<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 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 92121-2779
(Address of Principal Executive Offices) (Zip Code)
(858) 882-6000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [ ]
The number of shares of registrant's common stock outstanding on July 10,
2000 was 26,529,085.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................................... $ 543,118 $ 26,215
Restricted cash equivalents and short-term investments ............. 55,555 --
Short-term investments ............................................. 46,340 --
Accounts receivable, net ........................................... 12,944 2,726
Inventories ........................................................ 4,681 5,410
Recoverable taxes .................................................. 11,233 3,907
Other current assets ............................................... 10,664 1,926
----------- -----------
Total current assets ........................................... 684,535 40,184
Property and equipment, net ........................................ 237,300 116,947
Investments in and loans receivable from unconsolidated
wireless operating companies .................................. 61,290 94,429
Wireless licenses and other intangible assets, net ................. 207,042 73,944
Restricted investments ............................................. 50,284 --
Deferred financing costs and other assets .......................... 25,855 9,827
----------- -----------
Total assets ................................................... $ 1,266,306 $ 335,331
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities ........................... $ 43,255 $ 16,372
Loans payable to banks ............................................. 46,513 17,225
Other current liabilities .......................................... 4,401 --
----------- -----------
Total current liabilities ...................................... 94,169 33,597
Long-term debt ..................................................... 736,019 221,812
Other long-term liabilities ........................................ 12,118 8,504
----------- -----------
Total liabilities .............................................. 842,306 263,913
----------- -----------
Commitments and contingencies (Notes 3, 7, 9 and 11)
Minority interest in consolidated subsidiary ....................... 16,802 518
----------- -----------
Stockholders' equity:
Preferred stock - authorized 10,000,000 shares;
$.0001 par value, no shares issued and outstanding ............. -- --
Common stock - authorized 75,000,000 shares;
$.0001 par value, 25,411,560 shares issued and outstanding ..... 3 2
Additional paid-in capital ....................................... 789,372 291,189
Accumulated deficit .............................................. (378,329) (216,896)
Accumulated other comprehensive loss ............................. (3,848) (3,395)
----------- -----------
Total stockholders' equity ..................................... 407,198 70,900
----------- -----------
Total liabilities and stockholders' equity ..................... $ 1,266,306 $ 335,331
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
MAY 31,
---------------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues ............................... $ 16,931 $ -- $ 31,242 $ --
--------- --------- --------- ---------
Operating expenses:
Cost of operating revenues .................... (16,871) -- (39,333) --
Selling, general and administrative ........... (22,594) (5,951) (55,588) (14,357)
Depreciation and amortization ................. (7,781) (265) (18,029) (408)
--------- --------- --------- ---------
Total operating expenses .................. (47,246) (6,216) (112,950) (14,765)
--------- --------- --------- ---------
Operating loss .............................. (30,315) (6,216) (81,708) (14,765)
Equity in net loss of unconsolidated
wireless operating companies ................... (17,095) (38,722) (67,229) (74,130)
Interest income .................................. 10,275 455 11,852 2,280
Interest expense ................................. (31,747) (2,326) (52,867) (4,239)
Foreign currency transaction gains ............... 9,373 -- 7,977 --
Minority interest ................................ 1,376 -- 1,893 --
Gain on issuance of stock by unconsolidated
wireless operating company ..................... 25,734 -- 25,734 --
Other income (expense), net ...................... 204 132 (2,663) 835
--------- --------- --------- ---------
Loss before extraordinary item .............. (32,195) (46,677) (157,011) (90,019)
Extraordinary loss on early
extinguishment of debt ........................ -- -- (4,422) --
--------- --------- --------- ---------
Net loss .................................... $ (32,195) $ (46,677) $(161,433) $ (90,019)
========= ========= ========= =========
Other comprehensive income (loss):
Foreign currency translation gains
(losses) .................................... 2,227 (202) (453) (364)
--------- --------- --------- ---------
Comprehensive loss .......................... $ (29,968) $ (46,879) $(161,886) $ (90,383)
========= ========= ========= =========
Basic and diluted net loss per common share:
Loss before extraordinary item ................ $ (1.26) $ (2.60) $ (7.22) $ (5.06)
Extraordinary loss ............................ (0.00) -- (0.20) --
--------- --------- --------- ---------
Net loss ........................................ $ (1.26) $ (2.60) $ (7.42) $ (5.06)
========= ========= ========= =========
Shares used to calculate basic and diluted
net loss per common share ..................... 25,603 17,952 21,741 17,794
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
MAY 31,
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net cash used in operating activities .............................. $ (46,872) $ (23,790)
--------- ---------
Investing activities:
Purchase of property and equipment ............................... (37,510) (3,060)
Investments in and loans to unconsolidated wireless
operating companies ............................................. (17,009) (107,609)
Proceeds from liquidation of discontinued foreign venture ........ 11,337 --
Loan receivable to related party ................................. -- (17,500)
Repayment of loan receivable from related party .................. -- 17,500
Purchase of held-to-maturity investments ......................... (37,649) --
Restricted cash equivalents and investments ...................... (105,839) --
Acquisitions, net of cash acquired ............................... (1,327) (26,942)
Purchase of wireless licenses .................................... (13,396) (689)
--------- ---------
Net cash used in investing activities .............................. (201,393) (138,300)
--------- ---------
Financing activities:
Proceeds from issuance of senior discount notes .................. 325,102 --
Proceeds from issuance of senior notes ........................... 225,000 --
Proceeds from loans payable to banks ............................. 28,000 6,720
Proceeds from long-term debt ..................................... 104,781 99,721
Repayments of senior notes long-term debt ........................ (233,995) (17,500)
Payments of debt financing costs ................................. (16,558) --
Net proceeds from issuance of common stock ....................... 334,137 1,408
Issuance of subsidiary common stock .............................. 2,840 --
Other financing for purchase of property and equipment ........... 1,634 --
Former parent company's investment ............................... -- 95,268
--------- ---------
Net cash provided by financing activities .......................... 770,941 185,617
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents ............................................ (5,773) --
--------- ---------
Net increase in cash and cash equivalents .......................... 516,903 23,527
Cash and cash equivalents at beginning of period ................... 26,215 --
--------- ---------
Cash and cash equivalents at end of period ......................... $ 543,118 $ 23,527
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $ 21,593 $ --
Supplemental disclosure of non-cash investing and financing
activities:
Loans to unconsolidated wireless operating company converted
to equity investment ........................................ $ -- $ 50,196
Long-term financing for loans to unconsolidated wireless
operating company ........................................... $ 20,759 $ --
Long-term financing to purchase assets ........................... $ 119,945 $ --
Long-term financing to purchase wireless licenses ................ $ 9,601 $ --
Facility fee due on long-term debt ............................... $ -- $ 5,300
Repurchase of stock purchase warrant ............................. $ -- $ 5,355
Supplemental disclosure of cash used for acquisitions:
Total purchase value ............................................. $ 152,946 $ 43,699
Warrant issued for subsidiary company common stock ............... (15,353) --
Liabilities assumed at present value ............................. (131,293) (15,699)
Cash acquired .................................................... (4,973) (1,058)
--------- ---------
Cash used for acquisitions ....................................... $ 1,327 $ 26,942
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
THE COMPANY AND NATURE OF BUSINESS
Leap Wireless International, Inc., a Delaware corporation, and its wholly
owned and majority-owned subsidiaries (the "Company" or "Leap") is a wireless
communications carrier that deploys, owns and operates networks in domestic and
international markets. Through its operating companies, Leap has launched
all-digital wireless networks in the United States, Chile and Mexico.
INTERIM FINANCIAL STATEMENTS
The accompanying interim condensed consolidated financial statements have
been prepared by the Company without audit, in accordance with the instructions
to Form 10-Q and, therefore, do not include all information and footnotes
necessary for a fair presentation of its financial position, results of
operations, cash flows and stockholders' equity in accordance with generally
accepted accounting principles. In the opinion of management, the unaudited
financial information for the interim periods presented reflects all adjustments
(which include only normal, recurring adjustments) necessary for a fair
presentation. These condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report to Shareholders for
the Fiscal Year Ended August 31, 1999 incorporated by reference in the Company's
1999 Annual Report on Form 10-K. Operating results for interim periods are not
necessarily indicative of operating results for an entire fiscal year. The
accounts of Smartcom S.A. ("Smartcom"), the Company's Chilean subsidiary, have
been consolidated using a two-month lag. See Note 3.
The condensed consolidated financial statements are prepared using generally
accepted accounting principles. 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. Certain prior period amounts have been reclassified to conform
to the current period presentation.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the three and nine months
ended May 31, 2000 were calculated by dividing the net loss for each of the
periods by the weighted average number of common shares outstanding for each of
the periods of 25,602,950 and 21,740,600, respectively. Basic and diluted net
loss per common share for the three and nine months ended May 31, 1999 were
calculated by dividing the net loss for each of the periods by the weighted
average number of common shares outstanding for each of the periods of
17,952,373 and 17,794,358, respectively. At May 31, 2000 stock options for
5,281,561 common shares and the exercise of a warrant issued to Qualcomm for
4,500,000 shares of the Company's common stock have not been considered in
calculating basic and diluted net loss per common share because their effect
would be anti-dilutive. As a result, the Company's basic and diluted net loss
per common share are the same.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2001.
This statement establishes a new model for accounting for derivatives 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarized certain of the staff's interpretations in
applying generally accepted accounting principles to revenue recognition. The
provisions of SAB No. 101 are effective for the Company's quarter ending August
31, 2001. The Company does not expect that the adoption of SAB No. 101 will have
a material impact on its consolidated financial position or results of
operations.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies
6
<PAGE> 7
as a non compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The Company does not expect that the adoption of FIN 44 will have a material
effect on its financial position or results of operations.
NOTE 2. RESTRICTED CASH EQUIVALENTS AND INVESTMENTS
Restricted cash equivalents and investments are debt securities which have
been pledged to provide for the payment of the first seven scheduled interest
payments on long-term notes payable and to secure the Company's obligations
under a letter of credit with a bank. Management determines the appropriate
classification of its investment in debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. At May 31, 2000,
the Company's restricted cash equivalents, restricted investments and
non-restricted investments consisted of U.S. government securities classified as
held-to-maturity and carried at amortized cost, which approximates fair value.
NOTE 3. ACQUISITIONS, PENDING ACQUISITIONS AND DISPOSITION
CHASE TELECOMMUNICATIONS HOLDINGS
In March 2000, the Company completed its acquisition of substantially all the
assets of Chase Telecommunications Holdings Inc. ("Chase Telecommunications
Holdings"). The purchase price included approximately $6.3 million in cash, the
assumption of principal amounts of liabilities that totaled $138.0 million (with
a fair value of approximately $131.3 million), a warrant to purchase 1% of the
common stock of the Company's subsidiary Cricket Communications Holdings, Inc.
("Cricket Communications Holdings") at an exercise price of $1.0 million (which
had a fair value of approximately $15.3 million at the acquisition date
determined using the Black-Scholes option pricing model), and contingent
earn-out payments of up to $41.0 million (plus certain expenses) based on the
earnings of the business acquired during the fifth full year following the
closing of the acquisition. The liabilities to be assumed include approximately
$78.8 million in principal amounts owed to the FCC associated with the wireless
licenses that bear interest at the rate of 7.0% per annum and must be repaid in
quarterly installments of principal and interest through January 2007.
Therefore, under the purchase method of accounting, the total estimated fair
value of the acquisition was $152.9 million, of which $43.2 million has been
allocated to property and equipment and other assets and approximately $109.7
million has been allocated to intangible assets, primarily wireless licenses
which are to be amortized over their estimated useful lives of 40 years upon
commencement of commercial service. 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):
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
-------------------------
(UNAUDITED)
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating revenues ........................................ $ 37,356 $ 1,917
========= =========
Loss before extraordinary item ............................ $(171,368) $ (90,033)
========= =========
Net loss .................................................. $(175,790) $ (90,033)
========= =========
Pro forma basic and diluted net loss per common share ..... $ (8.09) $ (5.06)
========= =========
</TABLE>
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.
ACQUISITION OF WIRELESS LICENSES
In January 2000, the Company purchased three wireless licenses covering
markets in North Carolina from AirGate Wireless, L.L.C. ("AirGate") for $25.0
million. The purchase price consisted of the Company assuming $11.1 million of
notes due to the Federal Communications Commission ("FCC") related to the
licenses and the remainder payable in cash.
7
<PAGE> 8
PENDING ACQUISITIONS OF WIRELESS LICENSES
In May 2000, the Company agreed to renegotiate a September 1999 agreement to
purchase a wireless license covering the Dayton, Ohio market from PCS Devco,
Inc. ("PCS Devco"). The renegotiated purchase price of $16.2 million consists of
$8.1 million of the Company's common stock, approximately $1.1 million in
indebtedness to the FCC related to the license which will be assumed by the
Company at closing and the remainder payable in cash. Prior to closing, PCS
Devco can elect to receive $8.1 million in cash in lieu of the Company's common
stock. The Company is required to make PCS Devco's payments on the FCC note
during the period prior to closing of the transaction, reducing the remaining
cash payment to PCS Devco.
In January 2000, the Company agreed to acquire two wireless licenses covering
the Pittsburgh, Pennsylvania and Denver, Colorado markets from Radiofone PCS,
L.L.C. ("Radiofone"). The purchase price for the Pittsburgh license is $18.4
million in cash and the purchase price for the Denver license is 232,754 shares
of the Company's common stock and $3.4 million in cash less the amount of debt
owed by Radiofone to the FCC related to the license which will be assumed by the
Company at the closing. As of May 31, 2000, the outstanding principal amount of
the FCC debt was approximately $1.5 million. The amounts owed to the FCC must be
repaid in quarterly installments of principal and interest through April 2007.
In February 2000, the Company agreed to purchase all of the outstanding stock
of three subsidiaries of Zuma PCS, LLC, which own three wireless licenses
covering markets in Albany, Columbus and Macon, Georgia. The purchase price
consists of 170,374 shares of the Company's common stock.
In March 2000, the Company agreed to acquire three wireless licenses covering
the Phoenix, Arizona, Reno, Nevada and Roswell, New Mexico markets from Beta
Communications, L.L.C. The purchase price for the licenses is $33.3 million in
cash. In April 2000, the Company agreed to acquire a wireless license covering
the Omaha, Nebraska market from CM PCS, LLC. The purchase price for the license
is $14.2 million in cash plus the assumption of approximately $0.6 million in
indebtedness to the FCC related to the license. Also in April 2000, the Company
agreed to acquire a wireless license covering the Lincoln, Nebraska market from
Center Point PCS. The purchase price for the wireless license is $4.3 million in
cash.
Each of these transactions is subject to FCC approval and other conditions
prior to closing. Accordingly, there can be no assurance that these transactions
will ultimately be consummated.
SALE OF SMARTCOM
In June 2000, the Company completed the sale of all of the issued and
outstanding shares of Smartcom to Endesa, S.A., a Spanish utility company
("Endesa"), for $156.8 million in cash and notes totaling $143.2 million subject
to certain post closing adjustments, plus repayment of intercompany debt owed to
the Company by Smartcom totaling $53.3 million and the release of cash
collateral posted by Leap securing Smartcom indebtedness to a bank of
approximately $28.2 million. The sale of the Smartcom shares resulted in the
removal of approximately $191.4 million of Smartcom liabilities (in addition to
the $28.2 million Smartcom bank indebtedness) from the Company's consolidated
balance sheet at the date of sale. Following the closing of the sale of
Smartcom, the Company's loans payable to banks in Chile of $10.3 million and
$7.6 million were repaid by the Company.
NOTE 4. INVESTMENTS AND LOANS TO UNCONSOLIDATED WIRELESS OPERATING COMPANIES
The Company has equity interests in companies that directly or indirectly
operate wireless telecommunications networks. Its participation in each company
differs and the Company does not have majority interests in such companies. The
Company accounts for these equity interests under the equity method. The Company
accounts for its investments in foreign operating companies using a two-month
lag. The Company's ability to withdraw funds, including dividends, from its
participation in such investments is dependent in many cases on receiving the
consent of lenders and the other participants, over which the Company has no
control.
Commencing with the fourth quarter of fiscal 1999, the Company began
accounting for Smartcom as a consolidated entity. Prior to the fourth quarter of
fiscal 1999, Smartcom was accounted for under the equity method. The Company
recorded equity losses from Smartcom of $5.6 million and $13.1 million during
the three months and nine months ended May 31, 1999, 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 zero
and $20.2 million during the three and nine months ended May 31, 2000,
respectively, and $4.5 million and $16.9 million during the three and nine
months ended May 31, 1999, respectively.
The Company has a 22.4% interest in Pegaso Telecommunicaciones S.A. de C.V.
("Pegaso"), a Mexican corporation that is deploying the first 100% digital
wireless communications network in Mexico. The Company invested $100.0 million
in Pegaso from June to September 1998 as a founding shareholder. In April 2000,
Sprint PCS invested approximately $200.0 million by purchasing shares from
Pegaso and shareholders other than Leap. As a result,
8
<PAGE> 9
the Company's ownership interest in Pegaso was diluted from 28.6% to 22.4%. The
Company recorded equity losses from Pegaso of $17.1 million and $47.1 million
during the three and nine months ended May 31, 2000, respectively, and $6.3
million and $15.2 million during the three and nine months ended May 31, 1999,
respectively. In the quarter ended May 31, 2000, the Company recognized a gain
of $25.8 million on the issuance of stock by Pegaso as described above.
Condensed combined financial information for the Leap operating companies
accounted for under the equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
2000 1999
----------- ----------
(UNAUDITED)
<S> <C> <C>
Current assets ........................................ $ 187,989 $ 140,899
Non-current assets .................................... 579,751 576,765
Current liabilities ................................... (262,500) (112,539)
Non-current liabilities ............................... (231,657) (347,590)
--------- ---------
Total stockholders' capital ........................ 273,583 257,535
Other stockholders' share of capital .................. 212,293 146,059
--------- ---------
Company's share of capital ............................ 61,290 111,476
Lag period loans and advances ......................... -- 10,195
Write-down in investments ............................. -- (27,242)
--------- ---------
Investments in and loans receivable from
unconsolidated wireless operating companies ..... $ 61,290 $ 94,429
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
MAY 31,
---------------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues ................................... $ 19,860 $ 4,015 $ 31,214 $ 10,138
--------- --------- --------- ---------
Operating losses ..................................... (64,562) (53,859) (192,435) (106,012)
Other income (expense), net .......................... (13,173) (7,033) (35,553) (11,412)
Foreign currency transaction gains (losses) .......... 14,594 (1,406) 15,588 (5,430)
--------- --------- --------- ---------
Net loss .......................................... (63,141) (62,298) (212,400) (122,854)
Other stockholders' share of net loss ................ (46,046) (21,963) (143,172) (44,567)
--------- --------- --------- ---------
Company's share of net loss .......................... (17,095) (40,335) (69,228) (78,287)
Amortization of excess cost of investment ............ -- (322) -- (631)
Elimination of intercompany transactions ............. -- 1,935 1,999 4,788
--------- --------- --------- ---------
Equity in net loss of unconsolidated wireless
operating companies ............................ $ (17,095) $ (38,722) $ (67,229) $ (74,130)
========= ========= ========= =========
</TABLE>
NOTE 5. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
2000 1999
----------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Trade accounts receivable ........... $ 12,968 $ 2,197
Other accounts receivable ........... 1,317 1,112
-------- --------
14,285 3,309
Allowance for doubtful accounts ..... (1,341) (583)
-------- --------
$ 12,944 $ 2,726
======== ========
INVENTORIES:
Handsets ............................ $ 3,689 $ 4,320
Accessories ......................... 992 1,090
-------- --------
$ 4,681 $ 5,410
======== ========
</TABLE>
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<PAGE> 10
NOTE 6. LOANS PAYABLE TO BANKS
In February 2000, the Company renewed its loans with banks in Chile,
including capitalized and accrued interest. The renewed loans of $10.3 million
and $7.6 million bore interest at rates of 8.2% and 7.85% per annum,
respectively, and were due to be repaid in September 2000.
In November 1999, the Company and Smartcom entered into a loan arrangement
with a bank. Pursuant to the arrangement, Leap acted as account party to cause
the bank to issue letters of credit to secure the loan to Smartcom. At May 31,
2000, Leap had deposited funds with the bank totaling $29.1 million and pledged
such funds as cash collateral to secure its obligation under the letters of
credit. These funds are recorded as restricted cash equivalents in the condensed
consolidated balance sheet. At May 31, 2000, Smartcom's borrowings from the bank
totaled $28.2 million, bore interest at the weighted-average rate of 7.01% per
annum and were due to be repaid in July 2000.
In connection with the sale of Smartcom, the Company's loans with banks in
Chile were repaid and the Company's cash collateral securing the Smartcom
letters of credit was released.
NOTE 7. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
2000
-----------
(UNAUDITED)
<S> <C>
12.5% senior notes, due 2010, effective interest rate of 15.8% ......... $158,964
14.5% senior discount notes, face amount $668.0 million, due 2010,
effective interest rate of 16.3% .................................... 242,582
Smartcom deferred payment and credit agreements ........................ 125,933
Lucent credit agreement ................................................ 111,002
U.S. government financing .............................................. 79,970
Note payable to Telex-Chile, net of discount ........................... 17,568
--------
$736,019
========
</TABLE>
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, and $164.4 million of the total proceeds were allocated to the
fair value of the warrants, estimated using the Black-Scholes option pricing
model. In addition, the Company capitalized certain debt issuance costs of
approximately $13.5 million, consisting of underwriting, printing, legal and
accounting fees. A portion of the net proceeds from the units offering was used
for the repayment of borrowings under the Company's credit agreement with
Qualcomm Incorporated ("Qualcomm"). The remaining proceeds from the units
offering will be used for capital expenditures, acquisitions of wireless
licenses, strategic investments, sales and marketing activities, and working
capital and general corporate purposes.
Interest on the Senior Notes is payable on April 15 and October 15 of each
year, beginning on April 15, 2000. The Company used $79.5 million of the
proceeds from the Senior Notes to purchase and pledge, for the benefit of the
holders of the Senior Notes, certain U.S. Government securities to provide for
the payment of the first seven scheduled interest payments on the Senior Notes.
The remaining unpaid portion of such amounts is classified as restricted cash
equivalents and investments in the accompanying condensed consolidated balance
sheet.
Each Senior Discount Note has an initial accreted value of $486.68 and a
principal amount at maturity of $1,000. The Senior Discount Notes will not begin
to accrue cash interest until April 15, 2005. Interest on the Senior Discount
Notes will be payable on April 15 and October 15 of each year, beginning on
October 15, 2005.
10
<PAGE> 11
The Company may redeem any of the notes beginning April 15, 2005. The initial
redemption price of the Senior Notes is 106.25% of their principal amount plus
accrued interest. The initial redemption price of the Senior Discount Notes is
107.25% of their principal amount at maturity plus accrued interest. In
addition, before April 15, 2003, the Company may redeem up to 35% of both the
Senior Notes and the Senior Discount Notes using proceeds from certain qualified
equity offerings of the Company's common stock at 112.5% of their principal
amount and 114.5% of their accreted value, respectively.
The notes rank equally with the Company's other unsecured senior
indebtedness. The notes are effectively subordinate to all of the Company's
secured indebtedness. The notes are guaranteed by the Company's domestic
subsidiary, Cricket Communications Holdings. The terms of the notes include
certain covenants that restrict the Company's ability to, among other things,
incur additional indebtedness, create liens, pay dividends, make investments,
sell assets and effect a consolidation or merger. The Company is obligated to
consummate an exchange offer for the notes pursuant to an effective registration
statement or cause to become effective a shelf registration statement for
resales of the notes. If one of these events does not occur within 180 days
after the closing of the units offering, interest on the notes will increase by
0.5% per annum until the exchange offer is consummated or such shelf
registration statement becomes effective.
Each warrant included as part of the senior units is initially exercisable
to purchase 5.146 shares (1,157,850 shares in aggregate) of the Company's common
stock at an exercise price of $96.80 per share. Each warrant included as part of
the senior discount units is initially exercisable to purchase 2.503 shares
(1,672,004 shares in aggregate) of the Company's common stock at an exercise
price of $96.80 per share. The warrants may be exercised at any time on or after
February 23, 2001 and prior to April 15, 2010. The Company is obligated to file
a shelf registration statement covering the resale of the warrants and related
common stock issuable upon exercise of the warrants within 180 days after the
closing of the units offering.
QUALCOMM CREDIT AGREEMENT
The Company entered into a secured credit facility (the "Qualcomm Credit
Agreement") with Qualcomm on September 23, 1998. The Qualcomm Credit Agreement
consisted of two sub-facilities. The working capital sub-facility enabled the
Company to borrow up to $35.2 million from Qualcomm for working capital needs.
The investment capital sub-facility enabled the Company to borrow up to $229.8
million from Qualcomm for strategic capital investments. In February 2000, the
Company used a portion of the net proceeds of the units and equity offerings 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 condensed consolidated statements of
operations.
LUCENT CREDIT AGREEMENT
In September 1999, Cricket Communications, Inc., ("Cricket Communications")
an indirect subsidiary of the Company, entered into an agreement with Lucent
Technologies Inc. ("Lucent") for the purchase of up to $330.0 million of
infrastructure products and services, and in June 2000, increased that
commitment to $900.0 million. The purchase agreement is subject to early
termination at Cricket Communications' convenience subject to payments for
equipment purchased. Lucent agreed to finance these purchases plus additional
working capital under a credit facility (the "Lucent Credit Agreement"). The
Lucent Credit Agreement originally permitted up to $641.0 million in total
borrowings, which was increased to up to $1,350.0 million in June 2000, with
borrowing availability based on a ratio of the total amount of equipment
purchased from Lucent. Lucent is not required to make loans under the facility
if the total of the loans held directly or supported by Lucent is an amount
greater than $815.0 million. The Credit Agreement contains various covenants and
conditions typical for a loan of this type, including minimum levels of
customers and covered potential customers which must increase over time, limits
on annual capital expenditures, dividend restrictions and other financial ratio
tests. The obligations under the Lucent Credit Agreement are secured by all of
the stock of Cricket Communications and its subsidiaries, all of their
respective assets, the assets of Cricket Communications Holdings and the stock
of each special purpose subsidiary of Leap formed to hold wireless licenses.
Borrowings under the Lucent Credit Agreement 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 Lucent a commitment fee equal to 0.75% to 1.25%
per annum based upon the unused commitment under the facility. 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 May 31, 2000, the Company had $111.0 million outstanding under the Lucent
Credit Agreement, including $3.1 million in accrued and capitalized interest.
11
<PAGE> 12
SMARTCOM DEFERRED PAYMENT AND CREDIT AGREEMENTS
Smartcom entered into a Deferred Payment Agreement, as amended and restated
(the "Deferred Payment Agreement"), with Qualcomm related to Smartcom's purchase
of equipment, software and services from Qualcomm. Under the Deferred Payment
Agreement, Qualcomm agreed to defer collection of amounts up to a maximum of
$115.7 million including capitalized interest. The obligations under the
Deferred Payment Agreement were secured by all of the assets of Smartcom. A Leap
subsidiary had agreed to pledge its shares in Smartcom as collateral for its
guarantee of Smartcom's obligations to Qualcomm under the agreement. The
Deferred Payment Agreement required Smartcom to meet certain financial and
operating covenants, including a debt to equity ratio and restrictions on
Smartcom's ability to pay dividends and to distribute assets. As a result,
substantially all the net assets of Smartcom were restricted from distribution
to Leap. The deferred payments bore interest at a rate equal to LIBOR plus 5.0%
to 6.5% or a bank base rate plus 4.0% to 5.5%, in each case with the specific
rate based on certain financial ratios. Accrued interest could be added to the
outstanding principal amount of the applicable borrowing until September 2001.
Amounts deferred under the agreement were to have been repaid by September 2006.
At May 31, 2000, the Company had $98.4 million outstanding under the Deferred
Payment Agreement.
In February 2000, Smartcom and Qualcomm entered into an agreement (the
"Equipment Credit Agreement") related to Smartcom's equipment supply and service
agreements with a vendor. The Equipment Credit Agreement permitted up to $38.5
million in borrowings, including capitalized interest. The Equipment Credit
Agreement provided for certain financial and operating covenants similar to the
Deferred Payment Agreement. Borrowings under the Equipment Credit Agreement
accrued at an interest rate equal to LIBOR plus 5.0% to 7.0% or a bank base rate
plus 4.0% to 6.0%, in each case with the specific rate based on certain
financial ratios. Principal payments were scheduled to begin in March 2002 with
a final maturity of September 2006. At May 31, 2000, Smartcom had $16.3 million
outstanding under the Equipment Credit Agreement.
In February 2000, Smartcom and Qualcomm entered into an agreement (the
"Subscriber Deferred Payment Agreement") related to Smartcom's purchase of
handsets and accessories and test equipment from Qualcomm. Under the terms of
the agreement, Qualcomm had agreed to defer collection of amounts up to a
maximum of $11.2 million, including capitalized interest. The Subscriber
Deferred Payment Agreement provided for certain financial and operating
covenants similar to the Deferred Payment Agreement. Borrowings under the
Subscriber Deferred Payment Agreement accrued at an interest rate equal to LIBOR
plus 3.5% to 5.0% or a bank base rate plus 2.5% to 4.0%, in each case with the
specific rate based on certain financial ratios. Principal outstanding was due
at maturity in September 2001. At May 31, 2000, Smartcom had $11.2 million
outstanding under the Subscriber Deferred Payment Agreement.
In connection with the sale of Smartcom, the Company was released of its
obligations to Qualcomm under the Deferred Payment Agreement, Equipment Credit
Agreement and Subscriber Deferred Payment Agreement.
U.S. GOVERNMENT FINANCING
As part of the consideration for three wireless licenses acquired from
AirGate, the Company assumed $11.1 million ($9.6 million, net of discount) of
U.S. Government financing with the FCC. The terms of the notes include an
interest rate of 6.25% per annum and quarterly principal and interest payments
until maturity in April 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 of 10.75% per annum.
As part of the consideration for the acquisition of Chase, the Company
assumed $78.8 million ($70.5 million, net of discount) of U.S. Government
financing with the FCC. The terms of the notes include an interest rate of 7%
per annum and quarterly principal and interest payments until maturity in
January 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 of 9.75% per annum.
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, the Company received $82.72 per share,
or $330.9 million in the aggregate. The Company expects to pay approximately
$0.9 million of expenses related to the equity offering, and these costs have
been recorded as reductions to additional paid-in capital. A portion of the net
proceeds from the equity offering was used for the repayment of the Qualcomm
Credit Agreement. The remaining proceeds from the equity offering will be used
for capital expenditures, acquisitions of wireless licenses, strategic
investments, sales and marketing activities and working capital and general
corporate purposes.
12
<PAGE> 13
STOCKHOLDER RIGHTS PLAN
In March 2000, the Company's Board of Directors approved an amendment to
the Company's Stockholder Rights Plan that increases the purchase price from $90
to $350 for each one one-thousandth share of Series A Junior Participating
Preferred Stock.
NOTE 9. COMMITMENTS AND CONTINGENCIES
PEGASO
In May 1999, Pegaso entered into a $100 million loan agreement with several
banks with credit support from Qualcomm. The Company guaranteed 33% of Pegaso's
obligations under this loan agreement in the event of Pegaso's default. In
December 1999, as a condition of the guarantee, the Company received an option
to subscribe for and purchase up to 243,090 limiting voting series "N" treasury
shares of Pegaso. The number of shares to be purchased by the Company under the
option will be calculated to provide a total internal rate of return on the
average outstanding balance of the bridge loan of 20%. The options have an
exercise price of $0.01 per share and expire 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.
LITIGATION
In September 1999, the Company declared default under loans to Metrosvyaz, a
Russian venture in which the Company had a 35% indirect interest, stopped
funding those loans, wrote off its remaining $9.6 million investment in
Metrosvyaz, and issued a demand for arbitration against Metrosvyaz and one of
its directors with respect to those loans. In response, in March 2000,
Metrosvyaz filed suit against the Company and certain of its directors and
officers in the U.S. District Court for the Southern District of California. The
Metrosvyaz suit alleged claims for libel, trade libel, intentional and negligent
interference with prospective advantage and breach of fiduciary duty.
In April 2000, the Company resolved its differences with Metrosvyaz. As
part of the settlement, Metrosvyaz dismissed its action against the Company and
its officers in the federal court in San Diego, Leap dismissed its demand for
arbitration, and both companies agreed to general releases. The Company
surrendered its interest in a joint venture company that owned an interest in
Metrosvyaz, wrote off the balance of its investments in Russia and received a
contractual right to certain contingent payments from Qualcomm.
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.
NOTE 10. SEGMENT DATA
The Company's current reportable segments are countries in which it manages,
supports, operates and otherwise participates in wireless communications
business ventures. These reportable segments are evaluated separately because
each geographic region presents different marketing strategies and operational
issues, as well as distinct economic climates and regulatory constraints. The
Company's reportable segments are comprised of its consolidated and
unconsolidated United States subsidiaries, and Leap's operating companies in
Mexico and Chile.
13
<PAGE> 14
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
MAY 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
UNITED STATES
Revenues ................................................ $ 4,823 $ 1,093 $ 10,111 $ 1,917
Operating loss .......................................... (16,018) (7,210) (58,936) (16,097)
Operating loss before depreciation and amortization ..... (13,564) (6,235) (29,263) (13,322)
Capital expenditures .................................... (55,036) (2,042) (82,719) (3,828)
Purchase of wireless licenses ........................... -- -- (23,489) --
Total assets ............................................ 275,510 85,790 275,510 85,790
CHILE
Revenues ................................................ 12,883 2,386 27,094 3,670
Operating loss .......................................... (14,961) (6,443) (52,462) (17,426)
Operating loss before depreciation and amortization ..... (9,808) (2,295) (37,430) (8,217)
Capital expenditures .................................... (18,285) (5,448) (48,471) (44,845)
Total assets ............................................ 240,625 132,360 240,625 132,360
MEXICO
Revenues ................................................ 19,035 514 25,101 514
Operating loss .......................................... (62,776) (19,999) (154,309) (44,817)
Operating loss before depreciation and amortization ..... (53,188) (18,572) (137,322) (43,312)
Capital expenditures .................................... (21,361) (19,914) (123,707) (151,466)
Purchase of wireless licenses ........................... -- -- -- (175,864)
Total assets ............................................ 622,083 430,397 622,083 430,397
</TABLE>
A reconciliation of the total of the Company's segment revenues, operating
losses and operating losses before depreciation and amortization to the
corresponding consolidated amounts is as follows (in thousands):
14
<PAGE> 15
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
MAY 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total segment revenues .................................... $ 36,741 $ 3,993 $ 62,306 $ 6,101
Revenues of unconsolidated wireless
operating companies .................................. (19,860) (3,993) (31,214) (6,101)
Other revenues ............................................ 50 150
--------- --------- --------- ---------
Consolidated revenues ................................ $ 16,931 $ -- $ 31,242 $ --
========= ========= ========= =========
Total segment operating losses ............................ $ (93,755) $ (33,652) $(265,707) $ (78,340)
Operating losses of unconsolidated wireless
operating companies .................................. 64,490 53,932 192,363 106,085
Discontinued foreign ventures ............................. (23,175) (33,073)
Corporate and eliminations ................................ (1,050) (3,321) (8,364) (9,437)
--------- --------- --------- ---------
Consolidated operating loss .......................... $ (30,315) $ (6,216) $ (81,708) $ (14,765)
========= ========= ========= =========
Total segment operating losses before depreciation
and amortization ..................................... $ (76,560) $ (27,102) $(204,015) $ (64,851)
Operating losses before depreciation and amortization
of unconsolidated wireless operating companies ....... 54,510 47,382 147,814 92,596
Discontinued foreign ventures ............................. (23,175) (33,073)
Corporate and eliminations ................................ (484) (3,056) (7,478) (9,029)
--------- --------- --------- ---------
Consolidated operating losses before depreciation
and amortization .................................. $ (22,534) $ (5,951) $ (63,679) $ (14,357)
========= ========= ========= =========
</TABLE>
Revenues and long-lived assets related to operations in the United States
and other foreign countries are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------- ------- --------------------
MAY 31,
2000 1999 2000 1999
------- ------- ------- -------
REVENUES: (UNAUDITED)
<S> <C> <C> <C> <C>
United States ...................... $ 4,048 $ -- $ 4,148 $ --
Other foreign countries ............ 12,883 -- 27,094 --
------- ------- ------- -------
Total consolidated revenues ..... $16,931 $ -- $31,242 $ --
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
2000 1999
----------- ----------
LONG-LIVED ASSETS: (UNAUDITED)
<S> <C> <C>
United States .................................. $252,739 $ 23,599
Other foreign countries ........................ 262,209 264,369
-------- --------
Total consolidated long-lived assets ........ $514,948 $287,968
======== ========
</TABLE>
15
<PAGE> 16
NOTE 11. SUBSEQUENT EVENTS
CRICKET COMMUNICATIONS HOLDINGS
In June 2000, the Company acquired the 5.11% of Cricket Communications
Holdings that it did not already own through a subsidiary merger. These shares
were owned by individuals, including directors and employees of the Company and
Cricket Communications Holdings. Under the terms of the merger, 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 Company common stock. As a result, an aggregate of
1,048,635 shares of the Company's common stock were issued. The value of the
shares issued in excess of the minority interest will be allocated to goodwill.
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 also assumed
an obligation to issue 202,566 shares of its common stock for an aggregate
exercise price of $1.0 million upon the conversion and exercise of Chase
Telecommunications Holdings' warrant to purchase 643,068 shares of Cricket
Communications Holdings.
PENDING WIRELESS LICENSE ACQUISITION
In July 2000, the Company agreed to acquire a wireless license covering the
Lakeland, Florida market from Lakeland PCS, LLC ("Lakeland") for a purchase
price of $6.9 million, consisting of the assumption by the Company of
approximately $1.9 million in indebtedness to the FCC related to the license and
the remainder payable in cash. The agreement may be terminated by either party
if the transaction is not consummated by July 2001. The agreement is subject to
FCC approval and other conditions prior to closing. Accordingly, there can be no
assurance that the transaction will ultimately be consummated.
* * * *
16
<PAGE> 17
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 the Company's future. 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. The Company's actual results could differ materially
from those stated or implied by such forward looking statements due to risks and
uncertainties associated with the Company's business. Factors that could cause
or contribute to such differences, including factors relating to joint ventures
and other entities in which the Company has interests, include, but are not
limited to: the ability to successfully deploy wireless networks; the ability to
raise sufficient funds to finance such deployment; the ability to control costs
relating to constructing, expanding, and operating the networks; the ability to
attract new subscribers and the rate of growth of the subscriber base; the usage
and revenue generated from subscribers; the level of airtime and equipment
prices; the rate of churn of subscribers; the range of services offered; the
ability to effectively manage growth and the intense competition in the wireless
communications industry, as well as conditions governing the use of network
licenses set by various government and regulatory authorities; and developments
in current or future litigation. The forward looking statements should be
considered in the context of these and other risk factors detailed in Amendment
No. 1 to the Company's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on June 28, 2000, under the heading "Risk
Factors." Investors and prospective investors are cautioned not to place undue
reliance on such forward-looking statements. We disclaim any obligation to
update the forward-looking statements contained herein to reflect future events
or developments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Amendment No. 1 to the Company's Registration
Statement on Form S-4.
As used in this report, the terms "we," "our" or "us" refer to Leap Wireless
International, Inc. and its subsidiaries unless the context suggests otherwise.
OVERVIEW
Leap is a wireless communications carrier with an innovative approach to
providing digital wireless service that is designed to appeal to the mass
market. We intend to transform wireless into a mass consumer product by
deploying customer-oriented, low-cost, simple wireless services. We generally
seek to address a much broader population segment than incumbent wireless
operators have addressed to date. In the United States, we are employing a
unique business strategy to extend the benefits of mobility to the mass market
by offering wireless service under the brand name Cricket that is as simple as,
and priced at rates competitive with, traditional landline service. Chase
Telecommunications, Inc., a company we acquired in March 2000, introduced
Cricket service in Chattanooga and Nashville, Tennessee in March 1999 and
January 2000, respectively. To expand the Cricket service, we currently have
acquired or agreed to acquire wireless licenses covering approximately 36
million potential customers.
Internationally, we are involved in developing and operating a nationwide
digital wireless system in Mexico. While our current emphasis is on our
U.S.-based operations, we plan to focus our international efforts in markets
primarily in the Americas where we believe the combination of unfulfilled demand
and our attractive wireless service offerings will fuel rapid growth. In Mexico,
we were a founding shareholder and have invested $100 million in Pegaso, a joint
venture with Grupo Pegaso and Grupo Televisa, the largest media company in the
Spanish-speaking world. We currently own 22.4% of Pegaso, which is deploying the
first 100% digital wireless communications network in Mexico. Pegaso holds
wireless licenses generally in the 1900 MHz band to provide nationwide service
covering all of Mexico, with approximately 99 million potential customers.
In 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 the
agreement with Endesa, Endesa purchased all of the outstanding capital stock of
Smartcom from our subsidiary, Inversiones Leap Wireless Chile, S.A., and its
designated shareholder nominee (who held one share of the Series A preferred
stock of Smartcom in order to comply with Chilean law which requires two
shareholders for each Chilean sociedad anonima), in exchange for gross
consideration of approximately $381.5 million, consisting of cash, three
promissory notes and the release of cash collateral posted by us to secure
Smartcom indebtedness to a bank of approximately $28.2 million. The sale of the
Smartcom shares resulted in the removal of approximately $191.4 million of
Smartcom liabilities (in addition to the $28.2 million Smartcom bank
indebtedness) from our consolidated balance sheet at the date of sale.
Smartcom holds a nationwide wireless license in the 1900 MHz band and
operated a nationwide digital wireless system in Chile. In April 1999, we
acquired the remaining 50% of Smartcom that we did not already own.
17
<PAGE> 18
Subsequently, we recruited a new management team, upgraded the network
capabilities and, in November 1999, re-launched service under a new brand name,
SMARTCOM PCS. Smartcom's network is the only CDMA-based network in Chile.
In June 2000, we acquired the 5.11% of Cricket Communications Holdings that
we did not already own through a subsidiary merger. These shares were owned by
individuals, including directors and employees of Leap and Cricket
Communications Holdings. Under the terms of the merger, each issued and
outstanding share of Cricket Communications Holdings common stock not held by
Leap was converted into the right to receive 0.315 of a fully paid and
non-assessable share of our common stock. As a result, an aggregate of 1,048,635
shares of our common stock were issued. The value of the shares issued in excess
of the minority interest will be 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 our common stock.
We also assumed an obligation to issue 202,566 shares of our common stock for an
aggregate exercise price of $1.0 million upon the conversion and exercise of
Chase Telecommunications Holdings' warrant to purchase 643,068 shares of Cricket
Communications Holdings.
We are in the early stages of development and our financial results continue
to reflect the considerable investment associated with completion of our network
build-outs and the initial launch of commercial service in new markets. As we
continue to expand our operations, our net operating losses and our
proportionate share of the losses in our unconsolidated wireless operating
companies is expected to grow.
The term "operating company" refers to Cricket Communications, Chase
Telecommunications and Pegaso.
RECENT OR PENDING ACQUISITIONS
Chase Telecommunications. In March 2000, we completed the acquisition of
substantially all of the assets of Chase Telecommunications Holdings, including
wireless licenses. The purchase price included approximately $6.3 million in
cash, the assumption of principal amounts of liabilities that totaled
approximately $138.0 million (with a fair value of approximately $131.3
million), a warrant to purchase 1% of the common stock of our subsidiary Cricket
Communications Holdings at an exercise price of $1.0 million (which had a fair
value of approximately $15.3 million at the acquisition date determined using
the Black-Scholes option pricing model), and contingent earn-out payments of up
to $41.0 million (plus certain expenses) based on the earnings of the business
acquired during the fifth full year following the closing of the acquisition.
The liabilities assumed included approximately $78.8 million in principal
amounts owed to the FCC associated with the wireless licenses that bear interest
at the rate of 7.0% per annum and must be repaid in quarterly installments of
principal and interest through January 2007. Therefore, under the purchase
method of accounting, the total estimated fair value of the acquisition was
$152.9 million, of which $43.2 million has been allocated to property and
equipment and other assets and approximately $109.7 million has been allocated
to intangible assets, primarily wireless licenses which are to be amortized over
their estimated useful lives of 40 years upon commencement of commercial
service.
Other Wireless Licenses. In September 1999, we agreed to acquire a wireless
license covering the Dayton, Ohio market from PCS Devco for a purchase price of
approximately $2.4 million in cash and the assumption of principal amounts of
approximately $1.1 million in debt obligations to the FCC. Amounts owed to the
FCC bear interest at the rate of 6.25% per annum and must be repaid in quarterly
installments of principal and interest through July 2007. In addition, Leap has
agreed to transfer to PCS Devco a wireless license that covers 135,000 potential
customers. Until closing, Leap is required to make PCS Devco's payments under
its FCC debt, with any payments made by Leap reducing the cash payment to PCS
Devco. In February 2000, the FCC consented to the transfer of PCS Devco's
license to us, although the decision has not yet become a final order and as a
result of a challenge by a third party, is currently subject to further
administrative review. Because the decision did not become a final order prior
to March 2000, the agreement was subject to termination by either party at its
discretion. In May 2000, the parties amended the agreement to, among other
things, revise the consideration payable and modify the conditions to closing.
Under the revised agreement, PCS Devco will be merged into a subsidiary of Leap
in exchange for (1) $8.1 million in cash, less $1.1 million principal amount
($0.9 million net of discount) of the 6.25% per annum note due in June 2007 to
the FCC related to the license and (2) $8.1 million of Leap common stock, with
the number of shares of common stock issuable based on the average of market
closing prices before the date the transaction closes. Prior to the closing, in
lieu of the merger described above, PCS Devco may elect to assign the license
directly to Leap in exchange for $16.2 million in cash, less the principal
amount of FCC debt owed on the license. Under the revised agreement, Leap will
retain the wireless license that it was to transfer to PCS Devco under the
original agreement. The transaction is subject to customary closing conditions,
although a final order regarding the FCC's consent is not a condition under the
amended agreement. We expect that the transaction will close in July after
satisfaction of the closing conditions specified in the revised agreement. In
the event that the transaction has not closed within 90 days after the later of
July 31, 2000 or the date when all closing conditions have been satisfied or
waived, it may be terminated by either party.
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In January 2000, we acquired three wireless licenses covering markets in
North Carolina from AirGate for a purchase price of approximately $13.9 million
in cash and the assumption of principal amounts of approximately $11.1 million
in debt obligations to the FCC. Amounts owed to the FCC bear interest at the
rate of 6.25% per annum and must be repaid in quarterly installments of
principal and interest through April 2007.
Also in January 2000, we agreed to acquire two wireless licenses covering the
Pittsburgh, Pennsylvania and Denver, Colorado markets from Radiofone. The
purchase price for the Pittsburgh license is approximately $18.4 million in cash
and the purchase price for the Denver license is 232,754 shares of our common
stock and approximately $3.4 million in cash, less the amount of debt owed by
Radiofone to the FCC associated with the Denver license which will be assumed by
Leap at the closing. As of May 31, 2000, the outstanding principal amount owed
to the FCC associated with the Denver license was approximately $1.5 million.
The amounts owed to the FCC must be repaid in quarterly installments of
principal and interest through April 2007. As a condition to closing the
purchase of the Denver license, we must file and have declared effective a
resale shelf registration statement with the SEC covering the shares of our
common stock to be issued to the seller, subject to certain "lock-up"
restrictions on resale. The transaction is subject to FCC approval and other
conditions. Either party may terminate the Radiofone agreement in October 2000
if the transactions are not consummated by that date.
In February 2000, we agreed to acquire all of the outstanding stock of three
subsidiaries of Zuma, which own wireless licenses covering markets in Albany,
Columbus and Macon, Georgia for an aggregate purchase price of 170,374 shares of
our common stock. The merger agreement provides that these corporations will
have no indebtedness or other liabilities at the closing. The merger agreement
also provides that we must file and have declared effective a resale shelf
registration statement with the SEC covering the shares of our common stock
issued to the seller as soon as reasonably practicable after the closing of the
transaction, subject to certain "lock-up" restrictions on resale. The
transaction is subject to FCC approval and other conditions. Either party may
terminate the merger agreement in February 2001 if the transaction is not
consummated by that date.
In March 2000, we agreed to acquire three wireless licenses covering the
Phoenix, Arizona, Reno, Nevada and Roswell, New Mexico markets from Beta
Communications, L.L.C. The purchase price for the licenses is $33.3 million in
cash. The transaction is subject to FCC approval and other conditions. Our
agreement with Beta Communications may be terminated by either party in
September 2000 if the transaction is not consummated by that date, subject to
certain rights to extend the agreement to December 2000.
In April 2000, we agreed to acquire a wireless license covering the Omaha,
Nebraska market from CM PCS, Inc. The purchase price for the license is $14.2
million in cash plus the assumption of approximately $0.6 million in
indebtedness to the FCC related to the license. Also in April 2000, we agreed to
acquire a wireless license covering the Lincoln, Nebraska market from Center
Point PCS. The purchase price for the wireless license is $4.3 million in cash.
These agreements may be terminated by either party if the transaction is not
consummated by April 2001.
In July 2000, we agreed to acquire a wireless license covering the Lakeland,
Florida market from Lakeland PCS, LLC for an aggregate purchase price of $6.9
million, consisting of the assumption by Leap of approximately $1.9 million in
indebtedness to the FCC related to the license and the remainder payable in
cash. The agreement may be terminated by either party if the transaction is not
consummated by July 2001.
These transactions are subject to FCC approval and other conditions prior to
closing. Accordingly, the transactions ultimately may not be consummated.
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
from AirGate to one of our subsidiaries which cover portions of North Carolina,
in each case subject to the fulfillment of certain conditions. In October 1999,
the FCC issued to us the 36 re-auctioned licenses. In January 2000, the FCC
released an order consenting to the transfer of control of wireless licenses
from ChaseTel Licensee Corp. to us and to the mutual assignments of wireless
licenses from us to PCS Devco and vice versa.
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, has requested that the FCC
review the July 1999 order. In March 2000, the same party filed an application
for review of the FCC's January 2000 order, and has opposed all of our pending
assignment or transfer applications at the FCC. In addition, Nextel
Communications, Inc. has challenged one of our pending FCC applications,
alleging that we may no longer be
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compliant with C- and F- Block "total asset" eligibility requirements. Further
judicial review of the FCC's order granting us licenses is possible.
We may not prevail in connection with any such appeals or proceedings and we
may not remain qualified to hold C-Block or F-Block licenses. If the FCC
determines that we are not qualified to hold C-Block or F-Block licenses, it
could take the position that all of our licenses should be divested, cancelled
or re-auctioned.
PRESENTATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the financial condition of the businesses that Qualcomm
transferred to us in September 1998 as if we were a separate entity for all
periods discussed. We adopted the equity method of accounting for our investment
in Chase Telecommunications Holdings, Inc. in the third quarter of fiscal 1999.
Before that, we accounted for our investment in Chase Telecommunications
Holdings under the cost method. Accordingly, all prior periods presented in the
accompanying financial statements have been adjusted retroactively in accordance
with generally accepted accounting principles.
In April 1999, we increased our ownership interest in Smartcom from 50% to
100%. As a result of the reporting lag we have adopted for our foreign operating
companies, we began fully consolidating Smartcom's results of operations in June
1999, the beginning of the fourth quarter of fiscal 1999. Before that, we
accounted for our investment in Smartcom under the equity method of accounting.
In June, 2000, we sold all of the outstanding shares of Smartcom to Endesa. We
account for our interest in Pegaso under the equity method of accounting. As of
May 31, 2000, we owned 22.4% of Pegaso.
The directors of the Transworld Companies, partially owned subsidiaries of
a company in which we have an indirect interest, recently voted to liquidate the
companies. The decision followed the Transworld Companies' loss of leased
satellite transmission capacity and the companies' failure to develop an
acceptable business plan that did not utilize satellite transmission. As a
result of these developments, we wrote down our indirect investment in the
Transworld Companies in the fourth quarter of fiscal 1999. In addition, we have
ceased funding loans to Metrosvyaz and, as a result, have written-off our
remaining investment in Metrosvyaz.
RESULTS OF OPERATIONS
The results of operations discussed below include period-to-period
comparisons that may not reflect the character of our future results of
operations because of the following events:
- the initial launch of the Cricket service in the U.S.;
- our acquisition of wireless licenses from AirGate and agreements to
acquire the wireless licenses of PCS Devco, Radiofone, Zuma, Beta
Communications, CM PCS, Center Point PCS and Lakeland PCS;
- the consolidation of Smartcom with Leap after our purchase of the
remaining 50% interest in Smartcom that we did not already own and the
subsequent sale of Smartcom to Endesa in June, 2000;
- the purchase and consolidation of Chase Telecommunications with Leap in
March 2000; and
- the decrease in our percentage interest in Pegaso from 28.6% to 22.4%
which resulted from Sprint PCS's investment of $200 million in the Mexican
wireless carrier in April 2000.
THREE AND NINE MONTHS ENDED MAY 31, 2000 COMPARED TO THREE AND NINE MONTHS ENDED
MAY 31, 1999
We incurred a net loss of $32.2 million and $161.4 million, respectively,
during the three and nine month periods ended May 31, 2000 compared to a net
loss of $46.7 million and $90.0 million, respectively, in the corresponding
periods of the prior fiscal year. The increase in net loss (excluding a gain on
issuance of stock by Pegaso of $25.7 million in the current quarter) relates
primarily to increased operating expenses associated with the launch of network
service in new markets and interest expense on senior notes and senior discount
notes issued in February 2000 and the launch of network service in new markets.
Pegaso launched operations in Tijuana, Guadalajara and Monterrey in February
through September 1999 and in Mexico City in December 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 subscribers on our networks reached
approximately 423,000 subscribers at May 31, 2000 (46,000 in the U.S., 127,000
in Chile and 250,000 in Mexico), compared to a total subscriber base of
approximately 42,400 subscribers at May 31, 1999.
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As a direct result of the consolidation of Smartcom, we recorded $12.9
million and $27.1 million of operating revenues, $13.6 million and $36.1 million
of cost of operating revenues, $9.0 million and $28.4 million of additional
selling, general and administrative expenses, $5.1 million and $15.0 million of
additional depreciation and amortization, $8.2 million and $13.6 million of
additional net interest expense, and $9.4 million and $8.0 million of foreign
currency transaction gains during the three and nine month periods ended May 31,
2000, respectively. Smartcom's net loss of $10.4 million and $57.4 million
recognized during the three and nine month periods ended May 31, 2000,
respectively, before intercompany eliminations, compares to $5.6 million and
$13.1 million that we recognized under the equity method for our 50% interest in
the corresponding periods of the prior fiscal year.
As a direct result of the consolidation of Chase Telecommunications in March
2000, we recorded $4.0 million of operating revenues, $3.2 million of cost of
operating revenues, $3.5 million of additional selling, general and
administrative expenses, $2.0 million of additional depreciation and
amortization and $1.4 million of additional net interest expense during the
three and nine months ended May 31, 2000.
During the first nine months of fiscal 1999, 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 generated revenues of
approximately $6.1 million in the first nine months of fiscal 1999.
We incurred $22.6 million and $55.6 million of selling, general and
administrative expenses during the three and nine month periods ended May 31,
2000, respectively, compared to $6.0 million and $14.4 million in the
corresponding periods of the prior fiscal year. The increase includes $9.0
million and $28.4 million, respectively, from the consolidation of Smartcom.
Excluding Smartcom, selling, general and administrative expenses increased by
$7.6 million and $12.9 million, respectively, over the corresponding three and
nine month periods of the prior fiscal year due to increased staffing and
business development activities related to our domestic subsidiary Cricket
Communications.
We incurred operating losses of $30.3 million and $81.7 million during the
three and nine month periods ended May 31, 2000, respectively, compared to
operating losses of $6.2 million and $14.8 million in the corresponding periods
of the prior fiscal year. The $24.1 million and $66.9 million respective
increases primarily reflect the consolidation of Smartcom and Chase
Telecommunications. We expect continued substantial growth in subscribers,
operating revenues and operating expenses as a result of our consolidation of
Chase Telecommunications and the planned development and launch of Cricket
service in multiple U.S. markets. We also expect substantial growth in Pegaso's
subscribers, operating revenues and operating expenses; however, because Pegaso
is accounted for under the equity method, its operating revenues and expenses
are partially consolidated.
Equity in net loss of unconsolidated wireless operating companies was $17.1
million and $67.2 million during the three and nine month periods ended May 31,
2000, respectively, compared to $38.7 million and $74.1 million in the
corresponding periods of the prior fiscal year. During the first nine months of
the current fiscal year, our equity share in the net loss of our unconsolidated
wireless operating companies related to Pegaso and Chase Telecommunications
prior to our consolidation of Chase Telecommunications. During the corresponding
period of fiscal 1999, our equity share in the net loss of our unconsolidated
wireless operating companies also included Smartcom (prior to 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.
Interest expense was $31.7 million and $52.9 million during the three and
nine month periods ended May 31, 2000, respectively, compared to $2.3 million
and $4.2 million in the corresponding periods of the prior fiscal year. Interest
expense related primarily to senior notes and senior discount notes issued in
February 2000, borrowings under our credit agreement with Qualcomm prior to
repayment of the facility in February 2000 and Cricket Communications' and
Smartcom's financing of their wireless communications networks. We expect
interest expense to increase substantially in the future due to senior notes and
senior discount notes borrowings and expected borrowings used to fund the
construction of wireless networks in various markets across the United States.
Foreign currency transaction gains of $9.4 million and $8.0 million during
the three and nine month period ended May 31, 2000, respectively, reflected
unrealized foreign exchange gains recognized by Smartcom on U.S. dollar
denominated loans as a result of changes in the exchange rate between the U.S.
dollar and the Chilean peso.
Included in the nine month period ended May 31, 2000, in connection with the
repayment of the Qualcomm Credit Agreement in February 2000, we wrote-off and
reported as an extraordinary loss $4.4 million in related unamortized debt
issuance costs.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Over the next twelve months, we have budgeted a total of approximately
$1,051.2 million for the following capital requirements:
- approximately $955.0 million for capital expenditures for the build-out of
our first 25 Cricket networks in our initial phase of development and to
fund operating losses;
- approximately $79.2 million in connection with our pending acquisitions of
wireless licenses from Radiofone, Beta, CM PCS and Center Point PCS; and
- approximately $17.0 million for general corporate overhead and other
expenses.
Our actual expenditures may vary significantly depending upon whether we
purchase additional wireless licenses, the progress of the build-out of our
networks and other factors, including unforeseen delays, cost overruns,
unanticipated expenses, regulatory expenses, engineering design changes and
other technological risks. Additionally, we may continue to seek additional
financing commitments from our infrastructure equipment vendors. If we fail to
obtain such commitments, we may reduce our budgeted capital expenditures.
As of May 31, 2000, we had a total of approximately $1,117.0 million in
unused capital resources for our future cash needs as follows:
- approximately $583.9 million in consolidated cash, cash equivalents and
investments on hand, excluding Smartcom; and
- approximately $533.1 million in commitments under vendor financing
arrangements with Lucent Technologies, with availability based upon a
ratio of the total amounts of equipment purchased.
In addition, in June 2000, we received approximately $220.4 million in cash
as a result of the sale of Smartcom, net of repayment of loans payable to banks
in Chile totaling $19.5 million. Furthermore, in June 2000, we entered into a
third amendment to the Lucent Credit Agreement that increased the total
borrowings available under the agreement from up to $641.0 million to up to
$1,350.0 million, with borrowing availability based on a ratio of the total
amounts of equipment purchased, subject to various covenants and conditions
typical for a loan of this type. 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.
Accordingly, we believe that if we do not make any additional license
acquisitions or any investments in new ventures, we have adequate capital
resources to fund our operations for the next twelve months.
We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities in the future while we continue to
build-out our networks and add to our customer base. Our ability to satisfy our
debt repayment obligations and covenants depends upon our future performance,
which is subject to a number of factors, many of which are beyond our control.
We cannot guarantee that we will generate sufficient cash flow from our
operating activities to meet our debt service and working capital requirements,
and we may need to refinance our indebtedness. However, our ability to refinance
our indebtedness will depend on, among other things, our financial condition,
the state of the public and private debt and equity markets, the restrictions in
the instruments governing our indebtedness and other factors, some of which may
be beyond our control. In addition, if we do not generate sufficient cash flow
to meet our debt service requirements or if we fail to comply with the covenants
governing our indebtedness, we may need additional financing in order to service
or extinguish our indebtedness. We may not be able to obtain financing or
refinancing on terms that are acceptable to us, or at all.
Although we are unable to predict the amount of expenditures that we will
make beyond the next 12 months, we may need to raise additional capital to fund
and expand our business operations. We also may need to raise additional capital
if we decide to acquire additional licenses or businesses. We are exploring
other debt and equity financing alternatives, including the sale from time to
time of convertible preferred stock, convertible debentures and other debt and
equity securities. However, we may not be able to raise additional capital on
terms that are acceptable to us, or at all.
We expect that we will require $1,450.0 million over the next several years
to substantially complete the build-out of our planned wireless networks in the
U.S., not including the acquisition of additional licenses and the build-out of
markets related to additional licenses. These capital requirements include
license acquisition costs, capital expenditures for network construction,
operating cash flow losses and other working capital costs, debt service and
closing fees and expenses. As is typical for start-up telecommunications
networks, we expect our networks to incur operating expenses significantly in
excess of revenues in their early years of operations. We intend to finance the
construction and
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operation of Cricket networks primarily through the proceeds of existing
equipment financing agreements, cash on hand and additional financings.
We have no direct obligation to fund the operations of Pegaso, our venture in
Mexico, and expect Pegaso to be funded independently. Although Pegaso has raised
or obtained commitments for debt and equity capital in excess of $1.2 billion,
Pegaso will need to obtain substantial additional capital to complete the
build-out, launch and operation of its planned networks. As a result, Pegaso is
seeking additional debt and equity financing, including additional vendor
financing.
In February 2000, we completed a public equity offering of 4,000,000 shares
of common stock at a price of $88.00 per share. Net of underwriters' discounts
and commissions, the Company received $82.72 per share, or $330.9 million in the
aggregate. The Company incurred approximately $0.9 million of expenses related
to the equity offering, and these costs have been recorded as reductions to
additional paid-in capital. A portion of the net proceeds from the equity
offering was used for the repayment of the Qualcomm Credit Agreement. The
remaining proceeds from the equity offering will be used for capital
expenditures, acquisitions of wireless licenses, strategic investments, sales
and marketing activities and working capital and general corporate purposes.
CREDIT FACILITIES AND OTHER FINANCING ARRANGEMENTS
Units Offering. In February 2000, we completed an offering of 225,000 senior
units, each senior unit consisting of one 12.5% senior note due 2010 (Senior
Note) and one warrant to purchase our common stock, and 668,000 senior discount
units, each senior discount unit consisting of one 14.5% senior discount note
due 2010 (Senior Discount Note) and one warrant to purchase our common stock.
The total gross proceeds from the sale of the senior units and senior discount
units were $225.0 million and $325.1 million, respectively, and $164.4 million
of the total proceeds were allocated to the fair value of the warrants,
estimated using the Black-Scholes option-pricing model. In addition, we
capitalized certain debt issuance costs of approximately $13.5 million,
consisting of underwriting, printing, legal and accounting fees. A portion of
the net proceeds from the units offering were used for the repayment of
borrowings under the Qualcomm Credit Agreement. The remaining proceeds from the
units offering will be used for capital expenditures, acquisitions of wireless
licenses, strategic investments, sales and marketing activities and working
capital and general corporate purposes.
Interest on the Senior Notes is payable on April 15 and October 15 of each
year, beginning on April 15, 2000. We used $79.5 million of the proceeds from
the Senior Notes to purchase and pledge, for the benefit of the holders of the
Senior Notes, certain U.S. Government securities to provide for the payment of
the first seven scheduled interest payments on the Senior Notes. The remaining
unpaid portion of such amounts is classified as restricted cash equivalents and
investments in the accompanying condensed consolidated balance sheet.
Each Senior Discount Note has an initial accreted value of $486.68 and a
principal amount at maturity of $1,000. The Senior Discount Notes will not begin
to accrue cash interest until April 15, 2005. Interest on the Senior Discount
Notes will be payable on April 15 and October 15 of each year, beginning on
October 15, 2005.
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, we may redeem up to 35% of both the Senior
Notes and the Senior Discount Notes using proceeds from certain qualified equity
offerings of our common stock at 112.5% of their principal amount and 114.5% of
their accreted value, respectively.
The notes rank equally with our other unsecured senior indebtedness. The
notes are effectively subordinate to all of our secured indebtedness. The notes
are guaranteed by our domestic subsidiary, Cricket Communications Holdings. The
terms of the notes include certain covenants that restrict our ability to, among
other things, incur additional indebtedness, create liens, pay dividends, make
investments, sell assets and effect a consolidation or merger. We are obligated
to consummate an exchange offer for the notes pursuant to an effective
registration statement or cause to become effective a shelf registration
statement for resales of the notes. If one of these events does not occur within
180 days after the closing of the units offering, interest on the notes will
increase by 0.5% per annum until the exchange offer is consummated or such shelf
registration statement becomes effective.
Each warrant included as part of the Senior Units is initially exercisable
to purchase 5.146 shares (1,157,850 shares in aggregate) of our common stock at
an exercise price of $96.80 per share. Each warrant included as part of the
Senior Discount Units is initially exercisable to purchase 2.503 shares
(1,672,004 shares in aggregate) of our common stock at an exercise price of
$96.80 per share. The warrants may be exercised at any time on or after February
23, 2001 and prior to April 15, 2010. We are obligated to file a shelf
registration statement covering the resale of the warrants and related common
stock issuable within 180 days after the closing of the units offering.
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Lucent Equipment Financing. Cricket Communications originally agreed to
purchase $330.0 million of infrastructure products and services from Lucent
Technologies, and in June 2000, increased that commitment to up to $900.0
million. The purchase agreement is subject to early termination at Cricket
Communications' convenience subject to payments for equipment purchased. Lucent
agreed to finance these purchases plus additional working capital under a credit
facility. The credit facility originally permitted up to $641.0 million in total
borrowings by Cricket Communications, which was increased to up to $1,350.0
million in June 2000, with borrowing availability based on a ratio of the total
amount of equipment purchased from Lucent. Lucent is not required to make loans
under the facility if the total of the loans held directly or supported by
Lucent is an amount greater than $815.0 million. The Credit Agreement contains
various covenants and conditions typical for a loan of this type, including
minimum levels of customers and covered potential customers which must increase
over time, limits on annual capital expenditures, dividend restrictions and
other financial ratio tests. Borrowings under the Lucent credit facility accrue
interest at a rate equal to LIBOR plus 3.5% to 4.25% or a bank base rate plus
2.5% to 3.25%, in each case with the specific rate based on the ratio of total
indebtedness to EBITDA. Cricket Communications must pay a commitment fee equal
to 1.25% per annum of the commitments under the credit facility until the
aggregate principal amount of borrowings equals $175 million, at which time the
rate decreases to 1.0% until the aggregate principal amount equals $350 million,
at which time the rate further decreases to 0.75%. Principal payments are
scheduled to begin after three years with a final maturity after eight years.
Repayment is weighted to the later years of the repayment schedule. The
obligations under the Lucent Credit Agreement are secured by all of the stock of
Cricket Communications and its subsidiaries, all of their respective assets, the
assets of Cricket Communications Holdings and the stock of each special purpose
subsidiary of Leap formed to hold wireless licenses. At May 31, 2000, Cricket
Communications had $111.0 million outstanding under the Lucent Credit Agreement,
including $3.1 million in accrued and capitalized interest.
Ericsson Equipment Financing. Cricket Communications also has agreed to
purchase $330.0 million of next-generation infrastructure products that are
currently in development and related services from Ericsson. Purchases from
Ericsson will be on substantially similar terms to the Lucent agreement,
including a credit facility providing for borrowings up to $495.0 million with
borrowing availability based on the total amount of equipment purchased from
Ericsson. The commitment of funds by Ericsson is subject to the development of
the next generation equipment, the negotiation of definitive documentation and
the approval of Ericsson's board of directors.
Obligations to the FCC. We have assumed $11.1 million and $78.8 million in
debt obligations to the FCC as part of the purchase price for the wireless
licenses from AirGate and Chase Telecommunications in January and March 2000,
respectively. We also will assume additional debt obligations to the FCC in the
aggregate principal amount of approximately $4.8 million as part of the purchase
price for the pending acquisitions of wireless licenses from PCS Devco,
Radiofone, CM PCS and Lakeland PCS.
PEGASO FINANCING
Qualcomm and another equipment vendor have agreed to provide approximately
$580.0 million of secured equipment financing to Pegaso, a portion of which has
already been advanced to the venture. The shares of Pegaso Communicaciones y
Sistemas, S.A. de C.V., Pegaso's subsidiary that holds wireless licenses, serve
as collateral for Pegaso's obligations under the equipment financing.
In addition, in May 1999, Pegaso entered into a loan agreement with several
banks with credit support from Qualcomm. We guaranteed 33% of Pegaso's
obligations under the initial commitment from the lenders of $100 million. In
December 1999, as a condition of the guarantee, Leap received an option to
subscribe for and purchase up to 243,090 limiting voting series "N" treasury
shares of Pegaso. The number of shares to be purchased by Leap under the option
will be calculated to provide a total internal rate of return on the average
outstanding balance of the bridge loan of 20%. The options have an exercise
price of $0.01 per share and expire ten years from the date of issuance. The
options are exercisable at any time after the date on which all amounts under
the loan agreement are paid in full.
In July 1999, several existing investors contributed $50.0 million to Pegaso
as previously planned. In April 2000 Sprint PCS invested $200.0 million in
Pegaso by purchasing shares from Pegaso and shareholders other than Leap. Pegaso
expects to fund a large portion of its development and operating activities in
fiscal 2000 with cash from operations, proceeds of the $50 million investment
from several existing investors and the investment from Sprint PCS, and
borrowings under the $100 million loan agreement. Several other existing
investors are committed to contribute $50.0 million in additional equity capital
to Pegaso by August 2000. In addition, Pegaso is seeking additional debt and
equity financing, including additional vendor financing.
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OPERATING ACTIVITIES
We used $46.9 million in cash for operating activities during the nine month
period ended May 31, 2000 compared to $23.8 million in the corresponding period
of the prior fiscal year. The increase is primarily attributable to increased
marketing and other customer acquisition costs associated with launching new
markets, as well as the effect of the full consolidation of Smartcom and Chase
Telecommunications. We expect that cash used in operating activities will
increase substantially in the future as a result of our launch and other
activities related to our U.S. networks.
INVESTING ACTIVITIES
Cash used in investing activities was $201.4 million during the nine month
period ended May 31, 2000 compared to $138.3 million in the corresponding period
of the prior fiscal year. Investments during the nine month period ended May 31,
2000 consisted of $105.8 million net restricted cash equivalents and
investments, which have been pledged to provide for the payment of the
semi-annual scheduled interest payments on the senior notes payable through
April 2003 and to secure our obligations under a letter of credit with a bank,
the purchase of held-to-maturity investments of $37.6 million, loans to Chase
Telecommunications of $17.0 million, the acquisition of Chase Telecommunications
of $1.3 million net of cash acquired, the purchase of wireless licenses totaling
$13.4 million and capital expenditures of $37.5 million, primarily by Cricket
Communications and Smartcom, offset by $11.3 million of proceeds received from
the liquidation of Russian companies. Investments in the corresponding period of
the prior fiscal year consisted primarily of a $60.7 million capital
contribution to Pegaso, loans and advances of $46.9 million to our operating
companies, a $17.5 million loan, net of repayments of $7.5 million, provided to
a related party and the acquisition of the remaining 50% interest in Smartcom of
$26.9 million net of cash acquired. In the remainder of fiscal 2000, we expect
to make significant investments in capital assets, including network equipment
and wireless communications licenses.
FINANCING ACTIVITIES
Cash provided by financing activities during the nine month period ended May
31, 2000, primarily from proceeds of our public equity offering, units offering,
borrowings under credit agreements with Qualcomm and Lucent and from banks, was
$770.9 million. Cash provided by financing activities in the corresponding
period of the prior fiscal year was $185.6 million, primarily from $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 $88.9 million of net borrowings under the credit agreement and from banks.
CURRENCY FLUCTUATION RISKS
We report our financial statements in U.S. dollars. Our international
operating companies report their results in local currencies. Consequently,
fluctuations in currency exchange rates between the U.S. dollar and the
applicable local currency will affect our results of operations as well as the
value of our ownership interests in our operating companies.
Generally, our international operating companies generate revenues that are
received in their local currency. However, many of these operating companies'
major contracts, including financing agreements and contracts with equipment
suppliers, are denominated in U.S. dollars. As a result, a significant change in
the value of the U.S. dollar against the national currency of an operating
company could result in a significant increase in the operating company's
expenses and could have a material adverse effect on the operating company and
on us. In some emerging markets, including Mexico, significant devaluations of
the local currency have occurred and may occur again in the future.
We do not currently hedge against foreign currency exchange rate or interest
rate risks.
INFLATION
Inflation has had and may continue to have negative effects on the economies
and securities markets of emerging market countries and could have negative
effects on our operating companies and any new start-up project in those
countries, including their ability to obtain financing. Mexico, for example, has
periodically experienced relatively high rates of inflation. Our operating
companies, where permitted and subject to competitive pressures, intend to
increase their tariffs to account for the effects of inflation. However, in
those jurisdictions where tariff rates are regulated or specified in the
wireless license, the operating companies may not successfully mitigate the
impact of inflation on their operations.
YEAR 2000 ISSUE
We have recently begun our operations and have designed and built our
wireless communications networks and support systems with the Year 2000 issue in
mind. To date, we have not incurred any material costs in support of the Year
2000 issue. The recent acquisition of network equipment and software does not
guarantee, however, that such equipment and software are Year 2000 compliant
(i.e., able to distinguish 21st century dates from 20th century dates).
25
<PAGE> 26
As of July 14, 2000, our systems have operated without any apparent Year 2000
related problems and appear to be Year 2000 compliant. All of our financial and
operational systems were available over the millennium changeover and the
integrity of the historical information contained within those systems has not
been affected. Further, we are not aware that any of our primary vendors or
systems maintained by third parties (such as landline, long-distance and power
systems) have experienced significant Year 2000 compliance problems. However,
while no such problem has been discovered as of the date indicated above, Year
2000 issues may not become apparent immediately and therefore, we may be
affected in the future. We will continue to monitor the issue and work to
remediate any Year 2000 issues that may arise.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," which we
must adopt for fiscal year 2001. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. We do not expect that the adoption of this new accounting standard will
have a material impact on our consolidated financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". SAB
No. 101 summarized certain of the staff's interpretations in applying generally
accepted accounting principles to revenue recognition. The provisions of SAB No.
101 are effective for the Company's quarter ending August 31, 2001. Leap does
not expect that the adoption of SAB No. 101 will have a material impact on its
consolidated financial position or results of operations.
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. Leap does not expect that the adoption of
FIN 44 will have a material effect on its financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our variable rate long-term debt obligations. For a description of our
long-term debt obligations, see Note 6 to the Condensed Consolidated Financial
Statements, which are included elsewhere herein. The general level of U.S.
interest rates and/or LIBOR affect the interest expense that we recognize on our
variable rate long-term debt obligations. As of May 31, 2000, the principal
amounts of our variable rate long-term debt obligations amounted to
approximately $111.0 million, excluding principal amounts owed by Smartcom,
which we sold in June 2000. An increase of 10% in interest rates would increase
our interest expense for the next twelve months by approximately $1.2 million.
This hypothetical amount is only suggestive of the effect of changes in interest
rates on our results of operations for the next twelve months.
FOREIGN EXCHANGE MARKET RISK
The long-term debt obligations of our wholly owned Chilean subsidiary,
Smartcom, which are denominated in U.S. dollars, are subject to the effects of
currency fluctuations and may affect reported earnings and losses. A significant
change in the value of U.S. dollars against the Chilean peso could result in a
significant increase in our consolidated expenses. As of May 31, 2000,
Smartcom's long-term debt obligations that were denominated in U.S. dollars
amounted to approximately $143.5 million. Our results of operations would be
negatively impacted by approximately $12.0 million for the next twelve months if
U.S. dollars were to appreciate against the Chilean peso by 10%. This
hypothetical amount is only suggestive of the effect of currency fluctuations on
our results of operations for the next twelve months (excluding the sale of
Smartcom). On June 2, 2000, we completed the sale of all of the outstanding
shares of Smartcom to Endesa.
26
<PAGE> 27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In September 1999, the Company declared default under loans to Metrosvyaz,
stopped funding those loans, wrote off its remaining $9.6 million investment in
Metrosvyaz, and issued a demand for arbitration against Metrosvyaz and one of
its directors with respect to those loans. In response, in March 2000,
Metrosvyaz filed suit against the Company and certain of its directors and
officers in the U.S. District Court for the Southern District of California. The
Metrosvyaz suit alleged claims for libel, trade libel, intentional and negligent
interference with prospective advantage and breach of fiduciary duty.
In April 2000, the Company resolved its differences with Metrosvyaz. As
part of the settlement, Metrosvyaz dismissed its action against the Company and
its officers in the federal court in San Diego, Leap dismissed its demand for
arbitration, and both companies agreed to general releases. The Company
surrendered its interest in a joint venture company that owned an interest in
Metrosvyaz, wrote off the balance of its investments in Russia and received a
contractual right to certain contingent payments from Qualcomm.
Various other 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The following pro forma information can be found at pages PF-1 to PF-7, attached
to this report:
Pro Forma Financial Information
Unaudited Pro Forma Consolidated Balance Sheet at May 31, 2000
Unaudited Pro Forma Consolidated Statement of Operations for the nine months
ended May 31, 2000
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
August 31, 1999
Unaudited Notes to the Pro Forma Financial Information
27
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits:
<TABLE>
<S> <C>
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.
4.6(2) Rights Agreement, dated as of September 14, 1998, between
Leap Wireless International, Inc. and Harris Trust Company
of California.
4.6.1* First Amendment to Rights Agreement, dated as of February 8,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
4.6.2* Second Amendment to Rights Agreement, dated as of March 30,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
10.29.1* First Amendment to the Leap Wireless International, Inc.
Executive Officer Deferred Stock Plan.
27.1* Financial Data Schedule.
</TABLE>
----------------
* Filed herewith.
(1) Filed as an exhibit to Leap's Current Report on Form 8-K (File
333-93073) dated June 2, 2000, and incorporated herein by
reference.
(2) Filed as an exhibit to Leap's Current Report on Form 8-K dated
September 18, 1998, and incorporated herein by reference.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed on April 3, 2000 announcing the
completion of Leap's acquisition of substantially all the assets of Chase
Telecommunications Holdings, Inc. and a recent amendment to the Company's
stockholder rights plan. An amended report was filed on May 25, 2000 to include
financial statements to the registrant's Current Report on Form 8-K, filed April
3, 2000. The financial statements reflect Leap's, and an indirect subsidiary of
Leap's, March 17, 2000 acquisition of substantially all of the assets of Chase
Telecommunications Holdings, Inc.
A Current Report on Form 8-K was filed on June 19, 2000 to report the sale by
Leap and its designated nominee on June 2, 2000 of all of the issued and
outstanding capital stock of Smartcom S.A. to Endesa, S.A., a Spanish utility
company. An amended report was filed on June 28, 2000 to update the pro forma
financial information contained in Leap's Current Report on Form 8-K, dated June
2, 2000 and filed with the Securities and Exchange Commission on June 19, 2000,
to reflect a pro forma gain on sale of the capital stock of Smartcom, S.A. of
$303.8 million (previously $349.0 million), pro forma long-term debt of $416.3
million (previously $361.1 million) and pro forma other long-term liabilities of
$33.9 million (previously $44.0 million).
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAP WIRELESS INTERNATIONAL, INC.
Date: July 17, 2000 By: /s/ HARVEY P. WHITE
-------------------------------------
Harvey P. White
Chairman and Chief Executive Officer
Date: July 17, 2000 By: /s/ STEPHEN P. DHANENS
-------------------------------------
Stephen P. Dhanens
Vice President, Corporate Controller
(Chief Accounting Officer)
29
<PAGE> 30
LEAP WIRELESS INTERNATIONAL, INC.
PRO FORMA FINANCIAL INFORMATION
The Pro Forma Financial Information is based on the historical consolidated
financial statements of Leap Wireless International, Inc. and its subsidiaries
("Leap" or the "Company") at May 31, 2000, for the nine months ended May 31,
2000 and for the year ended August 31, 1999, adjusted to give effect to: a) the
acquisition in March 2000 of substantially all the assets of Chase
Telecommunications Holdings, Inc. ("Chase Telecommunications Holdings") by the
Company and its indirect subsidiary Cricket Communications, Inc.; b) the
Company's sale on June 2, 2000 of all of the issued and outstanding shares in
Smartcom, S.A. ("Smartcom"); c) the Company's wireless license acquisition from
AirGate Wireless, L.L.C. ("AirGate") in January 2000; and d) the Company's
pending wireless license acquisitions from PCS Devco, Inc. ("PCS Devco"),
Radiofone PCS, L.L.C. ("Radiofone"), Zuma PCS, LLC ("Zuma"), Beta
Communications, L.L.C. ("Beta"), CM PCS LLC ("CM PCS"), Center Point PCS
("Center Point") and Lakeland PCS, LLC ("Lakeland") as if they had already
occurred. The Unaudited Pro Forma Consolidated Balance Sheet at May 31, 2000
gives effect to the sale of all of the issued and outstanding shares in Smartcom
and the pending acquisitions of wireless licenses from PCS Devco, Radiofone,
Zuma, Beta, CM PCS, Center Point and Lakeland as if they had occurred as of May
31, 2000. The Unaudited Pro Forma Consolidated Statements of Operations for the
nine months ended May 31, 2000 and the year ended August 31, 1999 give effect to
the acquisition of substantially all the assets of Chase Telecommunications
Holdings, the sale of all of the issued and outstanding shares in Smartcom and
the acquisition and pending acquisitions of wireless licenses from AirGate, PCS
Devco, Radiofone, Zuma, Beta, CM PCS, Center Point and Lakeland as if they had
occurred as of September 1, 1998; however, such statements do not include pro
forma gain on sale of Smartcom of approximately $319.3 million and related pro
forma income tax expense of approximately $32.3 million. The acquisitions and
sale and related adjustments are described in the accompanying notes. The Pro
Forma Financial Information is based upon available information and certain
assumptions that management believes are reasonable. In our opinion, all
adjustments have been made that are necessary to present fairly the pro forma
data. The final recorded amounts could differ although such differences are not
expected to be material.
The Pro Forma Financial Information is provided for illustrative purposes
only and does not purport to represent what the Company's results of operations
or financial condition actually would have been had these acquisitions in fact
occurred on such dates or to project the Company's results of operations or
financial condition for any future period or date. The Pro Forma Financial
Information and accompanying notes should be read in conjunction with the
historical financial statements of the Company and Chase Telecommunications
Holdings.
PF-1
<PAGE> 31
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, 2000
-------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
----------- ---------------------------------------
WIRELESS LEAP
LICENSE CONSOLIDATED
LEAP SMARTCOM ACQUISITIONS PRO FORMA
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ............. $ 543,118 $ 215,385(5)(6)(7) $ (84,223)(14) $ 674,280
Restricted cash equivalents and
short-term investments ............... 55,555 (29,076)(7) -- 26,479
Short-term investments ................ 46,340 -- -- 46,340
Accounts receivable, net .............. 12,944 (8,986)(5) -- 3,958
Inventories ........................... 4,681 (3,848)(5) -- 833
Recoverable taxes ..................... 11,233 (11,233)(5) -- --
Notes receivable ...................... -- 143,173(8) -- 143,173
Other current assets .................. 10,664 (9,813)(5) -- 851
----------- ----------- ----------- -----------
Total current assets ............... 684,535 295,602 (84,223) 895,914
----------- ----------- ----------- -----------
Property and equipment, net ........... 237,300 (146,269)(5) -- 91,031
Investments in and loans
receivable from unconsolidated
wireless operating
companies ............................ 61,290 -- -- 61,290
Intangible assets, net ................ 207,042 (54,365)(5) 114,520(14) 267,197
Restricted investments ................ 50,284 -- -- 50,284
Deposits and other assets ............. 25,855 (566)(5) (100)(14) 25,189
----------- ----------- ----------- -----------
Total assets ....................... $ 1,266,306 $ 94,402 $ 30,197 $ 1,390,905
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued
liabilities .......................... $ 43,255 $ (24,990)(5) $ -- $ 18,265
Loans payable to banks ................ 46,513 (46,513)(5)(6) -- --
Other current liabilities ............. 4,401 32,290(9) -- 36,691
----------- ----------- ----------- -----------
Total current liabilities .......... 94,169 (39,213) -- 54,956
----------- ----------- ----------- -----------
Long-term debt ........................ 736,019 (143,501)(5) 4,359(14) 596,877
Other long-term liabilities ........... 12,118 (9,903)(5) -- 2,215
----------- ----------- ----------- -----------
Total liabilities .................. 842,306 (192,617) 4,359 654,048
----------- ----------- ----------- -----------
Minority interest in consolidated
subsidiary ......................... 16,802 -- -- 16,802
----------- ----------- ----------- -----------
Stockholders' equity (deficit):
Preferred stock ...................... -- -- -- --
Common stock ......................... 3 -- -- 3
Additional paid-in capital ........... 789,372 -- 25,838(14) 815,210
Accumulated deficit .................. (378,329) 287,019(10) -- (91,310)
Accumulated other
comprehensive loss ................. (3,848) -- -- (3,848)
----------- ----------- ----------- -----------
Total stockholders' equity
(deficit) ........................ 407,198 287,019 25,838 720,055
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit) ........................ $ 1,266,306 $ 94,402 $ 30,197 $ 1,390,905
=========== =========== =========== ===========
</TABLE>
See Notes to the Pro Forma Financial Information.
PF-2
<PAGE> 32
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31, 2000
-------------------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------- ------------------------------------------------
CHASE CHASE
TELE- TELE- WIRELESS LEAP
COMMUNICATIONS COMMUNICATIONS LICENSE CONSOLIDATED
LEAP HOLDINGS HOLDINGS SMARTCOM ACQUISITIONS PRO FORMA
--------- -------------- -------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues .................. $ 31,242 $ 6,114 $ -- $ (27,094)(11) $ -- $ 10,262
--------- --------- --------- --------- --------- ---------
Operating expenses:
Cost of operating revenues ........ (39,333) (8,919) -- 36,112(11) -- (12,140)
Selling, general and
administrative .................. (55,588) (6,953) 758(1) 28,411(11) -- (33,372)
Depreciation and amortization ..... (18,029) (19,011) (1,152)(2) 15,033 -- (23,159)
--------- --------- --------- --------- --------- ---------
Total operating expenses ........ (112,950) (34,883) (394) 79,556 -- (68,671)
--------- --------- --------- --------- --------- ---------
Operating loss .................... (81,708) (28,769) (394) 52,462 -- (58,409)
Equity in net loss of unconsolidated
wireless operating companies ...... (67,229) -- 20,162(3) -- -- (47,067)
Interest income ..................... 11,852 40 --(4) (205)(11) -- 11,687
Interest expense .................... (52,867) (11,020) 5,789(4) 14,806 (11)(12) (6,139)(15) (49,431)
Foreign currency transaction gains .. 7,977 -- -- (7,977)(11) -- --
Minority interest ................... 1,893 -- -- -- -- 1,893
Gain on issuance of stock by
unconsolidated wireless operating
company ........................... 25,734 -- -- -- -- 25,734
Other income (expense), net ......... (2,663) (165) -- (293) -- (3,121)
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
item .............................. $(157,011) $ (39,914) $ 25,557 $ 58,793 $ (6,139) $(118,714)
========= ========= ========= ========= ========= =========
Basic and diluted net loss per common
share before extraordinary item ... $ (7.22) $ (5.32)
========= =========
Shares used to calculate basic and
diluted net loss per common share
before extraordinary item ......... 21,741 22,334
========= =========
</TABLE>
See Notes to the Pro Forma Financial Information.
PF-3
<PAGE> 33
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
-----------------------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
---------------------------- -------------------------------------------------
CHASE CHASE
TELE- TELE- WIRELESS LEAP
LEAP COMMUNICATIONS COMMUNICATIONS LICENSE CONSOLIDATED
CONSOLIDATED HOLDINGS HOLDINGS SMARTCOM ACQUISITIONS PRO FORMA
------------ -------------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ................. $ 3,907 $ 4,389 $ -- $ (3,774)(11) $ -- $ 4,522
--------- --------- --------- --------- --------- ---------
Operating expenses:
Cost of operating revenues ....... (3,810) (7,513) -- 3,810(11) -- (7,513)
Selling, general and
administrative ................. (28,745) (7,682) 373(1) 4,548(11) -- (31,506)
Depreciation and amortization .... (5,824) (5,476) (2,014)(2) 5,261(11) -- (8,053)
--------- --------- --------- --------- --------- ---------
Total operating expenses ....... (38,379) (20,671) (1,641) 13,619 -- (47,072)
--------- --------- --------- --------- --------- ---------
Operating loss ................... (34,472) (16,282) (1,641) 9,845 -- (42,550)
Equity in net loss of unconsolidated
wireless operating companies ..... (100,300) -- 20,900(3) 13,129(13) -- (66,271)
Write-down of investments in
unconsolidated wireless operating
companies ........................ (27,242) -- -- -- -- (27,242)
Interest income .................... 2,505 207 -- (259)(11) -- 2,453
Interest expense ................... (10,356) (16,129) 6,092(4) 5,809(11)(12) (11,063)(15) (25,647)
Foreign currency transaction
losses ........................... (7,211) -- -- 7,211(11) -- --
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 income (expense), net ........ (243) 379 -- 140(11) -- 276
--------- --------- --------- --------- --------- ---------
Net income (loss) ................ $(164,613) $ (31,825) $ 25,351 $ 35,875 $ (11,063) $(146,275)
========= ========= ========= ========= ========= =========
Basic and diluted net loss per
common share ..................... $ (9.19) $ (7.76)
========= =========
Shares used to calculate basic and
diluted net loss per common
share ............................ 17,910 18,845
========= =========
</TABLE>
See Notes to the Pro Forma Financial Information.
PF-4
<PAGE> 34
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
NOTE 1. DESCRIPTION OF TRANSACTIONS
CHASE TELECOMMUNICATIONS HOLDINGS ACQUISITION
In March 2000, the Company acquired substantially all the assets of Chase
Telecommunications Holdings for: $6.3 million in cash; the assumption of certain
liabilities of Chase Telecommunications Holdings; a warrant to purchase 1% of
the common stock of Cricket Communications Holdings, Inc. ("Cricket
Communications Holdings"), exercisable at $1.0 million; the return of the
Company's existing stock ownership and warrants to purchase stock in Chase
Telecommunications Holdings; and certain contingent earn-outs.
The acquisition has been accounted for under the purchase method of
accounting. Based on the fair value of Chase Telecommunications Holdings'
liabilities assumed and the fair value of approximately $15.3 million attributed
to the warrant to purchase 1% of the common stock of Cricket Communications
Holdings, the aggregate purchase price will be approximately $152.9 million
($161.2 million, excluding discount on Federal Communications Commission ("FCC")
debt). The fair value of the warrant was determined on the date of closing,
which was the date the number of warrant shares first became known, using the
Black-Scholes option pricing model. Of this amount, approximately $43.2 million
has been allocated to property and equipment and other assets and approximately
$109.7 million to intangible assets, primarily wireless licenses. The contingent
earn-out payments, up to a maximum of $41.0 million (plus certain expenses), are
based upon certain targeted operating results for the Chase Telecommunications
Holdings properties during the fifth full fiscal year following the closing of
the transaction. These payment obligations, if any, will be recorded as
additional purchase price.
SALE OF SMARTCOM
In June 2000, the Company, its wholly-owned subsidiary Inversiones Leap
Wireless Chile, S.A. ("Inversiones"), and a nominee shareholder designated by
Inversiones completed the sale of all of the issued and outstanding shares of
Smartcom to Endesa, S.A., a Spanish utility company ("Endesa") for $156.8
million in cash and notes totaling $143.2 million subject to certain
post-closing adjustments, plus repayment of intercompany debt owed to Leap and
Inversiones by Smartcom totaling $53.3 million and the release of cash
collateral posted by Leap securing Smartcom indebtedness of approximately $28.2
million. Smartcom, a Chilean corporation that holds a license to offer wireless
telephone services, has deployed and is operating a nationwide wireless
telephone system in Chile.
In April 1999, Inversiones acquired all of the shares of Smartcom that it
did not already own. Prior to the acquisition, Inversiones owned 50% of the
shares of Smartcom. The Company had previously accounted for its interest in
Smartcom under the equity method.
WIRELESS LICENSE ACQUISITION
In January 2000, the Company purchased three wireless licenses covering
markets in North Carolina from AirGate for $25.0 million. The purchase price
consisted of the Company assuming $11.1 million ($9.6 million, net of discount),
6.25% per annum notes due in April 2007 to the FCC related to the licenses and
the remainder payable in cash. The Company obtained the $13.9 million for the
cash payment through additional borrowings under the Company's credit agreement
with Qualcomm Incorporated ("Qualcomm").
PENDING WIRELESS LICENSE ACQUISITIONS
In May 2000, the Company agreed to renegotiate a September 1999 agreement to
purchase a wireless license covering the Dayton, Ohio market from PCS Devco. The
renegotiated purchase price of $16.2 million consists of $8.1 million of the
Company's common stock, a $1.1 million ($0.9 million, net of discount), 6.25%
per annum note due in June 2007 to the FCC related to the license which will be
assumed by the Company at closing and the remainder payable in cash. Prior to
closing, PCS Devco can elect to receive $8.1 million in cash in lieu of the
Company's common stock. The Company is required to make PCS Devco's payments on
the FCC note during the period prior to closing of the transaction, reducing the
remaining cash payment to PCS Devco.
PF-5
<PAGE> 35
In January 2000, the Company agreed to purchase two wireless licenses
covering the Pittsburgh, Pennsylvania and Denver, Colorado markets from
Radiofone. The purchase price for the Pittsburgh license is $18.4 million in
cash and the purchase price for the Denver license consists of 232,754 shares of
the Company's common stock (valued at approximately $10.2 million at May 31,
2000) and $3.4 million in cash less a $1.8 million, 9.75% per annum note due in
April 2007 to the FCC related to the license which will be assumed by the
Company at the closing. As of May 31, 2000, the outstanding principal amount of
the FCC debt was approximately $1.5 million.
In February 2000, the Company agreed to purchase all the outstanding stock
of three subsidiaries of Zuma that own three wireless licenses covering markets
in Albany, Columbus and Macon, Georgia. The purchase price consists of 170,374
shares of the Company's common stock (valued at approximately $7.5 million at
May 31, 2000).
In March 2000, the Company agreed to acquire three wireless licenses
covering the Phoenix, Arizona, Reno, Nevada and Roswell, New Mexico markets from
Beta. The purchase price for the licenses is $33.3 million in cash.
In April 2000, the Company agreed to acquire a wireless license covering the
Omaha, Nebraska market from CM PCS. The purchase price for the license is $14.2
million in cash plus the assumption of a $0.6 million ($0.5 million, net of
discount), 6.25% per annum note due in April 2007 to the FCC related to the
license. As of May 31, 2000, the outstanding principal amount of the FCC debt
was approximately $0.6 million.
Also in April 2000, the Company agreed to acquire a wireless license
covering the Lincoln, Nebraska market from Center Point. The purchase price for
the wireless license is $4.3 million in cash.
In July 2000, the Company agreed to acquire a wireless license covering the
Lakeland, Florida market from Lakeland PCS, LLC ("Lakeland") for an aggregate
purchase price of $6.9 million, consisting of the assumption of approximately
$1.9 million ($1.7 million, net of discount) in indebtedness to the FCC related
to the license and the remainder payable in cash at closing. The agreement may
be terminated by either party if the transaction is not consummated by July
2001. As of May 31, 2000, the outstanding principal amount of the FCC debt was
approximately $1.5 million.
Each of these transactions is subject to FCC approval and other conditions
prior to closing. Accordingly, there can be no assurance that these transactions
will ultimately be consummated.
NOTE 2. PRO FORMA ADJUSTMENTS RELATED TO ACQUISITION OF SUBSTANTIALLY ALL THE
ASSETS OF CHASE TELECOMMUNICATIONS HOLDINGS
(1) To eliminate Leap management and royalty fee expense recorded by Chase
Telecommunications Holdings.
(2) Additional amortization resulting from the preliminary purchase price
allocation of (a) $1.0 million and $1.9 million for the nine months ended
May 31, 2000 and the year ended August 31, 1999, respectively, for
customer list (amortized on a straight-line basis over a 12 month expected
useful life for the market where service has commenced); and (b) $0.1
million for the nine months ended May 31, 2000 and the year ended August
31, 1999, respectively, for wireless licenses (amortized on a
straight-line basis over a 40 year expected useful life for the market
where service has commenced).
(3) Elimination of the Company's share of the net loss of Chase
Telecommunications Holdings previously recognized under the equity method
of accounting.
(4) (a) Elimination of interest expense recorded by Chase Telecommunications
Holdings on debt balances not assumed by Leap and inter-company working
capital and equipment loans provided by Leap; and (b) adjustment to
interest expense resulting from the amortization of the discount on the
FCC debt obligations of Chase Telecommunications Holdings. Interest income
due to Leap has previously been eliminated.
NOTE 3. PRO FORMA ADJUSTMENTS RELATED TO SALE OF ALL OF THE OUTSTANDING SHARES
IN SMARTCOM
(5) Reflects assets and liabilities of Smartcom sold to Endesa.
PF-6
<PAGE> 36
(6) Reflects cash proceeds received by the Company of $191.9 million
(including repayment of intercompany debt owed to Leap and Inversiones by
Smartcom totaling $53.3 million at May 31, 2000), net of repayment of
loans payable to banks in Chile totaling $18.3 million at May 31, 2000.
(7) To reclass $29.1 million of restricted cash at May 31, 2000 which was held
on account to secure a loan to Smartcom.
(8) Reflects promissory notes issued by Endesa for principal amounts in total
equal to the remainder of purchase price not paid in cash at closing. The
promissory notes plus accrued interest at the rate of 3-month LIBOR,
compounded semi-annually, are payable to the Company on the first
anniversary of closing.
(9) Reflects estimated Chilean income taxes of $32.3 million payable by
Inversiones, due in April 2001.
(10) Reflects gain on sale net of estimated Chilean income taxes payable by
Inversiones.
(11) To eliminate the results of operations of Smartcom.
(12) Reflects adjustment to interest expense of $3.5 million and $2.9 million
for the nine months ended May 31, 2000 and the year ended August 31, 1999,
respectively, for a) loans payable by Inversiones to banks in Chile that
were repaid at closing and b) borrowings under the Company's credit
agreement with Qualcomm that related to Smartcom funding by Leap.
(13) Elimination of the Company's share of the net loss of Smartcom previously
recognized under the equity method of accounting.
NOTE 4. PRO FORMA ADJUSTMENTS RELATED TO ACQUISITION AND PENDING ACQUISITIONS OF
WIRELESS LICENSES
(14) To record pending acquisitions of wireless licenses summarized as follows
(in thousands):
<TABLE>
<CAPTION>
PCS CENTER
DEVCO RADIOFONE ZUMA BETA CM PCS POINT LAKELAND TOTAL
-------- --------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash ............................. $ 7,001 $ 20,337 $ -- $ 33,250 $ 14,174 $ 4,326 $ 5,135 $ 84,223
Application of deposits .......... 100 -- -- -- -- -- -- 100
Fair value of FCC debt assumed
using an interest rate of 10.25%
per annum ...................... 874 1,440 -- -- 535 -- 1,510 4,359
Issuance of common stock ......... 8,100 10,242 7,496 -- -- -- -- 25,838
-------- -------- -------- -------- -------- -------- -------- --------
Total .................... $ 16,075 $ 32,019 $ 7,496 $ 33,250 $ 14,709 $ 4,326 $ 6,645 $114,520
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(15) To record interest expense on (a) FCC debt obligations of AirGate,
calculated using an interest rate of 10.75% per annum, PCS Devco,
Radiofone CM PCS and Lakeland, calculated using an interest rate of 10.25%
per annum and (b) additional borrowings under credit agreements to fund
license acquisitions.
* * * *
PF-7
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<S> <C>
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.
4.6(2) Rights Agreement, dated as of September 14, 1998, between
Leap Wireless International, Inc. and Harris Trust Company
of California.
4.6.1* First Amendment to Rights Agreement, dated as of February 8,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
4.6.2* Second Amendment to Rights Agreement, dated as of March 30,
2000, between Leap Wireless International, Inc. and Harris
Trust Company of California.
10.29.1* First Amendment to the Leap Wireless International, Inc.
Executive Officer Deferred Stock Plan.
27.1* Financial Data Schedule.
</TABLE>
----------------
* Filed herewith.
(1) Filed as an exhibit to Leap's Current Report on Form 8-K (File
333-93073) dated June 2, 2000, and incorporated herein by
reference.
(2) Filed as an exhibit to Leap's Current Report on Form 8-K dated
September 18, 1998, and incorporated herein by reference.
