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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________.
Commission file number ...000-22003...
US UNWIRED INC.
(Exact name of registrant as specified in its charter)
Louisiana 72-1457316
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Lakeshore Drive
Lake Charles, LA 70601
(Address of principal executive offices) (Zip code)
(337) 436-9000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No. __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
There were 128,831,535 shares of common stock, $0.01 par value per share,
outstanding at April 30, 2003.
Page
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets............................... 3
Condensed Consolidated Statements of Operations..................... 4
Condensed Consolidated Statements of Cash Flows..................... 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 19
Item 4. Controls and Procedures ............................................ 28
Part II - OTHER INFORMATION
Item 5. Other Information .................................................. 28
Item 6. Exhibits and Reports on Form 8-K.................................... 52
Signatures................................................................... 53
Certification by Chief Executive Officer..................................... 54
Certification by Chief Financial Officer..................................... 55
2
Part I Financial Information
Item 1. Financial Statements
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
------------ ------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 73,328 $ 61,985
Restricted cash 30,182 33,218
Subscriber receivables, net 34,779 47,727
Other receivables 2,471 2,661
Inventory 8,162 5,315
Prepaid expenses and other assets 18,125 15,077
Receivables from related parties 710 681
Receivables from officers 86 101
------------ ------------
Total current assets 167,843 166,765
Property and equipment, net 463,114 484,014
Restricted cash --- 8,000
Goodwill 51,965 51,961
Intangibles, net 68,441 78,292
Notes receivable from unconsolidated affiliates 1,815 1,811
Other assets 40,146 40,587
------------ ------------
Total assets $ 793,324 $ 831,430
============ ============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 24,667 $ 28,301
Accrued expenses 80,465 67,665
Current maturities of long term obligations 7,624 5,018
Current maturities of long term obligations in default 350,564 ---
------------ ------------
Total current liabilities 463,320 100,984
Long term obligations, net of current maturities 419,483 411,995
Long term obligations in default, net of current maturities --- 350,207
Deferred gain 33,425 34,581
Investments in and advances to unconsolidated affiliates 3,737 3,901
Stockholders' deficit:
Common stock 1,288 1,288
Additional paid in capital 658,527 657,459
Retained deficit (786,282) (728,811)
Promissory note (174) (174)
------------ ------------
Total stockholders' deficit (126,641) (70,238)
------------ ------------
Total liabilities and stockholders' deficit $ 793,324 $ 831,430
============ ============
See accompanying notes to condensed consolidated financial statements
3
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
For the three months ended
March 31,
2003 2002
----------- -----------
Revenues:
Subscriber $ 94,273 $ 56,115
Roaming 27,491 30,743
Merchandise sales 6,370 4,287
Other revenue 613 925
----------- -----------
Total revenue 128,747 92,070
Expenses:
Cost of service 51,846 39,975
Merchandise cost of sales 9,490 7,990
General and administrative 35,277 25,969
Sales and marketing 25,546 21,544
Non-cash stock compensation 1,067 1,166
Depreciation and amortization 30,161 14,185
IWO asset abandonment charge 12,403 ---
----------- -----------
Total operating expense 165,790 110,829
----------- -----------
Operating loss (37,043) (18,759)
Other income (expense):
Interest expense (20,690) (10,107)
Gain on sale of assets 81 ---
----------- -----------
Total other expense (20,609) (10,107)
----------- -----------
Loss before equity in income of unconsolidated affiliates
(57,652) (28,866)
Equity in income of unconsolidated affiliates 180 505
----------- -----------
Net loss $ (57,472) $ (28,361)
=========== ===========
Basic and diluted loss per share $ (0.45) $ (0.33)
=========== ===========
Weighted average outstanding common shares 128,832 84,856
=========== ===========
See accompanying notes to condensed consolidated financial statements
4
US UNWIRED INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the three months ended
March 31,
2003 2002
----------- -----------
Cash flows from operating activities
Net cash provided by operating activities $ 9,959 $ 3,413
Cash flows from investing activities
Proceeds from restricted cash 11,035 ---
Proceeds from sale of assets 350 ---
Payments for the purchase of equipment (9,829) (39,258)
Acquisition of business, net of cash acquired --- (55,265)
Sale of marketable securities --- 10,016
----------- -----------
Net cash provided by (used in) investing activities 1,556 (84,507)
Cash flows from financing activities
Principal payments of long-term debt (172) (171)
Proceeds from long-term debt --- 40,000
Proceeds from stock options exercised --- 167
Debt issuance costs --- (763)
----------- -----------
Net cash (used in) provided by financing activities (172) 39,233
----------- -----------
Net change in cash and cash equivalents 11,343 (41,861)
Cash and cash equivalents at beginning of period 61,985 100,589
----------- -----------
Cash and cash equivalents at end of period $ 73,328 $ 58,728
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
US UNWIRED INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three-month
period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
The condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The condensed consolidated financial statements contained
herein should be read in conjunction with the financial statements and
notes included in the Form 10-K for US Unwired Inc. for the year ended
December 31, 2002, filed on March 31, 2003 with the Securities and Exchange
Commission.
2. Description of the Organization
US Unwired Inc. ("the Company" or "US Unwired") is principally engaged in
the ownership and operation of wireless communications systems, consisting
of personal communications systems ("PCS"), cellular and paging
communication systems in the southern and northeastern regions of the
United States.
US Unwired acquired IWO Holdings, Inc. ("IWO") on April 1, 2002.
3. Liquidity and Capital Resources
US Unwired has a senior bank credit facility and senior subordinated
discount notes. IWO has a senior bank credit facility and senior notes. US
Unwired and IWO entered into these prior to the acquisition of IWO. Under
the terms of these debt instruments, funds available under the US Unwired
debt can only be used by US Unwired, and funds available under the IWO debt
can only be used by IWO. US Unwired is not obligated for the payment of
IWO's debt, and IWO is not obligated for the payment of US Unwired's debt.
US Unwired Liquidity
As of March 31, 2003, US Unwired had $47.3 million in cash and cash
equivalents; availability under the US Unwired senior bank credit facility
of $73.2 million; and, indebtedness that consisted of $90.0 million related
to the US Unwired senior bank credit facility, $326.0 million related to
the US Unwired senior subordinated discount notes and $11.1 million in
capital leases, promissory notes and vendor financing for a total of $427.1
million.
Given US Unwired's current business model, the Company believes US Unwired
will have sufficient cash to funds its operations, debt service and capital
requirements in 2003. US Unwired must comply with certain financial and
operating covenants of the US Unwired senior bank credit facility and the
US Unwired senior subordinated discount notes, and as of March 31, 2003,
was in compliance with these restrictive covenants. However, the Company's
current business model indicates that it will fail
6
to comply with certain financial covenants of the US Unwired senior bank
credit facility in 2003. The Company has initiated discussions with the US
Unwired banking group to amend these financial covenants. However, there
can be no assurance that the Company will be able to successfully negotiate
these amendments on terms acceptable to the Company. Should acceptable
amendments not be made, the banking group may elect to deny the Company
access to the remaining available funds under the US Unwired senior bank
credit facility. Under such circumstances, the Company believes that it
will have sufficient cash to fund operations, debt service and capital
requirements in 2003 without additional borrowing. The banking group may
also elect to accelerate repayment of the US Unwired senior bank credit
facility. Under such circumstances, this acceleration will serve to trigger
a default in the US Unwired senior subordinated discount notes. Should this
occur, both the holders of the US Unwired senior bank credit facility and
US Unwired senior subordinated discount notes may demand immediate payment
for all outstanding indebtedness, and the Company would be unable to pay
the accelerated amount.
As of the date of this filing, the Company is unable to express a belief on
whether it will have sufficient liquidity in 2004 and beyond, which will
depend on a number of factors including results of 2003 operations; its
relationship with Sprint PCS, major vendors and lenders; and the amended
terms of the US Unwired senior bank credit facility.
Considering the expected covenant violations in 2003 and the actions that
may result from such covenant violations and the operating losses incurred
to date, there is substantial doubt about US Unwired's ability to continue
as a going concern.
IWO Liquidity
The Company has been unable to develop a business plan for IWO that
provides sufficient liquidity in 2003, and has engaged in discussions with
the holders of the IWO senior bank credit facility and the holders of the
IWO senior notes regarding the restructuring of IWO.
As of March 31, 2003, IWO had $26.1 million in cash and cash equivalents
and $30.2 million in restricted cash; availability in revolving loans under
the IWO senior bank credit facility of $25.2 million; and indebtedness that
consisted of $213.2 million related to the IWO senior bank credit facility
and $137.4 million related to the IWO senior notes for a total of $350.6
million. A portion of the original proceeds of the IWO senior notes
offering was set aside as restricted cash to make the first six scheduled
interest payments on the IWO senior notes through January 2004. Repayment
of the IWO senior bank credit facility commences in March 2004.
IWO was not in compliance with its restrictive covenants under the IWO
senior bank credit facility at March 31, 2003, and as a result of these
covenant violations, the Company was in default of the IWO senior bank
credit facility at March 31, 2003. The holders of the IWO senior bank
credit facility have the right to deny IWO access to the remaining $25.2
million of availability. Without the remaining $25.2 million, IWO will not
have sufficient liquidity through 2003. The Company is in discussions with
the IWO banking group and IWO note holders to arrive at an acceptable
restructuring to preserve IWO liquidity. IWO, holders of the IWO senior
bank credit facility and holders of the IWO senior notes have all retained
advisors to assist in evaluating alternatives for IWO.
A default under the IWO senior bank credit facility does not result in IWO
being in default under the IWO senior notes. Should IWO be unable to amend
the IWO senior bank credit facility or obtain waivers for the violated
restricted covenants, the holders of IWO senior bank credit facility can
restrict any remaining future IWO borrowing capacity and accelerate
repayment of the IWO senior bank credit facility. Should the holders of IWO
senior bank credit facility accelerate repayment, that acceleration will
serve to trigger a default in the IWO senior notes. Should this occur, both
the holders of the IWO senior bank credit facility and the holders of the
IWO senior notes may demand immediate payment of all outstanding
indebtedness. If the indebtedness is accelerated, IWO does not have
sufficient cash to repay its indebtedness. As a result, IWO would be forced
to seek protection under bankruptcy.
7
As a result of liquidity challenges, IWO has made the decision to reduce
capital expenditures for network expansion. With the assistance of IWO's
advisors, IWO believed that it did not have sufficient liquidity, at this
time, to complete all cell sites under construction as of March 31, 2003.
As a result, IWO has elected to abandon the construction of cell sites that
do not provide a sufficient level of enhanced coverage. IWO recorded an
asset abandonment charge of $12.4 million during the three-month period
ended March 31, 2003 for the cell sites and the related property leases of
these abandoned cell sites. Included in this asset abandonment charge are
cell sites that IWO is required to construct to meet the build out
requirements under the IWO Sprint management agreement. Failure to complete
the build out of the IWO service area will place IWO in violation of the
IWO Sprint management agreement. As a result, Sprint PCS could declare IWO
in default and take action up to and including termination of the IWO
Sprint management agreement. At March 31, 2003, IWO's construction in
progress included $13.6 million primarily related to cell sites that IWO
plans to complete and management estimates that completion of these cell
sites will require approximately $10.9 million in additional construction
costs to complete construction and place these sites in operation. IWO
anticipates that only a portion of these sites will be completed in 2003.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to IWO. Further, IWO
creditors, IWO lenders and IWO note holders cannot place any liens or
encumbrances on the assets of US Unwired. Should the holders of the IWO
senior bank credit facility place IWO in default, US Unwired's relationship
with IWO may change and several alternatives exist ranging from working for
the holders of the IWO senior bank credit facility and the holders of the
IWO senior notes as a manager of the IWO territory, subject to the approval
by Sprint PCS, to no involvement with IWO at all.
Considering the covenant violations and the actions that may result from
such covenant violations and the operating losses incurred to date, there
is substantial doubt about IWO's ability to continue as a going concern.
The Company's Business Strategy
The Company is undertaking a number of key initiatives designed to enable
US Unwired to continue as a going concern. The Company has:
. reinstated the deposit requirement for higher credit risk subscribers
and will request not to participate in any Sprint PCS programs where
the Company's analysis indicates adversely impacted levels of customer
turnover or unsatisfactory economic returns.
. restructured sales employees' programs to pay higher commissions on
subscribers with better credit ratings.
. revised the local agent commission structure. The Company no longer
offers handset discounts to its local agents and instead pays higher
commissions for subscribers with good credit ratings. The Company has
cancelled and continues to cancel agreements with local agents that
continue to target higher risk subscribers or provide low economic
value.
. reintroduced the pre-pay program, which requires advance payment for
minutes of use. The Company believes that this program offers higher
credit risk subscribers a less stressful environment in which to
subscribe to the Company's service. The Company believes that there is
a lower susceptibility for this credit class of subscribers to churn
than with a post-pay program, and this service allows these
subscribers to better manage their expenditures for the service
provided.
. supplemented Sprint PCS's customer service function with certain of
its own staff that focuses on subscriber retention.
. limited its capital expenditures to: (1) capacity and required
technical upgrades of existing equipment, and (2) only adding
additional cell site coverage in areas that we expect will produce
positive cash returns as a result of either new subscriber growth or
decreases in subscriber turnover.
8
. continued to divest of certain non-core assets.
. undertaken a corporate wide evaluation of expenses. This includes the
consolidation of functions, divesting of unused and under utilized
facilities, renegotiation of vendor contracts, extension of vendor
payment terms and other cost cutting measures.
. evaluated and continues to evaluate its markets and is reducing sales
staffing levels and closing retail outlets that do not meet its
minimum internal rates of returns.
. continued to work with Sprint PCS to improve the detail, timeliness
and accuracy of information processed by Sprint PCS on the Company's
behalf.
While the Company believes that these initiatives will have a positive
impact on operating results, the Company cannot state with certainty that
these initiatives will result in its ability to sustain operations beyond
or even to the end of 2003, given the information as discussed above
regarding the Company's indebtedness.
4. Details of Certain Balance Sheet Accounts
Major categories of property and equipment consisted of the following:
March 31, December 31,
2003 2002
---------- ------------
(In thousands)
Land $ 890 $ 890
Buildings and leasehold improvements 22,415 22,713
Facilities and equipment 612,043 603,085
Furniture, fixtures and vehicles 10,112 9,744
Construction in progress 24,079 34,004
---------- ------------
669,539 670,436
Less accumulated depreciation an amortization 206,425 186,422
---------- ------------
$ 463,114 $ 484,014
========== ============
Intangibles consisted of the following:
March 31, December 31,
2003 2002
---------- ------------
(In thousands)
Intangible Assets:
Sprint affiliation agreement $ 35,266 $ 35,266
Subscriber base 81,824 81,824
---------- ------------
117,090 117,090
Less: accumulated amortization 48,649 38,798
---------- ------------
Intangible assets, net $ 68,441 $ 78,292
========== ============
9
5. Long-Term Obligations
Long-term debt, including capital lease obligations, consisted of the
following:
March 31, December 31,
2003 2002
------------ ------------
(In thousands)
US Unwired Inc. senior subordinated discount notes $ 325,975 $ 315,707
US Unwired Inc. senior bank credit facility 90,000 90,000
Capital leases 7,160 7,269
Promissory note 3,613 3,667
Vendor financing 359 370
------------ ------------
Total long-term obligations, US Unwired Inc. 427,107 417,013
IWO Holdings, Inc. senior notes 137,380 137,023
IWO Holdings, Inc. senior bank credit facility, in default 213,184 213,184
------------ ------------
Total long-term obligations, IWO Holdings Inc. 350,564 350,207
Less current maturities 358,188 5,018
------------ ------------
Long-term obligations, excluding current maturities $ 419,483 $ 762,202
============ ============
As of March 31, 2003, $73.2 million remained available for borrowing under
the US Unwired senior bank credit facility. As of March 31, 2003, US
Unwired was in compliance with all financial covenants under the US Unwired
senior bank credit facility and the US Unwired senior subordinated discount
notes.
As of March 31, 2003, $25.2 million was available under the IWO senior bank
credit facility. IWO was not in compliance with its restrictive covenants
under the IWO senior bank credit facility at March 31, 2003, and as a
result of these covenant violations, the Company was in default of the IWO
senior bank credit facility at March 31, 2003. The holders of the IWO
senior bank credit facility have the right to deny IWO access to the
remaining $25.2 million of availability as a result of the covenant
violations. As a result of the covenant violations and the impact of these
covenant violations on the IWO senior bank credit facility as discussed in
Note 3, the Company has classified all outstanding indebtedness of both the
IWO senior bank credit facility and the IWO senior notes as a current
liability.
US Unwired Senior Subordinated Discount Notes - 13 3/8%
In October 1999, US Unwired issued $400 million in aggregate principal
amount of 13 3/8% Senior Subordinated Discount Notes due November 1, 2009
("the US Unwired senior subordinated discount notes"). The US Unwired
senior subordinated discount notes were issued at a substantial discount
such that the Company received gross proceeds of approximately $209.2
million. The US Unwired senior subordinated discount notes increase in
value daily, compounded twice per year, at the rate of 13 3/8% per year
until November 1, 2004. On that date, the value of the US Unwired senior
subordinated discount notes will be equal to the face amount of the US
Unwired senior subordinated discount notes and interest will begin to
accrue at the rate of 13 3/8% per year. The Company will be required to pay
the accrued interest beginning May 1, 2005, and on each November 1 and May
1 thereafter. The US Unwired senior subordinated discount notes are a
general unsecured obligation of the Company, except for the limited
security provided by a pledge agreement by the Company's wholly owned
subsidiary, Louisiana Unwired LLC ("LA Unwired"). The US Unwired senior
subordinated discount notes rank junior to all existing and future senior
debt of the Company and equal in right of payment of any future senior
subordinated indebtedness of the Company.
10
The US Unwired senior subordinated discount notes are fully,
unconditionally, and jointly and severally guaranteed by two of the
Company's wholly owned subsidiaries: LA Unwired and Unwired Telecom Corp.
("Unwired Telecom"). Each of the guarantees is a general unsecured
obligation of the guarantor, except for a pledge by LA Unwired of its
interest in Texas Unwired and any notes payable to it by Texas Unwired as
security for the guarantee. Each of the guarantees ranks equally in right
of payment with the guarantor's future senior subordinated indebtedness and
is subordinated in right of payment to all existing and future senior debt
of the guarantor. The US Unwired senior subordinated discount notes are not
guaranteed by IWO.
US Unwired Senior Bank Credit Facility - $170 million
The $170 million US Unwired senior bank credit facility consists of an $80
million reducing revolving credit facility and $90 million in term loans.
The $80 million reducing revolving credit facility has been reduced by $6.0
million as a result of permanent reductions of $1.3 million and $2.0
million per quarter that began in June 2002. The US Unwired senior bank
credit facility matures in 2008. Effective June 6, 2002, the Company
amended the $170 million US Unwired senior bank credit facility to allow
for letters of credit. Any letters of credit issued by the Company reduce
the amount available under the reducing revolving credit facility. The term
loans will be repaid in quarterly installments beginning in June 2003. All
loans under the US Unwired senior bank credit facility bear interest at
variable rates tied to the federal funds rate or LIBOR. The US Unwired
senior bank credit facility is secured by all of the assets of the Company
and its subsidiaries (other than property owned by IWO which the Company
acquired on April 1, 2002). Such collateral also secures certain interest
rate protection and other hedging agreements permitted by our credit
agreement that may be entered into from time to time by us. Lucent
Technologies, Inc. is also a guarantor of a portion of our senior secured
credit facility. At March 31, 2003, the Company had $73.2 million available
under this facility. The proceeds from the US Unwired senior bank credit
facility are available for use only by US Unwired and its subsidiaries
other than IWO.
IWO Senior Notes - 14%
In February 2001, IWO issued 160,000 units, each consisting of $1,000
principal amount of 14% Senior Notes ("the IWO senior notes") due January
15, 2011 and one warrant to purchase 12.50025 shares of IWO's class C
common stock at an exercise price of $7.00 per share. As a result of US
Unwired's acquisition of IWO in April 2002, this warrant was converted to a
US Unwired warrant to purchase 12.96401 shares of US Unwired's common stock
at $6.75 per share. Interest is payable semi-annually on January 15 and
July 15 of each year. Independent Wireless One Corporation, a wholly owned
subsidiary of IWO, is the sole guarantor of the IWO senior notes. All of
IWO's restricted subsidiaries formed or acquired after the issuance of the
IWO senior notes that guarantee the IWO senior bank credit facility will
also be required to guarantee the IWO senior notes. The IWO senior notes
are not guaranteed by Independent Wireless One Realty Corporation, a wholly
owned subsidiary of IWO, or US Unwired and its subsidiaries.
A portion of the original proceeds of the IWO senior notes were used to
purchase a portfolio of U.S. government securities which will generate
sufficient proceeds to make the first six scheduled interest payments on
the IWO Notes through January 2004. The account holding the investment
securities and all of the securities and other items contained in the
account have been pledged to the trustee for the benefit of the holders of
the IWO senior notes.
IWO Senior Bank Credit Facility - $240 million
Effective December 2000, Independent Wireless One Corporation, a wholly
owned subsidiary of IWO, entered into an amended and restated secured
credit facility ("the IWO senior bank credit facility") under which it may
borrow up to $240 million in the aggregate consisting of up to $70 million
in revolving loans and $170 million in term loans. The IWO senior bank
credit facility matures in 2008. The term loans will be repaid in quarterly
installments beginning in March 2004 and the reducing revolver matures in
March 2008. All loans under the IWO senior bank credit facility bear
interest at variable rates tied to the prime rate, the federal funds rate
or LIBOR. The IWO senior bank credit facility is secured by all of the
assets of IWO and its subsidiaries. At March 31, 2003, the Company
11
had $25.2 million of availability under the IWO senior bank credit
facility. However, as mentioned above, the holders of the IWO senior bank
credit facility have a right to deny IWO access to the remaining $25.2
million of availability as a result of the covenant violations. The IWO
credit facility is available for use only by IWO and its subsidiaries.
6. Commitments and Contingencies
The Company's PCS licenses and the PCS licenses that the Company operates
for Sprint PCS are subject to a requirement that the Company construct
network facilities that offer coverage to 25% of the population or have
substantial service in each of its Basic Trading Areas ("BTAs") within five
years from the grant of the licenses. As of March 31, 2003, management
believes that Sprint PCS has met the requirements necessary for the
licenses that the Company operates for Sprint PCS under the Sprint PCS
management agreements and that the Company has met the requirements
necessary for the licenses that it owns.
The Company uses Sprint PCS to process all PCS subscriber billings
including monthly recurring charges, airtime and other charges such as
interconnect fees. The Company pays various fees to Sprint PCS for new
subscribers as well as recurring monthly fees for services performed for
existing customers including billing and management of customer accounts.
Sprint PCS's billing for these services is based upon an estimate of the
actual costs incurred by Sprint PCS to provide such services. At the end of
each calendar year, Sprint PCS compares its actual costs to provide such
services to remittances by the Company for estimated billings and either
refunds overpayments or bills for costs in excess of the payments made.
Based upon information as provided by Sprint PCS, the Company believes it
has adequately provided for the above-mentioned costs in the accompanying
consolidated financial statements. Additionally, Sprint PCS has contracted
with national retailers that sell handsets and service to new PCS
subscribers in the Company's markets. Sprint PCS pays these national
retailers a new subscriber commission and provides handsets to such
retailers below cost. Sprint PCS passes these costs of commissions and the
handset subsidies to the Company.
The Company periodically reviews all charges from Sprint PCS and from time
to time, the Company may dispute certain of these charges. Based upon the
information provided to the Company by Sprint PCS to date, the Company
believes the accompanying condensed consolidated balance sheet adequately
reflects its obligation to Sprint PCS for these charges.
7. Income Taxes
The Company's effective income tax rate for the interim periods presented
is based on management's estimate of the Company's effective tax rate for
the applicable year and differs from the federal statutory income tax rate
primarily due to nondeductible permanent differences, state income taxes
and changes in the valuation allowance for deferred tax assets.
12
8. Stock Compensation
The Company accounts for its stock compensation arrangements under the
provision of APB 25, accounting for stock issued to employees.
Had compensation expense for the Company's stock option plan been
determined in accordance with SFAS No. 123, the company's net loss and
basic and diluted net loss per share of common stock for the three months
ended March 31, 2003 and 2002 would have been:
Three months ended
March 31, 2003 March 31, 2002
-------------- --------------
Net loss:
As reported $ (57,472) $ (28,361)
Add recorded non-cash stock compensation 1,067 1,166
Less non-cash compensation in accordance
with SFAS No. 123 (1,871) (2,200)
-------------- --------------
Pro forma $ (58,276) $ (29,395)
============== ==============
Basic and diluted loss per share:
As reported $ (0.45) $ (0.33)
============== ==============
Pro forma $ (0.45) $ (0.35)
============== ==============
9. Condensed Consolidating Financial Information
As discussed in Note 5, the US Unwired Notes are guaranteed by certain of
the Company's subsidiaries. The following information presents the
condensed consolidating balance sheets as of March 31, 2003 and December
31, 2002 and the condensed consolidating statements of operations and cash
flows for the three ended March 31, 2003 and March 31, 2002 of (a) the
"Parent" Company, US Unwired Inc., (b) the "Guarantors", Unwired Telecom
Corporation and Louisiana Unwired, and (c) the "Non-Guarantor", IWO, and
includes eliminating entries and the Company on a consolidated basis.
The separate consolidated financial statements of IWO, including disclosure
of condensed consolidating financial information for IWO, are included in
IWO's separate Form 10-Q filing.
13
Condensed Consolidating Balance Sheet
As of March 31, 2003
--------------------
US Unwired Louisiana IWO Holdings,
Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
--------- ----------- ----------- ---------- --------------- ------------- ------------
(In thousands)
ASSETS:
Current Assets
Cash and cash equivalents $ 44,343 $ 426 $ 2,487 $ 2,913 $ 26,072 $ --- $ 73,328
Restricted cash --- --- --- --- 30,182 --- 30,182
Subscriber receivables, net --- 1,212 23,195 24,407 10,372 --- 34,779
Other receivables 49 --- 1,801 1,801 621 --- 2,471
Inventory --- 297 4,190 4,487 3,675 --- 8,162
Prepaid expenses and other assets 1,050 140 11,335 11,475 5,600 --- 18,125
Receivables from (payables to)
related parties 1,177 194 (727) (533) 25 41 710
Receivables from officers 86 --- --- --- --- --- 86
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current assets 46,705 2,269 42,281 44,550 76,547 41 167,843
Property and equipment, net 11,235 8,282 265,820 274,102 177,777 --- 463,114
Goodwill and other intangible
assets, net --- --- 72,358 72,358 48,048 --- 120,406
Notes receivable from
unconsolidated affiliates 168,346 29,192 --- 29,192 160 (195,883) 1,815
Other assets 11,119 132 12,026 12,158 16,869 --- 40,146
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total assets $ 237,405 $ 39,875 $ 392,485 $ 432,360 $ 319,401 $ (195,842) $ 793,324
========= =========== =========== ========== =============== ============= ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,057 $ 580 $ 12,147 $ 12,727 $ 10,883 $ --- $ 24,667
Accrued expenses 4,385 800 45,928 46,728 29,352 --- 80,465
Current maturities of long term
debt 34,477 61 168,795 168,856 350,564 (195,709) 358,188
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current liabilities 39,919 1,441 226,870 228,311 390,799 (195,709) 463,320
Long term debt, net of current
maturities 412,473 299 6,711 7,010 --- --- 419,483
Deferred gain --- 132 32,517 32,649 776 --- 33,425
Investments in and advances to
unconsolidated affiliates (41,125) 1,845 72,368 74,213 --- (29,351) 3,737
Stockholders' equity (deficit):
Common stock 1,288 600 --- 600 1 (601) 1,288
Additional paid in capital 660,247 1,347 809,068 810,415 446,449 (1,258,584) 658,527
Retained deficit (835,397) 34,211 (755,049) (720,838) (518,624) 1,288,577 (786,282)
Promissory note --- --- --- --- --- (174) (174)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total stockholder's equity
(deficit) (173,862) 36,158 54,019 90,177 (72,174) 29,218 (126,641)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total liabilities and
stockholders' equity (deficit) $ 237,405 $ 39,875 $ 392,485 $ 432,360 $ 319,401 $ (195,842) $ 793,324
========= =========== =========== ========== =============== ============= ============
14
Condensed Consolidating Balance Sheet
As of December 31, 2002
-----------------------
US Unwired Louisiana IWO Holdings,
Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
--------- ----------- ----------- ---------- --------------- ------------- ------------
(In thousands)
ASSETS:
Current Assets
Cash and cash equivalents $ 23,025 $ 2,605 $ 1,347 $ 3,952 $ 35,008 $ --- $ 61,985
Restricted cash and US
Treasury securities at
amortized cost-held to maturity --- --- --- --- 33,218 --- 33,218
Subscriber receivables, net --- 1,403 34,481 35,884 11,843 --- 47,727
Other receivables 33 1 1,030 1,031 1,597 --- 2,661
Inventory --- 99 2,637 2,736 2,579 --- 5,315
Prepaid expenses and other assets 1,012 63 9,323 9,386 4,679 --- 15,077
Receivables from (payables to)
related parties (1,362) 402 1,307 1,709 320 14 681
Receivables from officers 101 --- --- --- --- --- 101
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current assets 22,809 4,573 50,125 54,698 89,244 14 166,765
Property and equipment, net 11,844 9,031 273,261 282,292 189,878 --- 484,014
Restricted cash --- --- --- --- 8,000 --- 8,000
Goodwill and other intangible
assets, net --- --- 74,736 74,736 55,517 --- 130,253
Notes receivable from
unconsolidated affiliates 187,600 25,609 --- 25,609 174 (211,572) 1,811
Other assets 11,572 108 11,295 11,403 17,612 --- 40,587
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total assets $ 233,825 $ 39,321 $ 409,417 $ 448,738 $ 360,425 $ (211,558) $ 831,430
========= =========== =========== ========== =============== ============= ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,164 $ 1,054 $ 11,089 $ 12,143 $ 14,994 $ --- $ 28,301
Accrued expenses 3,803 816 33,726 34,542 29,320 --- 67,665
Current maturities of long term
debt 28,313 59 188,044 188,103 --- (211,398) 5,018
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total current liabilities 33,280 1,929 232,859 234,788 44,314 (211,398) 100,984
Long term debt, net of current
maturities 404,860 310 6,825 7,135 350,207 --- 762,202
Deferred gain --- 107 33,523 33,630 951 --- 34,581
Investments in and advance to
unconsolidated affiliates (88,013) 2,009 35,240 37,249 --- 54,665 3,901
Stockholders' equity (deficit):
Common stock 1,288 600 --- 600 1 (601) 1,288
Additional paid in capital 659,180 1,347 809,067 810,414 446,449 (1,258,584) 657,459
Retained deficit (776,770) 33,019 (708,097) (675,078) (481,497) 1,204,534 (728,811)
Promissory note --- --- --- --- --- (174) (174)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total stockholder's equity
(deficit) (116,302) 34,966 100,970 135,936 (35,047) (54,825) (70,238)
--------- ----------- ----------- ---------- --------------- ------------- ------------
Total liabilities and
stockholders' equity (deficit) $ 233,825 $ 39,321 $ 409,417 $ 448,738 $ 360,425 $ (211,558) $ 831,430
========= =========== =========== ========== =============== ============= ============
15
Condensed Consolidating Statement of Operations
Three-month period ended March 31, 2003
---------------------------------------
IWO
Unwired Louisiana Holdings,
US Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
---------- ----------- ----------- ---------- ---------- ------------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 2,925 $ 61,275 $ 64,200 $ 30,073 $ --- $ 94,273
Roaming --- 884 19,676 20,560 7,081 (150) 27,491
Merchandise sales --- 184 4,435 4,619 1,751 --- 6,370
Other revenue 6,550 118 286 404 115 (6,456) 613
---------- ----------- ----------- ---------- ---------- ------------- ------------
Total revenues 6,550 4,111 85,672 89,783 39,020 (6,606) 128,747
Expenses:
Cost of service --- 1,100 33,511 34,611 17,478 (243) 51,846
Merchandise cost sales --- 305 6,674 6,979 2,511 --- 9,490
General and administrative 6,550 596 21,516 22,112 12,978 (6,363) 35,277
Sales and marketing --- 893 16,121 17,014 8,532 --- 25,546
Non-cash stock compensation 935 81 51 132 --- --- 1,067
Depreciation and amortization 654 503 15,630 16,133 13,374 --- 30,161
IWO asset abandonment charge --- --- --- --- 12,403 12,403
---------- ----------- ----------- ---------- ---------- ------------- ------------
Total operating expense 8,139 3,478 93,503 96,981 67,276 (6,606) 165,790
---------- ----------- ----------- ---------- ---------- ------------- ------------
Operating income (loss) (1,589) 633 (7,831) (7,198) (28,256) --- (37,043)
Other income (expense)
Interest income (expense), net (10,149) 325 (1,995) (1,670) (8,871) --- (20,690)
Gain on sale of assets --- 79 2 81 --- --- 81
---------- ----------- ----------- ---------- ---------- ------------- ------------
Total other income (expense) (10,149) 404 (1,993) (1,589) (8,871) --- (20,609)
Equity in income (losses) of
unconsolidated subsidiaries (46,888) 154 (37,127) (36,973) --- 84,041 180
---------- ----------- ----------- ---------- ---------- ------------- ------------
Net income (loss) $ (58,626) $ 1,191 $ (46,951) $ (45,760) (37,127) $ 84,041 $ (57,472)
========== =========== =========== ========== ========== ============= ============
Condensed Consolidating Statement of Operations
Three-month period ended March 31,2002
--------------------------------------
US Unwired Louisiana
Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Entries Consolidated
--------- ----------- ----------- ---------- ------------- ------------
(In thousands)
Revenues:
Subscriber $ --- $ 3,415 $ 52,700 $ 56,115 $ --- $ 56,115
Roaming --- 2,913 27,830 30,743 --- 30,743
Merchandise sales --- 143 4,144 4,287 --- 4,287
Other revenue 6,927 124 565 689 (6,691) 925
--------- ----------- ----------- ---------- ------------- ------------
Total revenues 6,927 6,595 85,239 91,834 (6,691) 92,070
Expenses:
Cost of service --- 1,371 38,694 40,065 (90) 39,975
Merchandise cost of sales --- 454 7,536 7,990 --- 7,990
General and administrative 6,927 1,029 24,614 25,643 (6,601) 25,969
Sales and marketing --- 973 20,571 21,544 --- 21,544
Non-cash stock compensation 1,029 82 55 137 --- 1,166
Depreciation and amortization 2,113 557 11,515 12,072 --- 14,185
--------- ----------- ----------- ---------- ------------- ------------
Total operating expense 10,069 4,466 102,985 107,451 (6,691) 110,829
--------- ----------- ----------- ---------- ------------- ------------
Operating loss (3,142) 2,129 (17,746) (15,617) --- (18,759)
Other income (expense)
Interest income (expense), net (8,324) 119 (1,902) (1,783) --- (10,107)
Gain on sale of assets --- --- --- --- --- ---
--------- ----------- ----------- ---------- ------------- ------------
Total other (income) expense (8,324) 119 (1,902) (1,783) --- (10,107)
Equity in income (losses) of
unconsolidated subsidiaries (19,961) 178 --- 178 20,288 505
--------- ----------- ----------- ---------- ------------- ------------
Net income (loss) $ (31,427) $ 2,426 $ (19,648) $ (17,222) $ 20,288 $ (28,361)
========= =========== =========== ========== ============= ============
16
Condensed Consolidating Statement of Cash Flows
Three-month period ended March 31, 2003
---------------------------------------
IWO
US Unwired Louisiana Holdings,
Unwired Telecom Unwired Inc.
Inc. Corporation LLC Total (Non- Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Guarantor) Entries Consolidated
--------- ----------- ----------- ---------- --------- ------------- ------------
(In thousands)
Cash flows from operating activities:
Net cash provided by (used in) operating
activities $ (1,395) $ 1,077 $ 25,669 $ 26,746 $ (15,392) $ --- $ 9,959
Cash flows from investing activities:
Proceeds from restricted cash --- --- --- --- 11,035 --- 11,035
Proceeds from the sale of assets --- 350 --- 350 --- --- 350
Payments for the purchase of equipment (52) (31) (5,167) (5,198) (4,579) --- (9,829)
Disbursement of intercompany note 19,254 (3,565) --- (3,565) --- (15,689) ---
--------- ----------- ----------- ---------- --------- ------------- ------------
Net cash provided by (used in) investing
activities 19,202 (3,246) (5,167) (8,413) 6,456 (15,689) 1,556
Cash flows from financing activities:
Principal payments of long-term debt (833) (10) (31,363) (31,373) --- 32,034 (172)
Proceeds from long-term debt 4,345 --- 12,000 12,000 --- (16,345) ---
--------- ----------- ----------- ---------- --------- ------------- ------------
Net cash provided by (used in) activities 3,512 (10) (19,363) (19,373) --- 15,689 (172)
--------- ----------- ----------- ---------- --------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents 21,319 (2,179) 1,139 (1,040) (8,936) --- 11,343
Cash and cash equivalents at beginning of
period 23,025 2,605 1,347 3,952 35,008 --- 61,985
--------- ----------- ----------- ---------- --------- ------------- ------------
Cash and cash equivalents at end of period $ 44,344 $ 426 $ 2,486 $ 2,912 $ 26,072 $ --- $ 73,328
========= =========== =========== ========== ========= ============= ============
17
Condensed Consolidating Statement of Cash Flows
Three-month period ended March 31, 2002
---------------------------------------
US Unwired Louisiana
Unwired Telecom Unwired
Inc. Corporation LLC Total Consolidating
(Parent) (Guarantor) (Guarantor) Guarantors Entries Consolidated
--------- ----------- ----------- ---------- ------------- ------------
(In thousands)
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $ 56 $ 3,965 $ (3,172) $ 793 $ 2,564 $ 3,413
Cash flow from investing
activities:
Payments for the purchase of
equipment
(1,113) (531) (37,614) (38,145) --- (39,258)
Acquisition of business, net of
cash acquired (55,437) --- 2,736 2,736 (2,564) (55,265)
Proceeds from the sale of assets --- --- 10,016 10,016 --- 10,016
Disbursement of intercompany note (37,900) (4,250) --- (4,250) 42,150 ---
--------- ----------- ----------- ---------- ------------- ------------
Net cash provided by (used in)
investing activities (94,450) (4,781) (24,862) (29,643) 39,586 (84,507)
Cash flows from financing activities:
Proceeds from long-term debt 44,250 --- 37,900 37,900 (42,150) 40,000
Proceeds from stock options
exercised 167 --- --- --- --- 167
Principal payments of long-term
debt (53) (14) (104) (118) --- (171)
Debt issuance costs (763) --- --- --- --- (763)
--------- ----------- ----------- ---------- ------------- ------------
Net cash provided by (used in)
activities 43,601 (14) 37,796 37,782 (42,150) 39,233
--------- ----------- ----------- ---------- ------------- ------------
Net increase (decrease) in cash
and cash equivalents (50,793) (830) 9,762 8,932 --- (41,861)
Cash and cash equivalents at
beginning of period 79,184 4,418 16,987 21,405 --- 100,589
--------- ----------- ----------- ---------- ------------- ------------
Cash and cash equivalents at end
of period $ 28,391 $ 3,588 $ 26,749 $ 30,337 $ --- $ 58,728
========= =========== =========== ========== ============= ============
10. Subsequent Events
The Company announced on May 15, 2003 that it intends to offer to exchange
any and all of its existing US Unwired 13.375% $400 million senior
subordinated discount notes due November 1, 2009 for $187.50 in cash and
$185 in new senior notes per $1,000 principal amount of its existing US
Unwired notes. The new notes to be issued in the offer will be 13.375%
senior notes due on November 3, 2009 (or, in certain circumstances, on
November 1, 2008).
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are statements about
future business strategy, operations and capabilities, construction plans,
construction schedules, financial projections, plans and objectives of
management, expected actions of third parties and other matters. Forward-looking
statements often include words like believes, belief, expects, plans,
anticipates, intends, projects, estimates, may, might, would or similar words.
Forward-looking statements speak only as of the date of this report. They
involve known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different. In addition to the risk factors
described elsewhere, specific factors that might cause such a difference
include, but are not limited to (i) our ability to integrate operations and
finance future growth opportunities; (ii) our dependence on Sprint PCS; (iii)
our ability to expand our Sprint PCS network or to upgrade the Sprint PCS
network to accommodate new technologies; (iv) limited operating history in the
PCS market and anticipation of future losses; (v) potential fluctuations in
operating results; (vi) changes or advances in technology; (vii) changes in law
or government regulation; (viii) competition in the industry and markets in
which we operate; (ix) future acquisitions; (x) our ability to attract and
retain skilled personnel; (xi) our dependence on contractor and consultant
services, network implementation and information technology support; (xii) our
potential inability to expand the services and related products we provide in
the event of substantial increases in demand in excess of supply for network and
handset equipment and related services and products; (xiii) the availability at
acceptable terms of sufficient funds to pay for our business plans; (xiv)
changes in labor, equipment and capital costs; (xv) any inability to comply with
the indentures that govern our senior notes or credit agreements; (xvi) changes
in management; and (xvii) general economic and business conditions.
You should not rely too heavily on any forward-looking statement. We cannot
assure you that our forward-looking statements will prove to be correct. We have
no obligation to update or revise publicly any forward-looking statement based
on new information, future events or otherwise. This discussion should be read
in conjunction with our financial statements included in this report and with
the Risk Factors included in this report under Item 5 Other Information, and
with the financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations that are included in the Form 10-K
for US Unwired Inc. for the year ended December 31, 2002, filed on March 31,
2003 with the Securities and Exchange Commission ("SEC") and with the financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Form 10-K for IWO Holdings, Inc. for the year ended
December 31, 2002, filed on March 31, 2003 with the SEC.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
activation fee revenues and related expense, revenue recognition of credit
challenged subscribers, contract cancellation fees, inventory reserves,
intangible assets and contingencies. We base our estimates on our historical
experience, the historical experience of Sprint PCS and the historical
experience of other Sprint PCS affiliates and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may vary from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements.
19
Reliance on Sprint PCS Processing
We rely on Sprint PCS for much of our financial reporting information including:
revenues; commissions paid to national retailers; fees paid for customer care
and billing; roaming revenue and roaming expense on the Sprint PCS and Sprint
PCS affiliate network; and, the maintenance of accounts receivable, including
cash collections and the write off of customer balances that are not collectible
and the accuracy of our accounts receivable balance. Based upon the timing of
the information received from Sprint PCS, we make certain assumptions that the
information is accurate and that it is consistent with historical trends. We
also rely upon the evaluation of internal controls as performed by Sprint PCS's
external auditors that were performed in accordance with AICPA Statement on
Auditing Standards (SAS) No. 70.
Bad Debt Expense
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of subscribers to make payments. If the financial conditions of
our subscribers deteriorate, resulting in the subscribers' inability to make
payments, additional allowances will be required.
We estimate our allowance by examining the components of our revenue. We
establish a general reserve of all accounts receivable that are estimated to be
uncollectible. In addition, we do not recognize 100% of our late fees or
cancellation fees as revenue because of high uncertainty of the collectibility
of these amounts. Reserves for these amounts are recorded to our allowance for
doubtful accounts. Our evaluation of the adequacy of these amounts includes our
own historical experience and discussions with Sprint PCS and other Sprint PCS
affiliates.
Revenue Recognition
We recognize only a portion of contract cancellation fees billed to subscribers
that disconnect service prior to fulfilling the contractual length of service,
as there is significant uncertainty that all contract cancellation fees that are
billed will be collected. We have very limited information at a detail level
sufficient to perform our own evaluation and rely on Sprint PCS historical
trending to make our estimates. If the collections on contract cancellation fees
are less than that recognized, additional allowances may be required.
We recognize only a portion of late fees billed to subscribers that fail to pay
their bills within the required payment period, as there is no assurance that
all late fees that are billed will be collected. We have very limited
information at a detail level sufficient to perform our own evaluation and rely
on Sprint PCS historical trending to make our estimates. If the collections on
late fees are less than that recognized, additional allowances may be required.
We defer revenues collected for activation fees over the estimated life of the
subscriber relationship, which we believe to be 15-24 months, based upon our
historical trends of average customer lives and discussions with Sprint PCS. We
also defer an activation expense in an amount equal to the activation fee
revenue and amortize this expense in an amount equal to the activation fee
revenue over the life of the subscriber relationship. If the estimated life of
the subscriber relationship increases or decreases, the amounts of deferred
revenue and deferred expense will be adjusted over the revised estimated life of
the subscriber relationship.
Inventory Reserves
We review our inventory quarterly and write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
necessary.
20
Accrued Commissions
We accrue commissions and other costs related to national retailers based upon
their sales to new subscribers. The national retailers receive both a commission
and, because the handset is typically sold below cost, a reimbursement for the
difference between the sales price and the cost. We base our accruals on
information provided by Sprint PCS on subscriber additions and recognize that
there are typically timing differences between the point of subscriber
activation and the time that we are invoiced for commissions by Sprint PCS. We
periodically and annually evaluate the adequacy of our accruals through analysis
of historical information and discussions with Sprint PCS. Depending on the
level of sales and other factors, our estimates of the amounts accrued for
commissions and other costs owed to such retailers may require modification of
our previous estimates.
Goodwill and Intangible Assets Impairment Analysis
We perform impairment tests of goodwill and indefinite lived assets as required
by Statements of Financial Accounting Standards No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. The impairment analysis
requires numerous subjective assumptions and estimates to determine fair value
of the respective reporting units as required by FAS No. 142. Depending on level
of sales, our liquidity and other factors, we may be required to recognize
impairment charges in the future.
Overview
Through our subsidiaries, Louisiana Unwired LLC ("LA Unwired") and IWO Holdings,
Inc. ("IWO), we provide wireless personal communication services, commonly
referred to as PCS in all or some portion of Louisiana, Texas, Florida,
Arkansas, Mississippi, Georgia, Alabama, New York, New Hampshire, Vermont and
portions of Massachusetts and Pennsylvania. We are a network partner of Sprint
PCS, the personal communications services group of Sprint Corporation. Sprint
PCS, directly and through affiliates like us, provides wireless services in more
than 4,000 cities and communities across the country. We have the exclusive
right to provide digital PCS services under the Sprint(R) and Sprint PCS(R)
brand names in our service area which is among the largest in population and
subscribers of all of the Sprint PCS network partners and is contiguous with
Sprint PCS's launched markets.
Liquidity and Capital Resources
US Unwired Inc. ("US Unwired" or "us" or "we" or "our") has a senior bank credit
facility and senior subordinated discount notes. IWO has a senior bank credit
facility and senior notes. US Unwired and IWO entered into these prior to our
acquisition of IWO on April 1, 2002. Under the terms of these debt instruments,
funds available under the US Unwired debt can only be used by US Unwired, and
funds available under the IWO debt can only be used by IWO. US Unwired is not
obligated for the payment of IWO's debt, and IWO is not obligated for the
payment of US Unwired's debt.
US Unwired Liquidity
As of March 31, 2003, US Unwired had $47.3 million in cash and cash equivalents;
availability under the US Unwired senior bank credit facility of $73.2 million:
and, indebtedness that consisted of $90.0 million related to the US Unwired
senior bank credit facility, $326.0 million related to the US Unwired senior
subordinated discount notes and $11.1 million in capital leases, promissory
notes and vendor financing for a total of $427.1 million.
Given US Unwired's current business model, we believe US Unwired will have
sufficient cash to funds its operations, debt service and capital requirements
in 2003. US Unwired must comply with certain financial and operating covenants
of the US Unwired senior bank credit facility and the US Unwired senior
subordinated discount notes, and as of March 31, 2003, was in compliance with
these restrictive covenants. However, our current business model indicates that
we will fail to comply certain financial covenants of the US Unwired senior bank
credit facility in 2003. We have initiated discussions with the US Unwired
banking group to amend these financial covenants. However, there can be no
assurance that we will be
21
able to successfully negotiate these amendments on terms acceptable to us.
Should acceptable amendments not be made, the banking group may elect to deny us
access to the remaining available funds under the US Unwired senior bank credit
facility. Under such circumstances, we believe that we will have sufficient cash
to fund operations, debt service and capital requirements in 2003 without
additional borrowing. The banking group may also elect to accelerate repayment
of the US Unwired senior bank credit facility. Under such circumstances, this
acceleration will serve to trigger a default in the US Unwired senior
subordinated discount notes. Should this occur, both the holders of the US
Unwired senior bank credit facility and US Unwired senior subordinated discount
notes may demand immediate payment for all outstanding indebtedness, and we
would be unable to pay the accelerated amount.
We have received notice from Nasdaq that our common stock was delisted from the
Nasdaq National Market effective with the open of business on May 8, 2003 and
immediately eligible for quotation on the Nasdaq Over the Counter Bulletin Board
with the open of business on May 8, 2003.
We announced on May 15, 2003 that we intend to offer to exchange any and all of
our existing US Unwired 13.375% $400 million senior subordinated notes due
November 9, 2009 for $187.50 in cash and $185 in new senior notes per $1000
principal amount of our existing US Unwired notes. The new notes to be issued in
the offer will be 13.375% senior notes due on November 3, 2009 (or, in certain
circumstances, on November 1, 2008).
IWO Liquidity
We have been unable to develop a business plan for IWO that provides sufficient
liquidity in 2003, and we have engaged in discussions with the holders of the
IWO senior bank credit facility and the holders of the IWO senior notes
regarding the restructuring of IWO.
As of March 31, 2003, IWO had $26.1 million in cash and cash equivalents and
$30.2 million in restricted cash; availability in revolving loans under our
senior bank credit facility was $25.2 million; and indebtedness that consisted
of $213.2 million related to the IWO senior bank credit facility and $137.4
million related to the IWO senior notes for a total of $350.6 million. A portion
of the original proceeds of the IWO senior notes offering was set aside as
restricted cash to make the first six scheduled interest payments on the IWO
senior notes through January 2004. Repayment of the IWO senior bank credit
facility commences in March 2004.
IWO was not in compliance with all restrictive covenants under the IWO senior
bank credit facility at March 31, 2003, and as a result of these covenant
violations, was in default of the IWO senior bank credit facility at March 31,
2003. The holders of the IWO senior bank credit facility have the right to deny
IWO access to the remaining $25.2 million of availability. Without the remaining
$25.2 million, IWO will not have sufficient liquidity through 2003. We are in
discussions with the IWO banking group and IWO note holders to arrive at an
acceptable restructuring to preserve IWO liquidity. IWO, holders of the IWO
senior bank credit facility and holders of the IWO senior notes have all
retained advisors to assist in evaluating alternatives for IWO.
A default under the IWO senior bank credit facility does not result in IWO being
in default under the IWO senior notes. Should IWO be unable to amend the IWO
senior bank credit facility or obtain waivers for any violated restricted
covenants, the holders of IWO senior bank credit facility can in restrict any
remaining future borrowing capacity and accelerate repayment of the IWO senior
bank credit facility. Should the holders of IWO senior bank credit facility
accelerate repayment, that acceleration will serve to trigger a default in the
IWO senior notes. Should this occur, both the holders of the IWO senior bank
credit facility and the holders of the IWO senior notes may demand immediate
payment of all outstanding indebtedness. If the indebtedness is accelerated, IWO
does not have sufficient cash to repay its indebtedness. As a result, IWO would
be forced to seek protection under bankruptcy.
As a result of liquidity challenges, IWO has made the decision to reduce capital
expenditures for network expansion. With the assistance of IWO's advisors, IWO
believed that it did not have sufficient liquidity, at this time, to complete
all cell sites under construction as of March 31, 2003. As a result, IWO has
elected
22
to abandon the construction of cell sites that do not provide a sufficient level
of enhanced coverage. IWO recorded an asset abandonment charge of $12.4 million
during the three-month period ended March 31, 2003 for the cell sites and the
related property leases of these abandoned cell sites. Included in this asset
abandonment charge are cell sites that IWO is required to construct to meet the
build out requirements under the IWO Sprint management agreement. Failure to
complete the build out of the IWO service area will place IWO in violation of
the IWO Sprint management agreement. As a result, Sprint PCS could declare IWO
in default and take action up to and including termination of the IWO Sprint PCS
management agreement. At March 31, 2003, IWO construction in progress included
$13.6 million related to cell sites that IWO plans to complete, and we estimate
that completion of these cell sites will require approximately $10.9 million in
additional construction costs to complete construction and place these sites in
operation. IWO anticipates that only a portion of these sites will be completed
in 2003.
Due to restrictions in the US Unwired debt instruments, US Unwired cannot
provide any capital or other financial support to IWO. Further, IWO creditors,
IWO lenders and IWO note holders cannot place any liens or encumbrances on the
assets of US Unwired. Should the holders of the IWO's senior bank credit
facility place IWO in default, US Unwired's relationship with IWO may change and
several alternatives exist ranging from working for the holders of the IWO
senior bank credit facility and the holders of the IWO senior notes as a manager
of the IWO territory, subject to the approval by Sprint PCS, to no involvement
with IWO at all.
Considering the covenant violations and the actions that may result from such
covenant violations and the operating losses incurred to date, there is
substantial doubt about IWO's ability to continue as a going concern.
Our Business Strategy
We are undertaking a number of key initiatives designed to enable US Unwired to
continue as a going concern. The following represents some of our key strategic
initiatives for 2003:
. We have reinstated a deposit requirement for higher credit risk
subscribers and will request not to participate in any Sprint PCS
programs where our analysis indicates adversely impacted levels of
customer turnover or unsatisfactory economic returns.
. We have restructured our sales employees' programs to pay higher
commissions on subscribers with better credit ratings.
. We have revised our local agent commission structure. We no longer
offer handset discounts to local agents and instead pay higher
commissions for subscribers with good credit ratings. We have
cancelled and continue to cancel agreements with local agents that
continue to target higher risk subscribers or provide low economic
value.
. We have reintroduced our pre-pay program, which requires advance
payment for minutes of use. We believe that this program offers higher
credit risk subscribers a less stressful environment in which to
subscribe to our service. We believe that there is a lower
susceptibility for this credit class of subscribers to churn than with
a post-pay program, and this service allows these subscribers to
better manage their expenditures for the service provided.
. We now supplement Sprint PCS's customer service function with certain
of our own staff that focuses on subscriber retention.
. We are continuing to limit capital expenditures to: (1) capacity and
required technical upgrades of existing equipment, and (2) only adding
additional cell site coverage in areas that we expect will produce
ositive cash returns as a result of either new subscriber growth or
decreases in subscriber turnover.
. We are continuing to divest of certain non-core assets.
. We have undertaken a corporate wide evaluation of expenses. This
includes the consolidation of functions, divesting of unused and under
utilized facilities, renegotiation of vendor contracts, extension of
vendor payment terms and other cost cutting measures.
23
. We have evaluated and continue to evaluate our markets and reduce
sales staffing levels and closing retail outlets that do not meet
minimum internal rates of returns.
. We continue to work with Sprint PCS to improve the detail, timeliness
and accuracy of information processed by Sprint PCS on our behalf.
While we believe that these initiatives will have a positive impact on operating
results, we cannot state with certainty that these initiatives will result in
our ability to sustain operations beyond or even to the end of 2003, given the
information as discussed above regarding our indebtedness.
Cash Flows
Net cash provided by operating activities during the three-month period ended
March 31, 2003 was $10.0 million. Net cash provided by investing activities
during the three-month period ended March 31, 2003 was $1.6 million and included
$11.0 million in proceeds of restricted cash and $350,000 in proceeds from the
sale of assets offset by $9.8 million for capital expenditures. Cash used in
financing activities during the three-month period ended March 31, 2003 was
$172,000 and represented principal repayment of long-term debt.
Three-Month Period Ended March 31, 2003 Compared to the Three-Month Period Ended
March 31, 2002
Results of Operations
The wireless telecommunications industry uses terms such as subscriber
additions, average revenue per user, churn and cost per gross addition as
performance measurements or metrics. None of these terms are measures of
financial performance under accounting principles generally accepted in the
United States. When we use these terms, they may not be comparable to similar
terms used by other wireless telecommunications companies.
Subscriber Additions
As of March 31, 2003, we provided personal communication services to 584,200
customers as compared to 350,300 customers at March 31, 2002, an increase of
233,900 subscribers. The number of new subscribers includes 169,200 subscribers
that joined us on April 1, 2002 as a result of our acquisition of IWO. In the
three-month period ended March 31, 2003, we added an additional 25,600
subscribers in all markets. We provided network coverage in an area comprising
approximately 12.7 million residents out of approximately 17.6 million total
residents or 72% of the people in our service area. The number of people in our
service area does not represent the number of Sprint PCS subscribers that we
expect to have in our service area.
We also provide cellular and paging services in parts of Louisiana through our
wholly owned subsidiary, Unwired Telecom Corporation ("Unwired Telecom"). As of
March 31, 2003, we had approximately 26,400 cellular and 7,700 paging
subscribers as compared to 32,000 cellular and 12,000 paging subscribers at
March 31, 2002. We expect our cellular and paging subscribers to decline.
Subscriber and Roaming Revenue
Subscriber revenue consists primarily of a basic service plan (where the
customer purchases a pre-allotted number of minutes for voice and/or data
transmission); airtime (which consists of billings for minutes that either
exceed or are not covered by the basic service plan); long distance; and charges
associated with travel outside our service area.
Roaming revenue consists primarily of Sprint PCS travel revenue and foreign
roaming revenue. Sprint PCS travel revenue is generated on a per minute basis
when a Sprint PCS subscriber outside of our markets uses our service when
traveling through our markets. Foreign roaming revenue is generated when a
non-Sprint PCS customer uses our service when traveling through our markets.
24
Under our agreements with Sprint PCS, we believe that Sprint PCS can change the
travel rate within certain limitations that we receive and pay for each Sprint
PCS travel minute after December 31, 2002. Effective January 1, 2003, Sprint PCS
reduced the reciprocal travel rate for Louisiana Unwired from $0.20 per minute
in 2002 to $0.058 per minute in 2003 and for Texas Unwired and Georgia PCS
Management Inc. ("Georgia PCS"), both subsidiaries of LA Unwired, and IWO from
$0.10 per minute in 2002 to $0.058 per minute in 2003. While we believe that
this reduction is not in accordance with our management agreements with Sprint
PCS, we are reviewing our options, but our recourses against Sprint PCS for this
reduction may be limited. Currently the fees that we receive from Sprint PCS for
Sprint PCS's subscribers using our network exceeds those that we pay to Sprint
PCS for our subscribers using Sprint PCS's network. For the three-month period
ended March 31, 2003, the change in the travel rate has resulted in
approximately a $29.6 million decrease to our revenues, a $23.5 million decrease
to our expenses and a $6.1 decrease to our net travel position, which is the
difference between travel revenue and travel expense, increased our net loss by
$6.1 million and decreased our cash flow from operations by $6.1 million.
Average Revenue per User
Average revenue per user ("ARPU") is the average monthly service revenue per
user (subscriber) and is calculated by dividing total subscriber revenue for the
period by the average number of subscribers during the period. ARPU not
including roaming was $53.68 for the three-month period ended March 31, 2003 as
compared to $59.10 for the three-month period ended March 31, 2002. The decrease
was primarily due to a decrease in charges for minutes over plan caused by the
increase in the number of minutes that are included in basic service plans.
Churn
Churn is the monthly rate of customer turnover expressed as a percentage of our
overall average customers for the reporting period. Customer turnover includes
both customers that elected voluntarily to not continue using our service and
customers that were involuntarily terminated from using our service because of
non-payment. Churn is calculated by dividing the sum of (i) the number of
customers that discontinue service; (ii) less those customers discontinuing
their service within 30 days of their original activation date; and, (iii)
adding back those customers that reactivate their service, by our overall
average customers for the reporting period. Churn was unchanged at 3.7% for the
three-month periods ended March 31, 2003 and March 31, 2002.
Cost per Gross Addition
Cost per gross addition ("CPGA") summarizes the average cost to acquire all
customers during the reporting period. CPGA is computed by adding selling and
marketing expenses, cost of equipment and activation costs and reducing the
amount by the revenue from handset and accessory sales. The net amount is
divided by the number of total new subscribers added for the period. CPGA was
$297 for the three-month period ended March 31, 2003 as compared to $336 for the
three-month period ended March 31, 2002. The decrease in CPGA was primarily due
to a decrease in commissions and handset subsidies.
Revenues
Three-month period ended March 31,
2003 2002
--------- ---------
(In thousands)
Subscriber revenues $ 94,273 $ 56,115
Roaming revenues 27,491 30,743
Merchandise sales 6,370 4,287
Other revenues 613 925
--------- ---------
Total revenues $ 128,747 $ 92,070
========= =========
25
Subscriber revenues
Total subscriber revenues were $94.3 million for the three-month period ended
March 31, 2003 as compared to $56.1 million for the three-month period ended
March 31, 2002, representing an increase of $38.2 million and was primarily the
result of an increase in subscribers as discussed in Subscriber Additions above.
Roaming revenues
Roaming revenues were $27.5 million for the three-month period ended March 31,
2003 as compared to $30.7 million for the three-month period ended March 31,
2002, representing a decrease of $3.2 million and was primarily the result of
our April 1, 2002 acquisition of IWO that added $7.1 million in roaming revenue,
an increase of $12.4 million related to a higher volume of PCS subscribers
traveling though our service area and an increase of $2.6 million related to
non-Sprint PCS subscribers traveling through our service area offset by a
decrease of $25.3 million related to our decrease in the reciprocal roaming rate
as discussed in Subscriber and Roaming Revenue above. We provided service in 68
PCS markets at March 31, 2003 as compared to 49 PCS markets at March 31, 2002.
We continue to add cell sites in locations that we believe will enhance service
and increase roaming revenue.
Merchandise sales
Merchandise sales were $6.4 million for the three-month period ended March 31,
2003 as compared to $4.3 million for the three-month period ended March 31,
2002, representing an increase of $2.1 million of which $1.8 million related to
our IWO acquisition. The cost of handsets typically exceeds the amount received
from our subscribers because we subsidize the price of handsets to remain
competitive in the marketplace.
Other revenues
Other revenues were $.6 million for the three-month period ended March 31, 2003
as compared to $.9 million for the three-month period ended March 31, 2002,
representing a decrease of $.3 million and was primarily attributable to a
decrease in management services provided to related companies and a decrease in
interconnect revenues.
Operating Expenses
Three-month period ended March 31,
2003 2002
---------- ----------
(In thousands)
Cost of service $ 51,846 $ 39,975
Merchandise cost of sales 9,490 7,990
General & administrative 35,277 25,969
Sales & marketing 25,546 21,544
Non-cash stock compensation 1,067 1,166
Depreciation & amortization 30,161 14,185
IWO asset abandonment charge 12,403 ---
---------- ----------
Total operating expenses $ 165,790 $ 110,829
========== ==========
Cost of service
Cost of service was $51.8 million for the three-month period ended March 31,
2003 as compared to $40.0 million for the three-month period ended March 31,
2002, representing an increase of $11.8 million, that was primarily related to
our April 1, 2002 acquisition of IWO that added $17.5 million in cost of service
and a $1.5 million increase in new cell site lease expenses and escalators of
existing leases, offset by an $8.0 million decrease in roaming expense. The
overall decrease in roaming expense consisted of an
26
increase of $10.5 million related to a higher volume of our subscribers
traveling though other Sprint PCS and Sprint PCS affiliate service areas and an
increase of $1.3 million related to our subscribers using non-Sprint PCS service
area, offset by a decrease of $19.8 million related to our decrease in the
roaming revenue rate as discussed in Subscriber and Roaming Revenue above.
Merchandise cost of sales
Merchandise cost of sales was $9.5 million for the three-month period ended
March 31, 2003 as compared to $8.0 million for the three-month period ended
March 31, 2002, representing an increase of $1.5 million and primarily related
to our April 1, 2002 acquisition of IWO that added $1.8 million of merchandise
cost of sales. The cost of handsets typically exceeds the amount received from
our subscribers because we subsidize the price of handsets to remain competitive
in the marketplace. This subsidy continues to increase to remain competitive.
General and administrative expenses
General and administrative expenses were $35.3 million for the three-month
period ended March 31, 2003 as compared to $26.0 million for the three-month
period ended March 31, 2002, representing an increase of $9.3 million that was
primarily related to our April 1, 2002 acquisition of IWO that added $13.0
million of general and administrative expense in the three-month period ended
March 31, 2003 offset by a $3.7 million decrease in bad debt expense.
Sales and marketing expenses
Sales and marketing expenses were $25.5 million for the three-month period ended
March 31, 2003 as compared to $21.5 million for the three-month period ended
March 31, 2002, representing an increase of $4.0 million that primarily related
to our April 1, 2002 acquisition of IWO that added $8.5 million of selling and
marketing expense in the three-month period ended March 31, 2003 offset by
decreases in advertising of $1.3 million, agent commissions of $1.9 million and
handset subsidies of $1.7 million. We have revised our local agent commission
structure and no longer offer handset discounts to our local agents but instead
pay higher commissions for subscribers with good credit ratings.
Non-cash stock compensation
Non-cash compensation was $1.1 million for the three-month period ended March
31, 2003 as compared to $1.2 million for the three-month period ended March 31,
2002, representing a decrease of $0.1 million. The non-cash stock compensation
consists of compensation expense related to the granting of certain stock
options for the Company's stock in July 1999 and January 2000 with exercise
prices less than the market value of the Company's stock at the date of the
grant and the impact of the stock options granted in connection with the IWO
acquisition. The non-cash stock compensation expense is generally being
amortized over a four-year period representing the vesting periods of the
options.
Depreciation and amortization expense
Depreciation and amortization expense was $30.2 million for the three-month
period ended March 31, 2003 as compared to $14.2 million for the three-month
period ended March 31, 2002, representing an increase of $16.0 million. Net
property and equipment increased to $463.1 million at March 31, 2003, which
includes $184.7 million from our April 1, 2002 acquisition of IWO, from $286.6
million at March 31, 2002. Our April 1, 2002 acquisition of IWO added $5.9
million of depreciation and $7.5 million of amortization expense related to the
Sprint management agreement and subscriber base in the three-month period ended
March 31, 2003. The remaining $2.6 million related to increased depreciation
related to capital asset additions at LA Unwired and amortization related to the
Sprint management agreement and subscriber base of our March 8, 2002 acquisition
of Georgia PCS.
27
IWO asset abandonment charge
As discussed in Liquidity above, we recorded a $12.4 million write off of
construction in progress and related lease expense due to abandoned cell site
construction at IWO.
Other Income/(Expense)
Three-month period ended March 31,
2003 2002
--------- ----------
(In thousands)
Interest expense $ (21,313) $ (10,512)
Interest income 623 405
Gain on sale of assets 81 ---
-- ---
---------- ----------
Total other expense $ (20,609) $ (10,107)
========== ==========
Interest expense was $21.3 million for the three-month period ended March 31,
2003 as compared to $10.5 million for the three-month period ended March 31,
2002, representing an increase of $10.8 million. The increase in interest
expense resulted from the increase in outstanding debt. Our outstanding debt,
including current maturities, was $777.7 million at March 31, 2003, which
includes $350.6 million from our April 1, 2002 acquisition of IWO, as compared
to $388.2 million at March 31, 2002.
Interest income was $.6 million for the three-month period ended March 31, 2003
as compared to $.4 million for the three-month period ended March 31, 2002,
representing an increase of $.2 million. The increase was primarily due more
cash and cash equivalents available for investment.
Gain on sale of assets was $81,000 for the three-month period ended March 31
2003 as compared to $0 for the three-month period ended March 31, 2002. The
three-month period ended March 31, 2003 gain relates to a real estate sale.
Seasonality
Like the wireless communications industry in general, there is an increase in
subscriber additions in the fourth quarter due to the holiday season. A greater
number of phones sold at holiday promotional prices causes our losses on
merchandise sales to increase. Our sales and marketing expenses increase also
with holiday promotional activities. We generally have the weakest demand for
new wireless services during the summer. We expect these trends to continue
based on historical operating results.
Item 4. Controls and Procedures
In March 2003, an evaluation was performed under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as the evaluation date. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation date.
Part II
Item 5. Other Information
OUR SECURITY HOLDERS AND PERSONS WHO ARE CONSIDERING AN INVESTMENT IN OUR
SECURITIES SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, IN ADDITION TO THE
FACTORS DESCRIBED ELSEWHERE.
The risk factors described below are qualified and supplemented in their
entirety by the discussions in Note 3 to the condensed consolidated financial
statements included herein and in Item 2 (Management's
28
Discussion and Analysis of Financial Condition and Results of Operations) under
the captions "Overview" and "Liquidity." These items contain important
disclosures related to our and IWO Holdings, Inc.'s current liquidity, debt,
relationship with Sprint PCS and constraints on our business in the current
environment. An adequate understanding of near term risks facing us requires
consideration of the referenced discussions.
Introduction
In this section, "we" and "our" and the noun "combined company" refer
collectively to US Unwired and all of its subsidiaries. We use "US Unwired" to
refer just to our parent company without reference to its subsidiaries. "LA
Unwired" refers collectively to our subsidiaries Louisiana Unwired, LLC, Texas
Unwired general partnership, and Georgia PCS Management, L.L.C., unless the
context of the reference indicates otherwise.
An extremely brief overview introduces each of the subsections below. We think
the overview captures the gist of the subsection, but it is not a substitute for
reading the entire subsection.
Risks Related to Our Stock Price
Overview of this subsection:
Overview of this subsection: Our stock price has not been stable. Many
additional shares have become freely tradable in the public market. This may
cause our stock price to continue to fall. Our common stock was delisted from
the Nasdaq National Market effective May 8, 2003 and since then it has been
traded on the Nasdaq Over the Counter ("OTC") Bulletin Board.
The stock price of US Unwired may continue to be volatile.
The market price of our common stock could be subject to wide fluctuations in
response to factors such as the following, some of which are beyond our control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities
analysts and investors;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
. changes in our relationship and that of other Sprint PCS affiliates
with Sprint PCS;
. announcements by Sprint PCS or Sprint PCS affiliates concerning
developments or changes in its business, financial condition or
results of operations, or in its expectations as to future financial
performance;
. actual or potential defaults in bank covenants by Sprint PCS or Sprint
PCS affiliates, which may result in a perception that we are unable to
comply with our bank covenants;
. announcements of technological innovations or new products and
services by Sprint PCS or our competitors;
. changes in results of operations, market valuations and investor
perceptions of Sprint PCS, Sprint PCS affiliates or of other companies
in the telecommunications industry in general and the wireless
industry in particular, including our competitors;
. departures of key personnel;
. changes in laws and regulations;
. significant claims or lawsuits;
29
. the large number of US Unwired shares that can freely be sold in the
public market, as described under the following italicized heading;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
. general economic and competitive conditions.
The number of shares of our common stock that is freely tradable in the public
market increased substantially after November 22, 2002. Sales of unusually large
numbers of shares of our common stock in the public market, or the perception
that such sales could occur, could further depress our stock price.
We issued approximately 44,400,000 additional shares of our common stock when we
acquired Georgia PCS and IWO in March and April 2002 through two mergers, and we
agreed to issue about another 6,900,000 shares upon the exercise of warrants and
options that we assumed from IWO. Before November 22, 2002, most of these shares
were not freely tradable in the public market because of the combined effect of
restrictions under federal securities laws and of agreements, called lock up
agreements that we obtained from the holders not to sell shares before specified
dates. The restrictions imposed by federal securities laws on sales of these
shares terminated on November 22, 2002, which was the effective date of the
registration statement that we were required to file to register certain of
those shares for resale. On March 28, 2003, all remaining shares that were then
still subject to the lock up agreements, equal to about 1,080,000, shares became
freely tradable.
The market price of our common stock could be depressed if the holders of shares