1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0811062
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(858) 882-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORTED)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [ ]
The number of shares of registrant's common stock outstanding on May 11, 2001
was 33,877,628.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
LEAP WIRELESS INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition 19
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures About Market 40
Risk........................................................
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 42
Item 2. Changes in Securities and Uses of Proceeds.................. 42
Item 3. Defaults Upon Senior Securities............................. 42
Item 4. Submission of Matters to a Vote of Security Holders......... 42
Item 5. Other Information........................................... 42
Item 6. Exhibits and Reports on Form 8-K............................ 42
2
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 342,589 $ 338,878
Restricted cash equivalents................................. 13,678 13,575
Short-term investments...................................... 216,073 199,106
Inventories................................................. 12,574 9,032
Notes receivable, net....................................... 79,276 138,907
Other current assets........................................ 8,066 12,746
---------- ----------
Total current assets................................... 672,256 712,244
Property and equipment, net................................. 507,991 430,193
Investment in unconsolidated wireless operating company..... 8,191 34,691
Wireless licenses, net...................................... 273,436 265,635
Goodwill and other intangible assets, net................... 33,371 30,297
Restricted investments...................................... 52,735 51,896
Deposits for wireless licenses.............................. 91,867 91,772
Other assets................................................ 157,098 30,679
---------- ----------
Total assets........................................... $1,796,945 $1,647,407
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 40,331 $ 58,735
Other current liabilities................................... 60,023 65,690
---------- ----------
Total current liabilities.............................. 100,354 124,425
Long-term debt.............................................. 1,130,318 897,878
Other long-term liabilities................................. 40,014 41,846
---------- ----------
Total liabilities...................................... 1,270,686 1,064,149
---------- ----------
Commitments and contingencies (Note 6)
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, 30,063,176 and 28,348,694 shares issued and
outstanding at March 31, 2001 and December 31, 2000,
respectively........................................... 3 3
Additional paid-in capital................................ 948,990 893,401
Unearned stock-based compensation......................... (8,256) (10,019)
Accumulated deficit....................................... (417,283) (302,898)
Accumulated other comprehensive income.................... 2,805 2,771
---------- ----------
Total stockholders' equity............................. 526,259 583,258
---------- ----------
Total liabilities and stockholders' equity............. $1,796,945 $1,647,407
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
4
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
--------- --------
Revenues:
Service revenues.......................................... $ 25,655 $ 9,418
Equipment revenues........................................ 11,098 573
--------- --------
Total revenues.................................... 36,753 9,991
--------- --------
Operating expenses:
Cost of service........................................... (12,226) (2,783)
Cost of equipment......................................... (30,938) (13,248)
Selling and marketing..................................... (17,015) (6,676)
General and administrative................................ (24,686) (15,427)
Depreciation and amortization............................. (14,787) (5,242)
--------- --------
Total operating expenses.......................... (99,652) (43,376)
--------- --------
Operating loss............................................ (62,899) (33,385)
Equity in net loss of investments in and loan receivable
from unconsolidated wireless operating companies.......... (26,182) (29,583)
Interest income............................................. 10,899 4,691
Interest expense............................................ (37,611) (16,160)
Foreign currency transaction gains (losses), net............ (1,235) 1,399
Other income, net........................................... 3,576 635
--------- --------
Loss before income taxes and extraordinary item............. (113,452) (72,403)
Income taxes................................................ (933) --
--------- --------
Loss before extraordinary item.............................. (114,385) (72,403)
Extraordinary loss on early extinguishment of debt.......... -- (4,422)
--------- --------
Net loss.......................................... $(114,385) $(76,825)
========= ========
Other comprehensive income (loss):
Foreign currency translation gains (losses)............... (318) 3,348
Unrealized holding gains on investments, net.............. 352 --
--------- --------
Comprehensive loss................................ $(114,351) $(73,477)
========= ========
Basic and diluted net loss per common share:
Loss before extraordinary item............................ $ (3.88) $ (3.23)
Extraordinary loss........................................ -- (0.20)
--------- --------
Net loss.......................................... $ (3.88) $ (3.43)
========= ========
Shares used in per share calculations:
Basic and diluted......................................... 29,462 22,397
========= ========
See accompanying notes to condensed consolidated financial statements.
4
5
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
-------- ---------
Operating activities:
Net cash used in operating activities..................... $(78,577) $ (10,529)
-------- ---------
Investing activities:
Purchase of property and equipment........................ (29,574) (9,656)
Investments in and loans to unconsolidated wireless
operating companies.................................... -- (9,900)
Acquisitions, net of cash acquired........................ (2,900) (1,327)
Purchase of wireless licenses............................. (4,761) (13,396)
Net proceeds from disposal of subsidiary.................. -- 4,311
Purchase of investments................................... (85,771) (579,994)
Sale and maturity of investments.......................... 71,492 --
Restricted cash equivalents and investments, net.......... (942) (88,371)
Sale of note receivable................................... 60,678 --
Other..................................................... (2,179) --
-------- ---------
Net cash provided by (used in) investing
activities...................................... 6,043 (698,333)
-------- ---------
Financing activities:
Proceeds from issuance of senior and senior discount
notes.................................................. -- 550,102
Proceeds from loans payable to banks and long-term debt... 20,940 45,324
Repayment of long-term debt............................... (451) (228,522)
Issuance of common stock.................................. 55,756 334,435
Payment of debt financing costs........................... -- (13,758)
-------- ---------
Net cash provided by financing activities......... 76,245 687,581
-------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- (592)
-------- ---------
Net increase (decrease) in cash and cash equivalents........ 3,711 (21,873)
Cash and cash equivalents at beginning of period............ 338,878 44,109
-------- ---------
Cash and cash equivalents at end of period.................. $342,589 $ 22,236
======== =========
See accompanying notes to condensed consolidated financial statements.
5
6
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND BASIS OF PRESENTATION
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"). The Company's Cricket service was
introduced in Chattanooga, Tennessee in March 1999. Leap has introduced Cricket
service in additional markets in the United States in 2000 and 2001 and plans to
introduce Cricket service in additional markets in the United States in the
remainder of 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 the date of sale on
June 2, 2000, the Company owned 100% of Smartcom, S.A. ("Smartcom"), a Chilean
corporation which operates a nationwide wireless network in Chile.
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.
INTERIM FINANCIAL STATEMENTS
The accompanying interim condensed consolidated financial statements have
been prepared by the Company without audit, in accordance with the instructions
to Form 10-Q and, therefore, do not include all information and footnotes
necessary for a fair presentation of its financial position, results of
operations, cash flows and stockholders' equity in accordance with generally
accepted accounting principles. In the opinion of management, the unaudited
financial information for the interim periods presented reflects all adjustments
(which include only normal, recurring adjustments) necessary for a fair
presentation. These condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 filed with the Securities and Exchange Commission
on March 2, 2001. Operating results for interim periods are not necessarily
indicative of operating results for an entire fiscal year. To accommodate the
different fiscal periods of the Company and its foreign operating companies, the
Company recognizes its share of net earnings or losses of such foreign companies
on a three-month lag.
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
6
7
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 limited
rights to return handsets and accessories based on time and/or usage. The
Company records an estimate for returns at the time of recognizing revenue.
Returns have historically been insignificant.
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 reflects 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.
The following shares were not included in the computation of diluted
earnings per share as their effect would be antidilutive (in thousands):
THREE MONTHS
ENDED MARCH 31,
----------------
2001 2000
------ ------
(UNAUDITED)
Employee stock options...................................... 7,646 5,337
Qualcomm Incorporated warrant............................... 3,375 4,500
Senior and senior discount unit warrants.................... 2,830 2,830
As a result of the exclusion of these shares, basic and diluted net loss
per common share are the same for the periods presented.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
RECENT 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 was adopted by the Company
for the quarter ended March 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.
As defined under SFAS No. 133, the Company's derivative instruments and
hedging activities are limited to hedging agreements which fix or limit the
interest cost to Cricket Communications and the Leap subsidiaries that guarantee
Cricket Communications' vendor loans (other than Cricket Communications
Holdings) 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. As of March 31, 2001, Cricket Communications had
purchased agreements totaling $0.1 million that limit Cricket Communications'
interest cost on $300.0 million of its outstanding vendor loan balances which
expire on various dates through May 2003. The adoption of SFAS No. 133, as
amended by SFAS No. 138, has not had a material impact on the Company's
consolidated financial position or results of operations.
7
8
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITIONS
From January 1, 2001 through May 14, 2001, the Company completed the
purchase of wireless licenses in various markets and certain wireless data
assets for an aggregate of $177.8 million in cash, the assumption of debt and
other liabilities totaling $92.2 million (including a secured promissory note in
the principal amount of $86.5 million with interest at the rate of 10% per
annum, with principal and interest payable in quarterly installments, with the
first installment of $48.0 million plus interest due July 6, 2001, and the final
of the three remaining quarterly installments due April 6, 2002), and the
issuance of 722,245 shares of the Company's common stock with a fair value at
the time of purchase of approximately $19.7 million. Approximately 75,000 shares
issued in connection with one of the acquisitions are being held in an escrow
account for satisfaction of indemnification obligations of the seller.
NOTE 3. 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.
Prior to the Company's acquisition of substantially all the assets of Chase
Telecommunications Holdings, Inc. ("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 during the three months ended March 31, 2000.
At March 31, 2001, the Company had 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 recorded equity losses from Pegaso of $26.2 million and $19.2 million,
during the three months ended March 31, 2001 and 2000, respectively.
Condensed combined financial information for the operating companies
accounted for under the equity method is summarized as follows (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Current assets...................................... $ 87,896 $ 106,751
Non-current assets.................................. 718,319 678,628
Current liabilities................................. (435,274) (300,424)
Non-current liabilities............................. (330,219) (312,489)
--------- ---------
Total stockholders' capital............... 40,722 172,466
Other stockholders' share of capital................ 32,531 137,775
--------- ---------
Investment in unconsolidated wireless operating
company........................................... $ 8,191 $ 34,691
========= =========
8
9
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
--------- --------
(UNAUDITED)
Operating revenues.................................... $ 38,295 $ 7,623
--------- --------
Operating expenses.................................... (138,955) (71,462)
Other expense, net.................................... (16,658) (13,677)
Foreign currency transaction losses, net.............. (12,844) (4,932)
--------- --------
Net loss.................................... (130,162) (82,448)
Other stockholders' share of net loss................. (103,980) (51,293)
--------- --------
Company's share of net loss........................... (26,182) (31,155)
Elimination of intercompany transactions.............. -- 1,572
--------- --------
Equity in net loss of investments in and
loan receivable from unconsolidated
wireless operating companies.............. $ (26,182) $(29,583)
========= ========
NOTE 4. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
12.5% senior notes, due 2010, effective interest
rate of 15.8%.................................... $ 164,608 $162,939
14.5% senior discount notes, face amount of $668.0
million, due 2010, effective interest rate of
16.3%............................................ 289,180 274,776
Vendor financing agreements, weighted average
interest rate of 9.6%............................ 466,511 378,668
U.S. government financing, weighted average
effective interest rate of 9.9%.................. 84,559 83,140
Qualcomm term loan, effective interest rate of
11.0%............................................ 127,338 --
---------- --------
1,132,196 899,523
Less current portion............................... (1,878) (1,645)
---------- --------
$1,130,318 $897,878
========== ========
QUALCOMM TERM LOAN
In January 2001, the Company entered into a secured loan agreement with
Qualcomm Incorporated ("Qualcomm") under which Qualcomm agreed to loan to the
Company approximately $125.3 million to finance its acquisition of wireless
licenses in the Federal Communication Commission's ("FCC") broadband PCS auction
completed in January 2001. In March 2001, Qualcomm funded borrowings of the full
amount available under the agreement by the transfer to the Company of an FCC
auction discount voucher, and the Company issued promissory notes in favor of
Qualcomm for an aggregate principal amount of $126.6 million, representing
$125.3 million for the value of the auction discount voucher and $1.3 million
for the commitment fee due to Qualcomm at the initial borrowing. Under the terms
of the agreement, the Company must repay the outstanding principal and accrued
interest to Qualcomm under these notes 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's
receiving net cash proceeds in excess of $400.0 million from issuances of debt
or equity securities by the Company or its subsidiaries (other than certain
excluded
9
10
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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%. Interest on the loan is payable semi-annually. However, the Company
may elect to defer interest payments through September 2002 and capitalize the
deferred interest under the promissory notes. The auction discount voucher loan
will begin to accrue interest from the date the FCC applies the auction discount
voucher against amounts the Company owes for licenses it acquires through the
January 2001 FCC auction. As of March 31, 2001, none of the licenses for which
the Company was the winning bidder in the January 2001 FCC auction had been
granted by the FCC, and the auction discount voucher had not yet been applied.
If the FCC does not issue the licenses on which the Company was the successful
high bidder, under certain circumstances the Company may be able to repay the
loan by returning the auction discount voucher. As security for the loan, the
Company has agreed to pledge in favor of Qualcomm the stock of subsidiaries
holding licenses that the Company acquires through 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.
NOTE 5. STOCKHOLDERS' EQUITY
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 up to a
maximum of $125.0 million of 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. In January 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.
NOTE 6. 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. As of March 31, 2001, the maximum amount of the loan
had been increased to approximately $300.0 million although the amount of the
Company's guarantee had not increased.
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
10
11
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 7. SUPPLEMENTARY CASH FLOW INFORMATION (IN THOUSANDS):
THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
-------- ---------
(UNAUDITED)
Supplementary disclosure of cash flow information:
Cash paid for interest.............................. $ 2,082 $ 14,653
Cash paid for income taxes.......................... $ 5,639 $ --
Supplementary disclosure of non-cash investing and
financing activities:
Long-term financing to purchase equipment........... $ 57,799 $ 39,545
Long-term financing to purchase wireless licenses... 1,418 9,601
Long-term financing for auction discount voucher.... 125,274 --
Facility fee due on long-term debt.................. 1,253 1,800
Long-term financing for loans to unconsolidated
wireless operating company....................... -- 10,338
Supplementary disclosure of cash used for
acquisitions:
Total purchase price................................ 3,560 152,946
Warrant issued for subsidiary company common
stock............................................ -- (15,353)
Liabilities assumed at present value................ (660) (131,293)
Cash acquired....................................... -- (4,973)
-------- ---------
Cash used for acquisitions.......................... $ 2,900 $ 1,327
======== =========
NOTE 8. 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 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
Company's June 2000 sale of Smartcom, segment data excludes Smartcom.
11
12
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summary information by segment is as follows (in thousands):
AS OF AND FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
---------- --------
(UNAUDITED)
UNITED STATES:
Revenues............................................. $ 36,753 $ 4,199
Operating loss....................................... (55,358) (14,506)
Depreciation and amortization........................ (14,341) (5,669)
Capital expenditures................................. (86,037) (35,886)
Purchase of wireless licenses........................ (6,714) (73,154)
Total assets......................................... 1,173,583 213,635
MEXICO:
Revenues............................................. 38,295 4,652
Operating loss....................................... (100,660) (53,509)
Depreciation and amortization........................ (12,789) (5,027)
Capital expenditures................................. (99,133) (66,067)
Total assets......................................... 806,215 597,566
A reconciliation of the Company's segment revenues, operating losses and
depreciation and amortization to the corresponding consolidated amounts is as
follows (in thousands):
THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
--------- --------
(UNAUDITED)
Segment revenues...................................... $ 75,048 $ 8,851
Revenues of unconsolidated wireless operating
companies........................................... (38,295) (7,623)
Smartcom.............................................. -- 8,763
--------- --------
Consolidated revenues............................... $ 36,753 $ 9,991
========= ========
Segment operating losses.............................. $(156,018) $(68,015)
Operating losses of unconsolidated wireless operating
companies........................................... 100,660 63,839
Smartcom.............................................. -- (23,176)
Corporate and eliminations............................ (7,541) (6,033)
--------- --------
Consolidated operating loss......................... $ (62,899) $(33,385)
========= ========
Segment depreciation and amortization................. $ (27,130) $(10,696)
Depreciation and amortization of unconsolidated
wireless operating companies........................ 12,789 10,482
Smartcom.............................................. -- (4,863)
Corporate and eliminations............................ (446) (165)
--------- --------
Consolidated depreciation and amortization.......... $ (14,787) $ (5,242)
========= ========
12
13
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenues and long-lived assets related to operations in the United States
and other countries are as follows (in thousands):
THREE MONTHS
ENDED MARCH 31,
-------------------------
2001 2000
--------- ------------
(UNAUDITED)
REVENUES:
United States........................................ $ 36,753 $ 1,228
Other countries...................................... -- 8,763
-------- --------
Total consolidated revenues................ $ 36,753 $ 9,991
======== ========
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
LONG-LIVED ASSETS:
United States........................................ $828,967 $734,782
Other countries...................................... 8,191 34,691
-------- --------
Total consolidated long-lived assets....... $837,158 $769,473
======== ========
NOTE 9. SUBSEQUENT EVENTS
STOCKHOLDER RIGHTS PLAN
In April 2001, the Company's Board of Directors authorized and approved an
increase in the number of shares designated as Series A Junior Participating
Preferred Stock from 75,000 to 300,000 shares.
2001 NON-QUALIFIED STOCK OPTION PLAN
In April 2001, the Company's Board of Directors adopted the 2001
Non-Qualified Stock Option Plan (the "2001 Non-Qualified Plan") that allows the
Board of Directors to grant options to employees, directors and consultants to
purchase shares of the Company's common stock. A total of 2,500,000 shares of
common stock were reserved for issuance under the 2001 Non-Qualified Plan. Terms
of the 2001 Non-Qualified Plan are comparable to the Company's 1998 Stock Option
Plan and 2000 Stock Option Plan, except that only non-qualified stock options
may be granted and the number of options that may be granted to officers and
directors is limited under the 2001 Non-Qualified Plan.
EMPLOYEE STOCK PURCHASE PLAN
In April 2001, the Company's stockholders approved an amendment to the
Company'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.
2001 EXECUTIVE OFFICER DEFERRED BONUS STOCK PLAN
In April 2001, the Company's stockholders approved the adoption of the
Company's 2001 Executive Officer Deferred Bonus Stock Plan, under which 275,000
shares of common stock were reserved for issuance. Terms of the plan are
comparable to the Company's Executive Officer Deferred Stock Plan.
EQUITY OFFERING
In May 2001, the Company completed an underwritten public offering of
3,000,000 shares of its common stock at a price of $33.50 per share. The Company
received proceeds of approximately $97.9 million, net of underwriting discounts
and commissions and other offering expenses, from the offering.
13
14
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. 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 March 31, 2001 and December 31, 2000 and for the
three months ended March 31, 2001 and 2000 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.
BALANCE SHEET INFORMATION AS OF MARCH 31, 2001 (UNAUDITED, IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents..................... $ 266,300 $ -- $ 76,289 $ -- $ 342,589
Restricted cash equivalents................... 13,678 -- -- -- 13,678
Short-term investments........................ 5,309 -- 210,764 -- 216,073
Inventories................................... -- -- 12,574 -- 12,574
Notes receivable, net......................... -- -- 79,276 -- 79,276
Other current assets.......................... 726 -- 7,340 -- 8,066
---------- --------- ---------- ----------- ----------
Total current assets.................. 286,013 -- 386,243 -- 672,256
Property and equipment, net................... 6,653 -- 501,338 -- 507,991
Investment in subsidiaries and unconsolidated
wireless operating company.................. 512,858 297,670 8,191 (810,528) 8,191
Wireless licenses, net........................ 23,751 -- 249,685 -- 273,436
Goodwill and other intangible assets, net..... 5,363 -- 63,277 (35,269) 33,371
Restricted investments........................ 52,735 -- -- -- 52,735
Deposits for wireless licenses................ 91,867 -- -- -- 91,867
Other assets.................................. 148,837 -- 8,261 -- 157,098
---------- --------- ---------- ----------- ----------
Total assets.......................... $1,128,077 $ 297,670 $1,216,995 $ (845,797) $1,796,945
========== ========= ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities...... $ 4,644 $ -- $ 49,579 $ (13,892) $ 40,331
Other current liabilities..................... 14,237 -- 45,786 -- 60,023
---------- --------- ---------- ----------- ----------
Total current liabilities............. 18,881 -- 95,365 (13,892) 100,354
Long-term debt................................ 581,540 -- 548,778 -- 1,130,318
Other long-term liabilities................... 1,397 -- 38,617 -- 40,014
---------- --------- ---------- ----------- ----------
Total liabilities..................... 601,818 -- 682,760 (13,892) 1,270,686
---------- --------- ---------- ----------- ----------
Stockholders' Equity:
Common stock................................ 3 -- 7 (7) 3
Additional paid-in capital.................. 948,990 563,543 828,055 (1,391,598) 948,990
Unearned stock-based compensation........... (8,256) -- (8,256) 8,256 (8,256)
Accumulated deficit......................... (417,283) (265,873) (288,285) 554,158 (417,283)
Accumulated other comprehensive income...... 2,805 -- 2,714 (2,714) 2,805
---------- --------- ---------- ----------- ----------
Total stockholders' equity............ 526,259 297,670 534,235 (831,905) 526,259
---------- --------- ---------- ----------- ----------
Total liabilities and stockholders'
equity.............................. $1,128,077 $ 297,670 $1,216,995 $ (845,797) $1,796,945
========== ========= ========== =========== ==========
14
15
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED 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................ 705,455 338,418 34,691 (1,043,873) 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 for wireless licenses................ 91,772 -- -- -- 91,772
Other assets.................................. 22,268 -- 8,411 -- 30,679
---------- --------- ---------- ----------- ----------
Total assets.......................... $1,044,008 $ 338,418 $1,343,519 $(1,078,538) $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.................. 893,401 539,578 812,863 (1,352,441) 893,401
Unearned stock-based compensation........... (10,019) -- (10,019) 10,019 (10,019)
Accumulated deficit......................... (302,898) (201,160) (72,470) 273,630 (302,898)
Accumulated other comprehensive income...... 2,771 -- 2,713 (2,713) 2,771
---------- --------- ---------- ----------- ----------
Total stockholders' equity............ 583,258 338,418 733,087 (1,071,505) 583,258
---------- --------- ---------- ----------- ----------
Total liabilities and stockholders'
equity.............................. $1,044,008 $ 338,418 $1,343,519 $(1,078,538) $1,647,407
========== ========= ========== =========== ==========
15
16
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED MARCH 31,
2001 (UNAUDITED, IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Revenues:
Service revenues............................ $ -- $ -- $ 25,655 $ -- $ 25,655
Equipment revenues.......................... -- -- 11,098 -- 11,098
--------- -------- -------- -------- ---------
Total revenues........................ -- -- 36,753 -- 36,753
--------- -------- -------- -------- ---------
Operating expenses:
Cost of service............................. -- -- (13,380) 1,154 (12,226)
Cost of equipment........................... -- -- (30,938) -- (30,938)
Selling, general and administrative......... (5,427) -- (36,274) -- (41,701)
Depreciation and amortization............... (446) -- (14,341) -- (14,787)
--------- -------- -------- -------- ---------
Total operating expenses.............. (5,873) -- (94,933) 1,154 (99,652)
--------- -------- -------- -------- ---------
Operating loss.............................. (5,873) -- (58,180) 1,154 (62,899)
Equity in net loss of subsidiaries and
unconsolidated wireless operating company... (91,516) (64,713) (26,182) 156,229 (26,182)
Interest income............................... 4,172 -- 6,727 -- 10,899
Interest expense.............................. (24,241) -- (13,370) -- (37,611)
Foreign currency transaction losses, net...... -- -- (1,235) -- (1,235)
Other income (expense), net................... 3,582 -- (6) -- 3,576
--------- -------- -------- -------- ---------
Loss before income taxes...................... (113,876) (64,713) (92,246) 157,383 (113,452)
Income taxes.................................. (509) -- (424) -- (933)
--------- -------- -------- -------- ---------
Net loss.............................. $(114,385) $(64,713) $(92,670) $157,383 $(114,385)
========= ======== ======== ======== =========
STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED MARCH 31,
2000 (UNAUDITED, IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Revenues:
Service revenues............................. $ -- $ -- $ 9,418 $ -- $ 9,418
Equipment revenues........................... -- -- 573 -- 573
-------- -------- -------- ------- --------
Total revenues......................... -- -- 9,991 -- 9,991
-------- -------- -------- ------- --------
Operating expenses:
Cost of service.............................. -- -- (2,783) -- (2,783)
Cost of equipment............................ -- -- (13,248) -- (13,248)
Selling, general and administrative.......... (3,486) -- (18,617) -- (22,103)
Depreciation and amortization................ (165) -- (5,077) -- (5,242)
-------- -------- -------- ------- --------
Total operating expenses............... (3,651) -- (39,725) -- (43,376)
-------- -------- -------- ------- --------
Operating loss............................... (3,651) -- (29,734) -- (33,385)
Equity in net loss of subsidiaries and
unconsolidated wireless operating
companies.................................... (59,910) (15,510) (29,583) 75,420 (29,583)
Interest income................................ 4,277 -- 414 -- 4,691
Interest expense............................... (13,778) -- (2,382) -- (16,160)
Foreign currency transaction gains, net........ -- -- 1,399 -- 1,399
Other income (expense), net.................... 660 -- (25) -- 635
-------- -------- -------- ------- --------
Loss before extraordinary item................. (72,402) (15,510) (59,911) 75,420 (72,403)
Extraordinary loss on early extinguishment of
debt......................................... (4,422) -- -- -- (4,422)
-------- -------- -------- ------- --------
Net loss............................... $(76,824) $(15,510) $(59,911) $75,420 $(76,825)
======== ======== ======== ======= ========
16
17
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED,
IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Operating activities:
Net cash provided by (used in)
operating activities................. $104,555 $ -- $(183,132) $ -- $(78,577)
-------- ---- --------- ---- --------
Investing activities:
Purchase of property and equipment........... (1,336) -- (28,238) -- (29,574)
Acquisitions, net of cash acquired........... (2,900) -- -- -- (2,900)
Purchase of wireless licenses................ (4,761) -- -- -- (4,761)
Purchase of investments...................... -- -- (85,771) -- (85,771)
Sale and maturity of investments............. 11,000 -- 60,492 -- 71,492
Restricted cash equivalents and investments,
net........................................ (942) -- -- -- (942)
Sale of note receivable...................... -- -- 60,678 -- 60,678
Other........................................ (1,125) -- (1,054) -- (2,179)
-------- ---- --------- ---- --------
Net cash provided by (used in)
investing activities................. (64) -- 6,107 -- 6,043
-------- ---- --------- ---- --------
Financing activities:
Proceeds from long-term debt................. -- -- 20,940 -- 20,940
Repayment of long-term debt.................. (451) -- -- -- (451)
Issuance of common stock..................... 55,756 -- -- -- 55,756
-------- ---- --------- ---- --------
Net cash provided by financing
activities........................... 55,305 -- 20,940 -- 76,245
-------- ---- --------- ---- --------
Net increase (decrease) in cash and cash
equivalents.................................. 159,796 -- (156,085) -- 3,711
Cash and cash equivalents at beginning of
period....................................... 106,504 -- 232,374 -- 338,878
-------- ---- --------- ---- --------
Cash and cash equivalents at end of period..... $266,300 $ -- $ 76,289 $ -- $342,589
======== ==== ========= ==== ========
17
18
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED,
IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating activities:
Net cash used in operating
activities.......................... $ (9,941) $ -- $ (588) $ -- $ (10,529)
--------- ---- -------- ---- ---------
Investing activities:
Purchase of property and equipment.......... (319) -- (9,337) -- (9,656)
Loans to unconsolidated wireless operating
company................................... (9,900) -- -- -- (9,900)
Acquisitions, net of cash acquired.......... -- -- (1,327) -- (1,327)
Purchase of wireless licenses............... (13,396) -- -- -- (13,396)
Net proceeds from disposal of subsidiary.... 4,311 -- -- -- 4,311
Purchase of investments..................... (579,994) -- -- -- (579,994)
Restricted cash equivalents and investments,
net....................................... (88,371) -- -- -- (88,371)
--------- ---- -------- ---- ---------
Net cash used in investing
activities.......................... (687,669) -- (10,664) -- (698,333)
--------- ---- -------- ---- ---------
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 -- 14,302 -- 45,324
Repayment of long-term debt................. (228,522) -- -- -- (228,522)
Issuance of common stock.................... 334,435 -- -- -- 334,435
Payment of debt financing costs............. (13,758) -- -- -- (13,758)
--------- ---- -------- ---- ---------
Net cash provided by financing
activities.......................... 673,279 -- 14,302 -- 687,581
--------- ---- -------- ---- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ -- -- (592) -- (592)
--------- ---- -------- ---- ---------
Net increase (decrease) in cash and cash
equivalents................................. (24,331) -- 2,458 -- (21,873)
Cash and cash equivalents at beginning of
period...................................... 35,713 -- 8,396 -- 44,109
--------- ---- -------- ---- ---------
Cash and cash equivalents at end of period.... $ 11,382 $ -- $ 10,854 $ -- $ 22,236
========= ==== ======== ==== =========
18
19
ITEM 2. 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 information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, filed with the Securities and Exchange
Commission on March 2, 2001.
Except for the historical information contained herein, this report,
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 report. It is based on current information, which we have assessed but
which by its nature is dynamic and subject to rapid and even abrupt changes. Our
actual results could differ materially from those stated or implied by such
forward-looking statements due to risks and uncertainties associated with our
business. Factors that could cause actual results to differ include, but are not
limited to: changes in the economic conditions of the various markets 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 contained in 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 report;
technological challenges in developing wireless data services and customer
acceptance of such services if developed; our ability to integrate the
businesses and technologies we acquire; 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 report 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
term contract, and because service is paid in advance, we currently require no
credit check. The simplicity of the Cricket service
19
20
allows us to sustain lower operating costs per customer compared to traditional
wireless providers. Our networks are 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.
As of March 31, 2001, we had launched Cricket service in markets covering a
total population of approximately 9.2 million and had approximately 339,000
Cricket customers across the U.S. To date we have acquired or have rights to
acquire wireless licenses covering approximately 72.6 million potential
customers in 36 states, and we plan to continue launching new Cricket markets
throughout 2001 and beyond.
We 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 a
proprietary, personalized, location-based technology, and in March and April
2001 we completed two additional acquisitions to support our future offering of
wireless data services. We have several new services in development including a
data service designed to provide wireless information to customers' mobile
phones. We recently announced the first of these services which is expected to
be launched prior to June 30, 2001, in Chattanooga. The service will be marketed
under the brand name "Slice(TM)."
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 in approach than our Cricket service.
Pegaso holds wireless licenses covering all of Mexico, representing
approximately 99 million potential customers. At the end of March 2001, Pegaso
had approximately 624,000 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
In April and May 2001, we acquired wireless licenses in various markets
from CenturyTel, Inc. for an aggregate of $118.7 million in cash and an $86.5
million secured promissory note with interest at the rate of 10% per annum.
Principal and accrued interest under this note are payable in quarterly
installments, with the first installment of $48.0 million plus interest due July
6, 2001, and the final of the three remaining quarterly installments due April
6, 2002. In addition, from January 1, 2001 through May 14, 2001, we completed
the purchase of wireless licenses in various other markets and certain wireless
data assets for an aggregate of $59.1 million in cash, the assumption of debt
and other liabilities totaling $5.7 million, and the issuance of 722,245 shares
of our common stock with a fair value at the time of purchase of approximately
$19.7 million. Approximately 75,000 shares issued in connection with one of the
acquisitions are being held in an escrow account for satisfaction of
indemnification obligations of the seller. In addition, as of May 14, 2001, we
had entered into various agreements with third parties pursuant to which we
expect 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 $139.9 million, 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
20
21
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
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. In February 2001, we sold one of the
promissory notes, which had an original principal amount of $58.2 million, to a
third party for $60.7 million including accrued interest. One of the remaining
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. The final remaining promissory note was subject
to adjustment based upon an audit of the closing balance sheet of Smartcom
completed following the closing of the agreement. In March 2001, we agreed to
settle all items in dispute related to the audit of the closing balance sheet of
Smartcom for a closing adjustment of $6.0 million. 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. We recognized a gain on sale of
Smartcom of $313.4 million before related income tax expense of $34.5 million.
PRESENTATION
FOREIGN SUBSIDIARIES
To accommodate the different fiscal periods of Leap and its foreign
subsidiaries, we have recognized our share of net earnings or losses of such
foreign companies on a three-month lag.
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.
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 limited rights to
return handsets and accessories based on time and/or usage. Returns have
historically been insignificant.
21
22
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.
22
23
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
DOMESTIC BUSINESS
At March 31, 2001, customers of our Cricket service rose to approximately
339,000, compared to approximately 43,000 at March 31, 2000. We added
approximately 149,000 customers in the first quarter of 2001, due to increased
penetration in existing markets and the launch of four new markets, bringing the
total potential customer base covered by our networks in markets across the U.S.
to approximately 9.2 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. During the three months
ended March 31, 2001, our CPGA was approximately $230, including all pre-launch
marketing expenses associated with the launch of our new markets as well as
promotional activities.
During the three months ended March 31, 2001, we generated $25.7 million
and $11.1 million in service and equipment revenues, respectively, and incurred
$12.2 million and $30.9 million in cost of service and cost of equipment,
respectively. 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 $1.2 million
in revenues and incurred $1.0 million of cost of revenues from our Cricket
operations for the period from March 17, 2000 to March 31, 2000.
Selling and marketing expenses were $17.0 million for the three months
ended March 31, 2001, compared to $0.2 million, excluding Smartcom, in the
corresponding period of the prior year. General and administrative expenses were
$24.7 million for the three months ended March 31, 2001, compared to $9.9
million, excluding Smartcom, in the corresponding period of the prior year. The
increase in selling and marketing and 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. Selling and
marketing expenses for the three months ended March 31, 2001 consisted primarily
of advertising and public relations and related payroll expenses. General and
administrative expenses for the three months ended March 31, 2001 included costs
for business development associated with negotiations for and acquisitions of
wireless licenses, government relations, public reporting and investor
relations, legal expenses and development of our wireless data services
businesses. In addition, we incurred stock-based compensation expense of $1.6
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 and marketing and 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.
Depreciation and amortization was $14.8 million for the three months ended
March 31, 2001, compared to $0.4 million, excluding Smartcom, in the
corresponding period of the prior year. The increase in depreciation and
amortization resulted primarily from a larger base of equipment and wireless
licenses in service compared to the prior year.
Our operating loss was $62.9 million for the three months ended March 31,
2001, compared to $10.2 million, excluding Smartcom, in the corresponding period
of the prior year. The increase in operating loss primarily reflected 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 three month period ended March 31, 2001, our equity share in the
net loss of unconsolidated wireless operating company related only to Pegaso.
Our equity share of future net losses of Pegaso will be limited to the extent of
our investment. At March 31, 2001, our remaining investment in Pegaso was $8.2
million. During the corresponding period of the prior year, our equity share in
the net loss of our
23
24
unconsolidated wireless operating companies related to Pegaso and to Chase
Telecommunications Holdings prior to March 2000.
Interest income was $10.9 million for the three months ended March 31,
2001, compared to $4.7 million, excluding Smartcom, in the corresponding period
of the prior year. The increase in interest income related to increased average
cash and cash equivalents and investment balances resulting from our equity
offering and units offering in February 2000, cash and notes receivable related
to the sale of Smartcom in June 2000 and proceeds from the sale of stock under
our purchase agreement with Acqua Wellington.
Interest expense was $37.6 million for the three months ended March 31,
2001, compared to $12.7 million, excluding Smartcom, in the corresponding period
of the prior year. 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 purchase of wireless licenses and
construction of wireless networks in various markets across the U.S.
Foreign currency transaction gains (losses) primarily reflected unrealized
exchange gains (losses) recognized by Leap and Smartcom on cash balances,
payables and loans as a result of changes in the exchange rate between the U.S.
dollar and the Chilean peso.
Included in the three month period ended March 31, 2000, we wrote-off and
reported as an extraordinary loss $4.4 million in unamortized debt issuance
costs in connection with the repayment of our credit agreement with Qualcomm in
February 2000.
CONSOLIDATION OF SMARTCOM
As a direct result of the consolidation of Smartcom, for the three months
ended March 31, 2000 we recorded $8.7 million of additional service revenues,
$2.7 million and $12.4 million of additional cost of service and cost of
equipment, respectively, $6.5 million and $5.5 million of additional selling and
marketing and general and administrative expenses, respectively, $4.9 million of
additional depreciation and amortization, $3.4 million of additional net
interest expense and $1.4 million of additional foreign currency transaction
gains.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
For the twelve months beginning April 1, 2001, we expect to spend a total
of approximately $1,742 million for the following requirements:
- approximately $794 million for capital expenditures for the buildout of
our networks and approximately $233 million to fund operating losses for
our voice and initial wireless data service offerings;
- approximately $658 million in connection with our pending acquisitions
of wireless licenses;
- approximately $24 million for general corporate overhead and other
expenses; and
- approximately $33 million for taxes payable related to the sale of
Smartcom.
Over the next twelve months, interest under our senior notes, senior
discount notes, vendor facilities and the Qualcomm Term Loan is either deferred
and added to principal or otherwise paid from our restricted cash and restricted
investment accounts and is therefore not included in the numbers above. 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 March 31, 2001, we had a total of approximately $2,127 million in
unused capital resources for our future cash needs as follows:
- approximately $655 million in consolidated unrestricted cash, cash
equivalents, investments and deposits on hand;
24
25
- approximately $80 million of proceeds (net of taxes and reserves) we
expect to receive from the notes received from the sale of Smartcom;
- approximately $125 million in an auction discount voucher we received
from Qualcomm Incorporated in March 2001 to pay for wireless licenses
for which we were the high bidder in the federal government's auction
completed in January 2001; and
- approximately $1,267 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 May 2001 we received approximately $97.9 million in
proceeds from the sale of common stock pursuant to an underwritten public
offering, net of underwriting discounts and commissions and other offering
expenses.
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 engage in significant activities in addition to those described above,
including launching additional markets, investing in new voice or data services
or ventures, or completing 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 additional planned
wireless networks in the U.S., the planned acquisition of additional licenses,
the buildout of markets related to those additional licenses and the development
and launch of additional wireless data services. 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.
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
25
26
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.
Common Stock Purchase Agreement. 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 up to a maximum of $125.0
million of 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. In January 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.
Equity Offering. In May 2001, we completed an underwritten public offering
of 3,000,000 shares of our common stock at a price of $33.50 per share. We
received proceeds of approximately $97.9 million, net of underwriting discounts
and commissions and other offering expenses, from the offering.
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
26
27
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. Based on the covenants in these credit agreements and our expectations
with respect to product and service purchases from the vendors, we will not be
able to draw all of the availability under the vendor credit facilities during
the next twelve months. 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. 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 March 31, 2001, Cricket Communications had $466.5 million
outstanding under the vendor credit agreements, at a weighted-average interest
rate of 9.6%. In addition, at March 31, 2001, we had amounts payable to the
vendors that will be financed under the vendor credit agreements of $32.4
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 for the quarter ended
December 31, 2000 was below the minimum required level contained in the
financial covenants in the vendor loan facilities. Leap received waivers of its
failure to meet this revenue target from all of the required lenders. We have
made up this revenue shortfall and are in compliance with the revenue covenant
for the quarter ended March 31, 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 agreed to loan to us approximately
$125.3 million to finance our acquisition of wireless licenses in the FCC's
broadband PCS auction completed in January 2001. In March 2001, Qualcomm funded
our borrowings of the full amount available under the agreement by the transfer
to us of an FCC auction discount voucher, and we issued promissory notes in
favor of Qualcomm for an aggregate principal amount of $126.6 million,
representing $125.3 million for the value of the auction discount voucher and
$1.3 million for the commitment fee due to Qualcomm at the initial borrowing.
Under the terms of the agreement, we must repay the outstanding principal and
accrued interest to Qualcomm under these notes 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%. Interest on
the loan is payable semi-annually. However, we may elect to defer interest
payments through September 2002 and capitalize the deferred interest under the
promissory notes. The auction discount voucher loan will begin to accrue
interest from the date the FCC applies the auction discount voucher against
amounts we owe for licenses we acquire through the January 2001 FCC auction. As
of March 31, 2001, none of the licenses for which we were the winning bidder in
the January 2001 FCC auction had been granted by the FCC, and the auction
discount voucher had not yet been applied. As security for the loan, we have
agreed to pledge in favor of Qualcomm the stock of subsidiaries holding licenses
that we acquire through 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 $94.8 million ($85.9 million,
net of discount) in debt obligations to the FCC as part of the purchase price
for wireless licenses through March 2001. The terms of
27
28
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.
CenturyTel Note. In April and May 2001, we acquired wireless licenses in
various markets from CenturyTel, Inc. for an aggregate of $118.7 million in cash
and an $86.5 million secured promissory note with interest at the rate of 10%
per annum. Principal and accrued interest under this note are payable in
quarterly installments, with the first installment of $48.0 million plus
interest due July 6, 2001 and the final of the three remaining quarterly
installments due April 6, 2002. The note is secured by a pledge of the
outstanding stock of two wholly-owned subsidiaries of Leap which together own 10
wireless licenses.
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. As of March 31, 2001, the maximum amount of the loan
had been increased to approximately $300.0 million although the amount of our
guarantee had not increased.
OPERATING ACTIVITIES
We used $78.6 million in cash for operating activities during the three
month period ended March 31, 2001 compared to $10.5 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 and the development and
launch of our wireless data services.
INVESTING ACTIVITIES
Cash provided by investing activities was $6.0 million during the three
month period ended March 31, 2001 compared to cash used in investing activities
of $698.3 million in the corresponding period of the prior year. Investments
during the three month period ended March 31, 2001 consisted primarily of $60.7
million in proceeds from the sale of a note receivable due from Smartcom,
partially offset by equipment purchases of $29.6 million for the continued
buildout of planned networks, in addition to net purchases of short-term
investments of $14.3 million. Investments in the corresponding period of the
prior year consisted primarily of $668.4 million in purchases of short-term
investments and restricted cash equivalents and investments with proceeds from
our equity and units offerings, in addition to expenditures of $13.4 million for
the purchase of wireless licenses and $9.7 million for the purchase of fixed
assets, primarily related to our Smartcom operations.
FINANCING ACTIVITIES
Cash provided by financing activities during the three month period ended
March 31, 2001 was $76.2 million and consisted of $55.8 million in proceeds from
the sale of common stock, primarily under our stock purchase agreement with
Acqua Wellington, in addition to cash proceeds from loans under our vendor loan
facilities for the purchase of property and equipment of $20.9 million. Cash
provided by financing activities in the corresponding period of the prior year
was $687.6 million, and consisted primarily of proceeds from our public equity
offering and units offering and loans from equipment vendors and banks totaling
28
29
$926.0 million, partially offset by the repayment of our credit agreements with
Qualcomm and other debt totaling $228.5 million.
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.
RECENT 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 was adopted by the Company
for the quarter ended March 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.
As defined under SFAS No. 133, our derivative instruments and hedging
activities are limited to hedging agreements which fix or limit the interest
cost to Cricket Communications and the Leap subsidiaries that guarantee Cricket
Communications' vendor loans (other than Cricket Communications Holdings) 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. As of March 31, 2001, Cricket Communications had
purchased agreements totaling $0.1 million that limit Cricket Communications'
interest cost on $300.0 million of its outstanding vendor loan balances which
expire on various dates through May 2003. The adoption of SFAS No. 133, as
amended by SFAS No. 138, has not had a material impact on our consolidated
financial position or results of operations.
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.
OUR 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
29
30
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.
Similarly, we currently have several new services in development, including a
data service designed to provide wireless information to consumers' mobile
phones. These planned services are innovative and unproven. They may not attract
or retain customers at a rate necessary to make them profitable and otherwise
may not prove to be successful.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
Leap experienced net losses of approximately $114.4 million in the three
month period ended March 31, 2001, $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 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
30
31
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.
YOUR OWNERSHIP INTEREST IN LEAP WILL BE DILUTED UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE
On May 9, 2001, 33,862,435 shares of our common stock were outstanding, and
22,804,362 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 May 9, 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;
- 10,500,869 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;
- 2,906,784 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
31
32
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.
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 the pending acquisition of
wireless licenses in Buffalo and Syracuse, New York that we refer to above, the
seller has asserted that based on the results of the recent FCC auction of
wireless licenses, it is entitled to a purchase price adjustment that would
result in the purchase price being effectively doubled. Under the terms of the
agreement, if we are obligated to pay a purchase price adjustment, we are
entitled to pay such additional amounts in cash or Leap common stock, at our
discretion. We believe the seller's position is without merit, and we will
vigorously defend against any claim that the seller may make in the future.
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 up to a maximum of $125 million of 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 and restated) 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.
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. 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.
32
33
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
- 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 made up this revenue shortfall and were 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.
33
34
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.
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 1,100 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.
34
35
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 opposed 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. In November 2000, the wireless operating
company and Leap executed a settlement agreement that resolves all pending
agency or court proceedings brought by the wireless operating company against
Leap applications. This agreement was approved by the FCC on March 1, 2001. The
wireless operating company has withdrawn all pending agency and judicial
challenges to Leap's applications. On March 15, 2001, the United States Court of
Appeals for the D.C. Circuit issued an order dismissing the wireless operating
company's appeal. On April 13, 2001, the FCC issued a public notice officially
approving the withdrawal of the wireless operating company's pending petitions
to deny and applications for review of our applications. While we believe
further review is unlikely, this action may still be subject to additional
judicial or administrative review.
Further judicial review of the FCC's orders granting us licenses is
possible. In addition, licenses awarded to us at auction may be subject to the
outcome of pending judicial proceedings by parties challenging the auction
process or the FCC's decision or authority to auction or reauction certain
C-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 reauction of C-Block and F-Block PCS spectrum that closed in January
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.
35
36
IT MAY BE MORE DIFFICULT FOR US TO ACQUIRE C-BLOCK AND F-BLOCK LICENSES IN THE
FUTURE
Regulatory changes or requirements, or market circumstances, could make it
more difficult to acquire C- or F-Block PCS licenses, either at auction or in
the aftermarket.
The FCC 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 basic trading area, or BTA, service areas to which C-Block and
F-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 BTAs, one 10 MHz C-Block license remained subject to a
closed bidding process, such that only entities meeting C-Block and F-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 reauction that closed in January 2001 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.
While we are in compliance with the terms of our C- and F-Block licenses,
as a result of the expansion of our business, we have now grown beyond certain
designated entity size thresholds specified in FCC rules. This growth will
likely preclude our ability to obtain additional C- or F-Block licenses that may
be auctioned by the FCC in the future. This growth does not preclude us from
continuing to acquire C- and F-Block licenses in the aftermarket, but we may be
subject to unjust enrichment penalties if we seek to acquire C- or F-Block
licenses from entities that qualify as "very small businesses" under FCC rules.
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
36
37
achieved and we have applied to the FCC for a limited waiver of its construction
requirements for a number of licenses. We cannot predict whether or the extent
to which our request will be granted. Failure to comply with FCC 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.
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.
37
38
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.
38
39
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 May 11, 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
investment
39
40
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.
ITEM 3. 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.
As of March 31, 2001, Leap had accrued for taxes payable to the Chilean
government denominated in Chilean pesos related to its June 2000 sale of
Smartcom. These taxes were paid in 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 interest expense
that we recognize on our variable rate long-term debt obligations. As of March
31, 2001, the principal amounts of our variable rate long-term debt obligations
amounted to approximately $593.8 million. An increase of 10% in interest rates
would increase our interest expense for the next twelve months by approximately
$5.9 million. This hypothetical amount is only suggestive of the effect of
changes in interest rates on our results of operations for the next twelve
months.
40
41
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.
41
42
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July 1999, the FCC issued an opinion and order that found that Leap was
qualified to acquire C-Block and F-Block licenses. The order also approved
Leap's acquisition of the 36 C-Block licenses for which Leap was the high bidder
in the FCC's 1999 spectrum reauction, and approved the transfer to Leap of three
F-Block licenses covering portions of North Carolina, in each case subject to
the fulfillment of some conditions. Various parties previously challenged Leap's
qualification to hold C-Block and F-Block licenses, which challenges were
rejected in the FCC's July 1999 order. One of these parties, Carolina PCS
Limited Partnership I, L.P., a wireless operating company, requested that the
FCC review its order, as well as the order consenting to the transfer of
licenses to Leap from Chase Telecommunications and PCS Devco. In July 2000, the
FCC affirmed its July 1999 order, as well as the order consenting to the
transfer of licenses to Leap from Chase Telecommunications and PCS Devco, and
Carolina PCS subsequently appealed the FCC's decision to the U.S. Court of
Appeal for the D.C. Circuit. In November 2000, Carolina PCS and Leap executed a
settlement agreement that resolves all pending agency or court proceedings
brought by Carolina PCS against Leap applications. This agreement was approved
by the FCC on March 1, 2001. Carolina PCS has withdrawn all pending agency and
judicial challenges to Leap's applications. On March 15, 2001, the United States
Court of Appeals for the D.C. Circuit issued an order dismissing Carolina PCS's
appeal. On April 13, 2001, the FCC issued a public notice officially approving
the withdrawal of the wireless operating company's pending petitions to deny and
applications for review of Leap's applications. While Leap believes further
review is unlikely, this action may still be subject to additional judicial or
administrative review.
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 Leap's
management, the ultimate liability for such claims will not have a material
adverse effect on Leap's consolidated financial position, results of operations
or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits:
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.3.1* Certificate of Amendment to Certificate of Designation of
Series A Junior Participating Preferred Stock of Registrant.
10.11(1) Leap Wireless International, Inc. 1998 Employee Stock
Purchase Plan, as amended.
10.19.3* Schedule to form of Amendment # to System Equipment
Purchase Agreement.
42
43
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.19.4*+ Amendment #6 to System Equipment Purchase Agreement,
effective as of February 5, 2001, by and between Cricket
Communications, Inc. and Ericsson Wireless Communications
Inc. Portions of this exhibit (indicated by asterisks) have
been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
10.27.1*+ Amendment No. 1 to Credit Agreement, dated as of February 5,
2001, among Cricket Communications Holdings, Inc., Cricket
Communications, Inc. and Ericsson Credit AB, as
Administrative Agent and Lender. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.
10.27.2* Amendment No. 2 to Credit Agreement, dated as of February
28, 2001, among Cricket Communications Holdings, Inc.,
Cricket Communications, Inc., the lenders party thereto and
Ericsson Credit AB, individually and as Administrative
Agent.
10.28* Amended and Restated Agreement for Purchase and Sale of
Licenses, effective as of November 3, 2000, by and among the
Registrant, MVI Corp., Century Personal Access Network,
Inc., Wisconsin RSA #7, Limited Partnership and CenturyTel,
Inc.
10.28.1* Promissory Note, dated April 6, 2001, by the Registrant in
favor of Century Personal Access Network, Inc.
10.28.2* Share Pledge Agreement, dated as of April 6, 2001, by and
between the Registrant and Century Personal Access Network,
Inc.
10.29(2) Amended and Restated Common Stock Purchase Agreement,
effective as of December 20, 2000, by and between the
Registrant and Acqua Wellington North American Equities
Fund, Ltd.
10.30(3) Loan Agreement, dated as of January 22, 2001, by and among
the Registrant, Qualcomm Incorporated, the other lenders
from time to time party thereto, Citibank, N.A., as
Administrative Agent, and Citibank, N.A., as Collateral
Agent.
10.31(3) Pledge Agreement, dated as of January 22, 2001, between the
Registrant and Citibank, N.A. as the Collateral Agent.
10.32(1) Leap Wireless International, Inc. 2001 Executive Officer
Deferred Bonus Stock Plan.
10.33* Leap Wireless International, Inc. 2001 Non-Qualified Stock
Option Plan.
10.34* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Harvey P. White.
10.35* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Susan G. Swenson.
10.36* Change in Control Agreement dated as of March 7, 2001
between the Registrant and James E. Hoffmann.
10.37* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Stewart D. Hutcheson.
10.38* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Daniel O. Pegg.
10.39* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Leonard C. Stephens.
10.40* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Thomas D. Willardson.
43
44
- ---------------
* Filed herewith.
+ A request for confidential treatment with respect to portions of this
exhibit which have been omitted (indicated by asterisks) pursuant to Rule
24b-2 under the Securities Exchange Act of 1934 is currently pending.
(1) Filed as an exhibit to Leap's Registration Statement on Form S-8 (File No.
333-59460), and incorporated herein by reference.
(2) Filed as an exhibit to Leap's Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (File No. 333-45388), and incorporated herein by
reference.
(3) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, as filed with the SEC on March 2, 2001, and
incorporated herein by reference.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K, dated January 11, 2001, filed with the SEC on
January 19, 2001 and Amendment No. 1 thereto filed on Form 8-K/A with the
SEC on January 25, 2001. Items 5 and 7 reported, relating to Leap having
entered into an amendment to its common stock purchase agreement with Acqua
Wellington North American Equities Fund, Ltd.
(2) Current Report on Form 8-K, dated January 23, 2001, filed with the SEC on
January 31, 2001. Item 5 reported, relating to Leap having entered into a
secured loan agreement with QUALCOMM Incorporated and Leap having announced
that it was the high bidder on 22 wireless operating licenses covering
approximately 22.4 million potential customers (1998 POPs) in the broadband
PCS auction held by the FCC completed in January 2001.
(3) Current Report on Form 8-K, dated February 14, 2001, filed with the SEC on
February 14, 2001. Items 5 and 7 reported, relating to Leap having announced
its earnings for the fiscal year ended December 31, 2000.
(4) Current Report on Form 8-K, dated March 16, 2001, filed with the SEC on
March 16, 2001. Item 5 reported, relating to Leap having announced that
Carolina PCS Limited Partnership I, L.P. had agreed to dismiss its
challenges to Leap's "designated entity" status under FCC rules and
regulations.
44
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAP WIRELESS INTERNATIONAL, INC.
Date: May 14, 2001 By: /s/ HARVEY P. WHITE
------------------------------------
Harvey P. White
Chairman and Chief Executive Officer
Date: May 14, 2001 By: /s/ STEPHEN P. DHANENS
------------------------------------
Stephen P. Dhanens
Vice President, Corporate Controller
(Chief Accounting Officer)
45
46
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.3.1* Certificate of Amendment to Certificate of Designation of
Series A Junior Participating Preferred Stock of Registrant.
10.11(1) Leap Wireless International, Inc. 1998 Employee Stock
Purchase Plan, as amended.
10.19.3* Schedule to form of Amendment # to System Equipment
Purchase Agreement.
10.19.4*+ Amendment #6 to System Equipment Purchase Agreement,
effective as of February 5, 2001, by and between Cricket
Communications, Inc. and Ericsson Wireless Communications
Inc. Portions of this exhibit (indicated by asterisks) have
been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
10.27.1*+ Amendment No. 1 to Credit Agreement, dated as of February 5,
2001, among Cricket Communications Holdings, Inc., Cricket
Communications, Inc. and Ericsson Credit AB, as
Administrative Agent and Lender. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2
under the Securities Exchange Act of 1934.
10.27.2* Amendment No. 2 to Credit Agreement, dated as of February
28, 2001, among Cricket Communications Holdings, Inc.,
Cricket Communications, Inc., the lenders party thereto and
Ericsson Credit AB, individually and as Administrative
Agent.
10.28* Amended and Restated Agreement for Purchase and Sale of
Licenses, effective as of November 3, 2000, by and among the
Registrant, MVI Corp., Century Personal Access Network,
Inc., Wisconsin RSA #7, Limited Partnership and CenturyTel,
Inc.
10.28.1* Promissory Note, dated April 6, 2001, by the Registrant in
favor of Century Personal Access Network, Inc.
10.28.2* Share Pledge Agreement, dated as of April 6, 2001, by and
between the Registrant and Century Personal Access Network,
Inc.
10.29(2) Amended and Restated Common Stock Purchase Agreement,
effective as of December 20, 2000, by and between the
Registrant and Acqua Wellington North American Equities
Fund, Ltd.
10.30(3) Loan Agreement, dated as of January 22, 2001, by and among
the Registrant, Qualcomm Incorporated, the other lenders
from time to time party thereto, Citibank, N.A., as
Administrative Agent, and Citibank, N.A., as Collateral
Agent.
10.31(3) Pledge Agreement, dated as of January 22, 2001, between the
Registrant and Citibank, N.A. as the Collateral Agent.
10.32(1) Leap Wireless International, Inc. 2001 Executive Officer
Deferred Bonus Stock Plan.
10.33* Leap Wireless International, Inc. 2001 Non-Qualified Stock
Option Plan.
10.34* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Harvey P. White.
10.35* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Susan G. Swenson.
10.36* Change in Control Agreement dated as of March 7, 2001
between the Registrant and James E. Hoffmann.
10.37* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Stewart D. Hutcheson.
47
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.38* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Daniel O. Pegg.
10.39* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Leonard C. Stephens.
10.40* Change in Control Agreement dated as of March 7, 2001
between the Registrant and Thomas D. Willardson.
- ---------------
* Filed herewith.
+ A request for confidential treatment with respect to portions of this
exhibit which have been omitted (indicated by asterisks) pursuant to Rule
24b-2 under the Securities Exchange Act of 1934 is currently pending.
(1) Filed as an exhibit to Leaps's Registration Statement on Form S-8 (File No.
333-59460), and incorporated herein by reference.
(2) Filed as an exhibit to Leap's Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (File No. 333-45388), and incorporated herein by
reference.
(3) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, as filed with the SEC on March 2, 2001, and
incorporated herein by reference.