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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
LEAP WIRELESS INTERNATIONAL, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LEAP WIRELESS LOGO]
10307 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 19, 2001
To the Stockholders of Leap Wireless International, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Leap
Wireless International, Inc., a Delaware corporation ("Leap"), will be held at
the San Diego Marriott La Jolla, 4240 La Jolla Village Drive, La Jolla,
California 92037, on Thursday, April 19, 2001 at 3:30 p.m. local time, for the
following purposes:
1. To elect the following three Class III directors to hold office until
the Annual Meeting of Stockholders following fiscal 2003 or until their
successors have been elected and have qualified:
Harvey P. White
Jeffrey P. Williams
Scot B. Jarvis
2. To approve the adoption of Leap's 2001 Executive Officer Deferred Bonus
Stock Plan set forth as Appendix A to the accompanying proxy statement.
3. To approve an amendment to Leap's 1998 Employee Stock Purchase Plan to
increase the number of shares of common stock reserved for issuance
under the plan from 200,000 to 500,000.
4. To ratify the selection of PricewaterhouseCoopers LLP as Leap's
independent accountants for the fiscal year ending December 31, 2001.
5. To transact such other business as may properly come before the Annual
Meeting or any continuation, adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 1, 2001 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting and at any continuation, adjournment or
postponement thereof.
By Order of the Board of Directors
/s/ HARVEY P. WHITE
Harvey P. White
Chairman of the Board and
Chief Executive Officer
San Diego, California
March 2, 2001
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED IN
YOUR NAME FROM THE RECORD HOLDER.
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[LEAP WIRELESS LOGO]
10307 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
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PROXY STATEMENT
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INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited by the Board of Directors (the "Board") of
Leap Wireless International, Inc., a Delaware corporation ("Leap"), for use at
the Annual Meeting of Stockholders to be held on Thursday, April 19, 2001, at
3:30 p.m. local time (the "Annual Meeting"), or at any continuation, adjournment
or postponement thereof, for the purposes set forth herein and in the
accompanying Notice of Annual Meeting. The Annual Meeting will be held at the
San Diego Marriott La Jolla, 4240 La Jolla Village Drive, La Jolla, California
92037. The approximate date on which this proxy statement and the accompanying
proxy card are first to be sent to stockholders is March 15, 2001.
SOLICITATION
Leap will bear the cost of soliciting proxies for the upcoming Annual
Meeting. Leap will ask banks, brokerage houses, fiduciaries and custodians
holding stock in their names for others to send proxy materials to and obtain
proxies from the beneficial owners of such stock, and Leap will reimburse them
for their reasonable expenses in doing so. In addition to soliciting proxies by
mail, Leap and its directors, officers and regular employees may also solicit
proxies personally, by telephone or by other appropriate means. No additional
compensation will be paid to directors, officers or other regular employees for
such services. Leap has also retained D.F. King & Co., Inc., a professional
proxy solicitation firm, to assist in the solicitation of proxies at an
estimated cost of $8,500, plus certain out-of-pocket expenses.
VOTING RIGHTS AND OUTSTANDING SHARES
Stockholders of record at the close of business on March 1, 2001 (the
"Record Date") are entitled to receive notice of and to vote at the Annual
Meeting, or at any continuation, adjournment or postponement thereof. At the
close of business on the Record Date, Leap had 30,040,580 shares of common stock
outstanding and entitled to vote. Stockholders of record on such date will be
entitled to one vote on all matters to be voted upon for each share of common
stock held.
All votes will be tabulated by the inspector of election appointed for the
Annual Meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be considered shares entitled
to vote in the tabulation of votes cast on proposals presented to the
stockholders and will have the same effect as negative votes. Broker non-votes
(i.e., shares held by a broker or nominee that are represented at the meeting
but which the broker or nominee is not empowered to vote on a particular
proposal) are counted towards a quorum but are not counted for any purpose in
determining whether a matter has been approved.
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REVOCABILITY OF PROXIES
Any stockholder giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted. It may be revoked by filing with
the Secretary of Leap at Leap's principal executive offices, 10307 Pacific
Center Court, San Diego, California 92121, a written notice of revocation or a
duly executed proxy bearing a later date. A stockholder of record at the close
of business on the Record Date may vote in person if present at the meeting,
whether or not he or she has previously given a proxy. Attendance at the meeting
will not, by itself, revoke a proxy.
PROPOSAL 1
ELECTION OF DIRECTORS
Leap's Amended and Restated Certificate of Incorporation, as amended,
provides that the number of directors that shall constitute the whole Board of
Directors shall be fixed exclusively by one or more resolutions adopted from
time to time by the Board of Directors. The authorized number of directors is
currently set at 11. Leap's Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws also provide that the Board of
Directors shall be divided into three classes, with each class having a
three-year term. Directors are assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. Due to the
resignation of one of Leap's directors, the Board currently is comprised of 10
directors. The vacant seat is not in the class of directors that is up for
election at the Annual Meeting. Leap is conducting a search for an appropriate
candidate to be appointed to the Board to fill the vacant seat. Under Leap's
Amended and Restated Bylaws, any vacancy on the Board resulting from resignation
shall be filled by a majority vote of the directors then in office. The Board
expects to fill the vacant seat following the Annual Meeting.
Three seats on the Board of Directors, currently held by Harvey P. White,
Jeffrey P. Williams and Scot B. Jarvis, have been designated as Class III Board
seats, with the term of the directors occupying such seats expiring as of the
Annual Meeting.
Each of the nominees for election to this class is currently a Board member
of Leap. Mr. White was previously elected by QUALCOMM Incorporated ("Qualcomm"),
the sole stockholder of Leap at the time of his election. Messrs. Williams and
Jarvis were appointed as Directors by the Board in September 1998. If elected at
the Annual Meeting, each of the three nominees will serve until Leap's Annual
Meeting of Stockholders following fiscal 2003, in each case until his successor
is elected and has qualified, or until his earlier death, resignation or
removal.
Directors are elected by a plurality of the votes of the shares present in
person or represented by proxy at the Annual Meeting and entitled to vote on the
election of directors. Shares represented by executed proxies will be voted, if
authority to do so is not withheld, for the election of the three nominees named
below. In the event that any nominee should be unavailable for election as a
result of an unexpected occurrence, such shares will be voted for the election
of such substitute nominee as the Board of Directors may propose. Each person
nominated for election has agreed to serve if elected, and the Board of
Directors has no reason to believe that any nominee will be unable to serve.
Biographical information for each person nominated as a director, and for
each person whose term of office as a director will continue after the Annual
Meeting, is set forth below.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE ANNUAL MEETING
FOLLOWING FISCAL 2003
HARVEY P. WHITE
Harvey P. White, 66, has served as Chairman of the Board, Chief Executive
Officer and a Director of Leap since its formation in June 1998 and also served
as President of Leap from June 1998 to July 1999. Mr. White was one of the
founders of Qualcomm and served as Vice Chairman of the Board of Qualcomm from
June 1998 to September 1998. From May 1992 until June 1998, he served as
President of Qualcomm and from February 1994 to August 1995, as Chief Operating
Officer of Qualcomm. Before May 1992, he was
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Executive Vice President and Chief Operating Officer, and was also a Director of
Qualcomm since it began operations in July 1985 until he resigned in September
1998 when Leap became an independent, publicly-traded company. From March 1978
to June 1985, Mr. White was an officer of LINKABIT (M/A-COM LINKABIT after
August 1980), where he was successively Chief Financial Officer, Vice President,
Senior Vice President and Executive Vice President. Mr. White became Chief
Operating Officer of LINKABIT in July 1979 and a Director of LINKABIT in
December 1979. Mr. White is currently a Director of Verance, Inc., a
privately-held multimedia technology start-up company, Applied Micro Circuits
Corporation, a supplier of high-bandwidth silicon connectivity and Cibernet
Corp., a company that provides financial settlement services to
telecommunications companies. Mr. White holds a B.A. from Marshall University.
JEFFREY P. WILLIAMS
Jeffrey P. Williams, 49, has served as a Director of Leap since September
1998. He has been a Managing Director at Greenhill & Co., LLC, an investment
banking firm, since 1998. From September 1996 to January 1998, Mr. Williams was
Executive Vice President, Strategic Development and Global Markets for
McGraw-Hill Companies, and from 1984 through 1996, he was an investment banker
with Morgan Stanley & Co. Incorporated in their Telecommunications and Media
Group. Mr. Williams also serves as director of Berliner Communications, Inc. Mr.
Williams has a Bachelor of Architecture from the University of Cincinnati and an
M.B.A. from Harvard University Graduate School of Business Administration.
SCOT B. JARVIS
Scot B. Jarvis, 40, has served as a Director of Leap since September 1998.
Mr. Jarvis is a cofounder and a managing member of Cedar Grove Partners, LLC and
Cedar Grove Investments, LLC, privately-owned companies formed to make
investments in telecommunications ventures. From 1994 to 1996, Mr. Jarvis was a
Vice President of Operations for Eagle River, Inc., a telecommunications
investment company owned by Craig O. McCaw. While at Eagle River, Mr. Jarvis was
the cofounder and acting President of Nextlink Communications, Inc., now XO
Communications, Inc. and a publicly-traded competitive local exchange company.
Mr. Jarvis was also responsible for certain operations and was a Director of
NEXTEL Communications, a nationwide provider of specialized mobile radio
service. Mr. Jarvis also serves as a Director of Point.com, Metawave
Communications Corp. and Wireless Facilities, Inc. Mr. Jarvis holds a B.A. from
the University of Washington.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH NOMINEE NAMED ABOVE.
DIRECTORS CONTINUING IN OFFICE UNTIL THE ANNUAL MEETING FOLLOWING FISCAL 2001
ANTHONY R. CHASE
Anthony R. Chase, 45, has served as a Director of Leap since August 2000.
Mr. Chase has served as Chairman and Chief Executive Officer of Chasecom LP
since 1998, Chairman and Chief Executive Officer of Chase Radio Partners, Inc.
since 2000, and Chairman and Chief Executive Officer of both Faith Broadcasting
Corporation and Chase Telecommunications, Inc. since 1993. Mr. Chase is also
Chairman and Co-Founder, together with SBC Communications, Inc., of the Telecom
Opportunity Institute. Mr. Chase began teaching communications law and contracts
at the University of Houston Law School in 1990 and received tenure in 1996. Mr.
Chase received a B.A. with honors from Harvard University in 1977 and his M.B.A.
and J.D. from Harvard Business School and Harvard Law School in 1981. Mr. Chase
serves on the Boards of Directors of Cornell Companies, Inc. (NYSE), Northern
Trust Bank of Texas, numerous not-for-profit organizations, and is a member of
the Council on Foreign Relations.
SUSAN G. SWENSON
Susan G. Swenson, 52, has served as President and a Director since July
1999 and Chief Operating Officer since October 1999. She also served as Cricket
Communications' Chief Executive Officer from July 1999 until July 2000. From
March 1994 to July 1999, she served as President and Chief Executive Officer
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of Cellular One, a joint venture between AirTouch and AT&T Wireless that
provided wireless telecommunications services to regions covering approximately
10 million potential customers. From 1979 to 1994, Ms. Swenson held various
operating positions with Pacific Telesis Group, including Vice President and
General Manager of Pacific Bell's San Francisco Bay Area operating unit for one
year and President and Chief Operating Officer of PacTel Cellular for two and
one-half years. Ms. Swenson also serves as a Director of Wells Fargo & Company,
General Magic, Inc. and Palm, Inc. Ms. Swenson holds a B.A. from San Diego State
University.
MICHAEL B. TARGOFF
Michael B. Targoff, 56, has served as a Director of Leap since September
1998. He is founder and Chief Executive Officer of Michael B. Targoff and Co., a
company that seeks controlling investments in telecommunications and related
industry companies. From its formation in January 1996 through January 1998, Mr.
Targoff was President and Chief Operating Officer of Loral Space &
Communications Limited. Before that time, Mr. Targoff was Senior Vice President
of Loral Corporation. From 1991, Mr. Targoff was a Director and a principal
Loral executive responsible for Loral's satellite manufacturing joint venture
with Alcatel, Aerospatiale, Alenia and Daimler Benz Aerospace. Mr. Targoff was
also the President and is a Director of Globalstar Telecommunications Limited,
the company that is the public owner of Globalstar, Loral's global mobile
satellite system. Before joining Loral Corporation in 1981, Mr. Targoff was a
Partner in the New York law firm of Willkie Farr and Gallagher. Mr. Targoff
holds a B.A. from Brown University and a J.D. from Columbia University School of
Law, where he was a Hamilton Fisk Scholar and Editor of the Columbia Journal of
Law and Social Problems.
DIRECTORS CONTINUING IN OFFICE UNTIL THE ANNUAL MEETING FOLLOWING FISCAL 2002
JILL E. BARAD
Jill E. Barad, 49, has served as a Director of Leap since August 2000. Ms.
Barad was Chairman of the Board and Chief Executive Officer of Mattel, Inc. from
October 1997 to February 2000, and she served as President and Chief Executive
Officer of Mattel, Inc. from January 1997 to October 1997. From July 1992 to
January 1997, she served as President and COO of Mattel, Inc. Ms. Barad started
her career at Mattel as a product manager in 1981. Ms. Barad graduated from
Queens College in 1973 with a B.A. in English Literature and Psychology. Ms.
Barad is a member of the Board of Directors at Pixar Animation Studios. She is a
member of the UCLA Executive Board of Medical Sciences, the Board of Governors
of Town Hall Los Angeles, the Board of Fellows of Claremont University Center
and Graduate School and Trustee Emeritus of the Queens College Foundation. She
is Chairman of the Executive Advisory Board of the Children Affected by AIDS
Foundation, and a member of the Advisory Committee Board of the For All Kids
Foundation. Ms. Barad is also on the Board of Advisors of the Children's
Scholarship Fund.
THOMAS J. BERNARD
Thomas J. Bernard, 68, has served as a Director of Leap since its formation
in June 1998 and is currently Vice Chairman of the Board. Mr. Bernard also
served as President -- International Business Division of Leap from July 1999
until his retirement as an officer of Leap in December 2000. From June 1998 to
July 1999, he served as Executive Vice President of Leap. From April 1996 to
June 1998, Mr. Bernard served as a Senior Vice President of Qualcomm and General
Manager of Qualcomm's Infrastructure Products division. Mr. Bernard had retired
in April 1994, but returned to Qualcomm in August 1995 as Executive Consultant
and became Senior Vice President, Marketing, in December 1995. Mr. Bernard first
joined Qualcomm in September 1986. He served as Vice President and General
Manager for the OmniTRACS division and in September 1992 was promoted to Senior
Vice President of Qualcomm. Before joining Qualcomm, Mr. Bernard was Executive
Vice President and General Manager, M/A-COM LINKABIT, Telecommunications
Division, Western Operations. Mr. Bernard also serves as a Director of AirFiber
Inc., a privately-held company that markets high-speed open-air optical
communication systems, cVideo, a developer of software-based recording and
transmission products, and Pegaso PCS, an affiliate of Pegaso Telecomunicaciones
S.A., de C.V.
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ALEJANDRO BURILLO AZCARRAGA
Alejandro Burillo Azcarraga, 48, has served as a Director of Leap since
September 1998. Mr. Burillo has more than 30 years experience working for Grupo
Televisa. Mr. Burillo served as Vice-Chairman of the Board of Directors of Grupo
Televisa until 1999. In addition, Mr. Burillo served as President of
International Affairs of Grupo Televisa from 1997 to 1999, and before that time
served as Chief Operating Officer of Grupo Televisa. Mr. Burillo also holds a
controlling interest in Grupo Pegaso, a private investment group with interests
in various industries including cable television, communications, retail
electronics, real estate, sports and entertainment. Mr. Burillo also serves as a
Director of Grupo Desc, an NYSE-listed company and one of Mexico's main
industrial groups.
ROBERT C. DYNES
Robert C. Dynes, 58, has served as a Director of Leap since July 1999. He
has served as the Chancellor of the University of California, San Diego since
1996 and as a Professor of Physics at UCSD since 1991 and was Senior Vice
Chancellor -- Academic Affairs of UCSD from 1995 to 1996. Before 1991,
Chancellor Dynes held numerous research science positions at AT&T Bell
Laboratories. Chancellor Dynes holds a B.Sc. in Mathematics and Physics from the
University of Western Ontario and a M.Sc. and Ph.D. in Physics from McMaster
University in Hamilton, Ontario. Chancellor Dynes is a member of the National
Academy of Sciences and a Fellow of the American Academy of Arts and Sciences,
the Canadian Institute of Advanced Research and the American Physical Society.
Chancellor Dynes serves on numerous scientific and educational boards and
committees.
COMPANY MANAGEMENT
Biographical information for the executive officers of Leap who are not
directors is set forth below. There are no family relationships between any
director or executive officer and any other director or executive officer.
Executive officers serve at the discretion of the Board of Directors and until
their successors have been duly elected and qualified, unless sooner removed by
the Board of Directors. Officers are elected by the Board of Directors annually
at its first meeting following the Annual Meeting of Stockholders.
JAMES E. HOFFMANN, 50, has served as Senior Vice President, General Counsel
and Secretary of Leap since its formation in June 1998. Mr. Hoffmann also served
as a Director of Leap from September 1998 to July 1999. From June 1998 to
September 1998, Mr. Hoffmann was Vice President, Legal Counsel of Qualcomm. From
February 1995 to June 1998, he served as Vice President of Qualcomm and Division
Counsel for the Infrastructure Products Division, having joined Qualcomm as
Senior Legal Counsel in June 1993. Before joining Qualcomm, Mr. Hoffmann was a
partner in the law firm of Gray, Cary, Ames & Frye, where he practiced
transactional corporate law. Mr. Hoffmann holds a B.S. from the United States
Naval Academy, an M.B.A. from Golden Gate University and a J.D. from University
of California, Hastings College of the Law.
STEWART DOUGLAS HUTCHESON, 44, has served as Senior Vice President,
Wireless Data Development since July 2000, having previously served as Senior
Vice President, Business Development from April 2000 to July 2000 and as Vice
President, Business Development from September 1998 to April 2000. From February
1995 to September 1998, Mr. Hutcheson served as Vice President, Marketing in the
Wireless Infrastructure division at Qualcomm. Before joining Qualcomm, Mr.
Hutcheson held operational and technical management positions at Solar Turbines,
Inc. for 13 years. Mr. Hutcheson holds a B.S. in mechanical engineering from
California State Polytechnic University and an M.B.A. from University of
California, Irvine.
DANIEL O. PEGG, 55, has served as Senior Vice President, Public Affairs of
Leap since its formation in June 1998. From March 1997 to September 1998, Mr.
Pegg served as Senior Vice President, Public Affairs of Qualcomm. Before joining
Qualcomm, Mr. Pegg was President and Chief Executive Officer of the San Diego
Economic Development Corporation for 14 years. Mr. Pegg served on the Board of
Directors of Gensia Pharmaceuticals from 1986 to 1996. Mr. Pegg holds a B.A.
from California State University at Los Angeles.
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LEONARD C. STEPHENS, 44, has served as Senior Vice President, Human
Resources of Leap since its formation in June 1998. From December 1995 to
September 1998, Mr. Stephens was Vice President, Human Resources Operations for
Qualcomm. Before joining Qualcomm, Mr. Stephens was employed by Pfizer Inc.,
where he served in a number of human resources positions over a 14 year career.
Mr. Stephens holds a B.A. from Howard University.
THOMAS D. WILLARDSON, 50, has served as Senior Vice President, Finance and
Treasurer of Leap since July 1998. From July 1995 to July 1998, Mr. Willardson
was Vice President and Associate Managing Director of Bechtel Enterprises, Inc.,
a wholly-owned investment and development subsidiary of Bechtel Group, Inc. From
January 1986 to July 1995, Mr. Willardson was a principal at The Fremont Group,
an investment company. Mr. Willardson has served as a Director of Cost Plus,
Inc. since March 1991. Mr. Willardson holds a B.S. in Finance from Brigham Young
University and an M.B.A. from the University of Southern California.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Leap's
directors and executive officers, and persons who beneficially own more than ten
percent of a registered class of Leap's equity securities to file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of Leap. Officers, directors and greater-than-ten-percent beneficial
owners are required by Commission regulations to furnish Leap with copies of all
Section 16(a) forms they file.
To Leap's knowledge, based solely on a review of the copies of such reports
furnished to Leap and written representations that no other reports were
required, during the fiscal year ended December 31, 2000, all Section 16(a)
filing requirements applicable to its officers, directors and
greater-than-ten-percent beneficial owners were complied with, except as
identified immediately below.
A Form 4 for Thomas J. Bernard was filed late. Mr. Bernard's spouse retired
from Qualcomm Incorporated and exercised her distribution options to purchase
Leap common stock on September 17, 2000. Mr. Bernard's Form 4 was due October
10, 2000, but was not filed until October 27, 2000. In addition, Qualcomm filed
the following forms late: a Form 5 for the fiscal year ending August 31, 1999
was due October 15, 1999, but was not filed until February 23, 2001; a Form 4
relating to Qualcomm's acquisition of senior discount units in Leap's February
2000 units offering was due March 10, 2000, but was not filed until February 23,
2001; and a Form 4 relating to Qualcomm's exercise of portions of an outstanding
warrant to purchase Leap common stock in December 2000 was due January 10, 2001,
but was not filed until February 23, 2001.
COMPENSATION OF DIRECTORS
Directors of Leap do not receive any compensation for their services as
director except that each non-employee director receives an option to purchase
20,000 shares of Leap common stock when he or she first serves as a non-employee
director and an option to purchase 10,000 additional shares of Leap common stock
at the time of each subsequent annual meeting that occurs while he or she
continues to serve as a non-employee director. Beginning in 2001, a director
also receives an additional option to purchase 5,000 shares of Leap common stock
for each year during which such director serves as chair of either the Audit
Committee or the Compensation Committee.
The exercise price for each option is the fair market value of Leap's
common stock on the date the option is granted. Each option becomes exercisable
over five years according to the following schedule: as long as the optionee
continues to serve as a non-employee director, employee or consultant to Leap,
20% of the shares subject to the option first become exercisable on each of the
first five anniversaries of the date of grant. Each option has a term of 10
years, provided that the options terminate 30 days after the optionee ceases to
be a non-employee director, employee or consultant to Leap. Special exercise and
termination rules apply if the optionee's relationship with Leap is terminated
as a result of retirement at age 70 after at least nine years of service on the
Board, permanent and total disability, or death.
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Leap also reimburses directors for their travel expenses incurred in
connection with attendance at Board and Board committee meetings.
BOARD AND COMMITTEE MEETINGS
Leap's Board held three regularly scheduled meetings and four special
(telephonic) meetings during fiscal 2000. During the past fiscal year, each
incumbent Director attended at least 75% of the aggregate of the total number of
meetings of the Board and the total number of meetings of committees of the
Board on which he or she served, except as follows: Mr. Alejandro Burillo
Azcarraga attended five of the 11 meetings of the Board and meetings of
committees of the Board on which he served. The Board has established an Audit
Committee and a Compensation Committee. Leap does not have a Nominating
Committee or any other standing committee.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Ms. Barad and Messrs. Targoff and Jarvis.
Leap has adopted an Audit Committee charter, a copy of which is set forth as
Appendix B hereto, which the Audit Committee reviews annually to ensure that it
meets the requirements set forth in Rule 4350(d)(1) of the National Association
of Securities Dealers, Inc. ("NASD") listing standards for issuers with
securities listed for trading on The Nasdaq Stock Market. The charter specifies
that the Audit Committee shall have at least three members, comprised solely of
independent directors, each of whom is able to read and understand fundamental
financial statements. In addition, at least one member of the Audit Committee
must have past employment experience in finance or accounting. Each of the
current Audit Committee members is an "independent director" as defined in Rule
4200(a)(14) of the NASD listing standards. The Audit Committee oversees
management's conduct of Leap's financial reporting process, Leap's systems of
internal accounting and financial controls, and the independent audit of Leap's
financial statements. The Audit Committee selects or nominates for stockholder
approval, evaluates and, where appropriate, replaces the outside auditor. The
Audit Committee held four meetings during fiscal 2000.
The current member of Leap's Compensation Committee is Mr. Dynes. Mr. John
Moores served as a member of the Compensation Committee from December 1999 until
his resignation from the Board in February 2001. Leap is currently considering a
replacement for Mr. Moores to serve on the Compensation Committee. The
Compensation Committee reviews management compensation programs, approves
compensation changes for senior executive officers, reviews compensation changes
for senior management and other employees and administers stock plan awards. The
Compensation Committee held four meetings during fiscal 2000.
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REPORT OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
The Audit Committee is composed of three directors, Michael B. Targoff,
Scot B. Jarvis and Jill E. Barad, and operates pursuant to a written charter (a
copy of which is attached as Appendix B to this proxy statement) adopted by the
Board of Directors. The Audit Committee reviews and reassesses the adequacy of
the charter on an annual basis. The Audit Committee is responsible for
monitoring and overseeing management's conduct of Leap's financial reporting
process, Leap's systems of internal accounting and financial controls, and the
independent audit of Leap's financial statements by Leap's independent auditors,
PricewaterhouseCoopers LLP.
In this context, the Audit Committee reviewed and discussed the audited
financial statements with both management and PricewaterhouseCoopers LLP.
Specifically, the Audit Committee discussed with PricewaterhouseCoopers LLP
those matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU sec. 380).
The Audit Committee received from PricewaterhouseCoopers LLP the written
disclosures and the letter required by Independence Standards Board Standard No.
1 (Independence Discussions with Audit Committees), and discussed with
PricewaterhouseCoopers LLP the issue of its independence from Leap.
Based on the Audit Committee's review of the audited financial statements
and its discussions with management and PricewaterhouseCoopers LLP noted above,
the Audit Committee recommended to the Board of Directors that the audited
consolidated financial statements be included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 for filing with the Commission.
AUDIT COMMITTEE
Michael B. Targoff
Scot B. Jarvis
Jill E. Barad
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of January 31, 2001, with
respect to the beneficial ownership of Leap's common stock by: (i) each
stockholder known to Leap to be the beneficial owner of more than 5% of Leap's
common stock; (ii) each director; (iii) each of the five most highly compensated
executive officers of Leap; and (iv) all current executive officers and
directors as a group.
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER OF PERCENT OF
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS SHARES(2) TOTAL
--------------------------------------- --------- ----------
Qualcomm Incorporated(3).................................... 5,161,624 15.1%
Stephen F. Mandel(14)....................................... 1,616,400 5.4%
Harvey P. White(4)(5)(9)(12)(13)............................ 691,518 2.3%
Susan G. Swenson(5)(9)(11)(12)(13).......................... 99,328 *
Thomas J. Bernard(5)(6)(9).................................. 99,706 *
James E. Hoffmann(5)(7)(9)(12)(13).......................... 56,696 *
Leonard C. Stephens(5)(9)(12)(13)........................... 55,325 *
Jill E. Barad............................................... 0 *
Alejandro Burillo Azcarraga(5).............................. 16,000 *
Anthony R. Chase(5)(10)..................................... 206,946 *
Robert C. Dynes(5).......................................... 8,000 *
Scot B. Jarvis(5)(8)........................................ 305,392 1.0%
Michael B. Targoff(5)....................................... 62,500 *
Jeffrey P. Williams(5)...................................... 165,215 *
All Executive Officers and Directors as a group (15
persons)(5)............................................... 1,905,887 6.2%
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders of Leap and by Schedules 13D and 13G filed with the
Commission. Unless otherwise indicated in the footnotes to this table and
subject to marital property laws where applicable, each of the stockholders
named in this table has sole voting and investment power with respect to
the shares indicated as beneficially owned and has a business address of
Leap Wireless International, Inc., 10307 Pacific Center Court, San Diego,
California 92121. Applicable percentages are based on 30,020,857 shares of
Leap common stock outstanding as of January 31, 2001, adjusted as required
by rules promulgated by the Commission.
(2) In addition to shares held in the individual's sole name, this column
includes shares held by the spouse and other members of the named person's
immediate household, and shares held in family trusts.
(3) Consists partially of the right to purchase 3,375,000 shares of Leap common
stock for approximately $6.11 per share, or an aggregate purchase price of
$20,621,250, under a warrant. The warrant is fully exercisable and expires
in September 2008. This table also reflects Qualcomm's right to purchase
approximately 770,924 shares of common stock at an exercise price of $96.80
per share, under warrants which Qualcomm purchased in our February 2000
units offering. Such warrants are exercisable beginning February 23, 2001
and expire on April 15, 2010. On a fully diluted basis, as of January 31,
2001, Qualcomm would own approximately 11.7% of Leap common stock upon
exercise of the warrants described above. Qualcomm's business address is
5775 Morehouse Dr., San Diego, California 92121.
(4) Includes 2,500 shares held in a foundation of which Mr. White disclaims
beneficial ownership. Also includes 357,429 shares held in family trusts,
250 shares held in a charitable remainder trust, 77,565 shares held in a
family trust for the benefit of grandchildren and 61,232 shares held in
trusts for the benefit of relatives.
(5) Includes shares issuable upon exercise of options exercisable within 60
days of January 31, 2001 as follows: Mr. Bernard, 55,500 shares; Mr.
Burillo, 10,000 shares; Mr. Chase, 3,780 shares; Mr. Dynes, 8,000 shares;
Mr. Hoffmann, 31,450 shares; Mr. Hutcheson, 13,450 shares; Mr. Jarvis,
16,000 shares;
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Mr. Pegg, 26,520 shares; Mr. Stephens, 25,150 shares; Ms. Swenson, 50,000
shares; Mr. Targoff, 10,000 shares; Mr. White, 150,150 shares; Mr. Willardson,
18,520 shares; and Mr. Williams, 16,000 shares.
(6) Includes 5,710 shares held by Mr. Bernard's spouse.
(7) Includes 2,500 shares held in a custodial account for the benefit of Mr.
Hoffmann's spouse and 16,215 shares held in a family trust.
(8) Includes 50 shares held in an IRA account, 150 shares held for the benefit
of Mr. Jarvis' children, 187,425 shares held by Cedar Grove Partners, LLC
and 101,267 shares held by Cedar Grove Investments, LLC. Mr. Jarvis is a
managing member of Cedar Grove Partners, LLC and Cedar Grove Investments,
LLC and has shared voting and investment power with respect to the shares
held by these entities.
(9) Includes shares subject to vesting 20% per year over a five-year period
commencing September 24, 1999 as follows: Mr. White, 47,250 shares; Ms.
Swenson, 39,375 shares; Mr. Bernard, 23,625 shares; Mr. Hoffmann, 7,560
shares; and Mr. Stephens, 18,900 shares.
(10) Includes 202,566 shares issuable upon exercise of a warrant held by Chase
Telecommunications Holdings, Inc., a company through which Mr. Chase, by
virtue of his position as an officer and director, has the shared power to
vote and direct the disposition of such shares. Mr. Chase holds a 41.25%
ownership interest in Chase Telecommunications Holdings, Inc. and disclaims
beneficial ownership of all but 83,558 of the 202,566 shares issuable upon
exercise of the warrant.
(11) Includes 5,150 shares held by Ms. Swenson's spouse.
(12) Includes shares held in trust pursuant to Leap's Executive Officer Deferred
Stock Plan, which are voted at the direction of the respective officer, as
follows: Mr. White 21,826 shares; Ms. Swenson, 3,734 shares; Mr. Hoffmann,
5,634 shares; and Mr. Stephens, 5,227 shares.
(13) Includes shares held in trust pursuant to Leap's Executive Retirement
Matching Contribution Plan, which are voted at the direction of the
respective officer, as follows: Mr. White, 5,950 shares; Ms. Swenson, 739
shares; Mr. Hoffmann, 567 shares; and Mr. Stephens, 513 shares.
(14) Includes shares held by Lone Spruce, L.P.; Lone Balsam, L.P.; Lone Sequoia,
L.P. and Lone Cypress Ltd. The general partner of Lone Spruce, Lone Balsam
and Lone Sequoia is Lone Pine Associates LLC. Lone Pine Capital LLC serves
as the investment manager to Lone Cypress. Mr. Mandell is the Managing
Member of Lone Pine Associates LLC and Lone Pine Capital LLC. This
information is based solely on a Schedule 13G/A filed with the Securities
and Exchange Commission for the aforementioned entities on February 14,
2001. The business address for each of the entities identified herein is
Two Greenwich Plaza, Greenwich, Connecticut 06830.
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EXECUTIVE COMPENSATION
The following table sets forth certain compensation information with
respect to Leap's Chief Executive Officer and other four most highly-paid
executive officers for the fiscal year ended December 31, 2000 (the "Named
Executive Officers"). Leap first hired employees on September 23, 1998. Prior to
that date, four of the five Named Executive Officers were employees of Qualcomm.
Susan G. Swenson became an employee of Leap on July 15, 1999. As a result, the
information set forth in the following tables reflects compensation earned by
the Named Executive Officers for services they rendered to Leap during the
twelve months ended December 31, 2000, December 31, 1999 and August 31, 1999,
and for the four former employees of Qualcomm, for services rendered to Qualcomm
during its fiscal year 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
----------------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS AT LEAP YEAR SALARY BONUS(5) COMPENSATION OPTIONS COMPENSATION(9)
- ------------------------------------ ---- -------- -------- ------------ ------------ ---------------
Harvey P. White................... 2000 $600,000 $556,000 $ 0 300,000 $817,395
Chairman of the Board and 1999(2) $550,000 $305,000 $ 0 197,250 $699,581
Chief Executive Officer 1999(3) $488,464 $305,000 $ 0 497,000(8) $273,222
1998 $477,853 $320,000 $ 0 75,000 $108,902
Susan G. Swenson.................. 2000 $410,769 $392,000 $116,251(6) 200,000 $ 73,467
President, Chief Operating 1999(2)(4) $180,000 $ 35,000 $ 0 360,250 $ 1,750
Officer and Director 1999(3)(4) $ 41,539 $ 0 $ 0 360,250 $ 0
1998 N/A N/A N/A N/A N/A
Thomas J. Bernard................. 2000 $350,480 $180,500 $ 0 75,000 $ 46,529
Vice Chairman, President -- 1999(2) $332,500 $150,000 $ 0 113,625 $ 66,834
International Business Division 1999(3) $280,924 $150,000 $ 0 180,000(8) $ 46,351
and Director 1998 $287,509 $120,000 $ 0 0 $ 34,545
James E. Hoffmann................. 2000 $250,889 $146,500 $ 0 60,000 $ 69,869
Senior Vice President, 1999(2) $245,000 $ 80,000 $ 0 48,900 $ 20,308
General Counsel, and Secretary 1999(3) $224,117 $ 80,000 $ 0 83,000(8) $ 5,219
1998 $178,930 $ 60,000 $ 0 4,000 $ 13,899
Leonard C. Stephens............... 2000 $235,004 $132,000 $ 0 65,000 $ 62,470
Senior Vice President, 1999(2) $220,000 $ 80,000 $ 0 48,900 $ 27,995
Human Resources 1999(3) $197,270 $ 80,000 $ 0 76,000(8) $ 13,464
1998 $176,930 $ 55,000 $104,947(7) 6,000 $ 2,258
- ---------------
(1) As permitted by rules established by the Commission, no amounts are shown
with respect to certain "perquisites" where such amounts do not exceed the
lesser of either $50,000 or 10% of the total of annual salary and bonus.
(2) Calculated for the twelve months ended December 31, 1999. In July 2000, Leap
elected to change its fiscal year end from August 31 to December 31.
(3) Fiscal year ended August 31, 1999. Amounts reflect compensation paid to the
Named Executive Officers by Leap after the September 23, 1998 spin-off from
Qualcomm, representing approximately eleven months of the fiscal year ended
August 31, 1999.
(4) Represents compensation paid for partial year only, as Ms. Swenson became an
employee of Leap on July 15, 1999.
(5) In November 1999, Leap adopted a deferred compensation plan that provided
for mandatory deferral of 25% and voluntary deferral of up to the remaining
75% of executive officer bonuses. Bonus deferrals were converted into share
units credited to the participant's account. Each share unit represents the
right to receive one share of Leap's common stock in accordance with the
plan. Leap also credited to a matching account that number of share units
equal to 20% of the share units credited to the participant's accounts for
each bonus payday. Matching share units vest ratably over three years on
each anniversary date of the applicable bonus payday. The participant's
accounts are unsecured and subject to the general creditors of Leap.
(6) Reflects amounts paid to Ms. Swenson in connection with her relocation
expenses.
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(7) In December 1995, Mr. Stephens joined Qualcomm as Vice President of Human
Resources. Qualcomm made payments related to his relocation as shown above
and in fiscal 1998 also reimbursed Mr. Stephens $50,705 for income taxes
arising from the relocation payment.
(8) In connection with the spin-off of Leap by Qualcomm in September 1998, Leap
was contractually obligated to issue options to purchase Leap common stock
to the holders of outstanding options to purchase Qualcomm common stock (the
"Distribution Options"). This arrangement was made to preserve the value of
the outstanding Qualcomm options at the time of the spin-off. Distribution
Options granted to the Named Executive Officers were 91,000 shares to Mr.
White; 15,000 shares to Mr. Bernard; 8,000 shares to Mr. Hoffmann; and 6,000
shares to Mr. Stephens.
(9) Includes matching 401(k) contributions, executive benefits payments,
executive retirement stock matching, executive officer deferred bonus stock
matching and financial planning services as follows:
MATCHING EXECUTIVE EXECUTIVE DEFERRED FINANCIAL TOTAL
401(K) BENEFITS RETIREMENTS BONUS STOCK PLANNING OTHER
NAME YEAR CONTRIBUTIONS PAYMENTS CONTRIBUTIONS(3) MATCHING(4) SERVICES COMPENSATION
---- ---- ------------- --------- ---------------- ----------- --------- ------------
Harvey P. White............... 2000 $3,360 $11,531 $54,750 $109,556 $15,639 $817,395(5)
1999(1) $4,800 $ 6,971 $50,000 $ 15,250 $ 0 $699,581(6)
1999(2) $4,615 $ 1,850 $47,077 N/A $16,640 $273,222(7)
1998 $2,313 $ 2,520 $48,919 N/A $38,070 $108,902(8)
Susan G. Swenson.............. 2000 $4,827 $ 0 $34,402 $ 19,301 $14,937 $ 73,467
1999(1) $ 0 $ 0 $ 0 $ 1,750 $ 0 $ 1,750
1999(2) $ 0 $ 0 $ 0 N/A $ 0 $ 0
Thomas J. Bernard............. 2000 $3,953 $ 9,703 $32,250 $ 0 $ 623 $ 46,529
1999(1) $4,800 $14,596 $39,938 $ 7,500 $ 0 $ 66,834
1999(2) $3,269 $14,596 $17,870 N/A $10,616 $ 46,351
1998 $2,659 $ 4,270 $26,532 N/A $ 1,084 $ 34,545
James E. Hoffmann............. 2000 $5,048 $ 7,644 $20,843 $ 28,244 $ 8,090 $ 69,869
1999(1) $4,800 $ 3,508 $ 8,000 $ 4,000 $ 0 $ 20,308
1999(2) $2,032 $ 3,187 $ 0 N/A $ 0 $ 5,219
1998 $2,659 $ 0 $ 8,916 N/A $ 2,324 $ 13,899
Leonard C. Stephens........... 2000 $5,250 $ 9,893 $18,250 $ 26,008 $ 3,069 $ 62,470
1999(1) $4,800 $ 8,955 $ 8,000 $ 4,000 $ 2,240 $ 27,995
1999(2) $4,182 $ 7,042 $ 0 N/A $ 2,240 $ 13,464
1998 $2,258 $ 0 $ 0 N/A $ 0 $ 2,258
- ---------------
(1) Calculated for the twelve months ended December 31, 1999. In July 2000, Leap
elected to change its fiscal year end from August 31 to December 31.
(2) Fiscal year ended August 31, 1999.
(3) Leap has a voluntary retirement plan that allows eligible executives to
defer up to 100% of their income on a pre-tax basis. The participants
receive a 50% company stock match on a maximum deferral of 20% of income
payable only upon eligible retirement. Participants become fully vested in
the stock benefit at age 65, with partial vesting beginning after the
participant reaches the age of 61 and has at least three years of employment
with Leap or has participated in the plan for more than ten years. The
employee contributions and the stock benefit are unsecured and subject to
the general creditors of Leap. At December 31, 2000, 5,950 shares were
vested on behalf of Mr. White; 739 shares have been issued but have not
vested on behalf of Ms. Swenson; 2,169 shares were vested on behalf of Mr.
Bernard; 567 shares have been issued but have not vested on behalf of Mr.
Hoffmann; and 513 shares have been issued but have not vested on behalf of
Mr. Stephens.
(4) In November 1999, Leap adopted an executive officer deferred stock plan that
provided for mandatory deferral of 25% and voluntary deferral of up to the
remaining 75% of executive officer bonuses. Bonus deferrals were converted
into share units credited to the participant's account, with each share unit
entitling the participant to one share of Leap common stock. Participants
received a 20% company stock match on the share units credited to their
accounts for each bonus payday. After bonuses for the year ended December
31, 2000 had been paid, Mr. White held 21,826 shares, Ms. Swenson held 3,734
shares, Mr. Hoffmann held 5,634 shares, and Mr. Stephens held 5,227 shares
in their plan accounts. Matching share units vest ratably over three years
on each anniversary date of the applicable bonus payday. The participant's
accounts are unsecured and subject to the general creditors of Leap.
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(5) Also includes $622,559, the dollar value of the benefits of premiums paid
for a split-dollar life insurance policy (unrelated to term life insurance
coverage) (the "Split-Dollar Insurance") reflecting the present value of the
economic benefit of the premiums paid by Leap during the twelve months ended
December 31, 2000.
(6) Also includes $622,560, the dollar value of the benefits of premiums paid
for the Split-Dollar Insurance reflecting the present value of the economic
benefit of the premiums paid by Leap during the twelve months ended December
31, 1999.
(7) Also includes $203,040, the dollar value of the benefits of premiums paid
for the Split-Dollar Insurance reflecting the present value of the economic
benefit of the premiums paid by Leap during the twelve months ended August
31, 1999.
(8) Also includes $17,080, the dollar value of the benefit of premiums paid for
the Split Dollar Insurance reflecting the present value of the economic
benefit of the premiums paid by Qualcomm during its 1998 fiscal year.
The following table shows specified information with respect to options to
purchase Leap common stock granted to the Named Executive Officers during the
twelve months ended December 31, 2000, including option grants to purchase
Cricket Communications Holdings, Inc. common stock, which were converted into
options to purchase Leap common stock in connection with the merger of Cricket
Communications Holdings into a wholly-owned subsidiary of Leap in June 2000.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS GRANTED STOCK PRICE APPRECIATION FOR
OPTIONS TO COMPANY OPTION TERM(2)
GRANTED EMPLOYEES IN EXERCISE EXPIRATION ----------------------------
NAME (#)(1) FISCAL YEAR PRICE DATE 5% 10%
---- ---------- --------------- -------- ---------- -------------- -----------
Harvey P. White........... 300,000 11.79% $62.94 7/25/10 $11,870,677 $30,080,258
Susan G. Swenson.......... 200,000 7.86% $62.94 7/25/10 $ 7,913,785 $20,053,506
Thomas J. Bernard......... 75,000 2.95% $62.94 7/25/10 $ 2,967,669 $ 7,520,065
James E. Hoffmann......... 60,000 2.36% $62.94 7/25/10 $ 2,374,135 $ 6,016,052
Leonard C. Stephens....... 65,000 2.55% $62.94 7/25/10 $ 2,571,980 $ 6,517,389
- ---------------
(1) Options granted by Leap to executive officers in its fiscal year ending
December 31, 2000 become exercisable in equal installments on the first
through fifth anniversaries of the date of grant.
(2) Calculated on the assumption that the market value of the underlying common
stock increases at the stated values, compounded annually. Options granted
under Leap's stock option plans generally have a maximum term of ten years.
The total appreciation of the options over their ten year terms at 5% and
10% is 63% and 159%, respectively.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the
exercise of options to purchase common stock of Leap during the twelve months
ended December 31, 2000, and the unexercised options held and the value thereof
at that date, for each of the Named Executive Officers.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
SHARES VALUE (#) ($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Harvey P. White............. 47,250 $300,038 150,150 585,350 $2,792,278 $4,299,162
Susan G. Swenson............ 39,375 $500,063 50,000 470,875 $ 300,000 $2,521,819
Thomas J. Bernard........... 23,625 $150,019 52,500 196,500 $ 857,580 $1,498,380
James E. Hoffmann........... 7,560 $ 48,006 31,450 122,890 $ 595,869 $ 881,599
Leonard C. Stephens......... 18,900 $120,015 25,150 113,750 $ 452,533 $ 680,057
- ---------------
(1) Represents the closing price per share of the underlying shares on the last
trading day of the year ended December 31, 2000 less the option exercise
price multiplied by the number of shares. The closing value per share was
$25.00 on the last trading day of the year as reported on the Nasdaq
National Market.
EMPLOYMENT AGREEMENT
Leap and Susan G. Swenson entered into an employment offer letter dated
June 11, 1999 which provides that Ms. Swenson will serve as President of Leap.
Ms. Swenson currently serves as President, Chief Operating Officer and Director
of Leap. Under the letter, Ms. Swenson is entitled to an annual salary of
$400,000 and, beginning with fiscal 1999, an annual bonus of up to 60% of her
base salary. In connection with the letter, Ms. Swenson received an option under
Leap's option plan to acquire 250,000 shares of Leap's common stock at a price
of $19.00 per share. The option vests at the rate of 20% per year upon each
anniversary of the grant date. Under the letter, Ms. Swenson also received an
option to purchase 350,000 shares of Cricket Communications Holdings, Inc.
common stock at a price of $2.00 per share, that will become fully vested after
five years from the grant date. In connection with the merger of Cricket
Communications Holdings into a wholly-owned subsidiary of Leap in June 2000, Ms.
Swenson's outstanding options to purchase shares of Cricket Communications
Holdings common stock were converted into options to purchase 70,875 shares of
Leap's common stock at a price of $6.35 per share. Under the letter, Ms. Swenson
is eligible to participate in Leap's executive retirement plan and is also
entitled to comprehensive benefits. The letter includes a special termination
provision that requires Leap to pay to Ms. Swenson 12 months base pay if her
employment is terminated for other than gross misconduct or gross neglect of
duty within 12 months of her date of hire. If Ms. Swenson is terminated for
other than gross misconduct or gross neglect of duty within 13 to 24 months of
her date of hire, Leap is required to make payment to Ms. Swenson equal to nine
months of her base pay.
CHANGE OF CONTROL AGREEMENTS
In January 2001, the Board determined that it was in the best interests of
Leap and its stockholders to assure that Leap has the continued attention and
dedication of its executive officers in the event of a possible change in
control of Leap. Leap has presented change in control agreements to each of its
executive officers. Leap expects that each executive officer will enter into
such agreement. The purpose of the agreements is to diminish the possibility of
departure or distraction of Leap's executive officers, to the detriment of Leap
and its stockholders, caused by the uncertainties and risks raised by a pending
or threatened change in control and to induce the executive officers to remain
in the employ of Leap. The agreements have an initial term ending on December
31, 2002. Beginning January 1, 2003, and each January 1 thereafter, the
agreements are automatically renewed for a one-year term unless Leap has given
written notice to the executive officer that it does not intend to renew the
agreement by June 30 of the preceding year. Under the agreements, a "change in
control" occurs if (i) any person becomes the beneficial owner of 35% or more of
the combined voting power of Leap's then outstanding securities; (ii) the
continuing directors (as defined in the agreement) cease to
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constitute a majority of the Board; (iii) Leap merges or consolidates with
another entity and the voting securities of Leap immediately prior to the
transaction fail to represent at least 60% of the voting power of the surviving
entity following the transaction; or (iv) the stockholders of Leap approve a
plan of complete liquidation of Leap or enter into an agreement for the sale or
disposition by Leap of all or substantially all of its assets. Under the
agreements, immediately prior to a change in control which is not approved in
advance by a majority of the Board, 50% of the executive officer's unvested
stock awards will immediately become vested and exercisable and the remaining
50% will become vested and exercisable on the one year anniversary of the change
in control (if the executive officer is then employed under the agreement) or
upon the executive officer's termination other than for cause or resignation for
good reason within one year of the change in control. If, as a result of a
change in control, the executive officer's unvested stock awards will terminate
or be canceled, then immediately prior to the termination or cancellation of the
unvested stock awards, all of the executive officer's unvested stock awards will
become immediately vested and exercisable. In addition, if the executive officer
is terminated within one year of a change in control other than for cause or if
the executive officer resigns for good reason, the executive officer is entitled
to either two years of salary and bonus (in the case of the Chief Executive
Officer and President) or one year of salary and bonus (in the case of all other
executive officers) in a lump sum payment, the immediate and full acceleration
of any remaining unvested stock awards, the continuation of directors and
officers' liability insurance for a period of six years and the continuation of
certain medical and dental benefits for either 12 or 24 months, as the case may
be. In the event that the termination payments to the executive officer under
the agreement are subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code, then Leap will make additional payments to the executive
officer in an aggregate amount such that the net amount of the termination
payments and additional payments retained by the executive officer after the
payment of all excise taxes on the termination payments and all federal, state
and local income tax, employment tax and excise taxes on the additional
payments, will be equal to the amount of the termination payments. In
consideration of any benefits provided under these agreements, the executive
officer will release Leap from further claims and agree not to compete directly
or indirectly with Leap for a period of one or two years, as the case may be.
For purposes of the agreements, "cause" means willful and continued failure to
substantially perform job duties and follow and comply with lawful directives of
the Board, willful commission of acts of fraud or dishonesty or willful
engagement in illegal conduct or gross misconduct that is materially damaging to
Leap. "Good reason" includes the diminution of the responsibility, position or
salary of the executive officer, Leap's breach of the change in control
agreement or the involuntary relocation of the executive officer.
EXECUTIVE OFFICER DEFERRED STOCK PLAN
In November 1999, Leap established an Executive Officer Deferred Stock Plan
that provided for mandatory deferral of 25% and voluntary deferral of up to 75%
of executive officer bonuses. Bonus deferrals were converted into share units
credited to the participant's account, with the number of share units calculated
by dividing the deferred bonus amount by the fair market value of Leap's common
stock on the bonus payday. Share units represent the right to receive shares of
Leap's common stock in accordance with the plan. Leap also credited to a
matching account that number of shares units equal to 20% of the share units
credited to the participant's accounts. Matching share units vest ratably over
three years on each anniversary date of the applicable bonus payday. Leap
reserved 25,000 shares of its common stock for issuance under the plan.
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PERFORMANCE GRAPH
The following graph compares cumulative stockholder return on Leap's common
stock since September 23, 1998 to (i) the Nasdaq Composite Index, U.S. and
foreign companies, (ii) a peer group selected by Leap which includes nine
publicly traded companies within Leap's industry (the "New Peer Group"), and
(iii) a peer group index previously used by Leap (the "Former Peer Group").
Leap's New Peer Group is comprised of the following issuers: AirGate PCS, Inc.;
Alamosa Holdings, Inc.; Nextel Communications Inc.; Nextel Partners, Inc.;
Sprint PCS Group; TeleCorp PCS, Inc.; Triton PCS Holdings, Inc.; UbiquTel, Inc.;
and US Unwired, Inc. Leap's Former Peer Group is comprised of the following
issuers: Bell Canada International, Inc., Millicom International Cellular S.A.,
Nextel Communications Inc., Telesystem International Wireless, Inc. and Vodafone
Group Plc. Leap has changed its peer group from the Former Peer Group because
Leap believes that the inclusion of Bell Canada International, Inc., Millicom
International Cellular S.A. and Telesystem International Wireless, Inc. no
longer accurately reflects Leap's business focus, which is now more heavily
concentrated on domestic wireless telecommunications markets rather than
international markets. Leap believes the New Peer Group more accurately reflects
this business focus. The graph assumes an initial investment of $100 at
September 23, 1998 and reinvestment of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN ON INVESTMENT SINCE
SEPTEMBER 23, 1998
[GRAPH]
LEGEND
SYMBOL 09/1998 12/1998 08/1999 12/1999 08/2000 12/2000
------ ------- ------- ------- ------- ------- -------
- -------- [x] Leap Wireless International, Inc. 100.0 161.1 386.1 1744.4 1763.9 555.6
[------] [*] Nasdaq Stock Market (US & Foreign) 100.0 124.8 156.4 232.7 240.0 140.5
[-- --] [o] New Peer Group(1) 100.0 147.9 374.6 654.1 670.3 297.3
[======] [t] Former Peer Group(2) 100.0 119.2 202.6 282.6 259.9 170.2
(1) Companies in the New Peer Group: AirGate PCS, Inc., Alamosa Holdings, Inc.,
Nextel Communications Inc., Nextel Partners, Inc., Sprint PCS Group, TeleCorp
PCS, Inc., Triton PCS Holdings, Inc., UbiquiTel, Inc., US Unwired, Inc.
(2) Companies in the Former Peer Group: Bell Canada International Inc., Millicom
International Cellular SA, Nextel Communications Inc., Telesystem International
Wireless Inc., Vodafone Group PLC New
Leap's closing stock price as reported by the Nasdaq National Market on
December 31, 2000, the last trading day of Leap's 2000 fiscal year, was $25.00.
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REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
OVERVIEW AND PHILOSOPHY
Leap's Compensation Committee (the "Committee") is currently composed of
one outside Director: Mr. Robert C. Dynes. Mr. John J. Moores also served on the
Compensation Committee until his resignation from the Board in February 2001.
Mr. Moores was involved in consideration of executive officer bonuses for the
fiscal year ended December 31, 2000 and is therefore submitting this report
along with Mr. Dynes. The Board is currently considering a replacement for Mr.
Moores to serve on the Compensation Committee. The Committee develops Leap's
compensation policies and annually reviews and approves executive officer
compensation. In general, the compensation policies adopted by the Committee are
designed (1) to attract and retain executives capable of leading Leap to meet
its business objectives, and (2) to motivate Leap's executives to enhance
long-term stockholder value.
EXECUTIVE OFFICER COMPENSATION
In recognition of the strong demand for executives in the wireless
communications industry, Leap's limited operating history, and Leap's on-going
need to attract and retain senior level talent, the Committee generally intends
to set total executive compensation at or above the median levels for comparable
positions at similarly sized companies in the wireless communications industry.
The Committee also expects that the total compensation for each executive
officer will depend upon Leap's performance and the executive's level of
responsibility, experience, performance and contribution to Leap's growth and
profitability.
Leap's executive officer compensation program is comprised of three primary
components: base salary, annual incentive compensation in the form of cash
bonuses, and long-term incentive compensation in the form of stock options.
The Committee sets the base salary for executive officers based on salary
data for markets from which Leap attracts executive talent as well as Leap's own
experience in negotiating compensation with senior executives that Leap is
attempting to hire. In line with Leap's expectations concerning total
compensation for executives, the Committee generally sets the base salaries for
executive officers at or slightly above the median level for Leap's industry.
Leap intends to pay bonuses to its executive officers after the end of each
fiscal year, based primarily upon Leap's performance during the year, the
individual performance of each executive officer, and compensation survey
information for executives employed within Leap's market segment. Following its
analysis of these factors for Leap's executive officers, the Committee awarded
executive officer bonuses for the year ended December 31, 2000 in January 2001.
Leap grants stock options to provide long-term incentives and to align
employee and stockholder long-term interests. Stock options provide a direct
link between compensation and stockholder return. Stock options are generally
granted with an exercise price equal to the fair market value of Leap's common
stock on the date of the grant. To facilitate the long-term incentives provided
by option grants, options become exercisable over five years, with the shares
covered by an option becoming exercisable in five equal installments on the
first through fifth anniversaries of the date of the grant. The option exercise
period is designed to encourage employees to work for the long-term view of
Leap's welfare and to establish their long-term relationship with Leap. It is
also designed to reduce employee turnover and to retain the trained skills of
valued employees.
The number of options granted to individual executive officers depends upon
the executive's position at Leap, his or her performance prior to the option
grant, and market practices within the wireless communications industry. Because
a primary purpose of granting options is to provide incentives for future
performance and to retain valued employees, the Committee considers the number
of shares that are not yet exercisable by an executive under previously granted
options when granting additional stock options.
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CHIEF EXECUTIVE OFFICER'S COMPENSATION
Mr. Harvey White, a founder of Leap, led the company to a successful fiscal
year 2000. Leap's fiscal year 2000 achievements were quite significant.
Specifically, Leap:
- raised $902 million through a public offering of Leap common stock and a
units offering;
- sold its Chilean subsidiary, Smartcom, recognizing a gain of $313.4
million before related income tax effects;
- acquired 25 wireless licenses covering approximately 22.7 million
potential customers (1998 POPs);
- entered into financing agreements and amendments to existing financing
agreements with three major infrastructure vendors, which together
produced up to an aggregate of $1,845.0 million in vendor financing; and
- launched the Cricket service in 10 markets nationwide and increased its
customers to more than 190,000 at the end of 2000.
Based upon the aforementioned significant accomplishments and Mr. White's
contribution to Leap, the Committee awarded Mr. White a fiscal year 2000 bonus
of $556,000. Additionally, Mr. White received a fiscal year 2001 salary increase
of $150,000 based on his performance and competitive market data for CEO's of
companies similar in size within the wireless communications industry. Mr. White
also received options to purchase 300,000 shares of Leap common stock for his
leadership and guidance during fiscal year 2000.
TAX CONSIDERATIONS
Section 162(m) of the Internal Revenue Code generally limits the tax
deductions a public corporation may take for compensation paid to its chief
executive officer and its other four most highly compensated executive officers
to $1 million per executive per year. Performance based compensation tied to the
attainment of specific goals is excluded from the limitation. The stockholders
have previously approved Leap's 1998 Stock Option Plan, the Cricket
Communications Holdings, Inc. 1999 Stock Option Plan and Leap's 2000 Stock
Option Plan, qualifying future awards under these plans as performance based
compensation exempt from the Section 162(m) limits. In addition, the Committee
intends to evaluate Leap's executive compensation policies and benefit plans
during the coming year to determine whether additional actions to maintain the
tax deductibility of executive compensation are in the best interest of Leap's
stockholders.
COMPENSATION COMMITTEE
Robert C. Dynes
John J. Moores
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current member of Leap's Compensation Committee is Mr. Dynes. Mr. John
Moores served as a member of the Compensation Committee from December 1999 until
his resignation from the Board in February 2001. Leap is currently considering a
replacement for Mr. Moores to serve on the Compensation Committee. During the
fiscal year ended December 31, 2000, Messrs. Burillo and Targoff also served at
various times as members of the Compensation Committee.
In December 1999, Michael B. Targoff, a director of Leap, purchased 166,667
shares of Cricket Communications Holdings at a price of $6.00 per share. The
shares were acquired in exchange for issuance of a secured demand promissory
note issued to Cricket Communications Holdings by Mr. Targoff in the amount of
$1,000,002. The promissory note, which has been paid in full, was secured by the
shares and accrued interest at the rate of 10% per annum. In connection with the
merger of Cricket Communications Holdings into a wholly-owned subsidiary of Leap
in June 2000, each issued and outstanding share of Cricket Communications
Holdings not held by Leap was converted into the right to receive 0.315 of a
fully paid and nonassessable share of Leap's common stock.
In April 1999, Leap entered into an agreement with Pegaso to provide it
with network management and operations services for five years, subject to
earlier termination in accordance with the terms of the agreement. Leap
generally subcontracted these services to a subsidiary of an international
telecommunications company. From the September 23, 1998 spin-off of Leap until
April 1999, Leap also provided management and operations services to Pegaso
through a subsidiary of the international telecommunications company. In fiscal
1999, Pegaso paid Leap $28.2 million for services plus related expenses under
these arrangements. In fiscal 2000, Pegaso paid Leap $35.6 million for services
plus related expenses. Mr. Burillo and his affiliates own an interest of
approximately 33.2% in Pegaso. Leap owns an interest of approximately 20.1% in
Pegaso.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH DIRECTORS
Before the spin-off of Leap from Qualcomm, Scot B. Jarvis and Jeffrey P.
Williams, two of Leap's directors, worked with Qualcomm to develop the Cricket
unlimited local calling strategy that Leap has adopted and refined for use in
domestic wireless markets. Through June 2000, Messrs. Jarvis and Williams were
also directors of Cricket Communications Holdings, Inc., a subsidiary of Leap
that is implementing the Cricket strategy. In June 1999, Cricket Communications
Holdings granted Messrs. Jarvis and Williams options to purchase 795,000 and
410,000 shares, respectively, of its common stock, exercisable at $1.00 per
share. Messrs. Jarvis and Williams exercised these options in full, and as a
result they owned approximately 1.5% and 0.8%, respectively, of the outstanding
common stock of Cricket Communications Holdings, prior to its June 2000 merger
with a subsidiary of Leap.
Mr. Jarvis fully exercised his Cricket Communications Holdings stock
options in July 1999. Upon exercise, Mr. Jarvis paid $346,334 in cash and issued
to Cricket Communications Holdings a promissory note for the remaining balance
of $448,666. The promissory note was secured by 498,666 shares of Cricket
Communications Holdings common stock and accrued interest at a rate of 9% per
annum, compounded annually, on the outstanding balance of the loan. The loan was
paid in full on August 31, 2000.
Mr. Williams fully exercised his Cricket Communications Holdings stock
options in July 1999 and paid to Cricket Communications the exercise price of
$410,000 in cash.
In December 1999, Mr. Jarvis and Mr. Williams purchased 121,483 and 63,700
shares of Cricket Communications Holdings, respectively, at a price of $6.00 per
share. The shares were acquired in exchange for issuance of demand promissory
notes issued to Cricket Communications Holdings by Messrs. Jarvis and Williams
in the amounts of $728,898 and $382,200, respectively. The promissory notes are
secured by the shares and accrue interest at the rate of 10% per annum.
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In connection with the merger of Cricket Communications Holdings into a
wholly-owned subsidiary of Leap in June 2000, each issued and outstanding share
of Cricket Communications Holdings not held by Leap was converted into the right
to receive 0.315 of a fully-paid and nonassessable share of Leap common stock.
In March 2000, Leap acquired substantially all of the assets of Chase
Telecommunications Holdings, Inc., a company partially owned and controlled by
Mr. Chase. As part of the consideration of that acquisition, (i) Mr. Chase
entered into a consulting agreement with a wholly-owned subsidiary of Leap
pursuant to which Mr. Chase will receive $250,000 per year for 5 years and was
granted options to purchase 9,450 shares of Leap common stock, (ii) Chase
Telecommunications Holdings, Inc. received a warrant to purchase 202,566 shares
of Leap common stock for an aggregate exercise price of $1,000,000, and (iii)
Chase Telecommunications Holdings, Inc. received a contingent earn-out payment
of up to $41.0 million (plus certain expenses) based on the earnings of the
business acquired from Chase Telecommunications Holdings, Inc. during the fifth
full year following the closing of the acquisition.
In October 2000, Leap entered into a preliminary agreement with Greenhill &
Co. LLC, an affiliate of Leap's director, Mr. Williams, to act as a financial
advisor to Leap in connection with the evaluation and implementation of a
program to raise privately sourced capital from financial investors and to
assist Leap in a competitive analysis of other participants in the FCC's
broadband PCS reauction of wireless licenses that closed on January 26, 2001.
The agreement has not yet been finalized. However, the parties have
preliminarily agreed that as compensation for these services, Greenhill will
receive an advisory fee of $150,000 and a placement fee in an amount equal to
two percent (2%) of the gross investment proceeds, if any, received by Leap in
connection with the capital raising efforts conducted by Greenhill. In addition,
Greenhill will be entitled to reimbursement of its reasonable out-of-pocket
expenses. The agreement, once finalized, will contain terms and conditions
typical for an arrangement of this type, including indemnification of Greenhill.
TRANSACTIONS WITH QUALCOMM
Leap was formed as a Delaware corporation in June 1998 as a subsidiary of
Qualcomm. In September 1999, Qualcomm distributed all of the common stock of
Leap to Qualcomm's stockholders as a taxable dividend. To transfer the Leap
business from Qualcomm to us, Qualcomm entered into various agreements with Leap
that are described below. The agreements have been amended from time to time,
including changes required by the FCC as a condition to allowing us to acquire
specific wireless licenses. In May 1999, Qualcomm sold its network
infrastructure division to Ericsson. In connection with that sale, Qualcomm
transferred to Ericsson its rights to sell network infrastructure equipment to
Leap and its subsidiaries and ventures. In February 2000, Qualcomm sold its
subscriber division to Kyocera. In connection with that sale, Qualcomm
transferred to Kyocera its rights to sell customer equipment to Leap and its
subsidiaries and ventures.
FEBRUARY 2000 UNITS OFFERING
Qualcomm purchased $150.0 million (original purchase price) of senior
discount units in Leap's units offering in February 2000. Leap used a portion of
the net proceeds from its February 2000 equity offering to repay all outstanding
borrowings under its credit agreement with Qualcomm and terminated the credit
agreement. As a result of Qualcomm's participation in the units offering,
however, Qualcomm remains a significant lender to Leap. Leap's relationship with
Qualcomm may also create conflicts of interest between Leap and Qualcomm. In
addition, Qualcomm is not restricted from competing with Leap or directly
pursuing wireless telecommunications businesses or interests which would also be
attractive to Leap.
QUALCOMM LOAN AGREEMENT
In January 2001, Leap entered into a secured loan agreement with Qualcomm
under which Qualcomm will loan to Leap approximately $125 million to finance its
acquisition of wireless licenses in the FCC's recent broadband PCS auction
completed in January 2001. Qualcomm has agreed to fund borrowings under the
agreement by the transfer to Leap of an FCC auction discount voucher, or, at
Qualcomm's option, cash. Under the terms of the agreement, Leap must repay the
outstanding principal and accrued interest to
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Qualcomm in a single payment no later than five years after the date of the
initial borrowing. The loan is subject to mandatory prepayments in certain
circumstances, including as a result of our receiving net cash proceeds in
excess of $400 million from issuances of debt or equity securities by Leap or
its subsidiaries (other than certain excluded issuances such as equipment vendor
financing, and sales under the Acqua Wellington common stock purchase agreement
the proceeds of which are used to acquire wireless licenses). The loan bears
interest at a variable rate depending on the collateral Leap provides. Leap
expects this rate to be at LIBOR plus 7.5%. As security for the loan, Leap has
agreed to pledge in favor of Qualcomm the stock of subsidiaries holding licenses
acquired in the recent FCC auction with an aggregate purchase price of at least
150% of the outstanding principal amount of the loan. The loan is subject to the
same covenants that are contained in the Indenture for the high-yield notes
issued in Leap's February 2000 units offering, and other customary covenants and
conditions.
REAL ESTATE LEASE
In July 2000, Leap entered into a sublease agreement with Qualcomm under
which Leap subleases 10,575 square feet of office space located in San Diego,
California. The term of the agreement began on October 1, 2000 and continues on
a month-to-month basis. Leap currently pays $13,219 per month to Qualcomm under
the sublease, which will increase to $13,500 beginning September 1, 2001. Either
party may terminate the sublease on 90 days' written notice and the sublease
will automatically terminate if the term of the master lease terminates for any
reason. Leap expects that the amount of space it subleases from Qualcomm will
increase to approximately 25,000 square feet in the near future.
AGREEMENTS RELATING TO SPIN-OFF DISTRIBUTION
Separation and Distribution Agreement
Immediately before the distribution of Leap common stock to Qualcomm's
stockholders, we entered into the Separation and Distribution Agreement with
Qualcomm. The Separation and Distribution Agreement governed the principal
transactions required to effect the separation of the companies and the
distribution, and other agreements governing the relationship between the
parties.
To effect the separation of the companies, Qualcomm transferred some of its
businesses and ventures to us. Qualcomm also contributed to Leap the following:
- $10 million in cash;
- Qualcomm's right to receive payment of approximately $113 million of debt
from Leap's operating companies;
- Qualcomm's rights under specific agreements relating to Leap's business
and ventures; and
- other assets.
Qualcomm's performance as an equipment vendor was not a condition of
payment to Leap under the notes and other debt transferred. Leap did not receive
any intellectual property in connection with the separation of the companies,
and Qualcomm retained all rights not expressly transferred regarding agreements
with Leap's subsidiaries and ventures.
In connection with the transfer of assets and rights by Qualcomm, Leap
issued a warrant to Qualcomm to purchase 5,500,000 shares of Leap common stock
for $6.11 per share. In March 1999, in exchange for consideration valued at $5.4
million, Qualcomm agreed to amend the warrant to reduce the number of shares
which may be acquired upon exercise of the warrant to 4,500,000. The warrant is
currently exercisable and remains exercisable until 2008. Qualcomm has agreed
that it will not exercise the warrant in a manner that would cause Qualcomm and
its officers and directors to collectively hold more than 15% of Leap's
outstanding common stock. On December 6, 2000, Qualcomm exercised a portion of
the warrant and received 562,500 shares of Leap's common stock for an aggregate
purchase price of $3,434,766 in cash. On December 12, 2000, Qualcomm
net-exercised an additional portion of the warrant and received 453,200 shares
of Leap's common stock, surrendering warrants to purchase 109,300 shares of
Leap's common stock in payment of the exercise
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price. After both of these exercises, the remaining number of shares which may
be acquired upon exercise of the warrant is 3,375,000.
In the Separation and Distribution Agreement, Leap also assumed some
liabilities of Qualcomm, including:
- funding obligations to Leap's subsidiaries and ventures totaling
approximately $75 million;
- Qualcomm's rights and obligations to manage Leap's subsidiaries and
ventures; and
- $2 million of accrued liabilities regarding Leap's employees.
The Separation and Distribution Agreement provides for:
- releases of claims of each party against the other;
- the allocation of potential liabilities; and
- indemnification rights between the parties.
The Separation and Distribution Agreement also provides that, in
international markets, Leap will deploy, and will cause its affiliates to
deploy, only systems using cdmaOne until January 1, 2004.
CdmaOne is the original standard for fixed or mobile wireless
communications systems based on or derived from Qualcomm's CDMA technology and
successor standards that Qualcomm has adopted. The Telecommunications Industry
Association and other recognized international standards bodies have adopted
cdmaOne as an industry standard. Leap also agreed that, in international
markets, it would invest only in companies using cdmaOne systems until January
1, 2004.
Under the Separation and Distribution Agreement, Leap also granted Qualcomm
a non-exclusive, royalty-free license to any patent rights developed by Leap or
its affiliates. In addition, under the Separation and Distribution Agreement,
Leap granted Qualcomm a right of first refusal for a period of three years with
respect to proposed transfers by Leap of its investments and joint venture
interests. Leap further agreed to take an active role in the management of
companies in which it holds stock or joint venture interests. The parties also
generally agreed that, for a period of three years following our spin-off from
Qualcomm, neither party would solicit or hire employees of the other.
Master Agreement Regarding Equipment Acquisition
The Master Agreement Regarding Equipment Acquisition contains Leap's
obligations regarding the purchase and sale of terrestrial-based cdmaOne
infrastructure and customer equipment. As a result of Qualcomm's sale of its
network infrastructure division to Ericsson, Leap owes some purchase obligations
to Ericsson with respect to network equipment and, as a result of the sale of
Qualcomm's subscriber division to Kyocera, to Kyocera with respect to customer
equipment. Under the Master Agreement Regarding Equipment Acquisition, Leap
generally agreed that:
For five years, Leap will purchase at least 50% of its requirements for
infrastructure equipment from Ericsson and 50% of its requirements for customer
equipment from Kyocera. In addition, for each initial investment by Leap made
before October 2002 in a wireless telecommunication entity operating in the
U.S., Leap will require the U.S. operator to enter into an equipment
requirements agreement with Kyocera and Ericsson. The equipment requirements
agreement will require the U.S. operator to purchase at least 50% of its
requirements for infrastructure equipment from Ericsson and 50% of its
requirements for customer equipment from Kyocera, in each case for a five year
period. For each investment by Leap in a U.S. operator of wireless
communications made after October 2002, Leap will attempt to require the U.S.
operator to provide Ericsson and Kyocera with an opportunity to bid on its
requirements for infrastructure equipment and customer equipment, respectively.
Leap also will encourage the U.S. operator to acquire equipment from Ericsson
and Kyocera.
Leap and the U.S. companies in which it invests must comply with these
requirements only if Kyocera or Ericsson, as applicable, offers competitive
equipment on competitive terms, and its bid to sell equipment and
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related services is less than or equal to the lowest competing bid that Leap or
such companies would accept. However, until Kyocera has received contracts from
Leap and the companies in which it invests for at least $250 million of customer
equipment for use in the U.S., Leap and U.S. companies in which it initially
invests before 2002 must comply with these requirements if Kyocera's bid is 110%
or less than the lowest competing bid Leap or such other company would accept.
Under the terms of the agreement, because Leap has already received more
than $60 million in financing from parties other than Qualcomm, if Leap makes an
initial investment in a wireless communications company operating outside of the
U.S., Leap will seek to provide Kyocera and Ericsson with an opportunity to bid
on the foreign operator's infrastructure and customer equipment. Leap will also
encourage the foreign operator to acquire its equipment from Kyocera and
Ericsson. The obligations of all the foreign operators will depend on Kyocera
and Ericsson offering competitive equipment on competitive terms, including
price.
All the obligations of Leap regarding equipment purchases under the Master
Agreement Regarding Equipment Acquisition will expire in September 2007. If Leap
attempts to acquire equipment on a "bundled" basis, then Ericsson and Kyocera
are entitled, in some cases, to respond separately to each portion of the
proposed bundled acquisition. If Leap does not attempt to acquire the equipment
on a competitive basis from multiple vendors, but instead decides to negotiate
exclusively with Ericsson or Kyocera, then Ericsson or Kyocera, as applicable,
will offer and sell the equipment to Leap on a "most favored pricing" basis.
Conversion Agreement
Under the Conversion Agreement with Qualcomm, Leap agreed to issue up to
2,271,060 shares of its common stock to the holders of the Trust Convertible
Preferred Securities of Qualcomm Financial Trust I, a wholly owned statutory
business trust of Qualcomm, upon the conversion of their securities. On March 6,
2000, Qualcomm issued a call for the redemption of the remaining outstanding
Trust Convertible Preferred Securities, all of which have now been converted or
redeemed. In sum, Leap issued an aggregate of 2,268,732 shares of its common
stock to the holders of the Trust Convertible Preferred Securities under the
Conversion Agreement. The remaining 2,328 shares reserved for issuance under the
Conversion Agreement were not issued as a result of cash payments in lieu of
fractional shares that would have been issued upon conversion of the Trust
Convertible Preferred Securities and as a result of redemptions by Qualcomm.
Upon conversion of the Trust Convertible Preferred Securities, Qualcomm received
a benefit in the form of forgiveness of debt, but Leap received no benefit or
other consideration.
DEFERRED PAYMENT AGREEMENTS WITH SMARTCOM
Smartcom entered into a Deferred Payment Agreement, as amended and
restated, with Qualcomm related to Smartcom's purchase of equipment, software
and services from Qualcomm. Under the terms of the Deferred Payment Agreement,
Qualcomm agreed to defer collection of principal amounts up to a maximum of
$115.7 million, including capitalized interest. The obligations under the
Deferred Payment Agreement were secured by all of the assets of Smartcom.
Inversiones had agreed to pledge its shares in Smartcom as collateral for its
guarantee of Smartcom's obligations to Qualcomm under the agreement. The
Deferred Payment Agreement required Smartcom to meet certain financial and
operating covenants, including a debt to equity ratio and restrictions on
Smartcom's ability to pay dividends and to distribute assets. As a result,
substantially all the net assets of Smartcom were restricted from distribution
to Leap. The deferred payments bore interest at a rate equal to LIBOR plus 5.0%
to 6.5% or a bank base rate plus 4.0% to 5.5%, in each case with the specific
rate based on specific financial ratios. Accrued interest could be added to the
outstanding principal amount of the applicable borrowing until September 2001.
Amounts deferred under the agreement were to have been repaid by September
2006. In February 2000, Smartcom and Qualcomm entered into an Equipment Credit
Agreement related to Smartcom's equipment supply and service agreements with a
vendor. The Equipment Credit Agreement permitted up to $38.5 million of
borrowings, including capitalized interest. The Equipment Credit Agreement
provided for financial and operating covenants similar to the Deferred Payment
Agreement. Borrowings under the Equipment Credit Agreement accrued interest at a
rate equal to LIBOR plus 5.0% to 7.0% or a bank base rate plus 4.0% to 6.0%,
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in each case with the specific rate based on certain financial ratios. Principal
payments were scheduled to begin in March 2002 with a final maturity of
September 2006. At May 31, 2000, Smartcom had financed amounts totaling $16.3
million, including capitalized interest, under the Equipment Credit Agreement.
In February 2000, Smartcom and Qualcomm entered into a Subscriber Deferred
Payment Agreement related to Smartcom's purchase of handsets and accessories and
test equipment from Qualcomm. Under the terms of the agreement, Qualcomm had
agreed to defer collection of amounts up to a maximum of $11.2 million,
including capitalized interest. The Subscriber Deferred Payment Agreement
provided for certain financial and operating covenants similar to the Deferred
Payment Agreement. Borrowings under the Subscriber Deferred Payment Agreement
accrued interest at a rate equal to LIBOR plus 3.5% to 5.0% or a bank base rate
plus 2.5% to 4.0%, in each case with the specific rate based on certain
financial ratios. Principal outstanding was due at maturity in September 2001.
At May 31, 2000, just prior to Leap's sale of Smartcom, Smartcom had financed
amounts totaling $11.2 million under the Subscriber Deferred Payment Agreement.
In connection with Leap's sale of Smartcom, in June 2000, Leap entered into
a Waiver, Release and Termination of Obligations with Qualcomm, Inversiones and
Smartcom, whereunder Qualcomm released us and Inversiones from our respective
obligations under the Deferred Payment Agreement, the Equipment Credit
Agreement, the Subscriber Deferred Payment Agreement and all other related
agreements.
PROPOSAL 2
PROPOSAL TO APPROVE THE ADOPTION OF LEAP'S
2001 EXECUTIVE OFFICER DEFERRED BONUS STOCK PLAN
In January 2001, the Board of Directors approved, subject to stockholder
approval, the adoption of Leap's 2001 Executive Officer Deferred Bonus Stock
Plan (the "2001 Plan"). The 2001 Plan is a deferred compensation plan that
provides for the mandatory deferral of 25% of each executive officer's bonuses,
and the voluntary deferral of up to 75% of such bonuses for a given year if paid
after the last day of that year. Share units representing such deferrals, which
are payable on a deferred basis in shares of Leap common stock are credited to
the participants' accounts on the bonus payday. Leap also matches 20% of the
total amount of the bonuses deferred through the crediting of additional share
units to a participant's account, which share units vest ratably over a three
year period.
The 2001 Plan is intended to reward Leap's executive officers for their
performance through the issuance of the matching share units as well as to serve
as a retention tool through the 2001 Plan's vesting provisions. The 2001 Plan
has the added benefits of conserving cash that otherwise would be paid currently
in the form of executive officer bonuses and further aligning the interests of
Leap's executive officers with those of its stockholders by increasing the
ownership of Leap common stock by such officers.
A total of 275,000 shares of common stock would be reserved for issuance
under the 2001 Plan. No shares of Leap's common stock have been issued pursuant
to the 2001 Plan. There are seven executive officers of Leap currently eligible
to participate in the 2001 Plan. A copy of the 2001 Plan is attached hereto as
Appendix A.
The Board adopted Leap's first executive officer deferred stock plan in
1999. The Board found that this pilot plan, which contained terms similar to the
2001 Plan, was well received by Leap's executive officers and was an effective
tool in motivating and retaining officers. Based in part on the success of the
pilot plan, the Leap Board has approved the adoption of the 2001 Plan, subject
to the requisite stockholder approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
GENERAL
The 2001 Plan is a non-qualified deferred compensation plan that provides
for mandatory deferral of 25% of an executive officer's bonuses, and voluntary
deferral of up to 75% of such bonuses for a given year if paid after the last
day of that year. Bonus deferrals are converted into share units credited to the
participant's deferred bonus share account, with the number of share units
calculated by dividing the deferred bonus
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amount by the fair market value of Leap's common stock on the bonus payday. Each
share unit represents the right to receive one share of Leap's common stock in
accordance with the 2001 Plan. Leap will also credit to a matching share account
that number of share units equal to 20% of the share units credited to the
participant's deferred bonus share account for each bonus payday. Matching share
units vest ratably over three years on each anniversary date of the applicable
bonus payday. Participants' accounts are unsecured and subject to the claims of
general creditors of Leap.
PURPOSE
The 2001 Plan is intended to reward Leap's executive officers for their
performance through the deferred distribution of matching share units as well as
to serve as a retention tool through the 2001 Plan's vesting provisions. The
2001 Plan has the added benefits of conserving cash that otherwise would be paid
currently in the form of executive officer bonuses and further aligns the
interests of the executive officers with those of Leap's stockholders by
increasing the ownership of Leap's common stock by the officers. The 2001 Plan
would provide deferred compensation for a select group of management or highly
compensated employees, within the meaning of Sections 201(2), 301(a)(3) and
401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
ADMINISTRATION
The 2001 Plan is administered by the Board of Directors in accordance with
the 2001 Plan. The Board has full discretionary power and authority to:
- engage actuaries, attorneys, accountants, appraisers, brokers,
consultants, administrators, physicians or other firms or persons and to
rely upon the reports, advice, opinions or valuations of any such persons
except as required by law;
- adopt rules applicable to the 2001 Plan and construe the 2001 Plan and
the rules established thereunder;
- determine questions of eligibility, vesting, entitlement to benefits and
distributions of participants;
- make findings of fact as necessary to make any determinations and
decisions in the exercise of such discretionary power and authority;
- appoint claims and review officials to conduct claims procedures; and
- delegate any duty, power or responsibility to a committee (as provided
below), to any firm or to any other person or persons.
The Board of Directors is authorized to delegate administration of the 2001 Plan
to a committee composed of not fewer than three members of the Board. Every
finding, decision and determination made by the Board shall, to the fullest
extent permitted by law, be final and binding on all parties. As used herein
with respect to the 2001 Plan, the "Board" refers to any committee to which
administration of the 2001 Plan has been delegated as well as to the Board of
Directors itself. Leap will pay for all expenses properly incurred in the
administration of the 2001 Plan.
STOCK SUBJECT TO THE 2001 PLAN
The total number of share units that may be credited under the 2001 Plan
may not exceed 275,000, subject to adjustment as described below. Share units
that are distributed as shares of common stock will not be available for
subsequent crediting under the 2001 Plan. Share units that are forfeited prior
to vesting will be available for subsequent crediting under the 2001 Plan. As of
February 22, 2001, no share units were credited to participants under the 2001
Plan and no shares of common stock have been issued under the 2001 Plan.
ELIGIBILITY
An employee who on the first day of any fiscal year is a Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Executive Vice
President or Senior Vice President of Leap is a participant in the 2001
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Plan for that fiscal year. Leap has seven executive officers who would be
participants in the 2001 Plan for fiscal year 2001.
SHARE UNITS CREDITED UNDER THE 2001 PLAN
Leap has not credited any share units representing rights to receive shares
of common stock under the 2001 Plan. The 2001 Plan is effective for bonuses
earned with respect to the 2001 fiscal year. Participation in the 2001 Plan is
mandatory to the extent of 25% of an executive officer's bonuses for each fiscal
year. In addition, under the 2001 Plan an executive officer may, at his or her
sole discretion, defer up to 75% of his or her bonuses for a given year that are
paid after the last day of such year. The Compensation Committee of the Board of
Directors considers whether, and to what extent, each executive officer shall be
awarded a bonus after the end of each fiscal year. Also, an executive officer
will be credited with matching share units equal to 20% of the share units
credited to his or her deferred bonus share account. Matching share units vest
ratably over three years on each anniversary date of the applicable bonus
payday.
The following table sets forth the benefits that would have been conferred
under the 2001 Plan for bonuses awarded to executive officers for the year ended
December 31, 2000, had the 2001 Plan been in effect for fiscal 2000, to (i) each
of the named executive officers and (ii) the executive officers as a group.
Officers and directors who are not executive officers are not eligible to
participate in the 2001 Plan. Benefits under the 2001 Plan for future years are
not determinable until such time as executive officer bonuses are awarded for
such fiscal year. In addition, benefits conferred under the 2001 Plan depend on
the amount of voluntary bonus deferrals elected by the executive officers in
future fiscal years.
MANDATORY VOLUNTARY MATCHING SHARE UNITS
NAME AND POSITION DEFERRAL DEFERRAL CONTRIBUTION(1) RECEIVED(2)
----------------- --------- --------- --------------- -----------
Harvey P. White.................................. $136,985 $410,954 $109,556 19,996
Chairman of the Board and Chief Executive
Officer
Susan G. Swenson................................. 96,579 0 19,301 3,524
President, Chief Operating Officer and Director
James E. Hoffmann................................ 35,313 105,939 28,244 5,154
Senior Vice President, General Counsel, and
Secretary
Leonard C. Stephens.............................. 32,522 97,565 26,008 4,747
Senior Vice President, Human Resources
All Executive Officers as a Group (7
persons)(3).................................... 293,353 880,059 234,566 42,818
- ---------------
(1) Matching contributions vest ratably over three years on each anniversary
date of the applicable bonus payday.
(2) Share units received is calculated by dividing the total dollar value of the
deferrals (including matching contributions) by the fair market value of the
common stock on the bonus payday. Bonuses awarded for fiscal year 2000 were
paid on February 21, 2001.
(3) Mr. Bernard, one of the named executive officers, retired from his position
as an officer of Leap on December 31, 2000. Therefore, in accordance with
the terms of the 2001 Plan, none of his bonus for the year ended December
31, 2000 would have been deferred under the 2001 Plan, but would have been
paid in full to Mr. Bernard in cash.
GRANTOR TRUST
Leap may establish a grantor trust under the 2001 Plan and may make
contributions to the trust to provide for distributions of benefits to be made
under the 2001 Plan. Leap's contributions to the trust may be in the form of
cash, shares of common stock or other securities or property.
TERMS OF SHARE UNITS
Distribution Date. Each participant in the 2001 Plan shall select a
distribution date for his or bonus deferral and matching share units credited
for each plan year. The participant may select any distribution date
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no earlier than the third anniversary of the last bonus payday for the plan year
and no later than the tenth anniversary of such bonus payday.
A participant who has not terminated employment with Leap and its
subsidiary companies will receive a distribution of his or her vested share
units to be distributed with respect to a distribution date in a lump sum not
later than 30 days after the calendar month in which the distribution date
occurs. The share units will be distributed in the form of shares of common
stock, less amounts required to be withheld by law. A participant who terminates
employment with Leap and its subsidiary companies will receive a distribution of
his or her remaining vested share units in a lump sum not later than 30 days
after the calendar month in which such termination of employment occurs. The
share units will be distributed in the form of shares of common stock, less
amounts required to be withheld by law. In the case of a participant's death,
the participant's vested share units, less amounts required to be withheld by
law, will be distributed to the participant's designated beneficiary or
beneficiaries in a lump sum. If a participant's employment terminates, his or
her unvested share units will be forfeited.
Dividends and Distributions on Common Stock. If a dividend or distribution
(other than a dividend in the form of shares of common stock) is paid or
distributed on the common stock, a participant's accounts will be credited, as
of the payment or distribution date, with the number of full and fractional
share units equal to (i) the product of (1) the number of share units credited
to the participant's accounts as of the record date of such dividend or other
distribution, multiplied by (2) the dollar amount or fair market value of such
dividend or distribution per share of common stock, divided by (ii) the fair
market value of a share of common stock as of the date of payment or
distribution. If a dividend in the form of shares of common stock is distributed
on the common stock, a participant's account will be credited, as of the
distribution date of such dividend, with the number of full and fractional share
units equal to the number of share units credited to such participant's accounts
as of the record date of such dividend, multiplied by the number of shares of
common stock distributed with respect to such dividend per share of common
stock.
Vesting of Accounts. A participant is fully vested as to share units
credited to his or her deferred bonus share account immediately upon deposit.
Share units credited to a participant's matching share account vest ratably over
three years on each anniversary date of the applicable bonus payday. A
participant will become vested in all share units credited to his or her
matching share account upon the earliest to occur of his or her separation of
service from Leap by reason of his or her:
- retirement after attaining age 65;
- death;
- disability (as defined in the 2001 Plan); or
- discharge other than for cause (as defined in the 2001 Plan).
Upon a participant's separation from service other than as described above, the
portion of the participant's matching share account that is not vested as of the
date of his or her separation from service will be immediately forfeited.
Limitation on Rights of Employees. The 2001 Plan is strictly a voluntary
undertaking on the part of Leap and does not constitute a contract between Leap
and any employee with respect to, or consideration for, or an inducement or
condition of, the employment of the employee.
DURATION, AMENDMENT AND TERMINATION
The Board has the right to terminate the 2001 Plan at any time. If the 2001
Plan is terminated, Leap will distribute participants' accounts as provided by
the Board.
The 2001 Plan may be amended at any time by the Board, including
retroactive amendments necessary to conform the 2001 Plan to the provisions and
requirements of ERISA or the Internal Revenue Code of 1986, as amended (the
"Code"). No amendment may decrease the vested percentage or amount of interest
any
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participant, any beneficiary or any other person entitled to payment under the
2001 Plan has in the participant's accounts.
EFFECT OF CERTAIN CORPORATE EVENTS
If any dividend or other distribution, recapitalization, reclassification,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale,
transfer, exchange or other disposition of all or substantially all of the
assets of Leap, or exchange of common stock or other securities of Leap,
issuance of warrants or other rights to purchase common stock or other
securities of Leap, or other similar corporate transaction or event, in the
Board's sole discretion, affects the common stock such that an adjustment is
determined by the Board to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the 2001 Plan, then the Board shall, in such manner as it may deem
equitable, adjust the aggregate number of share units that will be credited
under the 2001 Plan and the number of share units credited or to be credited to
participants' accounts under the 2001 Plan and the number and kind of shares of
common stock (or other securities or property) or amounts to be distributed to
participants or beneficiaries under the 2001 Plan.
In the event of any transaction or event described above or any unusual or
nonrecurring transactions or events affecting Leap, any affiliate of Leap, or
the financial statements of Leap or any affiliate of Leap, or of changes in
applicable laws, regulations, or accounting principles, the Board, in its sole
and absolute discretion, and on such terms and conditions as it deems
appropriate, by action taken prior to the occurrence of such transaction or
event and either automatically or upon the participant's request, is authorized
to take any one or more of the following actions whenever the Board determines
that such action is appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the 2001
Plan:
- to provide for the early distribution of the share units credited to such
participant's accounts;
- to provide that such participant's matching share account cannot become
vested after such event;
- to provide that such participant's matching share account shall become
fully vested;
- to provide that the obligations of Leap with respect to such
participant's accounts be assumed by the successor or survivor
corporation, or a parent or subsidiary thereof, or the rights of such
participant with respect to such participant's accounts shall be
substituted for by similar rights covering units or amounts representing
the stock of the successor or survivor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and
kind of share units or other units or amounts credited to such
participant; and
- to make adjustments in the number and type of shares of common stock (or
other securities or property) or cash amounts to be distributed to
participants under the 2001 Plan.
The existence of the 2001 Plan and the accounts of participants under the
2001 Plan shall not affect or restrict in any way the right or power of Leap or
its stockholders to make or authorize any adjustment, recapitalization,
reorganization or other change in Leap's capital structure or its business, any
merger or consolidation of Leap, any issue of stock or of options, warrants or
rights to purchase stock or of bonds, debentures, preferred or prior preference
stocks whose rights are superior to or affect the common stock or the rights
thereof or which are convertible into or exchangeable for common stock, or the
dissolution or liquidation of Leap, or any sale or transfer of all or any part
of its assets or business, or any other corporate act or proceeding, whether of
a similar character or otherwise.
In the event of the consolidation or merger of Leap with or into any other
corporation, or the sale by Leap of its assets, the resulting successor may
continue the 2001 Plan by adopting it in a resolution of its board of directors
or agreement of its partners. If within 90 days from the effective date of such
consolidation, merger or sale of assets, such new corporation does not adopt the
2001 Plan, then the 2001 Plan will be terminated.
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FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the Federal income tax consequences of an
executive officer's participation in the 2001 Plan and is not intended to be a
complete description of the tax consequences. This summary does not address
Federal employment taxes, foreign, state and local income taxes and other taxes
that may be applicable.
Bonus Deferrals; Bonus and Matching Share Units. An executive officer
participating in the 2001 Plan will not recognize the bonus deferred as taxable
income upon the mandatory or voluntary deferral of the executive officer's
bonuses under the 2001 Plan. Also, an executive officer will not recognize
taxable income as a result of the crediting of share units to the execution
officer's deferred bonus share account based on the deferral of the executive
officer's bonus, or the crediting of share units to the executive officer's
matching share account, under the 2001 Plan.
Dividends and Distributions on Common Stock. An executive officer will not
recognize taxable income upon the crediting of additional share units to such
executive officer's accounts as a result of dividends or distributions on the
common stock.
Distributions Under the 2001 Plan. An executive officer will recognize
ordinary income upon the distribution of his or her share units under the 2001
Plan. The amount recognized will equal the fair market value of the shares of
common stock distributed, determined at the time of distribution, and the amount
of cash paid to the executive officer.
The Company's Deductions. Leap (or the subsidiary corporation that employs
the executive officer) will be entitled to a tax deduction in the amount of the
ordinary income recognized by the executive officer upon the distribution of the
executive officer's share units under the 2001 Plan.
REQUIRED VOTE
Approval of the adoption of the 2001 Plan requires the affirmative vote of
a majority of the shares of Leap's common stock represented and voting at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
PROPOSAL 3
PROPOSAL TO APPROVE AN AMENDMENT TO LEAP'S
1998 EMPLOYEE STOCK PURCHASE PLAN TO INCREASE THE NUMBER OF SHARES
RESERVED FOR ISSUANCE UNDER THE PLAN
In September 1998, the Board of Directors adopted, and Qualcomm, as sole
stockholder of Leap, approved, the Leap Wireless International, Inc. 1998
Employee Stock Purchase Plan (the "Purchase Plan") to provide all eligible
employees an opportunity to purchase shares of common stock of Leap. Under the
Plan, eligible employees may purchase shares of Leap common stock at 85% of the
lesser of the fair market value of such stock on the first or the last day of
each offering period. A total of 200,000 shares of common stock are currently
reserved for sale under the Purchase Plan. As of January 31, 2001, 105,758
shares of common stock have been sold pursuant to the Purchase Plan and only
94,242 shares of common stock remain available for purchase under the Purchase
Plan. At February 1, 2001, there were approximately 860 employees eligible to
participate in the Purchase Plan. Leap expects to hire approximately 1,100 new
employees during 2001. This projected increase in the workforce makes the
increase in shares reserved for sale under the Purchase Plan essential to Leap's
expected growth and retention of key employees.
In February 2001, the Board of Directors adopted, subject to stockholder
approval, an amendment to the Purchase Plan to increase the number of shares
reserved for sale under the Purchase Plan from 200,000 to 500,000. In accordance
with the terms of the Purchase Plan, the amendment is being submitted to the
stockholders for approval, which approval is required for the amendment to
become effective.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3.
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GENERAL
The Purchase Plan provides a means by which eligible employees of Leap or
certain of its affiliates may purchase Leap common stock at 85% of the lesser of
the fair market value of such stock on the first or the last day of each
offering period. Employees may authorize Leap to withhold up to 15% of their
earnings during any offering period, subject to certain limitations.
PURPOSE
The purpose of the Purchase Plan is to provide a means by which employees
of Leap and its designated parent and subsidiary corporations may be given an
opportunity to purchase common stock of Leap at a discount to the market price.
Leap, by means of the Purchase Plan, seeks to retain the services of these
employees, to secure and retain the services of new employees, and to provide
incentives for employees to exert maximum efforts for the success of Leap. Leap
intends that the rights to purchase stock of Leap granted under the Purchase
Plan be considered options issued under an "employee stock purchase plan" as
that term is defined in Section 423(b) of the Internal Revenue Code of 1986, as
amended (the "Code").
ADMINISTRATION
The Purchase Plan generally is administered by the Board of Directors,
which has the final power to construe and interpret the Purchase Plan and the
rights granted under it. The Board has the power, subject to the provisions of
the Purchase Plan to determine when and how rights to purchase stock of Leap
will be granted, the provisions of each offering of such rights and whether any
parent or subsidiary corporation of Leap will be eligible to participate in the
Purchase Plan. For purposes of the Purchase Plan, parent corporation and
subsidiary corporation have the respective meanings set forth in Sections 424(e)
and (f) of the Code.
The Board of Directors is authorized to delegate administration of the
Purchase Plan to a committee composed of not fewer than two members of the
Board. The Board may abolish any such committee at any time and revest in the
Board the administration of the Purchase Plan. The Board has delegated
administration of the Purchase Plan to the Compensation Committee of the Board.
As used herein with respect to the Purchase Plan, the "Board" refers to the
Compensation Committee as well as to the Board of Directors itself.
STOCK SUBJECT TO THE PURCHASE PLAN
Currently, the total number of shares of common stock that may be sold
pursuant to the Purchase Plan may not exceed 200,000 shares, subject to
adjustment as described below. As of January 31, 2001, 105,758 shares of Leap
common stock have been sold under the Purchase Plan. The proposed amendment to
the Purchase Plan would increase the number of shares of common stock that may
be sold under the Purchase Plan from 200,000 to 500,000. If rights granted under
the Purchase Plan terminate without having been exercised, the common stock not
purchased again becomes available for sale under the Purchase Plan.
ELIGIBILITY
Any employee who is employed by Leap or a designated parent or subsidiary
corporation and, unless otherwise provided by the Board, who is customarily
employed at least 20 hours per week and five months per calendar year by Leap on
the first day of an offering period is eligible to participate in that offering
under the Purchase Plan. In addition, the Board requires that an employee
complete a period of 90 days of continuous employment in order to be eligible to
participate in the Purchase Plan. At February 1, 2001 Leap and its affiliates
had approximately 860 employees who were eligible to participate in the Purchase
Plan, including seven executive officers. Leap expects to hire approximately
1,100 new employees in 2001. This projected increase in the workforce makes the
increase in the number of shares of common stock which may be issued under the
proposed amendment to the Purchase Plan essential to Leap's expected growth and
retention of key employees.
No rights to purchase common stock may be granted under the Purchase Plan
to any person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 5% or more of the total combined
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voting power or value of all classes of stock of Leap or of any affiliate of
Leap. An eligible employee will not be granted rights to purchase common stock
under the Purchase Plan and other "employee stock purchase plans" of Leap's
affiliates that, in the aggregate, accrue at a rate that exceeds $25,000 of the
fair market value of the stock (determined at the time such rights are granted)
for each calendar year such rights are outstanding. The Board may exclude
certain employees of Leap who are highly compensated employees within the
meaning of Section 423(b)(4)(D) of the Code from an offering.
The following table sets forth the benefits conferred under the Purchase
Plan for the year ended December 31, 2000, to (i) each of the named executive
officers, (ii) the executive officers as a group and (iii) all non-executive
officer employees as a group. Directors who are not employees of Leap and its
affiliates are not eligible to participate in the Purchase Plan. Benefits under
the Purchase Plan for future years are not determinable, as they depend on a
variety of factors, including but not limited to:
- the individual elections of eligible employees as to whether and to what
extent they will participate in the Purchase Plan;
- the determinations of the Board as to whether and how often they will
conduct offerings; and
- the market price of Leap common stock.
SHARES AVERAGE PRICE
NAME AND POSITION ISSUED PER SHARE
----------------- ------ -------------
Harvey P. White........................................ 8,029 $13.15
Chairman of the Board and Chief Executive Officer
Susan G. Swenson....................................... 330 37.77
President, Chief Operating Officer and Director
Thomas J. Bernard...................................... 8,029 13.15
Vice Chairman, Former President -- International
Business Division and Director
James E. Hoffmann...................................... 6,787 13.15
Senior Vice President, General Counsel, and Secretary
Leonard C. Stephens.................................... 3,418 13.15
Senior Vice President, Human Resources
All Executive Officers as a Group (7 persons).......... 25,899 25.46
Non-Executive Officer Employees as a Group (107
persons).............................................. 79,859 13.15
OFFERINGS
The Purchase Plan is implemented by offerings of rights to all eligible
employees from time to time, as determined by the Board. The Board has
historically utilized 6-month offering periods ending in April and October of
each year. The Board may specify a maximum number of shares that may be
purchased by any employee, as well as a maximum aggregate number of shares that
may be purchased by all eligible employees, in an offering.
TERMS OF RIGHTS
The following is a description of the terms of rights under the Purchase
Plan:
Participation. An eligible employee may participate in an offering by
delivering a participation agreement to Leap. The participation agreement
authorizes payroll deductions of up to 15% of the employee's earnings during the
purchase period. The Board may designate the maximum percentage of earnings that
an eligible employee may use to purchase shares of common stock for an offering
and may permit eligible employees to use additional amounts apart from payroll
deductions to purchase shares of common stock. An eligible employee's earnings
include regular salary or wages (including certain 401(k) plan, cafeteria plan
and other plan employee contributions and deferrals) and may also include or
exclude bonuses, commissions, overtime pay, incentive pay and other amounts.
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Purchase Price. The purchase price of common stock acquired under the
Purchase Plan is 85% of the lesser of the fair market value of a share of Leap
common stock on the first or the last day of each offering period. Under the
Purchase Plan, the fair market value of a share of common stock is the closing
price for which the common stock was sold on the Nasdaq National Market System
on the last market trading day prior to the day of determination.
Payment of Purchase Price; Payroll Deductions. The purchase price of the
shares is accumulated by payroll deductions over the offering period. A
participant may reduce or terminate his or her payroll deductions no more than
once during an offering period. A participant may not increase or begin such
payroll deductions after the beginning of any offering period. All payroll
deductions made for a participant are credited to his or her account under the
Purchase Plan and deposited with the general funds of Leap. A participant may
not make any additional payments into such account.
Purchase of Stock. In connection with offerings made under the Purchase
Plan, the Board may specify a maximum number of shares any employee may purchase
and a maximum aggregate number of shares that may be purchased in the offering
by all participants. If the aggregate number of shares to be purchased upon
exercise of rights granted in the offering would exceed the maximum aggregate
number of shares that may be purchased, as designated by the Board, the Board
may make a pro rata allocation of shares available in a uniform and equitable
manner. Unless the employee's participation is discontinued, his or her right to
purchase shares is exercised automatically at the end of the purchase period at
the applicable price.
Withdrawal. A participant may withdraw from an offering under the Purchase
Plan at any time at least 10 days prior to the end of the offering period by
delivering to Leap a notice of withdrawal. Upon withdrawal from an offering by
the employee, Leap will distribute to the employee his or her accumulated
payroll deductions without interest, less any accumulated deductions previously
applied to the purchase of stock on the employee's behalf during the offering,
and the employee's interest in the offering will be automatically terminated.
The employee is not entitled to again participate in the offering. An employee's
withdrawal from an offering will not have any effect upon the employee's
eligibility to participate in subsequent offerings under the Purchase Plan.
Termination of Employment. Rights granted pursuant to any offering under
the Purchase Plan terminate immediately upon cessation of an employee's
employment for any reason and Leap will distribute to such employee all of his
or her accumulated payroll deductions, without interest.
Restrictions on Transfer. Rights granted under the Purchase Plan may not be
transferred and may be exercised only by the person to whom such rights are
granted.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event any change is made in Leap's capitalization, such as a stock
split or stock dividend, which results in an increase or decrease in the number
of outstanding shares of Leap common stock without Leap's receipt of
consideration, appropriate adjustments will be made to the number of shares of
common stock authorized for issuance under the Purchase Plan, the maximum number
of shares of common stock issuable in any offering and the price of such common
stock.
In the event of a dissolution, liquidation or some types of mergers
involving Leap, the surviving corporation will either assume the rights under
the Purchase Plan or substitute similar rights, or the exercise date of any
ongoing offering will be accelerated such that the outstanding rights may be
exercised immediately prior to, or concurrent with, any such event.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Purchase Plan at any time.
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The Board may also amend the Purchase Plan at any time. However, no
amendment will be effective unless approved by the stockholders of Leap within
twelve (12) months before or after its adoption by the Board if the amendment
would:
- increase the number of shares of common stock reserved for sale under the
Purchase Plan;
- modify the requirements relating to eligibility for participation in the
Purchase Plan; or
- modify the Purchase Plan in any other way if such modification requires
stockholder approval in order for the Purchase Plan to obtain employee
stock purchase plan treatment under Section 423 of the Code or to comply
with the requirements of Rule 16b-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act").
FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the Federal income tax consequences of an
employee's participation in the Purchase Plan and is not intended to be a
complete description of the tax consequences. This summary does not address
Federal employment taxes, foreign, state and local income taxes and other taxes
that may be applicable.
Grant of Option; Exercise of Option. An eligible employee will not
recognize taxable income on the date the employee is granted an option under the
Purchase Plan (i.e., the first day of the offering period). In addition, the
employee will not recognize taxable income on the date shares are purchased
under the Purchase Plan (i.e., the last day of the offering period).
Sale of Common Stock After the Holding Period. If an employee does not sell
or otherwise dispose of the shares of common stock purchased upon exercise of
his or her option under the Purchase Plan within two years after the date on
which the option is granted or within one year after the date on which the
shares of common stock are purchased (the "Holding Period"), or if the employee
dies while owning the shares of common stock, the employee will be taxed in the
year in which he or she sells or disposes of the shares of common stock, or the
year closing with his or her death, whichever applies, as follows:
- The employee will recognize ordinary income in an amount equal to the
lesser of:
- the excess, if any, of the fair market value of the shares of common
stock on the date on which such shares are sold or otherwise disposed,
or the date on which the employee died, over the amount paid for the
shares of common stock, or
- the excess of the fair market value of the shares of common stock on the
date the option was granted over the option price (determined assuming
that the option was exercised on the date granted) for such shares of
common stock; and
- The employee will recognize as capital gain any further gain realized
(after increasing the tax basis in the shares of common stock by the
amount of ordinary income recognized as described above).
Sale of Common Stock During the Holding Period. If the employee sells or
otherwise disposes of the shares of the common stock purchased upon exercise of
his or her option under the Purchase Plan before the Holding Period expires, and
the amount realized is greater than or equal to the fair market value of the
shares of common stock on the date of exercise, the employee will be taxed in
the year in which he or she sells or disposes of the shares of common stock as
follows:
- The employee will recognize ordinary income to the extent of the excess
of the fair market value of the shares of common stock on the date on
which the option was exercised, over the option price for such shares of
common stock; and
- The employee will recognize as capital gain any further gain realized
(after increasing the tax basis in the shares of common stock by the
amount of ordinary income recognized as described above).
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If the employee sells or otherwise disposes of the shares of common stock
before the Holding Period expires, and the amount realized is less than the fair
market value of the shares of common stock on the date of exercise, the employee
will be taxed in the year in which he or she sells or disposes of the shares of
common stock as follows:
- The employee will recognize ordinary income to the extent of the excess
of the fair market value of the shares of common stock on the date on
which the option was exercised, over the option price for such shares of
common stock; and
- The employee will recognize capital loss to the extent the fair market
value of the shares of common stock on the exercise date exceeds the
amount realized on the sale or other disposition.
The Company's Deduction. Leap (or the subsidiary that employs the employee)
is entitled to a tax deduction only to the extent that the employee recognizes
ordinary income because the employee sells or otherwise disposes of the shares
of common stock during the Holding Period.
REQUIRED VOTE
The approval of the amendment to increase the number of shares issuable
under the Purchase Plan requires the affirmative vote of a majority of the
shares of Leap's common stock represented and voting at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3.
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected PricewaterhouseCoopers LLP as Leap's
independent accountants for the fiscal year ending December 31, 2001 and has
directed that management submit the selection of independent accountants to the
stockholders for ratification at the Annual Meeting. PricewaterhouseCoopers LLP
audited Leap's financial statements for the fiscal years 1998 and 1999, the
four-month transition period from September 1, 1999 to December 31, 1999 and the
fiscal year 2000. Representatives of PricewaterhouseCoopers LLP are expected to
be present at the Annual Meeting, will have an opportunity to make a statement
if they so desire, and will be available to respond to appropriate questions.
Stockholders are not required to ratify the selection of
PricewaterhouseCoopers LLP as Leap's independent accountants. However, the Board
is submitting the selection of PricewaterhouseCoopers LLP to the stockholders
for ratification as a matter of good corporate practice. If the stockholders
fail to ratify the selection, the Board and the Audit Committee will reconsider
whether or not to retain that firm. Even if the selection is ratified, the Board
and the Audit Committee in their discretion may direct the appointment of a
different independent accounting firm at any time during the year if they
determine that such a change would be in the best interests of Leap and its
stockholders.
Audit Fees
The aggregate fees billed for professional services rendered by
PricewaterhouseCoopers LLP for the audit of Leap's annual financial statements
for the year ended December 31, 2000 and the reviews of the financial statements
included in Leap's Form 10-Qs for the year ended December 31, 2000 were
$624,559. The aggregate fees billed for professional services rendered by
PricewaterhouseCoopers LLP for the audit of Leap's financial statements included
in Leap's Transition Report on Form 10-K for the period from September 1, 1999
to December 31, 1999, which was filed in October 2000, were $354,366.
34
37
Financial Information Systems Design and Implementation Fees
No fees were billed to Leap for professional services rendered by
PricewaterhouseCoopers LLP relating to the design and implementation of Leap's
financial information systems during the year ended December 31, 2000.
All Other Fees
The aggregate fees billed for all other services rendered by
PricewaterhouseCoopers LLP to Leap for the year ended December 31, 2000 was
$822,865. These fees included fees billed for professional services rendered for
the reviews of Leap's various SEC filings, for tax consulting services and for
other consulting services in the amounts of $328,665, $324,000 and $170,200,
respectively.
The Audit Committee has considered whether the provision of services under
the headings "Financial Information Systems Design and Implementation Fees" and
"All Other Fees" is compatible with maintaining the accountants' independence
and determined that it is consistent with such independence.
The affirmative vote of the holders of a majority of the shares represented
and voting at the Annual Meeting will be required to ratify the selection of
PricewaterhouseCoopers LLP.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Leap's financial statements for the 2000 fiscal year have been examined by
PricewaterhouseCoopers LLP. The Board has selected PricewaterhouseCoopers LLP to
serve as Leap's independent accountants for the 2001 fiscal year.
Representatives of PricewaterhouseCoopers LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement and to respond
to appropriate questions.
STOCKHOLDER PROPOSALS
Proposals that stockholders wish to include in the Proxy Statement for the
next annual stockholders meeting must be received by Leap no later than November
2, 2001 and must satisfy the conditions established by the Securities and
Exchange Commission for such proposals. Proposals that stockholders wish to
present at the annual stockholders meeting to be held following fiscal 2001 (but
not included in the related Proxy Statement) must be received by Leap at its
principal executive office at 10307 Pacific Center Court, San Diego, California
92121, not before January 19, 2002 and no later than 5:00 p.m. P.D.T. on
February 18, 2002 and must satisfy the conditions for such proposals set forth
in Leap's Amended and Restated Bylaws. Stockholders are also advised to review
Leap's Amended and Restated Bylaws, which contain additional advance notice
requirements, including requirements with respect to advance notice of
stockholder proposals and director nominations.
35
38
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
A COPY OF LEAP'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
EXCLUDING EXHIBITS, MAY BE OBTAINED BY STOCKHOLDERS WITHOUT CHARGE BY WRITTEN
REQUEST ADDRESSED TO LEAP WIRELESS INTERNATIONAL, INC., ATTN. INVESTOR
RELATIONS, 10307 PACIFIC CENTER COURT, SAN DIEGO, CALIFORNIA 92121.
By Order of the Board of Directors
/s/ HARVEY P. WHITE
Harvey P. White
Chairman of the Board and
Chief Executive Officer
March 2, 2001
36
39
APPENDIX A
THE LEAP WIRELESS INTERNATIONAL, INC.
2001 EXECUTIVE OFFICER DEFERRED
BONUS STOCK PLAN
40
THE LEAP WIRELESS INTERNATIONAL, INC.
2001 EXECUTIVE OFFICER DEFERRED BONUS STOCK PLAN
TABLE OF CONTENTS
PAGE
----
ARTICLE I. DEFINITIONS......................................
A-1
Section 1.1 -- General....................................
A-1
Section 1.2 -- Accounts...................................
A-1
Section 1.3 -- Active Participant.........................
A-1
Section 1.4 -- Administrator..............................
A-2
Section 1.5 -- Beneficiary................................
A-2
Section 1.6 -- Board......................................
A-2
Section 1.7 -- Bonus......................................
A-2
Section 1.8 -- Bonus Payday...............................
A-2
Section 1.9 -- Cause......................................
A-2
Section 1.10 -- Code......................................
A-2
Section 1.11 -- Committee.................................
A-2
Section 1.12 -- Company; Company Affiliate................
A-3
Section 1.13 -- Deferred Bonus............................
A-3
Section 1.14 -- Deferred Bonus Share Account..............
A-3
Section 1.15 -- Disability................................
A-3
Section 1.16 -- Employee..................................
A-3
Section 1.17 -- ERISA.....................................
A-3
Section 1.18 -- Executive Officer.........................
A-3
Section 1.19 -- Fair Market Value.........................
A-3
Section 1.20 -- Matching Share Account....................
A-4
Section 1.21 -- Participant...............................
A-4
Section 1.22 -- Plan......................................
A-4
Section 1.23 -- Plan Year.................................
A-4
Section 1.24 -- Separation from the Service...............
A-4
Section 1.25 -- Share Unit................................
A-4
Section 1.26 -- Vested....................................
A-4
ARTICLE II. ELIGIBILITY.....................................
A-4
Section 2.1 -- Requirements for Participation.............
A-4
Section 2.2 -- Bonus Deferral Election Procedure..........
A-4
Section 2.3 -- Content of Deferral Election Form..........
A-5
ARTICLE III. PARTICIPANT BONUS DEFERRALS....................
A-5
Section 3.1 -- Mandatory Bonus Deferrals..................
A-5
Section 3.2 -- Voluntary Bonus Deferrals..................
A-5
ARTICLE IV. SHARE CREDITS...................................
A-6
Section 4.1 -- Deferred Bonus Share Credits...............
A-6
Section 4.2 -- Matching Share Credits.....................
A-6
Section 4.3 -- Share Units Subject to the Plan............
A-6
ARTICLE V. ACCOUNTS.........................................
A-6
Section 5.1 -- Deferred Bonus Share Account...............
A-6
Section 5.2 -- Matching Share Account.....................
A-6
Section 5.3 -- Assignments, etc. Prohibited...............
A-7
ARTICLE VI. ACCOUNT BALANCES................................
A-7
Section 6.1 -- Account Balances...........................
A-7
Section 6.2 -- Dividends and Distributions on Common
Stock..................................................
A-7
i
41
PAGE
----
ARTICLE VII. VESTING OF ACCOUNTS............................
A-7
Section 7.1 -- Vesting of Accounts........................
A-7
Section 7.2 -- Additional Vesting of Matching Share
Accounts...............................................
A-8
ARTICLE VIII. DISTRIBUTION OF BENEFITS TO PARTICIPANTS......
A-8
Section 8.1 -- Distribution Prior to Separation from the
Service................................................
A-8
Section 8.2 -- Distribution on Separation from the
Service................................................
A-8
Section 8.3 -- Effect of Delay or Failure to Ascertain
Amount Distributable or to Locate
Distributee................................
A-9
Section 8.4 -- Forfeitures................................
A-9
ARTICLE IX. BENEFITS UPON DEATH.............................
A-9
Section 9.1 -- Designation of Beneficiary.................
A-9
Section 9.2 -- Distribution upon Death....................
A-9
ARTICLE X. ADMINISTRATIVE PROVISIONS........................
A-10
Section 10.1 -- Duties and Powers of the Administrator....
A-10
Section 10.2 -- Committee.................................
A-10
Section 10.3 -- Limitations upon Powers of the
Administrator..........................................
A-11
Section 10.4 -- Compensation and Indemnification of
Administrator; Expenses of Administration..............
A-11
Section 10.5 -- Effect of Administrator Action............
A-11
Section 10.6 -- Recordkeeping.............................
A-11
Section 10.7 -- Statement to Participants.................
A-11
Section 10.8 -- Inspection of Records.....................
A-11
Section 10.9 -- Identification of Fiduciaries.............
A-12
Section 10.10 -- Procedure for Allocation of
Administrative Responsibilities........................
A-12
Section 10.11 -- Claims Procedure.........................
A-12
Section 10.12 -- Conflicting Claims.......................
A-13
Section 10.13 -- Service of Process.......................
A-13
ARTICLE XI. MISCELLANEOUS PROVISIONS........................
A-13
Section 11.1 -- Termination of the Plan...................
A-13
Section 11.2 -- Changes in Common Stock or Assets of the
Company, Acquisition or Liquidation of the
Company and Other Corporate Events........
A-13
Section 11.3 -- Limitation on Rights of Employees.........
A-14
Section 11.4 -- Unfunded Obligations of the Company.......
A-15
Section 11.5 -- Grantor Trust.............................
A-15
Section 11.6 -- Consolidation or Merger...................
A-16
Section 11.7 -- Errors and Misstatements..................
A-16
Section 11.8 -- Payment on Behalf of Minor, etc...........
A-16
Section 11.9 -- Amendment of Plan.........................
A-16
Section 11.10 -- Tax Withholding..........................
A-16
Section 11.11 -- Governing Law............................
A-17
Section 11.12 -- Pronouns and Plurality...................
A-17
Section 11.13 -- Titles...................................
A-17
Section 11.14 -- References...............................
A-17
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THE LEAP WIRELESS INTERNATIONAL, INC.
2001 EXECUTIVE OFFICER DEFERRED BONUS STOCK PLAN
Leap Wireless International, Inc., a Delaware corporation (the "Company"),
by resolution of its Board of Directors, adopted The Leap Wireless
International, Inc. 2001 Executive Officer Deferred Bonus Stock Plan (the
"Plan"), for the benefit of certain executive officers of the Company, subject
to the approval of the stockholders of the Company at the annual meeting to be
held on April 15, 2001.
The Plan shall become effective as of January 1, 2001, subject to the
approval of the Plan by the stockholders of the Company. The first Plan Year
shall be the Company's fiscal year beginning on January 1, 2001. The first Bonus
of eligible Executive Officers deferred under the Plan shall be the Bonus earned
for the first Plan Year.
The Plan is a nonqualified deferred compensation plan pursuant to which
twenty-five percent (25%) of an eligible executive officer's Bonus (as defined
herein) will be deferred and converted into Share Units (as defined herein)
credited to the officer's account under the Plan. Share Units will represent the
right to receive shares of the Company's Common Stock, par value $0.0001 per
share ("Common Stock"), in accordance with the Plan. The Plan also provides that
an eligible executive officer may elect to defer all or any portion of the
remainder of such eligible executive officer's Bonus and that amounts deferred
at the election of an eligible executive officer will be converted into Share
Units credited to the officer's account under the Plan. Finally, the Plan
provides for additional Share Units that will be credited to the eligible
executive officer's account under the Plan, determined based on such executive
officer's Bonus deferrals pursuant to the Plan. The Plan provides that the Share
Units credited to an eligible executive officer's account will be distributed to
such eligible executive officer upon the earlier of the date or dates designated
by the officer or the officer's retirement, death, Disability (as defined
herein) or other termination of employment. Subject to the provisions of the
Plan, the aggregate number of Share Units credited under the Plan shall not
exceed 275,000 Share Units.
The Plan is unfunded and is maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees, within the meaning of Sections 201(2), 301(a)(3) and
401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended.
The Company may establish a grantor trust pursuant to the Plan and may make
contributions to the trust to provide for distributions of benefits to be made
under the Plan. The Company's contributions may be in the form of cash, shares
of Common Stock or other securities or property.
ARTICLE I.
DEFINITIONS
Section 1.1 -- General
Whenever the following terms are used in the Plan with the first letter
capitalized, they shall have the meanings specified below unless the context
clearly indicates to the contrary.
Section 1.2 -- Accounts
"Accounts" of a Participant shall mean, as the context indicates, either or
both of his Deferred Bonus Share Account and his Matching Share Account.
Section 1.3 -- Active Participant
"Active Participant" shall mean any Employee who is participating in the
Plan for the Plan Year in question as provided in Article II.
A-1
43
Section 1.4 -- Administrator
"Administrator" shall mean Leap Wireless International, Inc., acting
through the Board or its delegates, except that if Leap Wireless International,
Inc. appoints a Committee under Section 10.2, the term "Administrator" shall
mean the Committee as to those duties, powers and responsibilities specifically
conferred upon the Committee. Leap Wireless International, Inc. shall have all
duties and responsibilities imposed by ERISA, except as specifically assigned
to, delegated to or reserved to the Board or the Committee under the Plan.
Section 1.5 -- Beneficiary
"Beneficiary" of a Participant shall mean the person or persons designated
by the Participant in accordance with Section 9.1 and the Rules of the Plan.
Section 1.6 -- Board
"Board" shall mean the Board of Directors of Leap Wireless International,
Inc. The Board may delegate any power or duty otherwise allocated to the
Administrator to any other person or persons, including a Committee appointed
under Section 10.2.
Section 1.7 -- Bonus
"Bonus" of an Active Participant for any Plan Year shall mean the amount of
his or her bonus or bonuses earned for such Plan Year, prior to the deferral of
all or any portion thereof in accordance with the Plan, determined under any
bonus program maintained by the Company for Executive Officers for such Plan
Year. The "Bonus" of an Active Participant for a Plan Year shall be determined
without regard to whether the bonus or bonuses earned by such Active Participant
for such Plan Year would otherwise be paid by the Company during such Plan Year
or the next following Plan Year.
Section 1.8 -- Bonus Payday
"Bonus Payday" of an Active Participant for any Plan Year shall mean the
day or days established by the Company on which such Active Participant's Bonus
(or any portion thereof) would otherwise be paid.
Section 1.9 -- Cause
"Cause" with respect to a Participant shall mean:
(a) willful misconduct by the Participant that is materially damaging
to the Company or any Company Affiliate (whether financially or otherwise),
(b) the Participant's conviction of, or the entry by the Participant
of a guilty or no contest plea to, a felony, or a misdemeanor involving
moral turpitude,
(c) the Participant's commission of fraud, misappropriation or
embezzlement in connection with the business of the Company or a Company
Affiliate, or
(d) the Participant's willful and repeated failure to perform the
Participant's duties as an Executive Officer as directed by the Board.
Section 1.10 -- Code
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
Section 1.11 -- Committee
"Committee" shall mean the Committee, if any, appointed in accordance with
Section 10.2.
A-2
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Section 1.12 -- Company; Company Affiliate
(a) "Company" shall mean Leap Wireless International, Inc., and any
successor company which continues the Plan under Section 11.6.
(b) "Company Affiliate" shall mean any employer which, at the time of
reference, was, with the Company, a member of a controlled group of corporations
or trades or businesses under common control, or a member of an affiliated
service group, as determined under regulations issued by the Secretary of the
Treasury or his delegate under Code Sections 414(b), (c), (m) and any other
entity required to be aggregated with the Company pursuant to regulations issued
under Code Section 414(o).
Section 1.13 -- Deferred Bonus
"Deferred Bonus" of an Active Participant on any Bonus Payday shall mean
the dollar amount of such Active Participant's Bonus (or portion thereof) for
such Bonus Payday that is deferred under Section 3.1 or 3.2.
Section 1.14 -- Deferred Bonus Share Account
"Deferred Bonus Share Account" of a Participant shall mean his individual
account, if any, in the Plan established in accordance with Section 5.1.
Section 1.15 -- Disability
"Disability" of a Participant shall mean the Participant's complete
inability to engage in any substantial gainful activity or wage or profit for
reason of any medically determinable physical or mental impairment which can be
expected to result in death or has lasted or is expected to last for a
continuous period of not less than 12 months, as determined by the Administrator
in good faith, based on competent medical evidence.
Section 1.16 -- Employee
"Employee" shall mean any person who renders services to the Company in the
status of an employee as that term is defined in Code Section 3121(d).
Section 1.17 -- ERISA
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
Section 1.18 -- Executive Officer
"Executive Officer" shall mean an Employee who holds the position of Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Executive
Vice President or Senior Vice President of the Company.
Section 1.19 -- Fair Market Value
"Fair Market Value" as of a given date shall mean (a) the closing price of
a share of Common Stock on the trading day prior to such date on the principal
exchange on which shares of Common Stock are then trading, if any (or as
reported on any composite index which includes such principal exchange), or, if
shares were not traded on the day prior to such date, then on the next preceding
date on which trading occurred, or (b) if Common Stock is not traded on an
exchange but is quoted on NASDAQ or a successor quotation system, the mean
between the closing representative bid and asked prices for the Common Stock on
the trading day previous to such date as reported by NASDAQ or such successor
quotation system, or (c) if Common Stock is not publicly traded on an exchange
and not quoted on NASDAQ or a successor quotation system, the fair market value
of a share of Common Stock as established by the Administrator acting in good
faith.
A-3
45
Section 1.20 -- Matching Share Account
"Matching Share Account" of a Participant shall mean his individual
account, if any, in the Plan established in accordance with Section 5.2.
Section 1.21 -- Participant
"Participant" shall mean an Employee who is an Active Participant for the
Plan Year in question, or who was an Active Participant for a prior Plan Year.
Section 1.22 -- Plan
"Plan" shall mean The Leap Wireless International, Inc. 2001 Executive
Officer Deferred Bonus Stock Plan.
Section 1.23 -- Plan Year
"Plan Year" shall mean the fiscal year of the Company. The first Plan Year
shall be the Company's fiscal year beginning on January 1, 2001.
Section 1.24 -- Separation from the Service
(a) "Separation from the Service" of an Employee shall mean his or her
resignation from or discharge by a Company or a Company Affiliate, or his or her
Disability, death or retirement, but shall not include his or her transfer among
the Company and the Company Affiliates.
(b) A leave of absence or sick leave authorized by the Company or a Company
Affiliate in accordance with established policies, a vacation period, a
temporary layoff for lack of work or a military leave shall not constitute a
Separation from the Service.
Section 1.25 -- Share Unit
"Share Unit" shall mean a nominal unit credited under the Plan, which
represents the right to receive a share of Common Stock in accordance with the
Plan.
Section 1.26 -- Vested
"Vested," when used with reference to a Participant's Accounts, shall mean
nonforfeitable, except as provided in the Plan.
ARTICLE II.
ELIGIBILITY
Section 2.1 -- Requirements for Participation
(a) An Employee who is an Executive Officer on January 1, 2001 shall be an
Active Participant for the Plan Year ending on December 31, 2001.
(b) An Employee who on the first day of any Plan Year beginning after
January 1, 2001 is an Executive Officer shall be an Active Participant for such
Plan Year.
(c) An Employee who is an Active Participant for any Plan Year shall not be
an Active Participant for any subsequent Plan Year unless such Employee
satisfies the requirements of subsection (b) with respect to such Plan Year.
A-4
46
Section 2.2 -- Bonus Deferral Election Procedure
The Administrator shall provide each Active Participant for a Plan Year
with a Bonus deferral election form on which the Active Participant may elect to
defer all or a portion of his Bonus in accordance with Section 3.2. Each Active
Participant electing to defer Bonus under Section 3.2 for a Plan Year shall
complete and execute the Bonus deferral election form and return it to the
Administrator in accordance with the Rules of the Plan. For each Plan Year, an
Active Participant shall complete and execute the Bonus deferral election form
and return it to the Administrator no later than the last day of the third
quarter of the Company's fiscal year coinciding with the relevant Plan Year.
Section 2.3 -- Content of Deferral Election Form
(a) Each Active Participant for a Plan Year shall set forth on his or her
Bonus deferral election form for such Plan Year
(i) his or her consent that he, or she, his or her successors in
interest and assigns and all persons claiming under him or her shall be
bound, to the extent authorized by law, by the statements contained therein
and by the provisions of the Plan as they now exist, and as they may be
amended from time to time,
(ii) the percentage (if any) of his or her Bonus for such Plan Year to
be deferred under Section 3.2 and, in such case, his or her authorization
to the Company to reduce his or her Bonus in accordance with Section
3.2(a),
(iii) such other information as may be required for the administration
of the Plan.
(b) In addition, each Active Participant shall set forth on his or her
Bonus deferral election form for each Plan Year the Distribution Date for such
Plan Year.
(c) For purposes of this Article and Article VIII, the "Distribution Date"
of an Active Participant for a Plan Year shall mean the first day of a calendar
month designated by such Active Participant; provided, however, that such
"Distribution Date" shall not be earlier than the third anniversary of the
latest Bonus Payday for such Participant for such Plan Year and shall not be
later than the tenth anniversary on the last Bonus Payday for such Participant
for such Plan Year.
ARTICLE III.
PARTICIPANT BONUS DEFERRALS
Section 3.1 -- Mandatory Bonus Deferrals
Each Active Participant for a Plan Year shall defer to his or her Deferred
Bonus Share Account an amount equal to twenty-five percent (25%) of his or her
Bonus for each Bonus Payday for such Plan Year.
Section 3.2 -- Voluntary Bonus Deferrals
(a) An Active Participant may elect, in accordance with Section 2.2 above
and the Rules of the Plan, to defer to his or her Deferred Bonus Share Account
an amount equal to any whole number percentage, which is not greater than
seventy-five percent (75%) (or such other percentage as is established by the
Administrator for such Plan Year), of that portion of his or her Bonus for such
Plan Year which is paid by the Company to the Active Participant during the next
following Plan Year.
(b) An Active Participant's Bonus deferral election under subsection (a)
shall be made on the form described in Section 2.3 and shall be delivered to the
Administrator in accordance with Section 2.2 above and the Rules of the Plan.
A-5
47
ARTICLE IV.
SHARE CREDITS
Section 4.1 -- Deferred Bonus Share Credits
Subject to Section 4.3, for each Bonus Payday for a Plan Year, an Active
Participant's Deferred Bonus Share Account shall be credited with the number of
full and fractional Share Units equal to:
(a) the amount of such Active Participant's Deferred Bonus for such
Bonus Payday, divided by
(b) the Fair Market Value on such Bonus Payday.
Such Share Units shall be determined by rounding down, disregarding any
fractional Share Unit and refunding the dollar amount, if any, of such
Participant's Deferred Bonus which is not sufficient to credit one full Share
Unit, to the Participant for the Bonus Payday in question. Such Share Units
shall be credited to the Active Participant's Deferred Bonus Share Account as of
such Bonus Payday.
Section 4.2 -- Matching Share Credits
Subject to Section 4.3, for each Bonus Payday for a Plan Year, an Active
Participant's Matching Share Account shall be credited with the number of full
and fractional Share Units equal to twenty percent (20%) of the number of Share
Units credited to such Active Participant's Deferred Bonus Share Account as of
such Bonus Payday under Section 4.1. Such Share Units shall be determined by
rounding down and disregarding any fractional Share Unit. Such Share Units shall
be credited to the Active Participant's Matching Share Account as of such Bonus
Payday.
Section 4.3 -- Share Units Subject to the Plan
(a) Subject to adjustments under Section 11.2, the aggregate number of
Share Units that shall be credited under the Plan shall not exceed 275,000 Share
Units. Share Units debited upon distribution under Articles VIII and IX shall
not be available for subsequent crediting under this Article IV. Share Units
that are forfeited under Section 8.4 shall be available for subsequent crediting
under this Article IV.
(b) If the Share Units that would otherwise be credited under Section 4.1,
4.2 or 6.2 on any date would cause the aggregate number of Share Units credited
under the Plan to exceed the limit prescribed under subsection (a), the
Administrator shall make a pro rata allocation (and in full Share Units) of the
available remaining Share Units in as nearly a uniform manner as shall be
practicable and the dollar amounts not credited as Share Units shall be refunded
to the Active Participant (in the case of an Active Participant's Deferred Bonus
under Section 4.1), forfeited (in the case of amounts to be credited under
Section 4.2), or distributed in cash to the Participant in an amount equal to
the Fair Market Value thereof (in the case of amounts under Section 6.2).
ARTICLE V.
ACCOUNTS
Section 5.1 -- Deferred Bonus Share Account
The Administrator shall establish and maintain for each Participant a
Deferred Bonus Share Account to which shall be credited the Share Units under
Sections 4.1 and 6.2 and debited the Share Units distributed or forfeited under
Articles VIII and IX.
Section 5.2 -- Matching Share Account
The Administrator shall establish and maintain for each Participant a
Matching Share Account to which shall be credited the Share Units under Sections
4.2 and 6.2 and debited the Share Units distributed or forfeited under Articles
VIII and IX.
A-6
48
Section 5.3 -- Assignments, etc. Prohibited
No part of the Accounts of a Participant shall be liable for the debts,
contracts or engagements of such Participant, his or her Beneficiary or
Beneficiaries or successors in interest, or be taken in execution by levy,
attachment or garnishment or by any other legal or equitable proceeding, nor
shall any such person have any rights to alienate, anticipate, commute, pledge,
encumber or assign any benefits or payments hereunder in any manner whatsoever,
except to designate a Beneficiary or Beneficiaries as provided in Section 9.2.
ARTICLE VI.
ACCOUNT BALANCES
Section 6.1 -- Account Balances
A Participant's Account balances shall be denominated in full and
fractional Share Units.
Section 6.2 -- Dividends and Distributions on Common Stock
(a) Subject to Section 4.3, in the event that any dividend or other
distribution (other than a dividend in the form of shares of Common Stock) is
paid or distributed on shares of Common Stock, a Participant's Accounts shall be
credited, as of the payment or distribution date of such dividend or other
distribution, with the number of full and fractional Share Units equal to:
(i) the product of
(A) the number of Share Units credited to such Participant's
Accounts, as of the record date of such dividend or other distribution,
multiplied by
(B) the dollar amount of such dividend or distribution per share of
Common Stock (if such dividend or payment or distribution is paid in
cash), or the fair market value (as determined by the Administrator) of
such dividend or distribution per share of Common Stock (if such
dividend or distribution is distributed in kind), as of the date of
payment or distribution, divided by
(ii) the Fair Market Value, determined as of the date of payment or
distribution.
(b) Subject to Section 4.3, in the event that any dividend in the form of
shares of Common Stock is distributed on shares of Common Stock, a Participant's
Accounts shall be credited, as of the distribution date of such dividend, with
the number of full and fractional Share Units equal to:
(i) the number of Share Units credited to such Participant's Accounts,
as of the record date of such dividend, multiplied by
(ii) the number of shares of Common Stock distributed with respect to
such dividend per share of Common Stock.
ARTICLE VII.
VESTING OF ACCOUNTS
Section 7.1 -- Vesting of Accounts
(a) Except as provided in Section 8.3, a Participant shall be Vested at all
times in all of the Share Units credited to his Deferred Bonus Share Account.
(b) Subject to Sections 8.3 and 8.4, a Participant shall become Vested in
the Share Units credited to his Matching Share Account as of a Bonus Payday as
follows:
(i) one-third of such Share Units credited as of a Bonus Payday shall
become Vested on the first anniversary of such Bonus Payday; provided,
however, that if the resulting number of Share Units then
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becoming Vested produces a fractional Share Unit, the fractional Share Unit
shall be rounded up to the next whole number of Share Units,
(ii) one-third of such Share Units credited as of a Bonus Payday shall
become Vested on the second anniversary of such Bonus Payday; provided,
however, that if the resulting number of Share Units then becoming Vested
produces a fractional Share Unit, the fractional Share Unit shall be
rounded up to the next whole number of Share Units, and
(iii) one-third of such Share Units credited as of a Bonus Payday
shall become Vested on the third anniversary of such Bonus Payday;
provided, however, that if the resulting number of Share Units then
becoming Vested produces a fractional Share Unit, the fractional Share Unit
shall be rounded down to the remaining number of Share Units credited to
the Participant's Matching Share Account so that the Participant shall
become fully Vested in the Share Units credited to his Matching Share
Account as of such Bonus Payday as of the third anniversary of such Bonus
Payday.
Any Share Units that are credited to a Participant's Matching Share Account as a
result of any dividend or other distribution paid or distributed on shares of
Common Stock, with respect to the Share Units credited on the record date of
such dividend or distribution, in accordance with Section 6.2, shall become
Vested on such date as the Share Units credited on the record date become Vested
under this subsection.
Section 7.2 -- Additional Vesting of Matching Share Accounts
Except as provided in Section 8.3, a Participant shall become Vested in all
of the Share Units credited to his Matching Share Account upon the earliest to
occur of his Separation from the Service by reason of:
(a) his retirement after attaining age 65,
(b) his death,
(c) his Disability, or
(d) his discharge other than for Cause.
ARTICLE VIII.
DISTRIBUTION OF BENEFITS TO PARTICIPANTS
Section 8.1 -- Distribution Prior to Separation from the Service
A Participant who has elected to receive the distribution of the Share
Units credited for a Plan Year as of the Distribution Date for such Plan Year,
and who has not had a Separation from the Service before such Distribution Date,
shall receive a distribution of the Vested Share Units credited to his or her
Accounts for such Plan Year (and any Share Units credited with respect thereto
under Section 6.2), less any amounts required to be withheld by law, in one lump
sum, not later than 30 days after the end of the calendar month in which such
Distribution Date occurs. Such distribution shall be made by the Company in the
form of whole shares of Common Stock. Such Participant's Accounts shall be
debited the number of Share Units distributed.
Section 8.2 -- Distribution on Separation from the Service
A Participant who has a Separation from the Service (other than by reason
of his or her death) shall receive a distribution of the Vested Share Units
credited to his or her Accounts, less any amounts required to be withheld by
law, in one lump sum, not later than 30 days after the end of the calendar month
in which his or her Separation from the Service occurs. Such distribution shall
be made by the Company in the form of whole shares of Common Stock. Such
Participant's Accounts shall be debited the number of Share Units distributed.
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Section 8.3 -- Effect of Delay or Failure to Ascertain Amount Distributable or
to Locate Distributee
(a) If the person to whom an amount distributable or payable under Article
VIII or IX has not been ascertained or located within the stated time limits and
reasonable efforts to do so have been made, then distribution or payment shall
be made not later than 30 days after such amount is determined or such person is
ascertained or located, or as prescribed in subsection (b).
(b) If, within one year after a Participant has a Separation from the
Service, the Administrator, in the exercise of due diligence, has failed to
locate him or her (or if such Separation from the Service is by reason of his or
her death, has failed to locate the person entitled to the amount in his or her
Accounts under Article IX), the Share Units credited to his or her Accounts in
the Plan shall be forfeited (and debited from his or her Accounts); provided,
however, that if the Participant (or in the case of his or her death, the person
entitled thereto under Article IX) makes proper claim therefor under Section
10.11, the amount so forfeited (without interest, dividends or distributions
thereon) shall be paid to such Participant or such person, in one lump sum, not
later than 30 days after such claim is made.
Section 8.4 -- Forfeitures
If a Participant has a Separation from the Service, the portion of his
Matching Share Account which is not Vested as of the date of his Separation from
the Service shall be immediately forfeited (and debited from his Accounts) and
the Company shall cease to be obligated under Articles VIII and IX with respect
to the portion of such Matching Share Account that is forfeited.
ARTICLE IX.
BENEFITS UPON DEATH
Section 9.1 -- Designation of Beneficiary
(a) Each Participant shall have the right to designate, revoke and
redesignate one or more Beneficiaries hereunder and to direct distribution of
the Vested Share Units credited to his or her Accounts to such Beneficiaries.
(b) Designation, revocation and redesignation of Beneficiaries must be made
in writing in accordance with the Rules of the Plan on a form provided by the
Administrator and shall be effective upon delivery to the Administrator.
Section 9.2 -- Distribution upon Death
(a) Upon the death of a Participant, the Vested Share Units credited to his
or her Accounts, less any amounts required to be withheld by law, shall be
distributed to such Participant's Beneficiary or Beneficiaries designated under
Section 9.1, in one lump sum, not later than 30 days after the end of the
calendar month in which such Participant's death occurs. In the event that the
Participant has failed to designate a Beneficiary, or no Beneficiary survives
the Participant, the Share Units credited to his or her Accounts, less any
amounts required to be withheld by law, shall be distributed to such
Participant's estate, in one lump sum, not later than 30 days after the end of
the calendar month in which the Participant's death occurs. Such distribution
shall be made by the Company in the form of whole shares of Common Stock. Such
Participant's Accounts shall be debited the number of Share Units distributed.
(b) A Beneficiary shall cease to be entitled to benefits upon the
Administrator's determination that such Beneficiary did not survive the
Participant, or the Administrator's failure to locate such Beneficiary, after
making reasonable efforts to do so.
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ARTICLE X.
ADMINISTRATIVE PROVISIONS
Section 10.1 -- Duties and Powers of the Administrator
(a) The Administrator shall administer the Plan in accordance with the Plan
and ERISA and shall have full discretionary power and authority:
(i) to engage actuaries, attorneys, accountants, appraisers, brokers,
consultants, administrators, physicians or other firms or persons and (with
its officers, directors and Employees) to rely upon the reports, advice,
opinions or valuations of any such persons except as required by law;
(ii) to adopt Rules of the Plan that are not inconsistent with the
Plan or applicable law and to amend or revoke any such rules;
(iii) to construe the Plan and the Rules of the Plan;
(iv) to determine questions of eligibility and vesting of
Participants;
(v) to determine entitlement to a Benefit and to distributions of
Participants, "Beneficiaries," and all other persons;
(vi) to make findings of fact as necessary to make any determinations
and decisions in the exercise of such discretionary power and authority;
(vii) to appoint claims and review officials to conduct claims
procedures as provided in Section 10.11; and
(viii) to delegate any duty, power or responsibility to the Committee,
to any firm or person engaged under paragraph (i) or to any other person or
persons.
(b) Every finding, decision, and determination made by the Administrator
(or its delegate) shall, to the full extent permitted by law, be final and
binding upon all parties, except to the extent found by a court of competent
jurisdiction to constitute an abuse of discretion.
Section 10.2 -- Committee
(a) The Board may establish a Committee consisting of three or more members
to hold office at the pleasure of the Board.
(b) The Committee shall have such powers, duties and responsibilities as
are delegated to it by the Board. The Board may amend, modify or terminate the
delegation of powers, duties and responsibilities to the Committee from time to
time. Any power, duty or responsibility no longer delegated to the Committee
shall become a power, duty or responsibility of the Board, and may be delegated
by the Board to such person or persons as the Board determines appropriate.
Committee members shall not receive payment for their services as such.
(c) Appointment of Committee members shall be effective upon filing of
written acceptance of appointment with the Board. A Committee member may resign
at any time by delivery of written notice to the Board.
(d) Vacancies in the Committee shall be filled in accordance with
subsection (a).
(e) The Committee shall act by a majority of its members in office, either
by meeting or by a written instrument executed by a majority of the Committee
members. The Committee may, by a written instrument executed by all of the
Committee members then in office, authorize one of its members to execute any
instrument required to be executed by the Committee.
(f) The Chairperson of the Committee shall appoint a Secretary to keep the
minutes of its meetings.
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Section 10.3 -- Limitations upon Powers of the Administrator
The Plan shall be uniformly and consistently interpreted and applied with
regard to all Participants in similar circumstances. The Plan shall be
administered, interpreted and applied fairly and equitably and in accordance
with the specified purposes of the Plan.
Section 10.4 -- Compensation and Indemnification of Administrator; Expenses of
Administration
(a) The Company shall pay or reimburse the Chief Executive Officer of Leap
Wireless International, Inc. (and his delegates), each Committee member and each
Employee functioning under Section 10.1(a)(viii) for all expenses (including
reasonable attorneys' fees) properly incurred by him in the administration of
the Plan.
(b) The Company shall indemnify and hold each such Employee and Committee
member harmless from all claims, liabilities and costs (including reasonable
attorneys' fees) arising out of the good faith performance of his functions
hereunder.
(c) The Company may obtain and provide for any Employee and Committee
member, at the expense of the Company, liability insurance against liabilities
imposed on him by law.
(d) Legal fees incurred in the preparation and amendment of documents shall
be paid by the Company.
(e) Except as provided in subsection (a), fees and expenses of persons
rendering services to the Plan shall not be paid or reimbursed by the Company,
except as agreed upon by the Company.
Section 10.5 -- Effect of Administrator Action
Except as provided in Section 10.3, all actions taken and all
determinations made by the Administrator (or its delegate) in good faith shall
be final and binding upon all Participants, their Beneficiaries and any other
person.
Section 10.6 -- Recordkeeping
(a) The Administrator shall maintain suitable records as follows:
(i) records of each Participant's Accounts which, among other things,
shall show separately Compensation deferral and matching credits, and
(ii) records of its deliberations and decisions.
(b) The Administrator shall appoint a secretary, and at its discretion, an
assistant secretary, to keep the record of proceedings, to transmit its
decisions, instructions, consents or directions to any interested party, to
execute and file, on behalf of the Administrator, such documents, reports or
other matters as may be necessary or appropriate under ERISA and to perform
ministerial acts.
(c) The Administrator shall not be required to maintain any records or
accounts which duplicate any records or accounts maintained by the Company.
Section 10.7 -- Statement to Participants
Within 30 days after the last day of each Plan Year, the Administrator
shall furnish to each Participant a statement setting forth the value of his or
her Accounts and such other information as the Administrator shall deem
advisable to furnish.
Section 10.8 -- Inspection of Records
Copies of the Plan and the records of a Participant's Accounts shall be
open to inspection by him or her or his or her duly authorized representatives
at the office of the Administrator at any reasonable business hour.
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Section 10.9 -- Identification of Fiduciaries
(a) The Administrator shall be the named fiduciary of the Plan and, as
permitted or required by law, shall have exclusive authority and discretion to
operate and administer the Plan.
(b) The named fiduciary, the Board, the Company, and every person who
exercises any discretionary authority or discretionary control respecting the
Plan or who has any discretionary authority or discretionary responsibility in
the administration of the Plan, including any person designated by the named
fiduciary to carry out fiduciary responsibilities under the Plan, shall be a
fiduciary and as such shall be subject to provisions of ERISA and other
applicable laws governing fiduciaries.
Section 10.10 -- Procedure for Allocation of Administrative Responsibilities
(a) Administrative responsibilities under the Plan shall be allocated as
follows:
(i) the sole duties, responsibilities and powers allocated to the
Board, the Company, the Committee and any other person shall be those
expressly provided in the relevant Sections of the Plan, and
(ii) all administrative responsibilities not allocated to the Board,
or the Company, are allocated to the Administrator, subject to delegation.
(b) Administrative responsibilities under the Plan may be reallocated among
fiduciaries by amending the Plan in the manner prescribed in Section 11.8,
followed by the fiduciaries' acceptance of, or operation under, such amended
Plan.
Section 10.11 -- Claims Procedure
(a) A claim by a Participant, Beneficiary or any other person shall be
presented to the claims official appointed by the Administrator (or its
delegate) in writing within the maximum time permitted by law or under the
regulations of the Secretary of Labor or his delegate pertaining to claims
procedures.
(b) The claims official shall, within a reasonable time, consider the claim
and shall issue his or her determination thereon in writing.
(c) If the claim is granted, the appropriate distribution or payment shall
be made by the Company.
(d) If the claim is wholly or partially denied, the claims official shall,
within 90 days (or such longer period as may be reasonably necessary), provide
the claimant with written notice of such denial, setting forth, in a manner
calculated to be understood by the claimant
(i) the specific reason or reasons for such denial;
(ii) specific reference to pertinent Plan provisions on which the
denial is based;
(iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
(iv) an explanation of the Plan's claims review procedure.
(e) The Administrator (or its delegate) shall provide each claimant with a
reasonable opportunity to appeal the claim official's denial of a claim to a
review official (appointed by the Administrator (or its delegate) in writing)
for a full and fair review. The claimant or his duly authorized representative
(i) may request a review upon written application to the review
official (which shall be filed with it),
(ii) may review pertinent documents, and
(iii) may submit issues and comments in writing.
(f) The review official may establish such time limits within which a
claimant may request review of a denied claim as are reasonable in relation to
the nature of the benefit which is the subject of the claim and to
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other attendant circumstances but which, in no event, shall be less than 60 days
after receipt by the claimant of written notice of denial of his or her claim.
(g) The decision by the review official upon review of a claim shall be
made not later than 60 days after his or her receipt of the request for review,
unless special circumstances require an extension of time for processing, in
which case a decision shall be rendered as soon as possible, but not later than
120 days after receipt of such request for review.
(h) The decision on review shall be in writing and shall include specific
reasons for the decision written in a manner calculated to be understood by the
claimant with specific references to the pertinent Plan provisions on which the
decision is based.
(i) In considering claims under this claims procedure, the claims official
and the review official shall have fiduciary and discretionary authority to make
findings of fact and to construe the terms of the Plan and, to the full extent
permitted by law, the determination of the claims official (if no review is
properly requested or the decision of the review official on review, if review
has been properly requested) shall be final and binding on all parties unless
held by a court of competent jurisdiction to constitute an abuse of discretion.
Section 10.12 -- Conflicting Claims
If the Administrator is confronted with conflicting claims concerning a
Participant's Accounts, the Administrator may interplead the claimants in an
action at law, or in an arbitration conducted in accordance with the rules of
the American Arbitration Association, as the Administrator shall elect in its
sole discretion, and in either case, the attorneys' fees, expenses and costs
reasonably incurred by the Administrator in such proceeding shall be paid from
the Participant's Accounts.
Section 10.13 -- Service of Process
The Secretary of Leap Wireless International, Inc. is hereby designated as
agent of the Plan for the service of legal process.
ARTICLE XI.
MISCELLANEOUS PROVISIONS
Section 11.1 -- Termination of the Plan
(a) While the Plan is intended as a permanent program, the Board shall have
the right at any time to declare the Plan terminated; provided, however, that no
amendment shall decrease the Vested percentage or amount of interest any
Participant, any Beneficiary or any other person entitled to payment under the
Plan has in the Participant's Accounts.
(b) In the event of any termination, the Administrator shall distribute
Participants' Accounts as provided by the Board.
Section 11.2 -- Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events
(a) Notwithstanding Section 6.2, in the event that the Administrator
determines that any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Administrator's sole discretion, affects
the Common Stock such that an adjustment is determined by the Administrator to
be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or
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with respect to a Participant's Accounts under the Plan, then the Administrator
shall, in such manner as it may deem equitable, adjust the aggregate number of
Share Units that shall be credited under the Plan under Section 4.3 and the
number of Share Units (or other units or amounts) credited or to be credited to
Participants' Accounts under the Plan and the number and kind of shares of
Common Stock (or other securities or property) or amounts to be distributed to
Participants and Beneficiaries under the Plan.
(b) In the event of any transaction or event described in Section 11.2(a)
or any unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Administrator, in its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, by action taken prior to the
occurrence of such transaction or event and either automatically or upon the
Participant's request, is hereby authorized to take any one or more of the
following actions whenever the Administrator determines that such action is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to such Participant's Matching Share Account under the Plan, to facilitate such
transactions or events or to give effect to such changes in laws, regulations or
principles:
(i) To provide for the early distribution of the Share Units credited
to such Participant's Accounts in shares of Common Stock (or other
securities or property) or in cash;
(ii) To provide that such Participant's Matching Share Account cannot
become Vested after such event;
(iii) To provide that such Participant's Matching Share Account shall
become fully Vested;
(iv) To provide that the obligations of the Company with respect to
such Participant's Accounts be assumed by the successor or survivor
corporation, or a parent or subsidiary thereof, or the rights of such
Participant with respect to such Participant's Accounts shall be
substituted for by similar rights covering units or amounts representing
the stock of the successor or survivor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind
of Share Units or other units or amounts credited to such Participant; and
(v) To make adjustments in the number and type of shares of Common
Stock (or other securities or property) or cash amounts to be distributed
to Participants and Beneficiaries under the Plan.
(c) The existence of the Plan and the Accounts of Participants under the
Plan shall not affect or restrict in any way the right or power of the Company
or the shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or
affect the Common Stock or the rights thereof or which are convertible into or
exchangeable for Common Stock, or the dissolution or liquidation of the company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
Section 11.3 -- Limitation on Rights of Employees
The Plan is strictly a voluntary undertaking on the part of the Company and
shall not constitute a contract between a Company and any Employee with respect
to, or consideration for, or an inducement or condition of, the employment of an
Employee. Nothing contained in the Plan shall give any Employee the right to be
retained in the service of a Company or to interfere with or restrict the rights
of the Company, which are hereby expressly reserved, to discharge or retire any
Employee, except as provided by law, at any time without notice and with or
without cause. Inclusion under the Plan will not give any Employee any right or
claim to any benefit hereunder except to the extent such right has specifically
become fixed under the terms of the Plan. The doctrine of substantial
performance shall have no application to Employees, Participants,
"Beneficiaries" or any other persons entitled to payments under the Plan. Each
condition and provision, including numerical items, has been carefully
considered and constitutes the minimum limit on performance which will give rise
to the applicable right.
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Section 11.4 -- Unfunded Obligations of the Company
The obligations of the Company under the Plan shall be unfunded and
unsecured, and nothing contained herein shall be construed as providing for
assets to be held in trust or escrow or any other form of segregation of the
assets of the Company for the benefit of any Participant, any Beneficiary or any
other person or persons to whom benefits are to be paid pursuant to the terms of
the Plan. The interest of any Participant, any Beneficiary or any other person
hereunder shall be limited to the right to receive the benefits as set forth
herein. To the extent that a Participant, any Beneficiary or any other person
acquires a right to receive benefits under the Plan, such rights shall be no
greater than the right of an unsecured general creditor of the Company.
Section 11.5 -- Grantor Trust
(a) The Company may establish a grantor trust (the "Trust") in connection
with the Plan, and may make irrevocable contributions to the Trust in accordance
with the terms of the trust agreement (the "Trust Agreement") establishing the
Trust. The Company shall designate the trustee of the Trust. The Trust Agreement
shall provide that the Trust assets shall be subject to the claims of the
creditors of the Company in the event of the "Insolvency" (as defined in the
Trust Agreement) of the Company, and that the Trust shall constitute an unfunded
arrangement and shall not affect the status of the Plan as an unfunded plan for
purposes of the Code and ERISA.
(b) The Trust Agreement may provide that the trustee of the Trust shall
invest the assets in the Trust as directed by the Company. The Company may, but
shall not be obligated to, direct the trustee to invest the assets of the Trust
in shares of Common Stock.
(c) The Company may cause the payment of benefits under the Plan to be
made, in whole or in part, by the Trust in accordance with the terms of the
Trust Agreement.
(d) Any payment of benefits by the Trust shall be in satisfaction of the
obligations of the Company under the Plan. Notwithstanding the establishment of
the Trust, and any contributions made by the Company to the Trust, the Company
shall remain obligated to make all payments of benefits under the Plan, except
to the extent such payments are made by the Trust in accordance with the Trust
Agreement.
(e) To the extent the Company establishes the Trust and directs that the
assets of the Trust be invested in shares of Common Stock, all voting rights on
shares of Company Stock in the Trust Fund held by the Trust shall be exercised
by the Trustee in accordance with instructions from the Participants with
respect to the Share Units credited to their Accounts, or the Administrator in
accordance with the following provisions of this Section:
(i) All voting rights on shares of Company Stock in the Trust shall be
exercised by the Trustee only as directed by the Participants with respect
to shares of Company Stock attributable to the Share Units credited to
their Accounts in accordance with the following provisions of subsections
(ii) and (iii) below.
(ii) As soon as practicable before each annual or special
shareholders' meeting of the Company at which shares of Company Stock are
entitled to vote, the Trustee shall furnish to each Participant a copy of
the proxy solicitation material sent generally to stockholders, together
with a form requesting confidential instructions on how the shares of
Company Stock attributable to the Share Units credited to such
Participant's Accounts (including fractional shares to 1/1000th of a share)
are to be voted. The Company shall cooperate with the Trustee to ensure
that Participants receive the requisite information in a timely manner. The
materials furnished to the Participants shall include a notice from the
Trustee explaining each Participant's right to instruct the Trustee with
respect to the voting of the shares of Company Stock attributable to the
Share Units credited to the Participant's Accounts. Upon timely receipt of
such instructions, the Trustee (after combining votes of fractional shares
to give effect to the greatest extent to Participants' instructions) shall
vote the shares as instructed. If voting instructions for shares of Company
Stock to the Accounts of any Participant are not timely received by the
Trustee for a particular stockholders' meeting, such shares shall not be
voted in accordance with the instructions but shall be voted as provided in
subsection (iii) below. The instructions received by the Trustee from
Participants shall be held by the Trustee in strict confidence and shall
not be divulged or released to any
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person including directors, officers or employees of the Company, or of any
other company, except as otherwise required by law.
(iii) All shares of Company Stock attributable to Share Units credited
to the Accounts of Participants shall be voted only in accordance with the
directions of such Participants as given to the Trustee. Each Participant
shall be entitled to 1/1000th of a share) attributable to Share Units
credited to his or her Accounts. If, however, voting instructions for
shares of Company Stock to the Participant's Accounts are not timely
received by the Trustee for a particular stockholders' meeting, such shares
shall be voted by the Trustee as directed by the Administrator.
Section 11.6 -- Consolidation or Merger
In the event of the consolidation or merger of a Company with or into any
other corporation, or the sale by a Company of its assets, the resulting
successor may continue the Plan by adopting it in a resolution of its board of
directors or agreement of its partners. If within 90 days from the effective
date of such consolidation, merger or sale of assets, such new corporation does
not adopt the Plan, the Plan shall be terminated.
Section 11.7 -- Errors and Misstatements
In the event of any misstatement or omission of fact by a Participant to
the Administrator or any clerical error resulting in payment of benefits in an
incorrect amount, the Administrator shall promptly cause the amount of future
payments to be corrected upon discovery of the facts and the Companies shall pay
the Participant or any other person entitled to payment under the Plan any
underpayment in cash in a lump sum or to recoup any overpayment from future
payments to the Participant or any other person entitled to payment under the
Plan in such amounts as the Administrator shall direct or to proceed against the
Participant or any other person entitled to payment under the Plan for recovery
of any such overpayment.
Section 11.8 -- Payment on Behalf of Minor, etc.
In the event any amount becomes payable under the Plan to a minor or a
person who, in the sole judgment of the Administrator is considered by reason of
physical or mental condition to be unable to give a valid receipt therefor, the
Administrator may direct that such payment be made to any person found by the
Administrator in its sole judgment, to have assumed the care of such minor or
other person. Any payment made pursuant to such determination shall constitute a
full release and discharge of the Companies, the Board, the Administrator, the
Committee and their officers, directors and Employees.
Section 11.9 -- Amendment of Plan
As limited by any applicable law, the Plan may be wholly or partially
amended by the Board from time to time including retroactive amendments
necessary to conform to the provisions and requirements of ERISA or the Code or
regulations pursuant thereto; provided, however, that no amendment shall
decrease the Vested percentage or amount of interest any Participant or any
other person entitled to payment under the Plan has in the Participant's
Nonqualified Accounts.
Section 11.10 -- Tax Withholding
The Company shall be entitled to require payment in cash or deduction from
other compensation payable to a Participant of any sums required by federal,
state or local tax law to be withheld with respect to the crediting of Share
Units to a Participant's Accounts and the distribution of amounts to such
Participant. The Administrator may in its discretion and in satisfaction of the
foregoing requirement allow such Holder to elect to have the Company withhold
shares of Common Stock otherwise distributable under the Plan (or allow the
return of shares of Common Stock) having a Fair Market Value equal to the sums
required to be withheld.
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Section 11.11 -- Governing Law
This Plan shall be construed, administered and governed in all respects
under and by applicable federal laws and, where state law is applicable, the
laws of the State of California.
Section 11.12 -- Pronouns and Plurality
The masculine pronoun shall include the feminine pronoun, and the singular
the plural where the context so indicates.
Section 11.13 -- Titles
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan.
Section 11.14 -- References
Unless the context clearly indicates to the contrary, a reference to a
statute, regulation or document shall be construed as referring to any
subsequently enacted, adopted or executed statute, regulation or document.
Executed as of , 2001 at San Diego, California.
LEAP WIRELESS INTERNATIONAL, INC.
By:
Title:
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APPENDIX B
LEAP WIRELESS INTERNATIONAL, INC.
AUDIT COMMITTEE CHARTER
PURPOSE
The primary purpose of the Audit Committee (the "Committee") is to assist the
Board of Directors (the "Board") in fulfilling its responsibility to oversee
management's conduct of the Company's financial reporting process, including by
overviewing the financial reports and other financial information provided by
the Company to any governmental or regulatory body, the public or other users
thereof, the Company's systems of internal accounting and financial controls,
and the annual independent audit of the Company's financial statements.
In discharging its oversight role, the Committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities and personnel of the Company and the power to retain outside counsel,
auditors or other experts for this purpose. The Board and the Committee are in
place to represent the Company's shareholders; accordingly, the outside auditor
is ultimately accountable to the Board and the Committee.
The Committee shall review the adequacy of this Charter on an annual basis.
MEMBERSHIP
The Committee shall be comprised of not less than three members of the Board,
and the Committee's composition will meet the requirements of the Audit
Committee Policy of the NASD.
Accordingly, all of the members will be directors:
1. Who have no relationship to the Company that may interfere with the
exercise of their independence from management and the Company; and
2. Who are financially literate or who become financially literate within a
reasonable period of time after appointment to the Committee. In
addition, at least one member of the Committee will have accounting or
related financial management expertise.
KEY RESPONSIBILITIES
The Committee's job is one of oversight and it recognizes that the Company's
management is responsible for preparing the Company's financial statements and
that the outside auditors are responsible for auditing those financial
statements. Additionally, the Committee recognizes that the financial
management, as well as the outside auditors, have more time, knowledge and more
detailed information on the Company than do Committee members; consequently, in
carrying out its oversight responsibilities, the Committee is not providing any
expert or special assurance as to the Company's financial statements or any
professional certification as to the outside auditor's work.
The following functions shall be the common recurring activities of the
Committee in carrying out its oversight function. These functions are set forth
as a guide with the understanding that the Committee may diverge from this guide
as appropriate given the circumstances.
- - The Committee shall review with management and the outside auditors the
audited financial statements to be included in the Company's Annual Report on
Form 10-K (or the Annual Report to Shareholders if distributed prior to the
filing of Form 10-K) and review and consider with the outside auditors the
matters required to be discussed by Statement of Auditing Standards ("SAS")
No. 61.
- - As a whole, or through the Committee chair, the Committee shall review with
the outside auditors the Company's interim financial results to be included in
the Company's quarterly reports to be filed with Securities and Exchange
Commission and the matters required to be discussed by SAS No. 61; this review
will occur prior to the Company's filing of the Form 10-Q.
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- - The Committee shall discuss with management and the outside auditors the
quality and adequacy of the Company's internal controls.
- - The Committee shall:
- Request from the outside auditors annually, a formal written statement
delineating all relationships between the auditor and the company
consistent with Independence Standards Board Standard Number 1;
- Discuss with the outside auditors any such disclosed relationships and
their impact on the outside auditor's independence; and
- Recommend that the Board take appropriate action to oversee the
independence of the outside auditor.
The Committee, subject to any action that may be taken by the full Board, shall
have the ultimate authority and responsibility to select (or nominate for
shareholder approval), evaluate and, where appropriate, replace the outside
auditor.
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APPENDIX C
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Leap's common stock, $.0001 par value per share, is listed for trading on
The Nasdaq National Market under the symbol "LWIN." The following table sets
forth the high and low sales prices for the common stock as reported by the
Nasdaq National Market in each of the periods indicated:
HIGH ($) LOW ($)
-------- -------
CALENDAR YEAR -- 1999
First Quarter 14.88 5.19
Second Quarter 25.50 11.38
Third Quarter 26.50 14.56
Fourth Quarter 94.06 22.75
CALENDAR YEAR -- 2000
First Quarter 110.50 47.06
Second Quarter 99.75 32.25
Third Quarter 81.88 44.75
Fourth Quarter 66.63 23.50
On March 1, 2001, the last reported sale price of Leap's common stock on
the Nasdaq National Market was $31.38. As of March 1, 2001, there were
30,040,580 shares of common stock outstanding held by approximately 1,612
holders of record.
Leap has never paid or declared any cash dividends on its common stock and
does not intend to pay dividends on its common stock in the foreseeable future.
The terms of the indenture governing the high-yield notes issued in Leap's
February 2000 units offering restrict its ability to declare or pay dividends.
Leap intends to retain any earnings to fund its growth.
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SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
These tables should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the audited
consolidated financial statements included elsewhere in this report.
PERIOD FROM
YEAR ENDED AUGUST 31, SEPTEMBER 1 TO YEAR ENDED
---------------------------------------- DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 1999 2000
------- ------- -------- --------- -------------- ------------
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Service revenues........................... $ -- $ -- $ -- $ 3,619 $ 6,733 $ 40,599
Equipment revenues......................... -- -- -- 288 39 9,718
------- ------- -------- --------- -------- ----------
Total revenues............................. -- -- -- 3,907 6,772 50,317
------- ------- -------- --------- -------- ----------
Operating expenses:
Cost of service............................ -- -- -- (1,355) (2,409) (20,821)
Cost of equipment.......................... -- -- -- (2,455) (7,760) (54,883)
Selling, general and administrative
expenses................................. (396) (1,361) (23,888) (28,745) (19,344) (117,349)
Depreciation and amortization.............. -- -- -- (5,824) (6,926) (24,563)
------- ------- -------- --------- -------- ----------
Total operating expenses................. (396) (1,361) (23,888) (38,379) (36,439) (217,616)
------- ------- -------- --------- -------- ----------
Operating loss............................. (396) (1,361) (23,888) (34,472) (29,667) (167,299)
Equity in net loss of and write-down of
investments in and loan receivable from
unconsolidated wireless operating
companies.................................. -- (3,793) (23,118) (127,542) (23,077) (78,624)
Interest income.............................. -- -- 273 2,505 764 48,477
Interest expense............................. -- -- -- (10,356) (12,283) (112,358)
Foreign currency transaction gains (losses),
net........................................ -- -- -- (7,211) (8,247) 13,966
Gain on sale of wholly owned subsidiaries.... -- -- -- 9,097 -- 313,432
Gain on issuance of stock by unconsolidated
wireless operating company................. -- -- -- 3,609 -- 32,602
Other income (expense), net.................. -- -- -- (243) (3,336) 1,913
------- ------- -------- --------- -------- ----------
Income (loss) before income taxes and
extraordinary items........................ (396) (5,154) (46,733) (164,613) (75,846) 52,109
Income taxes................................. -- -- -- -- -- (47,540)
------- ------- -------- --------- -------- ----------
Income (loss) before extraordinary items..... (396) (5,154) (46,733) (164,613) (75,846) 4,569
Extraordinary loss on extinguishment of
debt....................................... -- -- -- -- -- (4,737)
------- ------- -------- --------- -------- ----------
Net loss................................. $ (396) $(5,154) $(46,733) $(164,613) $(75,846) $ (168)
======= ======= ======== ========= ======== ==========
Basic net income (loss) per common share:
Income (loss) before extraordinary items... $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ 0.18
Extraordinary loss......................... -- -- -- -- -- (0.19)
------- ------- -------- --------- -------- ----------
Net loss............................ $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ (0.01)
======= ======= ======== ========= ======== ==========
Diluted net income (loss) per common share:
Income (loss) before extraordinary items... $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ 0.14
Extraordinary loss......................... -- -- -- -- -- (0.15)
------- ------- -------- --------- -------- ----------
Net loss............................ $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ (0.01)
======= ======= ======== ========= ======== ==========
Shares used in per share calculations(2):
Basic...................................... 17,648 17,648 17,648 17,910 18,928 25,398
======= ======= ======== ========= ======== ==========
Diluted.................................... 17,648 17,648 17,648 17,910 18,928 32,543
======= ======= ======== ========= ======== ==========
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AS OF AUGUST 31, AS OF DECEMBER 31,
------------------------------------- ---------------------
1996 1997 1998 1999 1999 2000
----- ------- -------- -------- -------- ----------
BALANCE SHEET DATA(1):
Cash and cash equivalents.................... $ -- $ -- $ -- $ 26,215 $ 44,109 $ 338,878
Working capital (deficit).................... (111) (279) (14,789) 6,587 50,361 587,819
Restricted cash equivalents and
investments................................ -- -- -- -- 20,550 65,471
Total assets................................. -- 42,267 157,752 335,331 360,765 1,647,407
Long-term debt............................... -- -- -- 221,812 303,818 897,878
Stockholders' equity (deficit)............... (111) 41,988 142,963 70,900 10,892 583,258
- ---------------
(1) For the fourth quarter of the year ended August 31, 1999, the period from
September 1, 1999 to December 31, 1999, and the first six months of the year
ended December 31, 2000, the financial statements of Smartcom are included
in the selected consolidated financial data as a result of Leap's
acquisition of the remaining 50% interest in Smartcom that we did not
already own on April 19, 1999. Before the fourth quarter of the year ended
August 31, 1999, Leap's investment in Smartcom was accounted for using the
equity method of accounting. Leap subsequently divested its entire interest
in Smartcom on June 2, 2000.
(2) Refer to Note 2 of the Consolidated Financial Statements for an explanation
of the calculation of basic and diluted net loss per common share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The words "Leap," "we," "our," "ours" and "us" refer to Leap Wireless
International, Inc. and, unless the context otherwise requires, its consolidated
subsidiaries. Unless otherwise specified, information relating to population and
potential customers is based on 1998 population estimates provided by Easy
Analytic Software Incorporated.
The following discussion and analysis is based upon our financial
statements as of the dates and for the periods presented in this Appendix. You
should read this discussion and analysis in conjunction with our financial
statements and related notes.
Except for the historical information contained herein, this Appendix,
including "Management's Discussion and Analysis of Financial Condition and
Results of Operations," 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
this Appendix. 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 our
subsidiaries serve which could adversely affect the market for wireless
services; our ability to access capital markets; a failure to meet the
operational, financial or other covenants of our credit facilities; our ability
to rollout networks in accordance with our plans, including receiving equipment
and backhaul and interconnection facilities on schedule from third parties;
failure of network systems to perform according to expectations; the effect of
competition; the acceptance of our 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 ability to
close pending transactions described in this Appendix; technological challenges
in developing wireless data services and customer acceptance of such services if
developed; rulings by courts or the FCC adversely affecting our rights to own
and/or operate certain wireless licenses; and other factors detailed in the
section entitled "Risk Factors" included elsewhere in this Appendix and in our
other SEC filings. The forward-looking statements should be considered in the
context of these risk factors. Investors and prospective investors are cautioned
not to place undue reliance on such forward-looking statements. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
OVERVIEW
Leap is a wireless communications carrier that is providing innovative,
affordable, simple wireless services designed to accelerate the transformation
of wireless service into a mass consumer product. We generally seek to address a
much broader population segment than traditional wireless providers have
addressed to date. In the U.S., we are offering wireless service under the brand
name "Cricket(TM)." Our innovative Cricket strategy is designed to extend the
benefits of mobility to the mass market by offering wireless service that is as
simple to understand and use as, and priced competitively with, traditional
landline service. In each of our markets, we are deploying 100% digital, Code
Division Multiple Access, or CDMA, networks that we believe provide higher
capacity and more efficient deployment of capital than competing technologies.
This, when combined with our efforts to streamline operation and distribution
systems, allows us to be a low-cost provider of wireless services in each of our
markets.
Cricket service allows customers to make and receive virtually unlimited
calls within a local calling area for a low, flat monthly rate compared with
traditional wireless services. Cricket customers pay in advance each month's
service from a simple, straightforward bill. We offer Cricket service without a
contract, and because service is paid in advance, we currently require no credit
check. The simplicity of the Cricket service allows us to sustain lower
operating costs per customer compared to traditional wireless providers. Our
networks are
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designed and built to provide coverage in the local calling area where our
target customers live, work and play. As a result, we believe that our network
operating costs are less than those of traditional wireless providers.
At the end of 2000, we had launched Cricket service in markets covering a
total population of approximately 8 million and had more than 190,000 Cricket
customers across the U.S. To date we have acquired or have rights to acquire
wireless licenses covering approximately 73.1 million potential customers in 36
states, and we plan to continue launching new Cricket markets throughout 2001
and beyond.
We currently plan to expand our service offerings to include wireless data
services designed to appeal to a broad segment of the population and further
transform the nature of wireless communications for our customers. We believe
that wireless data services, like our innovative Cricket service, need to be
simple, easy to use and affordable for all consumers. In furtherance of our
objective to offer low-cost wireless data services, we completed our first
purchase of wireless data technology in December 2000 through the acquisition of
myAladdin.com, a proprietary, personalized, location-based technology, and we
are planning further acquisitions in this area.
In Mexico, we were a founding shareholder and have invested $100 million in
Pegaso Telecomunicaciones, S.A. de C.V., a company that is providing a wireless
service in Mexico that is more traditional than our Cricket service. Pegaso
holds wireless licenses covering all of Mexico, representing approximately 99
million potential customers. At the end of 2000, Pegaso had approximately
536,000 customers. We currently own 20.1% of Pegaso.
While we expect our emphasis for the next few years will be on our
U.S.-based operations, if presented with attractive opportunities, we may invest
in international markets where we believe the combination of unfulfilled demand
and our attractive wireless service offerings can fuel rapid growth.
As is typical for start-up telecommunications networks, we expect our
networks in each of our markets to incur operating expenses significantly in
excess of revenues in their initial period of operation. Operating losses are
likely to continue for the next several years as we rapidly expand service in
new markets and seek to increase our customer bases in new and existing markets.
We believe, however, that with our simple, easy to understand approach to
wireless, we can attract new customers more quickly, maintain lower customer
acquisition costs, and sustain lower operating costs per customer compared to
traditional wireless providers, which will allow us to generate profits in each
of our markets sooner than is typical for a start-up wireless provider.
RECENT AND PENDING ACQUISITIONS
CHASE TELECOMMUNICATIONS
In March 2000, we completed the acquisition of substantially all of the
assets of Chase Telecommunications Holdings, Inc., including its wireless
licenses. The purchase price included approximately $6.3 million in cash, the
assumption of principal amounts of liabilities that totaled approximately $138.0
million (with a fair market value of approximately $131.3 million), a warrant
now exercisable to purchase 202,566 shares of Leap common stock at an aggregate
exercise price of $1.0 million, and contingent earn-out payments of up to $41.0
million (plus certain expenses) based on earnings of the business acquired
during the fifth full year following the closing of the acquisition. Under the
purchase method of accounting, the total estimated fair value of the acquisition
was $152.9 million, of which $43.2 million was allocated to property and
equipment and other assets and $109.7 million was allocated to intangible
assets. Intangible assets consist primarily of wireless licenses, which are to
be amortized over their estimated useful lives of 40 years following
commencement of commercial service.
WIRELESS LICENSES
Leap acquired 36 licenses in the federal government's 1999 reauction of
broadband PCS spectrum licenses for $18.7 million in cash. From January 2000
through February 2001, we completed the purchase of additional licenses in the
U.S. from various third parties for an aggregate of $99.1 million in cash,
566,205 shares of our common stock that had an aggregate fair value at the time
of purchase of $26.7 million and the
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assumption of $13.8 million in debt, net of discount, 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 90 days after close and the final payment
due one year after close. In addition, from January 2000 through February 2001,
we entered into various agreements with third parties to purchase additional
wireless licenses in exchange for an aggregate of cash, shares of common stock
and the assumption of FCC debt with an aggregate estimated fair value of $197.6
million as of February 22, 2001, subject to certain adjustments based upon
changes in the market value of wireless licenses and the market price of our
common stock at the time of closing of some acquisitions. Each of the pending
agreements is subject to customary closing conditions, including FCC approval,
and may not be closed on schedule or at all. We were also the high bidder on 22
wireless licenses in the FCC's broadband PCS auction completed in January 2001
for an aggregate purchase price of $350.0 million. The transfer of these
licenses to Leap remains subject to FCC approval. See the section entitled "Risk
Factors -- The FCC's Decision that We Are Qualified to Hold C-Block and F-Block
Licenses Is Subject to Review and Appeal" included elsewhere in this report.
SMARTCOM DISPOSITION
In April 1999, we increased our ownership interest in Smartcom from 50% to
100%. We began fully consolidating Smartcom's results of operations in June
1999, having previously accounted for our investment in Smartcom under the
equity method of accounting. On June 2, 2000, we completed the sale of Smartcom
to Endesa S.A. 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,
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. The final audit is not yet completed, and we are in discussions with
Endesa concerning a potential adjustment, which we do not expect to be material.
In February 2001, we sold the third note which had an original principal amount
of $58.2 million to a third party for $60.7 million including accrued interest.
Each of the two remaining promissory notes matures on June 2, 2001 and bears
interest at a rate equal to the 3-month LIBOR, compounded semi-annually. 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 expense of $34.5 million.
PRESENTATION
CHANGE IN FISCAL YEAR
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 ended on December 31, 2000. As a result of the
change in year-end, we issued consolidated financial statements as of December
31, 1999 and for the period from September 1, 1999 to December 31, 1999.
FOREIGN SUBSIDIARIES
To accommodate the different fiscal periods of Leap and its foreign
subsidiaries, we have historically 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 beginning in
the period from September 1, 1999 to December 31, 1999. The effect of this
change on previously reported amounts was adjusted in accumulated deficit in the
period from September 1, 1999 to December 31, 1999.
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The financial statements of Smartcom are included in our consolidated
financial statements from June 1, 1999 to March 31, 2000 as a result of our
acquisition of the remaining 50% of Smartcom that we did not already own in
April 1999 and our sale of 100% of Smartcom on June 2, 2000. The accounts of
Smartcom were consolidated using a three-month lag, and as a result of the sale
in June 2000, the results of Smartcom for April and May 2000 have been reflected
in accumulated deficit during the year ended December 31, 2000. Due to the sale
of Smartcom, our reported results are not indicative of future results.
As we currently own 20.1% of Pegaso, we account for our interest in Pegaso
under the equity method of accounting.
REVENUES AND COST RECOGNITION
For our domestic Cricket business, revenues include wireless voice services
and the sale of handsets and accessories. Wireless services are provided on a
month-to-month basis and are generally billed in advance. We do not charge fees
for the initial activation of service. Revenues from wireless services are
recognized as services are rendered. Amounts received in advance are recorded as
deferred revenue. Cost of service generally includes direct costs and related
overhead, excluding depreciation and amortization, of operating our networks.
Equipment revenues arise from the sale of handsets and accessories. Revenues and
related costs from the sale of handsets are recognized when service is activated
by customers. Revenues and related costs from the sale of accessories are
recognized at the point of sale. The costs of handsets and accessories sold are
recorded in cost of equipment. Handsets sold to third party resellers are
included in inventory until they are sold to and activated by customers. Amounts
due from third party resellers for handsets are recorded as deferred revenue
upon shipment by us and are recognized as equipment revenues when service is
activated by customers. Sales incentives offered without charge to customers
related to the sale of handsets are recognized as a reduction of revenue when
the related equipment revenue is recognized. Customers have the right to return
handsets and accessories within 30 days of purchase or 30 minutes of usage,
whichever occurs first. We record an estimate for returns at the time of
recognizing revenue. Returns have historically been insignificant.
We sell our handsets to customers and resellers at prices below cost.
Handsets sold through our indirect resellers are subject to a reseller's mark-up
which is not included in our equipment revenues. We also deduct from equipment
revenues the value of the first month's service, which is included in the price
of the handset. We also generate revenues from features, including call waiting,
caller ID and voicemail. Service revenue is also generated from the customer's
usage of long-distance minutes purchased from Cricket and directory assistance.
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RESULTS OF OPERATIONS
The following table presents condensed consolidated statement of operations
data for the periods indicated (in thousands).
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
Revenues:
Service revenues.......................................... $ 40,599 $ 9,177
Equipment revenues........................................ 9,718 306
--------- ---------
Total revenues............................................ 50,317 9,483
--------- ---------
Operating expenses:
Cost of service........................................... (20,821) (3,263)
Cost of equipment......................................... (54,883) (7,931)
Selling, general and administrative expenses.............. (117,349) (40,272)
Depreciation and amortization............................. (24,563) (10,884)
--------- ---------
Total operating expenses.......................... (217,616) (62,350)
--------- ---------
Operating loss............................................ (167,299) (52,867)
Equity in net loss of and write-down of investments in and
loan receivable from unconsolidated wireless operating
companies................................................. (78,624) (130,441)
Interest income............................................. 48,477 2,482
Interest expense............................................ (112,358) (20,041)
Foreign currency transaction gains (losses), net............ 13,966 (10,005)
Gain on sale of wholly-owned subsidiaries................... 313,432 9,097
Gain on issuance of stock by unconsolidated wireless
operating company......................................... 32,602 3,609
Other income (expense), net................................. 1,913 (3,490)
--------- ---------
Income (loss) before income taxes and extraordinary items... 52,109 (201,656)
Income taxes................................................ (47,540) --
--------- ---------
Income (loss) before extraordinary items.................... 4,569 (201,656)
Extraordinary loss on early extinguishment of debt.......... (4,737) --
--------- ---------
Net income (loss)......................................... $ (168) $(201,656)
========= =========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
DOMESTIC BUSINESS
Prior to March 2000, we did not report any revenues and related cost of
revenues from our domestic Cricket business because Chase Telecommunications,
which introduced Cricket service in Chattanooga, Tennessee in March 1999 and
Nashville, Tennessee in January 2000, was accounted for under the equity method
of accounting. Excluding Smartcom, we generated $19.1 million and $9.6 million
in service and equipment revenues, respectively, and incurred $13.8 million and
$33.1 million of cost of service and cost of equipment, respectively, from our
Cricket operations for the period from March 17, 2000 to December 31, 2000.
During the fourth quarter of 2000, we launched additional Cricket markets,
bringing our total covered potential customers to approximately 8 million. We
continued to develop a strong network of national, regional and local resellers,
which, together with our company-owned Cricket stores, sell the Cricket service
and handsets.
At December 31, 2000, customers of our Cricket service rose to more than
190,000, compared to approximately 22,000 at December 31, 1999. We added over
127,000 customers in the fourth quarter of 2000, many in the month of December
due to the launch of four new markets covering approximately 4.0 million
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potential customers and our offering of rebates and holiday sales promotions. We
estimate these rebates and promotions resulted in a reduction of equipment
revenues of approximately $3.6 million.
We calculate cost per gross additional customer (CPGA) by including all
distribution costs such as advertising, all marketing and sales expenses
including corporate costs, as well as handset subsidies. In the fourth quarter
of 2000, our CPGA was approximately $249, including all pre-launch marketing
expenses associated with the launch of our new markets as well as holiday
promotional activities.
Excluding Smartcom, selling, general and administrative expenses were $96.3
million and $28.4 million for the years ended December 31, 2000 and 1999,
respectively. The increase in selling, general and administrative expenses was
due primarily to higher expenses associated with the development of new markets
in the U.S. and the launch of network service in additional markets. Excluding
Smartcom, sales and marketing expenses for the year ended December 31, 2000
totaled $22.6 million and consisted primarily of advertising and public
relations and related payroll expenses. General and administrative expenses
totaled $59.8 million for the year ended December 31, 2000 and included costs
for raising capital, business development including acquiring spectrum licenses,
government relations, public reporting and investor relations, legal expenses
and developing our wireless data services businesses. In addition, we incurred
stock-based compensation expense of $13.9 million related to the exchange of
stock options from our June 2000 acquisition of the remaining interest in
Cricket Communications Holdings that we did not already own. 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 additional U.S. markets and the development and launch of our
wireless data services.
Excluding Smartcom, depreciation and amortization was $14.5 million and
$0.6 million for the years ended December 31, 2000 and 1999, respectively. The
increase in depreciation and amortization was due primarily to the consolidation
of Chase Telecommunications from March 2000, network construction expenditures
and wireless licenses being placed in service in conjunction with market
launches, as well as amortization of goodwill associated with our June 2000
purchase of the remaining interest in Cricket Communications Holdings that we
did not already own.
Excluding Smartcom, our operating loss was $129.2 million and $29.0 million
for the years ended December 31, 2000 and 1999, respectively. The increase in
operating loss primarily reflected the consolidation of Chase Telecommunications
from March 2000 and the increase in market development and launch costs in the
U.S. We expect substantial growth in customers, operating revenues and operating
expenses as a result of the planned development and launch of Cricket service in
additional U.S. markets.
During the year ended December 31, 2000, our equity share in the net loss
of our unconsolidated wireless operating companies related to Pegaso and to
Chase Telecommunications prior to March 2000. During the corresponding period of
the prior year, our share of the net loss of and write-down of investments in
and loan receivable from 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.
Excluding Smartcom, our interest income was $48.4 million and $2.1 million
for the years ended December 31, 2000 and 1999, respectively. 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 cash and notes receivable related to the sale of Smartcom in June
2000.
Excluding Smartcom, our interest expense was $103.2 million and $14.3
million for the years ended December 31, 2000 and 1999, respectively. The
increase in interest expense related primarily to interest on our senior notes
and senior discount notes issued in our February 2000 units offering and to
vendor financing of our wireless networks. We expect interest expense to
increase substantially in the future due to our expected additional borrowings
used to finance the construction of wireless networks in various markets across
the U.S.
Foreign currency transaction gains (losses) primarily reflected unrealized
exchange gains (losses) 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.
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Gain on sale of subsidiary of $313.4 million reflects our June 2000 sale of
Smartcom, before related income tax effects of $34.5 million. In addition to the
taxes payable on this gain, we incurred an additional $13.0 million in income
taxes related to interest income and foreign exchange gains earned by our
Chilean holding company on U.S. dollar cash balances and notes receivable from
the sale.
Gain on issuance of stock by unconsolidated wireless operating company
reflects reductions in our share of Pegaso's accumulated losses as a result of
decreases in our percentage ownership interest of Pegaso. In July 1999, several
of the other investors contributed $50.0 million to Pegaso. In April 2000,
Sprint PCS invested $200 million in Pegaso by purchasing shares from Pegaso and
shareholders other than Leap. In August 2000, several other existing investors
contributed $50.0 million to Pegaso.
Included in the year ended December 31, 2000, in connection with the
repayment of our credit agreement with Qualcomm in February 2000, we wrote-off
and reported as an extraordinary loss $4.4 million in related unamortized debt
issuance costs.
CONSOLIDATION OF SMARTCOM
As a direct result of the consolidation of Smartcom, we recorded $21.5
million and $0.1 million of additional service and equipment revenues,
respectively, $7.0 million and $21.8 million of additional cost of service and
cost of equipment, respectively, $21.0 million of additional selling, general
and administrative expenses, $10.0 million of additional depreciation and
amortization, $9.0 of additional net interest expense, $10.8 million of
additional foreign currency transaction gains and $0.3 million of additional net
other income, in each case for the year ended December 31, 2000. As a direct
result of the consolidation of Smartcom, we recorded $9.2 million and $0.3
million of additional service and equipment revenues, respectively, $3.3 million
and $7.9 million of additional cost of service and cost of equipment,
respectively, $11.9 million of additional selling, general and administrative
expenses, $10.3 million of additional depreciation and amortization, $5.4
million of additional net interest expense, $10.0 million of additional foreign
currency transaction gains and $0.1 million of additional net other expense, in
each case for the year ended December 31, 1999.
FOUR MONTHS ENDED DECEMBER 31, 1999 COMPARED TO FOUR MONTHS ENDED DECEMBER 31,
1998
We incurred a net loss of $75.8 million during the four month period ended
December 31, 1999 compared to a net loss of $26.1 million in the corresponding
period of the prior year. The increase related primarily to the costs associated
with the launch of network service in new markets. Pegaso launched operations in
Tijuana, Guadalajara and Monterrey in February through September 1999. Cricket
wireless service was launched in Nashville, Tennessee in late January 2000. In
addition, in November 1999 we re-launched service in Chile under a new brand
name and corporate identity. As a result, total customers on our networks
reached approximately 206,000 customers at December 31, 1999 (22,000 in the
U.S., 78,000 in Chile and 106,000 in Mexico), compared to a total customer base
of approximately 23,000 customers at December 31, 1998.
As a direct result of the consolidation of Smartcom, we recorded $6.6
million of operating revenues, $10.2 million of cost of operating revenues, $9.9
million of additional selling, general and administrative expenses, $6.7 million
of additional depreciation and amortization, $4.7 million of additional net
interest expense, and $8.2 million of foreign currency transaction losses during
the four month period ended December 31, 1999. Smartcom's net loss of $33.1
million recognized during the four month period ended December 31, 1999,
compared to $4.5 million that we recognized under the equity method for our 50%
interest in the corresponding period of the prior year. During the four months
ended December 31, 1998, we did not report any operating revenues because all of
our revenue generating operating companies were accounted for under the equity
method of accounting. Our operating companies did not generate material revenues
in the four months ended December 31, 1998.
We incurred $19.3 million of selling, general and administrative expenses
during the four month period ended December 31, 1999, compared to $5.3 million
in the corresponding period of the prior year. The increase included $9.9
million from the consolidation of Smartcom. Excluding Smartcom, selling, general
and administrative expenses increased by $4.1 million over the corresponding
four month period of the prior year due to increased staffing and business
development activities related to Cricket Communications.
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We incurred an operating loss of $29.7 million during the four month period
ended December 31, 1999 compared to an operating loss of $5.5 million in the
corresponding period of the prior year. The $24.2 million increase primarily
reflected the consolidation of Smartcom.
Equity in net loss of unconsolidated wireless operating companies was $23.1
million during the four month period ended December 31, 1999 compared to $19.9
million in the corresponding period of the prior year. During the four months
ended December 31, 1999, our equity share in the net loss of our unconsolidated
wireless operating companies related to Pegaso and Chase Telecommunications.
During the corresponding period of the prior year, our equity share in the net
loss of our unconsolidated wireless operating companies also included Smartcom
(prior to Leap's acquisition of the remaining 50 percent interest) and our
Russian investments which have been subsequently written-down, liquidated or are
in the process of liquidation. Despite these changes, equity in net loss of
unconsolidated wireless operating companies increased as a result of the costs
associated with the launch of Pegaso's service and the expansion of Cricket
services by Chase Telecommunications.
Interest expense was $12.3 million during the four month period ended
December 31, 1999, compared to $1.3 million in the corresponding period of the
prior year. Interest expense related primarily to borrowings under our credit
agreement with Qualcomm and Smartcom's financing of its wireless communications
network.
Foreign currency transaction losses of $8.2 million during the four month
period ended December 31, 1999 reflected unrealized foreign exchange losses
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.
YEAR ENDED AUGUST 31, 1999 COMPARED TO YEAR ENDED AUGUST 31, 1998
We incurred a net loss of $164.6 million in the year ended August 31, 1999
compared to a net loss of $46.7 million in the year ended August 31, 1998. The
increase resulted primarily from start-up costs associated with our
unconsolidated wireless operating companies. Our equity in net loss of
unconsolidated wireless operating companies was $100.3 million in the year ended
August 31, 1999. In addition, in the year ended August 31, 1999, we recorded a
write-down of equity investments of $27.2 million, interest expense of $10.4
million, foreign currency transaction losses of $7.2 million, a gain on the sale
of a wholly-owned subsidiary of $9.1 million and a gain on issuance of stock by
an unconsolidated wireless operating company of $3.6 million.
As a direct result of the consolidation of Smartcom in the fourth quarter
of the year ended August 31, 1999, we recorded $3.9 million of operating
revenues, $3.8 million of cost of operating revenues, $4.5 million of additional
selling, general and administrative expenses, $5.3 million of additional
depreciation and amortization, $2.9 million of additional interest expense, and
$7.2 million of foreign currency transaction losses. Smartcom's full
consolidation increased our net operating loss in the year ended August 31, 1999
by $9.9 million. During the prior year, we did not report any operating revenues
because all of our operating companies were accounted for under the equity
method of accounting. Our operating companies did not generate material revenues
in the prior year.
We incurred $28.7 million of selling, general and administrative expenses
in the year ended August 31, 1999 compared to $23.9 million in the year ended
August 31, 1998. The increase resulted from the consolidation of Smartcom in the
fourth quarter of the year ended August 31, 1999. Excluding Smartcom, selling,
general and administrative expenses remained relatively flat.
We incurred an operating loss of $34.5 million in the year ended August 31,
1999 compared to an operating loss of $23.9 million in the year ended August 31,
1998. The $10.6 million increase primarily reflected the consolidation of
Smartcom in the fourth quarter of the year ended August 31, 1999.
Equity in net loss of unconsolidated wireless operating companies was
$100.3 million in the year ended August 31, 1999 compared to $23.1 million in
the year ended August 31, 1998. The significant increase in our share of the net
loss of our unconsolidated wireless operating companies related primarily to the
expenditures they incurred in launching their network services, including
marketing and other expenses, and the
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amortization of their capitalized network costs. Smartcom, accounted for under
the equity method until the fourth quarter of 1999, launched nationwide service
in September 1998. Pegaso launched operations in Tijuana, Guadalajara and
Monterrey from February through September 1999. Chase Telecommunications
launched its traditional wireless service in the U.S. in September 1998 and
re-launched service utilizing Leap's Cricket wireless concept in March 1999.
Equity in net loss of unconsolidated wireless operating companies included a
$16.9 million asset impairment charge in the year ended August 31, 1999 as a
result of the satellite failures experienced by one of our former Russian
investments.
We recorded an aggregate $27.2 million write-down in the fourth quarter of
the year ended August 31, 1999, related to our former Russian investments,
reducing the carrying value of these investments to the liquidation proceeds we
expect to receive.
Interest expense in the year ended August 31, 1999 related primarily to
borrowings under our credit agreement with Qualcomm and the consolidation of
$2.9 million of Smartcom interest expense in the fourth quarter of the year
ended August 31, 1999. Smartcom's interest expense related primarily to the
financing of its wireless communications network. We did not incur any interest
expense during the year ended August 31, 1998.
Foreign currency transaction losses of $7.2 million in the year ended
August 31, 1999 reflected unrealized foreign exchange losses 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 during the fourth quarter of
the year ended August 31, 1999.
Gain on sale of wholly-owned subsidiary of $9.1 million in the year ended
August 31, 1999 resulted from our sale of OzPhone Pty. Ltd., our former
Australian subsidiary. OzPhone held wireless licenses but had not initiated
service.
Gain on issuance of stock by unconsolidated wireless operating company of
$3.6 million in the year ended August 31, 1999 reflects a reduction in our share
of Pegaso's accumulated losses as a result of a decrease in our percentage
ownership of Pegaso. In July 1999, several of the other investors contributed
$50.0 million to Pegaso.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
For the year 2001, we have budgeted a total of approximately $1,817.1
million for the following requirements:
- approximately $850.0 million for capital expenditures for the buildout of
our networks and approximately $300.0 million to fund operating losses;
- approximately $649.4 million in connection with our pending acquisitions
of wireless licenses; and
- approximately $17.7 million for general corporate overhead and other
expenses.
Interest under our senior notes, senior discount notes and vendor
facilities is either deferred and added to principal or otherwise paid from our
restricted cash and restricted investment accounts. Our actual expenditures may
vary significantly depending upon whether we purchase additional wireless
licenses, the progress of the buildout of our networks and other factors,
including unforeseen delays, cost overruns, unanticipated expenses, regulatory
expenses, engineering design changes and other technological risks.
As of December 31, 2000, we had a total of approximately $2,099.6 million
in unused capital resources for our future cash needs as follows:
- approximately $635.1 million in consolidated unrestricted cash, cash
equivalents, investments and deposits on hand;
- approximately $102.2 million of proceeds (net of taxes and reserves) from
the notes receivable received from the sale of Smartcom; and
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- approximately $1,362.3 million in commitments (net of capitalized
interest) under vendor financing arrangements with Lucent Technologies,
Inc., Nortel Networks, Inc. and Ericsson Wireless Communications, Inc.,
with availability based on a ratio of the total amounts of products and
services purchased.
In addition, in January 2001 we entered into a secured loan agreement with
Qualcomm for up to approximately $125 million to support our acquisition of
C-Block and F-Block wireless licenses in the FCC's recent broadband PCS auction
that closed on January 26, 2001. We also received $55 million from the sale of
common stock to Acqua Wellington North American Equities Fund, Ltd. under a
common stock purchase agreement with Acqua Wellington we entered into in
December 2000.
According to our estimates, we believe we have sufficient capital resources
to build and launch networks and fund operating losses in markets with
approximately 36 million total potential customers. Our networks in these
markets are expected to cover approximately 24 million potential customers. If
we launch additional markets, invest in any new voice or data services or
ventures or make additional license purchases for cash, we will need to raise
substantial additional capital.
Although we expect some of our markets to be cash flow positive during
2001, 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. We plan to refinance our vendor indebtedness when market
conditions are attractive. 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 buildout of our planned
wireless networks in the U.S., the planned acquisition of additional licenses
and the buildout of markets related to those 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 wireless
communications 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.
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 $330.0 million.
In December 2000, we entered into a common stock purchase agreement with
Acqua Wellington North American Equities Fund, Ltd. under which we may, at our
discretion, sell registered common stock from time to time over the succeeding
28 month period. Under the agreement, we may require Acqua Wellington to
purchase between $10.0 and $25.0 million of common stock, depending on the
market price of our common stock, during one or more 18 trading day periods. In
addition, we may grant to Acqua Wellington an option to purchase up to an equal
amount of common stock during the same 18 trading day period. Acqua Wellington
purchases the common stock at a discount to its then current market price,
ranging from 4.0% to 5.5%, depending on our market capitalization at the time we
require Acqua Wellington to purchase our common stock. A special provision in
the agreement (as amended) allowed the first sale of common stock under the
agreement to be up to $55.0 million. On January 23, 2001, we completed the first
sale of our common stock under the agreement, issuing 1,564,336 shares to Acqua
Wellington in exchange for $55.0 million in cash.
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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 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, of
which $164.4 million of the total proceeds were allocated to the fair value of
the warrants, estimated using the Black-Scholes option pricing model. The
warrants issued in the units offering are exercisable for an aggregate of
2,829,854 shares of our common stock at an exercise price of $96.80 per share
from February 23, 2001 to prior to April 15, 2010. The terms and conditions of
the warrants are more fully described in the warrant agreement for the warrants,
which is filed as an exhibit to our Annual Report on Form 10-K.
Interest on the Senior Notes is payable semi-annually. The Senior Discount
Notes begin accruing cash interest on April 15, 2005, with the first semi-annual
interest payment due October 15, 2005. Each Senior Discount Note has an initial
accreted value of $486.68 and a principal amount at maturity of $1,000. We 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, Leap may redeem up to 35% of both the Senior Notes and the Senior
Discount Notes using proceeds from certain qualified equity offerings at 112.5%
of their principal amount and 114.5% of their accreted value, respectively. The
notes are guaranteed by Cricket Communications Holdings. The terms of the notes
include certain covenants that restrict Leap's ability to, among other things,
incur additional indebtedness, create liens, pay dividends, make investments,
sell assets and effect a consolidation or merger. The terms and conditions of
the notes are more fully described in the indenture for the notes, which is
filed as an exhibit to our Annual Report on Form 10-K.
Vendor Financing. Cricket Communications has entered into purchase
agreements and credit facilities with each of Lucent Technologies, Inc., Nortel
Networks, Inc. and Ericsson Wireless Communications, Inc. for the purchase of
network infrastructure products and services and the financing of these
purchases plus additional working capital. Cricket Communications has agreed to
purchase up to $900.0 million of infrastructure products and services from
Lucent. The purchase agreement is subject to early termination at Cricket
Communications' convenience subject to payments for products and services
purchased from Lucent. The Lucent credit facility permits up to $1,350.0 million
in total borrowings by Cricket Communications. 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. In August 2000, Cricket
Communications entered into a three-year supply agreement with Nortel for the
purchase of infrastructure products and services, and a related credit facility
that permits up to $525.0 million in total borrowings. 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, and a
related credit facility with Ericsson Credit AB that permits up to $495.0
million in total borrowings. Lucent, Nortel and Ericsson have agreed to share
collateral and limit total loans by the three vendors to $1,845.0 million.
Borrowing availability under each credit agreement is generally based on a
ratio of the total amount of products and services purchased from the vendor.
Each of the credit agreements contain various covenants and conditions typical
for loans of this type, including minimum levels of customers and covered
potential customers that must increase over time, minimum revenues, limits on
annual capital expenditures, dividend restrictions (other than the Nortel
Agreement) and other financial ratio tests. The obligations under the credit
agreements 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 each of the credit facilities 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 facilities, decreasing to
0.75% per annum. Principal payments are scheduled to begin after three years
with a final maturity after eight years. Repayment is
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weighted to the later years of the repayment schedule. We plan to refinance
these loans when market conditions are attractive; however, we may not be able
to refinance these loans at that time. At December 31, 2000, Cricket
Communications had $378.7 million outstanding under the vendor credit
agreements, at a weighted-average interest rate of 10.88%. In addition, at
December 31, 2000, we had amounts payable to the vendors that will be financed
under the vendor credit agreements of $34.0 million, which have been included in
other long-term liabilities.
Because Leap's new Cricket markets were launched later in the fourth
quarter of 2000 than anticipated and because of reduced equipment sales revenues
as a result of holiday promotions, Cricket revenue was below the minimum
required level contained in the financial covenants in the vendor loan
facilities. Leap has received waivers of its failure to meet this revenue target
from all of the required lenders. We expect to make up this revenue shortfall
and to be in compliance with the revenue covenant by the end of the first
quarter of 2001. There can be no assurance that additional delays in market
launches and/or other adverse results in our business will not result in a
failure to meet our financial or operating covenants in the future.
Qualcomm Term Loan. In January 2001, we entered into a secured loan
agreement with Qualcomm under which Qualcomm will loan to us approximately
$125.0 million to finance our acquisition of wireless licenses in the FCC's
broadband PCS auction completed in January 2001. Qualcomm has agreed to fund
borrowings under the agreement by the transfer to us of an FCC auction discount
voucher, or, at Qualcomm's option, cash. Under the terms of the agreement, we
must repay the outstanding principal and accrued interest to Qualcomm in a
single payment no later than five years after the date of the initial borrowing.
The loan is subject to mandatory prepayments in certain circumstances, including
as a result of our receiving net cash proceeds in excess of $400.0 million from
issuances of debt or equity securities by Leap or its subsidiaries (other than
certain excluded issuances such as equipment vendor financing, and sales under
the Acqua Wellington common stock purchase agreement which are used to acquire
wireless licenses). The loan bears interest at a variable rate depending on the
collateral we provide. We expect this rate to be at LIBOR plus 7.5%. As security
for the loan, we have agreed to pledge in favor of Qualcomm the stock of
subsidiaries holding licenses acquired in the January 2001 FCC auction with an
aggregate purchase price of at least 150% of the outstanding principal amount of
the loan. The loan is subject to the same covenants that are contained in the
Indenture for the high-yield notes issued in our February 2000 units offering,
and other customary covenants and conditions.
Debt Obligations to the FCC. We have assumed $93.0 million ($84.5 million,
net of discount) in debt obligations to the FCC as part of the purchase price
for wireless licenses from January to December 2000 and assumed in the
acquisition of the assets of Chase Telecommunications Holdings. The terms of the
notes include interest rates ranging from 6.25% to 9.75% per annum and quarterly
principal and interest payments until maturity through July 2007. The notes were
discounted using management's best estimate of the prevailing market interest
rate to us at the time of purchase of the wireless licenses ranging from 9.75%
to 10.75% per annum.
Pegaso Guarantee. 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 $100.0 million. In
connection with the guarantee, Leap has received an option to subscribe for and
purchase limited voting series "N" treasury shares of Pegaso. The number of
shares that may be purchased by Leap under the option will be calculated as a
proportion of the number of options granted to the lenders to provide a total
internal rate of return of 20% to the lenders on the average outstanding balance
of the bridge loan, subject to a maximum of 418,518 shares of series "N"
treasury shares issuable to Leap. The options have an exercise price of $0.01
per share and expire 10 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. At December 31, 2000, the maximum amount of the loan
had been increased to approximately $300.0 million although the amount of our
guarantee was not increased.
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OPERATING ACTIVITIES
We used $166.4 million in cash for operating activities during the year
ended December 31, 2000 compared to $52.2 million in the corresponding period of
the prior year. The increase was primarily attributable to the increase in
operating expenses associated with the launch of network service in additional
markets in the U.S. 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.
We used $31.6 million in cash for operating activities during the
four-month period ended December 31, 1999, compared to $13.5 million in the
corresponding period of the prior year. The increase was primarily attributable
to our net loss, as well as the effect of the full consolidation of Smartcom.
We used $34.1 million in cash for operating activities in the year ended
August 31, 1999, compared to $18.4 million in the year ended August 31, 1998.
Cash used in operating activities in the year ended August 31, 1999 included
$8.5 million attributable to the consolidation of Smartcom during the fourth
quarter.
INVESTING ACTIVITIES
Cash used in investing activities was $225.6 million during the year ended
December 31, 2000 compared to $96.0 million in the corresponding period of the
prior year. Investments during the year ended December 31, 2000 consisted
primarily of $44.9 million of net restricted cash equivalents and investments,
which have been pledged to provide for the payment of the first seven scheduled
interest payments on the senior notes payable through April 2003, the net
purchase of investments of $204.4 million, the purchase of wireless licenses
totaling $94.2 million, capital expenditures of $72.2 million, and loans to
unconsolidated wireless operating companies of $18.5 million, offset by $210.1
million of net proceeds from the sale of Smartcom and $4.3 million of proceeds
from the liquidation of our Russian investee companies. Investments in the
corresponding prior year consisted primarily of loans and advances of $40.4 to
our operating companies, the acquisition of the remaining 50% interest in
Smartcom for $26.9 million (net of cash acquired), and the purchase of wireless
licenses totaling $19.0 million, offset by $16.0 million of proceeds received
from the liquidation of our Russian investee companies. In 2001, we expect to
make significant investments in capital assets, including network infrastructure
and wireless licenses.
Cash used in investing activities was $27.8 million during the four month
period ended December 31, 1999 compared to $90.2 million in the corresponding
period of the prior year. Investments during the four month period ended
December 31, 1999 consisted primarily of $20.5 million held as restricted cash
to secure a Smartcom line of credit and capital expenditures, primarily by
Smartcom, of $4.6 million. Investments in the corresponding period of the prior
year consisted primarily of a $60.7 million capital contribution to Pegaso and
loans and advances of $26.1 million to our operating companies.
Cash used in investing activities was $158.3 million in the year ended
August 31, 1999, compared to $140.7 million in the year ended August 31, 1998.
Significant investments in the year ended August 31, 1999 consisted of $124.5
million of investments in and loans to our unconsolidated operating companies
(of which $71.4 million was made before we began to operate as an independent
company), $28.0 million for our acquisition of the remaining shares of Smartcom,
and $18.7 million for U.S. license acquisitions. Cash used in investing
activities was partially offset by $16.0 million provided from the sale of our
OzPhone subsidiary. Substantially all investments in the year ended August 31,
1998 consisted of investments in and loans to our operating companies.
FINANCING ACTIVITIES
Cash provided by financing activities during the year ended December 31,
2000 was $701.3 million and consisted primarily of proceeds from our public
equity offering and units offering and loans from equipment vendors and banks
totaling $964.8 million, offset by repayment of our credit agreements with
Qualcomm and banks totaling $248.2 million. Cash provided by financing
activities in the prior year ended December 31, 1999 was $161.2 million,
primarily from borrowings under our credit agreement with Qualcomm.
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Cash provided by financing activities during the four month period ended
December 31, 1999 consisted primarily of proceeds from our borrowings under the
credit agreement with Qualcomm of $63.4 million. Cash provided by financing
activities in the corresponding period of the prior year was $118.7 million,
representing $95.3 million of funding from Qualcomm for our operating and
investing activities prior to the distribution of our common stock to Qualcomm's
stockholders in September 1998, and $23.3 million of borrowings under the
Qualcomm credit agreement. Cash provided by financing activities during the year
ended August 31, 1999 amounted to $216.5 million, representing $95.3 million of
funding from Qualcomm for our operating and investing activities before the
distribution of our common stock to Qualcomm's stockholders in September 1998
and $111.1 million of net borrowings under the credit agreement with Qualcomm
after the distribution. Cash provided by financing activities during the year
ended August 31, 1998 amounted to $159.1 million, substantially all of which
represented funding from Qualcomm.
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 foreign subsidiaries and any new start-up projects in
foreign countries, including their ability to obtain financing. Mexico, for
example, has periodically experienced relatively high rates of inflation. We
expect that our foreign subsidiaries, where permitted and subject to competitive
pressures, would 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, they 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 our 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Fluctuation and Foreign Exchange Market Risk. We report our
financial statements in U.S. dollars. Pegaso reports its results in Mexican
pesos. Consequently, fluctuations in currency exchange rates between the U.S.
dollar and the Mexican peso may affect our results of operations as well as the
value of our ownership interest in Pegaso. Generally, Pegaso generates revenues
that are paid in Mexican pesos, but its 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 Mexican peso could result in a significant increase in its expenses
and could have a material adverse effect on Pegaso and on us. In some emerging
markets, including Mexico, significant devaluations of the local currency have
occurred and may occur again in the future.
Leap has accrued for taxes payable to the Chilean government denominated in
Chilean pesos related to its June 2000 sale of Smartcom. This liability is
subject to the effects of currency fluctuations that may affect reported
earnings and losses. A significant depreciation in the value of the U.S. dollar
against the Chilean peso could result in a significant increase in our
consolidated expenses. As of December 31, 2000, this liability amounted to
approximately $29.7 million. Our results of operations would be negatively
impacted by approximately $3.3 million if the U.S. dollar was 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.
Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates primarily to our variable rate long-term debt obligations. The
general level of U.S. interest rates and/or LIBOR affect the
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interest expense that we recognize on our variable rate long-term debt
obligations. As of December 31, 2000, the principal amounts of our variable rate
long-term debt obligations amounted to approximately $377.6 million. An increase
of 10% in interest rates would increase our interest expense for the year 2001
by approximately $4.1 million. This hypothetical amount is only suggestive of
the effect of changes in interest rates on our results of operations for the
year 2001.
Hedging Policy. As required by our vendor loan agreements, Leap will
maintain hedging agreements which fix or limit the interest cost to Cricket
Communications and the Leap subsidiaries that guarantee the vendor loans (other
than Cricket Communications Holdings, Inc.) to a portion of their long-term
indebtedness sufficient to cause 50% of their consolidated long-term
indebtedness to be comprised of a combination of (a) indebtedness bearing
interest at a fixed rate and (b) indebtedness covered by such hedging
agreements. Other than this, Leap does not have a policy to systematically hedge
against foreign currency exchange rate or interest rate risks.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY
We have operated as an independent company since September 1998 and we
acquired and/or launched all of our existing Cricket markets beginning in
January 2000. Because we are at an early stage of development, we face risks
generally associated with establishing a new business enterprise. When
considering our prospects, investors must consider the risks, expenses and
difficulties encountered by companies in their early stages of development.
These risks include possible disruptions and inefficiencies associated with
rapid growth and workplace expansion, the difficulties associated with raising
money to finance new enterprises and the difficulties of establishing a
significant presence in highly competitive markets.
THE CRICKET BUSINESS STRATEGY IS UNPROVEN
Our business strategy in the U.S., marketed under the brand name Cricket,
is to offer consumers a service plan that allows them to make and receive
virtually unlimited local calls for an affordable, flat monthly rate. This
strategy, which has been introduced in a limited number of markets, is a new
approach to marketing wireless services and may not prove to be successful. Our
marketing efforts may not draw the volume of customers necessary to sustain our
business plan, our capital and operating costs may exceed planned levels, and we
may be unable to compete effectively with landline and other wireless service
providers in our markets. In addition, potential customers may perceive the
Cricket service to be less appealing than other wireless plans, which offer more
features and options, including the ability to roam outside of the home service
area. If our business strategy proves to be successful, other wireless providers
are likely to adopt similar pricing plans and marketing approaches. Should our
competitors choose to adopt a strategy similar to the Cricket strategy, some of
them may be able to price their services more aggressively or attract more
customers because of their stronger market presence and geographic reach and
their larger financial resources.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
Leap experienced net losses of approximately $269.3 million (excluding the
gain on the sale of Smartcom, net of related taxes and foreign currency impact)
in the year ended December 31, 2000, $75.8 million in the transition period from
September 1, 1999 to December 31, 1999, $164.6 million in the year ended August
31, 1999, $46.7 million in the year ended August 31, 1998 and $5.2 million in
the year ended August 31, 1997. Losses are likely to be significant for the next
several years as we launch service in new markets and seek to increase our
customer bases in new and existing markets. We may not generate profits in the
short term or at all. If we fail to achieve profitability, that failure could
have a negative effect on the market value of our common stock.
IF WE EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, OUR COSTS COULD INCREASE
Many providers in the U.S. personal communications services, or PCS,
industry have experienced a high rate of customer turnover as compared to
cellular industry averages. The rate of customer turnover may be the result of
several factors, including limited network coverage, reliability issues such as
blocked or dropped calls, handset problems, inability to roam onto cellular
networks, affordability, customer care concerns and other competitive factors.
Our strategy to address customer turnover may not be successful, or the rate of
customer turnover may be unacceptable. In some markets, our competitors have
chosen to provide a service plan with pricing similar to the Cricket service,
and these competitive factors could also cause increased customer turnover. A
high rate of customer turnover could reduce revenues and increase marketing
costs in order to attract the minimum number of replacement customers required
to sustain our business plan, which, in turn, could have a material adverse
effect on our business and financial condition.
WE FACE SIGNIFICANT COMPETITION
The wireless telecommunications industry generally is very competitive and
competition is increasing. Unlike many wireless providers, we also intend to
compete directly with landline service providers in the
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telecommunications industry. Many competitors have substantially greater
resources than we have, and we may not be able to compete successfully. Some
competitors have announced rate plans substantially similar to the Cricket
service plan in markets in which we have launched or expect to launch service.
These competitive plans could adversely affect our ability to maintain our
pricing, market penetration and customer retention.
In the U.S., we will compete directly with other wireless providers and
traditional landline carriers in each of our markets, many of which have greater
resources than we do and entered the market before us. A few of our competitors
operate wireless telecommunications networks covering most of the U.S.
Competitors' earlier entry and broader presence in the U.S. telecommunications
market may have a negative effect on our ability to successfully implement our
strategy. Furthermore, the FCC is actively pursuing policies designed to
increase the number of wireless competitors in each of our markets. For example,
the FCC will soon auction licenses that will authorize the entry of two
additional wireless providers in each market. In addition, other wireless
providers in the U.S. could attempt to implement our domestic strategy of
providing unlimited local service at a low, flat monthly rate if our strategy
proves successful. The landline services with which we will compete are already
used by some of our potential customers, and we may not be successful in our
efforts to persuade potential customers to adopt our wireless service in
addition to, or in replacement of, their current landline service.
Although the deployment of advanced telecommunications services is in its
early stages in many developing countries, we believe competition is increasing
as businesses, and foreign governments realize the market potential of
telecommunications services. In Mexico, a number of international
telecommunications companies, including Verizon, AT&T, MCI, Motorola, Nextel and
SBC, as well as local competitors such as Telmex and other Mexican
telecommunications companies, continue to actively engage in developing
telecommunications services. Pegaso also competes against landline carriers,
including government-owned telephone companies. We also expect the prices that
Pegaso may charge for its products and services in some regions will decline
over the next few years as competition increases in its markets. Our competitors
in Mexico have greater financial resources and more established operations than
Pegaso. Pegaso is at an early stage of development and may not be able to
compete successfully.
We compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio
and domestic and global mobile satellite service. These technologies may have
advantages over the technology we use and may ultimately be more attractive to
customers. We may compete in the future with companies who offer new
technologies and market other services, including cable television access,
landline telephone service and Internet access, that we do not currently intend
to market. Some of our competitors offer these other services together with
their wireless communications service, which may make their services more
attractive to customers. In addition, we expect that, over time, providers of
wireless communications services will compete more directly with providers of
traditional landline telephone services. In addition, energy companies, utility
companies and cable operators may expand their services to offer communications
services.
LEAP MAY FAIL TO RAISE REQUIRED CAPITAL
We require significant additional capital to build out and operate planned
networks and for general working capital needs. We also require additional
capital to invest in any new wireless opportunities, including capital for
license acquisition costs, network buildout of newly-acquired licenses and the
planned development and rollout of our wireless data services. Capital markets
have recently been volatile and uncertain. These markets may not improve, and we
may not be able to access these markets to raise additional capital. If we fail
to obtain required new financing, that failure would have a material adverse
effect on our business and our financial condition. For example, if we are
unable to access capital markets, we may have to restrict our activities or sell
our interests in licenses, or in one or more of our subsidiaries or other
ventures earlier than planned or at a "distressed sale" price.
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YOUR OWNERSHIP INTEREST IN LEAP WILL BE DILUTED UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE
On February 22, 2001, 30,032,912 shares of our common stock were
outstanding, and 19,828,396 additional shares of our common stock were reserved
for issuance. The issuance of these additional shares will reduce your
percentage ownership in Leap.
The following shares were reserved for issuance as of February 22, 2001:
- 3,375,000 shares reserved for issuance upon exercise of a warrant issued
to Qualcomm in connection with the spin-off of Leap, which is exercisable
in whole or in part at any time between now and September 2008;
- 7,458,749 shares reserved for issuance upon the exercise of options or
awards granted or available for grant to employees, officers, directors
and consultants under Leap's equity incentive plans;
- 2,972,938 shares reserved for issuance upon exercise of options to
purchase Leap common stock granted to holders of Qualcomm options in
connection with the distribution of Leap's common stock to the
stockholders of Qualcomm;
- 2,203,691 shares reserved for issuance upon consummation of our pending
acquisitions of wireless licenses in Utica, New York, Visalia,
California, Birmingham and Tuscaloosa, Alabama, Jonesboro, Arkansas, and
Jackson, Mississippi, and up to 785,598 shares (subject to certain
adjustments based upon changes in the market value of wireless licenses)
reserved for issuance in connection with our pending acquisition of
wireless licenses in Buffalo and Syracuse, New York, all of which
acquisitions are subject to FCC approval and other conditions;
- 202,566 shares of common stock reserved for issuance upon exercise of a
warrant held by Chase Telecommunications Holdings, Inc.; and
- 2,829,854 shares of common stock reserved for issuance upon exercise of
the warrants issued in connection with our February 2000 units offering.
We have also committed to issue $9 million of our common stock in a license
acquisition transaction, with the exact number of shares to be set at the
closing of the license acquisition. Under certain circumstances, the number of
shares to be issued in connection with our acquisitions of wireless licenses is
subject to change based on the value of wireless licenses and the market price
of our common stock at the time of the closing of the acquisition.
In January 2001, the Board approved, subject to stockholder approval, an
amendment to Leap's Employee Stock Purchase Plan which would increase the number
of shares reserved for issuance under the plan from 200,000 to 500,000. In
addition, the Board approved, subject to stockholder approval, a new executive
officer deferred bonus stock plan under which 275,000 shares of common stock
would be reserved for issuance. Both of these matters will be voted on by the
stockholders at the annual meeting in April 2001.
In December 2000, we entered into a common stock purchase agreement with
Acqua Wellington North American Equities Fund, Ltd. under which we may, at our
discretion, sell registered common stock from time to time over the succeeding
28 month period. Under the agreement, we may require Acqua Wellington to
purchase between $10 and $25 million of common stock, depending on the market
price of our common stock, during one or more 18 trading day periods. In
addition, we may grant to Acqua Wellington an option to purchase up to an equal
amount of common stock during the same 18 trading day period. Acqua Wellington
purchases the common stock at a discount to its then current market price,
ranging from 4.0% to 5.5%, depending on our market capitalization at the time we
require Acqua Wellington to purchase our common stock. A special provision in
the agreement (as amended) allowed the first sale of common stock under the
agreement to be up to $55 million. On January 23, 2001, we completed the first
sale of our common stock under the agreement, issuing 1,564,336 shares to Acqua
Wellington in exchange for $55.0 million in cash.
Dilution of the outstanding number of shares of our common stock could
adversely affect prevailing market prices for our common stock and our ability
to raise capital through an offering of equity securities.
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We have agreed to file registration statements to register for resale up to
2,989,289 shares reserved for issuance upon consummation of our pending
acquisitions of wireless licenses, plus an additional $9 million of shares of
our common stock in connection with a license acquisition, with the exact number
of shares to be set at the closing of the license acquisition. Under certain
circumstances, the number of shares for which registration rights have been
granted is subject to change based on the value of wireless licenses and the
market price of our common stock at the time of the closing of the transactions
pursuant to which the shares to be registered are issued.
HIGH LEVELS OF DEBT COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION
We have obtained and expect to continue to obtain much of our required
capital through debt financing. A substantial portion of the debt financing,
including all of our vendor financing, bears or is likely to bear interest at a
variable rate, exposing us to interest rate risk.
Our high leverage could have important consequences, including the
following:
- our ability to obtain additional financing may be impaired;
- a substantial portion of our future cash flows from operations must be
dedicated to the servicing of our debt, thus reducing the funds available
for operations and investments;
- our leverage may reduce our ability to adjust rapidly to changing market
conditions and may make us more vulnerable to future downturns in the
general economy; and
- high levels of debt may reduce the value of stockholders' investments in
Leap because debt holders have priority regarding our assets in the event
of a bankruptcy or liquidation.
We may not have sufficient future cash flows to meet our debt payments, and may
not be able to refinance any of our debt at maturity.
In addition, our vendors have a right and may choose to sell outstanding
debt under our vendor financing agreements to third parties at a discount. Such
sales could affect the prices at which our outstanding notes trade and could
adversely affect the market's perception of Leap's creditworthiness.
OUR DEBT INSTRUMENTS CONTAIN PROVISIONS AND REQUIREMENTS THAT COULD LIMIT OUR
ABILITY TO PURSUE BORROWING OPPORTUNITIES
The restrictions contained in the indenture governing the notes issued in
our February 2000 units offering, and the restrictions contained in our vendor
facilities, may limit our ability to implement our business plan, finance future
operations, respond to changing business and economic conditions, secure
additional financing, if needed, and engage in opportunistic transactions, such
as the acquisition of wireless licenses. Such senior debt, among other things,
restricts our ability and the ability of our subsidiaries and our future
subsidiaries to do the following:
- incur additional indebtedness;
- create liens;
- make certain payments, including payments of dividends and distributions
in respect of capital stock;
- consolidate, merge and sell assets;
- engage in certain transactions with affiliates; and
- fundamentally change our business.
In addition, such senior debt requires us to maintain certain ratios,
including:
- leverage ratios;
- interest coverage ratios; and
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- fixed charges ratios;
and to satisfy certain tests, including tests relating to:
- maximum annual capital expenditures;
- minimum covered population in order to incur additional indebtedness;
- minimum number of subscribers to our services in order to incur
additional indebtedness; and
- minimum quarterly revenues and, commencing in 2004, minimum annual
revenues.
We may not satisfy the financial ratios, tests and other covenants under
our senior debt due to events that are beyond our control. If we fail to satisfy
any of the financial ratios, tests, or other covenants, we could be in default
under our senior debt or may be limited in our ability to access additional
funds under our senior debt, which could result in our being unable to make
payments on our outstanding notes. In addition, if we fail to meet performance
requirements, our equipment financing may be restricted or cancelled. Because
Leap's new Cricket markets were launched later in the fourth quarter of 2000
than anticipated and because of reduced equipment sales revenues as a result of
holiday promotions, Cricket revenue was below the minimum required level
contained in the financial covenants in the vendor loan facilities. Leap has
received waivers of its failure to meet this revenue target from all of the
required lenders. We expect to make up this revenue shortfall and to be in
compliance with the revenue covenant by the end of the first quarter of 2001.
There can be no assurance that additional delays in market launches and/or other
adverse results in our business will not result in a failure to meet our
financial or operating covenants in the future. Any defaults that result in a
suspension of further borrowings under the vendor facilities or acceleration of
our obligations to repay the outstanding balances under the vendor facilities
would have a material adverse effect on our business and our financial
condition.
WE MAY EXPERIENCE DIFFICULTIES IN CONSTRUCTING AND OPERATING OUR
TELECOMMUNICATIONS NETWORKS
We will need to construct new telecommunications networks and expand
existing networks. We will depend heavily on suppliers and contractors to
successfully complete these complex construction projects. We may experience
quality deficiencies, cost overruns and delays on these construction projects,
including deficiencies, overruns and delays not within our control or the
control of our contractors. We also will depend on third parties not under our
control or the control of our contractors to provide backhaul and
interconnection facilities on a timely basis. In addition, the construction of
new telecommunications networks requires the receipt of permits and approvals
from numerous governmental bodies including municipalities and zoning boards.
There are pressures to limit growth and tower and other construction in many of
our markets. Failure to receive these approvals in a timely fashion can delay
system rollouts and can raise the costs of completing construction projects.
Pegaso's launch of commercial service in Mexico City was delayed several months
due to delays in obtaining the required permits from local authorities for cell
site construction and some planned 2000 launches were delayed. Some of our
planned Cricket launches were delayed and launched with fewer cell sites than
desirable and therefore reduced coverage, as well.
We may not complete construction projects within budget or on a timely
basis. A failure to satisfactorily complete construction projects could
jeopardize wireless licenses and customer contracts. As a result, a failure of
this type could have a material adverse effect on our business and financial
condition.
Even if we complete construction in a timely and cost effective manner, we
will also face challenges in managing and operating our telecommunications
systems. These challenges include operating and maintaining the
telecommunications operating equipment and managing the sales, advertising,
customer support, billing and collection functions of the business. Our failure
in any of these areas could undermine customer satisfaction, increase customer
turnover, reduce revenues and otherwise have a material adverse effect on our
business and financial condition.
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WE HAVE ENCOUNTERED RELIABILITY PROBLEMS DURING THE INITIAL DEPLOYMENT OF OUR
NETWORKS
As is typical with newly-constructed and rapidly expanding wireless
networks, we have experienced reliability problems with respect to network
infrastructure equipment, reliability of third party suppliers and capacity
limitations of our networks. If our networks ultimately fail to perform as
expected, that failure could have a material adverse effect on our business and
financial condition.
CALL VOLUME UNDER CRICKET FLAT PRICE PLANS COULD EXCEED THE CAPACITY OF OUR
WIRELESS NETWORKS
Our Cricket strategy in the U.S. is to offer consumers a service plan that
allows them to make virtually unlimited local calls for a low, flat monthly
rate. Our business plans for this strategy assume that Cricket customers will
use their wireless phones for substantially more minutes per month than
customers who purchase service from other providers under more traditional
plans. Our current plans assume, and our experience has shown, that our Cricket
customers use their phones approximately 1,000 minutes per month. We design our
U.S. networks to accommodate this expected high call volume. Although we believe
CDMA-based networks will be well suited to support high call volumes, if
wireless use by Cricket customers exceeds the capacity of our future networks,
service quality may suffer, and we may be forced to raise the price of Cricket
service to reduce volume or otherwise limit the number of new customers, or
incur substantial capital expenditures to expand network capacity. If our
planned networks cannot handle the call volumes they experience, our competitive
position and business prospects in the U.S. could be materially adversely
affected.
THE FCC'S DECISION THAT WE ARE QUALIFIED TO HOLD C-BLOCK AND F-BLOCK LICENSES IS
SUBJECT TO REVIEW AND APPEAL
Our business plan depends on our acquisition and operation of C-Block and
F-Block licenses in the U.S. We may acquire and operate C-Block and F-Block
licenses only if we qualify as a "designated entity" under FCC rules.
In July 1999, the FCC issued an opinion and order that found that we were
entitled to acquire C-Block and F-Block licenses. The order approved our
acquisition of the 36 C-Block licenses for which we were the highest bidder in
the FCC's 1999 spectrum re-auction, and the transfer of three F-Block licenses
which cover portions of North Carolina from AirGate Wireless, L.L.C. to one of
our subsidiaries, in each case subject to the fulfillment of certain conditions.
In October 1999, the FCC issued to us the 36 re-auctioned licenses. In addition,
in March 2000, the FCC approved the transfer to us of 11 C-Block licenses from
Chase Telecommunications and one F-Block license from PCS Devco. Subsequently,
the FCC has approved the transfer to us of various other C-Block and F-Block
licenses.
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 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 business and financial condition.
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 subsequent 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 with the Court of Appeal for the D.C. Circuit, which appeal is
currently pending. 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
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auction or reauction certain C-Block and 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-Block and F-Block licensees or other
designated entities. For example, recent FCC rules changes have made it easier
for large companies to acquire C-Block and F-Block licenses at auction and in
the aftermarket.
In a recent reauction of C-Block and F-Block PCS spectrum that closed on
January 26, 2001, we were named the high bidder on 22 licenses covering 22.4
million potential customers. These licenses have not yet been granted to us, and
we cannot predict what effect any challenges before the FCC or in court to the
reauction generally, or the grant of these licenses to us specifically, will
have on us. NextWave Telecommunications, Inc. is a party to litigation
challenging the validity of the auction. Other parties have indicated publicly
that they intend to challenge the validity of the auction and grants thereunder,
as well.
We may not prevail in connection with any such challenges, appeals or
proceedings. If the FCC or a court determines that we are not qualified to hold
C-Block or F-Block licenses, it could take the position that some or all of our
licenses should be divested, cancelled or reauctioned, or that we should pay
certain financial penalties.
WE MAY NOT SATISFY THE BUILDOUT DEADLINES AND GEOGRAPHIC COVERAGE REQUIREMENTS
APPLICABLE TO OUR LICENSES, WHICH MAY RESULT IN THE REVOCATION OF SOME OF OUR
LICENSES OR THE IMPOSITION OF FINES AND/OR OTHER SANCTIONS
Each of our licenses is subject to an FCC mandate that we construct PCS
networks that provide adequate service to specified percentages of the
population in the areas covered by that license, or make a showing of
substantial service in that area, within five and ten years after the license
grant date. For 30 MHz C-Block licenses, this initial requirement is met when
adequate service is offered to at least one-third of the population of the
licensed service area. For 15 MHz and 10 MHz C-Block licenses and 10 MHz F-Block
licenses, the initial requirement is met when adequate service is provided to at
least one-quarter of the population in the licensed service area. Because we
obtained many of our wireless licenses from third parties subject to existing
buildout requirements, some of our licenses have buildout deadlines in 2001 and
several other licenses have buildout deadlines in the first half of 2002. We are
unable to predict whether the required coverage will be achieved. Failure to
comply with these buildout requirements could cause the revocation of some of
our licenses or the imposition of fines and/or other sanctions.
ADVERSE REGULATORY CHANGES COULD IMPAIR OUR ABILITY TO MAINTAIN EXISTING
LICENSES AND OBTAIN NEW LICENSES
We must maintain our existing telecommunications licenses and those we
acquire in the future to continue offering wireless telecommunications services.
Changes in regulations or failure to comply with the terms of a license or
failure to have the license renewed could result in a loss of the license,
penalties and fines. For example, we could lose a license if we fail to
construct or operate a wireless network as required by the license. If we lose a
license, that loss could have a material adverse effect on our business and
financial condition.
State regulatory agencies, the FCC, the U.S. Congress, the courts and other
governmental bodies regulate the operation of wireless telecommunications
systems and the use of licenses in the U.S. The FCC, Congress, the courts or
other federal, state or local bodies having jurisdiction over our operating
companies may take actions that could have a material adverse effect on our
business and financial condition.
The FCC recently held a reauction of 422 C-Block and F-Block licenses that
closed in January 2001. In connection with that reauction, the FCC made a number
of changes to its wireless and PCS licensing rules, and to the size of the
licenses being sold. Specifically, the FCC subdivided the C-Block licenses
slated for reauction into three 10 MHz licenses. For this reauction, the FCC
also subdivided the BTA service areas to which Entrepreneur's Block eligibility
restrictions would continue to apply into two tiers according to population. In
so-called "Tier 1" BTAs, service areas with a population equal to or greater
than 2.5 million, the FCC removed all eligibility restrictions on two of the
newly-created 10 MHz C-Block licenses, and sold them in open bidding to any
entity that could afford to purchase them, no matter how large. In these Tier 1
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BTAs, one 10 MHz C-Block license remained subject to a closed bidding process,
such that only entities meeting Entrepreneur's Block eligibility requirements
were permitted to bid. In Tier 2 BTAs, service areas with a population less than
2.5 million, two of the 10 MHz C-Block licenses remained subject to C-Block and
F-Block eligibility rules and thus were reserved for closed bidding by
designated entities, while one 10 MHz C-Block license per BTA was sold at open
bidding. Several 15 MHz C-Block licenses and a number of F-Block licenses slated
for reauction also were sold at open bidding, such that previous C-Block and
F-Block eligibility requirements no longer applied.
The FCC's recent reauction represented a compromise that made some
additional spectrum available to large carriers, but also continued to preserve
C-Block and F-Block spectrum for designated entities. The FCC's C-Block and
F-Block rules, the recent reauction, and FCC actions taken in connection with
previous C-Block auctions and reauctions, remain subject to pending FCC and
judicial proceedings. These proceedings, and continuing changes to the C-Block
and F-Block rules, could have a material adverse effect on our business and
financial condition, including our ability to continue acquiring C-Block and
F-Block licenses. In addition, in the reauction, we were named the high bidder
on 22 licenses covering 22.4 million potential customers. These licenses have
not yet been granted to us, and we cannot predict what effects any challenges
before the FCC or in court to the reauction generally, or the grant of these
licenses to us specifically, will have on us. NextWave Telecommunications, Inc.
is a party to litigation challenging the validity of the auction. Other parties
have indicated publicly that they intend to challenge the validity of the
auction and grants thereunder, as well.
Foreign governmental authorities regulate the operation of wireless
telecommunications systems and the use of licenses in the foreign countries in
which we operate. In some cases, the regulatory authorities also operate our
competitors. Changes in the current regulatory environment of these markets
could have a negative effect on us. In addition, the regulatory frameworks in
some of these countries are relatively new, and the interpretation of
regulations is uncertain.
We believe that the process of acquiring new telecommunications licenses
will be highly competitive. If we are not able to obtain new licenses, or cannot
otherwise participate in companies that obtain new licenses, our ability to
expand our operations would be limited.
RISKS ASSOCIATED WITH PEGASO COULD ADVERSELY AFFECT OUR BUSINESS
We face many risks from our international activities. Pegaso in Mexico
largely depends on the Mexican economy. The Mexican market is subject to rapid
fluctuations in currency exchange rates, consumer prices, inflation, employment
levels and gross domestic product.
Mexico's currency and financial markets continue to experience volatility.
The impact on the Mexican economy of the economic crisis that began in Asia and
then spread to Eastern Europe and Brazil has affected the ability of Mexican
companies to access the capital markets. The ability of Mexican companies to
access the capital markets may not improve and may deteriorate further in the
future. The economy of Mexico historically is affected by fluctuations in the
price of oil and petroleum products. Fluctuations in the prices of these
products and continuing political tensions in Mexico could negatively impact our
prospects in Mexico.
In addition, foreign laws and courts govern many of the agreements of
Pegaso. Other parties may breach or may make it difficult to enforce these
agreements.
Pegaso requires substantial additional capital to continue its planned
growth and operations. Leap may contribute capital to Pegaso in the future. If
Leap does not contribute additional capital to Pegaso, Leap's ownership interest
in Pegaso may be diluted due to additional capital contributions of other
investors.
If presented with attractive opportunities, Leap may invest in additional
international markets in the future. Any such international investment would
create risks associated with the applicable foreign country's economic
condition, including but not limited to currency exchange rates, inflation,
employment levels and gross domestic product.
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OUR RESULTS OF OPERATIONS MAY BE HARMED BY FOREIGN CURRENCY FLUCTUATIONS
We are exposed to risk from fluctuations in foreign currency rates, which
could impact our results of operations and financial condition. Although we
report our financial statements in U.S. dollars, Pegaso reports its results in
Mexican pesos. Consequently, fluctuations in currency exchange rates between the
U.S. dollar and the Mexican peso will affect our results of operations as well
as the value of our ownership interest in Pegaso. We do not currently hedge
against foreign currency exchange rate risks.
Pegaso generates revenues that are paid in Mexican pesos. However, many of
Pegaso's 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 Mexican peso could
significantly increase Pegaso's expenses and could have a material adverse
effect on our business and financial condition. For example, Pegaso may be
unable to satisfy its obligations under equipment supply agreements denominated
in U.S. dollars in the event of currency devaluations. In some developing
countries, including Mexico, significant currency devaluations relative to the
U.S. dollar have occurred and may occur again in the future. In such
circumstances, Leap and Pegaso may experience economic loss with respect to the
collectability of payments from their business partners and customers and the
recoverability of their investments.
If we invest in other foreign ventures in the future, we will face similar
risks relating to the applicable foreign currency of the foreign venture as well
as other country-specific risks.
THE TECHNOLOGIES THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR ABILITY
TO COMPETE EFFECTIVELY
We have employed digital wireless communications technology based on CDMA
technology. We are required under an agreement entered into with Qualcomm in
connection with our spin-off to use only cdmaOne systems in international
operations through January 2004. Other digital technologies may ultimately prove
to have greater capacity or features and be of higher quality than CDMA. If
another technology becomes the preferred industry standard in any of the
countries in which we operate, we may be at a competitive disadvantage, and
competitive pressures may require us to change our digital technology at
substantial cost. We may not be able to respond to those pressures or implement
new technology on a timely basis, or at an acceptable cost. If CDMA technology
becomes obsolete at some time in the future, and we are unable to effect a
cost-effective migration path, it could materially and adversely affect our
business and financial condition.
IF WIRELESS HANDSETS POSE HEALTH AND SAFETY RISKS, WE MAY BE SUBJECT TO NEW
REGULATIONS, AND DEMAND FOR OUR SERVICES MAY DECREASE
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health concerns, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may have the effect
of discouraging the use of wireless handsets, which would decrease demand for
our services. In recent years, the FCC and foreign regulatory agencies have
updated the guidelines and methods they use for evaluating radio frequency
emissions from radio equipment, including wireless handsets. In addition,
interest groups have requested that the FCC investigate claims that wireless
technologies pose health concerns and cause interference with airbags, hearing
aids and other medical devices. There also are some safety risks associated with
the use of wireless handsets while driving. Concerns over these safety risks and
the effect of any legislation that may be adopted in response to these risks
could limit our ability to market and sell our wireless service.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS
We believe our success depends on the contributions of a number of our key
personnel. These key personnel include but are not limited to Harvey P. White,
Chairman of the Board and Chief Executive Officer, and Susan G. Swenson,
President and Chief Operating Officer. If we lose the services of key personnel,
that loss could materially harm our business. We do not maintain "key person"
life insurance on any employee.
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OUR STOCK PRICE IS VOLATILE
The stock market in general, and the stock prices of telecommunications
companies and other technology-based companies in particular, have experienced
significant volatility that often has been unrelated to the operating
performance of any specific public companies. The market price of Leap common
stock has fluctuated widely in the past quarter and calendar year and is likely
to continue to fluctuate in the future. Factors that may have a significant
impact on the market price of Leap common stock include:
- future announcements concerning Leap or its competitors, including the
announcement of joint development efforts;
- changes in the prospects of our business partners or equipment suppliers;
- delays in the construction of planned Cricket networks and in general
implementation of our business plan;
- failure to achieve planned levels of subscriber growth and other
operating targets;
- deficiencies in our networks;
- results of technological innovations;
- government regulation, including the FCC's review of our acquisition of
wireless licenses;
- changes in recommendations of securities analysts and rumors that may be
circulated about Leap or its competitors;
- the impact of an economic slowdown on existing and future customers; and
- public perception of risks associated with our international operations.
Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Shortfalls in our revenues,
earnings or subscriber growth or delays in network buildout in any given period
relative to the levels and schedule expected by securities analysts could
immediately, significantly and adversely affect the trading price of Leap common
stock. In the past, following periods of volatility in the market price of a
company's securities, class action litigation has often been instituted against
the subject company. Litigation of this type could result in substantial costs
and a diversion of our management's attention and resources which could, in
turn, have a material adverse effect on our business and financial condition.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. The terms of the indenture governing the notes issued in our
February 2000 units offering restrict our ability to declare or pay dividends.
We intend to retain future earnings to fund our growth. Accordingly, you will
not receive a return on your investment in our common stock through the payment
of dividends in the foreseeable future and may not realize a return on your
investment even if you sell your shares. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
A DETERMINATION THAT LEAP IS AN INVESTMENT COMPANY COULD ADVERSELY AFFECT OUR
BUSINESS
Our ownership interest in Pegaso was 20.1% as of February 28, 2001, and we
expect that future investments in ventures will include ownership interests of
less than 50% and that our interests will vary over time as the ventures raise
additional capital. As a result, we could be subject to the registration
requirements of the Investment Company Act of 1940. The Investment Company Act
of 1940 requires registration of companies that engage primarily in the business
of investing in stock. Because we intend to actively participate in the business
operations of our subsidiaries and other ventures, we do not believe that we are
primarily engaged in the business of investing in stock. We intend to monitor
and adjust our interests in our ventures to the extent practical to avoid being
subject to the Investment Company Act of 1940. If we must register as an
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investment company under the Investment Company Act of 1940, compliance with
these regulations will negatively impact our business.
WE HAVE IMPLEMENTED OR ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD
PREVENT OR DELAY AN ACQUISITION OF LEAP THAT IS BENEFICIAL TO OUR STOCKHOLDERS
Our charter and bylaws could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. Our charter and
bylaw provisions could diminish the opportunities for a stockholder to
participate in tender offers. The charter and bylaws may also restrain
volatility in the market price of our common stock resulting from takeover
attempts. In addition, our board of directors may issue preferred stock that
could have the effect of delaying or preventing a change in control of Leap. The
issuance of preferred stock could also negatively affect the voting power of
holders of our common stock. The provisions of the charter and bylaws may have
the effect of discouraging or preventing an acquisition of Leap or a sale of our
businesses. In addition, Section 203 of the Delaware General Corporation Law
imposes restrictions on mergers and other business combinations between us and
any holder of 15% or more of our common stock.
We have adopted a rights plan that could discourage, delay or prevent an
acquisition of Leap at a premium price. The rights plan provides for preferred
stock purchase rights attached to each share of our common stock which will
cause substantial dilution to a person or group acquiring 15% or more of our
stock if the acquisition is not approved by our board of directors.
The transfer restrictions imposed on the U.S. wireless licenses we own also
adversely affect the ability of third parties to acquire us. Our licenses may
only be transferred with prior approval by the FCC. In addition, we are
prohibited from voluntarily assigning or transferring control of our C-Block and
F-Block licenses for five years after grant date except to assignees or
transferees that satisfy the financial criteria established by the FCC for
designated entities, unless we have met the first network buildout deadline
applicable to such license. Accordingly, the number of potential transferees of
our licenses is limited, and any acquisition, merger or other business
combination involving us would be subject to regulatory approval.
In addition, the documents governing our indebtedness contain limitations
on our ability to enter into a change of control transaction. Under these
documents, the occurrence of a change of control transaction, in some cases
after notice and grace periods, would constitute an event of default permitting
acceleration of the indebtedness.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Leap Wireless International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Leap Wireless International, Inc. and its subsidiaries at December
31, 2000 and 1999, and the results of their operations and their cash flows for
the year ended December 31, 2000, for the period from September 1, 1999 to
December 31, 1999 and for each of the two years in the period ended August 31,
1999, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Diego, California
February 28, 2001
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LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
2000 1999
---------- ---------
ASSETS
Cash and cash equivalents................................... $ 338,878 $ 44,109
Restricted cash equivalents and short-term investments...... 13,575 20,550
Short-term investments...................................... 199,106 --
Accounts receivable, net.................................... -- 2,742
Inventories................................................. 9,032 4,329
Notes receivable, net....................................... 138,907 --
Other current assets........................................ 12,746 15,411
---------- ---------
Total current assets................................... 712,244 87,141
Property and equipment, net................................. 430,193 113,059
Investments in and loans receivable from unconsolidated
wireless operating companies.............................. 34,691 85,878
Wireless licenses, net...................................... 265,635 56,484
Goodwill and other intangible assets, net................... 30,297 14,991
Restricted investments...................................... 51,896 --
Deposits and other assets................................... 122,451 3,212
---------- ---------
Total assets........................................... $1,647,407 $ 360,765
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 58,735 $ 19,097
Loans payable to banks...................................... -- 17,683
Other current liabilities................................... 65,690 --
---------- ---------
Total current liabilities.............................. 124,425 36,780
Long-term debt.............................................. 897,878 303,818
Other long-term liabilities................................. 41,846 9,275
---------- ---------
Total liabilities...................................... 1,064,149 349,873
---------- ---------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock -- authorized 10,000,000 shares; $.0001
par value, no shares issued and outstanding............ -- --
Common stock -- authorized 300,000,000 shares; $.0001 par
value, 28,348,694 and 20,039,556 shares issued and
outstanding at December 31, 2000 and 1999,
respectively........................................... 3 2
Additional paid-in capital................................ 893,401 292,933
Unearned stock-based compensation......................... (10,019) --
Accumulated deficit....................................... (302,898) (277,720)
Accumulated other comprehensive income (loss)............. 2,771 (4,323)
---------- ---------
Total stockholders' equity............................. 583,258 10,892
---------- ---------
Total liabilities and stockholders' equity............. $1,647,407 $ 360,765
========== =========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- ---------- ---------
Revenues:
Service revenues............................ $ 40,599 $ 6,733 $ 3,619 $ --
Equipment revenues.......................... 9,718 39 288 --
--------- -------- --------- --------
Total revenues...................... 50,317 6,772 3,907 --
--------- -------- --------- --------
Operating expenses:
Cost of service............................. (20,821) (2,409) (1,355) --
Cost of equipment........................... (54,883) (7,760) (2,455) --
Selling, general and administrative
expenses................................. (117,349) (19,344) (28,745) (23,888)
Depreciation and amortization............... (24,563) (6,926) (5,824) --
--------- -------- --------- --------
Total operating expenses............ (217,616) (36,439) (38,379) (23,888)
--------- -------- --------- --------
Operating loss.............................. (167,299) (29,667) (34,472) (23,888)
Equity in net loss of and write-down of
investments in and loan receivable from
unconsolidated wireless operating
companies................................... (78,624) (23,077) (127,542) (23,118)
Interest income............................... 48,477 764 2,505 273
Interest expense.............................. (112,358) (12,283) (10,356) --
Foreign currency transaction gains (losses),
net......................................... 13,966 (8,247) (7,211) --
Gain on sale of wholly-owned subsidiaries..... 313,432 -- 9,097 --
Gain on issuance of stock by unconsolidated
wireless operating company.................. 32,602 -- 3,609 --
Other income (expense), net................... 1,913 (3,336) (243) --
--------- -------- --------- --------
Income (loss) before income taxes and
extraordinary items......................... 52,109 (75,846) (164,613) (46,733)
Income taxes.................................. (47,540) -- -- --
--------- -------- --------- --------
Income (loss) before extraordinary items...... 4,569 (75,846) (164,613) (46,733)
Extraordinary loss on early extinguishment of
debt........................................ (4,737) -- -- --
--------- -------- --------- --------
Net loss............................ $ (168) $(75,846) $(164,613) $(46,733)
========= ======== ========= ========
Basic net income (loss) per common share:
Income (loss) before extraordinary items.... $ 0.18 $ (4.01) $ (9.19) $ (2.65)
Extraordinary loss.......................... (0.19) -- -- --
--------- -------- --------- --------
Net loss............................ $ (0.01) $ (4.01) $ (9.19) $ (2.65)
========= ======== ========= ========
Diluted net income (loss) per common share:
Income (loss) before extraordinary items.... $ 0.14 $ (4.01) $ (9.19) $ (2.65)
Extraordinary loss.......................... (0.15) -- -- --
--------- -------- --------- --------
Net loss............................ $ (0.01) $ (4.01) $ (9.19) $ (2.65)
========= ======== ========= ========
Shares used in per share calculations:
Basic....................................... 25,398 18,928 17,910 17,648
========= ======== ========= ========
Diluted..................................... 32,543 18,928 17,910 17,648
========= ======== ========= ========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
YEAR ENDED SEPTEMBER 1, 1999 YEAR ENDED AUGUST 31,
DECEMBER 31, TO DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- --------- ----------
Operating activities:
Net loss................................................ $ (168) $(75,846) $(164,613) $ (46,733)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 24,563 6,926 5,824 --
Gain on sale of wholly-owned subsidiaries............. (313,432) -- (9,097) --
Gain on issuance of stock by unconsolidated wireless
operating company.................................. (32,602) -- (3,609) --
Extraordinary loss on early extinguishment of debt.... 4,737 -- -- --
Equity in net loss of and write-down of investments in
and loan receivable from unconsolidated wireless
operating companies................................ 78,624 23,077 127,542 23,118
Interest accrued to loans receivable and payable,
net................................................ 83,910 7,023 8,251 (273)
Stock-based compensation.............................. 13,946 -- -- --
Other................................................. (3,065) (381) (386) --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net........................... 2,742 (491) (1,203) --
Inventories........................................ (7,969) 25 1,873 --
Deposits and other assets.......................... (112,729) 2,194 (6,588) --
Accounts payable and accrued liabilities........... 47,436 493 9,671 5,510
Other liabilities.................................. 47,630 5,410 (1,770) --
--------- -------- --------- ----------
Net cash used in operating activities............ (166,377) (31,570) (34,105) (18,378)
--------- -------- --------- ----------
Investing activities:
Purchase of property and equipment...................... (72,245) (4,568) (3,935) --
Investments in and loans to unconsolidated wireless
operating companies................................... (18,533) (2,744) (124,471) (133,904)
Acquisitions, net of cash acquired...................... (5,802) -- (26,942) (564)
Purchase of wireless licenses........................... (94,153) -- (19,009) (6,274)
Net proceeds from disposal of subsidiaries.............. 214,455 -- 16,024 --
Purchase of investments................................. (332,987) -- -- --
Sale and maturity of investments........................ 128,540 -- -- --
Restricted cash equivalents and investments, net........ (44,921) (20,500) -- --
--------- -------- --------- ----------
Net cash used in investing activities............ (225,646) (27,812) (158,333) (140,742)
--------- -------- --------- ----------
Financing activities:
Proceeds from issuance of senior and senior discount
notes................................................. 550,102 -- -- --
Proceeds from loans payable to banks and long-term
debt.................................................. 59,324 61,650 135,304 9,000
Repayment of loans payable to banks and long-term
debt.................................................. (248,204) -- (17,500) --
Issuance of common stock................................ 341,949 1,721 3,404 --
Payment of debt financing costs......................... (15,222) -- -- --
Former parent company's investment...................... -- -- 95,268 150,120
Book overdraft.......................................... 13,386 -- -- --
--------- -------- --------- ----------
Net cash provided by financing activities........ 701,335 63,371 216,476 159,120
--------- -------- --------- ----------
Effect of exchange rate changes on cash and cash
equivalents............................................. (8,998) 7,210 2,177 --
Effect of change in foreign company reporting lag on cash
and cash equivalents.................................... (5,545) 6,695 -- --
--------- -------- --------- ----------
Net increase in cash and cash equivalents................. 294,769 17,894 26,215 --
Cash and cash equivalents at beginning of period.......... 44,109 26,215 -- --
--------- -------- --------- ----------
Cash and cash equivalents at end of period................ $ 338,878 $ 44,109 $ 26,215 $ --
========= ======== ========= ==========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
FORMER OTHER
COMMON STOCK ADDITIONAL PARENT UNEARNED COMPREHENSIVE
------------------- PAID-IN COMPANY'S STOCK-BASED ACCUMULATED INCOME
SHARES AMOUNT CAPITAL INVESTMENT COMPENSATION DEFICIT (LOSS)
---------- ------ ---------- ---------- ------------ ----------- -------------
Balance at August 31, 1997............. -- $-- $ -- $ 47,478 $ -- $ (5,550) $ 60
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (46,733) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (2,412)
Total comprehensive loss.........
Transfers from former parent......... -- -- -- 150,120 -- -- --
---------- --- -------- --------- -------- --------- -------
Balance at August 31, 1998............. -- -- -- 197,598 -- (52,283) (2,352)
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (164,613) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (1,043)
Total comprehensive loss.........
Transfers from former parent......... -- -- -- 95,268 -- -- --
Distribution by former parent (Note
1)................................. 17,647,685 2 292,864 (292,866) -- -- --
Repurchase of warrant................ -- -- (5,355) -- -- -- --
Issuance of common stock............. 723,289 -- 2,356 -- -- -- --
Effect of subsidiary and
unconsolidated wireless operating
company equity transactions........ -- -- 1,324 -- -- -- --
---------- --- -------- --------- -------- --------- -------
Balance at August 31, 1999............. 18,370,974 2 291,189 -- -- (216,896) (3,395)
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (75,846) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (928)
Total comprehensive loss.........
Issuance of common stock............. 1,668,582 -- 1,744 -- -- -- --
Effect of change in foreign company
reporting lag (Note 2)............. -- -- -- -- -- 15,022 --
---------- --- -------- --------- -------- --------- -------
Balance at December 31, 1999........... 20,039,556 2 292,933 -- -- (277,720) (4,323)
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (168) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (1,271)
Unrealized holding gains on
investments, net................. -- -- -- -- -- -- 89
Total comprehensive loss......... -- -- -- -- -- -- --
Issuance of common stock:
Equity offering (Note 8)........... 4,000,000 1 329,980 -- -- -- --
Warrants exercised................. 1,015,700 -- 3,435 -- -- -- --
Employee stock options and benefit
plans............................ 1,678,598 -- 4,601 -- -- -- --
Tax benefit from exercise of non-
qualified options................ -- -- 1,426 -- -- -- --
Acquisitions....................... 1,614,840 -- 72,695 -- -- -- --
Issuance of warrants (Note 6)........ -- -- 164,366 -- -- -- --
Lag period results of Smartcom (Note
2)................................. -- -- -- -- -- (25,010) --
Realization of cumulative translation
adjustment of Smartcom............. -- -- -- -- -- -- 8,276
Unearned stock-based compensation.... -- -- 24,306 -- (24,306) -- --
Amortization of stock-based
compensation....................... -- -- (341) -- 14,287 -- --
---------- --- -------- --------- -------- --------- -------
Balance at December 31, 2000........... 28,348,694 $ 3 $893,401 $ -- $(10,019) $(302,898) $ 2,771
========== === ======== ========= ======== ========= =======
TOTAL
---------
Balance at August 31, 1997............. $ 41,988
Components of comprehensive loss:
Net loss........................... (46,733)
Foreign currency translation
adjustment....................... (2,412)
---------
Total comprehensive loss......... (49,145)
---------
Transfers from former parent......... 150,120
---------
Balance at August 31, 1998............. 142,963
Components of comprehensive loss:
Net loss........................... (164,613)
Foreign currency translation
adjustment....................... (1,043)
---------
Total comprehensive loss......... (165,656)
---------
Transfers from former parent......... 95,268
Distribution by former parent (Note
1)................................. --
Repurchase of warrant................ (5,355)
Issuance of common stock............. 2,356
Effect of subsidiary and
unconsolidated wireless operating
company equity transactions........ 1,324
---------
Balance at August 31, 1999............. 70,900
Components of comprehensive loss:
Net loss........................... (75,846)
Foreign currency translation
adjustment....................... (928)
---------
Total comprehensive loss......... (76,774)
---------
Issuance of common stock............. 1,744
Effect of change in foreign company
reporting lag (Note 2)............. 15,022
---------
Balance at December 31, 1999........... 10,892
Components of comprehensive loss:
Net loss........................... (168)
Foreign currency translation
adjustment....................... (1,271)
Unrealized holding gains on
investments, net................. 89
---------
Total comprehensive loss......... (1,350)
---------
Issuance of common stock:
Equity offering (Note 8)........... 329,981
Warrants exercised................. 3,435
Employee stock options and benefit
plans............................ 4,601
Tax benefit from exercise of non-
qualified options................ 1,426
Acquisitions....................... 72,695
Issuance of warrants (Note 6)........ 164,366
Lag period results of Smartcom (Note
2)................................. (25,010)
Realization of cumulative translation
adjustment of Smartcom............. 8,276
Unearned stock-based compensation.... --
Amortization of stock-based
compensation....................... 13,946
---------
Balance at December 31, 2000........... $ 583,258
=========
See accompanying notes to consolidated financial statements.
C-34
95
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
THE COMPANY AND NATURE OF BUSINESS
Leap Wireless International, Inc., a Delaware corporation, together with
its wholly-owned subsidiaries (the "Company" or "Leap") is a wireless
communications carrier that offers digital wireless service in the United States
under the brand "Cricket." Cricket service is operated by the Company's
wholly-owned subsidiary, Cricket Communications, Inc. ("Cricket
Communications"), a wholly-owned subsidiary of Cricket Communications Holdings,
Inc. ("Cricket Communications Holdings"). Under a license from Leap, Chase
Telecommunications, Inc. ("Chase Telecommunications"), a company that Leap
acquired in March 2000, introduced the Cricket service in Chattanooga, Tennessee
in March 1999 (see Note 3). Leap has introduced Cricket service in additional
markets in the United States in 2000 and plans to introduce Cricket service in
additional markets in the United States in 2001 and beyond. The Company also has
a 20.1% interest in Pegaso Telecomunicaciones, S.A. de C.V. ("Pegaso"), a
Mexican corporation which operates a wireless network in Mexico. From April 1999
to June 2, 2000, the Company owned 100% of Smartcom, S.A. ("Smartcom"), a
Chilean corporation which operates a nationwide wireless network in Chile (see
Note 3).
THE DISTRIBUTION
The Company was incorporated in Delaware on June 24, 1998 as a wholly-owned
subsidiary of Qualcomm Incorporated ("Qualcomm"). On September 23, 1998 (the
"Distribution Date"), Qualcomm distributed all of the outstanding shares of
common stock of the Company to Qualcomm's stockholders as a taxable dividend
(the "Distribution"). Following the Distribution, the Company and Qualcomm
operate as independent companies. Qualcomm transferred to the Company its equity
interests in certain operating companies. Qualcomm also transferred to the
Company cash and its right to receive payment from working capital and other
loans Qualcomm made to the operating companies, as well as other miscellaneous
assets and liabilities. The aggregate net tangible book value of the assets
transferred by Qualcomm to the Company in connection with the Distribution was
approximately $236.0 million. The consolidated financial statements reflect the
Company as if it were a separate entity for all periods presented.
CHANGE IN YEAR END
On July 31, 2000, the Board of Directors of the Company elected to change
the Company's fiscal year from a year ending on August 31 to a year ending on
December 31. The first new twelve-month fiscal year ended on December 31, 2000.
As a result of the change in year end, the Company issued consolidated financial
statements as of December 31, 1999 and for the period from September 1, 1999 to
December 31, 1999.
FINANCING RISKS
The Company expects to incur significant operating losses and to generate
significant negative cash flow from operations in the future while it continues
to launch new markets. There is no guarantee that the Company will be able to
generate sufficient cash flows from operations to meet its debt service
requirements. As a result, the Company plans to refinance its vendor
indebtedness when market conditions are attractive and may also need to obtain
additional financing in order to service or extinguish its indebtedness. In
addition, the Company will require significant additional financing to complete
the buildout of its planned networks, to acquire new licenses and to launch
markets related to new licenses. The Company may not be able to obtain
additional financing or refinancing on acceptable terms, or at all.
The Company's revenues in the fourth quarter of 2000 were below the minimum
required level contained in the financial covenants in its vendor loan
facilities (see Note 6). The Company has received waivers of its failure to meet
this revenue target from all of the required lenders. The Company expects to
make up this
C-35
96
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenue shortfall and to be in compliance with the revenue covenant by the end
of the first quarter of 2001. There can be no assurance that delays in market
launches or other adverse results in the Company's business will not result in a
failure to meet its financial or operating covenants in the future. Any defaults
that result in a suspension of further borrowings under the vendor facilities or
acceleration of the Company's obligations to repay the outstanding balances
under the vendor facilities would have a material adverse effect on its business
and its financial condition.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Leap and its
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Investments in entities in which Leap exercises significant
influence but does not control are accounted for using the equity method. To
accommodate the different fiscal periods of the Company and its foreign
investees, the Company historically recognized its share of net earnings or
losses of such foreign companies on a two month lag. In conjunction with the
Company's change in fiscal year end, this lag was extended to three months
beginning in the period from September 1, 1999 to December 31, 1999. The effect
of this change on previously reported amounts was adjusted in accumulated
deficit in the period from September 1, 1999 to December 31, 1999.
The financial statements of Smartcom were consolidated in the Company's
financial statements from June 1, 1999 to March 31, 2000 as a result of the
Company's acquisition of the remaining 50% of Smartcom that it did not already
own in April 1999 and the sale of all the issued and outstanding shares of
Smartcom on June 2, 2000. Due to the lag period, the results of Smartcom for
April and May 2000 have been reflected in accumulated deficit during the year
ended December 31, 2000.
USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The consolidated financial statements are prepared using accounting
principles generally accepted in the United States of America. These principles
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
ISSUANCE OF STOCK BY SUBSIDIARIES AND EQUITY INVESTEES
The Company recognizes gains and losses on issuance of stock by
subsidiaries and equity investees in its results of operations, except for those
subsidiaries and equity investees that are in the development stage. For those
entities in the development stage, gains and losses are reflected in "effect of
subsidiary and unconsolidated wireless operating company equity transactions" in
stockholders' equity.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company uses the local currency as the functional currency for all of
its international consolidated and unconsolidated operating companies, except
where such operating companies operate in highly inflationary economies. Assets
and liabilities are translated into U.S. dollars at the exchange rate in effect
at the balance sheet date. Revenues and expense items are translated at the
average exchange rate prevailing during the period. Resulting unrealized gains
and losses are accumulated and reported as other comprehensive income or loss.
The functional currency of the Company's foreign investees that operate in
highly inflationary economies is the U.S. dollar. The monetary assets and
liabilities of these foreign investees are re-measured into
C-36
97
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues,
expenses, gains and losses are translated at the average exchange rate for the
period, and non-monetary assets and liabilities are translated at historical
rates. Resulting re-measurement gains or losses are recognized in results of
operations. Mexico ceased to be considered a highly inflationary economy as of
January 1, 1999 and, as a result, Pegaso changed its functional currency from
the U.S. dollar to its local currency on that date.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At December 31, 2000,
the Company's cash and cash equivalents consisted of deposits with banks and
investments in money market accounts, commercial paper and U.S. government
securities. The Company has not experienced any losses on its cash and cash
equivalents.
RESTRICTED CASH EQUIVALENTS AND INVESTMENTS
Restricted cash equivalents at December 31, 1999 consisted of debt
securities with original maturities of three months or less which were pledged
to collateralize the Company's obligations under a letter of credit agreement
with a bank. Restricted cash equivalents and investments at December 31, 2000
consisted of U.S. government debt securities that have been pledged to provide
for the payment of the first seven scheduled interest payments on long-term
notes payable and are classified as held-to-maturity and carried at amortized
cost, which approximates fair value. At December 31, 2000, the Company's
non-restricted investments consisted of government and corporate fixed income
securities and commercial paper. While it is the Company's general intent to
hold such securities until maturity, management may occasionally sell particular
securities prior to maturity. As such, investments are classified as
available-for-sale and stated at fair value as determined by the most recent
traded price of each security at the balance sheet date. The net unrealized
gains or losses on available-for-sale securities are reported as a component of
comprehensive income (loss). The specific identification method is used to
compute the realized gains and losses on debt and equity securities. Investments
at December 31, 2000 consisted of the following (in thousands):
SHORT-TERM LONG-TERM
---------- ---------
RESTRICTED INVESTMENTS
U.S. government securities..................... $ 13,575 $51,896
======== =======
INVESTMENTS
Commercial paper............................... $117,297 $ --
Corporate notes................................ 28,452 5,341
U.S. government securities..................... 28,070 --
Certificates of deposit........................ 14,149 --
Corporate bonds................................ 8,131 --
Foreign debt securities........................ 3,007 --
-------- -------
$199,106 $ 5,341
======== =======
As of December 31, 2000, the contractual maturities of debt securities were as
follows (in thousands):
YEARS TO MATURITY
----------------------------
LESS THAN ONE ONE TO FIVE
------------- -----------
Held-to-maturity (restricted investments)...... $ 13,575 $51,896
Available-for-sale............................. $190,220 $ 78
C-37
98
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Available-for-sale securities were comprised as follows at December 31,
2000 (in thousands):
UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
-------- ---------- ---------- ----------
Debt securities................................... $190,209 $117 $(28) $190,298
Certificates of deposit........................... 14,149 -- -- 14,149
-------- ---- ---- --------
$204,358 $117 $(28) $204,447
======== ==== ==== ========
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments,
including cash equivalents and short-term investments, accounts receivable,
notes receivable and accounts payable, approximate fair value due to their
short-term maturities. Loans payable to banks, vendors and the U.S. government
approximate fair value due to their risk adjusted market rates of interest. The
Company's senior notes and senior discount notes had an aggregate estimated
market value of $264.1 million at December 31, 2000 compared to an aggregate
book value of $437.7 million (see Note 6).
INVENTORIES
Inventories consist of handsets and accessories not yet placed into service
and are stated at the lower of cost or market using the first-in, first-out
method.
INVESTMENTS IN UNCONSOLIDATED WIRELESS OPERATING COMPANIES
The Company uses the equity method to account for investments in corporate
entities in which it exercises significant influence but does not control. Under
the equity method, the investment is originally recorded at cost and adjusted to
recognize the Company's share of net earnings or losses of the investee, limited
to the extent of the Company's investment in, advances to and financial
guarantees for the investee. Such earnings or losses of the Company's investees
are adjusted to reflect the amortization of any differences between the carrying
value of the investment and the Company's equity in the net assets of the
investee. For those equity investees where the Company is the only contributor
of assets, equity in net losses of wireless operating companies includes 100% of
the losses of the equity investee.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Additions and improvements are
capitalized, while expenditures that do not enhance or extend the asset's useful
life are charged to operating expenses as incurred. Depreciation is applied
using the straight-line method over the estimated useful lives of the assets
once the assets are placed in service, which are 5 to 15 years for buildings and
network infrastructure assets, 3 to 7 years for equipment, which includes
furniture and fixtures, and 3 years for computer equipment. Leasehold
improvements, which are included in buildings and infrastructure, are amortized
over the shorter of their estimated useful lives or the remaining term of the
related lease.
The Company's network construction expenditures are recorded as assets
under construction until the network or assets are placed in service, at which
time the assets are transferred to the appropriate property and equipment
category. As a component of construction-in-progress, the Company capitalizes
interest and salaries and related costs of engineering employees, to the extent
time and expense are contributed to the construction effort, during the
construction period. At December 31, 2000, the Company had capitalized $3.9
million in interest to property and equipment.
C-38
99
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WIRELESS LICENSES
Wireless licenses are recorded at cost and amortized using the
straight-line method over their estimated useful lives upon commencement of
commercial service, generally 40 years. Accumulated amortization related to
wireless licenses totaled $1.2 million and $0.7 million at December 31, 2000 and
1999, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price and related costs over
the fair value assigned to the net tangible and identifiable intangible assets
of businesses acquired. Goodwill is amortized on a straight-line basis over its
estimated useful life, generally 20 years. Other intangible assets are amortized
on a straight-line basis over their estimated useful lives of generally 3 years.
Accumulated amortization of goodwill and other intangible assets totaled $2.2
million and $0.8 million at December 31, 2000 and 1999, respectively.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets and
intangible assets when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is recognized when the undiscounted cash flows expected to be
generated by an asset (or group of assets) is less than its carrying amount. Any
required impairment loss would be measured as the amount by which the asset's
carrying value exceeds its fair value, and would be recorded as a reduction in
the carrying value of the related asset and a charge to results of operations.
DEBT DISCOUNT AND DEFERRED FINANCING COSTS
Debt discount and deferred financing costs are amortized and recognized as
interest expense under the interest method.
REVENUES AND COST OF REVENUES
Wireless services are provided on a month-to-month basis and are generally
billed in advance. The Company does not charge fees for the initial activation
of service. Revenues from wireless services are recognized as services are
rendered. Amounts received in advance are recorded as deferred revenue. Cost of
service generally includes direct costs and related overhead, excluding
depreciation and amortization, of operating the Company's networks.
Equipment revenues arise from the sale of handsets and accessories.
Revenues and related costs from the sale of handsets are recognized when service
is activated by customers. Revenues and related costs from the sale of
accessories are recognized at the point of sale. The costs of handsets and
accessories sold are recorded in cost of equipment. Handsets sold to third party
resellers are included in inventory until they are sold to and activated by
customers. Amounts due from third party resellers for handsets are recorded as
deferred revenue upon shipment by the Company and are recognized as equipment
revenues when service is activated by customers.
Sales incentives offered without charge to customers related to the sale of
handsets are recognized as a reduction of revenue when the related equipment
revenue is recognized. Customers have the right to return handsets and
accessories within 30 days of purchase or 30 minutes of usage, whichever occurs
first. The Company records an estimate for returns at the time of recognizing
revenue. Returns have historically been insignificant.
C-39
100
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed as incurred. Advertising costs
totaled $3.0 million, $0.2 million and $0.1 million during the year ended
December 31, 2000, the period from September 1, 1999 to December 31, 1999 and
the year ended August 31, 1999.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee and director
stock-based compensation plans using the intrinsic value method. The Company
provides pro forma disclosures of net income (loss) and net income (loss) per
share as if a fair value method had been applied in measuring compensation
expense. Stock-based compensation is amortized over the related vesting periods
of the stock awards.
INCOME TAXES
Current income tax benefit (expense) is the amount expected to be
receivable (payable) for the current year. A deferred tax asset and/or liability
is computed for both the expected future impact of differences between the
financial statement and tax bases of assets and liabilities and for the expected
future tax benefit to be derived from tax loss and tax credit carryforwards.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be "more likely than not" realized in future
tax returns. Tax rate changes are reflected in income in the period such changes
are enacted.
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common share reflect the potential dilutive effect
of additional common shares that are issuable upon exercise of outstanding stock
options and warrants calculated using the treasury stock method and the
conversion of Qualcomm Trust Convertible Preferred Securities. The weighted
average number of common shares outstanding assumes that the 17,647,685 shares
issued at the Distribution were outstanding for the periods prior to the
Distribution. A reconciliation of weighted-average shares outstanding used in
calculating basic and diluted net income (loss) per share is as follows (in
thousands):
PERIOD FROM
SEPTEMBER 1, YEAR ENDED
YEAR ENDED 1999 TO AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------
2000 1999 1999 1998
------------ ------------ ------ ------
Weighted average shares outstanding -- basic
earnings per share........................... 25,398 18,928 17,910 17,648
Effect of dilutive securities: -- -- --
Employee stock options....................... 2,985 -- -- --
Qualcomm warrant............................. 3,980 -- -- --
Warrant to Chase Telecommunications
Holdings.................................. 103 -- -- --
Qualcomm Trust Convertible Preferred
Securities................................ 77 -- -- --
------ ------ ------ ------
Adjusted weighted average shares outstanding --
diluted earnings per share................... 32,543 18,928 17,910 17,648
====== ====== ====== ======
C-40
101
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following shares were not included in the computation of diluted
earnings per share as their effect would be antidilutive (in thousands):
PERIOD FROM
SEPTEMBER 1, YEAR ENDED
YEAR ENDED 1999 TO AUGUST 31,
DECEMBER 31, DECEMBER 31, -------------
2000 1999 1999 1998
------------ ------------ ----- ----
Employee stock options............................. 1,214 5,697 5,940 --
Qualcomm warrant................................... -- 4,500 4,500 --
Senior and senior discount unit warrants........... 2,830 -- -- --
Qualcomm Trust Convertible Preferred Securities.... -- 925 2,271 --
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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. The Company does not expect that the
adoption of SFAS No. 133 will have a material impact on its consolidated
financial position or results of operations.
NOTE 3. RECENT AND PENDING ACQUISITIONS AND DISPOSITION
CHASE TELECOMMUNICATIONS HOLDINGS
In March 2000, the Company completed the acquisition of substantially all
of the assets of Chase Telecommunications Holdings, Inc., 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 $131.3 million), a warrant now exercisable to purchase 202,566 shares of Leap
common stock at an aggregate exercise price of $1.0 million (which had a fair
value of $15.3 million at the acquisition date), 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. Under the purchase method of accounting, the total estimated fair
value of the acquisition was $152.9 million, of which $43.2 million was
allocated to property and equipment and other assets and $109.7 million was
allocated to intangible assets. Intangible assets consist primarily of wireless
licenses that are amortized over their estimated useful lives of 40 years
following commencement of commercial service.
C-41
102
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited pro forma results of operations are provided to reflect the
acquisition as if it had occurred as of September 1, 1998 (in thousands, except
per share data):
YEAR ENDED
--------------------------
DECEMBER 31, AUGUST 31,
2000 1999
------------ ----------
Revenues.................................................... $53,288 $ 8,296
======= =========
Income (loss) before extraordinary items.................... $ 2,811 $(171,192)
======= =========
Net loss.................................................... $(1,926) $(171,192)
======= =========
Pro forma basic net loss per common share................... $ (0.08) $ (9.56)
======= =========
Pro forma diluted net loss per common share................. $ (0.06) $ (9.56)
======= =========
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future.
CRICKET COMMUNICATIONS HOLDINGS
On June 15, 2000, through a subsidiary merger, the Company acquired the
remaining 5.11% of Cricket Communications Holdings that it did not already own.
These shares were owned by individuals and entities, including directors and
employees of the Company and Cricket Communications Holdings. Each issued and
outstanding share of Cricket Communications Holdings common stock not held by
the Company was converted into the right to receive 0.315 of a fully paid and
non-assessable share of the Company's common stock. As a result, 1,048,635
shares of the Company's common stock were issued. The Company 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 the Company's 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 was allocated to
goodwill. As a result, goodwill of $29.2 million was recorded in June 2000 and
is being amortized over 20 years. In addition, the Company assumed all unexpired
and unexercised 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 the Company's common stock. The Company
recorded unearned stock-based compensation of $24.3 million for the excess of
the fair value of the Company's common stock on the date of the merger over the
exercise price of the options exchanged. Amortization of stock-based
compensation amounted to $13.9 million for the year ended December 31, 2000.
WIRELESS LICENSES
The Company acquired 36 licenses in the federal government's 1999 reauction
of broadband PCS spectrum licenses for $18.7 million in cash. From January 2000
through February 2001, the Company completed the purchase of several additional
licenses in the United States from various third parties for an aggregate of
$99.1 million in cash, 566,205 shares of the Company's common stock with an
aggregate fair value at the time of purchase of $26.7 million and the assumption
of $13.8 million in debt, net of discount, owed to the Federal Communications
Commission ("FCC") related to the licenses. In November 2000, the Company
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 90 days after
close and the final payment due one year after close. In addition, from January
2000 through February 2001, the Company entered into various agreements with
third parties to purchase additional licenses in exchange for cash, shares of
common stock and the assumption of FCC debt with an aggregate estimated fair
C-42
103
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value of $197.6 million as of February 22, 2001, subject to certain adjustments
based upon changes in the market value of wireless licenses and the market price
of the Company's common stock at the time of closing of some acquisitions. Each
of the pending agreements is subject to customary closing conditions, including
FCC approval, and may not be closed on schedule or at all. The Company was also
the high bidder on 22 wireless licenses in the FCC's broadband PCS auction
completed in January 2001 for an aggregate purchase price of $350.0 million. The
transfer of these licenses to the Company remains subject to FCC approval.
SALE OF SMARTCOM
On June 2, 2000, the Company completed the sale of all of the issued and
outstanding shares of Smartcom to Endesa, S.A. ("Endesa") for gross
consideration of $381.5 million, consisting of $156.8 million in cash, three
one-year promissory notes totaling $143.2 million, subject to certain
post-closing adjustments, the repayment of intercompany debt owed to the Company
by Smartcom totaling $53.3 million and the release of cash collateral posted by
the Company securing Smartcom indebtedness of $28.2 million. In addition, the
Company's loans payable to banks in Chile of $10.3 million and $7.6 million were
repaid by the Company. The sale of the Smartcom shares resulted in the removal
of approximately $191.4 million of Smartcom liabilities from the Company's
consolidated balance sheet. The Company recognized a gain on the sale of $313.4
million before related income tax expense of $34.5 million. One of the
promissory notes is subject to a one year right of set-off to secure the
indemnification obligations of the Company 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. The final audit is not yet completed and the
Company is in discussions with Endesa concerning a potential adjustment, which
it does not expect to be material. In February 2001, the Company sold the third
note which had an original principal amount of $58.2 million to a third party
for $60.7 million including accrued interest. Each of the two remaining
promissory notes matures on June 2, 2001 and bears interest at a rate equal to
the 3-month LIBOR, compounded semi-annually.
Unaudited pro forma results of operations are provided to reflect the
acquisition of substantially all of the assets of Chase Telecommunications
Holdings and the sale of Smartcom as if they had occurred as of September 1,
1998 (in thousands, except per share data):
YEAR ENDED
--------------------------
DECEMBER 31, AUGUST 31,
2000 1999
------------ ----------
Revenues.................................................... $ 31,642 $ 4,389
========= =========
Loss before extraordinary items............................. $(228,522) $(135,450)
========= =========
Net loss.................................................... $(232,944) $(135,450)
========= =========
Pro forma basic and diluted net loss per common share....... $ (9.17) $ (7.56)
========= =========
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition and the sale
occurred on the date indicated, or which may result in the future.
NOTE 4. INVESTMENTS IN AND LOANS RECEIVABLE FROM WIRELESS OPERATING COMPANIES
The Company has equity interests in companies that directly or indirectly
operate wireless communications networks. The Company's ability to withdraw
funds, including dividends, from its participation in such investments is
dependent on receiving the consent of lenders and the other participants, over
which the Company has no control.
C-43
104
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commencing in June 1999, the Company began fully consolidating Smartcom as
a result of the Company's acquisition of the remaining 50% of Smartcom that it
did not already own. Prior to June 1999, Smartcom was accounted for under the
equity method. The Company recorded equity losses from Smartcom of $13.1 million
and $3.1 million during the years ended August 31, 1999 and 1998, respectively.
Prior to the Company's completion of its acquisition of substantially all
the assets of Chase Telecommunications Holdings in March 2000, Chase
Telecommunications Holdings was accounted for under the equity method. The
Company recorded equity losses from Chase Telecommunications Holdings of $10.4
million, $9.7 million, $20.9 million and $11.8 million during the year ended
December 31, 2000, the period from September 1, 1999 to December 31, 1999 and
the years ended August 31, 1999 and 1998, respectively.
At December 31, 2000, the Company has a 20.1% interest in Pegaso. The
Company invested $100.0 million in Pegaso from June to September 1998 as a
founding shareholder. In July 1999, several of the other investors purchased an
additional $50.0 million of capital stock of Pegaso. In April 2000, Sprint PCS
invested $200.0 million in Pegaso by purchasing shares from Pegaso and
shareholders other than Leap. Several of the other existing investors
contributed an additional $50.0 million of capital in August 2000, reducing the
Company's percentage interest to 20.1%. Pegaso requires substantial additional
capital to continue its planned growth and operations. As a result, Pegaso is
seeking additional debt and equity financing, including additional vendor
financing. Leap may contribute capital to Pegaso in the future. If Leap does not
contribute additional capital to Pegaso, Leap's ownership interest in Pegaso may
be diluted due to additional capital contributions of other investors. The
Company has recorded gains in results of operations due to these transactions of
$32.6 million during the year ended December 31, 2000, and for the year ended
August 31, 1999, the Company recognized a gain in results of operations of $3.6
million and recorded $0.8 million directly to additional paid-in capital for the
change in interest that occurred during Pegaso's development stage. The Company
recorded equity losses from Pegaso of $68.2 million, $13.4 million, $23.6
million and $2.1 million during the year ended December 31, 2000, the period
from September 1, 1999 to December 31, 1999 and the years ended August 31, 1999
and 1998, respectively.
Condensed combined financial information for the operating companies
accounted for under the equity method is summarized as follows (in thousands):
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Current assets.............................................. $ 106,751 $ 33,940
Non-current assets.......................................... 678,628 578,326
Current liabilities......................................... (300,424) (91,217)
Non-current liabilities..................................... (312,489) (349,262)
--------- ---------
Total stockholders' capital....................... 172,466 171,787
Other stockholders' share of capital........................ 137,775 85,909
--------- ---------
Company's share of capital.................................. $ 34,691 $ 85,878
========= =========
Investments in and loans receivable from unconsolidated
wireless operating companies.............................. $ 34,691 $ 85,878
========= =========
C-44
105
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM
SEPTEMBER 1, 1999
YEAR ENDED TO YEAR ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- ---------- ---------
Operating revenues........................... $ 80,909 $ 4,955 $ 8,190 $ 22
--------- -------- --------- --------
Operating expenses........................... (318,329) (70,804) (153,062) (20,739)
Other income (expense), net.................. (52,621) (14,516) (22,471) (18,403)
Foreign currency transaction gains (losses),
net........................................ 1,917 8,612 (1,489) (3,970)
--------- -------- --------- --------
Net loss........................... (288,124) (71,753) (168,832) (43,090)
Other stockholders' share of net loss........ (208,002) (47,212) (62,491) (19,402)
--------- -------- --------- --------
Company's share of net loss.................. (80,122) (24,541) (106,341) (23,688)
Write-down of investments.................... -- -- (27,242) --
Amortization of excess cost of investment.... -- -- (630) --
Elimination of intercompany transactions..... 1,498 1,464 6,671 570
--------- -------- --------- --------
Equity in net loss of and
write-down of investments in and
loan receivable from
unconsolidated wireless operating
companies........................ $ (78,624) $(23,077) $(127,542) $(23,118)
========= ======== ========= ========
NOTE 5. LOANS PAYABLE TO BANKS
Between July and November 1998, the Company borrowed $15.7 million under
notes payable to banks in Chile. The loans of $9.0 million and $6.7 million,
along with capitalized interest and fees of $1.9 million, at December 31, 1999
bore interest at rates of 8.1% and 8.5% per annum, respectively. The loans were
repaid in June 2000.
In November 1999, the Company and Smartcom entered into a loan arrangement
with a bank. At December 31, 1999, the Company deposited funds with the bank
totaling $20.6 million as collateral for borrowings under the credit
arrangement. These funds were recorded as restricted cash equivalents in the
accompanying consolidated balance sheet. At December 31, 1999, borrowings from
the bank totaled $14.1 million, which are not included in the consolidated
financial statements due to the three month reporting lag for Smartcom. The
borrowings bore interest at the weighted-average rate of 7.01% per annum and
were repaid in July 2000.
C-45
106
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
DECEMBER 31,
--------------------
2000 1999
-------- --------
12.5% senior notes, due 2010, effective interest rate of
15.8%..................................................... $162,939 $ --
14.5% senior discount notes, face amount of $668.0 million,
due 2010, effective interest rate of 16.3%................ 274,776 --
Vendor financing agreements, weighted average interest rate
of 10.88%................................................. 378,668 10,421
U. S. government financing.................................. 83,140 --
Qualcomm credit agreement, net of facility fee.............. -- 187,570
Smartcom payment agreement.................................. -- 89,220
Note payable, net of discount............................... -- 16,607
-------- --------
899,523 303,818
Less current portion........................................ (1,645) --
-------- --------
$897,878 $303,818
======== ========
UNITS OFFERING
In February 2000, the Company 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 the Company's common stock, and 668,000
senior discount units, each senior discount unit consisting of one 14.5% senior
discount note due 2010 ("Senior Discount Note") and one warrant to purchase the
Company's 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, of which $164.4 million of the total proceeds were allocated to
the fair value of the warrants, estimated using the Black-Scholes option pricing
model. The warrants are exercisable for an aggregate of 2,829,854 shares of the
Company's common stock at an exercise price of $96.80 per share from February
23, 2001 to prior to April 15, 2010.
Interest on the Senior Notes is payable semi-annually. The Senior Discount
Notes begin accruing cash interest on April 15, 2005, with the first semi-annual
interest payment due October 15, 2005. Each Senior Discount Note has an initial
accreted value of $486.68 and a principal amount at maturity of $1,000. 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 at 112.5% of their principal amount and 114.5% of their
accreted value, respectively. The notes are guaranteed by 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.
QUALCOMM CREDIT AGREEMENT
The Company entered into a credit facility with Qualcomm on September 23,
1998 (the "Qualcomm Credit Agreement"). In February 2000, the Company used a
portion of the net proceeds from the Units Offering and Equity Offering (see
Note 8) to repay in full $226.7 million outstanding under the Qualcomm Credit
Agreement. In connection with the repayment of the Qualcomm Credit Agreement,
the related unamortized debt issue costs of $4.4 million were written off and
reported as an extraordinary loss in the accompanying consolidated statements of
operations.
C-46
107
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VENDOR FINANCING AGREEMENTS
Cricket Communications has entered into purchase agreements and credit
facilities with each of Lucent Technologies, Inc. ("Lucent"), Nortel Networks,
Inc. ("Nortel") and Ericsson Wireless Communications, Inc. ("Ericsson") for the
purchase of network infrastructure products and services and the financing of
these purchases plus additional working capital. Cricket Communications has
agreed to purchase up to $900.0 million of infrastructure products and services
from Lucent. The purchase agreement is subject to early termination at Cricket
Communications' convenience subject to payments for products and services
purchased from Lucent. The Lucent credit facility permits up to $1,350.0 million
in total borrowings by Cricket Communications. 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. In August 2000, Cricket
Communications entered into a three-year supply agreement with Nortel for the
purchase of infrastructure products and services, and a related credit facility
that permits up to $525.0 million in total borrowings. 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, and a
related credit facility with Ericsson Credit AB that permits up to $495.0
million in total borrowings. Lucent, Nortel and Ericsson have agreed to share
collateral and limit total loans by the three vendors to $1,845.0 million.
Borrowing availability under each credit agreement is generally based on a
ratio of the total amount of products and services purchased from the vendor.
Each of the credit agreements contains various covenants and conditions typical
for loans of this type, including minimum levels of customers and covered
potential customers that must increase over time, minimum revenues, limits on
annual capital expenditures, dividend restrictions (other than the Nortel
agreement) and other financial ratio tests. The obligations under the credit
agreements 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 each of the credit facilities 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 facilities, 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. At December 31, 2000, $378.7 million was
outstanding under the vendor credit agreements at a weighted average interest
rate of 10.88%. In addition, at December 31, 2000, the Company had amounts
payable to the vendors that will be financed under the vendor credit agreements
of $34.0 million, which have been included in other long-term liabilities.
U.S. GOVERNMENT FINANCING
As part of the consideration for wireless licenses acquired from January to
December 2000 and assumed in the acquisition of the assets of Chase
Telecommunications Holdings, the Company assumed $93.0 million ($84.5 million,
net of discount) of U.S. government financing with the FCC. The terms of the
notes include interest rates ranging from 6.25% to 9.75% per annum and quarterly
principal and interest payments until maturity through July 2007. The notes were
discounted using management's best estimate of the prevailing market interest
rate to the Company at the time of purchase of the wireless licenses ranging
from 9.75% to 10.75% per annum.
SMARTCOM DEFERRED PAYMENT AND CREDIT AGREEMENTS
Smartcom entered into a deferred payment agreement with Qualcomm related to
Smartcom's purchase of equipment, software and services from Qualcomm. Under the
agreement, Qualcomm agreed to defer collection of amounts up to a maximum of
$115.7 million, including capitalized interest, until September 2006. In
February 2000, Smartcom and Qualcomm entered into a credit agreement related to
Smartcom's
C-47
108
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
equipment supply and service agreements with a vendor, which permitted up to
$38.5 million in borrowings, including capitalized interest. Also in February
2000, Smartcom and Qualcomm entered into a deferred payment agreement related to
Smartcom's purchase of handsets and accessories and test equipment from
Qualcomm, under which Qualcomm had agreed to defer collection of amounts up to a
maximum of $11.2 million, including capitalized interest. In connection with the
sale of Smartcom in June 2000, the Company was released of its obligations under
these agreements.
DEBT REPAYMENT SCHEDULE
The scheduled principal repayments for long-term debt at December 31, 2000
were as follows (in thousands):
YEAR ENDING DECEMBER 31:
- ------------------------------------------------------------
2001........................................................ $ 1,645
2002........................................................ 19,511
2003........................................................ 64,299
2004........................................................ 85,497
2005........................................................ 105,911
Thereafter.................................................. 785,050
----------
1,061,913
Less:
Current portion........................................... (1,645)
Unamortized discount...................................... (162,390)
----------
Total............................................. $ 897,878
==========
C-48
109
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
Federal, state and foreign components of the Company's income tax provision
for the year ended December 31, 2000 were $3.0 million, $0.6 million and $44.0
million, respectively. The components of the Company's deferred tax assets
(liabilities) are summarized as follows (in thousands):
DECEMBER 31,
---------------------
2000 1999
--------- --------
U.S. deferred tax assets:
Net operating loss carryforwards.......................... $ 34,100 $ 36,939
Equity in net loss of unconsolidated wireless operating
company................................................ -- 21,312
Deferred charges.......................................... 17,130 5,339
Credit carryforwards...................................... 38,541 --
Reserves and allowances................................... 34,491 3,820
--------- --------
124,262 67,410
Foreign deferred tax assets:
Net operating loss carryforwards.......................... -- 10,682
Reserves and allowances................................... -- 210
--------- --------
-- 10,892
--------- --------
Gross deferred tax assets................................... 124,262 78,302
Valuation allowance......................................... (114,109) (70,377)
U.S. deferred tax liabilities:
Wireless licenses......................................... (6,473) --
Property and equipment.................................... (6,728) --
Foreign deferred tax liabilities:
Intangible assets......................................... -- (7,925)
--------- --------
Net deferred tax liability.................................. $ (3,048) $ --
========= ========
Management has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
The net operating losses generated prior to the Distribution were retained
by Qualcomm. At December 31, 2000, the Company had federal and state net
operating loss carryforwards of approximately $86.6 million and $64.2 million,
which will begin to expire in 2021 and 2006, respectively. The Company also has
foreign tax credit carryforwards of approximately $36.6 million, which begin to
expire in 2004. Should a substantial change in the Company's ownership occur as
defined under Internal Revenue Code section 382, there will be an annual
limitation on its utilization of net operating loss and credit carryforwards.
Deferred tax assets of approximately $17.0 million and $4.8 million at
December 31, 2000 and 1999, respectively, resulted from the exercise of employee
stock options. When recognized, the tax benefit of these assets will be
accounted for as a credit to additional paid-in capital rather than a reduction
of the income tax provision.
C-49
110
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the income tax provision (benefit) to the amount
computed by applying the statutory federal income tax rate to income before
income tax provision is summarized as follows (in thousands):
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ---------------------
2000 1999 1999 1998
------------ ------------ --------- ---------
Amounts computed at statutory federal rate........ $ 16,581 $(26,304) $(57,615) $(16,357)
Non-deductible losses of foreign subsidiaries and
investees....................................... 25,312 17,387 16,649 2,150
State income tax, net of federal benefit.......... (3,758) 563 (5,740) (1,428)
Foreign income tax benefit........................ (33,272) (2,844) (123) --
Non-deductible expenses........................... 10,196 -- -- --
Other............................................. 940 163 508 (487)
Increase in valuation allowance................... 31,541 11,035 46,321 16,122
-------- -------- -------- --------
$ 47,540 $ -- $ -- $ --
======== ======== ======== ========
NOTE 8. STOCKHOLDERS' EQUITY
EQUITY OFFERING
In February 2000, the Company 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 offering expenses, the Company
received $330.0 million.
COMMON STOCK PURCHASE AGREEMENT
In December 2000, the Company entered into a common stock purchase
agreement with Acqua Wellington North American Equities Fund, Ltd. ("Acqua
Wellington") under which the Company may, at its discretion, sell registered
common stock from time to time over the succeeding 28 month period. Under the
agreement, the Company may require Acqua Wellington to purchase between $10.0
and $25.0 million of common stock, depending on the market price of its common
stock, during one or more 18 trading day periods. In addition, the Company may
grant to Acqua Wellington an option to purchase up to an equal amount of common
stock during the same 18 trading day period. Acqua Wellington purchases the
common stock at a discount to its then current market price, ranging from 4.0%
to 5.5%, depending on the Company's market capitalization at the time the
Company requires Acqua Wellington to purchase its common stock. A special
provision in the agreement (as amended) allowed the first sale of common stock
under the agreement to be up to $55.0 million. On January 23, 2001, the Company
completed the first sale of its common stock under the agreement, issuing
1,564,336 shares to Acqua Wellington in exchange for $55.0 million in cash.
AUTHORIZED SHARES
In September 2000, the Company's shareholders approved the amendment of the
Company's Amended and Restated Certificate of Incorporation to increase the
aggregate number of authorized shares of common stock from 75,000,000 to
300,000,000.
STOCKHOLDER RIGHTS PLAN
In September 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, the Board of
Directors declared a dividend, payable on September 16, 1998, of one preferred
purchase right (a "Right") for each share of common stock, $.0001 par value, of
the Company outstanding at the close of business on September 11, 1998. Similar
Rights will generally be issued in respect to common stock subsequently issued.
Each Right entitles the registered holder to purchase from
C-50
111
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company a one one-thousandth share of Series A Junior Participating
Preferred Stock, $.0001 par value, at a purchase price of $90 (subject to
adjustment). The Rights are exercisable only if a person or group (an "Acquiring
Person"), other than Qualcomm with respect to its exercise of the warrants
granted to it in connection with the Distribution or acquired by it in
connection with the Company's February 2000 units offering, acquires beneficial
ownership of 15% or more of the Company's outstanding shares of common stock.
Upon exercise, holders other than an Acquiring Person, will have the right
(subject to termination) to receive the Company's common stock or other
securities having a market value (as defined) equal to twice the purchase price
of the Right. The Rights, which expire on September 10, 2008, are redeemable in
whole, but not in part, at the Company's option at any time for a price of $.01
per Right. In conjunction with the distribution of the Rights, the Company's
Board of Directors designated 75,000 shares of Preferred Stock as Series A
Junior Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Rights. At December 31, 2000, no shares of Preferred Stock were
outstanding.
In March 2000, the Company's Board of Directors approved an amendment to
the Company's Rights Plan that increased the purchase price from $90 to $350 for
each one one-thousandth share of Series A Junior Participating Preferred Stock.
WARRANT
In connection with the Distribution, the Company issued to Qualcomm a
warrant to purchase 5,500,000 shares of its common stock. In March 1999,
Qualcomm agreed to reduce the number of shares which may be acquired on exercise
to 4,500,000 for consideration of $5.4 million, which was the estimated fair
value of the warrant repurchase as determined by an option pricing model. In
December 2000, Qualcomm received 1,015,700 shares of the Company's common stock
upon exercising portions of the warrant for cash proceeds of $3.4 million and
the surrender of rights to purchase 109,300 shares in partial payment of the
exercise price. The remaining number of shares which may be acquired upon
exercise of the warrant is 3,375,000. This warrant is currently exercisable and
remains exercisable until September 2008.
TRUST CONVERTIBLE PREFERRED SECURITIES
Under the conversion agreement between the Company and Qualcomm, Leap
agreed to issue up to 2,271,060 shares of its common stock upon the conversion
of the Trust Convertible Preferred Securities of a wholly-owned statutory
business trust of Qualcomm. After conversion of the Trust Convertible Preferred
Securities, Qualcomm will have some of its debt reduced, but Leap will receive
no benefit or other consideration. At December 31, 2000 and 1999, respectively,
substantially all of the shares and 1,345,707 shares of the Company's common
stock had been issued upon conversion.
NOTE 9. BENEFIT PLANS
EMPLOYEE SAVINGS AND RETIREMENT PLAN
In September 1998, the Company adopted a 401(k) plan that allows eligible
employees to contribute up to 15% of their salary, subject to annual limits. The
Company matches a portion of the employee contributions and may, at its
discretion, make additional contributions based upon earnings. The Company's
contribution expense for the year ended December 31, 2000, the period from
September 1, 1999 to December 31, 1999 and the year ended August 31, 1999 was
$139,000, $52,000 and $133,000, respectively.
STOCK OPTION PLANS
In September 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 Plan") that allows the Board of Directors to grant options to selected
employees, directors and consultants to the Company to purchase shares of the
Company's common stock. A total of 8,000,000 shares of common stock were
reserved
C-51
112
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for issuance under the 1998 Plan. The 1998 Plan provides for the grant of both
incentive and non-qualified stock options. Incentive stock options are
exercisable at a price not less than 100% of the fair market value of the common
stock on the date of grant. Non-qualified stock options are exercisable at a
price not less than 85% of the fair market value of the common stock on the date
of grant. Generally, options vest over a five-year period and are exercisable
for up to ten years from the grant date. The Company also adopted the 1998 Non-
Employee Directors Stock Option Plan (the "1998 Non-Employee Directors Plan"),
under which options to purchase common stock are granted to non-employee
directors on an annual basis. A total of 500,000 shares of common stock were
reserved for issuance under the 1998 Non-Employee Directors Plan. The options
are exercisable at a price equal to the fair market value of the common stock on
the date of grant, vest over a five-year period and are exercisable for up to
ten years from the grant date.
In September 2000, the Company's shareholders approved the adoption of the
2000 Stock Option Plan (the "2000 Plan"). A total of 2,250,000 shares of common
stock have been reserved for issuance under the 2000 Plan. Terms of the 2000
Plan are comparable to the 1998 Plan.
A summary of stock option transactions for the 1998 Plan and the 1998
Non-Employee Directors Plan follows (number of shares in thousands):
OPTIONS OUTSTANDING
-----------------------------
OPTIONS AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------------- --------- ----------------
Options authorized........................ 8,500
Options granted at Distribution........... (5,542) 5,542 $ 3.73
Options granted after Distribution........ (1,768) 1,768 10.52
Options cancelled......................... 513 (720) 4.03
Options exercised......................... -- (650) 3.11
------ -----
August 31, 1999......................... 1,703 5,940 5.78
Options granted........................... (127) 127 36.23
Options cancelled......................... 67 (67) 8.17
Options exercised......................... -- (303) 7.88
------ -----
December 31, 1999....................... 1,643 5,697 6.56
Options granted........................... (1,372) 1,372 60.04
Options cancelled......................... 155 (155) 8.23
Options exercised......................... -- (714) 3.58
------ -----
December 31, 2000....................... 426 6,200 $18.70
====== =====
In June 1999, Cricket Communications Holdings adopted its own 1999 Stock
Option Plan (the "1999 Cricket Plan") that allowed the Cricket Communications
Holdings Board of Directors to grant options to selected employees, directors
and consultants to purchase shares of Cricket Communications Holdings common
stock. A total of 7,600,000 shares of Cricket Communications Holdings common
stock were reserved for issuance under the 1999 Cricket Plan. The 1999 Cricket
Plan provides for the grant of both incentive and non-qualified stock options.
Incentive stock options are exercisable at a price not less than 100% of the
fair market value of the common stock on the date of grant. Non-qualified stock
options are exercisable at a price not less than 85% of the fair market value of
the common stock on the date of grant. Generally, options vest over a five-year
period and are exercisable for up to ten years from the grant date.
In June 1999, a total of 1,205,000 options to purchase Cricket
Communications Holdings common stock were granted to two directors of the
Company, exercisable at $1.00 per share with accelerated vesting provisions. In
July 1999, all of these options vested and were fully exercised. In addition,
795,000 other options granted in June 1999 at $1.00 per share were exercised in
July 1999. Cricket Communications Holdings
C-52
113
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
received promissory notes totaling $0.9 million and cash of $1.1 million as
consideration for the issuance of the shares.
In connection with Leap's purchase of the remaining 5.11% of Cricket
Communications Holdings that it did not already own in a subsidiary merger on
June 15, 2000 (see Note 3), each outstanding unexpired and unexercised option
under the 1999 Cricket Plan was converted into a stock option to purchase 0.315
shares of Leap common stock. The intrinsic value of the Leap replacement options
on the date of the transaction was $24.3 million and was recorded as unearned
stock-based compensation. Subsequent to June 15, 2000, the 1999 Cricket Plan has
been used to grant options in Leap common stock.
A summary of stock option transactions for the 1999 Cricket Plan follows
(number of shares in thousands):
OPTIONS OUTSTANDING
---------------------------
OPTIONS AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------------- --------- --------------
Options authorized.......................... 7,600
Options granted............................. (3,335) 3,335 $ 1.16
Options cancelled........................... 2 (2) 1.00
Options exercised........................... -- (2,000) 1.00
------ ------
August 31, 1999........................... 4,267 1,333 1.41
Options granted............................. (600) 600 4.53
Options cancelled........................... 21 (21) 3.82
------ ------
December 31, 1999......................... 3,688 1,912 2.35
Options granted............................. (239) 239 6.00
Options exercised........................... -- (856) 2.49
------ ------
June 14, 2000............................. 3,449 1,295 2.93
June 15, 2000, as converted............... 1,086 408 9.30
Options granted............................. (1,138) 1,138 51.40
Options cancelled........................... 52 (51) 46.16
Options exercised........................... -- (7) 3.23
------ ------
December 31, 2000......................... -- 1,488 $40.27
====== ======
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
under the 1998 Plan, the 1998 Non-Employee Directors Plan and the 1999 Cricket
Plan at December 31, 2000 (number of shares in thousands):
OPTIONS OUTSTANDING
-------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE -------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
OF LIFE EXERCISE OF EXERCISE
EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE
- --------------- ------ ----------- -------- ------- ---------
$ 0.78 to $ 3.63 2,191 5.50 $ 2.85 1,508 $2.73
$ 3.64 to $ 5.04 1,382 6.58 4.49 671 4.37
$ 5.05 to $12.70 670 7.34 6.38 244 5.74
$12.71 to $19.26 786 8.60 18.93 132 19.02
$19.27 to $28.91 214 9.04 22.02 26 19.80
$28.92 to $43.36 207 9.87 33.95 -- --
$43.37 to $65.04 2,031 9.54 57.70 24 53.9
$65.05 to $92.50 207 9.58 74.00 -- --
----- -----
7,688 7.57 $22.87 2,605 $4.91
===== =====
EMPLOYEE STOCK PURCHASE PLAN
In September 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 ESP Plan") for all eligible employees to purchase shares of
common stock at 85% of the lower of the fair market value of such stock on the
first or the last day of each offering period. A total of 200,000 shares of
common stock were reserved for issuance under the 1998 ESP Plan. Employees may
authorize the Company to withhold up to 15% of their compensation during any
offering period, subject to certain limitations. For the year ended December 31,
2000, the period from September 1, 1999 to December 31, 1999 and the year ended
August 31, 1999, a total of 24,613, 17,366 and 63,779 shares were issued under
the 1998 ESP Plan at a weighted average price of $35.64, $15.51 and $3.83 per
share, respectively. At December 31, 2000, 94,242 shares were available for
future issuance.
EXECUTIVE RETIREMENT PLAN
In September 1998, the Company adopted a voluntary retirement plan that
allows eligible executives to defer up to 100% of their income on a pre-tax
basis. On a quarterly basis, participants receive up to a 10% match of their
income in the form of the Company's common stock based on the then current
market price, to be issued to the participant upon eligible retirement. The
income deferred and the Company match are unsecured and subject to the claims of
general creditors of the Company. The plan authorized up to 100,000 shares of
common stock to be allocated to participants. For the year ended December 31,
2000, the period from September 1, 1999 to December 31, 1999 and the year ended
August 31, 1999, 6,107, 3,953 and 8,718 shares, respectively, were allocated
under the plan and the Company's matching contribution amounted to $625,000,
$162,000 and $86,000, respectively. At December 31, 2000, 81,222 shares were
available for future allocation.
EXECUTIVE OFFICER DEFERRED STOCK PLAN
In December 1999, the Company established an Executive Officer Deferred
Stock Plan that provides for mandatory deferral of 25% and voluntary deferral of
up to 75% of executive officer bonuses. Bonus deferrals are converted into share
units credited to the participant's account, with the number of share units
calculated by dividing the deferred bonus amount by the fair market value of the
Company's common stock on the bonus
C-54
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payday. Share units represent the right to receive shares of the Company's
common stock in accordance with the plan. The Company will also credit to a
matching account that number of share units equal to 20% of the share units
credited to the participants' accounts. Matching share units vest ratably over
three years on each anniversary date of the applicable bonus payday. For the
year ended December 31, 2000, 4,710 shares were issued under the Executive
Officer Deferred Stock Plan. At December 31, 2000, 20,290 shares were available
for future issuance.
PRO FORMA INFORMATION
For purposes of pro forma disclosures, the fair value of options granted
has been estimated at the date of grant using the Black-Scholes option-pricing
model using the following weighted average assumptions:
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
2000 1999 1999
------------ ------------ ----------
Risk-free interest rate:
1998 Stock Option Plan....................... 6.01% 6.55% 5.0%
1999 Cricket Plan............................ 5.85% 6.55% 5.0%
1998 ESP Plan................................ 6.31% 5.74% 4.5%
Volatility:
1998 Stock Option Plan....................... 60.0% 50.0% 50.0%
1999 Cricket Plan............................ 60.0% 0.0% 0.0%
1998 ESP Plan................................ 105.0% 55.0% 55.0%
Dividend yield (all plans)..................... 0.0% 0.0% 0.0%
Expected life (years):
1998 Stock Option Plan....................... 5.0 6.0 6.0
1999 Cricket Plan............................ 5.0 6.0 6.0
1998 ESP Plan................................ 0.5 0.5 0.5
The weighted average estimated grant date fair values of stock options were
as follows:
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
2000 1999 1999
------------ ------------ ----------
1998 Stock Option Plan......................... $33.53 $20.35 $1.57
1999 Cricket Plan (grants prior to merger)..... $ 2.99 $ 1.42 $0.12
1999 Cricket Plan (grants subsequent to
merger)...................................... $28.31 $ -- $ --
1998 ESP Plan.................................. $35.64 $ 3.46 $2.37
C-55
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's pro forma information is as follows (in thousands, except per
share data):
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
2000 1999 1999
------------ ------------ ----------
Net loss:
As reported...................................... $ (168) $(75,846) $(164,613)
Pro forma........................................ $(8,929) $(76,815) $(171,415)
Diluted net loss per common share:
As reported...................................... $ (0.01) $ (4.01) $ (9.19)
Pro forma........................................ $ (0.27) $ (4.06) $ (9.57)
NOTE 10. COMMITMENTS AND CONTINGENCIES
In May 1999, Pegaso entered into a loan agreement with several banks with
credit support from Qualcomm. The Company guaranteed 33% of Pegaso's obligations
under the initial commitment from the lenders of $100.0 million. In connection
with the guarantee, the Company has received an option to subscribe for and
purchase limited voting series "N" treasury shares of Pegaso. The number of
shares that may be purchased by the Company under the option will be calculated
as a proportion of the number of options granted to the lenders to provide a
total internal rate of return of 20% to the lenders on the average outstanding
balance of the bridge loan, subject to a maximum of 418,518 shares of series "N"
treasury shares issuable to Leap. The options have an exercise price of $0.01
per share and expire 10 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. At December 31, 2000, the maximum amount of the loan
had been increased to approximately $300.0 million although the amount of the
Company's guarantee was not increased.
The Company has entered into non-cancelable operating lease agreements to
lease its facilities, certain equipment and rental of sites for towers and
antennas required for the operation of its wireless networks in the United
States. Future minimum rental payments required for all non-cancelable operating
leases at December 31, 2000 are as follows (in thousands):
YEAR ENDING DECEMBER 31:
- ------------------------------------------------------------
2001........................................................ $16,868
2002........................................................ 17,242
2003........................................................ 17,183
2004........................................................ 16,905
2005........................................................ 12,250
Thereafter.................................................. 18,671
-------
Total............................................. $99,119
=======
Rent expense totaled $5.5 million, $0.9 million and $1.2 million for the
year ended December 31, 2000, the period from September 1, 1999 to December 31,
1999 and the year ended August 31, 1999, respectively. No rent expense was
incurred by the Company prior to the Distribution.
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
C-56
117
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY BALANCE SHEET INFORMATION
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Accounts receivable, net:
Trade accounts receivable................................. $ -- $ 3,455
Allowance for doubtful accounts........................... -- (713)
-------- --------
$ -- $ 2,742
======== ========
Other current assets:
Recoverable taxes......................................... $ -- $ 6,592
Other..................................................... 12,746 8,819
-------- --------
$ 12,746 $ 15,411
======== ========
Property and equipment, net:
Land...................................................... $ -- $ 302
Buildings and infrastructure.............................. 217,793 103,882
Computer equipment and other.............................. 21,597 24,962
Construction-in-progress.................................. 202,859 --
-------- --------
442,249 129,146
Accumulated depreciation and amortization................. (12,056) (16,087)
-------- --------
$430,193 $113,059
======== ========
Deposits and other assets:
Deposits for wireless licenses............................ $ 91,772 $ --
Other..................................................... 30,679 3,212
-------- --------
$122,451 $ 3,212
======== ========
Accounts payable and accrued liabilities:
Trade accounts payable.................................... $ 12,678 $ 4,167
Accrued payroll and related benefits...................... 9,750 4,827
Accrued loss on handset purchase commitment............... -- 5,074
Other accrued liabilities................................. 36,307 5,029
-------- --------
$ 58,735 $ 19,097
======== ========
Other current liabilities:
Income taxes payable...................................... $ 39,214 $ --
Book overdraft............................................ 13,386 --
Interest payable.......................................... 6,922 --
Other..................................................... 6,168 --
-------- --------
$ 65,690 $ --
======== ========
C-57
118
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTARY CASH FLOW INFORMATION (IN THOUSANDS):
PERIOD FROM
YEAR ENDED SEPTEMBER 1, 1999 YEAR ENDED AUGUST 31,
DECEMBER 31, TO DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- ----------- -------
Supplementary disclosure of cash flow
information:
Cash paid for interest.................... $ 36,964 $ -- $ -- $ --
Cash paid for income taxes................ $ 3,705 $ -- $ -- $ --
Supplementary disclosure of non-cash
investing and financing activities:
Loans to unconsolidated wireless operating
companies converted to equity
investment............................. $ -- $ -- $ 50,196 $ --
Long-term financing to purchase
equipment.............................. 457,960 -- 8,791 --
Long-term financing to purchase wireless
licenses............................... 12,410 -- -- --
Facility fee due on long-term debt........ 1,800 -- 5,300 --
Repurchase of warrant..................... -- -- 5,355 --
Issuance of common stock to purchase
wireless licenses...................... 26,734 -- -- --
Issuance of common stock to purchase
minority interest in subsidiary........ 45,961 -- -- --
Effect of change in foreign company
reporting lag on investment in
unconsolidated wireless operating
company................................ -- 2,913 -- --
Long-term financing for loans to
unconsolidated wireless operating
company................................ 10,338 8,562 -- --
Issuance of notes receivable for sale of
Smartcom............................... 143,173 -- -- --
Supplementary disclosure of cash used for
acquisitions:
Total purchase price...................... 159,044 -- 43,699 564
Warrant issued for subsidiary company
common stock........................... (15,353) -- -- --
Notes payable issued, net of discount..... (750) -- (15,699) --
Liabilities assumed at present value...... (132,166) -- -- --
Cash acquired............................. (4,973) -- (1,058) --
--------- ------ -------- ----
Cash used for acquisitions................ $ 5,802 $ -- $ 26,942 $564
========= ====== ======== ====
C-58
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMPARATIVE FINANCIAL INFORMATION
The following is summarized results of operations and cash flows
information for the periods from September 1, 1999 to December 31, 1999 and from
September 1, 1998 to December 31, 1998 (unaudited) (in thousands):
PERIOD FROM PERIOD FROM
SEPTEMBER 1, 1999 SEPTEMBER 1, 1998
TO DECEMBER 31, TO DECEMBER 31,
1999 1998
----------------- -----------------
(UNAUDITED)
STATEMENT OF OPERATIONS INFORMATION:
Operating revenues................................ $ 6,772 $ --
Operating expenses................................ (36,439) (5,502)
-------- --------
Operating loss................................. (29,667) (5,502)
Equity in net loss of unconsolidated wireless
operating companies............................ (23,077) (19,908)
Other income (expense), net....................... (23,102) (697)
-------- --------
Net loss....................................... $(75,846) $(26,107)
======== ========
Basic and diluted net loss per common share....... $ (4.01) $ (1.48)
======== ========
CASH FLOWS INFORMATION:
Operating activities:
Net loss.......................................... $(75,846) $(26,107)
Equity in net loss of unconsolidated wireless
operating companies............................ 23,077 19,908
Other............................................. 21,199 (7,318)
-------- --------
Net cash used in operating activities........ (31,570) (13,517)
-------- --------
Investing activities:
Investments in and loans to unconsolidated
wireless operating companies................... (2,744) (86,791)
Restricted cash equivalents....................... (20,500) --
Other............................................. (4,568) (3,399)
-------- --------
Net cash used in investing activities........ (27,812) (90,190)
-------- --------
Financing activities:
Proceeds from long-term debt...................... 61,650 23,315
Former parent company's investment................ -- 95,268
Other............................................. 1,721 104
-------- --------
Net cash provided by financing activities.... 63,371 118,687
-------- --------
Effect of exchange rate changes on cash and cash
equivalents.................................... 7,210 --
Effect of change in foreign company reporting lag
on cash and cash equivalents................... 6,695 --
-------- --------
Net increase in cash and cash equivalents.... $ 17,894 $ 14,980
======== ========
NOTE 13. SEGMENT DATA
The Company's current reportable segments are countries in which it
manages, supports, operates and participates in wireless communications business
ventures. These reportable segments are evaluated separately because each
geographic region presents different marketing strategies and operational
issues, as well as
C-59
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
distinct economic climates and regulatory constraints. The Company's reportable
segments are comprised of its consolidated and unconsolidated U.S. subsidiaries
and Pegaso in Mexico. As a result of the sale of Smartcom, segment data has been
restated for all periods presented to exclude Smartcom.
Summary information by segment is as follows (in thousands):
AS OF
DECEMBER 31,
1999 AND FOR THE
PERIOD FROM
AS OF AND FOR THE SEPTEMBER 1, AS OF AND FOR THE YEAR
YEAR ENDED 1999 TO ENDED AUGUST 31,
DECEMBER 31, DECEMBER ----------------------
2000 1999 1999 1998
----------------- ---------------- ---------- ---------
UNITED STATES:
Revenues.................................... $ 31,643 $ 3,142 $ 3,337 $ 22
Operating loss.............................. (105,669) (22,951) (22,414) (20,017)
Depreciation and amortization............... (19,177) (13,863) (2,033) (120)
Capital expenditures........................ (422,226) (15,691) (6,177) (12,852)
Purchase of wireless licenses............... (184,452) -- (18,920) --
Total assets...................... 1,157,175 113,205 109,437 88,991
MEXICO:
Revenues.................................... 77,938 1,813 1,203 --
Operating loss.............................. (227,090) (47,169) (68,847) (5,350)
Depreciation and amortization............... (39,976) (3,337) (2,320) --
Capital expenditures........................ (171,536) (36,279) (8,315) (822)
Purchase of wireless licenses............... -- -- (175,864) (57,666)
Total assets...................... 785,379 514,918 551,098 71,760
C-60
121
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the Company's segment revenues, operating expenses,
depreciation and amortization and total assets to the corresponding consolidated
amounts is as follows (in thousands):
AS OF DECEMBER 31,
1999 AND FOR THE
AS OF AND FOR THE PERIOD FROM AS OF AND FOR THE YEAR
YEAR ENDED SEPTEMBER 1, 1999 ENDED AUGUST 31,
DECEMBER 31, TO DECEMBER 31, -----------------------
2000 1999 1999 1998
----------------- ------------------ ---------- ----------
Segment revenues......................... $ 109,581 $ 4,955 $ 4,540 $ 22
Revenues of unconsolidated wireless
operating companies.................... (80,909) (4,955) (8,190) (22)
Smartcom................................. 21,645 6,644 7,444 --
Other unallocable revenues............... -- 128 113 --
---------- --------- --------- ---------
Consolidated revenues.................. $ 50,317 $ 6,772 $ 3,907 $ --
========== ========= ========= =========
Segment operating losses................. $ (332,759) $ (70,120) $ (91,261) $ (25,367)
Operating losses of unconsolidated
wireless operating companies........... 237,420 65,850 125,176 21,224
Smartcom................................. (38,137) (20,096) (27,479) (4,380)
Discontinued foreign ventures............ -- -- (23,648) (6,073)
Corporate and eliminations............... (33,823) (5,301) (17,260) (9,292)
---------- --------- --------- ---------
Consolidated operating loss............ $ (167,299) $ (29,667) $ (34,472) $ (23,888)
========== ========= ========= =========
Segment depreciation and amortization.... $ (59,153) $ (17,200) $ (4,353) $ (120)
Depreciation and amortization of
unconsolidated wireless operating
companies.............................. 45,119 17,200 28,124 180
Smartcom................................. (10,017) (6,714) (9,409) (60)
Discontinued foreign ventures............ -- -- (19,623) --
Corporate depreciation and
amortization........................... (512) (212) (563) --
---------- --------- --------- ---------
Consolidated depreciation and
amortization........................ $ (24,563) $ (6,926) $ (5,824) $ --
========== ========= ========= =========
Segment total assets..................... $1,942,554 $ 628,123 $ 660,535 $ 160,751
Total assets of unconsolidated wireless
operating companies.................... (785,379) (612,266) (717,664) (285,365)
Investments in and loans receivable from
unconsolidated wireless operating
companies.............................. 34,691 85,878 94,429 150,914
Smartcom................................. -- 190,297 186,645 124,614
Discontinued foreign ventures............ -- -- 77,926 --
Corporate assets......................... 455,541 68,733 33,460 6,838
---------- --------- --------- ---------
Consolidated total assets.............. $1,647,407 $ 360,765 $ 335,331 $ 157,752
========== ========= ========= =========
C-61
122
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenues and long-lived assets related to operations in the United States
and other countries are as follows (in thousands):
AS OF
DECEMBER 31,
1999 AND FOR
THE PERIOD
FROM AS OF AND FOR THE
AS OF AND FOR THE SEPTEMBER 1, YEAR ENDED
YEAR ENDED 1999 TO DECEMBER 31,
DECEMBER 31, DECEMBER 31, -------------------
2000 1999 1999 1998
----------------- --------------- -------- --------
REVENUES:
United States................................. $ 28,672 $ -- $ -- $ --
Other countries............................... 21,645 6,772 3,907 --
-------- -------- -------- --------
Total consolidated revenues......... $ 50,317 $ 6,772 $ 3,907 $ --
======== ======== ======== ========
LONG-LIVED ASSETS:
United States................................. $734,782 $ 33,147 $ 23,599 $ --
Other countries............................... 34,691 240,477 264,369 104,557
-------- -------- -------- --------
Total consolidated long-lived
assets............................ $769,473 $273,624 $287,968 $104,557
======== ======== ======== ========
NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of operations of the interim periods. Summarized
quarterly data for the years ended December 31, 2000 and August 31, 1999 is as
follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 2000
------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- ---------
Revenues(1).......................................... $ 9,991 $ 18,524 $ 7,540 $ 14,262
Gross loss(2)........................................ (6,040) (177) (2,849) (16,321)
Income (loss) before extraordinary items............. (72,403) 234,575 (54,072) (103,531)
Net income (loss).................................... (76,825) 234,260 (54,072) (103,531)
Basic net income (loss) per common share:
Income (loss) before extraordinary items........... $ (3.23) $ 9.18 $ (2.04) $ (3.82)
Extraordinary loss................................. (0.20) (0.01) -- --
-------- -------- -------- ---------
Net income (loss)............................... $ (3.43) $ 9.17 $ (2.04) $ (3.82)
======== ======== ======== =========
Diluted net income (loss) per common share:
Income (loss) before extraordinary items........... $ (3.23) $ 7.21 $ (2.04) $ (3.82)
Extraordinary loss................................. (0.20) (0.01) -- --
-------- -------- -------- ---------
Net income (loss)............................... $ (3.43) $ 7.20 $ (2.04) $ (3.82)
======== ======== ======== =========
YEAR ENDED AUGUST 31, 1999
------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- ---------
Revenues............................................. $ -- $ -- $ -- $ 3,907
Gross profit(2)...................................... -- -- -- 97
Net loss............................................. (20,982) (23,063) (46,809) (73,759)
Basic and diluted net loss per common share.......... $ (1.19) $ (1.30) $ (2.61) $ (4.04)
- ---------------
(1) The decrease in revenues from the second quarter to the third quarter of the
year ended December 31, 2000 was due to the Company's sale of Smartcom in
June 2000.
(2) Gross loss is calculated by subtracting cost of service and cost of
equipment from total revenues.
C-62
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SUBSEQUENT EVENT
QUALCOMM TERM LOAN
In January 2001, the Company entered into a loan agreement with Qualcomm
under which Qualcomm will loan to the Company approximately $125.0 million to
finance the acquisition of wireless licenses in the FCC's broadband PCS auction
completed in January 2001. Qualcomm has agreed to fund borrowings under the
agreement by the transfer to the Company of an FCC auction discount voucher, or,
at Qualcomm's option, cash. Under the terms of the agreement, the Company must
repay the outstanding principal and accrued interest to Qualcomm in a single
payment no later than five years after the date of the initial borrowing. The
loan is subject to mandatory prepayments in certain circumstances, including as
a result of the Company receiving net cash proceeds in excess of $400.0 million
from issuances of debt or equity securities by the Company (other than certain
excluded issuances such as equipment vendor financing, and sales under the Acqua
Wellington common stock purchase agreement which are used to acquire wireless
licenses). The loan bears interest at a variable rate, depending on the
collateral the Company provides. The Company expects this rate to be at LIBOR
plus 7.5%. As security for the loan, the Company agreed to pledge in favor of
Qualcomm the stock of subsidiaries holding licenses acquired in the January 2001
FCC auction with an aggregate purchase price of at least 150% of the outstanding
principal amount of the loan. The loan is subject to the same covenants that are
contained in the Indenture for the Senior Notes and Senior Discount Notes issued
in the Units Offering, and other customary covenants and conditions.
NOTE 16. SUBSIDIARY GUARANTEE
The Company's Senior Notes and Senior Discount Notes are guaranteed by
Cricket Communications Holdings. Because Cricket Communications Holdings is
wholly-owned by the Company and the guarantee provided by Cricket Communications
Holdings is full and unconditional, full financial statements of Cricket
Communications Holdings are not required to be issued. Condensed consolidating
financial information of Leap, Cricket Communications Holdings and non-guarantor
subsidiaries of Leap as of December 31, 2000 and 1999, for the year ended
December 31, 2000, for the period from September 1, 1999 to December 31, 1999
and for the years ended August 31, 1999 and 1998 is presented below. The
subsidiaries of Cricket Communications Holdings are not guarantors of the Senior
Notes and Senior Discount Notes and are therefore reflected as investments
accounted for under the equity method of accounting in the Cricket
Communications Holdings financial information.
C-63
124
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEET INFORMATION AS OF DECEMBER 31, 2000 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents....... $ 106,504 $ -- $ 232,374 $ -- $ 338,878
Restricted cash equivalents and
short-term investments........ 13,575 -- -- -- 13,575
Short-term investments.......... 16,237 -- 182,869 -- 199,106
Inventories..................... -- -- 9,032 -- 9,032
Notes receivable, net........... -- -- 138,907 -- 138,907
Other current assets............ 1,631 -- 11,115 -- 12,746
---------- --------- ---------- ----------- ----------
Total current
assets.............. 137,947 -- 574,297 -- 712,244
Property and equipment, net..... 5,763 -- 424,430 -- 430,193
Investments in subsidiaries and
unconsolidated wireless
operating companies........... 705,455 352,364 34,691 (1,057,819) 34,691
Wireless licenses, net.......... 25,107 -- 240,528 -- 265,635
Goodwill and other intangible
assets, net................... 3,800 -- 61,162 (34,665) 30,297
Restricted investments.......... 51,896 -- -- -- 51,896
Deposits and other assets....... 114,040 -- 8,411 -- 122,451
---------- --------- ---------- ----------- ----------
Total assets.......... $1,044,008 $ 352,364 $1,343,519 $(1,092,484) $1,647,407
========== ========= ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and accrued
liabilities................... $ 8,618 $ -- $ 57,150 $ (7,033) $ 58,735
Other current liabilities....... 12,319 -- 53,371 -- 65,690
---------- --------- ---------- ----------- ----------
Total current
liabilities......... 20,937 -- 110,521 (7,033) 124,425
Long-term debt.................. 438,143 -- 459,735 -- 897,878
Other long-term liabilities..... 1,670 -- 40,176 -- 41,846
---------- --------- ---------- ----------- ----------
Total liabilities..... 460,750 -- 610,432 (7,033) 1,064,149
---------- --------- ---------- ----------- ----------
Stockholders' Equity:
Common stock.................. 3 -- -- -- 3
Additional paid-in capital.... 893,401 539,578 788,898 (1,328,476) 893,401
Unearned stock-based
compensation............... (10,019) -- -- -- (10,019)
Accumulated deficit........... (302,898) (187,214) (58,524) 245,738 (302,898)
Accumulated other
comprehensive income....... 2,771 -- 2,713 (2,713) 2,771
---------- --------- ---------- ----------- ----------
Total stockholders'
equity.............. 583,258 352,364 733,087 (1,085,451) 583,258
---------- --------- ---------- ----------- ----------
Total liabilities and
stockholders'
equity.............. $1,044,008 $ 352,364 $1,343,519 $(1,092,484) $1,647,407
========== ========= ========== =========== ==========
C-64
125
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents......... $ 35,713 $ -- $ 8,396 $ -- $ 44,109
Restricted cash equivalents....... 20,550 -- -- -- 20,550
Accounts receivable, net.......... 717 -- 2,025 -- 2,742
Inventories....................... -- -- 4,329 -- 4,329
Other current assets.............. 2,967 -- 12,444 -- 15,411
--------- -------- --------- --------- ---------
Total current assets.... 59,947 -- 27,194 -- 87,141
Property and equipment, net....... 2,467 -- 110,592 -- 113,059
Investments in and loans
receivable from subsidiaries and
unconsolidated wireless
operating companies............. 118,506 (7,414) 85,878 (111,092) 85,878
Wireless licenses, net............ 18,920 -- 37,564 -- 56,484
Goodwill and other intangible
assets, net..................... -- -- 14,991 -- 14,991
Deposits and other assets......... 2,496 716 -- 3,212
--------- -------- --------- --------- ---------
Total assets............ $ 202,336 $ (7,414) $ 276,935 $(111,092) $ 360,765
========= ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and accrued
liabilities..................... $ 3,810 $ -- $ 22,970 $ (7,683) $ 19,097
Loans payable to banks............ -- -- 17,683 -- 17,683
--------- -------- --------- --------- ---------
Total current
liabilities........... 3,810 -- 40,653 (7,683) 36,780
Long-term debt.................... 187,570 -- 132,988 (16,740) 303,818
Other long-term liabilities....... 64 -- 9,211 -- 9,275
--------- -------- --------- --------- ---------
Total liabilities....... 191,444 -- 182,852 (24,423) 349,873
--------- -------- --------- --------- ---------
Stockholders' Equity:
Common stock.................... 2 6 -- (6) 2
Additional paid-in capital...... 292,933 125,839 265,656 (391,495) 292,933
Notes receivable from
stockholders................. -- (55,304) -- 55,304 --
Accumulated deficit............. (277,720) (77,955) (167,250) 245,205 (277,720)
Accumulated other comprehensive
loss......................... (4,323) -- (4,323) 4,323 (4,323)
--------- -------- --------- --------- ---------
Total stockholders'
equity................ 10,892 (7,414) 94,083 (86,669) 10,892
--------- -------- --------- --------- ---------
Total liabilities and
stockholders'
equity................ $ 202,336 $ (7,414) $ 276,935 $(111,092) $ 360,765
========= ======== ========= ========= =========
C-65
126
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Revenues:
Service revenues........ $ -- $ -- $ 40,599 $ -- $ 40,599
Equipment revenues...... -- -- 9,718 -- 9,718
--------- --------- --------- ------- ---------
Total
revenues...... -- -- 50,317 -- 50,317
--------- --------- --------- ------- ---------
Operating expenses:
Cost of service......... -- -- (22,111) 1,290 (20,821)
Cost of equipment....... -- -- (54,883) -- (54,883)
Selling, general and
administrative
expenses............. (35,233) -- (82,116) -- (117,349)
Depreciation and
amortization......... (815) -- (23,748) -- (24,563)
--------- --------- --------- ------- ---------
Total operating
expenses...... (36,048) -- (182,858) 1,290 (217,616)
--------- --------- --------- ------- ---------
Operating loss.......... (36,048) -- (132,541) 1,290 (167,299)
Equity in net income
(loss) of subsidiaries
and unconsolidated
wireless operating
companies............... 110,229 (110,762) (78,624) 533 (78,624)
Interest income........... 23,490 1,503 23,484 -- 48,477
Interest expense.......... (81,622) -- (30,736) -- (112,358)
Foreign currency
transaction gains,
net..................... 361 -- 13,605 -- 13,966
Gain on sale of wholly-
owned subsidiary........ (4,484) -- 317,916 -- 313,432
Gain on issuance of stock
by unconsolidated
wireless operating
company................. -- -- 32,602 -- 32,602
Other income, net......... 2,021 -- 1,182 (1,290) 1,913
--------- --------- --------- ------- ---------
Income (loss) before
income taxes and
extraordinary items..... 13,947 (109,259) 146,888 533 52,109
Income taxes.............. (9,693) -- (37,847) -- (47,540)
--------- --------- --------- ------- ---------
Income (loss) before
extraordinary items..... 4,254 (109,259) 109,041 533 4,569
Extraordinary loss on
early extinguishment of
debt.................... (4,422) -- (315) -- (4,737)
--------- --------- --------- ------- ---------
Net
income (loss)... $ (168) $(109,259) $ 108,726 $ 533 $ (168)
========= ========= ========= ======= =========
C-66
127
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS INFORMATION FOR THE PERIOD FROM SEPTEMBER 1, 1999
TO DECEMBER 31, 1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Revenues:
Service revenues................. $ -- $ -- $ 6,733 $ -- $ 6,733
Equipment revenues............... -- -- 39 -- 39
-------- -------- -------- ------- --------
Total revenues........... -- -- 6,772 -- 6,772
-------- -------- -------- ------- --------
Operating expenses:
Cost of service.................. -- -- (2,409) -- (2,409)
Cost of equipment................ -- -- (7,760) -- (7,760)
Selling, general and
administrative expenses....... (4,883) -- (14,461) -- (19,344)
Depreciation and amortization.... (212) -- (6,714) -- (6,926)
-------- -------- -------- ------- --------
Total operating
expenses............... (5,095) -- (31,344) -- (36,439)
-------- -------- -------- ------- --------
Operating loss................... (5,095) -- (24,572) -- (29,667)
Equity in net loss of subsidiaries
and unconsolidated wireless
operating companies.............. (62,351) (15,822) (23,077) 78,173 (23,077)
Interest income.................... 1,022 -- (258) -- 764
Interest expense................... (6,196) -- (6,087) -- (12,283)
Foreign currency transaction
losses, net...................... -- -- (8,247) -- (8,247)
Other expense, net................. (3,226) -- (110) -- (3,336)
-------- -------- -------- ------- --------
Net loss................. $(75,846) $(15,822) $(62,351) $78,173 $(75,846)
======== ======== ======== ======= ========
C-67
128
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED AUGUST 31, 1999 (IN
THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Revenues:
Service revenues................ $ -- $ -- $ 3,619 $ -- $ 3,619
Equipment revenues.............. -- -- 288 -- 288
--------- -------- --------- -------- ---------
Total revenues.......... -- -- 3,907 -- 3,907
--------- -------- --------- -------- ---------
Operating expenses:
Cost of service................. -- -- (1,355) -- (1,355)
Cost of equipment............... -- -- (2,455) -- (2,455)
Selling, general and
administrative expenses...... (17,004) -- (11,741) -- (28,745)
Depreciation and amortization... (563) -- (5,261) -- (5,824)
--------- -------- --------- -------- ---------
Total operating
expenses.............. (17,567) -- (20,812) -- (38,379)
--------- -------- --------- -------- ---------
Operating loss.................. (17,567) -- (16,905) -- (34,472)
Equity in net loss of and
write-down of investments in and
loan receivable from
subsidiaries and unconsolidated
wireless operating companies.... (150,897) (37,436) $(127,542) 188,333 (127,542)
Interest income................... 960 -- 1,545 -- 2,505
Interest expense.................. (6,102) -- (4,254) -- (10,356)
Foreign currency transaction
losses, net..................... -- -- (7,211) -- (7,211)
Gain on sale of wholly-owned
subsidiary...................... 9,097 -- -- -- 9,097
Gain on issuance of stock by
unconsolidated wireless
operating company............... -- -- 3,609 -- 3,609
Other expense, net................ (104) -- (139) -- (243)
--------- -------- --------- -------- ---------
Net loss................ $(164,613) $(37,436) $(150,897) $188,333 $(164,613)
========= ======== ========= ======== =========
STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED AUGUST 31, 1998 (IN
THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating expenses:
Selling, general and
administrative expenses...... $ (9,292) $ -- $ (14,596) $ -- $ (23,888)
--------- -------- --------- -------- ---------
Operating loss.................. (9,292) -- (14,596) -- (23,888)
Equity in net loss of subsidiaries
and unconsolidated wireless
operating companies............. (38,284) (20,697) (23,118) 58,981 (23,118)
Interest income................... 843 -- -- (570) 273
--------- -------- --------- -------- ---------
Net loss................ $ (46,733) $(20,697) $ (37,714) $ 58,411 $ (46,733)
========= ======== ========= ======== =========
C-68
129
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating activities:
Net cash provided by
(used in)
operating
activities....... $(128,328) $ 1,503 $ (49,317) $ 9,765 $(166,377)
--------- --------- --------- --------- ---------
Investing activities:
Purchase of property and
equipment................ (1,944) -- (70,301) -- (72,245)
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies...... (400,536) (370,161) (11,033) 763,197 (18,533)
Acquisitions, net of cash
acquired................. (4,475) -- (1,327) -- (5,802)
Purchase of wireless
licenses................. (14,934) -- (79,219) -- (94,153)
Net proceeds from disposal
of subsidiaries.......... 4,311 -- 210,144 -- 214,455
Purchase of investments.... (125,657) -- (207,330) -- (332,987)
Sale and maturity of
investments.............. 104,410 -- 24,130 -- 128,540
Restricted cash equivalents
and investments, net..... (44,921) -- -- -- (44,921)
--------- --------- --------- --------- ---------
Net cash used in
investing
activities....... (483,746) (370,161) (134,936) 763,197 (225,646)
--------- --------- --------- --------- ---------
Financing activities:
Proceeds from issuance of
senior and senior
discount notes........... 550,102 -- -- -- 550,102
Proceeds from loans payable
to banks and long-term
debt..................... 31,022 -- 28,302 -- 59,324
Repayment of loans payable
to banks and long-term
debt..................... (226,708) -- (21,496) -- (248,204)
Issuance of common stock... 341,949 -- 3,738 (3,738) 341,949
Payment of debt financing
costs.................... (13,500) -- (1,722) -- (15,222)
Parent company investment
and advances............. -- 368,658 400,566 (769,224) --
Book overdraft............. -- -- 13,386 -- 13,386
--------- --------- --------- --------- ---------
Net cash provided by
financing
activities....... 682,865 368,658 422,774 (772,962) 701,335
--------- --------- --------- --------- ---------
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- (8,998) -- (8,998)
Effect of change in foreign
company reporting lag on
cash and cash
equivalents................ -- -- (5,545) -- (5,545)
--------- --------- --------- --------- ---------
Net increase in cash and cash
equivalents................ 70,791 -- 223,978 -- 294,769
Cash and cash equivalents at
beginning of period........ 35,713 -- 8,396 -- 44,109
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period.............. $ 106,504 $ -- $ 232,374 $ -- $ 338,878
========= ========= ========= ========= =========
C-69
130
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE PERIOD FROM SEPTEMBER 1, 1999 TO DECEMBER 31,
1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Operating activities:
Net cash used in
operating activities... $ (5,620) $ -- $(28,551) $ 2,601 $(31,570)
-------- -------- -------- ------- --------
Investing activities:
Purchase of property and
equipment..................... (50) -- (4,518) -- (4,568)
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies........... (18,990) (11,087) (11,744) 39,077 (2,744)
Restricted cash equivalents...... (20,500) -- -- -- (20,500)
-------- -------- -------- ------- --------
Net cash used in
investing activities... (39,540) (11,087) (16,262) 39,077 (27,812)
-------- -------- -------- ------- --------
Financing activities:
Proceeds from loans payable to
bank and long-term debt....... 61,650 -- 28,290 (28,290) 61,650
Issuance of common stock......... 1,721 -- -- -- 1,721
Parent company investment and
advances...................... 11,087 2,301 (13,388) --
-------- -------- -------- ------- --------
Net cash provided by
financing activities... 63,371 11,087 30,591 (41,678) 63,371
-------- -------- -------- ------- --------
Effect of exchange rate changes on
cash and cash equivalents........ -- -- 7,210 -- 7,210
Effect of change in foreign company
reporting lag on cash and cash
equivalents...................... -- -- 6,695 -- 6,695
-------- -------- -------- ------- --------
Net increase (decrease) in cash and
cash equivalents................. 18,211 -- (317) -- 17,894
Cash and cash equivalents at
beginning of period.............. 17,502 -- 8,713 -- 26,215
-------- -------- -------- ------- --------
Cash and cash equivalents at end of
period........................... $ 35,713 $ -- $ 8,396 $ -- $ 44,109
======== ======== ======== ======= ========
C-70
131
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE YEAR ENDED AUGUST 31, 1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating activities:
Net cash used in
operating activities... $ (17,286) $ -- $ (16,819) $ -- $ (34,105)
--------- --------- --------- -------- ---------
Investing activities:
Purchase of property and
equipment..................... (3,182) (753) -- (3,935)
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies........... (186,707) (33,969) (159,484) 255,689 (124,471)
Acquisition, net of cash
acquired...................... -- -- (26,942) -- (26,942)
Purchase of wireless licenses.... -- -- (19,009) -- (19,009)
Net proceeds from disposal of
subsidiary.................... 16,024 -- -- -- 16,024
--------- --------- --------- -------- ---------
Net cash used in
investing activities... (173,865) (33,969) (206,188) 255,689 (158,333)
--------- --------- --------- -------- ---------
Financing activities:
Proceeds from loan payable to
bank and long-term debt....... 128,584 -- 16,720 (10,000) 135,304
Repayment of long-term debt...... (17,500) -- -- -- (17,500)
Issuance of common stock......... 2,301 1,103 -- -- 3,404
Parent company investment and
advances...................... 95,268 32,866 212,823 (245,689) 95,268
--------- --------- --------- -------- ---------
Net cash provided by
financing activities... 208,653 33,969 229,543 (255,689) 216,476
--------- --------- --------- -------- ---------
Effect of exchange rate changes on
cash and cash equivalents........ -- -- 2,177 -- 2,177
--------- --------- --------- -------- ---------
Net increase in cash and cash
equivalents...................... 17,502 -- 8,713 -- 26,215
Cash and cash equivalents at
beginning of period.............. -- -- -- -- --
--------- --------- --------- -------- ---------
Cash and cash equivalents at end of
period........................... $ 17,502 $ -- $ 8,713 $ -- $ 26,215
========= ========= ========= ======== =========
C-71
132
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE YEAR ENDED AUGUST 31, 1998 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating activities:
Net cash used in
operating activities... $ (9,322) $ -- $ (8,486) $ (570) $ (18,378)
--------- -------- --------- -------- ---------
Investing activities:
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies........... (140,234) (16,146) (129,156) 151,632 (133,904)
Acquisition...................... (564) -- -- -- (564)
Purchase of wireless licenses.... -- -- (6,274) -- (6,274)
--------- -------- --------- -------- ---------
Net cash used in
investing activities... (140,798) (16,146) (135,430) 151,632 (140,742)
--------- -------- --------- -------- ---------
Financing activities:
Proceeds from loan payable to
bank.......................... -- -- 9,000 -- 9,000
Parent company investment and
advances...................... 150,120 16,146 134,916 (151,062) 150,120
--------- -------- --------- -------- ---------
Net cash provided by
financing activities... 150,120 16,146 143,916 (151,062) 159,120
--------- -------- --------- -------- ---------
Net increase in cash and cash
equivalents...................... -- -- -- -- --
Cash and cash equivalents at
beginning of period.............. -- -- -- -- --
--------- -------- --------- -------- ---------
Cash and cash equivalents at end of
period........................... $ -- $ -- $ -- $ -- $ --
========= ======== ========= ======== =========
C-72
133
PROXY LEAP WIRELESS INTERNATIONAL, INC. PROXY
PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 19, 2001
The undersigned hereby appoints Harvey P. White and James E. Hoffmann, and
each of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Leap Wireless International,
Inc. ("Leap") which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of Leap to be held at the San Diego Marriott La Jolla,
4240 La Jolla Village Drive, La Jolla, California 92037, on Thursday, April 19,
2001 at 3:30 p.m. local time and at any and all continuations, adjournments or
postponements thereof, with all powers that the undersigned would possess if
personally present, on the following matters, in accordance with the following
instructions, and on all other matters that may properly come before the
meeting. With respect to any matter not known to Leap as of March 5, 2001, such
proxies are authorized to vote in their discretion.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES FOR DIRECTOR LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4 AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
YOUR VOTE IS IMPORTANT. THEREFORE, YOU ARE URGED TO COMPLETE, SIGN, DATE AND
PROMPTLY RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
(Continued and to be signed on other side)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
134
LEAP WIRELESS INTERNATIONAL, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED IN
PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4.
1. To elect three directors to hold office until the Annual Meeting of
Stockholders following fiscal year 2003.
NOMINEES: 01 Harvey P. White, 02 Jeffrey P. Williams and 03 Scot B. Jarvis
For All Except
For Withheld Nominees Written In Below
/ / / / / /
Nominee Exceptions _________________________________________________
2. To approve the adoption of Leap's 2001 Executive Officer Deferred Bonus
Stock Plan.
For Against Abstain
/ / / / / /
3. To approve an amendment to Leap's 1998 Employee Stock Purchase Plan.
For Against Abstain
/ / / / / /
4. To ratify the selection of PricewaterhouseCoopers LLP as Leap's independent
accountants for the fiscal year ending December 31, 2001.
For Against Abstain
/ / / / / /
I PLAN TO ATTEND THE MEETING / /
Please vote, sign, date and promptly return this proxy in the enclosed return
envelope which is postage prepaid if mailed in the United States.
Please sign exactly as name appears hereon. If the stock is registered in the
names of two or more persons, each should sign. Executors, administrators,
trustees, guardians and attorneys-in-fact should add their titles. If signer is
a corporation, please give full corporate name and have a duly authorized
officer sign, stating title. If signer is a partnership, please sign in
partnership name by authorized person.
Signature_________________ Dated:______ Signature__________________ Dated:______
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE -