dissatisfaction, increase the
loss of subscribers or otherwise increase LA Unwired's or IWO's costs.
Additionally, we are dependent on Sprint PCS to assist us in transferring our
back office services from Sprint PCS to a third party if we choose to do that,
and any failure by Sprint PCS to cooperate in this effort, such as by making a
transfer cost prohibitive, could have a similar adverse effect on us.
31
We rely on Sprint PCS for providing timely and accurate information to
allow us to meet our financial reporting obligations. If material internal
control weaknesses exist at Sprint PCS, we may not be able to provide timely
and accurate information.
Change in Sprint PCS products and services may reduce customer
additions. The competitiveness and effective promotion of Sprint PCS products
and services are key factors in our ability to attract and retain subscribers.
For example, under the Sprint PCS service plans, subscribers who do not meet
certain credit criteria can nevertheless select any plan offered subject to an
account spending limit, referred to as ASL, to control credit exposure. Account
spending limits range from $125 to $200 depending on the credit quality of the
customer. Prior to May 2001, all of these subscribers were required to make a
deposit ranging from $125 to $250 that could be credited against future
billings. In May 2001, a new Sprint PCS program, called NDASL for no deposit
account spending limit, eliminated the deposit requirement on certain, but not
all, credit classes. A significant amount of our new customer additions
occurred in 2002 under the NDASL program. Sprint PCS has replaced the NDASL
program with the "Clear Pay Program" without reinstating the deposit
requirement. The Clear Pay Program is substantially similar to the NDASL
program but with an increased emphasis on payment of outstanding amounts. Under
the Clear Pay Program, subscribers who do not meet certain credit criteria can
select any plan offered, subject to an account spending limit.
The NDASL program has had the effect of increasing churn and bad debt
expense. Sprint PCS has the right to end or materially change the terms of the
Clear Pay Program. If Sprint PCS chooses to eliminate the Clear Pay Program or
alter its features, the growth rate we expect to achieve may decrease. LA
Unwired requested and received, effective February 24, 2002, the ability to
reinstate deposits in their territories for subscribers with poor or inadequate
payment histories. Effective September 24, 2002, IWO reinstated deposits for
the Clear Pay Program. We believe that reinstatement of the deposit has reduced
the number of potential new subscribers in these markets.
Sprint PCS may elect to offer additional programs that may attract high
credit risk subscribers. To the extent that we feel these programs are not
economically beneficial to us, we will seek Sprint PCS's permission not to
participate, but we cannot be certain that Sprint PCS will agree.
If Sprint PCS does not complete the construction of its nationwide PCS
network, our PCS operating subsidiaries may not be able to attract and retain
subscribers. Sprint PCS and its affiliates currently intend to cover a
significant portion of the population of the United States, Puerto Rico and the
U.S. Virgin Islands by creating a nationwide PCS network through Sprint PCS's
own construction efforts and those of its network partners like LA Unwired and
IWO. Sprint PCS and its affiliates are still constructing the nationwide
network and do not yet offer PCS services, either on Sprint PCS's own network
or through its roaming agreements, everywhere in the United States.
If one of LA Unwired's or IWO's subscribers travels in an area where a
Sprint PCS or compatible system is not yet operational, the customer would not
be able to make a call on that area's system unless he or she has a telephone
handset that can make calls on both systems. Generally, these handsets are more
costly. Moreover, the Sprint PCS network does not allow for calls to be
transferred without interruption between the Sprint PCS network and another
wireless network. This means that a customer must end a call in progress and
initiate a new call when entering an area not served by the Sprint PCS network.
The quality of the service provided by another network may not be equal to that
32
of the Sprint PCS network, and LA Unwired's or IWO's subscribers may not be
able to use some of the advanced features of its network. This could result in
customer dissatisfaction and loss of subscribers.
Sprint PCS has entered into management agreements similar to LA Unwired's
and IWO's with companies in other markets under its nationwide PCS build-out
strategy. LA Unwired's and IWO's results of operations are dependent on Sprint
PCS's national network and, to a lesser extent, on the networks of Sprint PCS's
other network partners. Sprint PCS's network may not provide nationwide
coverage to the same extent as its competitors, which could adversely affect LA
Unwired's and IWO's ability to attract and retain subscribers.
If Sprint PCS does not succeed, or if LA Unwired or IWO does not maintain
a good relationship with Sprint PCS, LA Unwired's or IWO's business may not
succeed. If Sprint PCS has a significant disruption to its business plan or
network, fails to operate its business in an efficient manner, or suffers a
weakening of its brand name, LA Unwired's and IWO's operations and
profitability would likely be impaired. LA Unwired and IWO use their
relationships with Sprint PCS to obtain, at favorable prices, handsets and the
equipment for the construction or expansion and operation of their networks.
Any disruption in their relationships with Sprint PCS could make it much more
difficult for them to obtain this equipment.
If Sprint PCS should have significant financial problems, including
bankruptcy, our PCS business would suffer material adverse consequences that
could include termination or revision of our Sprint PCS agreements. We have no
reason to believe that Sprint PCS will have significant financial problems,
including bankruptcy.
If other Sprint PCS network partners have financial difficulties, the
Sprint PCS network could be disrupted. Sprint PCS's national network is a
combination of networks. The large metropolitan areas are owned and operated by
Sprint PCS, and the areas in between them are owned and operated by Sprint PCS
network partners, all of which are independent companies like we are. We
believe that most, if not all, of these companies have incurred substantial
debt to pay the large cost of building out their networks.
If other network partners experience financial difficulties, the Sprint
PCS network could be disrupted in the territories of those partners. If the
Sprint PCS agreements of those partners are like ours, Sprint PCS would have
the right to step in and operate the affected territory. Of course this right
could be delayed or hindered by legal proceedings, including any bankruptcy
proceeding relating to the affected network partner. A Sprint PCS network
partner, iPCS, Inc., recently filed bankruptcy and other network partners may
follow iPCS. The impact of these developments on the Sprint PCS network, on our
funding and our relationship with Sprint PCS, and on our travel revenue from
subscribers roaming in iPCS markets may be materially adverse.
Material disruptions in the Sprint PCS network would have a material
adverse effect on our ability to attract and retain subscribers.
Certain provisions of the Sprint PCS agreements may diminish the value of
US Unwired common stoc