<PAGE>
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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 September 30, 2000 or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121-2779
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(858) 882-6000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [_]
The number of shares of registrant's common stock outstanding on November
9, 2000 was 27,074,339.
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<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents........................... $ 623,236 $ 44,109
Restricted cash equivalents and short-term
investments........................................ 27,021 20,550
Short-term investments.............................. 112,345 --
Accounts receivable, net............................ -- 3,927
Inventories......................................... 415 4,329
Recoverable taxes................................... -- 6,592
Notes receivable.................................... 146,446 --
Other current assets................................ 13,370 7,634
---------- ---------
Total current assets............................. 922,833 87,141
Property and equipment, net......................... 303,197 113,059
Investments in and loans receivable from
unconsolidated wireless operating companies........ 39,432 85,878
Wireless licenses, net.............................. 189,787 37,564
Goodwill and other intangible assets, net........... 29,530 33,911
Investments......................................... 5,282 --
Restricted investments.............................. 51,422 --
Deferred financing costs and other.................. 20,019 3,212
---------- ---------
Total assets..................................... $1,561,502 $ 360,765
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued liabilities............ $ 29,638 $ 19,097
Loans payable to banks.............................. -- 17,683
Interest payable.................................... 10,270 --
Income taxes and other current liabilities.......... 41,088 --
---------- ---------
Total current liabilities........................ 80,996 36,780
Long-term debt...................................... 719,081 303,818
Other long-term liabilities......................... 98,626 9,275
---------- ---------
Total liabilities................................ 898,703 349,873
---------- ---------
Commitments and contingencies (Notes 3 and 7)
Stockholders' equity:
Preferred stock--authorized 10,000,000 shares;
$.0001 par value, no shares issued and
outstanding...................................... -- --
Common stock--authorized 300,000,000 shares;
$.0001 par value, 26,859,965 and 20,039,556
shares issued and outstanding at September 30,
2000 (unaudited) and December 31, 1999,
respectively..................................... 3 2
Additional paid-in capital........................ 872,395 292,933
Unearned stock-based compensation................. (11,750) --
Accumulated deficit............................... (191,093) (277,720)
Accumulated other comprehensive loss.............. (6,756) (4,323)
---------- ---------
Total stockholders' equity....................... 662,799 10,892
---------- ---------
Total liabilities and stockholders' equity....... $1,561,502 $ 360,765
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
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
Month Ended ------------------ --------------------
June 30, September 30,
------------------ ----------------------------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ 2,020 $ -- $ 7,540 $ 3,907 $ 36,055 $ 3,907
-------- -------- -------- -------- --------- ---------
Operating expenses:
Cost of operating
revenues and
operations........... (1,932) -- (10,389) (3,810) (45,121) (3,810)
Selling, general and
administrative....... (15,358) (1,692) (19,174) (14,778) (73,175) (25,495)
Depreciation and
amortization......... (1,148) (53) (3,573) (5,416) (17,251) (5,706)
-------- -------- -------- -------- --------- ---------
Total operating
expenses............ (18,438) (1,745) (33,136) (24,004) (135,547) (35,011)
-------- -------- -------- -------- --------- ---------
Operating loss.......... (16,418) (1,745) (25,596) (20,097) (99,492) (31,104)
Equity in net loss of
unconsolidated wireless
operating companies.... (2,671) (9,314) (25,249) (24,169) (72,001) (83,222)
Write-down of
investments in
unconsolidated wireless
operating companies.... -- -- -- (27,242) -- (27,242)
Interest income......... 5,975 84 16,934 361 33,938 2,142
Interest expense........ (9,679) (987) (28,437) (6,395) (80,908) (10,341)
Foreign currency
transaction gains
(losses)............... 949 -- 1,378 (7,211) 13,099 (7,211)
Minority interest....... 111 -- -- 46 1,762 46
Gain on sale of
subsidiary............. 313,432 -- -- 9,097 313,432 9,097
Gain on issuance of
stock by unconsolidated
wireless operating
company................ -- -- 6,898 3,609 32,602 3,609
Other income (expense),
net.................... (376) (882) -- (223) 216 (264)
-------- -------- -------- -------- --------- ---------
Income (loss) before
income taxes and
extraordinary items.... 291,323 (12,844) (54,072) (72,224) 142,648 (144,490)
Income taxes............ (34,548) -- -- -- (34,548) --
-------- -------- -------- -------- --------- ---------
Income (loss) before
extraordinary items.... 256,775 (12,844) (54,072) (72,224) 108,100 (144,490)
Extraordinary losses on
early extinguishment of
debt................... (315) -- -- -- (4,737) --
-------- -------- -------- -------- --------- ---------
Net income (loss).... $256,460 $(12,844) $(54,072) $(72,224) $ 103,363 $(144,490)
======== ======== ======== ======== ========= =========
Other comprehensive
income (loss):
Foreign currency
translation gains
(losses)............. 448 (67) (3,327) (679) (2,433) (456)
-------- -------- -------- -------- --------- ---------
Comprehensive income
(loss).............. $256,908 $(12,911) $(57,399) $(72,903) $ 100,930 $(144,946)
======== ======== ======== ======== ========= =========
Basic net income (loss)
per common share:
Income (loss) before
extraordinary items.. $ 9.92 $ (0.71) $ (2.04) $ (3.93) $ 4.35 $ (7.99)
Extraordinary loss.... (0.01) -- -- -- (0.19) --
-------- -------- -------- -------- --------- ---------
Net income (loss).... $ 9.91 $ (0.71) $ (2.04) $ (3.93) $ 4.16 $ (7.99)
======== ======== ======== ======== ========= =========
Diluted net income
(loss) per common
share:
Income (loss) before
extraordinary items.. $ 7.82 $ (0.71) $ (2.04) $ (3.93) $ 3.36 $ (7.99)
Extraordinary loss.... (0.01) -- -- -- (0.15) --
-------- -------- -------- -------- --------- ---------
Net income (loss).... $ 7.81 $ (0.71) $ (2.04) $ (3.93) $ 3.21 $ (7.99)
======== ======== ======== ======== ========= =========
Shares used in per share
calculations:
Basic................. 25,881 18,167 26,524 18,360 24,826 18,080
======== ======== ======== ======== ========= =========
Diluted............... 32,836 18,167 26,524 18,360 32,134 18,080
======== ======== ======== ======== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Operating activities:
Net cash used in operating activities..................... $ (32,942) $(31,462)
--------- --------
Investing activities:
Purchase of property and equipment...................... (43,686) (1,135)
Investments in and loans to unconsolidated wireless
operating companies.................................... (18,533) (37,680)
Proceeds from liquidation of discontinued foreign
venture................................................ 4,311 16,024
Net proceeds from sale of subsidiary.................... 210,144 --
Purchase of held-to-maturity investments................ (117,627) --
Restricted cash equivalents and investments, net........ (57,893) --
Acquisitions, net of cash acquired...................... (1,327) (26,942)
Purchase of wireless licenses........................... (39,364) (18,320)
--------- --------
Net cash used in investing activities................. (63,975) (68,053)
--------- --------
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 --
Proceeds from long-term debt............................ 31,324 114,269
Repayment of long-term debt............................. (229,120) (10,000)
Repayment of loans payable to banks..................... (18,700) --
Payments of debt financing costs........................ (15,222) --
Net proceeds from issuance of common stock.............. 333,219 1,780
Issuance of subsidiary common stock..................... 3,738 1,103
Other................................................... 822 --
--------- --------
Net cash provided by financing activities............. 684,163 107,152
--------- --------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (8,119) 2,177
--------- --------
Net increase in cash and cash equivalents................. 579,127 9,814
Cash and cash equivalents at beginning of period.......... 44,109 14,980
--------- --------
Cash and cash equivalents at end of period................ $ 623,236 $ 24,794
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest.................................. $ 21,322 $ --
Supplemental disclosure of non-cash investing and
financing activities:
Loans to unconsolidated wireless operating company
converted to equity investment......................... -- 22,000
Long-term financing for loans to unconsolidated wireless
operating company...................................... 10,338 --
Long-term financing to purchase assets.................. 296,141 8,791
Long-term financing to purchase wireless licenses....... 10,467 --
Facility fee due on long-term debt...................... 1,800 --
Repurchase of warrant................................... -- 5,355
Issuance of common stock for minority interest in
subsidiary............................................. 45,961 --
Issuance of common stock to purchase wireless
licenses............................................... 10,725 --
Issuance of notes receivable for sale of Smartcom....... 143,173 --
Supplemental disclosure of cash used for acquisitions:
Total purchase value.................................... 152,946 43,699
Warrant issued for subsidiary company common stock...... (15,353) --
Note payable issued, net of discount.................... -- (15,699)
Liabilities assumed at present value.................... (131,293) --
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>
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. The Company and Basis of Presentation
The Company and Nature of Business
Leap Wireless International, Inc., a Delaware corporation, together with its
wholly-owned 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.
The Company's domestic service is operated by its wholly-owned indirect
subsidiary, Cricket Communications, Inc. ("Cricket Communications"), a wholly-
owned subsidiary of Cricket Communications Holdings, Inc. ("Cricket
Communications Holdings"), and is marketed under the name "Cricket". Pegaso
Telecommunicaciones S.A. de C.V. ("Pegaso"), a Mexican corporation in which the
Company has a 20.1% interest, operates a wireless network in Mexico. Smartcom,
S.A, ("Smartcom"), a wholly-owned subsidiary from April 1999 through June 2,
2000, has operated a nationwide wireless network in Chile since September 1998.
On June 2, 2000, the Company completed the sale of all of the issued and
outstanding shares of Smartcom for total consideration of $300.0 million plus
the repayment of intercompany debt due from Smartcom of $53.3 million and the
release of cash collateral securing Smartcom's indebtedness of $28.2 million.
Cricket service was introduced in March 1999 in Tennessee using the existing
infrastructure of Chase Telecommunications, Inc. ("Chase Telecommunications")
and wireless licenses owned by a subsidiary of Chase Telecommunications,
companies that Leap acquired in March 2000 (see Note 3). Leap has introduced
Cricket service in other markets in Tennessee in fiscal 2000 and plans to
introduce Cricket service to additional markets in the United States in the
future. The Company acquired 36 licenses in the federal government's 1999
reauction of broadband PCS spectrum licenses for $18.7 million in cash. From
January through November 2000, the Company completed the purchase of several
additional licenses in the United States from various third parties for an
aggregate of $43.7 million in cash, 333,450 shares of the Company's common
stock that had an aggregate fair value at the time of purchase of $18.7 million
and the assumption of $12.4 million in debt owed to the Federal Communications
Commission ("FCC") related to the licenses. In November 2000, the Company
entered into an agreement with CenturyTel, Inc. to purchase wireless licenses
in various markets for $118.7 million in cash and promissory notes in the
aggregate face amount of $86.5 million payable with interest at the rate of 10%
per annum in quarterly installments with $48.0 million due in the first quarter
and the final payment due one year after close. In addition, from January
through November 2000, the Company entered into agreements with third parties
to purchase additional licenses in exchange for cash, shares of the Company's
common stock and the assumption of FCC debt with an aggregate estimated fair
value of $179.2 million as of November 13, 2000, subject to certain adjustments
based upon changes in the market value of wireless licenses. Each of the
pending agreements is subject to customary closing conditions, including FCC
approval, but no assurance can be given that they will be closed on schedule or
at all.
In July 1999, the FCC issued an opinion and order that found the Company was
qualified to acquire and operate C-Block and F-Block PCS spectrum licenses in
the United States, subject to specified conditions. The order also approved the
Company's acquisition of the 36 reauction licenses and approved the transfer of
three licenses in North Carolina to the Company. Another wireless company has
appealed the FCC's order. Although the Company believes that the appeal will be
denied, there can be no assurance that it will prevail in connection with any
further judicial review of the order or that it will otherwise remain qualified
to hold C-Block or F-Block spectrum licenses.
The FCC's grants of the Company's C-Block and F-Block licenses are subject
to certain conditions which have been satisfied. The Company has a continuing
obligation, during the designated entity holding period for its C-Block and F-
Block licenses, to limit its debt to Qualcomm Incorporated ("Qualcomm") to 50%
or less of its outstanding debt and to ensure that persons who are or were
previously officers or directors of Qualcomm do not comprise a majority of the
Company's board of directors or a majority of its officers. If the Company
6
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
fails to continue to meet any of the conditions imposed by the FCC or otherwise
fails to maintain its qualification to own C-Block and F-Block licenses, that
failure could have a material adverse effect on the Company's financial
condition and business prospects.
Change in Year End
On July 31, 2000, the Board of Directors of the Company elected to change
the Company's fiscal year from a year ending on August 31 to a year ending on
December 31. The first new twelve-month fiscal year will end on December 31,
2000. As a result of the change in year end, the Company has issued
consolidated financial statements as of December 31, 1999 and for the
transition period from September 1, 1999 to December 31, 1999 and is required
to issue interim financial statements for the three and nine months ended
September 30, 2000. Since the Company's previous interim financial statements
were as of May 31, 2000, the Company is also required to issue interim
financial statements for the month of June 2000.
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 Transition Report on
Form 10-K for the transition period from September 1, 1999 to December 31,
1999, filed with the Securities and Exchange Commission on October 30, 2000.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. To accommodate the different
fiscal periods of the Company and its foreign operating companies, the Company
recognizes its share of net earnings or losses of such foreign companies on a
three-month lag.
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.
7
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Basic and Diluted Net Income (Loss) Per Common Share
Basic earnings per common share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the
reporting period. Diluted earnings per common share reflect the potential
dilutive effect of additional common shares that are issuable upon exercise of
outstanding stock options and warrants calculated using the treasury stock
method, and the conversion of Qualcomm Trust Convertible Preferred Securities.
A reconciliation of weighted-average shares outstanding used in calculating
basic and diluted income (loss) per share is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Month Ended ------------- -------------
June 30, September 30,
------------- ---------------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding--basic earnings per
share.............................. 25,881 18,167 26,524 18,360 24,826 18,080
Effect of dilutive securities:
Options........................... 2,930 -- -- -- 3,046 --
Qualcomm warrant.................. 3,934 -- -- -- 4,085 --
Warrant to Chase
Telecommunications Holdings...... 91 -- -- -- 74 --
Qualcomm Trust Convertible
Preferred Securities............. -- -- -- -- 103 --
------ ------ ------ ------ ------ ------
Adjusted weighted average shares
outstanding--diluted earnings per
share.............................. 32,836 18,167 26,524 18,360 32,134 18,080
====== ====== ====== ====== ====== ======
</TABLE>
The following shares were not included in the computation of diluted
earnings per share as their effect would be antidilutive (in thousands):
<TABLE>
<CAPTION>
Three
Months Nine Months
Ended Ended
Month Ended ----------- -----------
June 30, September 30,
----------- -----------------------
2000 1999 2000 1999 2000 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Options................................... 324 6,231 7,448 5,908 808 5,908
Qualcomm warrant.......................... -- 4,500 4,500 4,500 -- 4,500
Senior and senior discount unit warrants.. 2,830 -- 2,830 -- 2,830 --
Warrant to Chase Telecommunications
Holdings................................. -- -- 203 -- -- --
Qualcomm Trust Convertible Preferred
Securities............................... -- 2,270 -- 2,269 -- 2,269
</TABLE>
Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for the
Company's year ending December 31, 2001. In June 2000, the FASB issued SFAS No.
138 which amended SFAS No. 133 for certain derivative instruments and hedging
activities. Under SFAS No. 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company does not expect that
the adoption of SFAS No. 133 will have a material impact on its consolidated
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the Staff's
8
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
interpretations in applying generally accepted accounting principles to revenue
recognition. The provisions of SAB No. 101 are effective for the Company's
quarter ending December 31, 2000. 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.
Notes 2. Restricted Cash Equivalents and Investments
Restricted cash equivalents at December 31, 1999 consist of debt securities
with original maturities of three months or less which have been pledged to
collateralize the Company's obligations under a letter of credit agreement with
a bank. Restricted cash equivalents and investments at September 30, 2000 are
debt securities that have been pledged to provide for the payment of the first
seven scheduled interest payments on long-term notes payable. At September 30,
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 and Disposition
Chase Telecommunications Holdings
In March 2000, the Company completed the acquisition of substantially all of
the assets of Chase Telecommunications Holdings, including wireless licenses.
The purchase price included $6.3 million in cash, the assumption of principal
amounts of liabilities that totaled $138.0 million (with a fair value of
$131.3 million), a warrant to purchase 1% of the common stock of Cricket
Communications Holdings at an exercise price of $1.0 million (which had a fair
value of $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 fair
value of the warrant was recorded in minority interest. The liabilities assumed
included $78.8 million in principal amounts owed to the FCC associated with the
wireless licenses that bear interest at the rate of 7.0% per annum and must be
repaid in quarterly installments of principal and interest through January
2007. Therefore, under the purchase method of accounting, the total estimated
fair value of the acquisition was $152.9 million, of which $43.2 million has
been allocated to property and equipment and other assets and $109.7 million
has been allocated to intangible assets. Intangible assets consist primarily of
wireless licenses that are to be amortized over their estimated useful lives of
40 years upon commencement of commercial service.
Unaudited pro forma results of operations are provided to reflect the
acquisition as if it had occurred as of January 1, 1999 (in thousands, except
per share data):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
-------- ---------
(Unaudited)
<S> <C> <C>
Operating revenues...................................... $ 39,026 $ 7,678
Income (loss) before extraordinary items................ $106,342 $(154,925)
Net income (loss)....................................... $101,605 $(154,925)
Pro forma basic net income (loss) per common share...... $ 4.09 $ (8.57)
Pro forma diluted net income (loss) per common share.... $ 3.16 $ (8.57)
</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.
9
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Cricket Communications Holdings
On June 15, 2000, through a subsidiary merger, the Company acquired the
remaining 5.11% of Cricket Communications Holdings that it did not already own.
These shares were owned by individuals and entities, including directors and
employees of the Company and Cricket Communications Holdings. Each issued and
outstanding share of Cricket Communications Holdings common stock not held by
the Company was converted into the right to receive 0.315 of a fully paid and
non-assessable share of the Company's common stock. As a result, 1,048,635
shares of the Company's common stock were issued. The Company also assumed
Chase Telecommunications Holdings' warrant to purchase 1% of the common stock
of Cricket Communications Holdings, which was converted into a warrant to
acquire 202,566 shares of its common stock, at an aggregate exercise price of
$1.0 million. The aggregate fair value of the shares issued and warrant assumed
in excess of the carrying value of the minority interest was allocated to
goodwill. As a result, goodwill of $29.2 million was recorded in June 2000 and
is being amortized over 20 years. In addition, the Company assumed all
unexpired and unexercised Cricket Communications Holdings stock options
outstanding at the time of the merger, whether vested or unvested, which upon
conversion amounted to options to purchase 407,784 shares of the Company's
common stock. The Company recorded unearned stock-based compensation of $24.3
million for the excess of the fair market value of the Company's common stock
on the date of the merger over the exercise price of the options replaced.
Amortization of stock-based compensation amounted to $10.2 million,
$2.0 million and $12.2 million in the month ended June 30, 2000 and the three
and nine months ended September 30, 2000, respectively. No pro forma
information has been provided with respect to the Company's purchase of the
remaining ownership interest in Cricket Communications Holdings because the
effect on the Company's results of operations would have been immaterial.
Sale of Smartcom
On June 2, 2000, the Company completed the sale of all of the issued and
outstanding shares of Smartcom to Endesa, S.A., a Spanish utility company
("Endesa"), for $156.8 million in cash and three one-year promissory 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 of $28.2 million. In addition, the Company's loans payable to
banks in Chile of $10.3 million and $7.6 million were repaid by the Company.
The Company recognized a gain on sale of $313.4 million before related income
tax expense of $34.5 million. One of the promissory notes is subject to a one
year right of set-off to secure the indemnification obligations of the Company
under the share purchase agreement between the parties. Another of the
promissory notes is subject to adjustment based upon an audit of the closing
balance sheet of Smartcom completed following the closing of the agreement.
Unaudited pro forma results of operations are provided to reflect the
acquisition of substantially all of the assets of Chase Telecommunications
Holdings and the sale of Smartcom as if they had occurred as of January 1, 1999
(in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Operating revenues................................... $ 17,380 $ 3,904
Income (loss) before extraordinary items............. $(136,491) $(121,734)
Net income (loss).................................... $(140,913) $(121,734)
Pro forma basic net income (loss) per common share... $ (5.68) $ (6.73)
Pro forma diluted net income (loss) per common
share............................................... $ (4.39) $ (6.73)
</TABLE>
10
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition and the sale
occurred on the date indicated, or which may result in the future.
Note 4. Investments in and Loans to Unconsolidated Wireless Operating Companies
The Company has equity interests in companies that directly or indirectly
operate wireless telecommunications networks. The Company's ability to withdraw
funds, including dividends, from its participation in such investments is
dependent on receiving the consent of lenders and the other participants, over
which the Company has no control.
Commencing in July 1999, the Company began fully consolidating Smartcom as a
result of the Company's acquisition of the remaining 50% of Smartcom that it
did not already own. Prior to July 1999, Smartcom was accounted for under the
equity method. The Company recorded equity losses from Smartcom of $9.7 million
during the nine months ended September 30, 1999. As a result of the sale of
Smartcom in June 2000, the results of operations of Smartcom for April and May
2000 have been reflected in accumulated deficit during the interim period ended
September 30, 2000.
Prior to the Company's completion of its acquisition of substantially all
the assets of Chase Telecommunications Holdings in March 2000, Chase
Telecommunications Holdings was accounted for under the equity method. The
Company recorded equity losses from Chase Telecommunications Holdings of
$10.4 million during the nine months ended September 30, 2000, and $2.5
million, $4.0 million and $11.2 million during the month ended June 30, 1999
and the three and nine months ended September 30, 1999, respectively.
The Company has a 20.1% interest in Pegaso. The Company invested $100.0
million in Pegaso from June to September 1998 as a founding shareholder. In
July 1999, several of the other investors purchased an additional $50.0 million
of capital stock of Pegaso. In April 2000, Sprint PCS invested approximately
$200.0 million in Pegaso by purchasing shares from Pegaso and shareholders
other than Leap. As a result, the Company's ownership interest in Pegaso was
diluted from 28.6% to 22.4%. In August 2000, the General Director of Pegaso
invested $50.0 million in Pegaso by purchasing shares from Pegaso and
shareholders other than Leap. As a result, the Company's ownership interest was
further diluted to 20.1%. The Company has recorded gains due to these
transactions of $6.9 million and $32.6 million during the three and nine months
ended September 30, 2000, respectively. The Company recorded equity losses from
Pegaso of $2.7 million, $25.2 million and $61.6 million during the month ended
June 30, 2000 and the three and nine months ended September 30, 2000,
respectively, and $4.2 million, $8.5 million and $22.9 million during the month
ended June 30, 1999 and the three and nine months ended September 30, 1999,
respectively.
11
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Condensed combined financial information for the operating companies
accounted for under the equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets.................................. $ 176,580 $ 33,940
Non-current assets.............................. 578,147 578,326
Current liabilities............................. (317,125) (91,217)
Non-current liabilities......................... (241,568) (349,262)
--------- ---------
Total stockholders' capital................... 196,034 171,787
Other stockholders' share of capital............ 156,602 85,909
--------- ---------
Company's share of capital...................... $ 39,432 $ 85,878
========= =========
Investments in and loans receivable from
unconsolidated wireless operating companies.. $ 39,432 $ 85,878
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Month Ended ------------------- --------------------
June 30, September 30,
------------------ -----------------------------------------
2000 1999 2000 1999 2000 1999
-------- -------- --------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ 5,418 $ 1,764 $ 24,394 $ 2,413 $ 51,052 $ 8,330
-------- -------- --------- -------- --------- ---------
Operating losses........ (15,259) (17,604) (64,727) (38,214) (191,342) (133,229)
Other income (expense),
net.................... (6,158) (2,046) (13,337) (12,097) (38,663) (20,738)
Foreign currency
transaction gains
(losses)............... 9,465 9 (34,857) 3,898 (25,195) (1,963)
-------- -------- --------- -------- --------- ---------
Net loss................ (11,952) (19,641) (112,921) (46,413) (255,200) (155,930)
Other stockholders'
share of net loss...... (9,281) (10,271) (87,672) (20,289) (181,701) (66,929)
-------- -------- --------- -------- --------- ---------
Company's share of net
loss................... (2,671) (9,370) (25,249) (26,124) (73,499) (89,001)
Amortization of excess
cost of investment..... -- (103) -- -- -- (364)
Elimination of
intercompany
transactions........... -- 159 -- 1,955 1,498 6,143
-------- -------- --------- -------- --------- ---------
Equity in net loss of
unconsolidated wireless
operating companies.... $ (2,671) $ (9,314) $ (25,249) $(24,169) $ (72,001) $ (83,222)
======== ======== ========= ======== ========= =========
</TABLE>
12
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Note 5. Long-Term Debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
12.5% senior notes, due 2010, effective interest
rate of 15.8%................................... $165,097 $ --
14.5% senior discount notes, face amount $668.0
million, due 2010, effective interest rate of
16.3%........................................... 260,489 --
Lucent credit agreement.......................... 212,579 10,421
U.S. government financing........................ 80,916 --
Qualcomm credit agreement, net of facility fee... -- 187,570
Deferred payment agreement....................... -- 89,220
Note payable, net of discount.................... -- 16,607
-------- --------
$719,081 $303,818
======== ========
</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. 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.
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.
13
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
The notes rank equally with the Company's other unsecured senior
indebtedness. The notes are effectively subordinate to all of the Company's
secured indebtedness. The notes are guaranteed by the Company's domestic
subsidiary, Cricket Communications Holdings. The terms of the notes include
certain covenants that restrict the Company's ability to, among other things,
incur additional indebtedness, create liens, pay dividends, make investments,
sell assets and effect a consolidation or merger. The Company consummated an
exchange offer for the notes pursuant to an effective registration statement in
July 2000.
Each warrant included as part of the senior 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 filed a
registration statement covering the resale of the warrants and related common
stock issuable upon exercise of the warrants in August 2000.
Lucent Supply and Credit Agreements
In September 1999, Cricket Communications agreed to purchase up to $330.0
million of products and services from Lucent Technologies, Inc. ("Lucent") and
in June 2000, increased the value of products and services that can be
purchased under the agreement to up to $900.0 million. The purchase agreement
is subject to early termination at Cricket Communications' convenience subject
to payments for products and services purchased from Lucent. Lucent agreed to
finance these purchases plus additional working capital under a credit
facility. The credit facility originally permitted up to $641.0 million in
total borrowings, which was increased to up to $1,350.0 million in June 2000,
with borrowing availability generally based on a ratio of the total amount of
products and services purchased from Lucent. Lucent is not required to make
loans under the facility if the total of the loans held directly or supported
by Lucent is an amount greater than $815.0 million. The agreement contains
various covenants and conditions typical for a loan of this type, including
minimum levels of customers and covered potential customers that must increase
over time, limits on annual capital expenditures, dividend restrictions and
other financial ratio tests. Borrowings under the credit facility accrue
interest at a rate equal to LIBOR plus 3.5% to 4.25% or a bank base rate plus
2.5% to 3.25%, in each case with the specific rate based on the ratio of total
indebtedness to EBITDA. Cricket Communications must pay a commitment fee equal
to 1.25% per annum on the unused commitment under the facility, decreasing to
0.75% per annum. Principal payments are scheduled to begin after three years
with a final maturity after eight years. Repayment is weighted to the later
years of the repayment schedule. The obligations under the credit agreement,
together with the obligations under similar facilities from Nortel Networks,
Inc. ("Nortel") and Ericsson Wireless Communications, Inc. ("Ericsson"), are
secured by all of the stock of Cricket Communications, its subsidiaries and the
stock of each special purpose subsidiary of the Company formed to hold wireless
licenses used in Cricket Communications' business, and all their respective
assets. At September 30, 2000, $212.6 million was outstanding under the Lucent
credit agreement at an interest rate of 11.0%. In addition, amounts payable to
Lucent of $96.2 million have been included in other long-term liabilities at
September 30, 2000.
Nortel Supply and Credit Agreements
In August 2000, Cricket Communications entered into a three-year supply
agreement with Nortel for the purchase of infrastructure products and services.
Nortel agreed to finance these purchases plus additional working capital under
a credit facility. The credit facility permits up to $525.0 million in total
borrowings, with borrowing availability generally based on a ratio of the total
amount of products and services purchased from
14
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Nortel. The credit agreement contains various covenants and conditions typical
for a loan of this type, including minimum levels of customers and covered
potential customers that must increase over time, limits on annual capital
expenditures and other financial ratio tests. The obligations under the credit
agreement, together with the obligations under similar facilities from Lucent
and Ericsson, are secured by all of the stock of Cricket Communications, its
subsidiaries and the stock of each special purpose subsidiary of the Company
formed to hold wireless licenses used in Cricket Communications' business, and
all their respective assets. Borrowings under the credit facility accrue
interest at a rate equal to LIBOR plus 3.5% to 4.25% or a bank base rate plus
2.5% to 3.25%, in each case with the specific rate based on the ratio of total
indebtedness to EBITDA. Cricket Communications must pay a commitment fee equal
to 1.25% per annum on the unused commitment under the credit facility,
decreasing to 0.75% per annum. Principal payments are scheduled to begin after
three years with a final maturity after eight years. Repayment is weighted to
the later years of the repayment schedule. At September 30, 2000, no amounts
were outstanding under the Nortel credit agreement.
Ericsson Supply and Credit Agreements
In October 2000, Cricket Communications entered into a three-year supply
agreement with Ericsson for the purchase of up to $330.0 million of
infrastructure products and services. Ericsson Credit AB agreed to finance
these purchases plus additional working capital under a credit facility. These
agreements amended and replaced the binding memorandum of agreement between the
parties dated September 20, 1999. The credit facility permits up to $495.0
million in total borrowings, with borrowing availability generally based on a
ratio of the total amount of products and services purchased from Ericsson. The
credit agreement contains various covenants and conditions typical for a loan
of this type, including minimum levels of customers and covered potential
customers that must increase over time, limits on annual capital expenditures,
dividend restrictions and other financial ratio tests. The obligations under
the credit agreement, together with the obligations under similar facilities
from Lucent and Nortel, are secured by all of the stock of Cricket
Communications, its subsidiaries and the stock of each special purpose
subsidiary of the Company formed to hold wireless licenses used in Cricket
Communications' business, and all their respective assets. Borrowings under the
credit facility accrue interest at a rate equal to LIBOR plus 3.5% to 4.25% or
a bank base rate plus 2.5% to 3.25%, in each case with the specific rate based
on the ratio of total indebtedness to EBITDA. Cricket Communications must pay a
commitment fee equal to 1.25% per annum on the unused commitment under the
credit facility, decreasing to 0.75% per annum. Principal payments are
scheduled to begin after three years with a final maturity after eight years.
Repayment is weighted to the later years of the repayment schedule.
Cricket Communications, Lucent, Nortel and Ericsson have entered into an
agreement pursuant to which Lucent, Nortel and Ericsson agreed to share
collateral and the parties agreed that Cricket Communications' total
outstanding balance of loans to the three vendors shall not exceed $1,845.0
million.
Smartcom Deferred Payment and Credit Agreement
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
15
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
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.
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.
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 accrue interest at a rate equal to LIBOR
plus 3.5% to 5.0% or a bank base rate plus 2.5% to 4.0%, in each case with the
specific rate based on certain financial ratios. The principal outstanding was
due at maturity in September 2001.
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 in January
2000, 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 Telecommunications
Holdings in March 2000, 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.
As part of the consideration for a wireless license acquired in July 2000,
the Company assumed $1.0 million ($0.9 million, net of discount) of U.S.
government financing with the FCC. The terms of the note include an interest
rate of 6.25% per annum and quarterly principal and interest payments until
maturity in July 2007. The note was discounted using management's best estimate
of the prevailing market interest rate to the Company at the time of purchase
of the wireless license of 10.75% per annum.
Qualcomm Credit Agreement
The Company entered into a secured credit facility with Qualcomm on
September 23, 1998 (the "Qualcomm Credit Agreement"). The Qualcomm Credit
Agreement consisted of two sub-facilities. The
16
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
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 Offering and Equity Offering 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.
Note 6. 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 has paid 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.
Stockholder Rights Plan
In March 2000, the Company's Board of Directors approved an amendment to the
Company's Stockholder Rights Plan that increased the purchase price from $90 to
$350 for each one one-thousandth of a share of Series A Junior Participating
Preferred Stock.
In September 2000, the Company's shareholders approved the amendment of the
Company's Certificate of Incorporation to increase the aggregate number of
authorized shares of common stock from 75,000,000 to 300,000,000.
Note 7. Commitments and Contingencies
Pegaso
In May 1999, Pegaso entered into a $100.0 million loan agreement. The
Company guaranteed 33% of Pegaso's obligations under this loan agreement in the
event of Pegaso's default. The amount of the loan was subsequently increased to
$190.0 million although the amount of the guarantee was not increased. 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
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
17
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
opinion of management, the ultimate liability for such claims will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
Note 8. Segment Data
The Company's current reportable segments are countries in which it manages,
supports, operates and participates in wireless communications business
ventures. These reportable segments are evaluated separately because each
geographic region presents different marketing strategies and operational
issues, as well as distinct economic climates and regulatory constraints. The
Company's reportable segments are comprised of its consolidated and
unconsolidated United States subsidiaries, and Leap's operating company in
Mexico. Prior to its sale in June 2000, Smartcom was a reportable segment. As a
result of the sale, segment data has been restated for all periods presented to
exclude Smartcom.
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Month Ended ------------------- -------------------
June 30, September 30,
----------------- ----------------------------------------
2000 1999 2000 1999 2000 1999
-------- ------- --------- -------- --------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
United States
Revenues................ $ 2,020 $ 491 $ 7,540 $ 1,724 $ 17,381 $ 3,642
Operating loss before
depreciation and
amortization........... (3,839) (1,445) (16,801) (4,761) (36,676) (13,312)
Operating loss.......... (5,002) (1,780) (20,190) (5,769) (48,827) (16,332)
Capital expenditures.... (6,265) (194) (207,429) (4,425) (291,518) (5,940)
Purchase of wireless
licenses............... -- -- (37,355) (18,920) (110,509) (18,920)
Total assets.......... 673,713 76,152 914,090 98,839 914,090 98,839
Mexico
Revenues................ 5,418 246 24,394 694 48,081 1,208
Operating loss before
depreciation and
amortization........... (12,116) (13,715) (52,114) (26,330) (153,784) (69,124)
Operating loss.......... (15,319) (13,715) (64,727) (27,055) (181,012) (71,338)
Capital expenditures.... (9,436) (9,794) (35,253) (38,851) (122,681) (129,973)
Total assets.......... 622,083 430,397 754,727 550,534 754,727 550,534
</TABLE>
18
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
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):
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
Month Ended June ------------------ -------------------
30, September 30,
------------------ ---------------------------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- --------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total segment revenues.. $ 7,438 $ 737 $ 31,934 $ 2,418 $ 65,462 $ 4,850
Revenues of
unconsolidated wireless
operating companies.... (5,418) (1,764) (24,394) (2,413) (51,052) (8,330)
Smartcom................ -- 1,027 -- 3,774 21,645 7,236
Other unallocable
revenues............... -- -- -- 128 -- 151
-------- -------- -------- -------- --------- --------
Consolidated
revenues............. $ 2,020 $ -- $ 7,540 $ 3,907 $ 36,055 $ 3,907
======== ======== ======== ======== ========= ========
Total segment operating
losses before
depreciation and
amortization........... $(15,955) $(15,160) $(68,915) $(31,091) $(190,460) $(82,436)
Operating losses before
depreciation and
amortization of
unconsolidated wireless
operating companies.... 12,116 15,711 52,114 35,950 158,971 104,255
Smartcom................ -- (1,147) -- (4,584) (23,104) (12,438)
Discontinued foreign
ventures............... -- -- -- (9,666) -- (21,679)
Corporate and
eliminations........... (11,431) (1,096) (5,222) (5,290) (27,648) (13,100)
-------- -------- -------- -------- --------- --------
Consolidated operating
losses before
depreciation and
amortization......... $(15,270) $ (1,692) $(22,023) $(14,681) $ (82,241) $(25,398)
======== ======== ======== ======== ========= ========
Total segment operating
losses................. $(20,321) $(15,495) $(84,917) $(32,824) $(229,839) $(87,670)
Operating losses of
unconsolidated wireless
operating companies.... 15,259 17,604 64,727 38,214 191,342 133,229
Smartcom................ -- (2,715) -- (9,845) (38,137) (21,847)
Discontinued foreign
ventures............... -- -- -- (10,228) -- (41,302)
Corporate and
eliminations........... (11,356) (1,139) (5,406) (5,414) (22,858) (13,514)
-------- -------- -------- -------- --------- --------
Consolidated operating
loss................. $(16,418) $ (1,745) $(25,596) $(20,097) $ (99,492) $(31,104)
======== ======== ======== ======== ========= ========
</TABLE>
Revenues and long-lived assets related to operations in the United States
and other countries are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Month Ended ------------- --------------
June 30, September 30,
------------ ----------------------------
2000 1999 2000 1999 2000 1999
------ ----- ------ ------ ------- ------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
United States......................... $2,020 $ -- $7,540 $ -- $14,409 $ --
Other countries....................... -- -- -- 3,907 21,646 3,907
------ ----- ------ ------ ------- ------
Total consolidated revenues......... $2,020 $ -- $7,540 $3,907 $36,055 $3,907
====== ===== ====== ====== ======= ======
</TABLE>
19
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
LONG-LIVED ASSETS:
United States..................................... $526,564 $ 33,147
Other countries................................... 39,584 240,477
-------- --------
Total consolidated long-lived assets............ $566,148 $273,624
======== ========
</TABLE>
20
<PAGE>
LEAP WIRELESS INTERNATIONAL
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Note 9. Supplemental Unaudited Quarterly Financial Data (In Thousands, Except
Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30,
--------- -------- ------------- ------------ --------- -------- -------------
1999 2000
----------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ -- $ -- $ 3,907 $ 5,576 $ 9,991 $ 18,524 $ 7,540
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Cost of operating
revenues and
operations............ -- -- (3,810) (7,384) (16,031) (18,701) (10,389)
Selling, general and
administrative........ (4,699) (6,018) (14,778) (14,777) (22,103) (31,898) (19,174)
Depreciation and
amortization.......... (143) (148) (5,416) (5,177) (5,242) (8,436) (3,573)
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............ (4,842) (6,166) (24,004) (27,338) (43,376) (59,035) (33,136)
-------- -------- -------- -------- -------- -------- --------
Operating loss....... (4,842) (6,166) (20,097) (21,762) (33,385) (40,511) (25,596)
Equity in net loss of
unconsolidated wireless
operating companies.... (17,828) (41,225) (24,169) (19,977) (29,583) (17,169) (25,249)
Write-down of
investments in
unconsolidated wireless
operating companies.... -- -- (27,242) -- -- -- --
Interest income......... 1,257 524 361 340 4,691 12,313 16,934
Interest expense........ (1,213) (2,732) (6,395) (9,701) (16,160) (36,311) (28,437)
Foreign currency
transaction gains
(losses)............... -- -- (7,211) (2,794) 1,399 10,322 1,378
Minority interest....... -- -- 46 -- 274 1,488 --
Gain on sale of
subsidiary............. -- -- 9,097 -- -- 313,432 --
Gain on issuance of
stock by unconsolidated
wireless operating
company................ -- -- 3,609 -- -- 25,734 6,898
Other income (expense),
net.................... -- (41) (223) (3,272) 361 (175) --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary items.... (22,626) (49,640) (72,224) (57,166) (72,403) 269,123 (54,072)
Income taxes............ -- -- -- -- -- (34,548) --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items.... (22,626) (49,640) (72,224) (57,166) (72,403) 234,575 (54,072)
Extraordinary losses on
early extinguishment of
debt................... -- -- -- -- (4,422) (315) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).... $(22,626) $(49,640) $(72,224) $(57,166) $(76,825) $234,260 $(54,072)
======== ======== ======== ======== ======== ======== ========
Basic net income (loss)
per common share:
Income (loss) before
extraordinary items... $ (1.27) $ (2.75) $ (3.93) $ (2.99) $ (3.23) $ 9.18 $ (2.04)
Extraordinary loss..... -- -- -- -- (0.20) (0.01) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ (1.27) $ (2.75) $ (3.93) $ (2.99) $ (3.43) $ 9.17 $ (2.04)
======== ======== ======== ======== ======== ======== ========
Diluted net income
(loss) per common
share:
Income (loss) before
extraordinary items... $ (1.27) $ (2.75) $ (3.93) $ (2.99) $ (3.23) $ 7.21 $ (2.04)
Extraordinary loss..... -- -- -- -- (0.20) (0.01) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).... $ (1.27) $ (2.75) $ (3.93) $ (2.99) $ (3.43) $ 7.20 $ (2.04)
======== ======== ======== ======== ======== ======== ========
Shares used in per share
calculations:
Basic.................. 17,809 18,065 18,360 19,129 22,397 25,536 26,524
======== ======== ======== ======== ======== ======== ========
Diluted................ 17,809 18,065 18,360 19,129 22,397 32,519 26,524
======== ======== ======== ======== ======== ======== ========
</TABLE>
* * * *
21
<PAGE>
Item 2. Management Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Item 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Transition Report on Form 10-K
for the transition period from September 1, 1999 to December 31, 1999, filed
with the Securities and Exchange Commission on October 30, 2000.
Except for the historical information contained herein, this document
contains forward-looking statements reflecting management's current forecast of
certain aspects of Leap's future. Some forward-looking statements can be
identified by forward-looking words such as "believe," "may," "could," "will,"
"estimate," "continue," "anticipate," "intend," "seek," "plan," "expect,"
"should," "would" and similar expressions in the report. It is based on current
information, which we have assessed but which by its nature is dynamic and
subject to rapid and even abrupt changes. Our actual results could differ
materially from those stated or implied by such forward-looking statements due
to risks and uncertainties associated with our business. Factors that could
cause actual results to differ include, but are not limited to: changes in the
economic conditions of the various markets the operating companies serve which
could adversely affect the market for wireless services; the ability of Leap or
its operating companies to access capital markets; the delayed build-out of the
systems; Leap's ability to roll out networks in accordance with its plans;
failure of the systems to perform according to expectations; the effect of
competition; the acceptance of the product offering by our target customers;
our ability to retain customers; our ability to maintain our cost, market
penetration and pricing structure in the face of competition; uncertainties
relating to negotiating and executing definitive agreements and the closing of
transactions described in this report; rulings by courts or the FCC adversely
affecting our rights to own and/or operate certain wireless licenses; as well
as other factors detailed in our SEC filings. The forward looking statements
should be considered in the context of these and other risk factors detailed in
the Company's Transition Report on Form 10-K for the transition period from
September 1, 1999 to December 31, 1999, filed with the Securities and Exchange
Commission on October 30, 2000, under the heading "Risk Factors." Investors and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. We disclaim any obligation to update the forward-
looking statements contained herein to reflect future events or developments.
As used in this report, the terms "we," "our" or "us" refer to Leap Wireless
International, Inc. and its subsidiaries unless the context suggests otherwise.
Overview
Leap is a wireless communications carrier with an innovative approach to
providing digital wireless service that is designed to appeal to the mass
market. We intend to transform wireless into a mass consumer product by
deploying customer-oriented, low-cost, simple wireless services. We generally
seek to address a much broader population segment than incumbent wireless
operators have addressed to date. In the United States, we are employing an
innovative business strategy to extend the benefits of mobility to the mass
market by offering digital wireless service under the brand name Cricket that
is as simple as, and priced at rates competitive with, traditional landline
service. Chase Telecommunications, Inc., a company we acquired in March 2000,
introduced Cricket service in Chattanooga and Nashville, Tennessee in March
1999 and January 2000, respectively. Cricket service is operated by Cricket
Communications, Inc., a wholly-owned subsidiary of Leap held through Cricket
Communications Holdings. Cricket Communications introduced Cricket service in
Knoxville, Tennessee in October 2000. To expand the Cricket service, we
currently have acquired or agreed to acquire wireless licenses covering
approximately 47.5 million potential customers.
Internationally, we are currently a minority shareholder and actively
involved on the board of Pegaso Telecomunicaciones, a company that is involved
in developing and operating a nationwide digital wireless system in Mexico.
While our current emphasis is on our U.S.-based operations, we plan to focus
our
22
<PAGE>
international efforts in markets primarily in the Americas where we believe the
combination of unfulfilled demand and our attractive wireless service offerings
will fuel rapid growth. In Mexico, we were a founding shareholder and have
invested $100 million in Pegaso, a joint venture with Grupo Pegaso. We
currently own 20.1% of Pegaso, which is deploying and operating the first 100%
digital wireless communications network in Mexico. Pegaso holds wireless
licenses generally in the 1900 MHz band to provide nationwide service covering
all of Mexico, with approximately 99 million potential customers.
On June 2, 2000, we completed the sale of our Chilean operating subsidiary,
Smartcom, S.A., to Endesa, S.A., a Spanish utility company. Under the terms of
our agreement with Endesa, Endesa purchased all of the outstanding capital
stock of Smartcom from our subsidiary, Inversiones Leap Wireless Chile, S.A.,
and its designated shareholder nominee (who held one share of the Series A
preferred stock of Smartcom in order to comply with Chilean law which requires
two shareholders for each Chilean sociedad anonima), in exchange for gross
consideration of approximately $381.5 million, consisting of cash, three
promissory notes, the repayment of intercompany debt due to Leap by Smartcom,
and the release of cash collateral. One of the promissory notes is subject to a
one year right of set-off to secure the indemnification obligations of Leap and
Inversiones under the share purchase agreement between the parties. Another of
the promissory notes is subject to adjustment based upon an audit of the
closing balance sheet of Smartcom completed following the closing of the
agreement. In addition, the sale of the Smartcom shares resulted in the removal
of approximately $191.4 million of Smartcom liabilities from our consolidated
balance sheet. We recognized a gain on sale of Smartcom of $313.4 million
before related income tax effects of $34.5 million.
Smartcom holds a nationwide wireless license in the 1900 MHz band and
operates a nationwide digital wireless system in Chile. In April 1999, we
acquired the remaining 50% of Smartcom that we did not already own.
Subsequently, we recruited a new management team, upgraded the network
capabilities and, in November 1999, re-launched service under a new brand name,
SMARTCOM PCS. Smartcom's network is the only CDMA-based network in Chile.
In June 2000, through a subsidiary merger, we acquired the 5.11% of Cricket
Communications Holdings that we did not already own. These shares were owned by
individuals and entities, including directors and employees of Leap and Cricket
Communications Holdings. Under the terms of the merger, each issued and
outstanding share of Cricket Communications Holdings common stock not held by
Leap was converted into the right to receive 0.315 of a fully paid and non-
assessable share of our common stock. As a result, an aggregate of 1,048,635
shares of our common stock were issued. We also assumed Chase
Telecommunications Holdings' warrant to purchase 1% of the common stock of
Cricket Communications Holdings, which was converted into a warrant to acquire
202,566 shares of our common stock, at an aggregate exercise price of $1.0
million. The aggregate fair value of the shares issued and warrant assumed in
excess of the carrying value of the minority interest of $29.2 million was
allocated to goodwill. In addition, we assumed all unexpired and unexercised
Cricket Communications Holdings stock options outstanding at the time of the
merger, whether vested or unvested, which upon conversion amounted to options
to purchase 407,784 shares of our common stock.
We are in the early stages of launching our networks and our financial
results continue to reflect the considerable investment associated with
completion of our network build-outs and the initial launch of commercial
service in new markets. As we continue to expand our operations, our net
operating losses and our proportionate share of the losses in our
unconsolidated wireless operating companies are expected to grow.
The term "operating company" refers to Cricket Communications, Chase
Telecommunications, Smartcom and Pegaso.
Recent or Pending Acquisitions
Chase Telecommunications. In March 2000, we completed the acquisition of
substantially all of the assets of Chase Telecommunications Holdings, including
wireless licenses. The purchase price included $6.3 million in cash, the
assumption of principal amounts of liabilities that totaled $138.0 million
(with a fair
23
<PAGE>
value of approximately $131.3 million), a warrant to purchase 1% of the common
stock of Cricket Communications Holdings (which has been converted into a
warrant to acquire 202,566 shares of Leap common stock) at an exercise price of
$1.0 million (which had a fair value of approximately $15.3 million at the
acquisition date determined using the Black Scholes option pricing model), and
contingent earn-out payments of up to $41.0 million (plus certain expenses)
based on the earnings of the business acquired during the fifth full year
following the closing of the acquisition. The liabilities assumed included
$78.8 million in principal amounts owed to the FCC associated with the wireless
licenses that bear interest at the rate of 7.0% per annum and must be repaid in
quarterly installments of principal and interest through January 2007.
Therefore, under the purchase method of accounting, the total estimated fair
value of the acquisition was $152.9 million, of which $43.2 million has been
allocated to property and equipment and other assets and $109.7 million has
been allocated to intangible assets. Intangible assets consist of primarily
wireless licenses that are to be amortized over their estimated useful lives of
40 years upon commencement of commercial service.
Wireless licenses. We acquired 36 licenses in the federal government's 1999
reauction of broadband PCS spectrum licenses for $18.7 million in cash. From
January through November 2000, we completed the purchase of several additional
licenses in the United States from various third parties for an aggregate of
$43.7 million in cash, 333,450 shares of our common stock that had an aggregate
fair value at the time of purchase of $18.7 million and the assumption of $12.4
million in debt owed to the FCC related to the licenses. In November 2000, we
entered into an agreement with CenturyTel, Inc. to purchase wireless licenses
in various markets in exchange for $118.7 million in cash and promissory notes
in the aggregate face amount of $86.5 million payable with interest at the rate
of 10% per annum in quarterly installments with $48.0 million due in the first
quarter and the final payment due one year after close. In addition, from
January through November 2000, we entered into agreements with third parties to
purchase additional licenses in exchange for cash, shares of our common stock
and the assumption of FCC debt with an aggregate estimated fair value of $179.2
million as of November 13, 2000, subject to certain adjustments based upon
changes in the market value of wireless licenses. Each of the pending
agreements is subject to customary closing conditions, including FCC approval,
but no assurance can be given that they will be closed on schedule or at all.
In July 1999, the FCC issued an opinion and order that found that we were
qualified to acquire C-Block and F-Block licenses. The order also approved our
acquisition of the 36 C-Block licenses for which we were the high bidder in the
FCC's 1999 spectrum reauction, and approved the transfer to Leap of three F-
Block licenses covering portions of North Carolina, in each case subject to the
fulfillment of some conditions. In October 1999, the FCC issued the 36 licenses
we acquired in the reauction.
The FCC's grants of our C-Block and F-Block licenses are subject to certain
conditions. Each of the conditions imposed by the FCC in the opinion and order
has been satisfied. We have a continuing obligation, during the designated
entity holding period for our C-Block and F-Block licenses, to limit our debt
to Qualcomm to 50% or less of our outstanding debt and to ensure that persons
who are or were previously officers or directors of Qualcomm do not comprise a
majority of our board of directors or a majority of our officers. If we fail to
continue to meet any of the conditions imposed by the FCC or otherwise fail to
maintain our qualification to own C-Block and F-Block licenses, that failure
could have a material adverse effect on our financial condition and business
prospects.
Various parties previously challenged our qualification to hold C-Block and
F- Block licenses, which challenges were rejected in the FCC's July 1999 order.
One of these parties, a wireless operating company, requested that the FCC
review its order, as well as the order consenting to the transfer of licenses
to us from Chase Telecommunications and PCS Devco. That wireless operating
company also has opposed all of our pending assignment or transfer applications
at the FCC. In July 2000, the FCC affirmed its July 1999 order as well as the
order consenting to the transfer of licenses to us from Chase
Telecommunications and PCS Devco, and the wireless operating company
subsequently appealed the FCC's decision to the Court of Appeal for the D.C.
Circuit, which appeal is currently pending. In addition, Nextel Communications,
Inc. has opposed one of our pending FCC applications, alleging that we may no
longer be compliant with C- and F-Block "total asset" eligibility requirements.
Further judicial review of the FCC's orders granting us licenses is possible.
In addition,
24
<PAGE>
licenses awarded to us at auction may be subject to the outcome of pending
judicial proceedings by parties challenging the auction process or the FCC's
decision or authority to auction or reauction certain C- or F-Block licenses.
We may also be affected by other pending or future FCC, legislative or
judicial proceedings that generally affect the rules governing C- and F-Block
licenses or other designated entities. For example, recent FCC rules changes
have made it easier for large companies to acquire C- and F-Block licenses at
auction and in the aftermarket.
We may not prevail in connection with any such appeals or proceedings and
we may not remain qualified to hold C-Block or F-Block licenses. If the FCC
determines that we are not qualified to hold C-Block or F-Block licenses, it
could take the position that all of our licenses should be divested, cancelled
or reauctioned.
Presentation
In April 1999, we increased our ownership interest in Smartcom from 50% to
100%. As a result of the reporting lag we have adopted for our foreign
operating companies, we began fully consolidating Smartcom's results of
operations in June 1999, the beginning of the fourth quarter of the year ended
August 31, 1999. Before that, we accounted for our investment in Smartcom
under the equity method of accounting. On June 2, 2000, we sold all of the
outstanding shares of Smartcom to Endesa. The results of operations of
Smartcom for April and May 2000 have been reflected in accumulated deficit
during the interim period ended September 30, 2000. We account for our
interest in Pegaso under the equity method of accounting. We currently own
20.1% of Pegaso.
On July 31, 2000, our Board of Directors elected to change Leap's fiscal
year from a year ending on August 31 to a year ending on December 31. The
first new twelve-month fiscal year will end on December 31, 2000. As a result
of the change in year-end, we were required to issue interim financial
statements for the three and nine months ended September 30, 2000. Since our
previous interim financial statements were as of May 31, 2000, we are also
required to issue interim financial statements for the month of June 2000. To
accommodate the different fiscal periods of Leap and its foreign operating
companies, we have recognized our share of net earnings or losses of such
foreign companies on a two-month lag. In conjunction with Leap's change in
fiscal year end, this lag was extended to three months.
Results of Operations
Month Ended June 30, 2000 and Three and Nine Months Ended September 30, 2000
Compared to Month Ended June 30, 1999 and Three and Nine Months Ended
September 30, 1999
We incurred net income (loss) of $256.5 million, $(54.1) million and $103.4
million, respectively, during the month ended June 30, 2000 and the three and
nine month periods ended September 30, 2000, respectively, compared to a net
loss of $12.8 million, $72.2 million and $144.5 million, respectively, in the
corresponding periods of the prior year. Excluding the gain on sale of
Smartcom net of related taxes and foreign currency impact, our net loss for
the month ended June 30, 2000 and the nine months ended September 30, 2000
would have been $23.4 million and $177.8 million, respectively. The increase
in net loss for the month ended June 30, 2000 and the nine months ended
September 30, 2000 over the corresponding periods of the prior year (excluding
a gain on issuance of stock by Pegaso of $32.6 million in the nine months
ended September 30, 2000) relates primarily to increased operating expenses
associated with the consolidation of Smartcom, the development of new markets,
the launch of network service in new markets and interest expense on senior
notes and senior discount notes issued in February 2000. Cricket wireless
service was launched in Nashville, Tennessee in late January 2000 and in
Knoxville, Tennesse in late October 2000. The decrease in net loss for the
three months ended September 30, 2000 over the corresponding period of the
prior year is due to Smartcom no longer being consolidated in the current
three month period. As a result, total subscribers on our networks reached
approximately 422,500 subscribers at September 30, 2000 (62,500 in the U.S.
and 360,000 in Mexico), compared to a total subscriber base, excluding
Smartcom, of approximately 2,600 subscribers at December 31, 1999.
25
<PAGE>
As a direct result of the consolidation of Smartcom, we recorded $21.6
million of additional operating revenues, $28.7 million of additional cost of
operating revenues, $16.0 million of additional selling, general and
administrative expenses, $15.0 million of additional depreciation and
amortization, $9.7 million of additional net interest expense, and $10.7
million of foreign currency transaction gains during the nine month period
ended September 30, 2000. As a direct result of the consolidation of Smartcom,
we recorded $3.8 million and $9.2 million of additional operating revenues,
$3.8 million and $11.2 million of additional cost of operating revenues, $4.5
million and $11.9 million of additional selling, general and administrative
expenses, $5.3 million and $10.3 million of additional depreciation and
amortization, $3.3 million and $6.9 million of additional net interest expense,
and $7.2 million and $10.0 million of foreign currency transaction losses
during the three and nine month periods ended September 30, 1999, respectively.
Smartcom was not consolidated in the months ended June 30, 2000 and 1999 and
the three months ended September 30, 2000.
Prior to March 2000, we did not report any operating revenues from any other
operating company because all of these operating companies were accounted for
under the equity method of accounting. We generated $1.9 million, $7.5 million
and $14.4 million in revenues during the month ended June 30, 2000 and the
three and nine month periods ended September 30, 2000 from our operations in
Chattanooga and Nashville, Tennessee.
We incurred $15.4 million, $19.2 million and $73.2 million of selling,
general and administrative expenses during the month ended June 30, 2000 and
the three and nine month periods ended September 30, 2000, respectively,
compared to $1.7 million, $14.8 million and $25.5 million in the corresponding
periods of the prior year. Excluding Smartcom, selling, general and
administrative expenses increased by $13.7 million, $4.4 million and $31.7
million, respectively, over the corresponding month ended June 30, 1999 and the
three and nine month periods ended September 30, 1999 due primarily to
increased expenses associated with the development of new markets in the United
States and the launch of network service in Nashville and Knoxville, Tennessee.
In addition, we incurred stock-based compensation expense of $10.2 million,
$2.0 million and $12.2 million in the month ended June 30, 2000 and the three
and nine month periods ended September 30, 2000, respectively. We expect that
selling, general and administrative expenses will continue to increase in the
future as a result of our planned network development and launch of Cricket
service in multiple U.S. markets.
We incurred operating losses of $16.4 million, $25.6 million and $99.5
million during the month ended June 30, 2000 and the three and nine month
periods ended September 30, 2000, respectively, compared to operating losses of
$1.7 million, $20.1 million and $31.1 million in the corresponding periods of
the prior year. Excluding Smartcom, increases over the corresponding periods of
the prior year primarily reflect the consolidation of Chase Telecommunications
from March 2000 and the increase in market development costs in the United
States. We expect substantial growth in subscribers, operating revenues and
operating expenses as a result of the planned development and launch of Cricket
service in multiple U.S. markets. We also expect substantial growth in Pegaso's
subscribers, operating revenues and operating expenses; however, because Pegaso
is accounted for under the equity method, its operating revenues and expenses
are not consolidated.
Equity in net loss of unconsolidated wireless operating companies was $2.7
million, $25.2 million and $72.0 million during the month ended June 30, 2000
and the three and nine month periods ended September 30, 2000, respectively,
compared to $9.3 million, $24.2 million and $83.2 million in the corresponding
periods of the prior year. During the first nine months of the current year,
our equity share in the net loss of our unconsolidated wireless operating
companies related to Pegaso and Chase Telecommunications prior to March 2000.
During the corresponding period of fiscal 1999, our equity share in the net
loss of our unconsolidated wireless operating companies also included Smartcom
prior to June 1999 (prior to Leap's acquisition of the remaining 50 percent
interest) and our Russian investments which were largely written-down or
liquidated by September 30, 1999.
Interest income was $6.0 million, $16.9 million and $33.9 million during the
month ended June 30, 2000 and the three and nine month periods ended September
30, 2000, respectively, compared to $0.1 million,
26
<PAGE>
$0.4 million and $2.1 million in the corresponding periods of the prior year.
The increase in interest income related to increased balances of our cash and
cash equivalents and investments, received from our equity offering and units
offering in February 2000, and notes receivable related to the sale of Smartcom
in June 2000.
Interest expense was $9.7 million, $28.4 million and $80.9 million during
the month ended June 30, 2000 and the three and nine month periods ended
September 30, 2000, respectively, compared to $1.0 million, $6.4 million and
$10.3 million in the corresponding periods of the prior year. Interest expense
related primarily to senior notes and senior discount notes issued in February
2000, borrowings under our credit agreement with Qualcomm prior to repayment of
the facility in February 2000 and financing of our wireless communications
networks in the United States and Chile. We expect interest expense to increase
substantially in the future due to our senior notes and senior discount notes
borrowings and expected additional borrowings used to fund the construction of
wireless networks in various markets across the United States.
Income taxes of $34.5 million for the month ended June 30, 2000 and the nine
months ended September 30, 2000 related to our sale of Smartcom in June 2000.
Foreign currency transaction gains (losses) primarily consisted of $10.8
million in gains during the nine month period ended September 30, 2000, and
$7.2 million in losses during the three and nine months ended September 30,
1999 and reflected unrealized foreign exchange gains recognized by Smartcom on
U.S. dollar denominated loans as a result of changes in the exchange rate
between the U.S. dollar and the Chilean peso.
Included in the nine month period ended September 30, 2000, in connection
with the repayment of the Qualcomm Credit Agreement in February 2000, we wrote-
off and reported as an extraordinary loss $4.4 million in related unamortized
debt issuance costs.
Liquidity and Capital Resources
General
Over the next twelve months from November 2000, we have budgeted a total of
approximately $1,569.9 million for the following capital requirements:
. approximately $1,233.0 million for capital expenditures for the build-
out of Cricket networks and to fund operating losses;
. approximately $324.9 million in connection with our pending acquisitions
of wireless licenses; and
. approximately $12.0 million for general corporate overhead and other
expenses.
Our actual expenditures may vary significantly depending upon whether we
purchase additional wireless licenses, the progress of the build-out of our
networks and other factors, including unforeseen delays, cost overruns,
unanticipated expenses, regulatory expenses, engineering design changes and
other technological risks.
As of September 30, 2000, we had a total of approximately $2,423.6 million
in unused capital resources for our future cash needs as follows:
. approximately $740.9 million in consolidated cash, cash equivalents and
investments on hand;
. notes receivable of $146.5 million from the sale of Smartcom; and
. approximately $1,536.2 million in commitments under vendor financing
arrangements with Lucent Technologies, Nortel and Ericsson, with
availability based on a ratio of the total amounts of products and
services purchased.
Accordingly, we believe that if we do not make any additional license
acquisitions or any investments in new ventures, we have adequate capital
resources to fund our operations for the next twelve months.
27
<PAGE>
We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities in the future while we continue to
build-out our networks and build our customer base. Our ability to satisfy our
debt repayment obligations and covenants depends upon our future performance,
which is subject to a number of factors, many of which are beyond our control.
We cannot guarantee that we will generate sufficient cash flow from our
operating activities to meet our debt service and working capital requirements,
and we may need to refinance our indebtedness. However, our ability to
refinance our indebtedness will depend on, among other things, our financial
condition, the state of the public and private debt and equity markets, the
restrictions in the instruments governing our indebtedness and other factors,
some of which may be beyond our control. In addition, if we do not generate
sufficient cash flow to meet our debt service requirements or if we fail to
comply with the covenants governing our indebtedness, we may need additional
financing in order to service or extinguish our indebtedness. We may not be
able to obtain financing or refinancing on terms that are acceptable to us, or
at all.
We expect that we will require significant additional financing over the
next several years to substantially complete the build-out of our planned
wireless networks in the U.S., the planned acquisition of additional licenses
and the build-out of markets related to additional licenses. These capital
requirements include license acquisition costs, capital expenditures for
network construction, operating cash flow losses and other working capital
costs, debt service and closing fees and expenses. As is typical for start-up
telecommunications networks, we expect our networks to incur operating expenses
significantly in excess of revenues in their early years of operations. We are
exploring other public and private debt and equity financing alternatives,
including the sale from time to time of convertible preferred stock,
convertible debentures and other debt and equity securities. However, we may
not be able to raise additional capital on terms that are acceptable to us, or
at all.
We have no direct obligation to fund the operations of Pegaso, our venture
in Mexico, and expect Pegaso to be funded independently. Although Pegaso has
raised or obtained commitments for debt and equity capital in excess of $1.2
billion, Pegaso will need to obtain substantial additional capital to complete
the build-out, launch and operation of its planned networks. As a result,
Pegaso is seeking additional debt and equity financing, including additional
vendor financing.
In February 2000, we completed a public equity offering of 4,000,000 shares
of common stock at a price of $88.00 per share. Net of underwriters' discounts
and commissions and other offering expenses, we received $82.72 per share, or
$330.0 million in the aggregate. A portion of the net proceeds from the equity
offering was used for the repayment of the Qualcomm credit agreement. The
remaining proceeds from the equity offering will be used for capital
expenditures, acquisitions of wireless licenses, strategic investments, sales
and marketing activities and working capital and general corporate purposes.
Credit Facilities and Other Financing Arrangements
Units Offering. In February 2000, we completed an offering of 225,000 senior
units, each senior unit consisting of one 12.5% senior note due 2010 (Senior
Note) and one warrant to purchase our common stock, and 668,000 senior discount
units, each senior discount unit consisting of one 14.5% senior discount note
due 2010 (Senior Discount Note) and one warrant to purchase our common stock.
The total gross proceeds from the sale of the senior units and senior discount
units were $225.0 million and $325.1 million, respectively, and $164.4 million
of the total proceeds were allocated to the fair value of the warrants,
estimated using the Black-Scholes option pricing model. In addition, we
capitalized debt issuance costs of $13.5 million, consisting of underwriting,
printing, legal and accounting fees. A portion of the net proceeds from the
units offering was used for the repayment of borrowings under the Qualcomm
credit agreement. The remaining proceeds from the units offering will be used
for capital expenditures, acquisitions of wireless licenses, strategic
investments, sales and marketing activities and working capital and general
corporate purposes.
Interest on the Senior Notes will be payable on April 15 and October 15 of
each year, beginning on April 15, 2000. We used $79.5 million of the proceeds
from the Senior Notes to purchase and pledge, for the benefit of the holders of
the Senior Notes, certain U.S. Government securities to provide for the payment
of the
28
<PAGE>
first seven scheduled interest payments on the Senior Notes. Each Senior
Discount Note has an initial accreted value of $486.68 and a principal amount
at maturity of $1,000. The Senior Discount Notes will not begin to accrue cash
interest until April 15, 2005. Interest on the Senior Discount Notes will be
payable on April 15 and October 15 of each year, beginning on October 15, 2005.
The Company may redeem any of the notes beginning April 15, 2005. The
initial redemption price of the Senior Notes is 106.25% of their principal
amount plus accrued interest. The initial redemption price of the Senior
Discount Notes is 107.25% of their principal amount at maturity plus accrued
interest. In addition, before April 15, 2003, the Company may redeem up to 35%
of both the Senior Notes and the Senior Discount Notes using proceeds from
certain qualified equity offerings of the Company's common stock at 112.5% of
their principal amount and 114.5% of their accreted value, respectively.
The notes rank equally with the Company's other unsecured senior
indebtedness. The notes are effectively subordinate to all of the Company's
secured indebtedness. The notes are guaranteed by the Company's domestic
subsidiary, Cricket Communications Holdings. The terms of the notes include
certain covenants that restrict the Company's ability to, among other things,
incur additional indebtedness, create liens, pay dividends, make investments,
sell assets and effect a consolidation or merger. The Company consummated an
exchange offer for the notes pursuant to an effective registration statement in
July 2000.
Each warrant included as part of the Senior Notes is initially exercisable
to purchase 5.146 shares (1,157,850 shares in aggregate) of our common stock at
an exercise price of $96.80 per share. Each warrant included as part of the
Senior Discount Notes is initially exercisable to purchase 2.503 shares
(1,672,004 shares in aggregate) of our common stock at an exercise price of
$96.80 per share. The warrants may be exercised at any time on or after
February 23, 2001 and prior to April 15, 2010. We filed a shelf registration
statement covering the resale of the warrants and related common stock issuable
upon exercise of the warrants in August 2000.
Lucent Equipment Financing. In September 1999, Cricket Communications agreed
to purchase up to $330.0 million of infrastructure products and services from
Lucent, and in June 2000, increased the value of products and services that can
be purchased under the agreement to up to $900.0 million. The purchase
agreement is subject to early termination at Cricket Communications'
convenience subject to payments for products and services purchased from
Lucent. Lucent agreed to finance these purchases plus additional working
capital under a credit facility. The credit facility originally permitted up to
$641.0 million in total borrowings which was increased to up to $1,350.0
million in June 2000, with borrowing availability generally based on a ratio of
the total amount of products and services purchased from Lucent. Lucent is not
required to make loans under the facility if the total of the loans held
directly or supported by Lucent is an amount greater than $815.0 million. The
agreement contains various covenants and conditions typical for a loan of this
type, including minimum levels of customers and covered potential customers
that must increase over time, limits on annual capital expenditures, dividend
restrictions and other financial ratio tests. Borrowings under the Lucent
credit facility accrue interest at a rate equal to LIBOR plus 3.5% to 4.25% or
a bank base rate plus 2.5% to 3.25%, in each case with the specific rate based
on the ratio of total indebtedness to EBITDA. Cricket Communications must pay a
commitment fee equal to 1.25% per annum on the unused commitment under the
facility, decreasing to 0.75% per annum. Principal payments are scheduled to
begin after three years with a final maturity after eight years. Repayment is
weighted to the later years of the repayment schedule. The obligations under
the Lucent credit agreement, together with the obligations under similar
facilities from Nortel Networks, Inc. and Ericsson Wireless Communications,
Inc., are secured by all of the stock of Cricket Communications, its
subsidiaries and the stock of each special purpose subsidiary of Leap formed to
hold wireless licenses used in Cricket Communications' business, and all of
their respective assets. At September 30, 2000, Cricket Communications had
$212.6 million outstanding under the Lucent credit agreement at an interest
rate of 11.0%. In addition, we had amounts payable to Lucent of $96.2 million
which have been included in other long-term liabilities at September 30, 2000.
29
<PAGE>
Nortel Equipment Financing. In August 2000, Cricket Communications entered
into a three-year supply agreement with Nortel for the purchase of
infrastructure products and services. Nortel agreed to finance these purchases
plus additional working capital under a credit facility. The credit facility
permits up to $525.0 million in total borrowings, with borrowing availability
generally based on a ratio of the total amount of equipment and services
purchased from Nortel. The credit agreement contains various covenants and
conditions typical for a loan of this type, including minimum levels of
customers and covered potential customers that must increase over time, limits
on annual capital expenditures and other financial ratio tests. The obligations
under the credit agreement, together with the obligations under similar
facilities from Lucent and Ericsson, are secured by all of the stock of Cricket
Communications, its subsidiaries and the stock of each special purpose
subsidiary of Leap formed to hold wireless licenses used in Cricket
Communications' business, and all of their respective assets. Borrowings under
the credit facility accrue interest at a rate equal to LIBOR plus 3.5% to 4.25%
or a bank base rate plus 2.5% to 3.25%, in each case with the specific rate
based on the ratio of total indebtedness to EBITDA. Cricket Communications must
pay a commitment fee equal to 1.25% per annum on the unused commitment under
the credit facility, decreasing to 0.75% per annum. Principal payments are
scheduled to begin after three years with a final maturity after eight years.
Repayment is weighted to the later years of the repayment schedule.
Ericsson Equipment Financing. In October 2000, Cricket Communications
entered into a three-year supply agreement with Ericsson for the purchase of up
to $330.0 million of infrastructure products and services. Ericsson Credit AB
agreed to finance these purchases plus additional working capital under a
credit facility. These agreements amended and replaced the binding memorandum
of agreement between the parties dated September 20, 1999. The credit facility
permits up to $495.0 million in total borrowings, with borrowing availability
generally based on a ratio of the total amount of products and services
purchased from Ericsson. The credit agreement contains various covenants and
conditions typical for a loan of this type, including minimum levels of
customers and covered potential customers that must increase over time, limits
on annual capital expenditures, dividend restrictions and other financial ratio
tests. The obligations under the credit agreement, together with the
obligations under similar facilities from Lucent and Nortel, are secured by all
of the stock of Cricket Communications, its subsidiaries, and the stock of each
special purpose subsidiary of Leap formed to hold wireless licenses used in
Cricket Communications' business, and all of their respective assets.
Borrowings under the credit facility accrue interest at a rate equal to LIBOR
plus 3.5% to 4.25% or a bank base rate plus 2.5% to 3.25%, in each case with
the specific rate based on the ratio of total indebtedness to EBITDA. Cricket
Communications must pay a commitment fee equal to 1.25% per annum on the unused
commitment under the credit facility, decreasing to 0.75% per annum. Principal
payments are scheduled to begin after three years with a final maturity after
eight years. Repayment is weighted to the later years of the repayment
schedule.
Cricket Communications, Lucent, Nortel and Ericsson have entered into an
agreement pursuant to which Lucent, Nortel and Ericsson agreed to share
collateral and the parties agreed that Cricket Communications' total
outstanding balance of loans to the three vendors shall not exceed $1,845.0
million.
Obligations to the FCC. We have assumed $91.2 million in debt obligations to
the FCC as part of the purchase price for wireless licenses in 2000. We also
will assume additional debt obligations to the FCC in the aggregate principal
amount of approximately $3.8 million as part of the purchase price for the
pending acquisitions of wireless licenses.
Pegaso Financing
Qualcomm and another equipment vendor have agreed to provide approximately
$580.0 million of secured equipment financing to Pegaso, a portion of which has
already been advanced to the venture. The shares of Pegaso Communications y
Sistemas, S.A. de C.V., Pegaso's subsidiary that holds wireless licenses, serve
as collateral for Pegaso's obligations under the equipment financing.
30
<PAGE>
In addition, in May 1999, Pegaso entered into a loan agreement with several
banks with credit support from Qualcomm. We guaranteed 33% of Pegaso's
obligations under the initial commitment from the lenders of $100 million. In
December 1999, as a condition of the guarantee, Leap received an option to
subscribe for and purchase up to 243,090 limited voting series "N" treasury
shares of Pegaso. The number of shares to be purchased by Leap under the option
will be calculated to provide a total internal rate of return on the average
outstanding balance of the bridge loan of 20%. The options have an exercise
price of $0.01 per share and expire ten years from the date of issuance. The
options are exercisable at any time after the date on which all amounts under
the loan agreement are paid in full. The amount of the loan was subsequently
increased to $190 million although the amount of the guarantee was not
increased.
In July 1999, several existing investors contributed $50.0 million to Pegaso
as previously planned. On April 26, 2000, Sprint PCS invested $200 million in
Pegaso by purchasing shares from Pegaso and shareholders other than Leap. In
August 2000, several existing investors contributed $50.0 million to Pegaso as
previously planned. Pegaso expects to fund a large portion of its development
and operating activities in the year ended December 31, 2000 with cash from
operations, proceeds of the $100 million in investments from several existing
investors and the investment from Sprint PCS, and borrowings under the $100
million loan agreement. In addition, Pegaso is seeking additional debt and
equity financing, including additional vendor financing.
Operating Activities
We used $32.9 million in cash for operating activities during the nine month
period ended September 30, 2000 compared to $31.5 million in the corresponding
period of the prior year. The increase is primarily attributable to our sale of
Smartcom in June 2000 offset by increased expenses associated with the
development of new markets in the United States and the launch of network
service in Nashville and Knoxville, Tennessee. We expect that cash used in
operating activities will increase substantially in the future as a result of
our planned development and launch of Cricket service in multiple U.S. markets.
Investing Activities
Cash used in investing activities was $64.0 million during the nine month
period ended September 30, 2000 compared to $68.1 million in the corresponding
period of the prior year. Investments during the nine month period ended
September 30, 2000 consisted primarily of $57.9 million net restricted cash
equivalents and investments, which have been pledged to provide for the payment
of the semi-annual scheduled interest payments on the senior notes payable
through April 2003, the purchase of held-to-maturity investments of $117.6
million, the purchase of wireless licenses totaling $39.4 million and capital
expenditures of $43.7 million, primarily by Cricket Communications and
Smartcom, offset by $210.1 million of net proceeds from the sale of Smartcom
and $4.3 million of proceeds from the liquidation of Russian investee
companies. Investments in the corresponding period of the prior year consisted
primarily of loans and advances of $37.7 million to our operating companies,
the acquisition of the remaining 50% interest in Smartcom of $26.9 million net
of cash acquired, the purchase of wireless licenses totaling $18.3 million,
offset by $16.0 million of proceeds received from the liquidation of Russian
investee companies. In the remainder of fiscal 2000, we expect to make
significant investments in capital assets, including network equipment and
wireless communications licenses.
Financing Activities
Cash provided by financing activities during the nine month period ended
September 30, 2000, primarily from proceeds of our public equity offering,
units offering, borrowings under credit agreements with Qualcomm and Lucent and
from banks, was $684.2 million. Cash provided by financing activities in the
corresponding period of the prior year was $107.1 million, primarily from
borrowings under our credit agreement with Qualcomm.
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<PAGE>
Currency Fluctuation Risks
We report our financial statements in U.S. dollars. Our international
operating companies report their results in local currencies. Consequently,
fluctuations in currency exchange rates between the U.S. dollar and the
applicable local currency will affect our results of operations as well as the
value of our ownership interests in our operating companies.
Generally, our international operating companies generate revenues that are
received in their local currency. However, many of these operating companies'
major contracts, including financing agreements and contracts with equipment
suppliers, are denominated in U.S. dollars. As a result, a significant change
in the value of the U.S. dollar against the national currency of an operating
company could result in a significant increase in the operating company's
expenses and could have a material adverse effect on the operating company and
on us. In some emerging markets, including Mexico, significant devaluations of
the local currency have occurred and may occur again in the future.
We do not currently hedge against foreign currency exchange rate or interest
rate risks.
Inflation
Inflation has had and may continue to have negative effects on the economies
and securities markets of emerging market countries and could have negative
effects on our operating companies and any new start-up project in those
countries, including their ability to obtain financing. Mexico, for example,
has periodically experienced relatively high rates of inflation. Our operating
companies, where permitted and subject to competitive pressures, intend to
increase their tariffs to account for the effects of inflation. However, in
those jurisdictions where tariff rates are regulated or specified in the
wireless license, the operating companies may not successfully mitigate the
impact of inflation on their operations.
Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for the
Company's year ending December 31, 2001. In June 2000, the FASB issued SFAS No.
138 which amended SFAS No. 133 for certain derivative instruments and hedging
activities. Under SFAS No. 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. We do not expect that the adoption
of SFAS No. 133 will have a material impact on our consolidated financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 summarizes certain of the Staff's interpretations in
applying generally accepted accounting principles to revenue recognition. The
provisions of SAB No. 101 are effective for the Company's quarter ending
December 31, 2000. Leap does not expect that the adoption of SAB No. 101 will
have a material impact on its consolidated financial position or results of
operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our variable rate long-term debt obligations. For a description of our long-
term debt obligations, see Note 6 to the Condensed Consolidated Financial
Statements, which are included elsewhere herein. The general level of U.S.
interest rates and/or LIBOR affect the interest expense that we recognize on
our variable rate long-term debt obligations. As of September 30, 2000, the
principal amounts of our variable rate long-term debt obligations amounted to
approximately $212.6 million. An increase of 10% in interest rates would
increase our interest expense for the
32
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next twelve months by approximately $2.3 million. This hypothetical amount is
only suggestive of the effect of changes in interest rates on our results of
operations for the next twelve months.
Hedging Policy. Leap does not currently have a policy to systematically
hedge against foreign currency exchange rate or interest rate risks.
Foreign Exchange Market Risk
In conjunction with the sale of Smartcom during June 2000, Leap accrued for
taxes payable to the Chilean government denominated in Chilean pesos. This
liability is subject to the effects of currency fluctuations which may affect
reported earnings and losses. A significant change in the value of the U.S.
dollar against the Chilean peso could result in a significant increase in our
consolidated expenses. As of May 31, 2000, this liability amounted to
approximately $30.2 million. Our results of operations would be negatively
impacted by approximately $3.4 million if U.S. dollars were to depreciate
against the Chilean peso by 10%. This hypothetical amount is only suggestive of
the effect of currency fluctuations on our results of operations. This
liability is due and payable by no later than April 2001.
33
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In July 1999, the FCC issued an opinion and order that found that Leap was
qualified to acquire C-Block and F-Block licenses. The order also approved
Leap's acquisition of the 36 C-Block licenses for which Leap was the high
bidder in the FCC's 1999 spectrum reauction, and approved the transfer to Leap
of three F-Block licenses covering portions of North Carolina, in each case
subject to the fulfillment of some conditions. Various parties previously
challenged Leap's qualification to hold C-Block and F-Block licenses, which
challenges were rejected in the FCC's July 1999 order. One of these parties,
Carolina PCS Limited Partnership I, L.P., a wireless operating company,
requested that the FCC review its order, as well as the order consenting to the
transfer of licenses to Leap from Chase Telecommunications and PCS Devco. In
July 2000, the FCC affirmed its July 1999 order, as well as the order
consenting to the transfer of licenses to Leap from Chase Telecommunications
and PCS Devco, and Carolina PCS subsequently appealed the FCC's decision to the
U.S. Court of Appeal for the D.C. Circuit. Leap has filed a motion seeking
summary dismissal of this appeal, based upon Leap's belief that Carolina PCS
has no standing to challenge the FCC's July 2000 order. The FCC has filed in
support of Leap's motion, which awaits disposition by the Court. Leap believes
the arguments of Carolina PCS are without merit and intends to vigorously
contest the appeal.
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty; however, in the opinion of Leap's
management, the ultimate liability for such claims will not have a material
adverse effect on Leap's consolidated financial position, results of operations
or cash flows.
Item 2. Changes in Securities and Use of Proceeds
(c) (1) On June 15, 2000, through a subsidiary merger, we acquired the 5.11%
of Cricket Communications Holdings that we did not already own. These shares
were owned by individuals and entities, including directors and employees of
Leap and Cricket Communications Holdings. Under the terms of the merger, each
issued and outstanding share of Cricket Communications Holdings common stock
not held by Leap was converted into the right to receive 0.315 of a fully paid
and nonassessable share of Leap common stock. As a result, an aggregate of
1,048,628 shares of Leap common stock were issued. We also assumed Chase
Telecommunications Holdings' warrant to purchase 1% of the common stock of
Cricket Communications Holdings, which was converted into a warrant to acquire
202,566 shares of our common stock, at an aggregate exercise price of
$1.0 million.
The issuances of the shares and the warrant were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
In addition, we assumed all unexpired and unexercised Cricket Communications
Holdings stock options outstanding at the time of the merger, whether vested or
unvested, which upon conversion amounted to options to purchase 407,784 shares
of Leap common stock at a weighted average exercise price of approximately
$9.31 per share.
The issuances of the stock options described above were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the stock certificates and other
instruments issued in such transactions. All recipients either received
adequate information about the registrant or had access, through employment or
other relationships, to such information.
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<PAGE>
(2) On July 18, 2000, Leap issued 163,076 shares of common stock to Robert
Martin, the sole stockholder of PCS Devco, Inc., under the terms of an
agreement and plan of merger pursuant to which Leap acquired a wireless license
covering the Dayton, Ohio market. The issuance of these shares was deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as a transaction by an issuer not involving a public
offering.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On September 28, 2000, Leap held a Special Meeting of Stockholders (the
"Meeting") for the following purposes:
1. To vote upon a proposal to amend Leap's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Leap's common stock from 75,000,000 to 300,000,000.
2. To vote upon a proposal to approve the adoption of Leap's 2000 Stock
Option Plan.
At the Meeting, the matters were submitted to the stockholders for a vote
and approved, with each matter receiving the number of votes indicated:
1. Approval of the Amendment to Leap's Amended and Restated Certificate
of Incorporation:
<TABLE>
<S> <C>
Affirmative Votes........................... 20,185,635
Negative Votes.............................. 5,166,833
Abstaining.................................. 117,674
Broker Non-Votes............................ 0
</TABLE>
2. Approval of the 2000 Stock Option Plan:
<TABLE>
<S> <C>
Affirmative Votes........................... 10,173,702
Negative Votes.............................. 5,541,583
Abstaining.................................. 104,861
Broker Non-Votes............................ 9,649,996
</TABLE>
A Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Leap was filed with the Secretary of State of the State of
Delaware on October 10, 2000. A copy of such amendment was filed as an exhibit
to Leap's Current Report on Form 8-K filed with the SEC on October 10, 2000,
and is incorporated by reference as an exhibit hereto.
A copy of the 2000 Stock Option Plan, as approved by the stockholders of
Leap, was filed as an exhibit to Leap's Current Report on Form 8-K filed with
the SEC on October 10, 2000, and is incorporated by reference as an exhibit
hereto.
Item 5. Other Information
None.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<C> <S>
2.1(1) Share Purchase Agreement, dated as of June 2, 2000 among Endesa
S.A., the Registrant and Inversiones Leap Wireless Chile, S.A.
3.1.1(2) Amended and Restated Certificate of Incorporation of the
Registrant.
3.1.2(3) Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant.
4.6(4) Trust Indenture, dated as of February 23, 2000, by and among the
Registrant, Cricket Communications Holdings, Inc. and State Street
Bank and Trust Company (including Forms of Notes).
4.6.1* Supplemental Indenture, dated as of June 13, 2000, by and among
Cricket Merger Sub, Inc., the Registrant, Cricket Communications
Holdings, Inc. and State Street Bank and Trust Company.
10.25*+ Amended and Restated System Equipment Purchase Agreement, entered
into as of June 30, 2000, by and between Cricket Communications,
Inc. and Lucent Technologies Inc. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request
for confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.26*+ Credit Agreement, dated as of September 20, 1999, as Amended and
Restated as of October 20, 2000, among Cricket Communications
Holdings, Inc., Cricket Communications, Inc., the lenders party
thereto and Lucent Technologies, Inc., as Administrative Agent
(including exhibits thereto). Portions of this exhibit (indicated
by asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
10.27*+ System Equipment Purchase Agreement, effective as of September 20,
1999, by and between Cricket Communications, Inc. and Ericsson
Wireless Communications Inc. Portions of this exhibit (indicated
by asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
10.33(3) 2000 Stock Option Plan.
10.34*+ Credit Agreement, dated as of October 20, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc., the
lenders party thereto and Ericsson Credit AB, as Administrative
Agent (including exhibits thereto). Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request
for confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.35*+ System Equipment Purchase Agreement, effective as of August 28,
2000, by and between Cricket Communications, Inc. and Nortel
Networks Inc. Portions of this exhibit (indicated by asterisks)
have been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
10.36*+ Credit Agreement, dated as of August 28, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc., the
lenders party thereto and Nortel Networks Inc., as Administrative
Agent (including exhibits thereto). Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request
for confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.36.1* First Amendment, dated as of October 20, 2000, to the Credit
Agreement, dated as of August 28, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc., the
lenders party thereto and Nortel Networks Inc., as Administrative
Agent (including exhibits thereto).
27.1* Financial Data Schedule.
</TABLE>
--------
* Filed herewith.
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<PAGE>
+ A request for confidential treatment with respect to portions of this
exhibit which have been omitted (indicated by asterisks) pursuant to Rule
24b-2 under the Securities Exchange Act of 1934 is currently pending.
(1) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended May 31, 2000, as filed with the SEC on July 17, 2000, and
incorporated herein by reference.
(2) Filed as an exhibit to Leap's Registration Statement on Form 10, as amended
(File No. 0-29752), and incorporated herein by reference.
(3) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
28, 2000, and incorporated herein by reference.
(4) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 29, 2000, as filed with the SEC on April 14, 2000, and
incorporated herein by reference.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K, dated June 2, 2000, filed with the SEC on
June 19, 2000 and Amendment No. 1 thereto filed on Form 8-K/A with the SEC on
June 28, 2000. Items 2 and 7 reported, relating to the completion of the sale
by Leap, its wholly-owned subsidiary, Inversiones Leap Wireless Chile S.A.
("Inversiones"), and a nominee shareholder designated by Inversiones, of all of
the issued and outstanding capital stock of the Chilean mobile wireless
operating company majority-owned by Inversiones, Smartcom, S.A., a sociedad
anonima organized under the laws of Chile, to Endesa S.A., a Spanish utility
company. The following financial statements were filed: (i) Unaudited Pro Forma
Consolidated Balance Sheet at February 29, 2000, (ii) Unaudited Pro Forma
Consolidated Statement of Operations for the six months ended February 29,
2000, (iii) Unaudited Pro Forma Consolidated Statement of Operations for the
year ended August 31, 1999 and (iv) Notes to the Pro Forma Financial
Information (unaudited).
(2) Current Report on Form 8-K, dated July 31, 2000, filed with the SEC on
August 14, 2000. Items 7 and 8 reported, relating to Leap's election to change
its fiscal year from a year ending on August 31 to a year ending on December
31.
(3) Current Report on Form 8-K, dated August 21, 2000, filed with the SEC on
August 24, 2000. Item 5 reported, relating to Leap having entered into an
agreement to purchase PCS operating licenses covering 6.7 million potential
customers from DCR PCS, Inc., a subsidiary of Pocket Communications, Inc.
(4) Current Report on Form 8-K, dated September 8, 2000, filed with the SEC
on September 11, 2000. Item 5 reported, relating to Leap having filed a
universal shelf registration statement on Form S-3 with the SEC pursuant to
which Leap may offer and sell from time to time in one or more classes or
series and in amounts, at prices and on terms that Leap will determine at the
time of offering, with an aggregate initial offering price of up to
$1,000,000,000: (i) debt securities, (ii) shares of preferred stock, (iii)
depositary shares, (iv) shares of common stock, (v) warrants, (vi) rights and
(vii) units consisting of two or more of the foregoing.
(5) Current Report on Form 8-K, dated September 18, 2000, filed with the SEC
on September 29, 2000. Item 5 reported, relating to Cricket Communications,
Inc., a subsidiary of Leap, having entered into a three-year supply agreement
under which Cricket may purchase wireless network infrastructure equipment and
services from Nortel Networks Inc. to support the build-out of Cricket networks
in the U.S. Concurrently, Nortel agreed to finance these purchases plus
additional working capital under a credit facility.
(6) Current Report on Form 8-K, dated September 28, 2000, filed with the SEC
on October 10, 2000. Items 5 and 7 reported, relating to the Special Meeting of
Stockholders held on September 28, 2000. See "Item 4. Submission of Matters to
a Vote of Security Holders."
37
<PAGE>
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: November 14, 2000 /s/ Harvey P. White
By: _________________________________
Harvey P. White
Chairman and Chief Executive
Officer
Date: November 14, 2000 /s/ Stephen P. Dhanens
By: _________________________________
Stephen P. Dhanens
Vice President, Corporate
Controller
(Chief Accounting Officer)
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<C> <S>
2.1(1) Share Purchase Agreement, dated as of June 2, 2000 among Endesa
S.A., the Registrant and Inversiones Leap Wireless Chile, S.A.
3.1.1(2) Amended and Restated Certificate of Incorporation of the Registrant.
3.1.2(3) Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant.
4.6(4) Trust Indenture, dated as of February 23, 2000, by and among the
Registrant, Cricket Communications Holdings, Inc. and State Street
Bank and Trust Company (including Forms of Notes).
4.6.1* Supplemental Indenture, dated as of June 13, 2000, by and among
Cricket Merger Sub, Inc., the Registrant, Cricket Communications
Holdings, Inc. and State Street Bank and Trust Company.
10.25*+ Amended and Restated System Equipment Purchase Agreement, entered
into as of June 30, 2000, by and between Cricket Communications,
Inc. and Lucent Technologies Inc. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
10.26*+ Credit Agreement, dated as of September 20, 1999, as Amended and
Restated as of October 20, 2000, among Cricket Communications
Holdings, Inc., Cricket Communications, Inc., the lenders party
thereto and Lucent Technologies, Inc., as Administrative Agent
(including exhibits thereto). Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.
10.27*+ System Equipment Purchase Agreement, effective as of September 20,
1999, by and between Cricket Communications, Inc. and Ericsson
Wireless Communications Inc. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934.
10.33(3) 2000 Stock Option Plan.
10.34*+ Credit Agreement, dated as of October 20, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc., the
lenders party thereto and Ericsson Credit AB, as Administrative
Agent (including exhibits thereto). Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
10.35*+ System Equipment Purchase Agreement, effective as of August 28,
2000, by and between Cricket Communications, Inc. and Nortel
Networks Inc. Portions of this exhibit (indicated by asterisks) have
been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
10.36*+ Credit Agreement, dated as of August 28, 2000, among Cricket
Communications Holdings, Inc., Cricket Communications, Inc., the
lenders party thereto and Nortel Networks Inc., as Administrative
Agent (including exhibits thereto). Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934.
10.36.1* First Amendment, dated as of October 20, 2000, to the Credit
Agreement, dated as of August 28, 2000, among Cricket Communications
Holdings, Inc., Cricket Communications, Inc., the lenders party
thereto and Nortel Networks Inc., as Administrative Agent (including
exhibits thereto).
27.1* Financial Data Schedule.
</TABLE>
--------
* Filed herewith.
+ A request for confidential treatment with respect to portions of this
exhibit which have been omitted (indicated by asterisks) pursuant to Rule
24b-2 under the Securities Exchange Act of 1934 is currently pending.
<PAGE>
(1) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended May 31, 2000, as filed with the SEC on July 17, 2000, and
incorporated herein by reference.
(2) Filed as an exhibit to Leap's Registration Statement on Form 10, as amended
(File No. 0-29752), and incorporated herein by reference.
(3) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
28, 2000, and incorporated herein by reference.
(4) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 29, 2000, as filed with the SEC on April 14, 2000, and
incorporated herein by reference.
