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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000 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: 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121-2779
(Address of Principal Executive Offices) (Zip Code)
(858) 882-6000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(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 twelve 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 ninety days. Yes [X] No [_]
The number of shares of registrant's common stock outstanding on November
9, 2000 was 27,074,339.
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This amendment is being filed to correct the following information contained
in the Form 10-Q filed by Leap Wireless International, Inc. (the "Company") on
November 14, 2000:
1. Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
a. The Company has deleted certain numbers erroneously included in the
second sentence of the second paragraph on page 26 of the original filing,
a comparative sentence relating to the financial effects directly resulting
from the consolidation of Smartcom for the three and nine month periods
ended September 30, 1999. The sentence has been revised to reflect the
correct historical amounts for both the three and nine month periods ended
September 30, 1999, which were the same for both periods.
b. The Company has revised one number to correct for a rounding error in
the second sentence of the third paragraph on page 26 of the original
filing, relating to revenues generated during the month ended June 30,
2000, changing $1.9 million to $2.0 million.
2. Item 3. Quantitative and Qualitative Disclosure About Market Risk. The
Company has corrected the date referred to in the introductory clause to the
fourth sentence in the paragraph under the heading "Foreign Exchange Market
Risk," relating to accrued taxes payable to the Chilean government. The
sentence which previously began with "As of May 31, 2000," has been changed to
read "As of September 30, 2000." The $30.2 million amount previously reported
is correct as of September 30, 2000.
All other information contained in the Form 10-Q filed on November 14, 2000
remains the same.
Item 2. Management Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Transition Report on Form 10-K
for the transition period from September 1, 1999 to December 31, 1999, filed
with the Securities and Exchange Commission on October 30, 2000.
Except for the historical information contained herein, this document
contains forward-looking statements reflecting management's current forecast of
certain aspects of Leap's future. Some forward-looking statements can be
identified by forward-looking words such as "believe," "may," "could," "will,"
"estimate," "continue," "anticipate," "intend," "seek," "plan," "expect,"
"should," "would" and similar expressions in the report. It is based on current
information, which we have assessed but which by its nature is dynamic and
subject to rapid and even abrupt changes. Our actual results could differ
materially from those stated or implied by such forward-looking statements due
to risks and uncertainties associated with our business. Factors that could
cause actual results to differ include, but are not limited to: changes in the
economic conditions of the various markets the operating companies serve which
could adversely affect the market for wireless services; the ability of Leap or
its operating companies to access capital markets; the delayed build-out of the
systems; Leap's ability to roll out networks in accordance with its plans;
failure of the systems to perform according to expectations; the effect of
competition; the acceptance of the product offering by our target customers;
our ability to retain customers; our ability to maintain our cost, market
penetration and pricing structure in the face of competition; uncertainties
relating to negotiating and executing definitive agreements and the closing of
transactions described in this report; rulings by courts or the FCC adversely
affecting our rights to own and/or operate certain wireless licenses; as well
as other factors detailed in our SEC filings. The forward looking statements
should be considered in the context of these and other risk factors detailed in
the Company's Transition Report on Form 10-K for the transition period from
September 1, 1999 to December 31, 1999, filed with the Securities and Exchange
Commission on October 30, 2000, under the heading "Risk Factors." Investors and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. We disclaim any obligation to update the forward-
looking statements contained herein to reflect future events or developments.
As used in this report, the terms "we," "our" or "us" refer to Leap Wireless
International, Inc. and its subsidiaries unless the context suggests otherwise.
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Overview
Leap is a wireless communications carrier with an innovative approach to
providing digital wireless service that is designed to appeal to the mass
market. We intend to transform wireless into a mass consumer product by
deploying customer-oriented, low-cost, simple wireless services. We generally
seek to address a much broader population segment than incumbent wireless
operators have addressed to date. In the United States, we are employing an
innovative business strategy to extend the benefits of mobility to the mass
market by offering digital wireless service under the brand name Cricket that
is as simple as, and priced at rates competitive with, traditional landline
service. Chase Telecommunications, Inc., a company we acquired in March 2000,
introduced Cricket service in Chattanooga and Nashville, Tennessee in March
1999 and January 2000, respectively. Cricket service is operated by Cricket
Communications, Inc., a wholly-owned subsidiary of Leap held through Cricket
Communications Holdings. Cricket Communications introduced Cricket service in
Knoxville, Tennessee in October 2000. To expand the Cricket service, we
currently have acquired or agreed to acquire wireless licenses covering
approximately 47.5 million potential customers.
Internationally, we are currently a minority shareholder and actively
involved on the board of Pegaso Telecomunicaciones, a company that is involved
in developing and operating a nationwide digital wireless system in Mexico.
While our current emphasis is on our U.S.-based operations, we plan to focus
our international efforts in markets primarily in the Americas where we believe
the combination of unfulfilled demand and our attractive wireless service
offerings will fuel rapid growth. In Mexico, we were a founding shareholder and
have invested $100 million in Pegaso, a joint venture with Grupo Pegaso. We
currently own 20.1% of Pegaso, which is deploying and operating the first 100%
digital wireless communications network in Mexico. Pegaso holds wireless
licenses generally in the 1900 MHz band to provide nationwide service covering
all of Mexico, with approximately 99 million potential customers.
On June 2, 2000, we completed the sale of our Chilean operating subsidiary,
Smartcom, S.A., to Endesa, S.A., a Spanish utility company. Under the terms of
our agreement with Endesa, Endesa purchased all of the outstanding capital
stock of Smartcom from our subsidiary, Inversiones Leap Wireless Chile, S.A.,
and its designated shareholder nominee (who held one share of the Series A
preferred stock of Smartcom in order to comply with Chilean law which requires
two shareholders for each Chilean sociedad anonima), in exchange for gross
consideration of approximately $381.5 million, consisting of cash, three
promissory notes, the repayment of intercompany debt due to Leap by Smartcom,
and the release of cash collateral. One of the promissory notes is subject to a
one year right of set-off to secure the indemnification obligations of Leap and
Inversiones under the share purchase agreement between the parties. Another of
the promissory notes is subject to adjustment based upon an audit of the
closing balance sheet of Smartcom completed following the closing of the
agreement. In addition, the sale of the Smartcom shares resulted in the removal
of approximately $191.4 million of Smartcom liabilities from our consolidated
balance sheet. We recognized a gain on sale of Smartcom of $313.4 million
before related income tax effects of $34.5 million.
Smartcom holds a nationwide wireless license in the 1900 MHz band and
operates a nationwide digital wireless system in Chile. In April 1999, we
acquired the remaining 50% of Smartcom that we did not already own.
Subsequently, we recruited a new management team, upgraded the network
capabilities and, in November 1999, re-launched service under a new brand name,
SMARTCOM PCS. Smartcom's network is the only CDMA-based network in Chile.
In June 2000, through a subsidiary merger, we acquired the 5.11% of Cricket
Communications Holdings that we did not already own. These shares were owned by
individuals and entities, including directors and employees of Leap and Cricket
Communications Holdings. Under the terms of the merger, each issued and
outstanding share of Cricket Communications Holdings common stock not held by
Leap was converted into the right to receive 0.315 of a fully paid and non-
assessable share of our common stock. As a result, an aggregate of 1,048,635
shares of our common stock were issued. We also assumed Chase
Telecommunications Holdings' warrant to purchase 1% of the common stock of
Cricket Communications Holdings, which was converted into a warrant to acquire
202,566 shares of our common stock, at an aggregate exercise price of $1.0
million. The aggregate fair value of the shares issued and warrant assumed in
excess of the carrying value of the minority interest of $29.2 million was
allocated to goodwill. In addition, we assumed all unexpired and unexercised
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Cricket Communications Holdings stock options outstanding at the time of the
merger, whether vested or unvested, which upon conversion amounted to options
to purchase 407,784 shares of our common stock.
We are in the early stages of launching our networks and our financial
results continue to reflect the considerable investment associated with
completion of our network build-outs and the initial launch of commercial
service in new markets. As we continue to expand our operations, our net
operating losses and our proportionate share of the losses in our
unconsolidated wireless operating companies are expected to grow.
The term "operating company" refers to Cricket Communications, Chase
Telecommunications, Smartcom and Pegaso.
Recent or Pending Acquisitions
Chase Telecommunications. In March 2000, we completed the acquisition of
substantially all of the assets of Chase Telecommunications Holdings, including
wireless licenses. The purchase price included $6.3 million in cash, the
assumption of principal amounts of liabilities that totaled $138.0 million
(with a fair value of approximately $131.3 million), a warrant to purchase 1%
of the common stock of Cricket Communications Holdings (which has been
converted into a warrant to acquire 202,566 shares of Leap common stock) at an
exercise price of $1.0 million (which had a fair value of approximately $15.3
million at the acquisition date determined using the Black Scholes option
pricing model), and contingent earn-out payments of up to $41.0 million (plus
certain expenses) based on the earnings of the business acquired during the
fifth full year following the closing of the acquisition. The liabilities
assumed included $78.8 million in principal amounts owed to the FCC associated
with the wireless licenses that bear interest at the rate of 7.0% per annum and
must be repaid in quarterly installments of principal and interest through
January 2007. Therefore, under the purchase method of accounting, the total
estimated fair value of the acquisition was $152.9 million, of which $43.2
million has been allocated to property and equipment and other assets and
$109.7 million has been allocated to intangible assets. Intangible assets
consist primarily of wireless licenses that are to be amortized over their
estimated useful lives of 40 years upon commencement of commercial service.
Wireless licenses. We acquired 36 licenses in the federal government's 1999
reauction of broadband PCS spectrum licenses for $18.7 million in cash. From
January through November 2000, we completed the purchase of several additional
licenses in the United States from various third parties for an aggregate of
$43.7 million in cash, 333,450 shares of our common stock that had an aggregate
fair value at the time of purchase of $18.7 million and the assumption of $12.4
million in debt owed to the FCC related to the licenses. In November 2000, we
entered into an agreement with CenturyTel, Inc. to purchase wireless licenses
in various markets in exchange for $118.7 million in cash and promissory notes
in the aggregate face amount of $86.5 million payable with interest at the rate
of 10% per annum in quarterly installments with $48.0 million due in the first
quarter and the final payment due one year after close. In addition, from
January through November 2000, we entered into agreements with third parties to
purchase additional licenses in exchange for cash, shares of our common stock
and the assumption of FCC debt with an aggregate estimated fair value of $179.2
million as of November 13, 2000, subject to certain adjustments based upon
changes in the market value of wireless licenses. Each of the pending
agreements is subject to customary closing conditions, including FCC approval,
but no assurance can be given that they will be closed on schedule or at all.
In July 1999, the FCC issued an opinion and order that found that we were
qualified to acquire C-Block and F-Block licenses. The order also approved our
acquisition of the 36 C-Block licenses for which we were the high bidder in the
FCC's 1999 spectrum reauction, and approved the transfer to Leap of three F-
Block licenses covering portions of North Carolina, in each case subject to the
fulfillment of some conditions. In October 1999, the FCC issued the 36 licenses
we acquired in the reauction.
The FCC's grants of our C-Block and F-Block licenses are subject to certain
conditions. Each of the conditions imposed by the FCC in the opinion and order
has been satisfied. We have a continuing obligation, during the designated
entity holding period for our C-Block and F-Block licenses, to limit our debt
to Qualcomm to 50% or less of our outstanding debt and to ensure that persons
who are or were previously officers or directors of Qualcomm do not comprise a
majority of our board of directors or a majority of our
4
officers. If we fail to continue to meet any of the conditions imposed by the
FCC or otherwise fail to maintain our qualification to own C-Block and F-Block
licenses, that failure could have a material adverse effect on our financial
condition and business prospects.
Various parties previously challenged our qualification to hold C-Block and
F- Block licenses, which challenges were rejected in the FCC's July 1999
order. One of these parties, a wireless operating company, requested that the
FCC review its order, as well as the order consenting to the transfer of
licenses to us from Chase Telecommunications and PCS Devco. That wireless
operating company also has opposed all of our pending assignment or transfer
applications at the FCC. In July 2000, the FCC affirmed its July 1999 order as
well as the order consenting to the transfer of licenses to us from Chase
Telecommunications and PCS Devco, and the wireless operating company
subsequently appealed the FCC's decision to the Court of Appeal for the D.C.
Circuit, which appeal is currently pending. In addition, Nextel
Communications, Inc. has opposed one of our pending FCC applications, alleging
that we may no longer be compliant with C- and F-Block "total asset"
eligibility requirements. Further judicial review of the FCC's orders granting
us licenses is possible. In addition, licenses awarded to us at auction may be
subject to the outcome of pending judicial proceedings by parties challenging
the auction process or the FCC's decision or authority to auction or reauction
certain C- or F-Block licenses. We may also be affected by other pending or
future FCC, legislative or judicial proceedings that generally affect the
rules governing C- and F-Block licenses or other designated entities. For
example, recent FCC rules changes have made it easier for large companies to
acquire C- and F-Block licenses at auction and in the aftermarket.
We may not prevail in connection with any such appeals or proceedings and
we may not remain qualified to hold C-Block or F-Block licenses. If the FCC
determines that we are not qualified to hold C-Block or F-Block licenses, it
could take the position that all of our licenses should be divested, cancelled
or reauctioned.
Presentation
In April 1999, we increased our ownership interest in Smartcom from 50% to
100%. As a result of the reporting lag we have adopted for our foreign
operating companies, we began fully consolidating Smartcom's results of
operations in June 1999, the beginning of the fourth quarter of the year ended
August 31, 1999. Before that, we accounted for our investment in Smartcom
under the equity method of accounting. On June 2, 2000, we sold all of the
outstanding shares of Smartcom to Endesa. The results of operations of
Smartcom for April and May 2000 have been reflected in accumulated deficit
during the interim period ended September 30, 2000. We account for our
interest in Pegaso under the equity method of accounting. We currently own
20.1% of Pegaso.
On July 31, 2000, our Board of Directors elected to change Leap's fiscal
year from a year ending on August 31 to a year ending on December 31. The
first new twelve-month fiscal year will end on December 31, 2000. As a result
of the change in year-end, we were required to issue interim financial
statements for the three and nine months ended September 30, 2000. Since our
previous interim financial statements were as of May 31, 2000, we are also
required to issue interim financial statements for the month of June 2000. To
accommodate the different fiscal periods of Leap and its foreign operating
companies, we have recognized our share of net earnings or losses of such
foreign companies on a two-month lag. In conjunction with Leap's change in
fiscal year end, this lag was extended to three months.
Results of Operations
Month Ended June 30, 2000 and Three and Nine Months Ended September 30, 2000
Compared to Month Ended June 30, 1999 and Three and Nine Months Ended
September 30, 1999
We incurred net income (loss) of $256.5 million, $(54.1) million and $103.4
million, respectively, during the month ended June 30, 2000 and the three and
nine month periods ended September 30, 2000, respectively, compared to a net
loss of $12.8 million, $72.2 million and $144.5 million, respectively, in the
corresponding
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periods of the prior year. Excluding the gain on sale of Smartcom net of
related taxes and foreign currency impact, our net loss for the month ended
June 30, 2000 and the nine months ended September 30, 2000 would have been
$23.4 million and $177.8 million, respectively. The increase in net loss for
the month ended June 30, 2000 and the nine months ended September 30, 2000 over
the corresponding periods of the prior year (excluding a gain on issuance of
stock by Pegaso of $32.6 million in the nine months ended September 30, 2000)
relates primarily to increased operating expenses associated with the
consolidation of Smartcom, the development of new markets, the launch of
network service in new markets and interest expense on senior notes and senior
discount notes issued in February 2000. Cricket wireless service was launched
in Nashville, Tennessee in late January 2000 and in Knoxville, Tennesse in late
October 2000. The decrease in net loss for the three months ended September 30,
2000 over the corresponding period of the prior year is due to Smartcom no
longer being consolidated in the current three month period. As a result, total
subscribers on our networks reached approximately 422,500 subscribers at
September 30, 2000 (62,500 in the U.S. and 360,000 in Mexico), compared to a
total subscriber base, excluding Smartcom, of approximately 2,600 subscribers
at December 31, 1999.
As a direct result of the consolidation of Smartcom, we recorded $21.6
million of additional operating revenues, $28.7 million of additional cost of
operating revenues, $16.0 million of additional selling, general and
administrative expenses, $15.0 million of additional depreciation and
amortization, $9.7 million of additional net interest expense, and $10.7
million of foreign currency transaction gains during the nine month period
ended September 30, 2000. As a direct result of the consolidation of Smartcom,
we recorded $3.8 million of additional operating revenues, $3.8 million of
additional cost of operating revenues, $4.5 million of additional selling,
general and administrative expenses, $5.3 million of additional depreciation
and amortization, $3.3 million of additional net interest expense, and $7.2
million of foreign currency transaction losses during the three and nine month
periods ended September 30, 1999. Smartcom was not consolidated in the months
ended June 30, 2000 and 1999 and the three months ended September 30, 2000.
Prior to March 2000, we did not report any operating revenues from any other
operating company because all of these operating companies were accounted for
under the equity method of accounting. We generated $2.0 million, $7.5 million
and $14.4 million in revenues during the month ended June 30, 2000 and the
three and nine month periods ended September 30, 2000 from our operations in
Chattanooga and Nashville, Tennessee.
We incurred $15.4 million, $19.2 million and $73.2 million of selling,
general and administrative expenses during the month ended June 30, 2000 and
the three and nine month periods ended September 30, 2000, respectively,
compared to $1.7 million, $14.8 million and $25.5 million in the corresponding
periods of the prior year. Excluding Smartcom, selling, general and
administrative expenses increased by $13.7 million, $4.4 million and $31.7
million, respectively, over the corresponding month ended June 30, 1999 and the
three and nine month periods ended September 30, 1999 due primarily to
increased expenses associated with the development of new markets in the United
States and the launch of network service in Nashville and Knoxville, Tennessee.
In addition, we incurred stock-based compensation expense of $10.2 million,
$2.0 million and $12.2 million in the month ended June 30, 2000 and the three
and nine month periods ended September 30, 2000, respectively. We expect that
selling, general and administrative expenses will continue to increase in the
future as a result of our planned network development and launch of Cricket
service in multiple U.S. markets.
We incurred operating losses of $16.4 million, $25.6 million and $99.5
million during the month ended June 30, 2000 and the three and nine month
periods ended September 30, 2000, respectively, compared to operating losses of
$1.7 million, $20.1 million and $31.1 million in the corresponding periods of
the prior year. Excluding Smartcom, increases over the corresponding periods of
the prior year primarily reflect the consolidation of Chase Telecommunications
from March 2000 and the increase in market development costs in the United
States. We expect substantial growth in subscribers, operating revenues and
operating expenses as a result of the planned development and launch of Cricket
service in multiple U.S. markets. We also expect substantial growth in Pegaso's
subscribers, operating revenues and operating expenses; however, because Pegaso
is accounted for under the equity method, its operating revenues and expenses
are not consolidated.
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Equity in net loss of unconsolidated wireless operating companies was $2.7
million, $25.2 million and $72.0 million during the month ended June 30, 2000
and the three and nine month periods ended September 30, 2000, respectively,
compared to $9.3 million, $24.2 million and $83.2 million in the corresponding
periods of the prior year. During the first nine months of the current year,
our equity share in the net loss of our unconsolidated wireless operating
companies related to Pegaso and Chase Telecommunications prior to March 2000.
During the corresponding period of fiscal 1999, our equity share in the net
loss of our unconsolidated wireless operating companies also included Smartcom
prior to June 1999 (prior to Leap's acquisition of the remaining 50 percent
interest) and our Russian investments which were largely written-down or
liquidated by September 30, 1999.
Interest income was $6.0 million, $16.9 million and $33.9 million during the
month ended June 30, 2000 and the three and nine month periods ended September
30, 2000, respectively, compared to $0.1 million, $0.4 million and $2.1 million
in the corresponding periods of the prior year. The increase in interest income
related to increased balances of our cash and cash equivalents and investments,
received from our equity offering and units offering in February 2000, and
notes receivable related to the sale of Smartcom in June 2000.
Interest expense was $9.7 million, $28.4 million and $80.9 million during
the month ended June 30, 2000 and the three and nine month periods ended
September 30, 2000, respectively, compared to $1.0 million, $6.4 million and
$10.3 million in the corresponding periods of the prior year. Interest expense
related primarily to senior notes and senior discount notes issued in February
2000, borrowings under our credit agreement with Qualcomm prior to repayment of
the facility in February 2000 and financing of our wireless communications
networks in the United States and Chile. We expect interest expense to increase
substantially in the future due to our senior notes and senior discount notes
borrowings and expected additional borrowings used to fund the construction of
wireless networks in various markets across the United States.
Income taxes of $34.5 million for the month ended June 30, 2000 and the nine
months ended September 30, 2000 related to our sale of Smartcom in June 2000.
Foreign currency transaction gains (losses) primarily consisted of $10.8
million in gains during the nine month period ended September 30, 2000, and
$7.2 million in losses during the three and nine months ended September 30,
1999 and reflected unrealized foreign exchange gains recognized by Smartcom on
U.S. dollar denominated loans as a result of changes in the exchange rate
between the U.S. dollar and the Chilean peso.
Included in the nine month period ended September 30, 2000, in connection
with the repayment of the Qualcomm Credit Agreement in February 2000, we wrote-
off and reported as an extraordinary loss $4.4 million in related unamortized
debt issuance costs.
Liquidity and Capital Resources
General
Over the next twelve months from November 2000, we have budgeted a total of
approximately $1,569.9 million for the following capital requirements:
. approximately $1,233.0 million for capital expenditures for the build-
out of Cricket networks and to fund operating losses;
. approximately $324.9 million in connection with our pending acquisitions
of wireless licenses; and
. approximately $12.0 million for general corporate overhead and other
expenses.
Our actual expenditures may vary significantly depending upon whether we
purchase additional wireless licenses, the progress of the build-out of our
networks and other factors, including unforeseen delays, cost overruns,
unanticipated expenses, regulatory expenses, engineering design changes and
other technological risks.
7
As of September 30, 2000, we had a total of approximately $2,423.6 million
in unused capital resources for our future cash needs as follows:
. approximately $740.9 million in consolidated cash, cash equivalents and
investments on hand;
. notes receivable of $146.5 million from the sale of Smartcom; and
. approximately $1,536.2 million in commitments under vendor financing
arrangements with Lucent Technologies, Nortel and Ericsson, with
availability based on a ratio of the total amounts of products and
services purchased.
Accordingly, we believe that if we do not make any additional license
acquisitions or any investments in new ventures, we have adequate capital
resources to fund our operations for the next twelve months.
We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities in the future while we continue to
build-out our networks and build our customer base. Our ability to satisfy our
debt repayment obligations and covenants depends upon our future performance,
which is subject to a number of factors, many of which are beyond our control.
We cannot guarantee that we will generate sufficient cash flow from our
operating activities to meet our debt service and working capital requirements,
and we may need to refinance our indebtedness. However, our ability to
refinance our indebtedness will depend on, among other things, our financial
condition, the state of the public and private debt and equity markets, the
restrictions in the instruments governing our indebtedness and other factors,
some of which may be beyond our control. In addition, if we do not generate
sufficient cash flow to meet our debt service requirements or if we fail to
comply with the covenants governing our indebtedness, we may need additional
financing in order to service or extinguish our indebtedness. We may not be
able to obtain financing or refinancing on terms that are acceptable to us, or
at all.
We expect that we will require significant additional financing over the
next several years to substantially complete the build-out of our planned
wireless networks in the U.S., the planned acquisition of additional licenses
and the build-out of markets related to additional licenses. These capital
requirements include license acquisition costs, capital expenditures for
network construction, operating cash flow losses and other working capital
costs, debt service and closing fees and expenses. As is typical for start-up
telecommunications networks, we expect our networks to incur operating expenses
significantly in excess of revenues in their early years of operations. We are
exploring other public and private debt and equity financing alternatives,
including the sale from time to time of convertible preferred stock,
convertible debentures and other debt and equity securities. However, we may
not be able to raise additional capital on terms that are acceptable to us, or
at all.
We have no direct obligation to fund the operations of Pegaso, our venture
in Mexico, and expect Pegaso to be funded independently. Although Pegaso has
raised or obtained commitments for debt and equity capital in excess of $1.2
billion, Pegaso will need to obtain substantial additional capital to complete
the build-out, launch and operation of its planned networks. As a result,
Pegaso is seeking additional debt and equity financing, including additional
vendor financing.
In February 2000, we completed a public equity offering of 4,000,000 shares
of common stock at a price of $88.00 per share. Net of underwriters' discounts
and commissions and other offering expenses, we received $82.72 per share, or
$330.0 million in the aggregate. A portion of the net proceeds from the equity
offering was used for the repayment of the Qualcomm credit agreement. The
remaining proceeds from the equity offering will be used for capital
expenditures, acquisitions of wireless licenses, strategic investments, sales
and marketing activities and working capital and general corporate purposes.
Credit Facilities and Other Financing Arrangements
Units Offering. In February 2000, we completed an offering of 225,000 senior
units, each senior unit consisting of one 12.5% senior note due 2010 (Senior
Note) and one warrant to purchase our common stock, and 668,000 senior discount
units, each senior discount unit consisting of one 14.5% senior discount note
due
8
2010 (Senior Discount Note) and one warrant to purchase our common stock. The
total gross proceeds from the sale of the senior units and senior discount
units were $225.0 million and $325.1 million, respectively, and $164.4 million
of the total proceeds were allocated to the fair value of the warrants,
estimated using the Black-Scholes option pricing model. In addition, we
capitalized debt issuance costs of $13.5 million, consisting of underwriting,
printing, legal and accounting fees. A portion of the net proceeds from the
units offering was used for the repayment of borrowings under the Qualcomm
credit agreement. The remaining proceeds from the units offering will be used
for capital expenditures, acquisitions of wireless licenses, strategic
investments, sales and marketing activities and working capital and general
corporate purposes.
Interest on the Senior Notes will be payable on April 15 and October 15 of
each year, beginning on April 15, 2000. We used $79.5 million of the proceeds
from the Senior Notes to purchase and pledge, for the benefit of the holders of
the Senior Notes, certain U.S. Government securities to provide for the payment
of the first seven scheduled interest payments on the Senior Notes. Each Senior
Discount Note has an initial accreted value of $486.68 and a principal amount
at maturity of $1,000. The Senior Discount Notes will not begin to accrue cash
interest until April 15, 2005. Interest on the Senior Discount Notes will be
payable on April 15 and October 15 of each year, beginning on October 15, 2005.
The Company may redeem any of the notes beginning April 15, 2005. The
initial redemption price of the Senior Notes is 106.25% of their principal
amount plus accrued interest. The initial redemption price of the Senior
Discount Notes is 107.25% of their principal amount at maturity plus accrued
interest. In addition, before April 15, 2003, the Company may redeem up to 35%
of both the Senior Notes and the Senior Discount Notes using proceeds from
certain qualified equity offerings of the Company's common stock at 112.5% of
their principal amount and 114.5% of their accreted value, respectively.
The notes rank equally with the Company's other unsecured senior
indebtedness. The notes are effectively subordinate to all of the Company's
secured indebtedness. The notes are guaranteed by the Company's domestic
subsidiary, Cricket Communications Holdings. The terms of the notes include
certain covenants that restrict the Company's ability to, among other things,
incur additional indebtedness, create liens, pay dividends, make investments,
sell assets and effect a consolidation or merger. The Company consummated an
exchange offer for the notes pursuant to an effective registration statement in
July 2000.
Each warrant included as part of the Senior Notes is initially exercisable
to purchase 5.146 shares (1,157,850 shares in aggregate) of our common stock at
an exercise price of $96.80 per share. Each warrant included as part of the
Senior Discount Notes is initially exercisable to purchase 2.503 shares
(1,672,004 shares in aggregate) of our common stock at an exercise price of
$96.80 per share. The warrants may be exercised at any time on or after
February 23, 2001 and prior to April 15, 2010. We filed a shelf registration
statement covering the resale of the warrants and related common stock issuable
upon exercise of the warrants in August 2000.
Lucent Equipment Financing. In September 1999, Cricket Communications agreed
to purchase up to $330.0 million of infrastructure products and services from
Lucent, and in June 2000, increased the value of products and services that can
be purchased under the agreement to up to $900.0 million. The purchase
agreement is subject to early termination at Cricket Communications'
convenience subject to payments for products and services purchased from
Lucent. Lucent agreed to finance these purchases plus additional working
capital under a credit facility. The credit facility originally permitted up to
$641.0 million in total borrowings which was increased to up to $1,350.0
million in June 2000, with borrowing availability generally based on a ratio of
the total amount of products and services purchased from Lucent. Lucent is not
required to make loans under the facility if the total of the loans held
directly or supported by Lucent is an amount greater than $815.0 million. The
agreement contains various covenants and conditions typical for a loan of this
type, including minimum levels of customers and covered potential customers
that must increase over time, limits on annual capital expenditures, dividend
restrictions and other financial ratio tests. Borrowings under the Lucent
credit facility accrue interest at a rate equal to LIBOR plus 3.5% to 4.25% or
a bank base rate plus 2.5% to 3.25%, in each case with the specific rate based
on the ratio of total indebtedness to EBITDA. Cricket
9
Communications must pay a commitment fee equal to 1.25% per annum on the unused
commitment under the facility, decreasing to 0.75% per annum. Principal
payments are scheduled to begin after three years with a final maturity after
eight years. Repayment is weighted to the later years of the repayment
schedule. The obligations under the Lucent credit agreement, together with the
obligations under similar facilities from Nortel Networks, Inc. and Ericsson
Wireless Communications, Inc., are secured by all of the stock of Cricket
Communications, its subsidiaries and the stock of each special purpose
subsidiary of Leap formed to hold wireless licenses used in Cricket
Communications' business, and all of their respective assets. At September 30,
2000, Cricket Communications had $212.6 million outstanding under the Lucent
credit agreement at an interest rate of 11.0%. In addition, we had amounts
payable to Lucent of $96.2 million which have been included in other long-term
liabilities at September 30, 2000.
Nortel Equipment Financing. In August 2000, Cricket Communications entered
into a three-year supply agreement with Nortel for the purchase of
infrastructure products and services. Nortel agreed to finance these purchases
plus additional working capital under a credit facility. The credit facility
permits up to $525.0 million in total borrowings, with borrowing availability
generally based on a ratio of the total amount of equipment and services
purchased from Nortel. The credit agreement contains various covenants and
conditions typical for a loan of this type, including minimum levels of
customers and covered potential customers that must increase over time, limits
on annual capital expenditures and other financial ratio tests. The obligations
under the credit agreement, together with the obligations under similar
facilities from Lucent and Ericsson, are secured by all of the stock of Cricket
Communications, its subsidiaries and the stock of each special purpose
subsidiary of Leap formed to hold wireless licenses used in Cricket
Communications' business, and all of their respective assets. Borrowings under
the credit facility accrue interest at a rate equal to LIBOR plus 3.5% to 4.25%
or a bank base rate plus 2.5% to 3.25%, in each case with the specific rate
based on the ratio of total indebtedness to EBITDA. Cricket Communications must
pay a commitment fee equal to 1.25% per annum on the unused commitment under
the credit facility, decreasing to 0.75% per annum. Principal payments are
scheduled to begin after three years with a final maturity after eight years.
Repayment is weighted to the later years of the repayment schedule.
Ericsson Equipment Financing. In October 2000, Cricket Communications
entered into a three-year supply agreement with Ericsson for the purchase of up
to $330.0 million of infrastructure products and services. Ericsson Credit AB
agreed to finance these purchases plus additional working capital under a
credit facility. These agreements amended and replaced the binding memorandum
of agreement between the parties dated September 20, 1999. The credit facility
permits up to $495.0 million in total borrowings, with borrowing availability
generally based on a ratio of the total amount of products and services
purchased from Ericsson. The credit agreement contains various covenants and
conditions typical for a loan of this type, including minimum levels of
customers and covered potential customers that must increase over time, limits
on annual capital expenditures, dividend restrictions and other financial ratio
tests. The obligations under the credit agreement, together with the
obligations under similar facilities from Lucent and Nortel, are secured by all
of the stock of Cricket Communications, its subsidiaries, and the stock of each
special purpose subsidiary of Leap formed to hold wireless licenses used in
Cricket Communications' business, and all of their respective assets.
Borrowings under the credit facility accrue interest at a rate equal to LIBOR
plus 3.5% to 4.25% or a bank base rate plus 2.5% to 3.25%, in each case with
the specific rate based on the ratio of total indebtedness to EBITDA. Cricket
Communications must pay a commitment fee equal to 1.25% per annum on the unused
commitment under the credit facility, decreasing to 0.75% per annum. Principal
payments are scheduled to begin after three years with a final maturity after
eight years. Repayment is weighted to the later years of the repayment
schedule.
Cricket Communications, Lucent, Nortel and Ericsson have entered into an
agreement pursuant to which Lucent, Nortel and Ericsson agreed to share
collateral and the parties agreed that Cricket Communications' total
outstanding balance of loans to the three vendors shall not exceed $1,845.0
million.
Obligations to the FCC. We have assumed $91.2 million in debt obligations to
the FCC as part of the purchase price for wireless licenses in 2000. We also
will assume additional debt obligations to the FCC in the
10
aggregate principal amount of approximately $3.8 million as part of the
purchase price for the pending acquisitions of wireless licenses.
Pegaso Financing
Qualcomm and another equipment vendor have agreed to provide approximately
$580.0 million of secured equipment financing to Pegaso, a portion of which has
already been advanced to the venture. The shares of Pegaso Communications y
Sistemas, S.A. de C.V., Pegaso's subsidiary that holds wireless licenses, serve
as collateral for Pegaso's obligations under the equipment financing.
In addition, in May 1999, Pegaso entered into a loan agreement with several
banks with credit support from Qualcomm. We guaranteed 33% of Pegaso's
obligations under the initial commitment from the lenders of $100 million. In
December 1999, as a condition of the guarantee, Leap received an option to
subscribe for and purchase up to 243,090 limited voting series "N" treasury
shares of Pegaso. The number of shares to be purchased by Leap under the option
will be calculated to provide a total internal rate of return on the average
outstanding balance of the bridge loan of 20%. The options have an exercise
price of $0.01 per share and expire ten years from the date of issuance. The
options are exercisable at any time after the date on which all amounts under
the loan agreement are paid in full. The amount of the loan was subsequently
increased to $190 million although the amount of the guarantee was not
increased.
In July 1999, several existing investors contributed $50.0 million to Pegaso
as previously planned. On April 26, 2000, Sprint PCS invested $200 million in
Pegaso by purchasing shares from Pegaso and shareholders other than Leap. In
August 2000, several existing investors contributed $50.0 million to Pegaso as
previously planned. Pegaso expects to fund a large portion of its development
and operating activities in the year ended December 31, 2000 with cash from
operations, proceeds of the $100 million in investments from several existing
investors and the investment from Sprint PCS, and borrowings under the $100
million loan agreement. In addition, Pegaso is seeking additional debt and
equity financing, including additional vendor financing.
Operating Activities
We used $32.9 million in cash for operating activities during the nine month
period ended September 30, 2000 compared to $31.5 million in the corresponding
period of the prior year. The increase is primarily attributable to our sale of
Smartcom in June 2000 offset by increased expenses associated with the
development of new markets in the United States and the launch of network
service in Nashville and Knoxville, Tennessee. We expect that cash used in
operating activities will increase substantially in the future as a result of
our planned development and launch of Cricket service in multiple U.S. markets.
Investing Activities
Cash used in investing activities was $64.0 million during the nine month
period ended September 30, 2000 compared to $68.1 million in the corresponding
period of the prior year. Investments during the nine month period ended
September 30, 2000 consisted primarily of $57.9 million net restricted cash
equivalents and investments, which have been pledged to provide for the payment
of the semi-annual scheduled interest payments on the senior notes payable
through April 2003, the purchase of held-to-maturity investments of $117.6
million, the purchase of wireless licenses totaling $39.4 million and capital
expenditures of $43.7 million, primarily by Cricket Communications and
Smartcom, offset by $210.1 million of net proceeds from the sale of Smartcom
and $4.3 million of proceeds from the liquidation of Russian investee
companies. Investments in the corresponding period of the prior year consisted
primarily of loans and advances of $37.7 million to our operating companies,
the acquisition of the remaining 50% interest in Smartcom of $26.9 million net
of cash acquired, the purchase of wireless licenses totaling $18.3 million,
offset by $16.0 million of proceeds received from the liquidation of Russian
investee companies. In the remainder of fiscal 2000, we expect to make
significant investments in capital assets, including network equipment and
wireless communications licenses.
11
Financing Activities
Cash provided by financing activities during the nine month period ended
September 30, 2000, primarily from proceeds of our public equity offering,
units offering, borrowings under credit agreements with Qualcomm and Lucent and
from banks, was $684.2 million. Cash provided by financing activities in the
corresponding period of the prior year was $107.1 million, primarily from
borrowings under our credit agreement with Qualcomm.
Currency Fluctuation Risks
We report our financial statements in U.S. dollars. Our international
operating companies report their results in local currencies. Consequently,
fluctuations in currency exchange rates between the U.S. dollar and the
applicable local currency will affect our results of operations as well as the
value of our ownership interests in our operating companies.
Generally, our international operating companies generate revenues that are
received in their local currency. However, many of these operating companies'
major contracts, including financing agreements and contracts with equipment
suppliers, are denominated in U.S. dollars. As a result, a significant change
in the value of the U.S. dollar against the national currency of an operating
company could result in a significant increase in the operating company's
expenses and could have a material adverse effect on the operating company and
on us. In some emerging markets, including Mexico, significant devaluations of
the local currency have occurred and may occur again in the future.
We do not currently hedge against foreign currency exchange rate or interest
rate risks.
Inflation
Inflation has had and may continue to have negative effects on the economies
and securities markets of emerging market countries and could have negative
effects on our operating companies and any new start-up project in those
countries, including their ability to obtain financing. Mexico, for example,
has periodically experienced relatively high rates of inflation. Our operating
companies, where permitted and subject to competitive pressures, intend to
increase their tariffs to account for the effects of inflation. However, in
those jurisdictions where tariff rates are regulated or specified in the
wireless license, the operating companies may not successfully mitigate the
impact of inflation on their operations.
Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for the
Company's year ending December 31, 2001. In June 2000, the FASB issued SFAS No.
138 which amended SFAS No. 133 for certain derivative instruments and hedging
activities. Under SFAS No. 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. We do not expect that the adoption
of SFAS No. 133 will have a material impact on our consolidated financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 summarizes certain of the Staff's interpretations in
applying generally accepted accounting principles to revenue recognition. The
provisions of SAB No. 101 are effective for the Company's quarter ending
December 31, 2000. Leap does not expect that the adoption of SAB No. 101 will
have a material impact on its consolidated financial position or results of
operations.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our variable rate long-term debt obligations. For a description of our long-
term debt obligations, see Note 6 to the Condensed Consolidated Financial
Statements, which are included elsewhere herein. The general level of U.S.
interest rates and/or LIBOR affect the interest expense that we recognize on
our variable rate long-term debt obligations. As of September 30, 2000, the
principal amounts of our variable rate long-term debt obligations amounted to
approximately $212.6 million. An increase of 10% in interest rates would
increase our interest expense for the next twelve months by approximately $2.3
million. This hypothetical amount is only suggestive of the effect of changes
in interest rates on our results of operations for the next twelve months.
Hedging Policy. Leap does not currently have a policy to systematically
hedge against foreign currency exchange rate or interest rate risks.
Foreign Exchange Market Risk
In conjunction with the sale of Smartcom during June 2000, Leap accrued for
taxes payable to the Chilean government denominated in Chilean pesos. This
liability is subject to the effects of currency fluctuations which may affect
reported earnings and losses. A significant change in the value of the U.S.
dollar against the Chilean peso could result in a significant increase in our
consolidated expenses. As of September 30, 2000, this liability amounted to
approximately $30.2 million. Our results of operations would be negatively
impacted by approximately $3.4 million if U.S. dollars were to depreciate
against the Chilean peso by 10%. This hypothetical amount is only suggestive of
the effect of currency fluctuations on our results of operations. This
liability is due and payable by no later than April 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAP WIRELESS INTERNATIONAL, INC.
/s/ Stephen P. Dhanens
Date: November 21, 2000 By: _________________________________
Stephen P. Dhanens
Vice President, Corporate
Controller
(Chief Accounting Officer)