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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0811062
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(858) 882-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE
(TITLE OF CLASS)
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 2001, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was approximately $901,992,839,
based on the closing price of Leap's Common Stock on the Nasdaq National Market
on March 1, 2001, of $31.38 per share.
As of March 1, 2001, 30,040,580 shares of registrant's Common Stock $.0001
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required to be furnished pursuant to Part III of this Form 10-K
will be set forth in, and is incorporated by reference to, the Registrant's
definitive Proxy Statement for the annual meeting of stockholders to be held
April 19, 2001, which definitive Proxy Statement will be filed by the Registrant
not later than 120 days after the close of the fiscal year ended December 31,
2000.
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LEAP WIRELESS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 27
Item 6. Selected Financial Data..................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 43
Item 8. Financial Statements and Supplementary Data................. 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 88
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 88
Item 11. Executive Compensation...................................... 88
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 88
Item 13. Certain Relationships and Related Transactions.............. 88
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 88
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PART I
FORWARD-LOOKING STATEMENTS; CAUTIONARY STATEMENT
Except for the historical information contained herein, this document
contains forward-looking statements reflecting management's current forecast of
certain aspects of Leap's future. Some forward-looking statements can be
identified by forward-looking words such as "believe," "may," "could," "will,"
"estimate," "continue," "anticipate," "intend," "seek," "plan," "expect,"
"should," "would" and similar expressions in this report. It is based on current
information, which Leap has 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;
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 document 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 disclaim any
obligation to update the forward-looking statements contained herein to reflect
future events or developments.
ITEM 1. BUSINESS
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.
OVERVIEW
Leap is a wireless communications carrier that is providing innovative,
affordable, simple wireless services designed to accelerate the transformation
of wireless service into a mass consumer product. We generally seek to address a
much broader population segment than traditional wireless providers have
addressed to date. In the U.S., we are offering wireless service under the brand
name "Cricket(TM)." Our innovative Cricket strategy is designed to extend the
benefits of mobility to the mass market by offering wireless service that is as
simple to understand and use as, and priced competitively with, traditional
landline service. In each of our markets, we are deploying 100% digital, Code
Division Multiple Access, or CDMA, networks that we believe provide higher
capacity and more efficient deployment of capital than competing technologies.
This, when combined with our efforts to streamline operation and distribution
systems, allows us to be a low-cost provider of wireless services in each of our
markets.
Cricket service allows customers to make and receive virtually unlimited
calls within a local calling area for a low, flat monthly rate compared with
traditional wireless services. Cricket customers pay in advance each month's
service from a simple, straightforward bill. We offer Cricket service without a
contract, and because service is paid in advance, we currently require no credit
check. The simplicity of the Cricket service allows us to sustain lower
operating costs per customer compared to traditional wireless providers. Our
networks are 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.
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At the end of 2000, we had launched Cricket service in markets covering a
total population of approximately 8 million and had more than 190,000 Cricket
customers across the U.S. To date we have acquired or have rights to acquire
wireless licenses covering approximately 73.1 million potential customers in 36
states, and we plan to continue launching new Cricket markets throughout 2001
and beyond. We currently plan to expand our wireless service offerings to
include data services designed to appeal to a broad segment of the population.
We believe that wireless data services, like our innovative Cricket service,
need to be simple, easy to use and affordable.
In Mexico, we were a founding shareholder and have invested $100 million in
Pegaso Telecomunicaciones, S.A. de C.V., a company that is providing a wireless
service in Mexico that is more traditional than our Cricket service. Pegaso
holds wireless licenses covering all of Mexico, representing approximately 99
million potential customers. At the end of 2000, Pegaso had approximately
536,000 customers. We currently own 20.1% of Pegaso.
BUSINESS STRATEGY
Our business strategy is to bring innovative wireless communications
products and services to markets with strong growth potential. Key elements of
this strategy include:
- Enhancing the Mass Market Appeal of Wireless Service. We are working to
remove the price and complexity barriers that we believe have prevented
many potential customers from using wireless service. We believe that
large segments of the population do not use wireless service because they
view wireless service as an expensive luxury item, believe they cannot
control the cost of service, or find existing service plans too
confusing. Our service plans are designed to offer appealing value in
simple formats that customers can understand and budget for.
- Offering an Appealing Value Proposition. We strive to provide service
offerings that combine high quality and advanced features with simplicity
and attractive pricing to create a "high value/reasonable price"
proposition and broaden the market for wireless services. In the U.S., we
offer the Cricket service plan at a flat rate, paid in advance each
month, that is competitive with traditional landline service.
- Controlling and Minimizing Costs. To become one of the lowest-cost
providers in the wireless industry, we are designing high-quality
networks to minimize our capital costs and streamlining marketing,
distribution and back-office procedures.
- Leveraging CDMA Technology. We are deploying state-of-the-art CDMA
networks that are designed to provide higher capacity at a lower capital
cost which can be easily upgraded to support enhanced capacity. We
believe this enables us to operate superior networks that support rapid
customer growth and high usage. In addition, we believe our CDMA networks
will provide a better platform to expand into data and other wireless
services based on advances in second and third generation digital
technology in the future.
- Expanding Our Cricket Service Through Acquisitions of Domestic Licenses
and Buildout of Additional Networks. We intend to expand the Cricket
service to selected metropolitan areas in the U.S. through the
acquisition of additional wireless licenses and the buildout of networks
for our newly-acquired wireless licenses.
- Expanding Our Service Offerings to Include Wireless Data Services. We
currently plan to expand our service offerings to include wireless data
services designed to appeal to a broad segment of the population and
further transform the nature of wireless communications for our
customers. We believe that wireless data services, like our innovative
Cricket service, need to be simple, easy to use and affordable for all
consumers.
- Investing Selectively in Foreign Ventures. While we expect our emphasis
for the next few years to be on our U.S.-based operations, if presented
with attractive opportunities, we may invest in international
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markets where we believe the combination of unfulfilled demand and our
attractive wireless service offerings can fuel rapid growth.
U.S. BUSINESSES
CRICKET
General. In the U.S., our business strategy is different from existing
models used by typical cellular or PCS wireless providers. Most of these
providers offer consumers a complex array of rate plans that include additional
charges for minutes above a set maximum, as well as fees for roaming, that may
result in monthly service charges that are higher than expected. Approximately
60% of the U.S. population currently does not subscribe to wireless service, and
we believe that many of these potential customers perceive wireless service as
too expensive and complicated. The Cricket service is based on our vision that
the mass market wants wireless service to be predictable, affordable and as
simple to understand and use as traditional landline telephone service, but with
the benefits of mobility.
We have designed the Cricket service to appeal to consumers who make the
majority of their calls from within the local areas in which they live, work and
play. The Cricket service allows customers to make and receive virtually
unlimited calls within a local calling area for an affordable, flat monthly rate
that is competitive with landline service. Cricket customers pay for each
month's service in advance from a simple, straightforward bill. We offer Cricket
service without a contract and because Cricket service is paid in advance, we
currently require no credit check. In addition to local calling, directory
assistance calls and long distance minutes can be purchased in advance and
direct dialed without the use of a special code or card.
We expect Cricket's simple pricing to attract customers who have been
apprehensive about the more complicated and unpredictable pricing plans offered
by traditional wireless providers. The simplicity of the Cricket service also
allows us to reduce costs by eliminating costly features of wireless services,
such as expansive geographic coverage and roaming, that our target customers are
likely to use infrequently. We are therefore able to offer our customers a high
quality mobile service at an affordable price.
Strategy. We believe that the Cricket service offering will help transform
wireless phone service from a luxury product into a mass consumer product. The
Cricket strategy is to provide digital wireless service to the mass market with
a simple, easy to understand approach. As a part of the Cricket strategy, we
intend to:
- attract new customers more quickly than traditional wireless providers
that offer complex pricing plans with peak/off-peak rates, roaming
charges and expensive "extra" minutes;
- maintain lower customer acquisition costs by offering one simple service
plan with a limited choice of handsets, and by distributing our product
through company stores and multiple third-party retail stores where the
mass market shops;
- sustain lower operating costs per customer compared to traditional
wireless providers through reduced network operation costs, streamlined
billing procedures, lower customer care expenses, lower credit
investigation costs and reduced bad debt; and
- deploy our capital more efficiently by building our networks to cover
only the urban and suburban areas of our markets where most of our
potential customers live, work and play, while avoiding rural areas and
corridors between distant markets.
Market Opportunity. Wireless penetration was approximately 38% in the U.S.
at the end of December 2000. Traditional wireless companies have generally
focused their U.S. marketing on highly mobile customers, including business
users, who are likely to generate the highest revenues. Their customers are
typically offered multiple service plans with prices based on the customer's
minutes of use during the billing period. Leap believes that the numerous plans
offered by wireless companies have tended to confuse many potential customers.
Market research indicates that many people are interested in a wireless product
but are concerned about the cost, complexity and unpredictability of traditional
wireless pricing plans.
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Sales and Distribution. We differentiate the Cricket service concept and
expect to increase our market share through promoting a simplified buying
process and focusing marketing efforts on potential customers in the communities
covered by our local wireless networks. The Cricket approach is to rapidly
penetrate our target markets while minimizing our sales and marketing expenses,
primarily by keeping the customer's purchase decision simple, thus minimizing
the need for sales agents and associated residuals.
The Cricket service and wireless handsets are sold through three main
channels:
- Cricket retail stores in high-traffic locations and Cricket kiosks
located in major shopping malls;
- the local stores of national retail chains; and
- independent third-party dealers who are well positioned through their
principal lines of business to reach our target potential customers, such
as furniture and appliance retailers and rental companies, convenience
stores and other local service businesses.
The Cricket service plan is designed so that a potential customer can make
a purchase decision with little or no sales assistance. Customers can read about
the Cricket service on the retail package for our wireless handsets and learn
virtually all they need to know about the service without consulting a
complicated plan summary or a specialized sales person. We simplify the
customer's decision process by limiting the number of Cricket handset models
available. We believe the sales costs for the Cricket service are lower than
traditional wireless providers because of this streamlined sales approach.
We currently offer handsets at two price points, priced with the first
month's Cricket service included. One is presented as an economically-priced
handset at approximately $100, and the other is positioned as a premium handset
at approximately $130. We expect to continue to charge customers a partially
subsidized price for handsets to ensure that they have made an investment in the
equipment related to our wireless service and provide a moderate economic
incentive to maintain the Cricket service rather than switching to the services
of a competitor. We do not require customers to sign a service contract, unlike
traditional wireless providers that require long-term commitments.
We combine mass marketing strategies and tactics to build awareness of the
Cricket service concept and brand name within the communities we service.
Because the Cricket service is offered in distinct "island" markets, we
advertise in local publications, on local radio stations and in local spot
television commercials. In addition to local advertising efforts, we maintain an
informational Web site for the Cricket service. Although we currently do not
sell our products or services directly over the Internet, some third-party
Internet retailers do sell the Cricket service over the Internet.
Network and Operations. The Cricket service is based on providing customers
with near-landline levels of usage at prices that are competitive with
traditional landline services and substantially lower than most of our wireless
competitors for similar usage. We believe our success depends on designing and
operating our networks to provide high, concentrated capacity with good
in-building coverage rather than the broad, geographically dispersed coverage
provided by traditional wireless carriers. Our current and planned Cricket
networks are in local population centers of self-contained communities where we
believe roaming is not an important component of service for our target
customers. Unlike traditional wireless providers who build comprehensive
networks to permit full-roaming by their customers, we believe that we can
deploy our capital more efficiently by tailoring our networks only to our target
population centers and omitting underutilized roaming sites between those
population centers.
We also seek to maintain lower operating costs through simplified billing.
Our simple, straight-forward bills show the monthly flat rate without any
per-call itemization. This simple format is expected to result in fewer billing
inquiries to our customer service center. Fewer calls to our customer service
center should, in turn, result in reduced customer service expenses compared to
more traditional wireless providers. In addition, because Cricket customers pay
in advance for each month's service, we minimize our costs of credit checks, bad
debt expenses and customer fraud. We also maintain low operating costs by
outsourcing our customer service center to third-party call centers. By
centralizing customer service in a few locations, we are able to
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streamline our customer care operations and gain economies of scale while
maximizing customer service availability.
Under a license from Leap, Chase Telecommunications, a company that we
acquired in March 2000, introduced the Cricket service in Chattanooga, Tennessee
in March 1999. At March 1, 2001, we had launched service in areas under 16 FCC
licenses with a total population of approximately 14.6 million, and our networks
covered approximately 9 million potential customers within those areas.
The appeal of our service in any given market is not dependent on the
Cricket service having ubiquitous coverage in the rest of the country or region
surrounding the market. Because our business model is scalable, we can launch
our networks on a market-by-market basis.
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The following table shows the wireless licenses for approximately 73.1
million potential customers that we have acquired or have rights to acquire.
1998 BTA
MARKET POPULATION(1) MHZ
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Anchorage, AK.......................... 442,324 30
Birmingham, AL(2)...................... 1,293,407 15
Florence, AL........................... 183,960 15
Tuscaloosa, AL(2)...................... 250,193 15
Blytheville, AR........................ 72,228 30
Fayetteville, AR....................... 287,594 30
Fort Smith, AR......................... 312,750 30
Hot Springs, AR........................ 132,519 15
Jonesboro, AR(2)....................... 174,746 15
Little Rock, AR(3)..................... 928,467 30
Pine Bluff, AR(3)...................... 150,421 30
Russellville, AR....................... 93,530 15
Nogales, AZ............................ 38,020 30
Phoenix, AZ............................ 3,089,889 10
Tucson, AZ............................. 790,975 15
Merced, CA............................. 211,145 15
Modesto, CA............................ 477,212 15
Redding, CA............................ 276,425 15
Visalia, CA(2)......................... 471,766 15
Denver/Boulder, CO..................... 2,471,889 10
Ft. Collins, CO(2)(3).................. 229,386 10
Greeley, CO(2)(3)...................... 157,890 10
Pueblo, CO............................. 299,154 30
New London, CT(5)...................... 358,218 10
Jacksonville, FL(5).................... 1,294,388 10
Lakeland, FL(2)........................ 450,761 10
Melbourne, FL(5)....................... 462,782 10
Albany, GA............................. 343,557 15
Columbus, GA........................... 357,914 30
Macon, GA.............................. 640,286 30
Boise, ID.............................. 534,196 30
Idaho Falls, ID........................ 212,301 30
Lewiston, ID........................... 123,479 30
Twin Falls, ID......................... 158,946 30
Peoria, IL(2).......................... 465,930 15
Columbus, IN(5)........................ 154,408 10
Evansville, IN(2)...................... 520,207 10
Ft Wayne, IN(2)........................ 689,252 10
Indianapolis, IN(5).................... 1,466,377 10
Coffeyville, KS........................ 61,901 15
Pittsburg, KS(2)....................... 90,471 30
Wichita, KS............................ 633,382 30
Lexington, KY(5)....................... 894,237 10
Louisville, KY(5)...................... 1,445,879 10
Middlesboro, KY........................ 120,774 15
Worcester, MA(5)....................... 725,747 10
Adrian, MI(2).......................... 98,691 15
Battle Creek, MI(2).................... 238,991 15
Escanaba, MI(2)........................ 48,203 10
Flint, MI(2)........................... 513,718 10
Grand Rapids, MI(2).................... 1,027,192 15
Houghton, MI(2)........................ 47,209 10
Iron Mountain, MI(2)................... 45,925 10
Ironwood, MI(2)........................ 32,432 20
Jackson, MI(2)......................... 203,672 15
Kalamazoo, MI(2)....................... 370,308 10
Lansing, MI(2)......................... 513,212 10
Marinette, WI-Menominee, MI(2)......... 67,950 10
Marquette, MI(2)....................... 69,425 10
Mount Pleasant, MI(2).................. 127,533 10
Muskegon, MI(2)........................ 220,532 15
Saginaw-Bay City, MI(2)................ 634,805 10
Sault Ste. Marie, MI(2)................ 56,243 20
Traverse City, MI(2)................... 234,122 10
Bemidji, MN(2)......................... 64,109 10
1998 BTA
MARKET POPULATION(1) MHZ
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Brainerd, MN(2)........................ 92,763 10
Duluth, MN(2).......................... 410,525 10
La Crosse, WI-Winona, MN(2)............ 311,841 10
Jackson, MS(2)......................... 653,863 10
Vicksburg, MS(2)....................... 60,797 10
Bozeman, MT............................ 78,996 30
Asheville, NC(5)....................... 571,334 10
Charlotte/Salisbury, NC................ 1,915,210 10
Greensboro/Winston-Salem, NC........... 1,371,782 10
Hickory, NC............................ 322,521 10
Fargo, ND.............................. 310,802 30
Grand Forks, ND........................ 212,006 15
Lincoln, NE(2)......................... 333,096 15
Omaha, NE.............................. 970,593 10
Albuquerque, NM........................ 800,201 15
Gallup, NM............................. 140,668 15
Las Cruces, NM(5)...................... 243,077 10
Roswell, NM............................ 80,005 15
Santa Fe, NM........................... 205,922 15
Reno, NV............................... 548,661 10
Albany, NY(5).......................... 1,048,614 10
Buffalo, NY(2)......................... 1,224,119 10
Poughkeepsie, NY(5).................... 431,444 10
Syracuse, NY(2)........................ 791,282 15
Utica, NY(2)........................... 294,296 10
Columbus, OH(5)........................ 1,623,401 10
Dayton/Springfield, OH................. 1,222,446 10
Sandusky, OH(2)........................ 140,841 15
Toledo, OH(2).......................... 785,760 15
Tulsa, OK.............................. 913,095 15
Eugene, OR(2)(3)....................... 313,316 10
Salem/Corvallis, OR.................... 512,535 30
Pittsburgh/Butler/Uniontown/Washington/
Latrobe, PA........................... 2,503,395 10
Scranton, PA(5)........................ 669,647 10
Providence, RI(5)...................... 1,508,224 10
Chattanooga, TN........................ 548,320 15
Clarksville, TN........................ 258,087 15
Cookeville, TN......................... 131,891 15
Dyersburg, TN.......................... 118,191 15
Jackson, TN............................ 275,578 15
Kingsport/Johnson/Bristol, TN.......... 690,437 15
Knoxville, TN.......................... 1,073,640 15
Memphis, TN............................ 1,499,222 15
Nashville/Murfreesboro, TN............. 1,662,927 15
Austin, TX(5).......................... 1,165,522 10
Brownsville, TX(5)..................... 348,225 10
Bryan, TX(5)........................... 164,465 10
El Paso, TX(5)......................... 771,774 10
Houston, TX(5)......................... 4,723,410 10
McAllen, TX(5)......................... 578,420 10
San Antonio, TX(5)..................... 1,784,992 10
Provo, UT.............................. 341,401 30
Salt Lake City/Ogden, UT............... 1,527,987 30
Kenewick/Pasco/Richland, WA............ 183,433 15
Spokane, WA............................ 725,591 15
Yakima, WA............................. 253,207 15
Appleton-Oshkosh, WI(2)................ 440,042 10
Eau Claire, WI(2)...................... 191,374 10
Stevens Point-Marshfield-Wisconsin
Rapids, WI(2)......................... 213,930 20
Casper, WY............................. 142,951 30
---------- --
TOTAL........................... 73,087,650(4)
==========
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(1) Demographic data related to 1998 population and population growth estimates
provided by Easy Analytic Software Incorporated.
(2) Represents licenses that Leap has rights to acquire under signed acquisition
agreements. These acquisitions remain subject to FCC approval and other
closing conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent or Pending Acquisitions" at
Item 7 below.
(3) Leap has agreed to transfer 10 MHz of licenses in Pine Bluff and Little
Rock, Arkansas to American Wireless in exchange for 10 MHz licenses in Fort
Collins and Greely, Colorado and Eugene, Oregon. An acquisition agreement
has been signed, but the transaction has not been completed. The transaction
is subject to FCC approval and other closing conditions.
(4) Leap has agreed to divest two wireless licenses covering 233,716 potential
customers in Grand Island and North Platte, Nebraska, which, accordingly,
are not included in the table above.
(5) Represents licenses for which Leap was the high bidder in the FCC's recent
reauction of C-Block and F-Block PCS spectrum that closed in January 2001.
These transfers remain subject to FCC approval.
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Cricket Communications has entered into infrastructure equipment purchase
agreements with Lucent Technologies, Inc., Nortel Networks, Inc. and Ericsson
Wireless Communications, Inc. to lead the overall buildout of our initial phase
of Cricket networks. Under the terms of the agreements, Cricket Communications
expects to contract most site acquisition activities and other services
associated with site development to third parties, including but not limited to
these vendors. To the extent the vendors are contracted to perform such
services, we expect that they will subcontract many of these services to a
number of different suppliers.
Leap's Rights and Interests. Our wholly-owned subsidiary, Cricket
Communications Holdings, Inc., owns Cricket Communications, Inc., which is the
operating company that is implementing the Cricket strategy.
On June 15, 2000, through a subsidiary merger, we acquired the 5.11% of
Cricket Communications Holdings that we did not already own. These shares were
owned by individuals and entities, including directors and employees of Leap and
Cricket Communications Holdings. Under the terms of the merger, each issued and
outstanding share of Cricket Communications Holdings common stock not held by
Leap was converted into the right to receive 0.315 of a fully paid and
nonassessable share of Leap common stock. As a result, an aggregate of 1,048,635
shares of Leap common stock were issued. We also assumed Chase
Telecommunications Holdings' warrant to purchase 1% of the common stock of
Cricket Communications Holdings, which was converted into a warrant to acquire
202,566 shares of our common stock, at an aggregate exercise price of $1.0
million. The aggregate fair value of the shares issued and warrant assumed in
excess of the carrying value of the minority interest was allocated to goodwill.
In addition, we assumed all unexpired and unexercised Cricket Communications
Holdings stock options outstanding at the time of the merger, whether vested or
unvested, which upon conversion amounted to options to purchase 407,784 shares
of Leap common stock.
Capital Requirements and Projected Investments. We will require substantial
capital to develop and operate wireless networks in the numerous markets in
which we plan to operate the Cricket service. The amount of financing that we
will require for these efforts will vary depending on the number of these
networks that are developed, including any markets covered by our future license
acquisitions, and the speed at which we construct and launch these networks. For
a more detailed description of our capital requirements and liquidity, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
Regulatory Environment. For a description of the extensive regulation
governing our domestic business, see "--Government Regulation," "Risk
Factors -- The FCC's Decision That We Are Qualified To Hold C-Block and F-Block
Licenses Is Subject To Review and Appeal," "Risk Factors -- 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," and "Risk Factors -- Adverse
Regulatory Changes Could Impair Our Ability To Maintain Existing Licenses and
Obtain New Licenses."
WIRELESS DATA SERVICES
We currently anticipate beginning launch of our first wireless data service
in selected markets during the first half of 2001. We are seeking to take the
same type of innovative approach to data as Cricket took with voice. Our vision
of wireless data services is that they should be simple, customer focused and
driven by customer needs rather than technology. We expect our first wireless
data service to provide customers with innovative, community- and location-based
information delivered with full mobility where our customers live, work and
play. We seek to personalize the content of these services for the individual
consumer. We took our first step toward offering wireless data services when we
acquired myAladdin.com, a proprietary, personalized, location-based technology.
Our goal will be to control both the content and the delivery of our wireless
data services. We expect to finance the development and operation costs of these
wireless data services largely through vendor financing, as well as from a
portion of the net proceeds from our February 2000 units and equity offerings,
our sale of Smartcom and other financing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity." We
expect, however, that we will also need to raise additional capital to fund
additional data launches and services.
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INTERNATIONAL INVESTMENTS
PEGASO
General. We were a founding shareholder and currently own 20.1% of Pegaso,
a joint venture formed to construct and operate the first 100% digital wireless
communications network in Mexico. In October 1998, a wholly-owned subsidiary of
Pegaso acquired nine regional PCS licenses and a public telecommunications
network license constituting nationwide coverage of Mexico's population of
approximately 99 million people, generally in the 1900 MHz band, for
approximately $234 million (based on exchange rates in effect on the dates the
license payments were made).
Pegaso launched commercial service in Tijuana in February 1999 and extended
its coverage area with launches in Mexico's three largest cities, Mexico City,
Guadalajara and Monterrey, in December, September and August 1999, respectively.
During the fourth quarter of 2000, Pegaso also moved forward with its plans to
build out its network with service launches in Chapala, Ensenada, Nuevo Laredo,
Reynosa and Toluca. As of December 31, 2000, Pegaso had approximately 536,000
customers. Pegaso is continuing its network expansion and plans to build
networks in additional metropolitan areas throughout Mexico as well as some
interconnecting highway corridors.
Pegaso offers roaming across the U.S-Mexico border as a result of its
agreement with Sprint PCS. The agreement permits Pegaso's post-paid customers to
use Sprint PCS's nationwide wireless network in the U.S. and allows Sprint PCS
customers to roam on Pegaso's network in Mexico. Pegaso believes this feature
will be attractive to the highly-mobile customers in Mexico's border cities.
We have entered into a management and operations agreement with Pegaso to
provide operator services and, in turn, have subcontracted those services to GTE
Data Services Mexico, a subsidiary of GTE. These arrangements are expected to
end in July 2001.
Strategic and Financial Partners. In addition to Leap, Pegaso
Comunicaciones y Servicios, S.A. de C.V. and Sprint Mexico Inc. have interests
in Pegaso. Pegaso Comunicaciones y Servicios is 99%-owned by Alejandro Burillo
Azcarraga, a member of our board of directors. Citicorp, the Latin America
Infrastructure Fund and Nissho Iwai have also invested in Pegaso.
On April 26, 2000, Sprint Corporation, through a subsidiary, invested $200
million in Pegaso by purchasing shares from Pegaso and shareholders other than
Leap. As a result of this transaction, our percentage interest in Pegaso was
reduced from 28.6% to 22.4%. Several other existing investors contributed an
additional $50 million of financing in August 2000, reducing our percentage
interest to 20.1%.
Leap's Rights and Interests. We currently own a 20.1% interest in Pegaso
and have invested $100 million of the $546 million of capital that has been
contributed by the owners of the venture. Pegaso is currently seeking additional
debt and equity financing. See "-- Capital Requirements and Projected
Investments" below. As noted above, we also provide operator services to Pegaso
under a management and operations agreement.
In December 1999, in connection with our guarantee of a portion of Pegaso's
obligations under its working capital facility, 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.
Capital Requirements and Projected Investments. Pegaso has already raised
or obtained commitments for substantial amounts of capital. To date, the members
of the joint venture have contributed $546 million of equity. In addition,
Qualcomm and another equipment vendor have agreed to provide approximately $580
million of secured equipment financing to the venture, a portion of which has
already been advanced. In May 1999, a Pegaso subsidiary also entered into a
working capital facility with several banks with credit
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support from Qualcomm. We guaranteed 33% of Pegaso's obligations under the
initial commitment from the lenders of $100 million. At December 31, 2000, the
maximum amount of the loan had been increased to approximately $300.0 million
although the amount of our guarantee was not increased. To complete the
buildout, launch and operation of its planned networks, however, Pegaso will
need to obtain substantial additional capital. 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.
Regulatory Environment. The Mexican Secretariat of Communications and
Transportation, or SCT, and Federal Telecommunications Commission, or COFETEL,
an independent regulatory body within the SCT, regulate the provision and
operation of telecommunications services in Mexico. The principal law governing
the provision of telecommunications services in Mexico is the 1995 Federal
Telecommunications Law and regulations promulgated thereunder; however, other
federal laws and regulations apply.
The SCT may grant licenses only to Mexican individuals and to Mexican
corporations in which non-Mexicans hold no more than 49% of the voting shares.
Cellular and PCS licensees may be more than 49% foreign-owned through a
structure involving limited- or non-voting interests with the prior approval of
the Mexican Foreign Investment Commission. Licenses may be sold or otherwise
transferred only with the prior authorization of the SCT. In addition, any
transfer of the shares of the holder of a license in excess of 10% of the total
equity outstanding requires the prior approval of the SCT and may require
notification to the Federal Competition Commission. A license may be terminated
upon expiration or dissolution of the holder of the license. The SCT may revoke
a license prior to its expiration under certain circumstances, including failure
to comply with the obligations and conditions specified in the license. The
Mexican government may also expropriate or temporarily seize assets related to a
license, but is obligated to compensate at market value the owner of such
assets.
Pegaso is interconnected nationwide with other Mexican wireless and
landline operators. Though interconnection arrangements are negotiated
privately, Telmex is required by law to interconnect with wireless operators,
and COFETEL will intervene where private parties reach an impasse. Wireless
rates are not regulated in Mexico but the rates must be registered with the SCT.
SMARTCOM
On June 2, 2000, we completed the sale of our Chilean operating subsidiary,
Smartcom, S.A., to Endesa, S.A., a Spanish utility company. Under the terms of
our agreement with Endesa, Endesa purchased all of the outstanding capital stock
of Smartcom from our subsidiary, Inversiones Leap Wireless Chile, S.A., and its
designated shareholder nominee (who held one share of the Series A preferred
stock of Smartcom in order to comply with Chilean law which requires two
shareholders for each Chilean sociedad anonima) in exchange for gross
consideration of approximately $381.5 million. The purchase price consisted of:
- approximately $156.8 million in cash;
- repayment of Smartcom indebtedness to us and Inversiones of approximately
$17.5 million and $35.8 million, respectively;
- release of cash collateral posted by us in the U.S. to collateralize our
reimbursement obligation with respect to a standby letter of credit
issued in favor of ABN AMRO Bank (Chile) to secure Smartcom indebtedness
of approximately $28.2 million; and
- three promissory notes issued by Endesa to Inversiones in the aggregate
amount of $143.2 million. One of the promissory notes is subject to a one
year right of set-off to secure the indemnification obligations of Leap
and Inversiones under the share purchase agreement between the parties.
Another of the promissory notes is subject to adjustment based upon an
audit of the closing balance sheet of Smartcom to be completed following
the closing of the agreement. The final audit is not yet completed, and
we are in discussions with Endesa concerning a potential adjustment,
which we do not expect to be
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material. In February 2001, we sold the third note which had an original
principal amount of $58.2 million to a third party for $60.7 million
including accrued interest.
Each of the two remaining promissory notes matures on June 2, 2001 and
bears interest at a rate equal to the 3-month LIBOR, compounded semi-annually.
In addition, the sale of the Smartcom shares resulted in the removal of
approximately $191.4 million of Smartcom liabilities from our consolidated
balance sheet.
Smartcom acquired a nationwide license in 1997 in the 1900 MHz band to
offer PCS services in Chile. Smartcom's nationwide system began operation in
September 1998. In April 1999, we increased our ownership of Smartcom from 50%
to 100% when our Chilean subsidiary purchased 50% of Smartcom from Telex-Chile,
a Chilean telecommunications company, and one of its affiliates for $28 million
in cash and a $22 million interest-free note payable in three years. Following
the acquisition, we recruited a new management team, upgraded the network
capabilities and, in November 1999, relaunched service under a new brand name,
SMARTCOM PCS. As a result of the favorable terms offered by Endesa for purchase
of the Smartcom shares, which represented a substantial return on our original
investment, we concluded that we could realize greater stockholder return
through the sale than we could through continued investment in Smartcom.
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 launched
rate plans substantially similar to the Cricket service plan in markets in which
we have launched or expect to launch service. These competitive plans could
adversely affect our ability to maintain our pricing, market penetration and
customer retention.
In the U.S., we will compete directly with other wireless providers and
traditional landline carriers in each of our markets, many of which have greater
resources than we do and entered the market before us. A few of our competitors
operate wireless telecommunications networks covering most of the U.S.
Competitors' earlier entry and broader presence in the U.S. telecommunications
market may have a negative effect on our ability to successfully implement our
strategy. Furthermore, the FCC is actively pursuing policies designed to
increase the number of wireless competitors in each of our markets. For example,
the FCC will soon auction licenses that will authorize the entry of two
additional wireless providers in each market. In addition, other wireless
providers in the U.S. could attempt to implement our domestic strategy of
providing unlimited local service at a low, flat monthly rate if our strategy
proves successful. The landline services with which we will compete are already
used by some of our potential customers, and we may not be successful in our
efforts to persuade potential customers to adopt our wireless service in
addition to, or in replacement of, their current landline service.
Although the deployment of advanced telecommunications services is in its
early stages in many developing countries, we believe competition is increasing
as businesses and foreign governments realize the market potential of
telecommunications services. In Mexico, a number of international
telecommunications companies, including Verizon, AT&T, MCI, Motorola, Nextel and
SBC, as well as local competitors such as Telmex and other Mexican
telecommunications companies, continue to actively engage in developing
telecommunications services. Pegaso also competes against landline carriers,
including government-owned telephone companies. We also expect the prices that
Pegaso may charge for its products and services in some regions will decline
over the next few years as competition increases in its markets. Our competitors
in Mexico have greater financial resources and more established operations than
Pegaso. Pegaso is at an early stage of development and may not be able to
compete successfully.
We compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio
and domestic and global mobile satellite service. These technologies may have
advantages over the technology we use and may ultimately be more attractive to
customers. We may compete in the future with companies who offer new
technologies and market other services, including cable television access,
landline telephone service and Internet access, that we do not
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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.
GOVERNMENT REGULATION
The spectrum licensing, construction, operation, sale and interconnection
arrangements of wireless communications networks are regulated to varying
degrees by state regulatory agencies, the FCC, Congress, the courts and other
governmental bodies. Proceedings before these bodies, such as the FCC and state
regulatory authorities, could have a significant impact on the competitive
market structure among wireless providers and on the relationships between
wireless providers and other carriers. These mandates may impose significant
financial obligations on us and other wireless providers. We are unable to
predict the scope, pace or financial impact of legal or policy changes that
could be adopted in these proceedings.
Licensing of PCS Systems. A broadband PCS system operates under a protected
geographic service area license granted by the FCC for a particular market on
one of six frequency blocks allocated for broadband PCS. Broadband PCS systems
generally are used for two-way voice applications. Narrowband PCS systems, in
contrast, are for non-voice applications such as paging and data service and are
separately licensed. The FCC has segmented the U.S. PCS markets into 51 large
regions called major trading areas, which are comprised of 493 smaller regions
called basic trading areas. The FCC awards two broadband PCS licenses for each
major trading area and four licenses for each basic trading area. Thus,
generally, six licensees will be authorized to compete in each area. The two
major trading area licenses authorize the use of 30 MHz of spectrum. One of the
basic trading area licenses is for 30 MHz of spectrum, and the other three are
for 10 MHz each. The FCC permits licensees to split their licenses and assign a
portion, on either a geographic or frequency basis or both, to a third party. In
recent years, the FCC has also further split licenses in connection with
re-auctions of PCS spectrum. Two cellular licenses are also available in each
market. Cellular markets are defined as either metropolitan statistical or rural
service areas.
The FCC's spectrum allocation for PCS includes two licenses, the 30 MHz
C-Block license and a 10 MHz F-Block license, that are designated as
"Entrepreneur's Blocks." The FCC requires holders of these licenses to meet
certain threshold financial size qualifications. In addition, the FCC has
determined that designated entities who qualify as small businesses or very
small businesses, as defined by a complex set of FCC rules, receive additional
benefits, such as bidding credits in C-Block or F-Block spectrum auctions or
reauctions, and in some cases, an installment loan from the federal government
for a significant portion of the dollar amount of the winning bids in the FCC's
initial auctions of C-Block and F-Block licenses. The FCC's rules also allow for
publicly traded corporations with widely dispersed voting power, as defined by
the FCC, to hold C-Block and F-Block licenses and to qualify as small or very
small businesses. In July 1999, the FCC issued an opinion and order that found
that we were entitled to acquire C-Block and F-Block licenses as a publicly
traded corporation with widely dispersed voting power and a very small business
under FCC rules. In July 2000, the FCC affirmed its July 1999 order.
Under the FCC's current rules specifying spectrum aggregation limits
affecting broadband PCS and cellular licensees, no entity may hold attributable
interests, generally 20% or more of the equity of, or an officer or director
position with, the licensee, in licenses for more than 45 MHz of PCS, cellular
and certain specialized mobile radio services where there is significant
overlap, except in rural areas. In rural areas, up to 55 MHz of spectrum may be
held. Passive investors may hold up to a 40% interest. Significant overlap will
occur when at least 10% of the population of the PCS licensed service area is
within the cellular and/or specialized mobile radio service area(s). The FCC has
initiated a proceeding to review whether the spectrum aggregation limits should
be retained. If the limits are removed, large carriers will be given additional
flexibility to acquire additional spectrum in our markets or in markets that we
may seek to enter. We cannot predict whether the limits will be removed or if
they are removed, what the effect would be on our business, financial condition
or results of operations.
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All PCS licenses have a 10-year term, at the end of which they must be
renewed. The FCC will award a renewal expectancy to a PCS licensee that has:
- provided substantial service during its past license term; and
- has substantially complied with applicable FCC rules and policies and the
Communications Act.
All PCS licensees must satisfy buildout deadlines and geographic coverage
requirements within five and ten years after the license grant date. For 30 MHz
C-Block licenses, this initial requirement is met when adequate service is
offered to at least one-third of the population of the licensed service area.
For 15 MHz and 10 MHz C-Block licenses and 10 MHz F-Block licenses, the initial
requirement is met when adequate service is provided to at least one-quarter of
the population in the licensed service area. Because we obtained many of our
wireless licenses from third parties subject to existing buildout requirements,
some of our licenses have buildout deadlines in 2001 and several other licenses
have buildout deadlines in the first half of 2002. We are unable to predict
whether the required coverage will be achieved. Failure to comply with these
buildout requirements could cause the revocation of some of our licenses or the
imposition of fines and/or other sanctions.
For a period of up to five years after the grant of a PCS license, subject
to extension, a licensee will be required to share spectrum with existing
licensees that operate certain fixed microwave systems within its license area.
In an effort to balance the competing interests of existing microwave users and
newly authorized PCS licensees, the FCC has adopted a transition plan to
relocate such microwave operators to other spectrum blocks and a cost sharing
plan so that if the relocation of an incumbent benefits more than one PCS
licensee, those licensees will share the cost of the relocation. To secure a
sufficient amount of unencumbered spectrum to operate our PCS systems
efficiently and with adequate population coverage, we may need to relocate one
or more of these incumbent fixed microwave licensees.
This transition plan currently allows most microwave users to operate in
the PCS spectrum for a two-year voluntary negotiation period and an additional
one-year mandatory negotiation period. Parties unable to reach agreement within
these time periods may refer the matter to the FCC for resolution, but the
incumbent microwave user is permitted to continue its operations until final FCC
resolution of the matter. The transition and cost sharing plans expire on April
4, 2005, at which time remaining microwave incumbents in the PCS spectrum will
be responsible for the costs of relocating to alternate spectrum locations.
PCS services are subject to certain FAA regulations governing the location,
lighting and construction of transmitter towers and antennas and may be subject
to regulation under Federal environmental laws and the FCC's environmental
regulations. State or local zoning and land use regulations also apply to our
activities. We expect to use common carrier point to point microwave facilities
to connect the transmitter, receiver, and signaling equipment for each PCS or
cellular cell, the cell sites, and to link them to the main switching office.
The FCC licenses these facilities separately and they are subject to regulation
as to technical parameters and service.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service, which includes PCS. The FCC generally does not
regulate commercial mobile radio service or private mobile radio service rates.
Recent Modifications of C-Block and F-Block Eligibility Rules and Recent
Reauction of PCS Licenses. The FCC recently held a reauction of 422 C-Block and
F-Block licenses that closed on January 26, 2001. In connection with that
reauction, the FCC made a number of changes to its wireless and PCS licensing
rules, and to the size of the licenses being sold. Specifically, the FCC
subdivided the C-Block licenses slated for reauction into three 10 MHz licenses.
For this reauction, the FCC also subdivided the BTA service areas to which
Entrepreneur's Block eligibility restrictions would continue to apply into two
tiers according to population. In so-called "Tier 1" BTAs, service areas with a
population equal to or greater than 2.5 million, the FCC removed all eligibility
restrictions on two of the newly-created 10 MHz C-Block licenses, and sold them
in open bidding to any entity that could afford to purchase them, no matter how
large. In these Tier 1 BTAs, one 10 MHz C-Block license remained subject to a
closed bidding process, such that only entities meeting Entrepreneur's Block
eligibility requirements were permitted to bid. In Tier 2 BTAs, service areas
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with a population less than 2.5 million, two of the 10 MHz C-Block licenses
remained subject to C-Block and F-Block eligibility rules and thus were reserved
for closed bidding by designated entities, while one 10 MHz C-Block license per
BTA was sold at open bidding. Several 15 MHz C-Block licenses and a number of
F-Block licenses slated for reauction also were sold at open bidding, such that
previous C-Block and F-Block eligibility requirements no longer applied.
The FCC's recent reauction represented a compromise that made some
additional spectrum available to large carriers, but also continued to preserve
C-Block and F-Block spectrum for designated entities. The FCC's C-Block and
F-Block rules, the recent reauction, and FCC actions taken in connection with
previous C-Block auctions and reauctions, remain subject to pending FCC and
judicial proceedings. These proceedings, and continuing changes to the C-Block
and F-Block rules, could have a material adverse effect on our business and
financial condition, including our ability to continue acquiring C-Block and
F-Block licenses. In addition, in the reauction, Leap was 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.
Transfer and Assignment of PCS Licenses. The Communications Act and FCC
rules require the FCC's prior approval of the assignment or transfer of control
of a license for a PCS or cellular system. Non-controlling interests in an
entity that holds an FCC license generally may be bought or sold without FCC
approval, subject to the FCC's spectrum aggregation limits.
C-Block and F-Block licenses historically have been subject to certain
additional transfer and assignment restrictions, including a prohibition on the
assignment or transfer of such licenses for a period of five years following the
initial license grant date to any entity that fails to satisfy C-Block and
F-Block financial qualification requirements. These rules were revised by the
FCC in August 2000. Under the revised rules, a C-Block or F-Block license may be
transferred to non-designated entities once the licensee has met its five-year
coverage requirement. Such transfers will remain subject to certain costs and
reimbursements to the government of any bidding credits or outstanding principal
and interest payments owed to the FCC.
Foreign Ownership. Under existing law, no more than 20% of an FCC
licensee's capital stock may be owned, directly or indirectly, or voted by
non-U.S. citizens or their representatives, by a foreign government or its
representatives or by a foreign corporation. If an FCC licensee is controlled by
another entity, as is the case with our ownership structure, up to 25% of that
entity's capital stock may be owned or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. Foreign ownership above the 25% holding company level may be
allowed should the FCC find such higher levels not inconsistent with the public
interest. The FCC has ruled that higher levels of foreign ownership, even up to
100%, are presumptively consistent with the public interest with respect to
investors from certain nations. If our foreign ownership were to exceed the
permitted level, the FCC could revoke our wireless licenses, although we could
seek a declaratory ruling from the FCC allowing the foreign ownership or take
other actions to reduce our foreign ownership percentage in order to avoid the
loss of our licenses. We have no knowledge of any present foreign ownership in
violation of these restrictions.
Other Recent Industry Developments. The FCC has a number of other complex
requirements and proceedings that affect the operation of our business. For
example, FCC rules currently require wireless carriers to make available
emergency 911 services, including enhanced emergency 911 services that provide
the caller's telephone number, and a requirement that emergency 911 services be
made available to users with speech or hearing disabilities. We also are subject
or potentially subject to interconnection, reciprocal compensation and universal
service obligations; number portability obligations; rules governing billing and
subscriber privacy; rules governing wireless resale and roaming obligations;
rules that require wireless service providers to configure their networks to
facilitate electronic surveillance by law enforcement officials; and rules
requiring us to offer equipment and services that are accessible to and usable
by persons with disabilities. These requirements are all the subject of pending
FCC or judicial proceedings, and we are unable to predict how they may affect
our business, financial condition or results of operations.
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State Regulation and Local Approvals. Congress has given the FCC the
authority to preempt states from regulating rates or entry into commercial
mobile radio service, including PCS. The FCC, to date, has denied all state
petitions to regulate the rates charged by commercial mobile radio service
providers. State and local governments are permitted to manage public rights of
way and can require fair and reasonable compensation from telecommunications
providers, on a competitively neutral and nondiscriminatory basis for the use of
such rights of way by telecommunications carriers, including PCS providers, so
long as the compensation required is publicly disclosed by the government. The
siting of base stations also remains subject to state and local jurisdiction,
although proceedings are pending at the FCC to determine the scope of that
authority. States may also impose competitively neutral requirements that are
necessary for universal service, to protect the public safety and welfare, to
ensure continued service quality and to safeguard the rights of consumers. While
a state may not impose requirements that effectively function as barriers to
entry or create a competitive disadvantage, the scope of state authority to
maintain existing or to adopt new such requirements is unclear. State
commissions have become increasingly aggressive in their efforts to conserve
numbering resources.
Privacy. In anticipation of our planned wireless data services, we have
developed and intend to comply with a policy designed to protect the privacy of
our customers and their personal information.
FINANCIAL INFORMATION CONCERNING SEGMENTS AND GEOGRAPHICAL INFORMATION
Financial information concerning Leap's operating segments and the
geographic areas in which it operates is set forth in Note 13 to the
Consolidated Financial Statements set forth in Item 8 of this report.
EMPLOYEES
On February 1, 2001, Leap employed approximately 860 full time employees,
including the approximately 652 employees of its subsidiary, Cricket
Communications.
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RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY
We have operated as an independent company since September 1998 and we
acquired and/or launched all of our existing Cricket markets beginning in
January 2000. Because we are at an early stage of development, we face risks
generally associated with establishing a new business enterprise. When
considering our prospects, investors must consider the risks, expenses and
difficulties encountered by companies in their early stages of development.
These risks include possible disruptions and inefficiencies associated with
rapid growth and workplace expansion, the difficulties associated with raising
money to finance new enterprises and the difficulties of establishing a
significant presence in highly competitive markets.
THE CRICKET BUSINESS STRATEGY IS UNPROVEN
Our business strategy in the U.S., marketed under the brand name Cricket,
is to offer consumers a service plan that allows them to make and receive
virtually unlimited local calls for an affordable, flat monthly rate. This
strategy, which has been introduced in a limited number of markets, is a new
approach to marketing wireless services and may not prove to be successful. Our
marketing efforts may not draw the volume of customers necessary to sustain our
business plan, our capital and operating costs may exceed planned levels, and we
may be unable to compete effectively with landline and other wireless service
providers in our markets. In addition, potential customers may perceive the
Cricket service to be less appealing than other wireless plans, which offer more
features and options, including the ability to roam outside of the home service
area. If our business strategy proves to be successful, other wireless providers
are likely to adopt similar pricing plans and marketing approaches. Should our
competitors choose to adopt a strategy similar to the Cricket strategy, some of
them may be able to price their services more aggressively or attract more
customers because of their stronger market presence and geographic reach and
their larger financial resources.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
Leap experienced net losses of approximately $269.3 million (excluding the
gain on the sale of Smartcom, net of related taxes and foreign currency impact)
in the year ended December 31, 2000, $75.8 million in the transition period from
September 1, 1999 to December 31, 1999, $164.6 million in the year ended August
31, 1999, $46.7 million in the year ended August 31, 1998 and $5.2 million in
the year ended August 31, 1997. Losses are likely to be significant for the next
several years as we launch service in new markets and seek to increase our
customer bases in new and existing markets. We may not generate profits in the
short term or at all. If we fail to achieve profitability, that failure could
have a negative effect on the market value of our common stock.
IF WE EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, OUR COSTS COULD INCREASE
Many providers in the U.S. personal communications services, or PCS,
industry have experienced a high rate of customer turnover as compared to
cellular industry averages. The rate of customer turnover may be the result of
several factors, including limited network coverage, reliability issues such as
blocked or dropped calls, handset problems, inability to roam onto cellular
networks, affordability, customer care concerns and other competitive factors.
Our strategy to address customer turnover may not be successful, or the rate of
customer turnover may be unacceptable. In some markets, our competitors have
chosen to provide a service plan with pricing similar to the Cricket service,
and these competitive factors could also cause increased customer turnover. A
high rate of customer turnover could reduce revenues and increase marketing
costs in order to attract the minimum number of replacement customers required
to sustain our business plan, which, in turn, could have a material adverse
effect on our business and financial condition.
WE FACE SIGNIFICANT COMPETITION
The wireless telecommunications industry generally is very competitive and
competition is increasing. Unlike many wireless providers, we also intend to
compete directly with landline service providers in the
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telecommunications industry. Many competitors have substantially greater
resources than we have, and we may not be able to compete successfully. Some
competitors have announced rate plans substantially similar to the Cricket
service plan in markets in which we have launched or expect to launch service.
These competitive plans could adversely affect our ability to maintain our
pricing, market penetration and customer retention.
In the U.S., we will compete directly with other wireless providers and
traditional landline carriers in each of our markets, many of which have greater
resources than we do and entered the market before us. A few of our competitors
operate wireless telecommunications networks covering most of the U.S.
Competitors' earlier entry and broader presence in the U.S. telecommunications
market may have a negative effect on our ability to successfully implement our
strategy. Furthermore, the FCC is actively pursuing policies designed to
increase the number of wireless competitors in each of our markets. For example,
the FCC will soon auction licenses that will authorize the entry of two
additional wireless providers in each market. In addition, other wireless
providers in the U.S. could attempt to implement our domestic strategy of
providing unlimited local service at a low, flat monthly rate if our strategy
proves successful. The landline services with which we will compete are already
used by some of our potential customers, and we may not be successful in our
efforts to persuade potential customers to adopt our wireless service in
addition to, or in replacement of, their current landline service.
Although the deployment of advanced telecommunications services is in its
early stages in many developing countries, we believe competition is increasing
as businesses, and foreign governments realize the market potential of
telecommunications services. In Mexico, a number of international
telecommunications companies, including Verizon, AT&T, MCI, Motorola, Nextel and
SBC, as well as local competitors such as Telmex and other Mexican
telecommunications companies, continue to actively engage in developing
telecommunications services. Pegaso also competes against landline carriers,
including government-owned telephone companies. We also expect the prices that
Pegaso may charge for its products and services in some regions will decline
over the next few years as competition increases in its markets. Our competitors
in Mexico have greater financial resources and more established operations than
Pegaso. Pegaso is at an early stage of development and may not be able to
compete successfully.
We compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio
and domestic and global mobile satellite service. These technologies may have
advantages over the technology we use and may ultimately be more attractive to
customers. We may compete in the future with companies who offer new
technologies and market other services, including cable television access,
landline telephone service and Internet access, that we do not currently intend
to market. Some of our competitors offer these other services together with
their wireless communications service, which may make their services more
attractive to customers. In addition, we expect that, over time, providers of
wireless communications services will compete more directly with providers of
traditional landline telephone services. In addition, energy companies, utility
companies and cable operators may expand their services to offer communications
services.
LEAP MAY FAIL TO RAISE REQUIRED CAPITAL
We require significant additional capital to build out and operate planned
networks and for general working capital needs. We also require additional
capital to invest in any new wireless opportunities, including capital for
license acquisition costs, network buildout of newly-acquired licenses and the
planned development and rollout of our wireless data services. Capital markets
have recently been volatile and uncertain. These markets may not improve, and we
may not be able to access these markets to raise additional capital. If we fail
to obtain required new financing, that failure would have a material adverse
effect on our business and our financial condition. For example, if we are
unable to access capital markets, we may have to restrict our activities or sell
our interests in licenses, or in one or more of our subsidiaries or other
ventures earlier than planned or at a "distressed sale" price.
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YOUR OWNERSHIP INTEREST IN LEAP WILL BE DILUTED UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE
On February 22, 2001, 30,032,912 shares of our common stock were
outstanding, and 19,828,396 additional shares of our common stock were reserved
for issuance. The issuance of these additional shares will reduce your
percentage ownership in Leap.
The following shares were reserved for issuance as of February 22, 2001:
- 3,375,000 shares reserved for issuance upon exercise of a warrant issued
to Qualcomm in connection with the spin-off of Leap, which is exercisable
in whole or in part at any time between now and September 2008;
- 7,458,749 shares reserved for issuance upon the exercise of options or
awards granted or available for grant to employees, officers, directors
and consultants under Leap's equity incentive plans;
- 2,972,938 shares reserved for issuance upon exercise of options to
purchase Leap common stock granted to holders of Qualcomm options in
connection with the distribution of Leap's common stock to the
stockholders of Qualcomm;
- 2,203,691 shares reserved for issuance upon consummation of our pending
acquisitions of wireless licenses in Utica, New York, Visalia,
California, Birmingham and Tuscaloosa, Alabama, Jonesboro, Arkansas, and
Jackson, Mississippi, and up to 785,598 shares (subject to certain
adjustments based upon changes in the market value of wireless licenses)
reserved for issuance in connection with our pending acquisition of
wireless licenses in Buffalo and Syracuse, New York, all of which
acquisitions are subject to FCC approval and other conditions;
- 202,566 shares of common stock reserved for issuance upon exercise of a
warrant held by Chase Telecommunications Holdings, Inc.; and
- 2,829,854 shares of common stock reserved for issuance upon exercise of
the warrants issued in connection with our February 2000 units offering.
We have also committed to issue $9 million of our common stock in a license
acquisition transaction, with the exact number of shares to be set at the
closing of the license acquisition. Under certain circumstances, the number of
shares to be issued in connection with our acquisitions of wireless licenses is
subject to change based on the value of wireless licenses and the market price
of our common stock at the time of the closing of the acquisition.
In January 2001, the Board approved, subject to stockholder approval, an
amendment to Leap's Employee Stock Purchase Plan which would increase the number
of shares reserved for issuance under the plan from 200,000 to 500,000. In
addition, the Board approved, subject to stockholder approval, a new executive
officer deferred bonus stock plan under which 275,000 shares of common stock
would be reserved for issuance. Both of these matters will be voted on by the
stockholders at the annual meeting in April 2001.
In December 2000, we entered into a common stock purchase agreement with
Acqua Wellington North American Equities Fund, Ltd. under which we may, at our
discretion, sell registered common stock from time to time over the succeeding
28 month period. Under the agreement, we may require Acqua Wellington to
purchase between $10 and $25 million of common stock, depending on the market
price of our common stock, during one or more 18 trading day periods. In
addition, we may grant to Acqua Wellington an option to purchase up to an equal
amount of common stock during the same 18 trading day period. Acqua Wellington
purchases the common stock at a discount to its then current market price,
ranging from 4.0% to 5.5%, depending on our market capitalization at the time we
require Acqua Wellington to purchase our common stock. A special provision in
the agreement (as amended) allowed the first sale of common stock under the
agreement to be up to $55 million. On January 23, 2001, we completed the first
sale of our common stock under the agreement, issuing 1,564,336 shares to Acqua
Wellington in exchange for $55.0 million in cash.
Dilution of the outstanding number of shares of our common stock could
adversely affect prevailing market prices for our common stock and our ability
to raise capital through an offering of equity securities.
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We have agreed to file registration statements to register for resale up to
2,989,289 shares reserved for issuance upon consummation of our pending
acquisitions of wireless licenses, plus an additional $9 million of shares of
our common stock in connection with a license acquisition, with the exact number
of shares to be set at the closing of the license acquisition. Under certain
circumstances, the number of shares for which registration rights have been
granted is subject to change based on the value of wireless licenses and the
market price of our common stock at the time of the closing of the transactions
pursuant to which the shares to be registered are issued.
HIGH LEVELS OF DEBT COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION
We have obtained and expect to continue to obtain much of our required
capital through debt financing. A substantial portion of the debt financing,
including all of our vendor financing, bears or is likely to bear interest at a
variable rate, exposing us to interest rate risk.
Our high leverage could have important consequences, including the
following:
- our ability to obtain additional financing may be impaired;
- a substantial portion of our future cash flows from operations must be
dedicated to the servicing of our debt, thus reducing the funds available
for operations and investments;
- our leverage may reduce our ability to adjust rapidly to changing market
conditions and may make us more vulnerable to future downturns in the
general economy; and
- high levels of debt may reduce the value of stockholders' investments in
Leap because debt holders have priority regarding our assets in the event
of a bankruptcy or liquidation.
We may not have sufficient future cash flows to meet our debt payments, and may
not be able to refinance any of our debt at maturity.
In addition, our vendors have a right and may choose to sell outstanding
debt under our vendor financing agreements to third parties at a discount. Such
sales could affect the prices at which our outstanding notes trade and could
adversely affect the market's perception of Leap's creditworthiness.
OUR DEBT INSTRUMENTS CONTAIN PROVISIONS AND REQUIREMENTS THAT COULD LIMIT OUR
ABILITY TO PURSUE BORROWING OPPORTUNITIES
The restrictions contained in the indenture governing the notes issued in
our February 2000 units offering, and the restrictions contained in our vendor
facilities, may limit our ability to implement our business plan, finance future
operations, respond to changing business and economic conditions, secure
additional financing, if needed, and engage in opportunistic transactions, such
as the acquisition of wireless licenses. Such senior debt, among other things,
restricts our ability and the ability of our subsidiaries and our future
subsidiaries to do the following:
- incur additional indebtedness;
- create liens;
- make certain payments, including payments of dividends and distributions
in respect of capital stock;
- consolidate, merge and sell assets;
- engage in certain transactions with affiliates; and
- fundamentally change our business.
In addition, such senior debt requires us to maintain certain ratios,
including:
- leverage ratios;
- interest coverage ratios; and
- fixed charges ratios;
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and to satisfy certain tests, including tests relating to:
- maximum annual capital expenditures;
- minimum covered population in order to incur additional indebtedness;
- minimum number of subscribers to our services in order to incur
additional indebtedness; and
- minimum quarterly revenues and, commencing in 2004, minimum annual
revenues.
We may not satisfy the financial ratios, tests and other covenants under
our senior debt due to events that are beyond our control. If we fail to satisfy
any of the financial ratios, tests, or other covenants, we could be in default
under our senior debt or may be limited in our ability to access additional
funds under our senior debt, which could result in our being unable to make
payments on our outstanding notes. In addition, if we fail to meet performance
requirements, our equipment financing may be restricted or cancelled. Because
Leap's new Cricket markets were launched later in the fourth quarter of 2000
than anticipated and because of reduced equipment sales revenues as a result of
holiday promotions, Cricket revenue was below the minimum required level
contained in the financial covenants in the vendor loan facilities. Leap has
received waivers of its failure to meet this revenue target from all of the
required lenders. We expect to make up this revenue shortfall and to be in
compliance with the revenue covenant by the end of the first quarter of 2001.
There can be no assurance that additional delays in market launches and/or other
adverse results in our business will not result in a failure to meet our
financial or operating covenants in the future. Any defaults that result in a
suspension of further borrowings under the vendor facilities or acceleration of
our obligations to repay the outstanding balances under the vendor facilities
would have a material adverse effect on our business and our financial
condition.
WE MAY EXPERIENCE DIFFICULTIES IN CONSTRUCTING AND OPERATING OUR
TELECOMMUNICATIONS NETWORKS
We will need to construct new telecommunications networks and expand
existing networks. We will depend heavily on suppliers and contractors to
successfully complete these complex construction projects. We may experience
quality deficiencies, cost overruns and delays on these construction projects,
including deficiencies, overruns and delays not within our control or the
control of our contractors. We also will depend on third parties not under our
control or the control of our contractors to provide backhaul and
interconnection facilities on a timely basis. In addition, the construction of
new telecommunications networks requires the receipt of permits and approvals
from numerous governmental bodies including municipalities and zoning boards.
There are pressures to limit growth and tower and other construction in many of
our markets. Failure to receive these approvals in a timely fashion can delay
system rollouts and can raise the costs of completing construction projects.
Pegaso's launch of commercial service in Mexico City was delayed several months
due to delays in obtaining the required permits from local authorities for cell
site construction and some planned 2000 launches were delayed. Some of our
planned Cricket launches were delayed and launched with fewer cell sites than
desirable and therefore reduced coverage, as well.
We may not complete construction projects within budget or on a timely
basis. A failure to satisfactorily complete construction projects could
jeopardize wireless licenses and customer contracts. As a result, a failure of
this type could have a material adverse effect on our business and financial
condition.
Even if we complete construction in a timely and cost effective manner, we
will also face challenges in managing and operating our telecommunications
systems. These challenges include operating and maintaining the
telecommunications operating equipment and managing the sales, advertising,
customer support, billing and collection functions of the business. Our failure
in any of these areas could undermine customer satisfaction, increase customer
turnover, reduce revenues and otherwise have a material adverse effect on our
business and financial condition.
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
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capacity limitations of our networks. If our networks ultimately fail to perform
as expected, that failure could have a material adverse effect on our business
and financial condition.
CALL VOLUME UNDER CRICKET FLAT PRICE PLANS COULD EXCEED THE CAPACITY OF OUR
WIRELESS NETWORKS
Our Cricket strategy in the U.S. is to offer consumers a service plan that
allows them to make virtually unlimited local calls for a low, flat monthly
rate. Our business plans for this strategy assume that Cricket customers will
use their wireless phones for substantially more minutes per month than
customers who purchase service from other providers under more traditional
plans. Our current plans assume, and our experience has shown, that our Cricket
customers use their phones approximately 1,000 minutes per month. We design our
U.S. networks to accommodate this expected high call volume. Although we believe
CDMA-based networks will be well suited to support high call volumes, if
wireless use by Cricket customers exceeds the capacity of our future networks,
service quality may suffer, and we may be forced to raise the price of Cricket
service to reduce volume or otherwise limit the number of new customers, or
incur substantial capital expenditures to expand network capacity. If our
planned networks cannot handle the call volumes they experience, our competitive
position and business prospects in the U.S. could be materially adversely
affected.
THE FCC'S DECISION THAT WE ARE QUALIFIED TO HOLD C-BLOCK AND F-BLOCK LICENSES IS
SUBJECT TO REVIEW AND APPEAL
Our business plan depends on our acquisition and operation of C-Block and
F-Block licenses in the U.S. We may acquire and operate C-Block and F-Block
licenses only if we qualify as a "designated entity" under FCC rules.
In July 1999, the FCC issued an opinion and order that found that we were
entitled to acquire C-Block and F-Block licenses. The order approved our
acquisition of the 36 C-Block licenses for which we were the highest bidder in
the FCC's 1999 spectrum re-auction, and the transfer of three F-Block licenses
which cover portions of North Carolina from AirGate Wireless, L.L.C. to one of
our subsidiaries, in each case subject to the fulfillment of certain conditions.
In October 1999, the FCC issued to us the 36 re-auctioned licenses. In addition,
in March 2000, the FCC approved the transfer to us of 11 C-Block licenses from
Chase Telecommunications and one F-Block license from PCS Devco. Subsequently,
the FCC has approved the transfer to us of various other C-Block and F-Block
licenses.
The FCC's grants of our C-Block and F-Block licenses are subject to certain
conditions. Each of the conditions imposed by the FCC in the opinion and order
has been satisfied. We have a continuing obligation, during the designated
entity holding period for our C-Block and F-Block licenses, to limit our debt to
Qualcomm to 50% or less of our outstanding debt and to ensure that persons who
are or were previously officers or directors of Qualcomm do not comprise a
majority of our board of directors or a majority of our officers. If we fail to
continue to meet any of the conditions imposed by the FCC or otherwise fail to
maintain our qualification to own C-Block and F-Block licenses, that failure
could have a material adverse effect on our business and financial condition.
Various parties previously challenged our qualification to hold C-Block and
F-Block licenses, which challenges were rejected in the FCC's July 1999 order.
One of these parties, a wireless operating company, requested that the FCC
review its order, as well as the order consenting to the transfer of licenses to
us from Chase Telecommunications and PCS Devco. That wireless operating company
also has opposed all of our subsequent assignment or transfer applications at
the FCC. In July 2000, the FCC affirmed its July 1999 order as well as the order
consenting to the transfer of licenses to us from Chase Telecommunications and
PCS Devco, and the wireless operating company subsequently appealed the FCC's
decision with the Court of Appeal for the D.C. Circuit, which appeal is
currently pending. Further judicial review of the FCC's orders granting us
licenses is possible. In addition, licenses awarded to us at auction may be
subject to the outcome of pending judicial proceedings by parties challenging
the auction process or the FCC's decision or authority to 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
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licensees or other designated entities. For example, recent FCC rules changes
have made it easier for large companies to acquire C-Block and F-Block licenses
at auction and in the aftermarket.
In a recent reauction of C-Block and F-Block PCS spectrum that closed on
January 26, 2001, we were named the high bidder on 22 licenses covering 22.4
million potential customers. These licenses have not yet been granted to us, and
we cannot predict what effect any challenges before the FCC or in court to the
reauction generally, or the grant of these licenses to us specifically, will
have on us. NextWave Telecommunications, Inc. is a party to litigation
challenging the validity of the auction. Other parties have indicated publicly
that they intend to challenge the validity of the auction and grants thereunder,
as well.
We may not prevail in connection with any such challenges, appeals or
proceedings. If the FCC or a court determines that we are not qualified to hold
C-Block or F-Block licenses, it could take the position that some or all of our
licenses should be divested, cancelled or reauctioned, or that we should pay
certain financial penalties.
WE MAY NOT SATISFY THE BUILDOUT DEADLINES AND GEOGRAPHIC COVERAGE REQUIREMENTS
APPLICABLE TO OUR LICENSES, WHICH MAY RESULT IN THE REVOCATION OF SOME OF OUR
LICENSES OR THE IMPOSITION OF FINES AND/OR OTHER SANCTIONS
Each of our licenses is subject to an FCC mandate that we construct PCS
networks that provide adequate service to specified percentages of the
population in the areas covered by that license, or make a showing of
substantial service in that area, within five and ten years after the license
grant date. For 30 MHz C-Block licenses, this initial requirement is met when
adequate service is offered to at least one-third of the population of the
licensed service area. For 15 MHz and 10 MHz C-Block licenses and 10 MHz F-Block
licenses, the initial requirement is met when adequate service is provided to at
least one-quarter of the population in the licensed service area. Because we
obtained many of our wireless licenses from third parties subject to existing
buildout requirements, some of our licenses have buildout deadlines in 2001 and
several other licenses have buildout deadlines in the first half of 2002. We are
unable to predict whether the required coverage will be achieved. Failure to
comply with these buildout requirements could cause the revocation of some of
our licenses or the imposition of fines and/or other sanctions.
ADVERSE REGULATORY CHANGES COULD IMPAIR OUR ABILITY TO MAINTAIN EXISTING
LICENSES AND OBTAIN NEW LICENSES
We must maintain our existing telecommunications licenses and those we
acquire in the future to continue offering wireless telecommunications services.
Changes in regulations or failure to comply with the terms of a license or
failure to have the license renewed could result in a loss of the license,
penalties and fines. For example, we could lose a license if we fail to
construct or operate a wireless network as required by the license. If we lose a
license, that loss could have a material adverse effect on our business and
financial condition.
State regulatory agencies, the FCC, the U.S. Congress, the courts and other
governmental bodies regulate the operation of wireless telecommunications
systems and the use of licenses in the U.S. The FCC, Congress, the courts or
other federal, state or local bodies having jurisdiction over our operating
companies may take actions that could have a material adverse effect on our
business and financial condition.
The FCC recently held a reauction of 422 C-Block and F-Block licenses that
closed in January 2001. In connection with that reauction, the FCC made a number
of changes to its wireless and PCS licensing rules, and to the size of the
licenses being sold. Specifically, the FCC subdivided the C-Block licenses
slated for reauction into three 10 MHz licenses. For this reauction, the FCC
also subdivided the BTA service areas to which Entrepreneur's Block eligibility
restrictions would continue to apply into two tiers according to population. In
so-called "Tier 1" BTAs, service areas with a population equal to or greater
than 2.5 million, the FCC removed all eligibility restrictions on two of the
newly-created 10 MHz C-Block licenses, and sold them in open bidding to any
entity that could afford to purchase them, no matter how large. In these Tier 1
BTAs, one 10 MHz C-Block license remained subject to a closed bidding process,
such that only entities meeting Entrepreneur's Block eligibility requirements
were permitted to bid. In Tier 2 BTAs, service areas
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with a population less than 2.5 million, two of the 10 MHz C-Block licenses
remained subject to C-Block and F-Block eligibility rules and thus were reserved
for closed bidding by designated entities, while one 10 MHz C-Block license per
BTA was sold at open bidding. Several 15 MHz C-Block licenses and a number of
F-Block licenses slated for reauction also were sold at open bidding, such that
previous C-Block and F-Block eligibility requirements no longer applied.
The FCC's recent reauction represented a compromise that made some
additional spectrum available to large carriers, but also continued to preserve
C-Block and F-Block spectrum for designated entities. The FCC's C-Block and
F-Block rules, the recent reauction, and FCC actions taken in connection with
previous C-Block auctions and reauctions, remain subject to pending FCC and
judicial proceedings. These proceedings, and continuing changes to the C-Block
and F-Block rules, could have a material adverse effect on our business and
financial condition, including our ability to continue acquiring C-Block and
F-Block licenses. In addition, in the reauction, we were named the high bidder
on 22 licenses covering 22.4 million potential customers. These licenses have
not yet been granted to us, and we cannot predict what effects any challenges
before the FCC or in court to the reauction generally, or the grant of these
licenses to us specifically, will have on us. NextWave Telecommunications, Inc.
is a party to litigation challenging the validity of the auction. Other parties
have indicated publicly that they intend to challenge the validity of the
auction and grants thereunder, as well.
Foreign governmental authorities regulate the operation of wireless
telecommunications systems and the use of licenses in the foreign countries in
which we operate. In some cases, the regulatory authorities also operate our
competitors. Changes in the current regulatory environment of these markets
could have a negative effect on us. In addition, the regulatory frameworks in
some of these countries are relatively new, and the interpretation of
regulations is uncertain.
We believe that the process of acquiring new telecommunications licenses
will be highly competitive. If we are not able to obtain new licenses, or cannot
otherwise participate in companies that obtain new licenses, our ability to
expand our operations would be limited.
RISKS ASSOCIATED WITH PEGASO COULD ADVERSELY AFFECT OUR BUSINESS
We face many risks from our international activities. Pegaso in Mexico
largely depends on the Mexican economy. The Mexican market is subject to rapid
fluctuations in currency exchange rates, consumer prices, inflation, employment
levels and gross domestic product.
Mexico's currency and financial markets continue to experience volatility.
The impact on the Mexican economy of the economic crisis that began in Asia and
then spread to Eastern Europe and Brazil has affected the ability of Mexican
companies to access the capital markets. The ability of Mexican companies to
access the capital markets may not improve and may deteriorate further in the
future. The economy of Mexico historically is affected by fluctuations in the
price of oil and petroleum products. Fluctuations in the prices of these
products and continuing political tensions in Mexico could negatively impact our
prospects in Mexico.
In addition, foreign laws and courts govern many of the agreements of
Pegaso. Other parties may breach or may make it difficult to enforce these
agreements.
Pegaso requires substantial additional capital to continue its planned
growth and operations. Leap may contribute capital to Pegaso in the future. If
Leap does not contribute additional capital to Pegaso, Leap's ownership interest
in Pegaso may be diluted due to additional capital contributions of other
investors.
If presented with attractive opportunities, Leap may invest in additional
international markets in the future. Any such international investment would
create risks associated with the applicable foreign country's economic
condition, including but not limited to currency exchange rates, inflation,
employment levels and gross domestic product.
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OUR RESULTS OF OPERATIONS MAY BE HARMED BY FOREIGN CURRENCY FLUCTUATIONS
We are exposed to risk from fluctuations in foreign currency rates, which
could impact our results of operations and financial condition. Although we
report our financial statements in U.S. dollars, Pegaso reports its results in
Mexican pesos. Consequently, fluctuations in currency exchange rates between the
U.S. dollar and the Mexican peso will affect our results of operations as well
as the value of our ownership interest in Pegaso. We do not currently hedge
against foreign currency exchange rate risks.
Pegaso generates revenues that are paid in Mexican pesos. However, many of
Pegaso's major contracts, including financing agreements and contracts with
equipment suppliers, are denominated in U.S. dollars. As a result, a significant
change in the value of the U.S. dollar against the Mexican peso could
significantly increase Pegaso's expenses and could have a material adverse
effect on our business and financial condition. For example, Pegaso may be
unable to satisfy its obligations under equipment supply agreements denominated
in U.S. dollars in the event of currency devaluations. In some developing
countries, including Mexico, significant currency devaluations relative to the
U.S. dollar have occurred and may occur again in the future. In such
circumstances, Leap and Pegaso may experience economic loss with respect to the
collectability of payments from their business partners and customers and the
recoverability of their investments.
If we invest in other foreign ventures in the future, we will face similar
risks relating to the applicable foreign currency of the foreign venture as well
as other country-specific risks.
THE TECHNOLOGIES THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR ABILITY
TO COMPETE EFFECTIVELY
We have employed digital wireless communications technology based on CDMA
technology. We are required under an agreement entered into with Qualcomm in
connection with our spin-off to use only cdmaOne systems in international
operations through January 2004. Other digital technologies may ultimately prove
to have greater capacity or features and be of higher quality than CDMA. If
another technology becomes the preferred industry standard in any of the
countries in which we operate, we may be at a competitive disadvantage, and
competitive pressures may require us to change our digital technology at
substantial cost. We may not be able to respond to those pressures or implement
new technology on a timely basis, or at an acceptable cost. If CDMA technology
becomes obsolete at some time in the future, and we are unable to effect a
cost-effective migration path, it could materially and adversely affect our
business and financial condition.
IF WIRELESS HANDSETS POSE HEALTH AND SAFETY RISKS, WE MAY BE SUBJECT TO NEW
REGULATIONS, AND DEMAND FOR OUR SERVICES MAY DECREASE
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health concerns, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may have the effect
of discouraging the use of wireless handsets, which would decrease demand for
our services. In recent years, the FCC and foreign regulatory agencies have
updated the guidelines and methods they use for evaluating radio frequency
emissions from radio equipment, including wireless handsets. In addition,
interest groups have requested that the FCC investigate claims that wireless
technologies pose health concerns and cause interference with airbags, hearing
aids and other medical devices. There also are some safety risks associated with
the use of wireless handsets while driving. Concerns over these safety risks and
the effect of any legislation that may be adopted in response to these risks
could limit our ability to market and sell our wireless service.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS
We believe our success depends on the contributions of a number of our key
personnel. These key personnel include but are not limited to Harvey P. White,
Chairman of the Board and Chief Executive Officer, and Susan G. Swenson,
President and Chief Operating Officer. If we lose the services of key personnel,
that loss could materially harm our business. We do not maintain "key person"
life insurance on any employee.
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OUR STOCK PRICE IS VOLATILE
The stock market in general, and the stock prices of telecommunications
companies and other technology-based companies in particular, have experienced
significant volatility that often has been unrelated to the operating
performance of any specific public companies. The market price of Leap common
stock has fluctuated widely in the past quarter and calendar year and is likely
to continue to fluctuate in the future. Factors that may have a significant
impact on the market price of Leap common stock include:
- future announcements concerning Leap or its competitors, including the
announcement of joint development efforts;
- changes in the prospects of our business partners or equipment suppliers;
- delays in the construction of planned Cricket networks and in general
implementation of our business plan;
- failure to achieve planned levels of subscriber growth and other
operating targets;
- deficiencies in our networks;
- results of technological innovations;
- government regulation, including the FCC's review of our acquisition of
wireless licenses;
- changes in recommendations of securities analysts and rumors that may be
circulated about Leap or its competitors;
- the impact of an economic slowdown on existing and future customers; and
- public perception of risks associated with our international operations.
Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Shortfalls in our revenues,
earnings or subscriber growth or delays in network buildout in any given period
relative to the levels and schedule expected by securities analysts could
immediately, significantly and adversely affect the trading price of Leap common
stock. In the past, following periods of volatility in the market price of a
company's securities, class action litigation has often been instituted against
the subject company. Litigation of this type could result in substantial costs
and a diversion of our management's attention and resources which could, in
turn, have a material adverse effect on our business and financial condition.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. The terms of the indenture governing the notes issued in our
February 2000 units offering restrict our ability to declare or pay dividends.
We intend to retain future earnings to fund our growth. Accordingly, you will
not receive a return on your investment in our common stock through the payment
of dividends in the foreseeable future and may not realize a return on your
investment even if you sell your shares. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
A DETERMINATION THAT LEAP IS AN INVESTMENT COMPANY COULD ADVERSELY AFFECT OUR
BUSINESS
Our ownership interest in Pegaso was 20.1% as of February 28, 2001, and we
expect that future investments in ventures will include ownership interests of
less than 50% and that our interests will vary over time as the ventures raise
additional capital. As a result, we could be subject to the registration
requirements of the Investment Company Act of 1940. The Investment Company Act
of 1940 requires registration of companies that engage primarily in the business
of investing in stock. Because we intend to actively participate in the business
operations of our subsidiaries and other ventures, we do not believe that we are
primarily engaged in the business of investing in stock. We intend to monitor
and adjust our interests in our ventures to the extent practical to avoid being
subject to the Investment Company Act of 1940. If we must register as an
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investment company under the Investment Company Act of 1940, compliance with
these regulations will negatively impact our business.
WE HAVE IMPLEMENTED OR ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD
PREVENT OR DELAY AN ACQUISITION OF LEAP THAT IS BENEFICIAL TO OUR STOCKHOLDERS
Our charter and bylaws could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. Our charter and
bylaw provisions could diminish the opportunities for a stockholder to
participate in tender offers. The charter and bylaws may also restrain
volatility in the market price of our common stock resulting from takeover
attempts. In addition, our board of directors may issue preferred stock that
could have the effect of delaying or preventing a change in control of Leap. The
issuance of preferred stock could also negatively affect the voting power of
holders of our common stock. The provisions of the charter and bylaws may have
the effect of discouraging or preventing an acquisition of Leap or a sale of our
businesses. In addition, Section 203 of the Delaware General Corporation Law
imposes restrictions on mergers and other business combinations between us and
any holder of 15% or more of our common stock.
We have adopted a rights plan that could discourage, delay or prevent an
acquisition of Leap at a premium price. The rights plan provides for preferred
stock purchase rights attached to each share of our common stock which will
cause substantial dilution to a person or group acquiring 15% or more of our
stock if the acquisition is not approved by our board of directors.
The transfer restrictions imposed on the U.S. wireless licenses we own also
adversely affect the ability of third parties to acquire us. Our licenses may
only be transferred with prior approval by the FCC. In addition, we are
prohibited from voluntarily assigning or transferring control of our C-Block and
F-Block licenses for five years after grant date except to assignees or
transferees that satisfy the financial criteria established by the FCC for
designated entities, unless we have met the first network buildout deadline
applicable to such license. Accordingly, the number of potential transferees of
our licenses is limited, and any acquisition, merger or other business
combination involving us would be subject to regulatory approval.
In addition, the documents governing our indebtedness contain limitations
on our ability to enter into a change of control transaction. Under these
documents, the occurrence of a change of control transaction, in some cases
after notice and grace periods, would constitute an event of default permitting
acceleration of the indebtedness.
ITEM 2. PROPERTIES
We currently lease two office buildings in San Diego, California for our
headquarters, totaling 61,102 square feet, which we use for sales, marketing,
product development and administrative purposes. The lease on 10,575 square feet
of such space, which we sublease from Qualcomm, is subject to termination upon
90 days' notice by either party. We expect that the amount of space we sublease
from Qualcomm will increase to approximately 25,000 square feet in the near
future. We are also currently considering additional expansion in San Diego, and
may lease up to an additional aggregate of approximately 20,000 square feet over
the next 18 months.
As of February 1, 2001, Leap had leased regional headquarters in
Bridgeville, Pennsylvania; Tulsa, Oklahoma; Albuquerque, New Mexico; and
Nashville, Tennessee, which range from approximately 17,000 square feet to
approximately 18,750 square feet in each market. Leap has 10 additional office
leases in its individual markets which range from 2,460 square feet to 9,208
square feet. We also lease 25 retail stores in our markets ranging in size from
824 square feet to 3,767 square feet and lease four kiosks for retail sales. In
addition, we currently lease approximately 730 cell site locations and 16 switch
and warehouse facilities which range in size from approximately 5,000 square
feet to approximately 23,000 square feet. We do not own any real property.
As we continue to buildout Cricket markets in 2001 and beyond, we expect
that we will need to lease substantial additional office facilities, retail
stores, cell sites and switch and warehouse facilities.
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ITEM 3. 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. A briefing schedule has been issued in the case.
Leap believes the arguments of Carolina PCS are without merit and is vigorously
contesting the appeal.
In a recent 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a)MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Leap's common stock, $.0001 par value per share, is listed for trading on
The Nasdaq National Market under the symbol "LWIN." The following table sets
forth the high and low sales prices for the common stock as reported by the
Nasdaq National Market in each of the periods indicated:
HIGH($) LOW($)
------- ------
CALENDAR YEAR -- 1999
First Quarter............................................ 14.88 5.19
Second Quarter........................................... 25.50 11.38
Third Quarter............................................ 26.50 14.56
Fourth Quarter........................................... 94.06 22.75
CALENDAR YEAR -- 2000
First Quarter............................................ 110.50 47.06
Second Quarter........................................... 99.75 32.25
Third Quarter............................................ 81.88 44.75
Fourth Quarter........................................... 66.63 23.50
On March 1, 2001, the last reported sale price of Leap's common stock on
the Nasdaq National Market was $31.38. As of March 1, 2001, there were
30,040,580 shares of common stock outstanding held by approximately 1,612
holders of record.
Leap has never paid or declared any cash dividends on its common stock and
does not intend to pay dividends on its common stock in the foreseeable future.
The terms of the indenture governing the high-yield notes issued in Leap's
February 2000 units offering restrict its ability to declare or pay dividends.
Leap intends to retain any earnings to fund its growth.
(b) RECENT SALES OF UNREGISTERED SECURITIES
(1) On October 27, 2000, Leap issued 170,374 shares of common stock to
Zuma PCS, LLC, under the terms of an agreement and plan of merger pursuant
to which Leap acquired wireless licenses covering the Albany, Columbus and
Macon, Georgia markets. The issuance of these shares was deemed to be
exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act as a transaction by an issuer not involving a
public offering.
(2) On December 6, 2000, Leap issued 562,500 shares of common stock to
Qualcomm for an aggregate purchase price of $3,434,766 in cash upon
Qualcomm's partial exercise of a warrant Leap issued to Qualcomm in
connection with the spin-off of Leap from Qualcomm in September 1998. The
issuance of these shares was deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
(3) On December 8, 2000, Leap issued 232,755 shares of common stock to
Radiofone PCS, L.L.C., under the terms of an agreement for purchase and
sale of licenses pursuant to which Leap acquired a wireless license
covering the Denver, Colorado market. The issuance of these shares was
deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
(4) On December 12, 2000, Qualcomm net-exercised an additional portion
of the warrant described in paragraph (2) above and Leap issued 453,200
shares of common stock to Qualcomm, with Qualcomm surrendering warrants to
purchase 109,300 shares of common stock in payment of the exercise price.
The issuance of these shares was deemed to be exempt from registration
under the Securities Act in reliance on Section 3(a)(9) and on Section 4(2)
of the Securities Act as a transaction by an issuer not involving a public
offering.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
These tables should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the audited
consolidated financial statements included elsewhere in this report.
PERIOD FROM
YEAR ENDED AUGUST 31, SEPTEMBER 1 TO YEAR ENDED
---------------------------------------- DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 1999 2000
------- ------- -------- --------- -------------- ------------
STATEMENT OF OPERATIONS DATA(1):
Revenues:
Service revenues........................... $ -- $ -- $ -- $ 3,619 $ 6,733 $ 40,599
Equipment revenues......................... -- -- -- 288 39 9,718
------- ------- -------- --------- -------- ----------
Total revenues............................. -- -- -- 3,907 6,772 50,317
------- ------- -------- --------- -------- ----------
Operating expenses:
Cost of service............................ -- -- -- (1,355) (2,409) (20,821)
Cost of equipment.......................... -- -- -- (2,455) (7,760) (54,883)
Selling, general and administrative
expenses................................. (396) (1,361) (23,888) (28,745) (19,344) (117,349)
Depreciation and amortization.............. -- -- -- (5,824) (6,926) (24,563)
------- ------- -------- --------- -------- ----------
Total operating expenses................. (396) (1,361) (23,888) (38,379) (36,439) (217,616)
------- ------- -------- --------- -------- ----------
Operating loss............................. (396) (1,361) (23,888) (34,472) (29,667) (167,299)
Equity in net loss of and write-down of
investments in and loan receivable from
unconsolidated wireless operating
companies.................................. -- (3,793) (23,118) (127,542) (23,077) (78,624)
Interest income.............................. -- -- 273 2,505 764 48,477
Interest expense............................. -- -- -- (10,356) (12,283) (112,358)
Foreign currency transaction gains (losses),
net........................................ -- -- -- (7,211) (8,247) 13,966
Gain on sale of wholly owned subsidiaries.... -- -- -- 9,097 -- 313,432
Gain on issuance of stock by unconsolidated
wireless operating company................. -- -- -- 3,609 -- 32,602
Other income (expense), net.................. -- -- -- (243) (3,336) 1,913
------- ------- -------- --------- -------- ----------
Income (loss) before income taxes and
extraordinary items........................ (396) (5,154) (46,733) (164,613) (75,846) 52,109
Income taxes................................. -- -- -- -- -- (47,540)
------- ------- -------- --------- -------- ----------
Income (loss) before extraordinary items..... (396) (5,154) (46,733) (164,613) (75,846) 4,569
Extraordinary loss on extinguishment of
debt....................................... -- -- -- -- -- (4,737)
------- ------- -------- --------- -------- ----------
Net loss................................. $ (396) $(5,154) $(46,733) $(164,613) $(75,846) $ (168)
======= ======= ======== ========= ======== ==========
Basic net income (loss) per common share:
Income (loss) before extraordinary items... $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ 0.18
Extraordinary loss......................... -- -- -- -- -- (0.19)
------- ------- -------- --------- -------- ----------
Net loss............................ $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ (0.01)
======= ======= ======== ========= ======== ==========
Diluted net income (loss) per common share:
Income (loss) before extraordinary items... $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ 0.14
Extraordinary loss......................... -- -- -- -- -- (0.15)
------- ------- -------- --------- -------- ----------
Net loss............................ $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (4.01) $ (0.01)
======= ======= ======== ========= ======== ==========
Shares used in per share calculations(2):
Basic...................................... 17,648 17,648 17,648 17,910 18,928 25,398
======= ======= ======== ========= ======== ==========
Diluted.................................... 17,648 17,648 17,648 17,910 18,928 32,543
======= ======= ======== ========= ======== ==========
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AS OF AUGUST 31, AS OF DECEMBER 31,
------------------------------------- ---------------------
1996 1997 1998 1999 1999 2000
----- ------- -------- -------- -------- ----------
BALANCE SHEET DATA(1):
Cash and cash equivalents.................... $ -- $ -- $ -- $ 26,215 $ 44,109 $ 338,878
Working capital (deficit).................... (111) (279) (14,789) 6,587 50,361 587,819
Restricted cash equivalents and
investments................................ -- -- -- -- 20,550 65,471
Total assets................................. -- 42,267 157,752 335,331 360,765 1,647,407
Long-term debt............................... -- -- -- 221,812 303,818 897,878
Stockholders' equity (deficit)............... (111) 41,988 142,963 70,900 10,892 583,258
- ---------------
(1) For the fourth quarter of the year ended August 31, 1999, the period from
September 1, 1999 to December 31, 1999, and the first six months of the year
ended December 31, 2000, the financial statements of Smartcom are included
in the selected consolidated financial data as a result of Leap's
acquisition of the remaining 50% interest in Smartcom that we did not
already own on April 19, 1999. Before the fourth quarter of the year ended
August 31, 1999, Leap's investment in Smartcom was accounted for using the
equity method of accounting. Leap subsequently divested its entire interest
in Smartcom on June 2, 2000.
(2) Refer to Note 2 of the Consolidated Financial Statements for an explanation
of the calculation of basic and diluted net loss per common share.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The words "Leap," "we," "our," "ours" and "us" refer to Leap Wireless
International, Inc. and, unless the context otherwise requires, its consolidated
subsidiaries. Unless otherwise specified, information relating to population and
potential customers is based on 1998 population estimates provided by Easy
Analytic Software Incorporated.
The following discussion and analysis is based upon our financial
statements as of the dates and for the periods presented in this report. You
should read this discussion and analysis in conjunction with our financial
statements and related notes.
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 of our credit facilities; our ability
to rollout networks in accordance with our plans, including receiving equipment
and backhaul and interconnection facilities on schedule from third parties;
failure of network systems to perform according to expectations; the effect of
competition; the acceptance of our product offering by our target customers; our
ability to retain customers; our ability to maintain our cost, market
penetration and pricing structure in the face of competition; uncertainties
relating to negotiating and executing definitive agreements and the ability to
close pending transactions described in this report; technological challenges in
developing wireless data services and customer acceptance of such services if
developed; rulings by courts or the FCC adversely affecting our rights to own
and/or operate certain wireless licenses; and other factors detailed in the
section entitled "Risk Factors" included elsewhere in this 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
contract, and because
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service is paid in advance, we currently require no credit check. The simplicity
of the Cricket service allows us to sustain lower operating costs per customer
compared to traditional wireless providers. Our networks are designed and built
to provide coverage in the local calling area where our target customers live,
work and play. As a result, we believe that our network operating costs are less
than those of traditional wireless providers.
At the end of 2000, we had launched Cricket service in markets covering a
total population of approximately 8 million and had more than 190,000 Cricket
customers across the U.S. To date we have acquired or have rights to acquire
wireless licenses covering approximately 73.1 million potential customers in 36
states, and we plan to continue launching new Cricket markets throughout 2001
and beyond.
We currently plan to expand our service offerings to include wireless data
services designed to appeal to a broad segment of the population and further
transform the nature of wireless communications for our customers. We believe
that wireless data services, like our innovative Cricket service, need to be
simple, easy to use and affordable for all consumers. In furtherance of our
objective to offer low-cost wireless data services, we completed our first
purchase of wireless data technology in December 2000 through the acquisition of
myAladdin.com, a proprietary, personalized, location-based technology, and we
are planning further acquisitions in this area.
In Mexico, we were a founding shareholder and have invested $100 million in
Pegaso Telecomunicaciones, S.A. de C.V., a company that is providing a wireless
service in Mexico that is more traditional than our Cricket service. Pegaso
holds wireless licenses covering all of Mexico, representing approximately 99
million potential customers. At the end of 2000, Pegaso had approximately
536,000 customers. We currently own 20.1% of Pegaso.
While we expect our emphasis for the next few years will be on our
U.S.-based operations, if presented with attractive opportunities, we may invest
in international markets where we believe the combination of unfulfilled demand
and our attractive wireless service offerings can fuel rapid growth.
As is typical for start-up telecommunications networks, we expect our
networks in each of our markets to incur operating expenses significantly in
excess of revenues in their initial period of operation. Operating losses are
likely to continue for the next several years as we rapidly expand service in
new markets and seek to increase our customer bases in new and existing markets.
We believe, however, that with our simple, easy to understand approach to
wireless, we can attract new customers more quickly, maintain lower customer
acquisition costs, and sustain lower operating costs per customer compared to
traditional wireless providers, which will allow us to generate profits in each
of our markets sooner than is typical for a start-up wireless provider.
RECENT AND PENDING ACQUISITIONS
CHASE TELECOMMUNICATIONS
In March 2000, we completed the acquisition of substantially all of the
assets of Chase Telecommunications Holdings, Inc., including its wireless
licenses. The purchase price included approximately $6.3 million in cash, the
assumption of principal amounts of liabilities that totaled approximately $138.0
million (with a fair market value of approximately $131.3 million), a warrant
now exercisable to purchase 202,566 shares of Leap common stock at an aggregate
exercise price of $1.0 million, and contingent earn-out payments of up to $41.0
million (plus certain expenses) based on earnings of the business acquired
during the fifth full year following the closing of the acquisition. Under the
purchase method of accounting, the total estimated fair value of the acquisition
was $152.9 million, of which $43.2 million was allocated to property and
equipment and other assets and $109.7 million was allocated to intangible
assets. Intangible assets consist primarily of wireless licenses, which are to
be amortized over their estimated useful lives of 40 years following
commencement of commercial service.
WIRELESS LICENSES
Leap acquired 36 licenses in the federal government's 1999 reauction of
broadband PCS spectrum licenses for $18.7 million in cash. From January 2000
through February 2001, we completed the purchase of
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additional licenses in the U.S. from various third parties for an aggregate of
$99.1 million in cash, 566,205 shares of our common stock that had an aggregate
fair value at the time of purchase of $26.7 million and the assumption of $13.8
million in debt, net of discount, owed to the FCC related to the licenses. In
November 2000, we entered into an agreement with CenturyTel, Inc. to purchase
wireless licenses in various markets in exchange for $118.7 million in cash and
promissory notes in the aggregate face amount of $86.5 million payable with
interest at the rate of 10% per annum in quarterly installments, with $48.0
million due 90 days after close and the final payment due one year after close.
In addition, from January 2000 through February 2001, we entered into various
agreements with third parties to purchase additional wireless licenses in
exchange for an aggregate of cash, shares of common stock and the assumption of
FCC debt with an aggregate estimated fair value of $197.6 million as of February
22, 2001, subject to certain adjustments based upon changes in the market value
of wireless licenses and the market price of our common stock at the time of
closing of some acquisitions. Each of the pending agreements is subject to
customary closing conditions, including FCC approval, and may not be closed on
schedule or at all. We were also the high bidder on 22 wireless licenses in the
FCC's broadband PCS auction completed in January 2001 for an aggregate purchase
price of $350.0 million. The transfer of these licenses to Leap remains subject
to FCC approval. See the section entitled "Risk Factors -- The FCC's Decision
that We Are Qualified to Hold C-Block and F-Block Licenses Is Subject to Review
and Appeal" included elsewhere in this report.
SMARTCOM DISPOSITION
In April 1999, we increased our ownership interest in Smartcom from 50% to
100%. We began fully consolidating Smartcom's results of operations in June
1999, having previously accounted for our investment in Smartcom under the
equity method of accounting. On June 2, 2000, we completed the sale of Smartcom
to Endesa S.A. Under the terms of our agreement with Endesa, Endesa purchased
all of the outstanding capital stock of Smartcom from our subsidiary,
Inversiones Leap Wireless Chile, S.A., and its designated shareholder nominee,
in exchange for gross consideration of approximately $381.5 million, consisting
of cash, three promissory notes, the repayment of intercompany debt due to Leap
by Smartcom, and the release of cash collateral. One of the promissory notes is
subject to a one year right of set-off to secure the indemnification obligations
of Leap and Inversiones under the share purchase agreement between the parties.
Another of the promissory notes is subject to adjustment based upon an audit of
the closing balance sheet of Smartcom completed following the closing of the
agreement. The final audit is not yet completed, and we are in discussions with
Endesa concerning a potential adjustment, which we do not expect to be material.
In February 2001, we sold the third note which had an original principal amount
of $58.2 million to a third party for $60.7 million including accrued interest.
Each of the two remaining promissory notes matures on June 2, 2001 and bears
interest at a rate equal to the 3-month LIBOR, compounded semi-annually. In
addition, the sale of the Smartcom shares resulted in the removal of
approximately $191.4 million of Smartcom liabilities from our consolidated
balance sheet. We recognized a gain on sale of Smartcom of $313.4 million before
related income tax expense of $34.5 million.
PRESENTATION
CHANGE IN FISCAL YEAR
On July 31, 2000, our Board of Directors elected to change Leap's fiscal
year from a year ending on August 31 to a year ending on December 31. The first
new twelve-month fiscal year ended on December 31, 2000. As a result of the
change in year-end, we issued consolidated financial statements as of December
31, 1999 and for the period from September 1, 1999 to December 31, 1999.
FOREIGN SUBSIDIARIES
To accommodate the different fiscal periods of Leap and its foreign
subsidiaries, we have historically recognized our share of net earnings or
losses of such foreign companies on a two-month lag. In conjunction with Leap's
change in fiscal year end, this lag was extended to three months beginning in
the period from September 1, 1999 to December 31, 1999. The effect of this
change on previously reported amounts was adjusted in accumulated deficit in the
period from September 1, 1999 to December 31, 1999.
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The financial statements of Smartcom are included in our consolidated
financial statements from June 1, 1999 to March 31, 2000 as a result of our
acquisition of the remaining 50% of Smartcom that we did not already own in
April 1999 and our sale of 100% of Smartcom on June 2, 2000. The accounts of
Smartcom were consolidated using a three-month lag, and as a result of the sale
in June 2000, the results of Smartcom for April and May 2000 have been reflected
in accumulated deficit during the year ended December 31, 2000. Due to the sale
of Smartcom, our reported results are not indicative of future results.
As we currently own 20.1% of Pegaso, we account for our interest in Pegaso
under the equity method of accounting.
REVENUES AND COST RECOGNITION
For our domestic Cricket business, revenues include wireless voice services
and the sale of handsets and accessories. Wireless services are provided on a
month-to-month basis and are generally billed in advance. We do not charge fees
for the initial activation of service. Revenues from wireless services are
recognized as services are rendered. Amounts received in advance are recorded as
deferred revenue. Cost of service generally includes direct costs and related
overhead, excluding depreciation and amortization, of operating our networks.
Equipment revenues arise from the sale of handsets and accessories. Revenues and
related costs from the sale of handsets are recognized when service is activated
by customers. Revenues and related costs from the sale of accessories are
recognized at the point of sale. The costs of handsets and accessories sold are
recorded in cost of equipment. Handsets sold to third party resellers are
included in inventory until they are sold to and activated by customers. Amounts
due from third party resellers for handsets are recorded as deferred revenue
upon shipment by us and are recognized as equipment revenues when service is
activated by customers. Sales incentives offered without charge to customers
related to the sale of handsets are recognized as a reduction of revenue when
the related equipment revenue is recognized. Customers have the right to return
handsets and accessories within 30 days of purchase or 30 minutes of usage,
whichever occurs first. We record an estimate for returns at the time of
recognizing revenue. Returns have historically been insignificant.
We sell our handsets to customers and resellers at prices below cost.
Handsets sold through our indirect resellers are subject to a reseller's mark-up
which is not included in our equipment revenues. We also deduct from equipment
revenues the value of the first month's service, which is included in the price
of the handset. We also generate revenues from features, including call waiting,
caller ID and voicemail. Service revenue is also generated from the customer's
usage of long-distance minutes purchased from Cricket and directory assistance.
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RESULTS OF OPERATIONS
The following table presents condensed consolidated statement of operations
data for the periods indicated (in thousands).
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
Revenues:
Service revenues.......................................... $ 40,599 $ 9,177
Equipment revenues........................................ 9,718 306
--------- ---------
Total revenues............................................ 50,317 9,483
--------- ---------
Operating expenses:
Cost of service........................................... (20,821) (3,263)
Cost of equipment......................................... (54,883) (7,931)
Selling, general and administrative expenses.............. (117,349) (40,272)
Depreciation and amortization............................. (24,563) (10,884)
--------- ---------
Total operating expenses.......................... (217,616) (62,350)
--------- ---------
Operating loss............................................ (167,299) (52,867)
Equity in net loss of and write-down of investments in and
loan receivable from unconsolidated wireless operating
companies................................................. (78,624) (130,441)
Interest income............................................. 48,477 2,482
Interest expense............................................ (112,358) (20,041)
Foreign currency transaction gains (losses), net............ 13,966 (10,005)
Gain on sale of wholly-owned subsidiaries................... 313,432 9,097
Gain on issuance of stock by unconsolidated wireless
operating company......................................... 32,602 3,609
Other income (expense), net................................. 1,913 (3,490)
--------- ---------
Income (loss) before income taxes and extraordinary items... 52,109 (201,656)
Income taxes................................................ (47,540) --
--------- ---------
Income (loss) before extraordinary items.................... 4,569 (201,656)
Extraordinary loss on early extinguishment of debt.......... (4,737) --
--------- ---------
Net income (loss)......................................... $ (168) $(201,656)
========= =========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
DOMESTIC BUSINESS
Prior to March 2000, we did not report any revenues and related cost of
revenues from our domestic Cricket business because Chase Telecommunications,
which introduced Cricket service in Chattanooga, Tennessee in March 1999 and
Nashville, Tennessee in January 2000, was accounted for under the equity method
of accounting. Excluding Smartcom, we generated $19.1 million and $9.6 million
in service and equipment revenues, respectively, and incurred $13.8 million and
$33.1 million of cost of service and cost of equipment, respectively, from our
Cricket operations for the period from March 17, 2000 to December 31, 2000.
During the fourth quarter of 2000, we launched additional Cricket markets,
bringing our total covered potential customers to approximately 8 million. We
continued to develop a strong network of national, regional and local resellers,
which, together with our company-owned Cricket stores, sell the Cricket service
and handsets.
At December 31, 2000, customers of our Cricket service rose to more than
190,000, compared to approximately 22,000 at December 31, 1999. We added over
127,000 customers in the fourth quarter of 2000, many in the month of December
due to the launch of four new markets covering approximately 4.0 million
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potential customers and our offering of rebates and holiday sales promotions. We
estimate these rebates and promotions resulted in a reduction of equipment
revenues of approximately $3.6 million.
We calculate cost per gross additional customer (CPGA) by including all
distribution costs such as advertising, all marketing and sales expenses
including corporate costs, as well as handset subsidies. In the fourth quarter
of 2000, our CPGA was approximately $249, including all pre-launch marketing
expenses associated with the launch of our new markets as well as holiday
promotional activities.
Excluding Smartcom, selling, general and administrative expenses were $96.3
million and $28.4 million for the years ended December 31, 2000 and 1999,
respectively. The increase in selling, general and administrative expenses was
due primarily to higher expenses associated with the development of new markets
in the U.S. and the launch of network service in additional markets. Excluding
Smartcom, sales and marketing expenses for the year ended December 31, 2000
totaled $22.6 million and consisted primarily of advertising and public
relations and related payroll expenses. General and administrative expenses
totaled $59.8 million for the year ended December 31, 2000 and included costs
for raising capital, business development including acquiring spectrum licenses,
government relations, public reporting and investor relations, legal expenses
and developing our wireless data services businesses. In addition, we incurred
stock-based compensation expense of $13.9 million related to the exchange of
stock options from our June 2000 acquisition of the remaining interest in
Cricket Communications Holdings that we did not already own. We expect that
selling, general and administrative expenses will continue to increase in the
future as a result of our planned network development and launch of Cricket
service in additional U.S. markets and the development and launch of our
wireless data services.
Excluding Smartcom, depreciation and amortization was $14.5 million and
$0.6 million for the years ended December 31, 2000 and 1999, respectively. The
increase in depreciation and amortization was due primarily to the consolidation
of Chase Telecommunications from March 2000, network construction expenditures
and wireless licenses being placed in service in conjunction with market
launches, as well as amortization of goodwill associated with our June 2000
purchase of the remaining interest in Cricket Communications Holdings that we
did not already own.
Excluding Smartcom, our operating loss was $129.2 million and $29.0 million
for the years ended December 31, 2000 and 1999, respectively. The increase in
operating loss primarily reflected the consolidation of Chase Telecommunications
from March 2000 and the increase in market development and launch costs in the
U.S. We expect substantial growth in customers, operating revenues and operating
expenses as a result of the planned development and launch of Cricket service in
additional U.S. markets.
During the year ended December 31, 2000, our equity share in the net loss
of our unconsolidated wireless operating companies related to Pegaso and to
Chase Telecommunications prior to March 2000. During the corresponding period of
the prior year, our share of the net loss of and write-down of investments in
and loan receivable from unconsolidated wireless operating companies also
included Smartcom prior to June 1999 (prior to Leap's acquisition of the
remaining 50 percent interest) and our Russian investments which were largely
written-down or liquidated.
Excluding Smartcom, our interest income was $48.4 million and $2.1 million
for the years ended December 31, 2000 and 1999, respectively. The increase in
interest income related to increased balances of our cash and cash equivalents
and investments received from our equity offering and units offering in February
2000, and cash and notes receivable related to the sale of Smartcom in June
2000.
Excluding Smartcom, our interest expense was $103.2 million and $14.3
million for the years ended December 31, 2000 and 1999, respectively. The
increase in interest expense related primarily to interest on our senior notes
and senior discount notes issued in our February 2000 units offering and to
vendor financing of our wireless networks. We expect interest expense to
increase substantially in the future due to our expected additional borrowings
used to finance the construction of wireless networks in various markets across
the U.S.
Foreign currency transaction gains (losses) primarily reflected unrealized
exchange gains (losses) recognized by Smartcom on U.S. dollar denominated loans
as a result of changes in the exchange rate between the U.S. dollar and the
Chilean peso.
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Gain on sale of subsidiary of $313.4 million reflects our June 2000 sale of
Smartcom, before related income tax effects of $34.5 million. In addition to the
taxes payable on this gain, we incurred an additional $13.0 million in income
taxes related to interest income and foreign exchange gains earned by our
Chilean holding company on U.S. dollar cash balances and notes receivable from
the sale.
Gain on issuance of stock by unconsolidated wireless operating company
reflects reductions in our share of Pegaso's accumulated losses as a result of
decreases in our percentage ownership interest of Pegaso. In July 1999, several
of the other investors contributed $50.0 million to Pegaso. In April 2000,
Sprint PCS invested $200 million in Pegaso by purchasing shares from Pegaso and
shareholders other than Leap. In August 2000, several other existing investors
contributed $50.0 million to Pegaso.
Included in the year ended December 31, 2000, in connection with the
repayment of our credit agreement with Qualcomm in February 2000, we wrote-off
and reported as an extraordinary loss $4.4 million in related unamortized debt
issuance costs.
CONSOLIDATION OF SMARTCOM
As a direct result of the consolidation of Smartcom, we recorded $21.5
million and $0.1 million of additional service and equipment revenues,
respectively, $7.0 million and $21.8 million of additional cost of service and
cost of equipment, respectively, $21.0 million of additional selling, general
and administrative expenses, $10.0 million of additional depreciation and
amortization, $9.0 of additional net interest expense, $10.8 million of
additional foreign currency transaction gains and $0.3 million of additional net
other income, in each case for the year ended December 31, 2000. As a direct
result of the consolidation of Smartcom, we recorded $9.2 million and $0.3
million of additional service and equipment revenues, respectively, $3.3 million
and $7.9 million of additional cost of service and cost of equipment,
respectively, $11.9 million of additional selling, general and administrative
expenses, $10.3 million of additional depreciation and amortization, $5.4
million of additional net interest expense, $10.0 million of additional foreign
currency transaction gains and $0.1 million of additional net other expense, in
each case for the year ended December 31, 1999.
FOUR MONTHS ENDED DECEMBER 31, 1999 COMPARED TO FOUR MONTHS ENDED DECEMBER 31,
1998
We incurred a net loss of $75.8 million during the four month period ended
December 31, 1999 compared to a net loss of $26.1 million in the corresponding
period of the prior year. The increase related primarily to the costs associated
with the launch of network service in new markets. Pegaso launched operations in
Tijuana, Guadalajara and Monterrey in February through September 1999. Cricket
wireless service was launched in Nashville, Tennessee in late January 2000. In
addition, in November 1999 we re-launched service in Chile under a new brand
name and corporate identity. As a result, total customers on our networks
reached approximately 206,000 customers at December 31, 1999 (22,000 in the
U.S., 78,000 in Chile and 106,000 in Mexico), compared to a total customer base
of approximately 23,000 customers at December 31, 1998.
As a direct result of the consolidation of Smartcom, we recorded $6.6
million of operating revenues, $10.2 million of cost of operating revenues, $9.9
million of additional selling, general and administrative expenses, $6.7 million
of additional depreciation and amortization, $4.7 million of additional net
interest expense, and $8.2 million of foreign currency transaction losses during
the four month period ended December 31, 1999. Smartcom's net loss of $33.1
million recognized during the four month period ended December 31, 1999,
compared to $4.5 million that we recognized under the equity method for our 50%
interest in the corresponding period of the prior year. During the four months
ended December 31, 1998, we did not report any operating revenues because all of
our revenue generating operating companies were accounted for under the equity
method of accounting. Our operating companies did not generate material revenues
in the four months ended December 31, 1998.
We incurred $19.3 million of selling, general and administrative expenses
during the four month period ended December 31, 1999, compared to $5.3 million
in the corresponding period of the prior year. The increase included $9.9
million from the consolidation of Smartcom. Excluding Smartcom, selling, general
and administrative expenses increased by $4.1 million over the corresponding
four month period of the prior year due to increased staffing and business
development activities related to Cricket Communications.
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We incurred an operating loss of $29.7 million during the four month period
ended December 31, 1999 compared to an operating loss of $5.5 million in the
corresponding period of the prior year. The $24.2 million increase primarily
reflected the consolidation of Smartcom.
Equity in net loss of unconsolidated wireless operating companies was $23.1
million during the four month period ended December 31, 1999 compared to $19.9
million in the corresponding period of the prior year. During the four months
ended December 31, 1999, our equity share in the net loss of our unconsolidated
wireless operating companies related to Pegaso and Chase Telecommunications.
During the corresponding period of the prior year, our equity share in the net
loss of our unconsolidated wireless operating companies also included Smartcom
(prior to Leap's acquisition of the remaining 50 percent interest) and our
Russian investments which have been subsequently written-down, liquidated or are
in the process of liquidation. Despite these changes, equity in net loss of
unconsolidated wireless operating companies increased as a result of the costs
associated with the launch of Pegaso's service and the expansion of Cricket
services by Chase Telecommunications.
Interest expense was $12.3 million during the four month period ended
December 31, 1999, compared to $1.3 million in the corresponding period of the
prior year. Interest expense related primarily to borrowings under our credit
agreement with Qualcomm and Smartcom's financing of its wireless communications
network.
Foreign currency transaction losses of $8.2 million during the four month
period ended December 31, 1999 reflected unrealized foreign exchange losses
recognized by Smartcom on U.S. dollar denominated loans as a result of changes
in the exchange rate between the U.S. dollar and the Chilean peso.
YEAR ENDED AUGUST 31, 1999 COMPARED TO YEAR ENDED AUGUST 31, 1998
We incurred a net loss of $164.6 million in the year ended August 31, 1999
compared to a net loss of $46.7 million in the year ended August 31, 1998. The
increase resulted primarily from start-up costs associated with our
unconsolidated wireless operating companies. Our equity in net loss of
unconsolidated wireless operating companies was $100.3 million in the year ended
August 31, 1999. In addition, in the year ended August 31, 1999, we recorded a
write-down of equity investments of $27.2 million, interest expense of $10.4
million, foreign currency transaction losses of $7.2 million, a gain on the sale
of a wholly-owned subsidiary of $9.1 million and a gain on issuance of stock by
an unconsolidated wireless operating company of $3.6 million.
As a direct result of the consolidation of Smartcom in the fourth quarter
of the year ended August 31, 1999, we recorded $3.9 million of operating
revenues, $3.8 million of cost of operating revenues, $4.5 million of additional
selling, general and administrative expenses, $5.3 million of additional
depreciation and amortization, $2.9 million of additional interest expense, and
$7.2 million of foreign currency transaction losses. Smartcom's full
consolidation increased our net operating loss in the year ended August 31, 1999
by $9.9 million. During the prior year, we did not report any operating revenues
because all of our operating companies were accounted for under the equity
method of accounting. Our operating companies did not generate material revenues
in the prior year.
We incurred $28.7 million of selling, general and administrative expenses
in the year ended August 31, 1999 compared to $23.9 million in the year ended
August 31, 1998. The increase resulted from the consolidation of Smartcom in the
fourth quarter of the year ended August 31, 1999. Excluding Smartcom, selling,
general and administrative expenses remained relatively flat.
We incurred an operating loss of $34.5 million in the year ended August 31,
1999 compared to an operating loss of $23.9 million in the year ended August 31,
1998. The $10.6 million increase primarily reflected the consolidation of
Smartcom in the fourth quarter of the year ended August 31, 1999.
Equity in net loss of unconsolidated wireless operating companies was
$100.3 million in the year ended August 31, 1999 compared to $23.1 million in
the year ended August 31, 1998. The significant increase in our share of the net
loss of our unconsolidated wireless operating companies related primarily to the
expenditures they incurred in launching their network services, including
marketing and other expenses, and the
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amortization of their capitalized network costs. Smartcom, accounted for under
the equity method until the fourth quarter of 1999, launched nationwide service
in September 1998. Pegaso launched operations in Tijuana, Guadalajara and
Monterrey from February through September 1999. Chase Telecommunications
launched its traditional wireless service in the U.S. in September 1998 and
re-launched service utilizing Leap's Cricket wireless concept in March 1999.
Equity in net loss of unconsolidated wireless operating companies included a
$16.9 million asset impairment charge in the year ended August 31, 1999 as a
result of the satellite failures experienced by one of our former Russian
investments.
We recorded an aggregate $27.2 million write-down in the fourth quarter of
the year ended August 31, 1999, related to our former Russian investments,
reducing the carrying value of these investments to the liquidation proceeds we
expect to receive.
Interest expense in the year ended August 31, 1999 related primarily to
borrowings under our credit agreement with Qualcomm and the consolidation of
$2.9 million of Smartcom interest expense in the fourth quarter of the year
ended August 31, 1999. Smartcom's interest expense related primarily to the
financing of its wireless communications network. We did not incur any interest
expense during the year ended August 31, 1998.
Foreign currency transaction losses of $7.2 million in the year ended
August 31, 1999 reflected unrealized foreign exchange losses recognized by
Smartcom on U.S. dollar denominated loans as a result of changes in the exchange
rate between the U.S. dollar and the Chilean peso during the fourth quarter of
the year ended August 31, 1999.
Gain on sale of wholly-owned subsidiary of $9.1 million in the year ended
August 31, 1999 resulted from our sale of OzPhone Pty. Ltd., our former
Australian subsidiary. OzPhone held wireless licenses but had not initiated
service.
Gain on issuance of stock by unconsolidated wireless operating company of
$3.6 million in the year ended August 31, 1999 reflects a reduction in our share
of Pegaso's accumulated losses as a result of a decrease in our percentage
ownership of Pegaso. In July 1999, several of the other investors contributed
$50.0 million to Pegaso.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
For the year 2001, we have budgeted a total of approximately $1,817.1
million for the following requirements:
- approximately $850.0 million for capital expenditures for the buildout of
our networks and approximately $300.0 million to fund operating losses;
- approximately $649.4 million in connection with our pending acquisitions
of wireless licenses; and
- approximately $17.7 million for general corporate overhead and other
expenses.
Interest under our senior notes, senior discount notes and vendor
facilities is either deferred and added to principal or otherwise paid from our
restricted cash and restricted investment accounts. Our actual expenditures may
vary significantly depending upon whether we purchase additional wireless
licenses, the progress of the buildout of our networks and other factors,
including unforeseen delays, cost overruns, unanticipated expenses, regulatory
expenses, engineering design changes and other technological risks.
As of December 31, 2000, we had a total of approximately $2,099.6 million
in unused capital resources for our future cash needs as follows:
- approximately $635.1 million in consolidated unrestricted cash, cash
equivalents, investments and deposits on hand;
- approximately $102.2 million of proceeds (net of taxes and reserves) from
the notes receivable received from the sale of Smartcom; and
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- approximately $1,362.3 million in commitments (net of capitalized
interest) under vendor financing arrangements with Lucent Technologies,
Inc., Nortel Networks, Inc. and Ericsson Wireless Communications, Inc.,
with availability based on a ratio of the total amounts of products and
services purchased.
In addition, in January 2001 we entered into a secured loan agreement with
Qualcomm for up to approximately $125 million to support our acquisition of
C-Block and F-Block wireless licenses in the FCC's recent broadband PCS auction
that closed on January 26, 2001. We also received $55 million from the sale of
common stock to Acqua Wellington North American Equities Fund, Ltd. under a
common stock purchase agreement with Acqua Wellington we entered into in
December 2000.
According to our estimates, we believe we have sufficient capital resources
to build and launch networks and fund operating losses in markets with
approximately 36 million total potential customers. Our networks in these
markets are expected to cover approximately 24 million potential customers. If
we launch additional markets, invest in any new voice or data services or
ventures or make additional license purchases for cash, we will need to raise
substantial additional capital.
Although we expect some of our markets to be cash flow positive during
2001, we expect to incur significant operating losses and to generate
significant negative cash flow from operating activities in the future while we
continue to build out our networks and build our customer base. Our ability to
satisfy our debt repayment obligations and covenants depends upon our future
performance, which is subject to a number of factors, many of which are beyond
our control. We cannot guarantee that we will generate sufficient cash flow from
our operating activities to meet our debt service and working capital
requirements. We plan to refinance our vendor indebtedness when market
conditions are attractive. However, our ability to refinance our indebtedness
will depend on, among other things, our financial condition, the state of the
public and private debt and equity markets, the restrictions in the instruments
governing our indebtedness and other factors, some of which may be beyond our
control. In addition, if we do not generate sufficient cash flow to meet our
debt service requirements or if we fail to comply with the covenants governing
our indebtedness, we may need additional financing in order to service or
extinguish our indebtedness. We may not be able to obtain financing or
refinancing on terms that are acceptable to us, or at all.
We expect that we will require significant additional financing over the
next several years to substantially complete the buildout of our planned
wireless networks in the U.S., the planned acquisition of additional licenses
and the buildout of markets related to those additional licenses. These capital
requirements include license acquisition costs, capital expenditures for network
construction, operating cash flow losses and other working capital costs, debt
service and closing fees and expenses. As is typical for start-up wireless
communications networks, we expect our networks to incur operating expenses
significantly in excess of revenues in their early years of operations. We are
exploring other public and private debt and equity financing alternatives,
including the sale from time to time of convertible preferred stock, convertible
debentures and other debt and equity securities. However, we may not be able to
raise additional capital on terms that are acceptable to us, or at all.
In February 2000, we completed a public equity offering of 4,000,000 shares
of common stock at a price of $88.00 per share. Net of underwriters' discounts
and commissions and other offering expenses, we received $330.0 million.
In December 2000, we entered into a common stock purchase agreement with
Acqua Wellington North American Equities Fund, Ltd. under which we may, at our
discretion, sell registered common stock from time to time over the succeeding
28 month period. Under the agreement, we may require Acqua Wellington to
purchase between $10.0 and $25.0 million of common stock, depending on the
market price of our common stock, during one or more 18 trading day periods. In
addition, we may grant to Acqua Wellington an option to purchase up to an equal
amount of common stock during the same 18 trading day period. Acqua Wellington
purchases the common stock at a discount to its then current market price,
ranging from 4.0% to 5.5%, depending on our market capitalization at the time we
require Acqua Wellington to purchase our common stock. A special provision in
the agreement (as amended) allowed the first sale of common stock under the
agreement to be up to $55.0 million. On January 23, 2001, we completed the first
sale of our common stock under the agreement, issuing 1,564,336 shares to Acqua
Wellington in exchange for $55.0 million in cash.
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CREDIT FACILITIES AND OTHER FINANCING ARRANGEMENTS
Units Offering. In February 2000, we completed an offering of 225,000
senior units, each senior unit consisting of one 12.5% senior note due 2010
(Senior Note) and one warrant to purchase our common stock, and 668,000 senior
discount units, each senior discount unit consisting of one 14.5% senior
discount note due 2010 (Senior Discount Note) and one warrant to purchase our
common stock. The total gross proceeds from the sale of the senior units and
senior discount units were $225.0 million and $325.1 million, respectively, of
which $164.4 million of the total proceeds were allocated to the fair value of
the warrants, estimated using the Black-Scholes option pricing model. The
warrants issued in the units offering are exercisable for an aggregate of
2,829,854 shares of our common stock at an exercise price of $96.80 per share
from February 23, 2001 to prior to April 15, 2010. The terms and conditions of
the warrants are more fully described in the warrant agreement for the warrants,
which is filed as an exhibit to our Annual Report on Form 10-K.
Interest on the Senior Notes is payable semi-annually. The Senior Discount
Notes begin accruing cash interest on April 15, 2005, with the first semi-annual
interest payment due October 15, 2005. Each Senior Discount Note has an initial
accreted value of $486.68 and a principal amount at maturity of $1,000. We may
redeem any of the notes beginning April 15, 2005. The initial redemption price
of the Senior Notes is 106.25% of their principal amount plus accrued interest.
The initial redemption price of the Senior Discount Notes is 107.25% of their
principal amount at maturity plus accrued interest. In addition, before April
15, 2003, Leap may redeem up to 35% of both the Senior Notes and the Senior
Discount Notes using proceeds from certain qualified equity offerings at 112.5%
of their principal amount and 114.5% of their accreted value, respectively. The
notes are guaranteed by Cricket Communications Holdings. The terms of the notes
include certain covenants that restrict Leap's ability to, among other things,
incur additional indebtedness, create liens, pay dividends, make investments,
sell assets and effect a consolidation or merger. The terms and conditions of
the notes are more fully described in the indenture for the notes, which is
filed as an exhibit to our Annual Report on Form 10-K.
Vendor Financing. Cricket Communications has entered into purchase
agreements and credit facilities with each of Lucent Technologies, Inc., Nortel
Networks, Inc. and Ericsson Wireless Communications, Inc. for the purchase of
network infrastructure products and services and the financing of these
purchases plus additional working capital. Cricket Communications has agreed to
purchase up to $900.0 million of infrastructure products and services from
Lucent. The purchase agreement is subject to early termination at Cricket
Communications' convenience subject to payments for products and services
purchased from Lucent. The Lucent credit facility permits up to $1,350.0 million
in total borrowings by Cricket Communications. Lucent is not required to make
loans under the facility if the total of the loans held directly or supported by
Lucent is an amount greater than $815.0 million. In August 2000, Cricket
Communications entered into a three-year supply agreement with Nortel for the
purchase of infrastructure products and services, and a related credit facility
that permits up to $525.0 million in total borrowings. In October 2000, Cricket
Communications entered into a three-year supply agreement with Ericsson for the
purchase of up to $330.0 million of infrastructure products and services, and a
related credit facility with Ericsson Credit AB that permits up to $495.0
million in total borrowings. Lucent, Nortel and Ericsson have agreed to share
collateral and limit total loans by the three vendors to $1,845.0 million.
Borrowing availability under each credit agreement is generally based on a
ratio of the total amount of products and services purchased from the vendor.
Each of the credit agreements contain various covenants and conditions typical
for loans of this type, including minimum levels of customers and covered
potential customers that must increase over time, minimum revenues, limits on
annual capital expenditures, dividend restrictions (other than the Nortel
Agreement) and other financial ratio tests. The obligations under the credit
agreements are secured by all of the stock of Cricket Communications, its
subsidiaries and the stock of each special purpose subsidiary of Leap formed to
hold wireless licenses used in Cricket Communications' business, and all of
their respective assets. Borrowings under each of the credit facilities accrue
interest at a rate equal to LIBOR plus 3.5% to 4.25% or a bank base rate plus
2.5% to 3.25%, in each case with the specific rate based on the ratio of total
indebtedness to EBITDA. Cricket Communications must pay a commitment fee equal
to 1.25% per annum on the unused commitment under the facilities, decreasing to
0.75% per annum. Principal payments are scheduled to begin after three years
with a final maturity after eight years. Repayment is
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weighted to the later years of the repayment schedule. We plan to refinance
these loans when market conditions are attractive; however, we may not be able
to refinance these loans at that time. At December 31, 2000, Cricket
Communications had $378.7 million outstanding under the vendor credit
agreements, at a weighted-average interest rate of 10.88%. In addition, at
December 31, 2000, we had amounts payable to the vendors that will be financed
under the vendor credit agreements of $34.0 million, which have been included in
other long-term liabilities.
Because Leap's new Cricket markets were launched later in the fourth
quarter of 2000 than anticipated and because of reduced equipment sales revenues
as a result of holiday promotions, Cricket revenue was below the minimum
required level contained in the financial covenants in the vendor loan
facilities. Leap has received waivers of its failure to meet this revenue target
from all of the required lenders. We expect to make up this revenue shortfall
and to be in compliance with the revenue covenant by the end of the first
quarter of 2001. There can be no assurance that additional delays in market
launches and/or other adverse results in our business will not result in a
failure to meet our financial or operating covenants in the future.
Qualcomm Term Loan. In January 2001, we entered into a secured loan
agreement with Qualcomm under which Qualcomm will loan to us approximately
$125.0 million to finance our acquisition of wireless licenses in the FCC's
broadband PCS auction completed in January 2001. Qualcomm has agreed to fund
borrowings under the agreement by the transfer to us of an FCC auction discount
voucher, or, at Qualcomm's option, cash. Under the terms of the agreement, we
must repay the outstanding principal and accrued interest to Qualcomm in a
single payment no later than five years after the date of the initial borrowing.
The loan is subject to mandatory prepayments in certain circumstances, including
as a result of our receiving net cash proceeds in excess of $400.0 million from
issuances of debt or equity securities by Leap or its subsidiaries (other than
certain excluded issuances such as equipment vendor financing, and sales under
the Acqua Wellington common stock purchase agreement which are used to acquire
wireless licenses). The loan bears interest at a variable rate depending on the
collateral we provide. We expect this rate to be at LIBOR plus 7.5%. As security
for the loan, we have agreed to pledge in favor of Qualcomm the stock of
subsidiaries holding licenses acquired in the January 2001 FCC auction with an
aggregate purchase price of at least 150% of the outstanding principal amount of
the loan. The loan is subject to the same covenants that are contained in the
Indenture for the high-yield notes issued in our February 2000 units offering,
and other customary covenants and conditions.
Debt Obligations to the FCC. We have assumed $93.0 million ($84.5 million,
net of discount) in debt obligations to the FCC as part of the purchase price
for wireless licenses from January to December 2000 and assumed in the
acquisition of the assets of Chase Telecommunications Holdings. The terms of the
notes include interest rates ranging from 6.25% to 9.75% per annum and quarterly
principal and interest payments until maturity through July 2007. The notes were
discounted using management's best estimate of the prevailing market interest
rate to us at the time of purchase of the wireless licenses ranging from 9.75%
to 10.75% per annum.
Pegaso Guarantee. In May 1999, Pegaso entered into a loan agreement with
several banks with credit support from Qualcomm. We guaranteed 33% of Pegaso's
obligations under the initial commitment from the lenders of $100.0 million. In
connection with the guarantee, Leap has received an option to subscribe for and
purchase limited voting series "N" treasury shares of Pegaso. The number of
shares that may be purchased by Leap under the option will be calculated as a
proportion of the number of options granted to the lenders to provide a total
internal rate of return of 20% to the lenders on the average outstanding balance
of the bridge loan, subject to a maximum of 418,518 shares of series "N"
treasury shares issuable to Leap. The options have an exercise price of $0.01
per share and expire 10 years from the date of issuance. The options are
exercisable at any time after the date on which all amounts under the loan
agreement are paid in full. At December 31, 2000, the maximum amount of the loan
had been increased to approximately $300.0 million although the amount of our
guarantee was not increased.
41
44
OPERATING ACTIVITIES
We used $166.4 million in cash for operating activities during the year
ended December 31, 2000 compared to $52.2 million in the corresponding period of
the prior year. The increase was primarily attributable to the increase in
operating expenses associated with the launch of network service in additional
markets in the U.S. We expect that cash used in operating activities will
increase substantially in the future as a result of our planned development and
launch of Cricket service in multiple U.S. markets.
We used $31.6 million in cash for operating activities during the
four-month period ended December 31, 1999, compared to $13.5 million in the
corresponding period of the prior year. The increase was primarily attributable
to our net loss, as well as the effect of the full consolidation of Smartcom.
We used $34.1 million in cash for operating activities in the year ended
August 31, 1999, compared to $18.4 million in the year ended August 31, 1998.
Cash used in operating activities in the year ended August 31, 1999 included
$8.5 million attributable to the consolidation of Smartcom during the fourth
quarter.
INVESTING ACTIVITIES
Cash used in investing activities was $225.6 million during the year ended
December 31, 2000 compared to $96.0 million in the corresponding period of the
prior year. Investments during the year ended December 31, 2000 consisted
primarily of $44.9 million of net restricted cash equivalents and investments,
which have been pledged to provide for the payment of the first seven scheduled
interest payments on the senior notes payable through April 2003, the net
purchase of investments of $204.4 million, the purchase of wireless licenses
totaling $94.2 million, capital expenditures of $72.2 million, and loans to
unconsolidated wireless operating companies of $18.5 million, offset by $210.1
million of net proceeds from the sale of Smartcom and $4.3 million of proceeds
from the liquidation of our Russian investee companies. Investments in the
corresponding prior year consisted primarily of loans and advances of $40.4 to
our operating companies, the acquisition of the remaining 50% interest in
Smartcom for $26.9 million (net of cash acquired), and the purchase of wireless
licenses totaling $19.0 million, offset by $16.0 million of proceeds received
from the liquidation of our Russian investee companies. In 2001, we expect to
make significant investments in capital assets, including network infrastructure
and wireless licenses.
Cash used in investing activities was $27.8 million during the four month
period ended December 31, 1999 compared to $90.2 million in the corresponding
period of the prior year. Investments during the four month period ended
December 31, 1999 consisted primarily of $20.5 million held as restricted cash
to secure a Smartcom line of credit and capital expenditures, primarily by
Smartcom, of $4.6 million. Investments in the corresponding period of the prior
year consisted primarily of a $60.7 million capital contribution to Pegaso and
loans and advances of $26.1 million to our operating companies.
Cash used in investing activities was $158.3 million in the year ended
August 31, 1999, compared to $140.7 million in the year ended August 31, 1998.
Significant investments in the year ended August 31, 1999 consisted of $124.5
million of investments in and loans to our unconsolidated operating companies
(of which $71.4 million was made before we began to operate as an independent
company), $28.0 million for our acquisition of the remaining shares of Smartcom,
and $18.7 million for U.S. license acquisitions. Cash used in investing
activities was partially offset by $16.0 million provided from the sale of our
OzPhone subsidiary. Substantially all investments in the year ended August 31,
1998 consisted of investments in and loans to our operating companies.
FINANCING ACTIVITIES
Cash provided by financing activities during the year ended December 31,
2000 was $701.3 million and consisted primarily of proceeds from our public
equity offering and units offering and loans from equipment vendors and banks
totaling $964.8 million, offset by repayment of our credit agreements with
Qualcomm and banks totaling $248.2 million. Cash provided by financing
activities in the prior year ended December 31, 1999 was $161.2 million,
primarily from borrowings under our credit agreement with Qualcomm.
42
45
Cash provided by financing activities during the four month period ended
December 31, 1999 consisted primarily of proceeds from our borrowings under the
credit agreement with Qualcomm of $63.4 million. Cash provided by financing
activities in the corresponding period of the prior year was $118.7 million,
representing $95.3 million of funding from Qualcomm for our operating and
investing activities prior to the distribution of our common stock to Qualcomm's
stockholders in September 1998, and $23.3 million of borrowings under the
Qualcomm credit agreement. Cash provided by financing activities during the year
ended August 31, 1999 amounted to $216.5 million, representing $95.3 million of
funding from Qualcomm for our operating and investing activities before the
distribution of our common stock to Qualcomm's stockholders in September 1998
and $111.1 million of net borrowings under the credit agreement with Qualcomm
after the distribution. Cash provided by financing activities during the year
ended August 31, 1998 amounted to $159.1 million, substantially all of which
represented funding from Qualcomm.
INFLATION
Inflation has had and may continue to have negative effects on the
economies and securities markets of emerging market countries and could have
negative effects on our foreign subsidiaries and any new start-up projects in
foreign countries, including their ability to obtain financing. Mexico, for
example, has periodically experienced relatively high rates of inflation. We
expect that our foreign subsidiaries, where permitted and subject to competitive
pressures, would increase their tariffs to account for the effects of inflation.
However, in those jurisdictions where tariff rates are regulated or specified in
the wireless license, they may not successfully mitigate the impact of inflation
on their operations.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for our year
ending December 31, 2001. In June 2000, the FASB issued SFAS No. 138 which
amended SFAS No. 133 for certain derivative instruments and hedging activities.
Under SFAS No. 133, all derivatives must be recognized as assets and liabilities
and measured at fair value. We do not expect that the adoption of SFAS No. 133
will have a material impact on our consolidated financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Fluctuation and Foreign Exchange Market Risk. We report our
financial statements in U.S. dollars. Pegaso reports its results in Mexican
pesos. Consequently, fluctuations in currency exchange rates between the U.S.
dollar and the Mexican peso may affect our results of operations as well as the
value of our ownership interest in Pegaso. Generally, Pegaso generates revenues
that are paid in Mexican pesos, but its major contracts, including financing
agreements and contracts with equipment suppliers, are denominated in U.S.
dollars. As a result, a significant change in the value of the U.S. dollar
against the Mexican peso could result in a significant increase in its expenses
and could have a material adverse effect on Pegaso and on us. In some emerging
markets, including Mexico, significant devaluations of the local currency have
occurred and may occur again in the future.
Leap has accrued for taxes payable to the Chilean government denominated in
Chilean pesos related to its June 2000 sale of Smartcom. This liability is
subject to the effects of currency fluctuations that may affect reported
earnings and losses. A significant depreciation in the value of the U.S. dollar
against the Chilean peso could result in a significant increase in our
consolidated expenses. As of December 31, 2000, this liability amounted to
approximately $29.7 million. Our results of operations would be negatively
impacted by approximately $3.3 million if the U.S. dollar was to depreciate
against the Chilean peso by 10%. This hypothetical amount is only suggestive of
the effect of currency fluctuations on our results of operations. This liability
is due and payable by no later than April 2001.
Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates primarily to our variable rate long-term debt obligations. The
general level of U.S. interest rates and/or LIBOR affect the
43
46
interest expense that we recognize on our variable rate long-term debt
obligations. As of December 31, 2000, the principal amounts of our variable rate
long-term debt obligations amounted to approximately $377.6 million. An increase
of 10% in interest rates would increase our interest expense for the year 2001
by approximately $4.1 million. This hypothetical amount is only suggestive of
the effect of changes in interest rates on our results of operations for the
year 2001.
Hedging Policy. As required by our vendor loan agreements, Leap will
maintain hedging agreements which fix or limit the interest cost to Cricket
Communications and the Leap subsidiaries that guarantee the vendor loans (other
than Cricket Communications Holdings, Inc.) to a portion of their long-term
indebtedness sufficient to cause 50% of their consolidated long-term
indebtedness to be comprised of a combination of (a) indebtedness bearing
interest at a fixed rate and (b) indebtedness covered by such hedging
agreements. Other than this, Leap does not have a policy to systematically hedge
against foreign currency exchange rate or interest rate risks.
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47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Leap Wireless International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Leap Wireless International, Inc. and its subsidiaries at December
31, 2000 and 1999, and the results of their operations and their cash flows for
the year ended December 31, 2000, for the period from September 1, 1999 to
December 31, 1999 and for each of the two years in the period ended August 31,
1999, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Diego, California
February 28, 2001
45
48
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
2000 1999
---------- ---------
ASSETS
Cash and cash equivalents................................... $ 338,878 $ 44,109
Restricted cash equivalents and short-term investments...... 13,575 20,550
Short-term investments...................................... 199,106 --
Accounts receivable, net.................................... -- 2,742
Inventories................................................. 9,032 4,329
Notes receivable, net....................................... 138,907 --
Other current assets........................................ 12,746 15,411
---------- ---------
Total current assets................................... 712,244 87,141
Property and equipment, net................................. 430,193 113,059
Investments in and loans receivable from unconsolidated
wireless operating companies.............................. 34,691 85,878
Wireless licenses, net...................................... 265,635 56,484
Goodwill and other intangible assets, net................... 30,297 14,991
Restricted investments...................................... 51,896 --
Deposits and other assets................................... 122,451 3,212
---------- ---------
Total assets........................................... $1,647,407 $ 360,765
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 58,735 $ 19,097
Loans payable to banks...................................... -- 17,683
Other current liabilities................................... 65,690 --
---------- ---------
Total current liabilities.............................. 124,425 36,780
Long-term debt.............................................. 897,878 303,818
Other long-term liabilities................................. 41,846 9,275
---------- ---------
Total liabilities...................................... 1,064,149 349,873
---------- ---------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock -- authorized 10,000,000 shares; $.0001
par value, no shares issued and outstanding............ -- --
Common stock -- authorized 300,000,000 shares; $.0001 par
value, 28,348,694 and 20,039,556 shares issued and
outstanding at December 31, 2000 and 1999,
respectively........................................... 3 2
Additional paid-in capital................................ 893,401 292,933
Unearned stock-based compensation......................... (10,019) --
Accumulated deficit....................................... (302,898) (277,720)
Accumulated other comprehensive income (loss)............. 2,771 (4,323)
---------- ---------
Total stockholders' equity............................. 583,258 10,892
---------- ---------
Total liabilities and stockholders' equity............. $1,647,407 $ 360,765
========== =========
See accompanying notes to consolidated financial statements.
46
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LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- ---------- ---------
Revenues:
Service revenues............................ $ 40,599 $ 6,733 $ 3,619 $ --
Equipment revenues.......................... 9,718 39 288 --
--------- -------- --------- --------
Total revenues...................... 50,317 6,772 3,907 --
--------- -------- --------- --------
Operating expenses:
Cost of service............................. (20,821) (2,409) (1,355) --
Cost of equipment........................... (54,883) (7,760) (2,455) --
Selling, general and administrative
expenses................................. (117,349) (19,344) (28,745) (23,888)
Depreciation and amortization............... (24,563) (6,926) (5,824) --
--------- -------- --------- --------
Total operating expenses............ (217,616) (36,439) (38,379) (23,888)
--------- -------- --------- --------
Operating loss.............................. (167,299) (29,667) (34,472) (23,888)
Equity in net loss of and write-down of
investments in and loan receivable from
unconsolidated wireless operating
companies................................... (78,624) (23,077) (127,542) (23,118)
Interest income............................... 48,477 764 2,505 273
Interest expense.............................. (112,358) (12,283) (10,356) --
Foreign currency transaction gains (losses),
net......................................... 13,966 (8,247) (7,211) --
Gain on sale of wholly-owned subsidiaries..... 313,432 -- 9,097 --
Gain on issuance of stock by unconsolidated
wireless operating company.................. 32,602 -- 3,609 --
Other income (expense), net................... 1,913 (3,336) (243) --
--------- -------- --------- --------
Income (loss) before income taxes and
extraordinary items......................... 52,109 (75,846) (164,613) (46,733)
Income taxes.................................. (47,540) -- -- --
--------- -------- --------- --------
Income (loss) before extraordinary items...... 4,569 (75,846) (164,613) (46,733)
Extraordinary loss on early extinguishment of
debt........................................ (4,737) -- -- --
--------- -------- --------- --------
Net loss............................ $ (168) $(75,846) $(164,613) $(46,733)
========= ======== ========= ========
Basic net income (loss) per common share:
Income (loss) before extraordinary items.... $ 0.18 $ (4.01) $ (9.19) $ (2.65)
Extraordinary loss.......................... (0.19) -- -- --
--------- -------- --------- --------
Net loss............................ $ (0.01) $ (4.01) $ (9.19) $ (2.65)
========= ======== ========= ========
Diluted net income (loss) per common share:
Income (loss) before extraordinary items.... $ 0.14 $ (4.01) $ (9.19) $ (2.65)
Extraordinary loss.......................... (0.15) -- -- --
--------- -------- --------- --------
Net loss............................ $ (0.01) $ (4.01) $ (9.19) $ (2.65)
========= ======== ========= ========
Shares used in per share calculations:
Basic....................................... 25,398 18,928 17,910 17,648
========= ======== ========= ========
Diluted..................................... 32,543 18,928 17,910 17,648
========= ======== ========= ========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
YEAR ENDED SEPTEMBER 1, 1999 YEAR ENDED AUGUST 31,
DECEMBER 31, TO DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- --------- ----------
Operating activities:
Net loss................................................ $ (168) $(75,846) $(164,613) $ (46,733)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 24,563 6,926 5,824 --
Gain on sale of wholly-owned subsidiaries............. (313,432) -- (9,097) --
Gain on issuance of stock by unconsolidated wireless
operating company.................................. (32,602) -- (3,609) --
Extraordinary loss on early extinguishment of debt.... 4,737 -- -- --
Equity in net loss of and write-down of investments in
and loan receivable from unconsolidated wireless
operating companies................................ 78,624 23,077 127,542 23,118
Interest accrued to loans receivable and payable,
net................................................ 83,910 7,023 8,251 (273)
Stock-based compensation.............................. 13,946 -- -- --
Other................................................. (3,065) (381) (386) --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net........................... 2,742 (491) (1,203) --
Inventories........................................ (7,969) 25 1,873 --
Deposits and other assets.......................... (112,729) 2,194 (6,588) --
Accounts payable and accrued liabilities........... 47,436 493 9,671 5,510
Other liabilities.................................. 47,630 5,410 (1,770) --
--------- -------- --------- ----------
Net cash used in operating activities............ (166,377) (31,570) (34,105) (18,378)
--------- -------- --------- ----------
Investing activities:
Purchase of property and equipment...................... (72,245) (4,568) (3,935) --
Investments in and loans to unconsolidated wireless
operating companies................................... (18,533) (2,744) (124,471) (133,904)
Acquisitions, net of cash acquired...................... (5,802) -- (26,942) (564)
Purchase of wireless licenses........................... (94,153) -- (19,009) (6,274)
Net proceeds from disposal of subsidiaries.............. 214,455 -- 16,024 --
Purchase of investments................................. (332,987) -- -- --
Sale and maturity of investments........................ 128,540 -- -- --
Restricted cash equivalents and investments, net........ (44,921) (20,500) -- --
--------- -------- --------- ----------
Net cash used in investing activities............ (225,646) (27,812) (158,333) (140,742)
--------- -------- --------- ----------
Financing activities:
Proceeds from issuance of senior and senior discount
notes................................................. 550,102 -- -- --
Proceeds from loans payable to banks and long-term
debt.................................................. 59,324 61,650 135,304 9,000
Repayment of loans payable to banks and long-term
debt.................................................. (248,204) -- (17,500) --
Issuance of common stock................................ 341,949 1,721 3,404 --
Payment of debt financing costs......................... (15,222) -- -- --
Former parent company's investment...................... -- -- 95,268 150,120
Book overdraft.......................................... 13,386 -- -- --
--------- -------- --------- ----------
Net cash provided by financing activities........ 701,335 63,371 216,476 159,120
--------- -------- --------- ----------
Effect of exchange rate changes on cash and cash
equivalents............................................. (8,998) 7,210 2,177 --
Effect of change in foreign company reporting lag on cash
and cash equivalents.................................... (5,545) 6,695 -- --
--------- -------- --------- ----------
Net increase in cash and cash equivalents................. 294,769 17,894 26,215 --
Cash and cash equivalents at beginning of period.......... 44,109 26,215 -- --
--------- -------- --------- ----------
Cash and cash equivalents at end of period................ $ 338,878 $ 44,109 $ 26,215 $ --
========= ======== ========= ==========
See accompanying notes to consolidated financial statements.
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LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
FORMER OTHER
COMMON STOCK ADDITIONAL PARENT UNEARNED COMPREHENSIVE
------------------- PAID-IN COMPANY'S STOCK-BASED ACCUMULATED INCOME
SHARES AMOUNT CAPITAL INVESTMENT COMPENSATION DEFICIT (LOSS)
---------- ------ ---------- ---------- ------------ ----------- -------------
Balance at August 31, 1997............. -- $-- $ -- $ 47,478 $ -- $ (5,550) $ 60
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (46,733) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (2,412)
Total comprehensive loss.........
Transfers from former parent......... -- -- -- 150,120 -- -- --
---------- --- -------- --------- -------- --------- -------
Balance at August 31, 1998............. -- -- -- 197,598 -- (52,283) (2,352)
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (164,613) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (1,043)
Total comprehensive loss.........
Transfers from former parent......... -- -- -- 95,268 -- -- --
Distribution by former parent (Note
1)................................. 17,647,685 2 292,864 (292,866) -- -- --
Repurchase of warrant................ -- -- (5,355) -- -- -- --
Issuance of common stock............. 723,289 -- 2,356 -- -- -- --
Effect of subsidiary and
unconsolidated wireless operating
company equity transactions........ -- -- 1,324 -- -- -- --
---------- --- -------- --------- -------- --------- -------
Balance at August 31, 1999............. 18,370,974 2 291,189 -- -- (216,896) (3,395)
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (75,846) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (928)
Total comprehensive loss.........
Issuance of common stock............. 1,668,582 -- 1,744 -- -- -- --
Effect of change in foreign company
reporting lag (Note 2)............. -- -- -- -- -- 15,022 --
---------- --- -------- --------- -------- --------- -------
Balance at December 31, 1999........... 20,039,556 2 292,933 -- -- (277,720) (4,323)
Components of comprehensive loss:
Net loss........................... -- -- -- -- -- (168) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- (1,271)
Unrealized holding gains on
investments, net................. -- -- -- -- -- -- 89
Total comprehensive loss......... -- -- -- -- -- -- --
Issuance of common stock:
Equity offering (Note 8)........... 4,000,000 1 329,980 -- -- -- --
Warrants exercised................. 1,015,700 -- 3,435 -- -- -- --
Employee stock options and benefit
plans............................ 1,678,598 -- 4,601 -- -- -- --
Tax benefit from exercise of non-
qualified options................ -- -- 1,426 -- -- -- --
Acquisitions....................... 1,614,840 -- 72,695 -- -- -- --
Issuance of warrants (Note 6)........ -- -- 164,366 -- -- -- --
Lag period results of Smartcom (Note
2)................................. -- -- -- -- -- (25,010) --
Realization of cumulative translation
adjustment of Smartcom............. -- -- -- -- -- -- 8,276
Unearned stock-based compensation.... -- -- 24,306 -- (24,306) -- --
Amortization of stock-based
compensation....................... -- -- (341) -- 14,287 -- --
---------- --- -------- --------- -------- --------- -------
Balance at December 31, 2000........... 28,348,694 $ 3 $893,401 $ -- $(10,019) $(302,898) $ 2,771
========== === ======== ========= ======== ========= =======
TOTAL
---------
Balance at August 31, 1997............. $ 41,988
Components of comprehensive loss:
Net loss........................... (46,733)
Foreign currency translation
adjustment....................... (2,412)
---------
Total comprehensive loss......... (49,145)
---------
Transfers from former parent......... 150,120
---------
Balance at August 31, 1998............. 142,963
Components of comprehensive loss:
Net loss........................... (164,613)
Foreign currency translation
adjustment....................... (1,043)
---------
Total comprehensive loss......... (165,656)
---------
Transfers from former parent......... 95,268
Distribution by former parent (Note
1)................................. --
Repurchase of warrant................ (5,355)
Issuance of common stock............. 2,356
Effect of subsidiary and
unconsolidated wireless operating
company equity transactions........ 1,324
---------
Balance at August 31, 1999............. 70,900
Components of comprehensive loss:
Net loss........................... (75,846)
Foreign currency translation
adjustment....................... (928)
---------
Total comprehensive loss......... (76,774)
---------
Issuance of common stock............. 1,744
Effect of change in foreign company
reporting lag (Note 2)............. 15,022
---------
Balance at December 31, 1999........... 10,892
Components of comprehensive loss:
Net loss........................... (168)
Foreign currency translation
adjustment....................... (1,271)
Unrealized holding gains on
investments, net................. 89
---------
Total comprehensive loss......... (1,350)
---------
Issuance of common stock:
Equity offering (Note 8)........... 329,981
Warrants exercised................. 3,435
Employee stock options and benefit
plans............................ 4,601
Tax benefit from exercise of non-
qualified options................ 1,426
Acquisitions....................... 72,695
Issuance of warrants (Note 6)........ 164,366
Lag period results of Smartcom (Note
2)................................. (25,010)
Realization of cumulative translation
adjustment of Smartcom............. 8,276
Unearned stock-based compensation.... --
Amortization of stock-based
compensation....................... 13,946
---------
Balance at December 31, 2000........... $ 583,258
=========
See accompanying notes to consolidated financial statements.
49
52
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
THE COMPANY AND NATURE OF BUSINESS
Leap Wireless International, Inc., a Delaware corporation, together with
its wholly-owned subsidiaries (the "Company" or "Leap") is a wireless
communications carrier that offers digital wireless service in the United States
under the brand "Cricket." Cricket service is operated by the Company's
wholly-owned subsidiary, Cricket Communications, Inc. ("Cricket
Communications"), a wholly-owned subsidiary of Cricket Communications Holdings,
Inc. ("Cricket Communications Holdings"). Under a license from Leap, Chase
Telecommunications, Inc. ("Chase Telecommunications"), a company that Leap
acquired in March 2000, introduced the Cricket service in Chattanooga, Tennessee
in March 1999 (see Note 3). Leap has introduced Cricket service in additional
markets in the United States in 2000 and plans to introduce Cricket service in
additional markets in the United States in 2001 and beyond. The Company also has
a 20.1% interest in Pegaso Telecomunicaciones, S.A. de C.V. ("Pegaso"), a
Mexican corporation which operates a wireless network in Mexico. From April 1999
to June 2, 2000, the Company owned 100% of Smartcom, S.A. ("Smartcom"), a
Chilean corporation which operates a nationwide wireless network in Chile (see
Note 3).
THE DISTRIBUTION
The Company was incorporated in Delaware on June 24, 1998 as a wholly-owned
subsidiary of Qualcomm Incorporated ("Qualcomm"). On September 23, 1998 (the
"Distribution Date"), Qualcomm distributed all of the outstanding shares of
common stock of the Company to Qualcomm's stockholders as a taxable dividend
(the "Distribution"). Following the Distribution, the Company and Qualcomm
operate as independent companies. Qualcomm transferred to the Company its equity
interests in certain operating companies. Qualcomm also transferred to the
Company cash and its right to receive payment from working capital and other
loans Qualcomm made to the operating companies, as well as other miscellaneous
assets and liabilities. The aggregate net tangible book value of the assets
transferred by Qualcomm to the Company in connection with the Distribution was
approximately $236.0 million. The consolidated financial statements reflect the
Company as if it were a separate entity for all periods presented.
CHANGE IN YEAR END
On July 31, 2000, the Board of Directors of the Company elected to change
the Company's fiscal year from a year ending on August 31 to a year ending on
December 31. The first new twelve-month fiscal year ended on December 31, 2000.
As a result of the change in year end, the Company issued consolidated financial
statements as of December 31, 1999 and for the period from September 1, 1999 to
December 31, 1999.
FINANCING RISKS
The Company expects to incur significant operating losses and to generate
significant negative cash flow from operations in the future while it continues
to launch new markets. There is no guarantee that the Company will be able to
generate sufficient cash flows from operations to meet its debt service
requirements. As a result, the Company plans to refinance its vendor
indebtedness when market conditions are attractive and may also need to obtain
additional financing in order to service or extinguish its indebtedness. In
addition, the Company will require significant additional financing to complete
the buildout of its planned networks, to acquire new licenses and to launch
markets related to new licenses. The Company may not be able to obtain
additional financing or refinancing on acceptable terms, or at all.
The Company's revenues in the fourth quarter of 2000 were below the minimum
required level contained in the financial covenants in its vendor loan
facilities (see Note 6). The Company has received waivers of its failure to meet
this revenue target from all of the required lenders. The Company expects to
make up this
50
53
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenue shortfall and to be in compliance with the revenue covenant by the end
of the first quarter of 2001. There can be no assurance that delays in market
launches or other adverse results in the Company's business will not result in a
failure to meet its financial or operating covenants in the future. Any defaults
that result in a suspension of further borrowings under the vendor facilities or
acceleration of the Company's obligations to repay the outstanding balances
under the vendor facilities would have a material adverse effect on its business
and its financial condition.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Leap and its
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Investments in entities in which Leap exercises significant
influence but does not control are accounted for using the equity method. To
accommodate the different fiscal periods of the Company and its foreign
investees, the Company historically recognized its share of net earnings or
losses of such foreign companies on a two month lag. In conjunction with the
Company's change in fiscal year end, this lag was extended to three months
beginning in the period from September 1, 1999 to December 31, 1999. The effect
of this change on previously reported amounts was adjusted in accumulated
deficit in the period from September 1, 1999 to December 31, 1999.
The financial statements of Smartcom were consolidated in the Company's
financial statements from June 1, 1999 to March 31, 2000 as a result of the
Company's acquisition of the remaining 50% of Smartcom that it did not already
own in April 1999 and the sale of all the issued and outstanding shares of
Smartcom on June 2, 2000. Due to the lag period, the results of Smartcom for
April and May 2000 have been reflected in accumulated deficit during the year
ended December 31, 2000.
USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The consolidated financial statements are prepared using accounting
principles generally accepted in the United States of America. These principles
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
ISSUANCE OF STOCK BY SUBSIDIARIES AND EQUITY INVESTEES
The Company recognizes gains and losses on issuance of stock by
subsidiaries and equity investees in its results of operations, except for those
subsidiaries and equity investees that are in the development stage. For those
entities in the development stage, gains and losses are reflected in "effect of
subsidiary and unconsolidated wireless operating company equity transactions" in
stockholders' equity.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company uses the local currency as the functional currency for all of
its international consolidated and unconsolidated operating companies, except
where such operating companies operate in highly inflationary economies. Assets
and liabilities are translated into U.S. dollars at the exchange rate in effect
at the balance sheet date. Revenues and expense items are translated at the
average exchange rate prevailing during the period. Resulting unrealized gains
and losses are accumulated and reported as other comprehensive income or loss.
The functional currency of the Company's foreign investees that operate in
highly inflationary economies is the U.S. dollar. The monetary assets and
liabilities of these foreign investees are re-measured into
51
54
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues,
expenses, gains and losses are translated at the average exchange rate for the
period, and non-monetary assets and liabilities are translated at historical
rates. Resulting re-measurement gains or losses are recognized in results of
operations. Mexico ceased to be considered a highly inflationary economy as of
January 1, 1999 and, as a result, Pegaso changed its functional currency from
the U.S. dollar to its local currency on that date.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At December 31, 2000,
the Company's cash and cash equivalents consisted of deposits with banks and
investments in money market accounts, commercial paper and U.S. government
securities. The Company has not experienced any losses on its cash and cash
equivalents.
RESTRICTED CASH EQUIVALENTS AND INVESTMENTS
Restricted cash equivalents at December 31, 1999 consisted of debt
securities with original maturities of three months or less which were pledged
to collateralize the Company's obligations under a letter of credit agreement
with a bank. Restricted cash equivalents and investments at December 31, 2000
consisted of U.S. government debt securities that have been pledged to provide
for the payment of the first seven scheduled interest payments on long-term
notes payable and are classified as held-to-maturity and carried at amortized
cost, which approximates fair value. At December 31, 2000, the Company's
non-restricted investments consisted of government and corporate fixed income
securities and commercial paper. While it is the Company's general intent to
hold such securities until maturity, management may occasionally sell particular
securities prior to maturity. As such, investments are classified as
available-for-sale and stated at fair value as determined by the most recent
traded price of each security at the balance sheet date. The net unrealized
gains or losses on available-for-sale securities are reported as a component of
comprehensive income (loss). The specific identification method is used to
compute the realized gains and losses on debt and equity securities. Investments
at December 31, 2000 consisted of the following (in thousands):
SHORT-TERM LONG-TERM
---------- ---------
RESTRICTED INVESTMENTS
U.S. government securities..................... $ 13,575 $51,896
======== =======
INVESTMENTS
Commercial paper............................... $117,297 $ --
Corporate notes................................ 28,452 5,341
U.S. government securities..................... 28,070 --
Certificates of deposit........................ 14,149 --
Corporate bonds................................ 8,131 --
Foreign debt securities........................ 3,007 --
-------- -------
$199,106 $ 5,341
======== =======
As of December 31, 2000, the contractual maturities of debt securities were as
follows (in thousands):
YEARS TO MATURITY
----------------------------
LESS THAN ONE ONE TO FIVE
------------- -----------
Held-to-maturity (restricted investments)...... $ 13,575 $51,896
Available-for-sale............................. $190,220 $ 78
52
55
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Available-for-sale securities were comprised as follows at December 31,
2000 (in thousands):
UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
-------- ---------- ---------- ----------
Debt securities................................... $190,209 $117 $(28) $190,298
Certificates of deposit........................... 14,149 -- -- 14,149
-------- ---- ---- --------
$204,358 $117 $(28) $204,447
======== ==== ==== ========
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments,
including cash equivalents and short-term investments, accounts receivable,
notes receivable and accounts payable, approximate fair value due to their
short-term maturities. Loans payable to banks, vendors and the U.S. government
approximate fair value due to their risk adjusted market rates of interest. The
Company's senior notes and senior discount notes had an aggregate estimated
market value of $264.1 million at December 31, 2000 compared to an aggregate
book value of $437.7 million (see Note 6).
INVENTORIES
Inventories consist of handsets and accessories not yet placed into service
and are stated at the lower of cost or market using the first-in, first-out
method.
INVESTMENTS IN UNCONSOLIDATED WIRELESS OPERATING COMPANIES
The Company uses the equity method to account for investments in corporate
entities in which it exercises significant influence but does not control. Under
the equity method, the investment is originally recorded at cost and adjusted to
recognize the Company's share of net earnings or losses of the investee, limited
to the extent of the Company's investment in, advances to and financial
guarantees for the investee. Such earnings or losses of the Company's investees
are adjusted to reflect the amortization of any differences between the carrying
value of the investment and the Company's equity in the net assets of the
investee. For those equity investees where the Company is the only contributor
of assets, equity in net losses of wireless operating companies includes 100% of
the losses of the equity investee.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Additions and improvements are
capitalized, while expenditures that do not enhance or extend the asset's useful
life are charged to operating expenses as incurred. Depreciation is applied
using the straight-line method over the estimated useful lives of the assets
once the assets are placed in service, which are 5 to 15 years for buildings and
network infrastructure assets, 3 to 7 years for equipment, which includes
furniture and fixtures, and 3 years for computer equipment. Leasehold
improvements, which are included in buildings and infrastructure, are amortized
over the shorter of their estimated useful lives or the remaining term of the
related lease.
The Company's network construction expenditures are recorded as assets
under construction until the network or assets are placed in service, at which
time the assets are transferred to the appropriate property and equipment
category. As a component of construction-in-progress, the Company capitalizes
interest and salaries and related costs of engineering employees, to the extent
time and expense are contributed to the construction effort, during the
construction period. At December 31, 2000, the Company had capitalized $3.9
million in interest to property and equipment.
53
56
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WIRELESS LICENSES
Wireless licenses are recorded at cost and amortized using the
straight-line method over their estimated useful lives upon commencement of
commercial service, generally 40 years. Accumulated amortization related to
wireless licenses totaled $1.2 million and $0.7 million at December 31, 2000 and
1999, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price and related costs over
the fair value assigned to the net tangible and identifiable intangible assets
of businesses acquired. Goodwill is amortized on a straight-line basis over its
estimated useful life, generally 20 years. Other intangible assets are amortized
on a straight-line basis over their estimated useful lives of generally 3 years.
Accumulated amortization of goodwill and other intangible assets totaled $2.2
million and $0.8 million at December 31, 2000 and 1999, respectively.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets and
intangible assets when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is recognized when the undiscounted cash flows expected to be
generated by an asset (or group of assets) is less than its carrying amount. Any
required impairment loss would be measured as the amount by which the asset's
carrying value exceeds its fair value, and would be recorded as a reduction in
the carrying value of the related asset and a charge to results of operations.
DEBT DISCOUNT AND DEFERRED FINANCING COSTS
Debt discount and deferred financing costs are amortized and recognized as
interest expense under the interest method.
REVENUES AND COST OF REVENUES
Wireless services are provided on a month-to-month basis and are generally
billed in advance. The Company does not charge fees for the initial activation
of service. Revenues from wireless services are recognized as services are
rendered. Amounts received in advance are recorded as deferred revenue. Cost of
service generally includes direct costs and related overhead, excluding
depreciation and amortization, of operating the Company's networks.
Equipment revenues arise from the sale of handsets and accessories.
Revenues and related costs from the sale of handsets are recognized when service
is activated by customers. Revenues and related costs from the sale of
accessories are recognized at the point of sale. The costs of handsets and
accessories sold are recorded in cost of equipment. Handsets sold to third party
resellers are included in inventory until they are sold to and activated by
customers. Amounts due from third party resellers for handsets are recorded as
deferred revenue upon shipment by the Company and are recognized as equipment
revenues when service is activated by customers.
Sales incentives offered without charge to customers related to the sale of
handsets are recognized as a reduction of revenue when the related equipment
revenue is recognized. Customers have the right to return handsets and
accessories within 30 days of purchase or 30 minutes of usage, whichever occurs
first. The Company records an estimate for returns at the time of recognizing
revenue. Returns have historically been insignificant.
54
57
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed as incurred. Advertising costs
totaled $3.0 million, $0.2 million and $0.1 million during the year ended
December 31, 2000, the period from September 1, 1999 to December 31, 1999 and
the year ended August 31, 1999.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee and director
stock-based compensation plans using the intrinsic value method. The Company
provides pro forma disclosures of net income (loss) and net income (loss) per
share as if a fair value method had been applied in measuring compensation
expense. Stock-based compensation is amortized over the related vesting periods
of the stock awards.
INCOME TAXES
Current income tax benefit (expense) is the amount expected to be
receivable (payable) for the current year. A deferred tax asset and/or liability
is computed for both the expected future impact of differences between the
financial statement and tax bases of assets and liabilities and for the expected
future tax benefit to be derived from tax loss and tax credit carryforwards.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be "more likely than not" realized in future
tax returns. Tax rate changes are reflected in income in the period such changes
are enacted.
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common share reflect the potential dilutive effect
of additional common shares that are issuable upon exercise of outstanding stock
options and warrants calculated using the treasury stock method and the
conversion of Qualcomm Trust Convertible Preferred Securities. The weighted
average number of common shares outstanding assumes that the 17,647,685 shares
issued at the Distribution were outstanding for the periods prior to the
Distribution. A reconciliation of weighted-average shares outstanding used in
calculating basic and diluted net income (loss) per share is as follows (in
thousands):
PERIOD FROM
SEPTEMBER 1, YEAR ENDED
YEAR ENDED 1999 TO AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------
2000 1999 1999 1998
------------ ------------ ------ ------
Weighted average shares outstanding -- basic
earnings per share........................... 25,398 18,928 17,910 17,648
Effect of dilutive securities: -- -- --
Employee stock options....................... 2,985 -- -- --
Qualcomm warrant............................. 3,980 -- -- --
Warrant to Chase Telecommunications
Holdings.................................. 103 -- -- --
Qualcomm Trust Convertible Preferred
Securities................................ 77 -- -- --
------ ------ ------ ------
Adjusted weighted average shares outstanding --
diluted earnings per share................... 32,543 18,928 17,910 17,648
====== ====== ====== ======
55
58
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following shares were not included in the computation of diluted
earnings per share as their effect would be antidilutive (in thousands):
PERIOD FROM
SEPTEMBER 1, YEAR ENDED
YEAR ENDED 1999 TO AUGUST 31,
DECEMBER 31, DECEMBER 31, -------------
2000 1999 1999 1998
------------ ------------ ----- ----
Employee stock options............................. 1,214 5,697 5,940 --
Qualcomm warrant................................... -- 4,500 4,500 --
Senior and senior discount unit warrants........... 2,830 -- -- --
Qualcomm Trust Convertible Preferred Securities.... -- 925 2,271 --
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for the
Company's year ending December 31, 2001. In June 2000, the FASB issued SFAS No.
138 which amended SFAS No. 133 for certain derivative instruments and hedging
activities. Under SFAS No. 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. The Company does not expect that the
adoption of SFAS No. 133 will have a material impact on its consolidated
financial position or results of operations.
NOTE 3. RECENT AND PENDING ACQUISITIONS AND DISPOSITION
CHASE TELECOMMUNICATIONS HOLDINGS
In March 2000, the Company completed the acquisition of substantially all
of the assets of Chase Telecommunications Holdings, Inc., including wireless
licenses. The purchase price included $6.3 million in cash, the assumption of
principal amounts of liabilities that totaled $138.0 million (with a fair value
of $131.3 million), a warrant now exercisable to purchase 202,566 shares of Leap
common stock at an aggregate exercise price of $1.0 million (which had a fair
value of $15.3 million at the acquisition date), and contingent earn out
payments of up to $41.0 million (plus certain expenses) based on the earnings of
the business acquired during the fifth full year following the closing of the
acquisition. Under the purchase method of accounting, the total estimated fair
value of the acquisition was $152.9 million, of which $43.2 million was
allocated to property and equipment and other assets and $109.7 million was
allocated to intangible assets. Intangible assets consist primarily of wireless
licenses that are amortized over their estimated useful lives of 40 years
following commencement of commercial service.
56
59
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited pro forma results of operations are provided to reflect the
acquisition as if it had occurred as of September 1, 1998 (in thousands, except
per share data):
YEAR ENDED
--------------------------
DECEMBER 31, AUGUST 31,
2000 1999
------------ ----------
Revenues.................................................... $53,288 $ 8,296
======= =========
Income (loss) before extraordinary items.................... $ 2,811 $(171,192)
======= =========
Net loss.................................................... $(1,926) $(171,192)
======= =========
Pro forma basic net loss per common share................... $ (0.08) $ (9.56)
======= =========
Pro forma diluted net loss per common share................. $ (0.06) $ (9.56)
======= =========
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future.
CRICKET COMMUNICATIONS HOLDINGS
On June 15, 2000, through a subsidiary merger, the Company acquired the
remaining 5.11% of Cricket Communications Holdings that it did not already own.
These shares were owned by individuals and entities, including directors and
employees of the Company and Cricket Communications Holdings. Each issued and
outstanding share of Cricket Communications Holdings common stock not held by
the Company was converted into the right to receive 0.315 of a fully paid and
non-assessable share of the Company's common stock. As a result, 1,048,635
shares of the Company's common stock were issued. The Company also assumed Chase
Telecommunications Holdings' warrant to purchase 1% of the common stock of
Cricket Communications Holdings, which was converted into a warrant to acquire
202,566 shares of the Company's common stock, at an aggregate exercise price of
$1.0 million. The aggregate fair value of the shares issued and warrant assumed
in excess of the carrying value of the minority interest was allocated to
goodwill. As a result, goodwill of $29.2 million was recorded in June 2000 and
is being amortized over 20 years. In addition, the Company assumed all unexpired
and unexercised Cricket Communications Holdings stock options outstanding at the
time of the merger, whether vested or unvested, which upon conversion amounted
to options to purchase 407,784 shares of the Company's common stock. The Company
recorded unearned stock-based compensation of $24.3 million for the excess of
the fair value of the Company's common stock on the date of the merger over the
exercise price of the options exchanged. Amortization of stock-based
compensation amounted to $13.9 million for the year ended December 31, 2000.
WIRELESS LICENSES
The Company acquired 36 licenses in the federal government's 1999 reauction
of broadband PCS spectrum licenses for $18.7 million in cash. From January 2000
through February 2001, the Company completed the purchase of several additional
licenses in the United States from various third parties for an aggregate of
$99.1 million in cash, 566,205 shares of the Company's common stock with an
aggregate fair value at the time of purchase of $26.7 million and the assumption
of $13.8 million in debt, net of discount, owed to the Federal Communications
Commission ("FCC") related to the licenses. In November 2000, the Company
entered into an agreement with CenturyTel, Inc. to purchase wireless licenses in
various markets in exchange for $118.7 million in cash and promissory notes in
the aggregate face amount of $86.5 million payable with interest at the rate of
10% per annum in quarterly installments with $48.0 million due 90 days after
close and the final payment due one year after close. In addition, from January
2000 through February 2001, the Company entered into various agreements with
third parties to purchase additional licenses in exchange for cash, shares of
common stock and the assumption of FCC debt with an aggregate estimated fair
57
60
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value of $197.6 million as of February 22, 2001, subject to certain adjustments
based upon changes in the market value of wireless licenses and the market price
of the Company's common stock at the time of closing of some acquisitions. Each
of the pending agreements is subject to customary closing conditions, including
FCC approval, and may not be closed on schedule or at all. The Company was also
the high bidder on 22 wireless licenses in the FCC's broadband PCS auction
completed in January 2001 for an aggregate purchase price of $350.0 million. The
transfer of these licenses to the Company remains subject to FCC approval.
SALE OF SMARTCOM
On June 2, 2000, the Company completed the sale of all of the issued and
outstanding shares of Smartcom to Endesa, S.A. ("Endesa") for gross
consideration of $381.5 million, consisting of $156.8 million in cash, three
one-year promissory notes totaling $143.2 million, subject to certain
post-closing adjustments, the repayment of intercompany debt owed to the Company
by Smartcom totaling $53.3 million and the release of cash collateral posted by
the Company securing Smartcom indebtedness of $28.2 million. In addition, the
Company's loans payable to banks in Chile of $10.3 million and $7.6 million were
repaid by the Company. The sale of the Smartcom shares resulted in the removal
of approximately $191.4 million of Smartcom liabilities from the Company's
consolidated balance sheet. The Company recognized a gain on the sale of $313.4
million before related income tax expense of $34.5 million. One of the
promissory notes is subject to a one year right of set-off to secure the
indemnification obligations of the Company under the share purchase agreement
between the parties. Another of the promissory notes is subject to adjustment
based upon an audit of the closing balance sheet of Smartcom completed following
the closing of the agreement. The final audit is not yet completed and the
Company is in discussions with Endesa concerning a potential adjustment, which
it does not expect to be material. In February 2001, the Company sold the third
note which had an original principal amount of $58.2 million to a third party
for $60.7 million including accrued interest. Each of the two remaining
promissory notes matures on June 2, 2001 and bears interest at a rate equal to
the 3-month LIBOR, compounded semi-annually.
Unaudited pro forma results of operations are provided to reflect the
acquisition of substantially all of the assets of Chase Telecommunications
Holdings and the sale of Smartcom as if they had occurred as of September 1,
1998 (in thousands, except per share data):
YEAR ENDED
--------------------------
DECEMBER 31, AUGUST 31,
2000 1999
------------ ----------
Revenues.................................................... $ 31,642 $ 4,389
========= =========
Loss before extraordinary items............................. $(228,522) $(135,450)
========= =========
Net loss.................................................... $(232,944) $(135,450)
========= =========
Pro forma basic and diluted net loss per common share....... $ (9.17) $ (7.56)
========= =========
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition and the sale
occurred on the date indicated, or which may result in the future.
NOTE 4. INVESTMENTS IN AND LOANS RECEIVABLE FROM WIRELESS OPERATING COMPANIES
The Company has equity interests in companies that directly or indirectly
operate wireless communications networks. The Company's ability to withdraw
funds, including dividends, from its participation in such investments is
dependent on receiving the consent of lenders and the other participants, over
which the Company has no control.
58
61
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commencing in June 1999, the Company began fully consolidating Smartcom as
a result of the Company's acquisition of the remaining 50% of Smartcom that it
did not already own. Prior to June 1999, Smartcom was accounted for under the
equity method. The Company recorded equity losses from Smartcom of $13.1 million
and $3.1 million during the years ended August 31, 1999 and 1998, respectively.
Prior to the Company's completion of its acquisition of substantially all
the assets of Chase Telecommunications Holdings in March 2000, Chase
Telecommunications Holdings was accounted for under the equity method. The
Company recorded equity losses from Chase Telecommunications Holdings of $10.4
million, $9.7 million, $20.9 million and $11.8 million during the year ended
December 31, 2000, the period from September 1, 1999 to December 31, 1999 and
the years ended August 31, 1999 and 1998, respectively.
At December 31, 2000, the Company has a 20.1% interest in Pegaso. The
Company invested $100.0 million in Pegaso from June to September 1998 as a
founding shareholder. In July 1999, several of the other investors purchased an
additional $50.0 million of capital stock of Pegaso. In April 2000, Sprint PCS
invested $200.0 million in Pegaso by purchasing shares from Pegaso and
shareholders other than Leap. Several of the other existing investors
contributed an additional $50.0 million of capital in August 2000, reducing the
Company's percentage interest to 20.1%. Pegaso requires substantial additional
capital to continue its planned growth and operations. As a result, Pegaso is
seeking additional debt and equity financing, including additional vendor
financing. Leap may contribute capital to Pegaso in the future. If Leap does not
contribute additional capital to Pegaso, Leap's ownership interest in Pegaso may
be diluted due to additional capital contributions of other investors. The
Company has recorded gains in results of operations due to these transactions of
$32.6 million during the year ended December 31, 2000, and for the year ended
August 31, 1999, the Company recognized a gain in results of operations of $3.6
million and recorded $0.8 million directly to additional paid-in capital for the
change in interest that occurred during Pegaso's development stage. The Company
recorded equity losses from Pegaso of $68.2 million, $13.4 million, $23.6
million and $2.1 million during the year ended December 31, 2000, the period
from September 1, 1999 to December 31, 1999 and the years ended August 31, 1999
and 1998, respectively.
Condensed combined financial information for the operating companies
accounted for under the equity method is summarized as follows (in thousands):
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Current assets.............................................. $ 106,751 $ 33,940
Non-current assets.......................................... 678,628 578,326
Current liabilities......................................... (300,424) (91,217)
Non-current liabilities..................................... (312,489) (349,262)
--------- ---------
Total stockholders' capital....................... 172,466 171,787
Other stockholders' share of capital........................ 137,775 85,909
--------- ---------
Company's share of capital.................................. $ 34,691 $ 85,878
========= =========
Investments in and loans receivable from unconsolidated
wireless operating companies.............................. $ 34,691 $ 85,878
========= =========
59
62
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM
SEPTEMBER 1, 1999
YEAR ENDED TO YEAR ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- ---------- ---------
Operating revenues........................... $ 80,909 $ 4,955 $ 8,190 $ 22
--------- -------- --------- --------
Operating expenses........................... (318,329) (70,804) (153,062) (20,739)
Other income (expense), net.................. (52,621) (14,516) (22,471) (18,403)
Foreign currency transaction gains (losses),
net........................................ 1,917 8,612 (1,489) (3,970)
--------- -------- --------- --------
Net loss........................... (288,124) (71,753) (168,832) (43,090)
Other stockholders' share of net loss........ (208,002) (47,212) (62,491) (19,402)
--------- -------- --------- --------
Company's share of net loss.................. (80,122) (24,541) (106,341) (23,688)
Write-down of investments.................... -- -- (27,242) --
Amortization of excess cost of investment.... -- -- (630) --
Elimination of intercompany transactions..... 1,498 1,464 6,671 570
--------- -------- --------- --------
Equity in net loss of and
write-down of investments in and
loan receivable from
unconsolidated wireless operating
companies........................ $ (78,624) $(23,077) $(127,542) $(23,118)
========= ======== ========= ========
NOTE 5. LOANS PAYABLE TO BANKS
Between July and November 1998, the Company borrowed $15.7 million under
notes payable to banks in Chile. The loans of $9.0 million and $6.7 million,
along with capitalized interest and fees of $1.9 million, at December 31, 1999
bore interest at rates of 8.1% and 8.5% per annum, respectively. The loans were
repaid in June 2000.
In November 1999, the Company and Smartcom entered into a loan arrangement
with a bank. At December 31, 1999, the Company deposited funds with the bank
totaling $20.6 million as collateral for borrowings under the credit
arrangement. These funds were recorded as restricted cash equivalents in the
accompanying consolidated balance sheet. At December 31, 1999, borrowings from
the bank totaled $14.1 million, which are not included in the consolidated
financial statements due to the three month reporting lag for Smartcom. The
borrowings bore interest at the weighted-average rate of 7.01% per annum and
were repaid in July 2000.
60
63
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
DECEMBER 31,
--------------------
2000 1999
-------- --------
12.5% senior notes, due 2010, effective interest rate of
15.8%..................................................... $162,939 $ --
14.5% senior discount notes, face amount of $668.0 million,
due 2010, effective interest rate of 16.3%................ 274,776 --
Vendor financing agreements, weighted average interest rate
of 10.88%................................................. 378,668 10,421
U. S. government financing.................................. 83,140 --
Qualcomm credit agreement, net of facility fee.............. -- 187,570
Smartcom payment agreement.................................. -- 89,220
Note payable, net of discount............................... -- 16,607
-------- --------
899,523 303,818
Less current portion........................................ (1,645) --
-------- --------
$897,878 $303,818
======== ========
UNITS OFFERING
In February 2000, the Company completed an offering of 225,000 senior
units, each senior unit consisting of one 12.5% senior note due 2010 ("Senior
Note") and one warrant to purchase the Company's common stock, and 668,000
senior discount units, each senior discount unit consisting of one 14.5% senior
discount note due 2010 ("Senior Discount Note") and one warrant to purchase the
Company's common stock. The total gross proceeds from the sale of the senior
units and senior discount units were $225.0 million and $325.1 million,
respectively, of which $164.4 million of the total proceeds were allocated to
the fair value of the warrants, estimated using the Black-Scholes option pricing
model. The warrants are exercisable for an aggregate of 2,829,854 shares of the
Company's common stock at an exercise price of $96.80 per share from February
23, 2001 to prior to April 15, 2010.
Interest on the Senior Notes is payable semi-annually. The Senior Discount
Notes begin accruing cash interest on April 15, 2005, with the first semi-annual
interest payment due October 15, 2005. Each Senior Discount Note has an initial
accreted value of $486.68 and a principal amount at maturity of $1,000. The
Company may redeem any of the notes beginning April 15, 2005. The initial
redemption price of the Senior Notes is 106.25% of their principal amount plus
accrued interest. The initial redemption price of the Senior Discount Notes is
107.25% of their principal amount at maturity plus accrued interest. In
addition, before April 15, 2003, the Company may redeem up to 35% of both the
Senior Notes and the Senior Discount Notes using proceeds from certain qualified
equity offerings at 112.5% of their principal amount and 114.5% of their
accreted value, respectively. The notes are guaranteed by Cricket Communications
Holdings. The terms of the notes include certain covenants that restrict the
Company's ability to, among other things, incur additional indebtedness, create
liens, pay dividends, make investments, sell assets and effect a consolidation
or merger.
QUALCOMM CREDIT AGREEMENT
The Company entered into a credit facility with Qualcomm on September 23,
1998 (the "Qualcomm Credit Agreement"). In February 2000, the Company used a
portion of the net proceeds from the Units Offering and Equity Offering (see
Note 8) to repay in full $226.7 million outstanding under the Qualcomm Credit
Agreement. In connection with the repayment of the Qualcomm Credit Agreement,
the related unamortized debt issue costs of $4.4 million were written off and
reported as an extraordinary loss in the accompanying consolidated statements of
operations.
61
64
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VENDOR FINANCING AGREEMENTS
Cricket Communications has entered into purchase agreements and credit
facilities with each of Lucent Technologies, Inc. ("Lucent"), Nortel Networks,
Inc. ("Nortel") and Ericsson Wireless Communications, Inc. ("Ericsson") for the
purchase of network infrastructure products and services and the financing of
these purchases plus additional working capital. Cricket Communications has
agreed to purchase up to $900.0 million of infrastructure products and services
from Lucent. The purchase agreement is subject to early termination at Cricket
Communications' convenience subject to payments for products and services
purchased from Lucent. The Lucent credit facility permits up to $1,350.0 million
in total borrowings by Cricket Communications. Lucent is not required to make
loans under the facility if the total of the loans held directly or supported by
Lucent is an amount greater than $815.0 million. In August 2000, Cricket
Communications entered into a three-year supply agreement with Nortel for the
purchase of infrastructure products and services, and a related credit facility
that permits up to $525.0 million in total borrowings. In October 2000, Cricket
Communications entered into a three-year supply agreement with Ericsson for the
purchase of up to $330.0 million of infrastructure products and services, and a
related credit facility with Ericsson Credit AB that permits up to $495.0
million in total borrowings. Lucent, Nortel and Ericsson have agreed to share
collateral and limit total loans by the three vendors to $1,845.0 million.
Borrowing availability under each credit agreement is generally based on a
ratio of the total amount of products and services purchased from the vendor.
Each of the credit agreements contains various covenants and conditions typical
for loans of this type, including minimum levels of customers and covered
potential customers that must increase over time, minimum revenues, limits on
annual capital expenditures, dividend restrictions (other than the Nortel
agreement) and other financial ratio tests. The obligations under the credit
agreements are secured by all of the stock of Cricket Communications, its
subsidiaries and the stock of each special purpose subsidiary of Leap formed to
hold wireless licenses used in Cricket Communications' business, and all of
their respective assets. Borrowings under each of the credit facilities accrue
interest at a rate equal to LIBOR plus 3.5% to 4.25% or a bank base rate plus
2.5% to 3.25%, in each case with the specific rate based on the ratio of total
indebtedness to EBITDA. Cricket Communications must pay a commitment fee equal
to 1.25% per annum on the unused commitment under the facilities, decreasing to
0.75% per annum. Principal payments are scheduled to begin after three years
with a final maturity after eight years. Repayment is weighted to the later
years of the repayment schedule. At December 31, 2000, $378.7 million was
outstanding under the vendor credit agreements at a weighted average interest
rate of 10.88%. In addition, at December 31, 2000, the Company had amounts
payable to the vendors that will be financed under the vendor credit agreements
of $34.0 million, which have been included in other long-term liabilities.
U.S. GOVERNMENT FINANCING
As part of the consideration for wireless licenses acquired from January to
December 2000 and assumed in the acquisition of the assets of Chase
Telecommunications Holdings, the Company assumed $93.0 million ($84.5 million,
net of discount) of U.S. government financing with the FCC. The terms of the
notes include interest rates ranging from 6.25% to 9.75% per annum and quarterly
principal and interest payments until maturity through July 2007. The notes were
discounted using management's best estimate of the prevailing market interest
rate to the Company at the time of purchase of the wireless licenses ranging
from 9.75% to 10.75% per annum.
SMARTCOM DEFERRED PAYMENT AND CREDIT AGREEMENTS
Smartcom entered into a deferred payment agreement with Qualcomm related to
Smartcom's purchase of equipment, software and services from Qualcomm. Under the
agreement, Qualcomm agreed to defer collection of amounts up to a maximum of
$115.7 million, including capitalized interest, until September 2006. In
February 2000, Smartcom and Qualcomm entered into a credit agreement related to
Smartcom's
62
65
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
equipment supply and service agreements with a vendor, which permitted up to
$38.5 million in borrowings, including capitalized interest. Also in February
2000, Smartcom and Qualcomm entered into a deferred payment agreement related to
Smartcom's purchase of handsets and accessories and test equipment from
Qualcomm, under which Qualcomm had agreed to defer collection of amounts up to a
maximum of $11.2 million, including capitalized interest. In connection with the
sale of Smartcom in June 2000, the Company was released of its obligations under
these agreements.
DEBT REPAYMENT SCHEDULE
The scheduled principal repayments for long-term debt at December 31, 2000
were as follows (in thousands):
YEAR ENDING DECEMBER 31:
- ------------------------------------------------------------
2001........................................................ $ 1,645
2002........................................................ 19,511
2003........................................................ 64,299
2004........................................................ 85,497
2005........................................................ 105,911
Thereafter.................................................. 785,050
----------
1,061,913
Less:
Current portion........................................... (1,645)
Unamortized discount...................................... (162,390)
----------
Total............................................. $ 897,878
==========
63
66
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
Federal, state and foreign components of the Company's income tax provision
for the year ended December 31, 2000 were $3.0 million, $0.6 million and $44.0
million, respectively. The components of the Company's deferred tax assets
(liabilities) are summarized as follows (in thousands):
DECEMBER 31,
---------------------
2000 1999
--------- --------
U.S. deferred tax assets:
Net operating loss carryforwards.......................... $ 34,100 $ 36,939
Equity in net loss of unconsolidated wireless operating
company................................................ -- 21,312
Deferred charges.......................................... 17,130 5,339
Credit carryforwards...................................... 38,541 --
Reserves and allowances................................... 34,491 3,820
--------- --------
124,262 67,410
Foreign deferred tax assets:
Net operating loss carryforwards.......................... -- 10,682
Reserves and allowances................................... -- 210
--------- --------
-- 10,892
--------- --------
Gross deferred tax assets................................... 124,262 78,302
Valuation allowance......................................... (114,109) (70,377)
U.S. deferred tax liabilities:
Wireless licenses......................................... (6,473) --
Property and equipment.................................... (6,728) --
Foreign deferred tax liabilities:
Intangible assets......................................... -- (7,925)
--------- --------
Net deferred tax liability.................................. $ (3,048) $ --
========= ========
Management has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
The net operating losses generated prior to the Distribution were retained
by Qualcomm. At December 31, 2000, the Company had federal and state net
operating loss carryforwards of approximately $86.6 million and $64.2 million,
which will begin to expire in 2021 and 2006, respectively. The Company also has
foreign tax credit carryforwards of approximately $36.6 million, which begin to
expire in 2004. Should a substantial change in the Company's ownership occur as
defined under Internal Revenue Code section 382, there will be an annual
limitation on its utilization of net operating loss and credit carryforwards.
Deferred tax assets of approximately $17.0 million and $4.8 million at
December 31, 2000 and 1999, respectively, resulted from the exercise of employee
stock options. When recognized, the tax benefit of these assets will be
accounted for as a credit to additional paid-in capital rather than a reduction
of the income tax provision.
64
67
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the income tax provision (benefit) to the amount
computed by applying the statutory federal income tax rate to income before
income tax provision is summarized as follows (in thousands):
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ---------------------
2000 1999 1999 1998
------------ ------------ --------- ---------
Amounts computed at statutory federal rate........ $ 16,581 $(26,304) $(57,615) $(16,357)
Non-deductible losses of foreign subsidiaries and
investees....................................... 25,312 17,387 16,649 2,150
State income tax, net of federal benefit.......... (3,758) 563 (5,740) (1,428)
Foreign income tax benefit........................ (33,272) (2,844) (123) --
Non-deductible expenses........................... 10,196 -- -- --
Other............................................. 940 163 508 (487)
Increase in valuation allowance................... 31,541 11,035 46,321 16,122
-------- -------- -------- --------
$ 47,540 $ -- $ -- $ --
======== ======== ======== ========
NOTE 8. STOCKHOLDERS' EQUITY
EQUITY OFFERING
In February 2000, the Company completed a public equity offering of
4,000,000 shares of common stock at a price of $88.00 per share. Net of
underwriters' discounts and commissions and offering expenses, the Company
received $330.0 million.
COMMON STOCK PURCHASE AGREEMENT
In December 2000, the Company entered into a common stock purchase
agreement with Acqua Wellington North American Equities Fund, Ltd. ("Acqua
Wellington") under which the Company may, at its discretion, sell registered
common stock from time to time over the succeeding 28 month period. Under the
agreement, the Company may require Acqua Wellington to purchase between $10.0
and $25.0 million of common stock, depending on the market price of its common
stock, during one or more 18 trading day periods. In addition, the Company may
grant to Acqua Wellington an option to purchase up to an equal amount of common
stock during the same 18 trading day period. Acqua Wellington purchases the
common stock at a discount to its then current market price, ranging from 4.0%
to 5.5%, depending on the Company's market capitalization at the time the
Company requires Acqua Wellington to purchase its common stock. A special
provision in the agreement (as amended) allowed the first sale of common stock
under the agreement to be up to $55.0 million. On January 23, 2001, the Company
completed the first sale of its common stock under the agreement, issuing
1,564,336 shares to Acqua Wellington in exchange for $55.0 million in cash.
AUTHORIZED SHARES
In September 2000, the Company's shareholders approved the amendment of the
Company's Amended and Restated Certificate of Incorporation to increase the
aggregate number of authorized shares of common stock from 75,000,000 to
300,000,000.
STOCKHOLDER RIGHTS PLAN
In September 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, the Board of
Directors declared a dividend, payable on September 16, 1998, of one preferred
purchase right (a "Right") for each share of common stock, $.0001 par value, of
the Company outstanding at the close of business on September 11, 1998. Similar
Rights will generally be issued in respect to common stock subsequently issued.
Each Right entitles the registered holder to purchase from
65
68
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company a one one-thousandth share of Series A Junior Participating
Preferred Stock, $.0001 par value, at a purchase price of $90 (subject to
adjustment). The Rights are exercisable only if a person or group (an "Acquiring
Person"), other than Qualcomm with respect to its exercise of the warrants
granted to it in connection with the Distribution or acquired by it in
connection with the Company's February 2000 units offering, acquires beneficial
ownership of 15% or more of the Company's outstanding shares of common stock.
Upon exercise, holders other than an Acquiring Person, will have the right
(subject to termination) to receive the Company's common stock or other
securities having a market value (as defined) equal to twice the purchase price
of the Right. The Rights, which expire on September 10, 2008, are redeemable in
whole, but not in part, at the Company's option at any time for a price of $.01
per Right. In conjunction with the distribution of the Rights, the Company's
Board of Directors designated 75,000 shares of Preferred Stock as Series A
Junior Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Rights. At December 31, 2000, no shares of Preferred Stock were
outstanding.
In March 2000, the Company's Board of Directors approved an amendment to
the Company's Rights Plan that increased the purchase price from $90 to $350 for
each one one-thousandth share of Series A Junior Participating Preferred Stock.
WARRANT
In connection with the Distribution, the Company issued to Qualcomm a
warrant to purchase 5,500,000 shares of its common stock. In March 1999,
Qualcomm agreed to reduce the number of shares which may be acquired on exercise
to 4,500,000 for consideration of $5.4 million, which was the estimated fair
value of the warrant repurchase as determined by an option pricing model. In
December 2000, Qualcomm received 1,015,700 shares of the Company's common stock
upon exercising portions of the warrant for cash proceeds of $3.4 million and
the surrender of rights to purchase 109,300 shares in partial payment of the
exercise price. The remaining number of shares which may be acquired upon
exercise of the warrant is 3,375,000. This warrant is currently exercisable and
remains exercisable until September 2008.
TRUST CONVERTIBLE PREFERRED SECURITIES
Under the conversion agreement between the Company and Qualcomm, Leap
agreed to issue up to 2,271,060 shares of its common stock upon the conversion
of the Trust Convertible Preferred Securities of a wholly-owned statutory
business trust of Qualcomm. After conversion of the Trust Convertible Preferred
Securities, Qualcomm will have some of its debt reduced, but Leap will receive
no benefit or other consideration. At December 31, 2000 and 1999, respectively,
substantially all of the shares and 1,345,707 shares of the Company's common
stock had been issued upon conversion.
NOTE 9. BENEFIT PLANS
EMPLOYEE SAVINGS AND RETIREMENT PLAN
In September 1998, the Company adopted a 401(k) plan that allows eligible
employees to contribute up to 15% of their salary, subject to annual limits. The
Company matches a portion of the employee contributions and may, at its
discretion, make additional contributions based upon earnings. The Company's
contribution expense for the year ended December 31, 2000, the period from
September 1, 1999 to December 31, 1999 and the year ended August 31, 1999 was
$139,000, $52,000 and $133,000, respectively.
STOCK OPTION PLANS
In September 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 Plan") that allows the Board of Directors to grant options to selected
employees, directors and consultants to the Company to purchase shares of the
Company's common stock. A total of 8,000,000 shares of common stock were
reserved
66
69
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for issuance under the 1998 Plan. The 1998 Plan provides for the grant of both
incentive and non-qualified stock options. Incentive stock options are
exercisable at a price not less than 100% of the fair market value of the common
stock on the date of grant. Non-qualified stock options are exercisable at a
price not less than 85% of the fair market value of the common stock on the date
of grant. Generally, options vest over a five-year period and are exercisable
for up to ten years from the grant date. The Company also adopted the 1998 Non-
Employee Directors Stock Option Plan (the "1998 Non-Employee Directors Plan"),
under which options to purchase common stock are granted to non-employee
directors on an annual basis. A total of 500,000 shares of common stock were
reserved for issuance under the 1998 Non-Employee Directors Plan. The options
are exercisable at a price equal to the fair market value of the common stock on
the date of grant, vest over a five-year period and are exercisable for up to
ten years from the grant date.
In September 2000, the Company's shareholders approved the adoption of the
2000 Stock Option Plan (the "2000 Plan"). A total of 2,250,000 shares of common
stock have been reserved for issuance under the 2000 Plan. Terms of the 2000
Plan are comparable to the 1998 Plan.
A summary of stock option transactions for the 1998 Plan and the 1998
Non-Employee Directors Plan follows (number of shares in thousands):
OPTIONS OUTSTANDING
-----------------------------
OPTIONS AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------------- --------- ----------------
Options authorized........................ 8,500
Options granted at Distribution........... (5,542) 5,542 $ 3.73
Options granted after Distribution........ (1,768) 1,768 10.52
Options cancelled......................... 513 (720) 4.03
Options exercised......................... -- (650) 3.11
------ -----
August 31, 1999......................... 1,703 5,940 5.78
Options granted........................... (127) 127 36.23
Options cancelled......................... 67 (67) 8.17
Options exercised......................... -- (303) 7.88
------ -----
December 31, 1999....................... 1,643 5,697 6.56
Options granted........................... (1,372) 1,372 60.04
Options cancelled......................... 155 (155) 8.23
Options exercised......................... -- (714) 3.58
------ -----
December 31, 2000....................... 426 6,200 $18.70
====== =====
In June 1999, Cricket Communications Holdings adopted its own 1999 Stock
Option Plan (the "1999 Cricket Plan") that allowed the Cricket Communications
Holdings Board of Directors to grant options to selected employees, directors
and consultants to purchase shares of Cricket Communications Holdings common
stock. A total of 7,600,000 shares of Cricket Communications Holdings common
stock were reserved for issuance under the 1999 Cricket Plan. The 1999 Cricket
Plan provides for the grant of both incentive and non-qualified stock options.
Incentive stock options are exercisable at a price not less than 100% of the
fair market value of the common stock on the date of grant. Non-qualified stock
options are exercisable at a price not less than 85% of the fair market value of
the common stock on the date of grant. Generally, options vest over a five-year
period and are exercisable for up to ten years from the grant date.
In June 1999, a total of 1,205,000 options to purchase Cricket
Communications Holdings common stock were granted to two directors of the
Company, exercisable at $1.00 per share with accelerated vesting provisions. In
July 1999, all of these options vested and were fully exercised. In addition,
795,000 other options granted in June 1999 at $1.00 per share were exercised in
July 1999. Cricket Communications Holdings
67
70
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
received promissory notes totaling $0.9 million and cash of $1.1 million as
consideration for the issuance of the shares.
In connection with Leap's purchase of the remaining 5.11% of Cricket
Communications Holdings that it did not already own in a subsidiary merger on
June 15, 2000 (see Note 3), each outstanding unexpired and unexercised option
under the 1999 Cricket Plan was converted into a stock option to purchase 0.315
shares of Leap common stock. The intrinsic value of the Leap replacement options
on the date of the transaction was $24.3 million and was recorded as unearned
stock-based compensation. Subsequent to June 15, 2000, the 1999 Cricket Plan has
been used to grant options in Leap common stock.
A summary of stock option transactions for the 1999 Cricket Plan follows
(number of shares in thousands):
OPTIONS OUTSTANDING
---------------------------
OPTIONS AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------------- --------- --------------
Options authorized.......................... 7,600
Options granted............................. (3,335) 3,335 $ 1.16
Options cancelled........................... 2 (2) 1.00
Options exercised........................... -- (2,000) 1.00
------ ------
August 31, 1999........................... 4,267 1,333 1.41
Options granted............................. (600) 600 4.53
Options cancelled........................... 21 (21) 3.82
------ ------
December 31, 1999......................... 3,688 1,912 2.35
Options granted............................. (239) 239 6.00
Options exercised........................... -- (856) 2.49
------ ------
June 14, 2000............................. 3,449 1,295 2.93
June 15, 2000, as converted............... 1,086 408 9.30
Options granted............................. (1,138) 1,138 51.40
Options cancelled........................... 52 (51) 46.16
Options exercised........................... -- (7) 3.23
------ ------
December 31, 2000......................... -- 1,488 $40.27
====== ======
68
71
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
under the 1998 Plan, the 1998 Non-Employee Directors Plan and the 1999 Cricket
Plan at December 31, 2000 (number of shares in thousands):
OPTIONS OUTSTANDING
-------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE -------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
OF LIFE EXERCISE OF EXERCISE
EXERCISE PRICES SHARES (IN YEARS) PRICE SHARES PRICE
- --------------- ------ ----------- -------- ------- ---------
$ 0.78 to $ 3.63 2,191 5.50 $ 2.85 1,508 $2.73
$ 3.64 to $ 5.04 1,382 6.58 4.49 671 4.37
$ 5.05 to $12.70 670 7.34 6.38 244 5.74
$12.71 to $19.26 786 8.60 18.93 132 19.02
$19.27 to $28.91 214 9.04 22.02 26 19.80
$28.92 to $43.36 207 9.87 33.95 -- --
$43.37 to $65.04 2,031 9.54 57.70 24 53.9
$65.05 to $92.50 207 9.58 74.00 -- --
----- -----
7,688 7.57 $22.87 2,605 $4.91
===== =====
EMPLOYEE STOCK PURCHASE PLAN
In September 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 ESP Plan") for all eligible employees to purchase shares of
common stock at 85% of the lower of the fair market value of such stock on the
first or the last day of each offering period. A total of 200,000 shares of
common stock were reserved for issuance under the 1998 ESP Plan. Employees may
authorize the Company to withhold up to 15% of their compensation during any
offering period, subject to certain limitations. For the year ended December 31,
2000, the period from September 1, 1999 to December 31, 1999 and the year ended
August 31, 1999, a total of 24,613, 17,366 and 63,779 shares were issued under
the 1998 ESP Plan at a weighted average price of $35.64, $15.51 and $3.83 per
share, respectively. At December 31, 2000, 94,242 shares were available for
future issuance.
EXECUTIVE RETIREMENT PLAN
In September 1998, the Company adopted a voluntary retirement plan that
allows eligible executives to defer up to 100% of their income on a pre-tax
basis. On a quarterly basis, participants receive up to a 10% match of their
income in the form of the Company's common stock based on the then current
market price, to be issued to the participant upon eligible retirement. The
income deferred and the Company match are unsecured and subject to the claims of
general creditors of the Company. The plan authorized up to 100,000 shares of
common stock to be allocated to participants. For the year ended December 31,
2000, the period from September 1, 1999 to December 31, 1999 and the year ended
August 31, 1999, 6,107, 3,953 and 8,718 shares, respectively, were allocated
under the plan and the Company's matching contribution amounted to $625,000,
$162,000 and $86,000, respectively. At December 31, 2000, 81,222 shares were
available for future allocation.
EXECUTIVE OFFICER DEFERRED STOCK PLAN
In December 1999, the Company established an Executive Officer Deferred
Stock Plan that provides for mandatory deferral of 25% and voluntary deferral of
up to 75% of executive officer bonuses. Bonus deferrals are converted into share
units credited to the participant's account, with the number of share units
calculated by dividing the deferred bonus amount by the fair market value of the
Company's common stock on the bonus
69
72
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payday. Share units represent the right to receive shares of the Company's
common stock in accordance with the plan. The Company will also credit to a
matching account that number of share units equal to 20% of the share units
credited to the participants' accounts. Matching share units vest ratably over
three years on each anniversary date of the applicable bonus payday. For the
year ended December 31, 2000, 4,710 shares were issued under the Executive
Officer Deferred Stock Plan. At December 31, 2000, 20,290 shares were available
for future issuance.
PRO FORMA INFORMATION
For purposes of pro forma disclosures, the fair value of options granted
has been estimated at the date of grant using the Black-Scholes option-pricing
model using the following weighted average assumptions:
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
2000 1999 1999
------------ ------------ ----------
Risk-free interest rate:
1998 Stock Option Plan....................... 6.01% 6.55% 5.0%
1999 Cricket Plan............................ 5.85% 6.55% 5.0%
1998 ESP Plan................................ 6.31% 5.74% 4.5%
Volatility:
1998 Stock Option Plan....................... 60.0% 50.0% 50.0%
1999 Cricket Plan............................ 60.0% 0.0% 0.0%
1998 ESP Plan................................ 105.0% 55.0% 55.0%
Dividend yield (all plans)..................... 0.0% 0.0% 0.0%
Expected life (years):
1998 Stock Option Plan....................... 5.0 6.0 6.0
1999 Cricket Plan............................ 5.0 6.0 6.0
1998 ESP Plan................................ 0.5 0.5 0.5
The weighted average estimated grant date fair values of stock options were
as follows:
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
2000 1999 1999
------------ ------------ ----------
1998 Stock Option Plan......................... $33.53 $20.35 $1.57
1999 Cricket Plan (grants prior to merger)..... $ 2.99 $ 1.42 $0.12
1999 Cricket Plan (grants subsequent to
merger)...................................... $28.31 $ -- $ --
1998 ESP Plan.................................. $35.64 $ 3.46 $2.37
70
73
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's pro forma information is as follows (in thousands, except per
share data):
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
2000 1999 1999
------------ ------------ ----------
Net loss:
As reported...................................... $ (168) $(75,846) $(164,613)
Pro forma........................................ $(8,929) $(76,815) $(171,415)
Diluted net loss per common share:
As reported...................................... $ (0.01) $ (4.01) $ (9.19)
Pro forma........................................ $ (0.27) $ (4.06) $ (9.57)
NOTE 10. COMMITMENTS AND CONTINGENCIES
In May 1999, Pegaso entered into a loan agreement with several banks with
credit support from Qualcomm. The Company guaranteed 33% of Pegaso's obligations
under the initial commitment from the lenders of $100.0 million. In connection
with the guarantee, the Company has received an option to subscribe for and
purchase limited voting series "N" treasury shares of Pegaso. The number of
shares that may be purchased by the Company under the option will be calculated
as a proportion of the number of options granted to the lenders to provide a
total internal rate of return of 20% to the lenders on the average outstanding
balance of the bridge loan, subject to a maximum of 418,518 shares of series "N"
treasury shares issuable to Leap. The options have an exercise price of $0.01
per share and expire 10 years from the date of issuance. The options are
exercisable at any time after the date on which all amounts under the loan
agreement are paid in full. At December 31, 2000, the maximum amount of the loan
had been increased to approximately $300.0 million although the amount of the
Company's guarantee was not increased.
The Company has entered into non-cancelable operating lease agreements to
lease its facilities, certain equipment and rental of sites for towers and
antennas required for the operation of its wireless networks in the United
States. Future minimum rental payments required for all non-cancelable operating
leases at December 31, 2000 are as follows (in thousands):
YEAR ENDING DECEMBER 31:
- ------------------------------------------------------------
2001........................................................ $16,868
2002........................................................ 17,242
2003........................................................ 17,183
2004........................................................ 16,905
2005........................................................ 12,250
Thereafter.................................................. 18,671
-------
Total............................................. $99,119
=======
Rent expense totaled $5.5 million, $0.9 million and $1.2 million for the
year ended December 31, 2000, the period from September 1, 1999 to December 31,
1999 and the year ended August 31, 1999, respectively. No rent expense was
incurred by the Company prior to the Distribution.
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
71
74
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY BALANCE SHEET INFORMATION
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Accounts receivable, net:
Trade accounts receivable................................. $ -- $ 3,455
Allowance for doubtful accounts........................... -- (713)
-------- --------
$ -- $ 2,742
======== ========
Other current assets:
Recoverable taxes......................................... $ -- $ 6,592
Other..................................................... 12,746 8,819
-------- --------
$ 12,746 $ 15,411
======== ========
Property and equipment, net:
Land...................................................... $ -- $ 302
Buildings and infrastructure.............................. 217,793 103,882
Computer equipment and other.............................. 21,597 24,962
Construction-in-progress.................................. 202,859 --
-------- --------
442,249 129,146
Accumulated depreciation and amortization................. (12,056) (16,087)
-------- --------
$430,193 $113,059
======== ========
Deposits and other assets:
Deposits for wireless licenses............................ $ 91,772 $ --
Other..................................................... 30,679 3,212
-------- --------
$122,451 $ 3,212
======== ========
Accounts payable and accrued liabilities:
Trade accounts payable.................................... $ 12,678 $ 4,167
Accrued payroll and related benefits...................... 9,750 4,827
Accrued loss on handset purchase commitment............... -- 5,074
Other accrued liabilities................................. 36,307 5,029
-------- --------
$ 58,735 $ 19,097
======== ========
Other current liabilities:
Income taxes payable...................................... $ 39,214 $ --
Book overdraft............................................ 13,386 --
Interest payable.......................................... 6,922 --
Other..................................................... 6,168 --
-------- --------
$ 65,690 $ --
======== ========
72
75
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTARY CASH FLOW INFORMATION (IN THOUSANDS):
PERIOD FROM
YEAR ENDED SEPTEMBER 1, 1999 YEAR ENDED AUGUST 31,
DECEMBER 31, TO DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- ----------- -------
Supplementary disclosure of cash flow
information:
Cash paid for interest.................... $ 36,964 $ -- $ -- $ --
Cash paid for income taxes................ $ 3,705 $ -- $ -- $ --
Supplementary disclosure of non-cash
investing and financing activities:
Loans to unconsolidated wireless operating
companies converted to equity
investment............................. $ -- $ -- $ 50,196 $ --
Long-term financing to purchase
equipment.............................. 457,960 -- 8,791 --
Long-term financing to purchase wireless
licenses............................... 12,410 -- -- --
Facility fee due on long-term debt........ 1,800 -- 5,300 --
Repurchase of warrant..................... -- -- 5,355 --
Issuance of common stock to purchase
wireless licenses...................... 26,734 -- -- --
Issuance of common stock to purchase
minority interest in subsidiary........ 45,961 -- -- --
Effect of change in foreign company
reporting lag on investment in
unconsolidated wireless operating
company................................ -- 2,913 -- --
Long-term financing for loans to
unconsolidated wireless operating
company................................ 10,338 8,562 -- --
Issuance of notes receivable for sale of
Smartcom............................... 143,173 -- -- --
Supplementary disclosure of cash used for
acquisitions:
Total purchase price...................... 159,044 -- 43,699 564
Warrant issued for subsidiary company
common stock........................... (15,353) -- -- --
Notes payable issued, net of discount..... (750) -- (15,699) --
Liabilities assumed at present value...... (132,166) -- -- --
Cash acquired............................. (4,973) -- (1,058) --
--------- ------ -------- ----
Cash used for acquisitions................ $ 5,802 $ -- $ 26,942 $564
========= ====== ======== ====
73
76
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMPARATIVE FINANCIAL INFORMATION
The following is summarized results of operations and cash flows
information for the periods from September 1, 1999 to December 31, 1999 and from
September 1, 1998 to December 31, 1998 (unaudited) (in thousands):
PERIOD FROM PERIOD FROM
SEPTEMBER 1, 1999 SEPTEMBER 1, 1998
TO DECEMBER 31, TO DECEMBER 31,
1999 1998
----------------- -----------------
(UNAUDITED)
STATEMENT OF OPERATIONS INFORMATION:
Operating revenues................................ $ 6,772 $ --
Operating expenses................................ (36,439) (5,502)
-------- --------
Operating loss................................. (29,667) (5,502)
Equity in net loss of unconsolidated wireless
operating companies............................ (23,077) (19,908)
Other income (expense), net....................... (23,102) (697)
-------- --------
Net loss....................................... $(75,846) $(26,107)
======== ========
Basic and diluted net loss per common share....... $ (4.01) $ (1.48)
======== ========
CASH FLOWS INFORMATION:
Operating activities:
Net loss.......................................... $(75,846) $(26,107)
Equity in net loss of unconsolidated wireless
operating companies............................ 23,077 19,908
Other............................................. 21,199 (7,318)
-------- --------
Net cash used in operating activities........ (31,570) (13,517)
-------- --------
Investing activities:
Investments in and loans to unconsolidated
wireless operating companies................... (2,744) (86,791)
Restricted cash equivalents....................... (20,500) --
Other............................................. (4,568) (3,399)
-------- --------
Net cash used in investing activities........ (27,812) (90,190)
-------- --------
Financing activities:
Proceeds from long-term debt...................... 61,650 23,315
Former parent company's investment................ -- 95,268
Other............................................. 1,721 104
-------- --------
Net cash provided by financing activities.... 63,371 118,687
-------- --------
Effect of exchange rate changes on cash and cash
equivalents.................................... 7,210 --
Effect of change in foreign company reporting lag
on cash and cash equivalents................... 6,695 --
-------- --------
Net increase in cash and cash equivalents.... $ 17,894 $ 14,980
======== ========
NOTE 13. SEGMENT DATA
The Company's current reportable segments are countries in which it
manages, supports, operates and participates in wireless communications business
ventures. These reportable segments are evaluated separately because each
geographic region presents different marketing strategies and operational
issues, as well as
74
77
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
distinct economic climates and regulatory constraints. The Company's reportable
segments are comprised of its consolidated and unconsolidated U.S. subsidiaries
and Pegaso in Mexico. As a result of the sale of Smartcom, segment data has been
restated for all periods presented to exclude Smartcom.
Summary information by segment is as follows (in thousands):
AS OF
DECEMBER 31,
1999 AND FOR THE
PERIOD FROM
AS OF AND FOR THE SEPTEMBER 1, AS OF AND FOR THE YEAR
YEAR ENDED 1999 TO ENDED AUGUST 31,
DECEMBER 31, DECEMBER ----------------------
2000 1999 1999 1998
----------------- ---------------- ---------- ---------
UNITED STATES:
Revenues.................................... $ 31,643 $ 3,142 $ 3,337 $ 22
Operating loss.............................. (105,669) (22,951) (22,414) (20,017)
Depreciation and amortization............... (19,177) (13,863) (2,033) (120)
Capital expenditures........................ (422,226) (15,691) (6,177) (12,852)
Purchase of wireless licenses............... (184,452) -- (18,920) --
Total assets...................... 1,157,175 113,205 109,437 88,991
MEXICO:
Revenues.................................... 77,938 1,813 1,203 --
Operating loss.............................. (227,090) (47,169) (68,847) (5,350)
Depreciation and amortization............... (39,976) (3,337) (2,320) --
Capital expenditures........................ (171,536) (36,279) (8,315) (822)
Purchase of wireless licenses............... -- -- (175,864) (57,666)
Total assets...................... 785,379 514,918 551,098 71,760
75
78
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the Company's segment revenues, operating expenses,
depreciation and amortization and total assets to the corresponding consolidated
amounts is as follows (in thousands):
AS OF DECEMBER 31,
1999 AND FOR THE
AS OF AND FOR THE PERIOD FROM AS OF AND FOR THE YEAR
YEAR ENDED SEPTEMBER 1, 1999 ENDED AUGUST 31,
DECEMBER 31, TO DECEMBER 31, -----------------------
2000 1999 1999 1998
----------------- ------------------ ---------- ----------
Segment revenues......................... $ 109,581 $ 4,955 $ 4,540 $ 22
Revenues of unconsolidated wireless
operating companies.................... (80,909) (4,955) (8,190) (22)
Smartcom................................. 21,645 6,644 7,444 --
Other unallocable revenues............... -- 128 113 --
---------- --------- --------- ---------
Consolidated revenues.................. $ 50,317 $ 6,772 $ 3,907 $ --
========== ========= ========= =========
Segment operating losses................. $ (332,759) $ (70,120) $ (91,261) $ (25,367)
Operating losses of unconsolidated
wireless operating companies........... 237,420 65,850 125,176 21,224
Smartcom................................. (38,137) (20,096) (27,479) (4,380)
Discontinued foreign ventures............ -- -- (23,648) (6,073)
Corporate and eliminations............... (33,823) (5,301) (17,260) (9,292)
---------- --------- --------- ---------
Consolidated operating loss............ $ (167,299) $ (29,667) $ (34,472) $ (23,888)
========== ========= ========= =========
Segment depreciation and amortization.... $ (59,153) $ (17,200) $ (4,353) $ (120)
Depreciation and amortization of
unconsolidated wireless operating
companies.............................. 45,119 17,200 28,124 180
Smartcom................................. (10,017) (6,714) (9,409) (60)
Discontinued foreign ventures............ -- -- (19,623) --
Corporate depreciation and
amortization........................... (512) (212) (563) --
---------- --------- --------- ---------
Consolidated depreciation and
amortization........................ $ (24,563) $ (6,926) $ (5,824) $ --
========== ========= ========= =========
Segment total assets..................... $1,942,554 $ 628,123 $ 660,535 $ 160,751
Total assets of unconsolidated wireless
operating companies.................... (785,379) (612,266) (717,664) (285,365)
Investments in and loans receivable from
unconsolidated wireless operating
companies.............................. 34,691 85,878 94,429 150,914
Smartcom................................. -- 190,297 186,645 124,614
Discontinued foreign ventures............ -- -- 77,926 --
Corporate assets......................... 455,541 68,733 33,460 6,838
---------- --------- --------- ---------
Consolidated total assets.............. $1,647,407 $ 360,765 $ 335,331 $ 157,752
========== ========= ========= =========
76
79
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenues and long-lived assets related to operations in the United States
and other countries are as follows (in thousands):
AS OF
DECEMBER 31,
1999 AND FOR
THE PERIOD
FROM AS OF AND FOR THE
AS OF AND FOR THE SEPTEMBER 1, YEAR ENDED
YEAR ENDED 1999 TO DECEMBER 31,
DECEMBER 31, DECEMBER 31, -------------------
2000 1999 1999 1998
----------------- --------------- -------- --------
REVENUES:
United States................................. $ 28,672 $ -- $ -- $ --
Other countries............................... 21,645 6,772 3,907 --
-------- -------- -------- --------
Total consolidated revenues......... $ 50,317 $ 6,772 $ 3,907 $ --
======== ======== ======== ========
LONG-LIVED ASSETS:
United States................................. $734,782 $ 33,147 $ 23,599 $ --
Other countries............................... 34,691 240,477 264,369 104,557
-------- -------- -------- --------
Total consolidated long-lived
assets............................ $769,473 $273,624 $287,968 $104,557
======== ======== ======== ========
NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of operations of the interim periods. Summarized
quarterly data for the years ended December 31, 2000 and August 31, 1999 is as
follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 2000
------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- ---------
Revenues(1).......................................... $ 9,991 $ 18,524 $ 7,540 $ 14,262
Gross loss(2)........................................ (6,040) (177) (2,849) (16,321)
Income (loss) before extraordinary items............. (72,403) 234,575 (54,072) (103,531)
Net income (loss).................................... (76,825) 234,260 (54,072) (103,531)
Basic net income (loss) per common share:
Income (loss) before extraordinary items........... $ (3.23) $ 9.18 $ (2.04) $ (3.82)
Extraordinary loss................................. (0.20) (0.01) -- --
-------- -------- -------- ---------
Net income (loss)............................... $ (3.43) $ 9.17 $ (2.04) $ (3.82)
======== ======== ======== =========
Diluted net income (loss) per common share:
Income (loss) before extraordinary items........... $ (3.23) $ 7.21 $ (2.04) $ (3.82)
Extraordinary loss................................. (0.20) (0.01) -- --
-------- -------- -------- ---------
Net income (loss)............................... $ (3.43) $ 7.20 $ (2.04) $ (3.82)
======== ======== ======== =========
YEAR ENDED AUGUST 31, 1999
------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- ---------
Revenues............................................. $ -- $ -- $ -- $ 3,907
Gross profit(2)...................................... -- -- -- 97
Net loss............................................. (20,982) (23,063) (46,809) (73,759)
Basic and diluted net loss per common share.......... $ (1.19) $ (1.30) $ (2.61) $ (4.04)
- ---------------
(1) The decrease in revenues from the second quarter to the third quarter of the
year ended December 31, 2000 was due to the Company's sale of Smartcom in
June 2000.
(2) Gross loss is calculated by subtracting cost of service and cost of
equipment from total revenues.
77
80
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SUBSEQUENT EVENT
QUALCOMM TERM LOAN
In January 2001, the Company entered into a loan agreement with Qualcomm
under which Qualcomm will loan to the Company approximately $125.0 million to
finance the acquisition of wireless licenses in the FCC's broadband PCS auction
completed in January 2001. Qualcomm has agreed to fund borrowings under the
agreement by the transfer to the Company of an FCC auction discount voucher, or,
at Qualcomm's option, cash. Under the terms of the agreement, the Company must
repay the outstanding principal and accrued interest to Qualcomm in a single
payment no later than five years after the date of the initial borrowing. The
loan is subject to mandatory prepayments in certain circumstances, including as
a result of the Company receiving net cash proceeds in excess of $400.0 million
from issuances of debt or equity securities by the Company (other than certain
excluded issuances such as equipment vendor financing, and sales under the Acqua
Wellington common stock purchase agreement which are used to acquire wireless
licenses). The loan bears interest at a variable rate, depending on the
collateral the Company provides. The Company expects this rate to be at LIBOR
plus 7.5%. As security for the loan, the Company agreed to pledge in favor of
Qualcomm the stock of subsidiaries holding licenses acquired in the January 2001
FCC auction with an aggregate purchase price of at least 150% of the outstanding
principal amount of the loan. The loan is subject to the same covenants that are
contained in the Indenture for the Senior Notes and Senior Discount Notes issued
in the Units Offering, and other customary covenants and conditions.
NOTE 16. SUBSIDIARY GUARANTEE
The Company's Senior Notes and Senior Discount Notes are guaranteed by
Cricket Communications Holdings. Because Cricket Communications Holdings is
wholly-owned by the Company and the guarantee provided by Cricket Communications
Holdings is full and unconditional, full financial statements of Cricket
Communications Holdings are not required to be issued. Condensed consolidating
financial information of Leap, Cricket Communications Holdings and non-guarantor
subsidiaries of Leap as of December 31, 2000 and 1999, for the year ended
December 31, 2000, for the period from September 1, 1999 to December 31, 1999
and for the years ended August 31, 1999 and 1998 is presented below. The
subsidiaries of Cricket Communications Holdings are not guarantors of the Senior
Notes and Senior Discount Notes and are therefore reflected as investments
accounted for under the equity method of accounting in the Cricket
Communications Holdings financial information.
78
81
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEET INFORMATION AS OF DECEMBER 31, 2000 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents....... $ 106,504 $ -- $ 232,374 $ -- $ 338,878
Restricted cash equivalents and
short-term investments........ 13,575 -- -- -- 13,575
Short-term investments.......... 16,237 -- 182,869 -- 199,106
Inventories..................... -- -- 9,032 -- 9,032
Notes receivable, net........... -- -- 138,907 -- 138,907
Other current assets............ 1,631 -- 11,115 -- 12,746
---------- --------- ---------- ----------- ----------
Total current
assets.............. 137,947 -- 574,297 -- 712,244
Property and equipment, net..... 5,763 -- 424,430 -- 430,193
Investments in subsidiaries and
unconsolidated wireless
operating companies........... 705,455 352,364 34,691 (1,057,819) 34,691
Wireless licenses, net.......... 25,107 -- 240,528 -- 265,635
Goodwill and other intangible
assets, net................... 3,800 -- 61,162 (34,665) 30,297
Restricted investments.......... 51,896 -- -- -- 51,896
Deposits and other assets....... 114,040 -- 8,411 -- 122,451
---------- --------- ---------- ----------- ----------
Total assets.......... $1,044,008 $ 352,364 $1,343,519 $(1,092,484) $1,647,407
========== ========= ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and accrued
liabilities................... $ 8,618 $ -- $ 57,150 $ (7,033) $ 58,735
Other current liabilities....... 12,319 -- 53,371 -- 65,690
---------- --------- ---------- ----------- ----------
Total current
liabilities......... 20,937 -- 110,521 (7,033) 124,425
Long-term debt.................. 438,143 -- 459,735 -- 897,878
Other long-term liabilities..... 1,670 -- 40,176 -- 41,846
---------- --------- ---------- ----------- ----------
Total liabilities..... 460,750 -- 610,432 (7,033) 1,064,149
---------- --------- ---------- ----------- ----------
Stockholders' Equity:
Common stock.................. 3 -- -- -- 3
Additional paid-in capital.... 893,401 539,578 788,898 (1,328,476) 893,401
Unearned stock-based
compensation............... (10,019) -- -- -- (10,019)
Accumulated deficit........... (302,898) (187,214) (58,524) 245,738 (302,898)
Accumulated other
comprehensive income....... 2,771 -- 2,713 (2,713) 2,771
---------- --------- ---------- ----------- ----------
Total stockholders'
equity.............. 583,258 352,364 733,087 (1,085,451) 583,258
---------- --------- ---------- ----------- ----------
Total liabilities and
stockholders'
equity.............. $1,044,008 $ 352,364 $1,343,519 $(1,092,484) $1,647,407
========== ========= ========== =========== ==========
79
82
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
ASSETS
Cash and cash equivalents......... $ 35,713 $ -- $ 8,396 $ -- $ 44,109
Restricted cash equivalents....... 20,550 -- -- -- 20,550
Accounts receivable, net.......... 717 -- 2,025 -- 2,742
Inventories....................... -- -- 4,329 -- 4,329
Other current assets.............. 2,967 -- 12,444 -- 15,411
--------- -------- --------- --------- ---------
Total current assets.... 59,947 -- 27,194 -- 87,141
Property and equipment, net....... 2,467 -- 110,592 -- 113,059
Investments in and loans
receivable from subsidiaries and
unconsolidated wireless
operating companies............. 118,506 (7,414) 85,878 (111,092) 85,878
Wireless licenses, net............ 18,920 -- 37,564 -- 56,484
Goodwill and other intangible
assets, net..................... -- -- 14,991 -- 14,991
Deposits and other assets......... 2,496 716 -- 3,212
--------- -------- --------- --------- ---------
Total assets............ $ 202,336 $ (7,414) $ 276,935 $(111,092) $ 360,765
========= ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and accrued
liabilities..................... $ 3,810 $ -- $ 22,970 $ (7,683) $ 19,097
Loans payable to banks............ -- -- 17,683 -- 17,683
--------- -------- --------- --------- ---------
Total current
liabilities........... 3,810 -- 40,653 (7,683) 36,780
Long-term debt.................... 187,570 -- 132,988 (16,740) 303,818
Other long-term liabilities....... 64 -- 9,211 -- 9,275
--------- -------- --------- --------- ---------
Total liabilities....... 191,444 -- 182,852 (24,423) 349,873
--------- -------- --------- --------- ---------
Stockholders' Equity:
Common stock.................... 2 6 -- (6) 2
Additional paid-in capital...... 292,933 125,839 265,656 (391,495) 292,933
Notes receivable from
stockholders................. -- (55,304) -- 55,304 --
Accumulated deficit............. (277,720) (77,955) (167,250) 245,205 (277,720)
Accumulated other comprehensive
loss......................... (4,323) -- (4,323) 4,323 (4,323)
--------- -------- --------- --------- ---------
Total stockholders'
equity................ 10,892 (7,414) 94,083 (86,669) 10,892
--------- -------- --------- --------- ---------
Total liabilities and
stockholders'
equity................ $ 202,336 $ (7,414) $ 276,935 $(111,092) $ 360,765
========= ======== ========= ========= =========
80
83
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Revenues:
Service revenues........ $ -- $ -- $ 40,599 $ -- $ 40,599
Equipment revenues...... -- -- 9,718 -- 9,718
--------- --------- --------- ------- ---------
Total
revenues...... -- -- 50,317 -- 50,317
--------- --------- --------- ------- ---------
Operating expenses:
Cost of service......... -- -- (22,111) 1,290 (20,821)
Cost of equipment....... -- -- (54,883) -- (54,883)
Selling, general and
administrative
expenses............. (35,233) -- (82,116) -- (117,349)
Depreciation and
amortization......... (815) -- (23,748) -- (24,563)
--------- --------- --------- ------- ---------
Total operating
expenses...... (36,048) -- (182,858) 1,290 (217,616)
--------- --------- --------- ------- ---------
Operating loss.......... (36,048) -- (132,541) 1,290 (167,299)
Equity in net income
(loss) of subsidiaries
and unconsolidated
wireless operating
companies............... 110,229 (110,762) (78,624) 533 (78,624)
Interest income........... 23,490 1,503 23,484 -- 48,477
Interest expense.......... (81,622) -- (30,736) -- (112,358)
Foreign currency
transaction gains,
net..................... 361 -- 13,605 -- 13,966
Gain on sale of wholly-
owned subsidiary........ (4,484) -- 317,916 -- 313,432
Gain on issuance of stock
by unconsolidated
wireless operating
company................. -- -- 32,602 -- 32,602
Other income, net......... 2,021 -- 1,182 (1,290) 1,913
--------- --------- --------- ------- ---------
Income (loss) before
income taxes and
extraordinary items..... 13,947 (109,259) 146,888 533 52,109
Income taxes.............. (9,693) -- (37,847) -- (47,540)
--------- --------- --------- ------- ---------
Income (loss) before
extraordinary items..... 4,254 (109,259) 109,041 533 4,569
Extraordinary loss on
early extinguishment of
debt.................... (4,422) -- (315) -- (4,737)
--------- --------- --------- ------- ---------
Net
income (loss)... $ (168) $(109,259) $ 108,726 $ 533 $ (168)
========= ========= ========= ======= =========
81
84
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS INFORMATION FOR THE PERIOD FROM SEPTEMBER 1, 1999
TO DECEMBER 31, 1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Revenues:
Service revenues................. $ -- $ -- $ 6,733 $ -- $ 6,733
Equipment revenues............... -- -- 39 -- 39
-------- -------- -------- ------- --------
Total revenues........... -- -- 6,772 -- 6,772
-------- -------- -------- ------- --------
Operating expenses:
Cost of service.................. -- -- (2,409) -- (2,409)
Cost of equipment................ -- -- (7,760) -- (7,760)
Selling, general and
administrative expenses....... (4,883) -- (14,461) -- (19,344)
Depreciation and amortization.... (212) -- (6,714) -- (6,926)
-------- -------- -------- ------- --------
Total operating
expenses............... (5,095) -- (31,344) -- (36,439)
-------- -------- -------- ------- --------
Operating loss................... (5,095) -- (24,572) -- (29,667)
Equity in net loss of subsidiaries
and unconsolidated wireless
operating companies.............. (62,351) (15,822) (23,077) 78,173 (23,077)
Interest income.................... 1,022 -- (258) -- 764
Interest expense................... (6,196) -- (6,087) -- (12,283)
Foreign currency transaction
losses, net...................... -- -- (8,247) -- (8,247)
Other expense, net................. (3,226) -- (110) -- (3,336)
-------- -------- -------- ------- --------
Net loss................. $(75,846) $(15,822) $(62,351) $78,173 $(75,846)
======== ======== ======== ======= ========
82
85
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED AUGUST 31, 1999 (IN
THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Revenues:
Service revenues................ $ -- $ -- $ 3,619 $ -- $ 3,619
Equipment revenues.............. -- -- 288 -- 288
--------- -------- --------- -------- ---------
Total revenues.......... -- -- 3,907 -- 3,907
--------- -------- --------- -------- ---------
Operating expenses:
Cost of service................. -- -- (1,355) -- (1,355)
Cost of equipment............... -- -- (2,455) -- (2,455)
Selling, general and
administrative expenses...... (17,004) -- (11,741) -- (28,745)
Depreciation and amortization... (563) -- (5,261) -- (5,824)
--------- -------- --------- -------- ---------
Total operating
expenses.............. (17,567) -- (20,812) -- (38,379)
--------- -------- --------- -------- ---------
Operating loss.................. (17,567) -- (16,905) -- (34,472)
Equity in net loss of and
write-down of investments in and
loan receivable from
subsidiaries and unconsolidated
wireless operating companies.... (150,897) (37,436) $(127,542) 188,333 (127,542)
Interest income................... 960 -- 1,545 -- 2,505
Interest expense.................. (6,102) -- (4,254) -- (10,356)
Foreign currency transaction
losses, net..................... -- -- (7,211) -- (7,211)
Gain on sale of wholly-owned
subsidiary...................... 9,097 -- -- -- 9,097
Gain on issuance of stock by
unconsolidated wireless
operating company............... -- -- 3,609 -- 3,609
Other expense, net................ (104) -- (139) -- (243)
--------- -------- --------- -------- ---------
Net loss................ $(164,613) $(37,436) $(150,897) $188,333 $(164,613)
========= ======== ========= ======== =========
STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED AUGUST 31, 1998 (IN
THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating expenses:
Selling, general and
administrative expenses...... $ (9,292) $ -- $ (14,596) $ -- $ (23,888)
--------- -------- --------- -------- ---------
Operating loss.................. (9,292) -- (14,596) -- (23,888)
Equity in net loss of subsidiaries
and unconsolidated wireless
operating companies............. (38,284) (20,697) (23,118) 58,981 (23,118)
Interest income................... 843 -- -- (570) 273
--------- -------- --------- -------- ---------
Net loss................ $ (46,733) $(20,697) $ (37,714) $ 58,411 $ (46,733)
========= ======== ========= ======== =========
83
86
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating activities:
Net cash provided by
(used in)
operating
activities....... $(128,328) $ 1,503 $ (49,317) $ 9,765 $(166,377)
--------- --------- --------- --------- ---------
Investing activities:
Purchase of property and
equipment................ (1,944) -- (70,301) -- (72,245)
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies...... (400,536) (370,161) (11,033) 763,197 (18,533)
Acquisitions, net of cash
acquired................. (4,475) -- (1,327) -- (5,802)
Purchase of wireless
licenses................. (14,934) -- (79,219) -- (94,153)
Net proceeds from disposal
of subsidiaries.......... 4,311 -- 210,144 -- 214,455
Purchase of investments.... (125,657) -- (207,330) -- (332,987)
Sale and maturity of
investments.............. 104,410 -- 24,130 -- 128,540
Restricted cash equivalents
and investments, net..... (44,921) -- -- -- (44,921)
--------- --------- --------- --------- ---------
Net cash used in
investing
activities....... (483,746) (370,161) (134,936) 763,197 (225,646)
--------- --------- --------- --------- ---------
Financing activities:
Proceeds from issuance of
senior and senior
discount notes........... 550,102 -- -- -- 550,102
Proceeds from loans payable
to banks and long-term
debt..................... 31,022 -- 28,302 -- 59,324
Repayment of loans payable
to banks and long-term
debt..................... (226,708) -- (21,496) -- (248,204)
Issuance of common stock... 341,949 -- 3,738 (3,738) 341,949
Payment of debt financing
costs.................... (13,500) -- (1,722) -- (15,222)
Parent company investment
and advances............. -- 368,658 400,566 (769,224) --
Book overdraft............. -- -- 13,386 -- 13,386
--------- --------- --------- --------- ---------
Net cash provided by
financing
activities....... 682,865 368,658 422,774 (772,962) 701,335
--------- --------- --------- --------- ---------
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- (8,998) -- (8,998)
Effect of change in foreign
company reporting lag on
cash and cash
equivalents................ -- -- (5,545) -- (5,545)
--------- --------- --------- --------- ---------
Net increase in cash and cash
equivalents................ 70,791 -- 223,978 -- 294,769
Cash and cash equivalents at
beginning of period........ 35,713 -- 8,396 -- 44,109
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period.............. $ 106,504 $ -- $ 232,374 $ -- $ 338,878
========= ========= ========= ========= =========
84
87
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE PERIOD FROM SEPTEMBER 1, 1999 TO DECEMBER 31,
1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------------- ------------- ------------ ------------
Operating activities:
Net cash used in
operating activities... $ (5,620) $ -- $(28,551) $ 2,601 $(31,570)
-------- -------- -------- ------- --------
Investing activities:
Purchase of property and
equipment..................... (50) -- (4,518) -- (4,568)
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies........... (18,990) (11,087) (11,744) 39,077 (2,744)
Restricted cash equivalents...... (20,500) -- -- -- (20,500)
-------- -------- -------- ------- --------
Net cash used in
investing activities... (39,540) (11,087) (16,262) 39,077 (27,812)
-------- -------- -------- ------- --------
Financing activities:
Proceeds from loans payable to
bank and long-term debt....... 61,650 -- 28,290 (28,290) 61,650
Issuance of common stock......... 1,721 -- -- -- 1,721
Parent company investment and
advances...................... 11,087 2,301 (13,388) --
-------- -------- -------- ------- --------
Net cash provided by
financing activities... 63,371 11,087 30,591 (41,678) 63,371
-------- -------- -------- ------- --------
Effect of exchange rate changes on
cash and cash equivalents........ -- -- 7,210 -- 7,210
Effect of change in foreign company
reporting lag on cash and cash
equivalents...................... -- -- 6,695 -- 6,695
-------- -------- -------- ------- --------
Net increase (decrease) in cash and
cash equivalents................. 18,211 -- (317) -- 17,894
Cash and cash equivalents at
beginning of period.............. 17,502 -- 8,713 -- 26,215
-------- -------- -------- ------- --------
Cash and cash equivalents at end of
period........................... $ 35,713 $ -- $ 8,396 $ -- $ 44,109
======== ======== ======== ======= ========
85
88
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE YEAR ENDED AUGUST 31, 1999 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating activities:
Net cash used in
operating activities... $ (17,286) $ -- $ (16,819) $ -- $ (34,105)
--------- --------- --------- -------- ---------
Investing activities:
Purchase of property and
equipment..................... (3,182) (753) -- (3,935)
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies........... (186,707) (33,969) (159,484) 255,689 (124,471)
Acquisition, net of cash
acquired...................... -- -- (26,942) -- (26,942)
Purchase of wireless licenses.... -- -- (19,009) -- (19,009)
Net proceeds from disposal of
subsidiary.................... 16,024 -- -- -- 16,024
--------- --------- --------- -------- ---------
Net cash used in
investing activities... (173,865) (33,969) (206,188) 255,689 (158,333)
--------- --------- --------- -------- ---------
Financing activities:
Proceeds from loan payable to
bank and long-term debt....... 128,584 -- 16,720 (10,000) 135,304
Repayment of long-term debt...... (17,500) -- -- -- (17,500)
Issuance of common stock......... 2,301 1,103 -- -- 3,404
Parent company investment and
advances...................... 95,268 32,866 212,823 (245,689) 95,268
--------- --------- --------- -------- ---------
Net cash provided by
financing activities... 208,653 33,969 229,543 (255,689) 216,476
--------- --------- --------- -------- ---------
Effect of exchange rate changes on
cash and cash equivalents........ -- -- 2,177 -- 2,177
--------- --------- --------- -------- ---------
Net increase in cash and cash
equivalents...................... 17,502 -- 8,713 -- 26,215
Cash and cash equivalents at
beginning of period.............. -- -- -- -- --
--------- --------- --------- -------- ---------
Cash and cash equivalents at end of
period........................... $ 17,502 $ -- $ 8,713 $ -- $ 26,215
========= ========= ========= ======== =========
86
89
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW INFORMATION FOR THE YEAR ENDED AUGUST 31, 1998 (IN THOUSANDS):
CRICKET
COMMUNICATIONS NON-GUARANTOR
LEAP HOLDINGS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- -------------- ------------- ------------ ------------
Operating activities:
Net cash used in
operating activities... $ (9,322) $ -- $ (8,486) $ (570) $ (18,378)
--------- -------- --------- -------- ---------
Investing activities:
Investments in and loans to
subsidiaries and
unconsolidated wireless
operating companies........... (140,234) (16,146) (129,156) 151,632 (133,904)
Acquisition...................... (564) -- -- -- (564)
Purchase of wireless licenses.... -- -- (6,274) -- (6,274)
--------- -------- --------- -------- ---------
Net cash used in
investing activities... (140,798) (16,146) (135,430) 151,632 (140,742)
--------- -------- --------- -------- ---------
Financing activities:
Proceeds from loan payable to
bank.......................... -- -- 9,000 -- 9,000
Parent company investment and
advances...................... 150,120 16,146 134,916 (151,062) 150,120
--------- -------- --------- -------- ---------
Net cash provided by
financing activities... 150,120 16,146 143,916 (151,062) 159,120
--------- -------- --------- -------- ---------
Net increase in cash and cash
equivalents...................... -- -- -- -- --
Cash and cash equivalents at
beginning of period.............. -- -- -- -- --
--------- -------- --------- -------- ---------
Cash and cash equivalents at end of
period........................... $ -- $ -- $ -- $ -- $ --
========= ======== ========= ======== =========
87
90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the section entitled
"Proposal 1 -- Election of Directors" in Leap's definitive Proxy Statement for
the Annual Meeting of Stockholders of the Company (the "Proxy Statement") which
is expected to be filed not later than 120 days after the end of Leap's fiscal
year ended December 31, 2000, and is incorporated in this report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the section entitled
"Executive Compensation" in Leap's definitive Proxy Statement and is
incorporated in this report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in Leap's
definitive Proxy Statement and is incorporated in this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the sections entitled
"Certain Relationships and Related Transactions" and "Compensation Committee
Interlocks and Insider Participation" in Leap's definitive Proxy Statement and
is incorporated in this report by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS:
The financial statements of Leap listed below are set forth in Item 8 of
this report for the year ended December 31, 2000:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the year ended December 31,
2000, for the period from September 1, 1999 to December 31, 1999 and for
each of the two years in the period ended August 31, 1999
Consolidated Statements of Cash Flows for the year ended December 31,
2000, for the period from September 1, 1999 to December 31, 1999 and for
each of the two years in the period ended August 31, 1999
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 2000, for the period from September 1, 1999 to December 31,
1999 and for each of the two years in the period ended August 31, 1999
Notes to Consolidated Financial Statements
88
91
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedule
Schedule I -- Condensed Financial Information at December 31, 2000 and
1999, and for the year ended December 31, 2000, for the period from
September 1, 1999 to December 31, 1999 and for each of the two years in
the period ended August 31, 1999
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
3. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1(1) Share Purchase Agreement, dated as of June 2, 2000 among
Endesa S.A., Leap Wireless International, Inc. and
Inversiones Leap Wireless Chile, S.A.
3.1(2) Amended and Restated Certificate of Incorporation of the
Registrant.
3.1.1(3) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Registrant.
3.2(2) Amended and Restated Bylaws of the Registrant.
3.3(4) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Registrant.
4.1(2) Form of Common Stock Certificate.
4.2(5) Letter, dated as of May 5, 1999, from Qualcomm Incorporated
to the Registrant.
4.2.1(6) Superceding Warrant, dated as of August 9, 1999, issued to
Qualcomm Incorporated.
4.2.2(6) Form of Voting Agreement, dated as of August 9, 1999,
between the Registrant and various officers and directors of
Qualcomm Incorporated.
4.2.3(6) Amended and Restated Agreement Concerning Share Ownership,
dated as of August 4, 1999, between the Registrant and
Qualcomm Incorporated.
4.3(4) Rights Agreement, dated as of September 14, 1998, between
the Registrant and Harris Trust Company of California.
4.3.1(1) First Amendment to Rights Agreement, dated as of February 8,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
4.3.2(1) Second Amendment to Rights Agreement, dated as of March 30,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
4.4(7) Warrant Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company (including Form of Warrant Certificate).
4.5(7) Warrant Registration Rights Agreement, dated as of February
23, 2000, by and between the Registrant and Morgan Stanley &
Co. Incorporated.
4.6(7) Trust Indenture, dated as of February 23, 2000, by and among
the Registrant, Cricket Communications Holdings, Inc. and
State Street Bank and Trust Company (including Forms of
Notes).
4.6.1(8) Supplemental Indenture, dated as of June 13, 2000, by and
among Cricket Merger Sub, Inc., the Registrant, Cricket
Communications Holdings, Inc. and State Street Bank and
Trust Company.
4.7(7) Pledge Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company.
4.8(7) Registration Rights Agreement, dated February 23, 2000, by
and among the Registrant, Cricket Communications Holdings,
Inc. and Morgan Stanley & Co. Incorporated.
10.1(9) Separation and Distribution Agreement, dated as of September
23, 1998, between Qualcomm Incorporated and the Registrant.
10.1.1(6) First Amendment to Separation and Distribution Agreement,
dated as of August 6, 1999, between the Registrant and
Qualcomm Incorporated.
89
92
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.2(9) Credit Agreement, dated as of September 23, 1998, between
Qualcomm Incorporated and the Registrant.
10.3(9) Tax Matters Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
10.4(9) Interim Services Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
10.5(9) Master Agreement Regarding Equipment Procurement, dated as
of September 23, 1998, between Qualcomm Incorporated and the
Registrant.
10.5.1(6) First Amendment to Master Agreement Regarding Equipment
Procurement, dated as of August 6, 1999, between the
Registrant and Qualcomm Incorporated.
10.6(9) Employee Benefits Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
10.7(9) Conversion Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
10.8(9) Assignment and Assumption Agreement, dated as of September
23, 1998, between Qualcomm Incorporated and the Registrant.
10.9(10) 1998 Stock Option Plan, as amended through April 13, 1999.
10.9.1(2) Form of non-qualified/incentive stock option under the 1998
Stock Option Plan.
10.9.2(2) Form of non-qualified stock option under the 1998 Stock
Option Plan granted to Qualcomm Incorporated option holders
in connection with the distribution of the Registrant's
common stock.
10.10(2) Form of the Registrant's 1998 Non-Employee Directors' Stock
Option Plan.
10.10.1(2) Form of non-qualified stock option under the 1998
Non-Employee Directors' Stock Option Plan.
10.11(2) Form of the Registrant's Employee Stock Purchase Plan.
10.12(2) Assignment and Assumption of Lease dated August 11, 1998
between Qualcomm Incorporated and Vaxa International, Inc.
10.13(2) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers.
10.14(11) Asset Purchase Agreement, dated December 24, 1998, by and
among Chase Telecommunications Holdings, Inc., Anthony
Chase, Richard McDugald and the Registrant.
10.15(12) Stock Purchase Agreement, dated April 12, 1999, by and among
Inversiones Leap Chile S.A., Telex -- Chile S.A., and
Chilesat S.A.
10.16(10) Novation and Assumption of Payment Obligation Agreement,
dated May 11, 1999, by and among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A. and Chilesat S.A. (In
Spanish and accompanied by a translation in English).
10.17(6) Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.17.1(7) Amendment No. 1 to 1999 Stock Option Plan of Cricket
Communications, Inc. (now known as Cricket Communications
Holdings, Inc.).
10.17.2(6) Form of non-qualified/incentive stock option under the
Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.18(6) Employment offer letter to Susan G. Swenson from Registrant,
dated July 9, 1999.
10.19(14) System Equipment Purchase Agreement, effective as of
September 20, 1999, by and between Cricket Communications,
Inc. and Ericsson Wireless Communications Inc. (including
exhibits thereto). 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.
90
93
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.19.1*+ Amendment #1 to System Equipment Purchase Agreement,
effective as of November 28, 2000, by and between Cricket
Communications, Inc. and Ericsson Wireless Communications
Inc. (including exhibits thereto). 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.
10.19.2*+ Form of Amendment # to System Equipment Purchase Agreement,
by and between Cricket Communications, Inc. and Ericsson
Wireless Communications Inc. (including exhibits thereto).
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.
10.19.3* Schedule to Form of Amendment # to System Equipment
Purchase Agreement.
10.20(13) Second Amended and Restated Deferred Payment Agreement,
dated October 12, 1999, among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A., and Qualcomm
Incorporated, as Vendor, Administrative Agent and Collateral
Agent Subsidiaries of the Registrant.
10.21(15) Executive Officer Deferred Stock Plan.
10.22(3) 2000 Stock Option Plan.
10.22.1* Form of non-qualified/incentive stock option under the 2000
Stock Option Plan.
10.23(13) Amended and Restated System Equipment Purchase Agreement,
entered into as of June 30, 2000, by and between Cricket
Communications, Inc. and Lucent Technologies Inc. (including
exhibits thereto). 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.
10.24(8) System Equipment Purchase Agreement, effective as of August
28, 2000, by and between Cricket Communications, Inc. and
Nortel Networks Inc. (including exhibits thereto). 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.
10.25(8) Credit Agreement, dated as of August 28, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc.,
the lenders party thereto and Nortel Networks Inc., as
Administrative Agent (including exhibits thereto). 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.
10.25.1(8) First Amendment, dated as of October 20, 2000, to the Credit
Agreement, dated as of August 28, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc.,
the lenders party thereto and Nortel Networks Inc., as
Administrative Agent (including exhibits thereto).
10.26(13) Credit Agreement, dated as of September 20, 1999, as Amended
and Restated as of October 20, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc,
the Lenders party thereto and Lucent Technologies Inc., as
Administrative Agent (including exhibits thereto). 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.
91
94
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.27(8) Credit Agreement, dated as of October 20, 2000, among
Cricket Communications Holdings, Inc., Cricket
Communications, Inc., the lenders party thereto and Ericsson
Credit AB, as Administrative Agent (including exhibits
thereto). 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.
10.28* Agreement for Purchase and Sale of Licenses, entered into 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.
10.29(16) Common Stock Purchase Agreement, dated as of December 20,
2000, by and between the Registrant and Acqua Wellington
North American Equities Fund, Ltd.
10.29.1(17) First Amendment to Common Stock Purchase Agreement, entered
into as of January 11, 2001, by and between the Registrant
and Acqua Wellington North American Equities Fund, Ltd.
10.30* 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* Pledge Agreement, dated as of January 22, 2001, between the
Registrant and Citibank, N.A., as the Collateral Agent.
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP, independent
accountants.
- ---------------
* 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 Quarterly Report on Form 10-Q for the quarter
ended May 31, 2000, as filed with the SEC on July 17, 2000, and
incorporated herein by reference.
(2) Filed as an exhibit to Leap's Registration Statement on Form 10, as amended
(File No. 0-29752), and incorporated herein by reference.
(3) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
28, 2000, and incorporated herein by reference.
(4) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
14, 1998, and incorporated herein by reference.
(5) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1999, as filed with the SEC on April 14, 1999, and
incorporated herein by reference.
(6) Filed as an exhibit to Leap's Post-Effective Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-64459) dated August 10,
1999, and incorporated herein by reference.
(7) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 29, 2000, as filed with the SEC on April 14, 2000, and
incorporated herein by reference.
(8) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, and incorporated herein by reference.
(9) Filed as an exhibit to Leap's Amendment No. 1 to Registration Statement on
Form S-1 (File No. 333-64459) dated October 13, 1998, and incorporated
herein by reference.
(10) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1999, as filed with the SEC on July 15, 1999, and
incorporated herein by reference.
92
95
(11) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1998, as filed with the SEC on January 14, 1999, and
incorporated herein by reference.
(12) Filed as an exhibit to Leap's Current Report on Form 8-K dated May 4, 1999,
and incorporated herein by reference.
(13) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal
year ended August 31, 1999, as filed with the SEC on October 20, 1999, as
amended, and incorporated herein by reference.
(14) Filed as an exhibit to Leap's Amendment No. 1 to Annual Report on Form
10-K/A for the fiscal year ended August 31, 1999, as filed with the SEC on
December 13, 1999, and incorporated herein by reference.
(15) Filed as an exhibit to Leap's Registration Statement on Form S-8 (File No.
333-94389) dated January 11, 2000, and incorporated herein by reference.
(16) Filed as an exhibit to Leap's Current Report on Form 8-K dated December 20,
2000, and incorporated herein by reference.
(17) Filed as an exhibit to Leap's Current Report on Form 8-K dated January 11,
2001, as amended by Amendment No. 1 thereto, and incorporated herein by
reference.
(b) REPORTS ON FORM 8-K
(1) Current Report on Form 8-K, dated September 28, 2000 filed with the SEC
on October 10, 2000. Items 5 and 7 reported, relating to the Special Meeting of
Stockholders held on September 28, 2000.
(2) Current Report on Form 8-K, dated December 20, 2000 filed with the SEC
on December 21, 2000. Items 5 and 7 reported, relating to Leap having entered
into a common stock purchase agreement with Acqua Wellington North American
Equities Fund, Ltd.
93
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 2, 2001 LEAP WIRELESS INTERNATIONAL, INC.
By: /s/ HARVEY P. WHITE
------------------------------------
Harvey P. White,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HARVEY P. WHITE Chief Executive Officer and March 2, 2001
- ----------------------------------------------------- Director
Harvey P. White (Principal Executive Officer)
/s/ SUSAN G. SWENSON President, Chief Operating March 2, 2001
- ----------------------------------------------------- Officer
Susan G. Swenson and Director
/s/ THOMAS D. WILLARDSON Senior Vice President, Finance March 2, 2001
- ----------------------------------------------------- and
Thomas D. Willardson Treasurer
(Principal Financial Officer)
/s/ STEPHEN P. DHANENS Vice President, Controller March 2, 2001
- ----------------------------------------------------- (Principal Accounting Officer)
Stephen P. Dhanens
Director March , 2001
- -----------------------------------------------------
Alejandro Burillo Azcarraga
/s/ JILL E. BARAD Director March 2, 2001
- -----------------------------------------------------
Jill E. Barad
/s/ THOMAS J. BERNARD Vice Chairman and Director March 2, 2001
- -----------------------------------------------------
Thomas J. Bernard
/s/ ANTHONY R. CHASE Director March 2, 2001
- -----------------------------------------------------
Anthony R. Chase
/s/ ROBERT C. DYNES Director March 2, 2001
- -----------------------------------------------------
Robert C. Dynes
/s/ SCOT B. JARVIS Director March 2, 2001
- -----------------------------------------------------
Scot B. Jarvis
/s/ MICHAEL B. TARGOFF Director March 2, 2001
- -----------------------------------------------------
Michael B. Targoff
Director March , 2001
- -----------------------------------------------------
Jeffrey P. Williams
97
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Leap Wireless International, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 28, 2001 appearing in this Annual Report on Form 10-K of Leap
Wireless International, Inc. also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
San Diego, California
February 28, 2001
98
SCHEDULE I
PAGE 1 OF 4
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED INFORMATION AS TO THE
FINANCIAL CONDITION OF THE REGISTRANT
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
2000 1999
---------- ---------
ASSETS
Cash and cash equivalents................................... $ 106,504 $ 35,713
Restricted cash equivalents and short-term investments...... 13,575 20,550
Short-term investments...................................... 16,237 --
Other current assets........................................ 1,631 3,684
---------- ---------
Total current assets.............................. 137,947 59,947
Property and equipment, net................................. 5,763 2,467
Investments in and loans receivable from subsidiaries....... 705,455 118,506
Intangible assets, net...................................... 28,907 18,920
Restricted investments...................................... 51,896 --
Deposits and other assets................................... 114,040 2,496
---------- ---------
Total assets...................................... $1,044,008 $ 202,336
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 8,618 $ 3,810
Other current liabilities................................... 12,319 --
---------- ---------
Total current liabilities......................... 20,937 3,810
Long-term debt.............................................. 438,143 187,570
Other long-term liabilities................................. 1,670 64
---------- ---------
Total liabilities................................. 460,750 191,444
---------- ---------
Stockholders' equity:
Preferred stock -- authorized 10,000,000 shares; $.0001
par value,
no shares issued and outstanding....................... -- --
Common stock -- authorized 300,000,000 shares; $.0001 par
value,
28,348,694 and 20,039,556 shares issued and outstanding
at
December 31, 2000 and 1999 respectively................ 3 2
Additional paid-in capital................................ 893,401 292,933
Unearned stock-based compensation......................... (10,019) --
Accumulated deficit....................................... (302,898) (277,720)
Accumulated other comprehensive income (loss)............. 2,771 (4,323)
---------- ---------
Total stockholders' equity........................ 583,258 10,892
---------- ---------
Total liabilities and stockholders' equity........ $1,044,008 $ 202,336
========== =========
See accompanying notes to condensed financial statements.
99
SCHEDULE I
PAGE 2 OF 4
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED INFORMATION AS TO THE RESULTS OF OPERATIONS OF THE REGISTRANT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM
SEPTEMBER 1,
YEAR ENDED 1999 TO YEAR ENDED AUGUST 31,
DECEMBER 31, DECEMBER 31, ----------------------
2000 1999 1999 1998
------------ ----------------- ---------- ---------
Operating expenses:
Selling, general and administrative
expenses................................. $(35,233) $ (4,883) $ (17,004) $ (9,292)
Depreciation and amortization............... (815) (212) (563) --
-------- -------- --------- --------
Total operating expenses............ (36,048) (5,095) (17,567) (9,292)
-------- -------- --------- --------
Operating loss.............................. (36,048) (5,095) (17,567) (9,292)
Equity in net loss of and write-down of
investments in and loan receivable from
subsidiaries................................ 110,229 (62,351) (150,897) (38,284)
Interest income............................... 23,490 1,022 960 843
Interest expense.............................. (81,622) (6,196) (6,102) --
Foreign currency transaction gains, net....... 361 -- --
Gain on sale of wholly-owned subsidiaries..... (4,484) -- 9,097 --
Other income (expense), net................... 2,021 (3,226) (104) --
-------- -------- --------- --------
Income (loss) before income taxes and
extraordinary items......................... 13,947 (75,846) (164,613) (46,733)
Income taxes.................................. (9,693) -- -- --
-------- -------- --------- --------
Income (loss) before extraordinary items...... 4,254 (75,846) (164,613) (46,733)
Extraordinary loss on early extinguishment of
debt........................................ (4,422) -- -- --
-------- -------- --------- --------
Net loss.................................... $ (168) $(75,846) $(164,613) $(46,733)
======== ======== ========= ========
Basic net income (loss) per common share:
Income (loss) before extraordinary items.... $ 0.16 $ (4.01) $ (9.19) $ (2.65)
Extraordinary loss.......................... (0.17) -- -- --
-------- -------- --------- --------
Net loss............................... $ (0.01) $ (4.01) $ (9.19) $ (2.65)
======== ======== ========= ========
Diluted net income (loss) per common share:
Income (loss) before extraordinary items.... $ 0.13 $ (4.01) $ (9.19) $ (2.65)
Extraordinary loss.......................... (0.14) -- -- --
-------- -------- --------- --------
Net loss............................... $ (0.01) $ (4.01) $ (9.19) $ (2.65)
======== ======== ========= ========
Shares used in per share calculations:
Basic....................................... 25,398 18,928 17,910 17,648
======== ======== ========= ========
Diluted..................................... 32,543 18,928 17,910 17,648
======== ======== ========= ========
See accompanying notes to condensed financial statements.
100
SCHEDULE I
PAGE 3 OF 4
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED INFORMATION AS TO THE
CASH FLOWS OF THE REGISTRANT
(IN THOUSANDS)
PERIOD FROM
YEAR ENDED SEPTEMBER 1, 1999 YEAR ENDED AUGUST 31,
DECEMBER 31, TO DECEMBER 31, ---------------------
2000 1999 1999 1998
------------ ----------------- --------- ---------
Net cash used in operating activities........ $(128,328) $ (5,620) $ (17,286) $ (9,322)
--------- -------- --------- ---------
Investing activities:
Purchase of property and equipment......... (1,944) (50) (3,182) --
Investments in and loans to subsidiaries... (400,536) (18,990) (186,707) (140,234)
Acquisitions, net of cash acquired......... (4,475) -- -- (564)
Purchase of wireless licenses.............. (14,934) -- -- --
Net proceeds from disposal of
subsidiaries............................ 4,311 -- 16,024 --
Purchases of investments................... (125,657) -- -- --
Sale and maturity of investments........... 104,410 -- -- --
Restricted cash equivalents and
investments, net........................ (44,921) (20,500) -- --
--------- -------- --------- ---------
Net cash used in investing
activities....................... (483,746) (39,540) (173,865) (140,798)
--------- -------- --------- ---------
Financing activities:
Proceeds from issuance of senior and senior
discount notes.......................... 550,102 -- -- --
Proceeds from loans payable to banks and
long-term debt.......................... 31,022 61,650 128,584 --
Repayment of loans payable to banks and
long-term debt.......................... (226,708) -- (17,500) --
Issuance of common stock................... 341,949 1,721 2,301 --
Payment of debt financing costs............ (13,500) -- -- --
Former parent company's investment......... -- -- 95,268 150,120
--------- -------- --------- ---------
Net cash provided by financing
activities....................... 682,865 63,371 208,653 150,120
--------- -------- --------- ---------
Net increase in cash and cash equivalents.... 70,791 18,211 17,502 --
Cash and cash equivalents at beginning of
period..................................... 35,713 17,502 -- --
--------- -------- --------- ---------
Cash and cash equivalents at end of period... $ 106,504 $ 35,713 $ 17,502 $ --
========= ======== ========= =========
See accompanying notes to condensed financial statements.
101
SCHEDULE I
PAGE 4 OF 4
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Leap Wireless International, Inc. ("Leap"), a Delaware corporation, is the
parent company of all Leap subsidiaries. The accompanying condensed financial
statements reflect the financial position, results of operations and
comprehensive loss and cash flows of Leap on a separate basis. All subsidiaries
of Leap are reflected as investments accounted for under the equity method of
accounting.
No cash dividends were paid to Leap by its subsidiaries during the year
ended December 31, 2000, the period from September 1, 1999 to December 31, 1999
or the years ended August 31, 1999 and 1998.
For accounting policies and other information, see the Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K.
102
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1(1) Share Purchase Agreement, dated as of June 2, 2000 among
Endesa S.A., Leap Wireless International, Inc. and
Inversiones Leap Wireless Chile, S.A.
3.1(2) Amended and Restated Certificate of Incorporation of the
Registrant.
3.1.1(3) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Registrant.
3.2(2) Amended and Restated Bylaws of the Registrant.
3.3(4) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Registrant.
4.1(2) Form of Common Stock Certificate.
4.2(5) Letter, dated as of May 5, 1999, from Qualcomm Incorporated
to the Registrant.
4.2.1(6) Superceding Warrant, dated as of August 9, 1999, issued to
Qualcomm Incorporated.
4.2.2(6) Form of Voting Agreement, dated as of August 9, 1999,
between the Registrant and various officers and directors of
Qualcomm Incorporated.
4.2.3(6) Amended and Restated Agreement Concerning Share Ownership,
dated as of August 4, 1999, between the Registrant and
Qualcomm Incorporated.
4.3(4) Rights Agreement, dated as of September 14, 1998, between
the Registrant and Harris Trust Company of California.
4.3.1(1) First Amendment to Rights Agreement, dated as of February 8,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
4.3.2(1) Second Amendment to Rights Agreement, dated as of March 30,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
4.4(7) Warrant Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company (including Form of Warrant Certificate).
4.5(7) Warrant Registration Rights Agreement, dated as of February
23, 2000, by and between the Registrant and Morgan Stanley &
Co. Incorporated.
4.6(7) Trust Indenture, dated as of February 23, 2000, by and among
the Registrant, Cricket Communications Holdings, Inc. and
State Street Bank and Trust Company (including Forms of
Notes).
4.6.1(8) Supplemental Indenture, dated as of June 13, 2000, by and
among Cricket Merger Sub, Inc., the Registrant, Cricket
Communications Holdings, Inc. and State Street Bank and
Trust Company.
4.7(7) Pledge Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company.
4.8(7) Registration Rights Agreement, dated February 23, 2000, by
and among the Registrant, Cricket Communications Holdings,
Inc. and Morgan Stanley & Co. Incorporated.
10.1(9) Separation and Distribution Agreement, dated as of September
23, 1998, between Qualcomm Incorporated and the Registrant.
10.1.1(6) First Amendment to Separation and Distribution Agreement,
dated as of August 6, 1999, between the Registrant and
Qualcomm Incorporated.
10.2(9) Credit Agreement, dated as of September 23, 1998, between
Qualcomm Incorporated and the Registrant.
10.3(9) Tax Matters Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
103
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.4(9) Interim Services Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
10.5(9) Master Agreement Regarding Equipment Procurement, dated as
of September 23, 1998, between Qualcomm Incorporated and the
Registrant.
10.5.1(6) First Amendment to Master Agreement Regarding Equipment
Procurement, dated as of August 6, 1999, between the
Registrant and Qualcomm Incorporated.
10.6(9) Employee Benefits Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
10.7(9) Conversion Agreement, dated as of September 23, 1998,
between Qualcomm Incorporated and the Registrant.
10.8(9) Assignment and Assumption Agreement, dated as of September
23, 1998, between Qualcomm Incorporated and the Registrant.
10.9(10) 1998 Stock Option Plan, as amended through April 13, 1999.
10.9.1(2) Form of non-qualified/incentive stock option under the 1998
Stock Option Plan.
10.9.2(2) Form of non-qualified stock option under the 1998 Stock
Option Plan granted to Qualcomm Incorporated option holders
in connection with the distribution of the Registrant's
common stock.
10.10(2) Form of the Registrant's 1998 Non-Employee Directors' Stock
Option Plan.
10.10.1(2) Form of non-qualified stock option under the 1998
Non-Employee Directors' Stock Option Plan.
10.11(2) Form of the Registrant's Employee Stock Purchase Plan.
10.12(2) Assignment and Assumption of Lease dated August 11, 1998
between Qualcomm Incorporated and Vaxa International, Inc.
10.13(2) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers.
10.14(11) Asset Purchase Agreement, dated December 24, 1998, by and
among Chase Telecommunications Holdings, Inc., Anthony
Chase, Richard McDugald and the Registrant.
10.15(12) Stock Purchase Agreement, dated April 12, 1999, by and among
Inversiones Leap Chile S.A., Telex -- Chile S.A., and
Chilesat S.A.
10.16(10) Novation and Assumption of Payment Obligation Agreement,
dated May 11, 1999, by and among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A. and Chilesat S.A. (In
Spanish and accompanied by a translation in English).
10.17(6) Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.17.1(7) Amendment No. 1 to 1999 Stock Option Plan of Cricket
Communications, Inc. (now known as Cricket Communications
Holdings, Inc.).
10.17.2(6) Form of non-qualified/incentive stock option under the
Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.18(6) Employment offer letter to Susan G. Swenson from Registrant,
dated July 9, 1999.
10.19(14) System Equipment Purchase Agreement, effective as of
September 20, 1999, by and between Cricket Communications,
Inc. and Ericsson Wireless Communications Inc. (including
exhibits thereto). 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.
104
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.19.1*+ Amendment #1 to System Equipment Purchase Agreement,
effective as of November 28, 2000, by and between Cricket
Communications, Inc. and Ericsson Wireless Communications
Inc. (including exhibits thereto). 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.
10.19.2*+ Form of Amendment # to System Equipment Purchase Agreement,
by and between Cricket Communications, Inc. and Ericsson
Wireless Communications Inc. (including exhibits thereto).
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.
10.19.3* Schedule to Form of Amendment # to System Equipment
Purchase Agreement
10.20(13) Second Amended and Restated Deferred Payment Agreement,
dated October 12, 1999, among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A., and Qualcomm
Incorporated, as Vendor, Administrative Agent and Collateral
Agent Subsidiaries of the Registrant.
10.21(15) Executive Officer Deferred Stock Plan.
10.22(3) 2000 Stock Option Plan.
10.22.1* Form of non-qualified/incentive stock option under the 2000
Stock Option Plan.
10.23(13) Amended and Restated System Equipment Purchase Agreement,
entered into as of June 30, 2000, by and between Cricket
Communications, Inc. and Lucent Technologies Inc. (including
exhibits thereto). 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.
10.24(8) System Equipment Purchase Agreement, effective as of August
28, 2000, by and between Cricket Communications, Inc. and
Nortel Networks Inc. (including exhibits thereto). 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.
10.25(8) Credit Agreement, dated as of August 28, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc.,
the lenders party thereto and Nortel Networks Inc., as
Administrative Agent (including exhibits thereto). 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.
10.25.1(8) First Amendment, dated as of October 20, 2000, to the Credit
Agreement, dated as of August 28, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc.,
the lenders party thereto and Nortel Networks Inc., as
Administrative Agent (including exhibits thereto).
10.26(13) Credit Agreement, dated as of September 20, 1999, as Amended
and Restated as of October 20, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc,
the Lenders party thereto and Lucent Technologies Inc., as
Administrative Agent (including exhibits thereto). 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(8) Credit Agreement, dated as of October 20, 2000, among
Cricket Communications Holdings, Inc., Cricket
Communications, Inc., the lenders party thereto and Ericsson
Credit AB, as Administrative Agent (including exhibits
thereto). 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.
105
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.28* Agreement for Purchase and Sale of Licenses, entered into 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.
10.29(16) Common Stock Purchase Agreement, dated as of December 20,
2000, by and between the Registrant and Acqua Wellington
North American Equities Fund, Ltd.
10.29.1(17) First Amendment to Common Stock Purchase Agreement, entered
into as of January 11, 2001, by and between the Registrant
and Acqua Wellington North American Equities Fund, Ltd.
10.30* 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* Pledge Agreement, dated as of January 22, 2001, between the
Registrant and Citibank, N.A., as the Collateral Agent.
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP, independent
accountants.
- ---------------
* 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 Quarterly Report on Form 10-Q for the quarter
ended May 31, 2000, as filed with the SEC on July 17, 2000, and
incorporated herein by reference.
(2) Filed as an exhibit to Leap's Registration Statement on Form 10, as amended
(File No. 0-29752), and incorporated herein by reference.
(3) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
28, 2000, and incorporated herein by reference.
(4) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
14, 1998, and incorporated herein by reference.
(5) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1999, as filed with the SEC on April 14, 1999, and
incorporated herein by reference.
(6) Filed as an exhibit to Leap's Post-Effective Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-64459) dated August 10,
1999, and incorporated herein by reference.
(7) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 29, 2000, as filed with the SEC on April 14, 2000, and
incorporated herein by reference.
(8) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, and incorporated herein by reference.
(9) Filed as an exhibit to Leap's Amendment No. 1 to Registration Statement on
Form S-1 (File No. 333-64459) dated October 13, 1998, and incorporated
herein by reference.
(10) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1999, as filed with the SEC on July 15, 1999, and
incorporated herein by reference.
(11) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1998, as filed with the SEC on January 14, 1999, and
incorporated herein by reference.
(12) Filed as an exhibit to Leap's Current Report on Form 8-K dated May 4, 1999,
and incorporated herein by reference.
(13) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal
year ended August 31, 1999, as filed with the SEC on October 20, 1999, as
amended, and incorporated herein by reference.
106
(14) Filed as an exhibit to Leap's Amendment No. 1 to Annual Report on Form
10-K/A for the fiscal year ended August 31, 1999, as filed with the SEC on
December 13, 1999, and incorporated herein by reference.
(15) Filed as an exhibit to Leap's Registration Statement on Form S-8 (File No.
333-94389) dated January 11, 2000, and incorporated herein by reference.
(16) Filed as an exhibit to Leap's Current Report on Form 8-K dated December 20,
2000, and incorporated herein by reference.
(17) Filed as an exhibit to Leap's Current Report on Form 8-K dated January 11,
2001, as amended by Amendment No. 1 thereto, and incorporated herein by
reference.