Leap Wireless International, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|
|
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2004
OR
|
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
.
Commission file number 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
|
|
|
Delaware
(State or Other Jurisdiction of
Incorporation or Organization) |
|
33-0811062
(I.R.S. Employer
Identification No.) |
|
10307 Pacific Center Court, San Diego, CA
(Address of Principal Executive Offices) |
|
92121
(Zip Code) |
(858) 882-6000
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
None.
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.0001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. YES x NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). YES o NO x
As of June 30, 2004, the aggregate market value of the
registrants voting and nonvoting common stock held by
non-affiliates of the registrant was approximately $737,000,
based on the closing price of Leaps common stock on the
OTC Bulletin Board on June 30, 2004, of $.02 per share.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes x No o
The number of shares of registrants common stock
outstanding on May 11, 2005 was 60,000,000.
EXPLANATORY NOTE
This annual report on Form 10-K for the year ended
December 31, 2004 includes consolidated financial
statements of Leap Wireless International, Inc. (the Predecessor
Company) for the seven months ended July 31, 2004 and
consolidated financial statements of Leap Wireless
International, Inc. (the Successor Company) for the five months
ended December 31, 2004.
The audited consolidated financial statements of the Predecessor
Company incorporate restatement adjustments relating to the
previously issued unaudited interim consolidated financial
information for the one month and seven months ended
July 31, 2004. The previously issued unaudited interim
consolidated financial information of the Predecessor Company
has been restated to properly present various liabilities,
including asset retirement obligations and deferred rent, upon
the adoption of fresh start reporting as of July 31, 2004.
See Note 2 to our consolidated financial statements
included as part of this annual report for additional
information.
Note 16 to the consolidated financial statements includes
restated unaudited quarterly financial data relating to the one
month interim period ended July 31, 2004 of the Predecessor
Company and the two month interim period ended
September 30, 2004 of the Successor Company.
LEAP WIRELESS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2004
TABLE OF CONTENTS
i
PART I
As used in this report, the terms we,
our, ours and us refer to
Leap Wireless International, Inc., a Delaware corporation, and
its subsidiaries, unless the context suggests otherwise. Unless
otherwise specified, information relating to population and
potential customers, or POPs, is based on 2005 population
estimates provided by Claritas Inc.
Forward-Looking Statements; Cautionary Statement
Except for the historical information contained herein, this
report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements reflect managements current forecast
of certain aspects of Leaps future. You can identify most
forward-looking statements by forward-looking words such as
believe, think, may,
could, will, estimate,
continue, anticipate,
intend, seek, plan,
expect, should, would and
similar expressions in this report. Such statements are based on
currently available operating, financial and competitive
information and are subject to various risks, uncertainties and
assumptions that could cause actual results to differ materially
from those anticipated or implied in our forward-looking
statements. Such risks, uncertainties and assumptions include,
among other things:
|
|
|
|
|
our ability to attract and retain customers in an extremely
competitive marketplace; |
|
|
|
our ability to attract, motivate and retain an experienced
workforce; |
|
|
|
changes in economic conditions that could adversely affect the
market for wireless services; |
|
|
|
the impact of competitors initiatives; |
|
|
|
our ability to successfully execute service expansion plans; |
|
|
|
failure of network systems to perform according to expectations; |
|
|
|
our ability to comply with the covenants in our senior secured
credit facilities; |
|
|
|
failure of the Federal Communications Commission, or the FCC, to
approve the transfers (a) to a third party of the wireless
licenses covered by the asset purchase agreement between Cricket
Communications, Inc., the third party and the other parties to
such agreement, and (b) to Alaska Native Broadband 1
License, LLC of the wireless licenses for which it was the
winning bidder in the FCCs Auction #58; |
|
|
|
global political unrest, including the threat or occurrence of
war or acts of terrorism; and |
|
|
|
other factors detailed in the section entitled Risk
Factors included in Item 1 below. |
All forward-looking statements in this report should be
considered in the context of these risk factors. We undertake no
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially
from those anticipated or implied in the forward-looking
statements. Accordingly, users of this report are cautioned not
to place undue reliance on the forward-looking statements.
Item 1. Business
Leap Wireless International, Inc., or Leap, together with its
wholly-owned subsidiaries, is a wireless communications carrier
that offers digital wireless service in the United States. Leap
operates through its subsidiaries; Leap has no independent
operations or sources of operating revenue other than through
dividends and distributions, if any, from its operating
subsidiaries. Cricket Communications, Inc. and its subsidiaries
that operate Crickets wireless communications business are
collectively referred to in this report as Cricket or the
Cricket Companies. Leap and the Cricket Companies are
collectively referred to in this report as the Company.
1
Leap was formed in 1998 by Qualcomm Incorporated, or Qualcomm.
Qualcomm distributed the common stock of Leap in a
spin-off distribution to Qualcomms
stockholders in September 1998. Under a license from Leap, the
Cricket service was first introduced in Chattanooga, Tennessee
in March 1999 by Chase Telecommunications, Inc., a company that
Leap acquired in March 2000.
On April 13, 2003, or the Petition Date, Leap, Cricket and
substantially all of their subsidiaries filed voluntary
petitions for relief under Chapter 11 in the
U.S. Bankruptcy Court for the Southern District of
California, or the Bankruptcy Court. Our Fifth Amended Joint
Plan of Reorganization, or Plan of Reorganization, was confirmed
by the Bankruptcy Court on October 22, 2003. The
effectiveness of our Plan of Reorganization was conditioned
upon, among other things, the receipt of required regulatory
approvals from the FCC for the transfer of wireless licenses
associated with the change of control that occurred upon our
emergence from bankruptcy. We received the requisite FCC
approvals on August 5, 2004 and, on August 16, 2004,
or the Effective Date, Leap, Cricket and each of their
subsidiaries that filed for Chapter 11 relief emerged from
bankruptcy. For a description of our bankruptcy proceedings, see
Chapter 11 Proceedings Under the
Bankruptcy Code below.
Cricket Business Overview
Cricket Service
The Cricket Companies offer wireless service in the United
States under the brand Cricket®. On
December 31, 2004, Cricket had approximately 1,570,000
customers located in 39 markets throughout the United States.
These markets are located in 47 basic trading areas, or BTAs,
covering a total population of approximately 26.7 million
potential customers. At December 31, 2004, we owned
wireless licenses covering approximately 53.0 million
potential customers in 31 states.
In February 2005, our subsidiary Cricket Licensee (Reauction),
Inc. was named the winning bidder in the FCCs Auction #58
for four wireless licenses covering approximately
11.1 million potential customers with an aggregate purchase
price of $166.9 million. The transfers of wireless licenses
to Cricket Licensee (Reauction), Inc. were subject to FCC
approval. The FCC approved these transfers on May 13, 2005.
In addition, in November 2004 we acquired a 75% non-controlling
membership interest in, and we are a secured lender to, Alaska
Native Broadband 1, LLC (referred to as ANB 1), whose
wholly-owned subsidiary Alaska Native Broadband 1 License, LLC
(referred to as ANB 1 License) was named the winning bidder in
Auction #58 for nine wireless licenses covering approximately
10.1 million potential customers with an aggregate purchase
price of $68.2 million. The transfers of wireless licenses
to ANB 1 License are subject to FCC approval. Although we expect
that such approvals will be issued in the normal course, we
cannot assure you that the FCC will grant such approvals.
In March 2005, subsidiaries of Leap signed an agreement to sell
23 wireless licenses and the operating assets in our Michigan
markets for $102.5 million. We have not launched commercial
operations in most of the markets covered by the licenses to be
sold. Completion of the transaction is subject to FCC approval
and other customary closing conditions. Although we expect to
receive such approval and satisfy such conditions in the normal
course, we cannot assure you that the FCC will grant such
approval or that the other conditions will be satisfied.
Including the licenses we acquired in Auction #58, we would own
wireless licenses covering approximately 60.2 million
potential customers if this sale is completed and after we close
our acquisition of the Fresno, California license which we have
previously agreed to purchase.
Our service allows customers to make and receive virtually
unlimited calls within a local calling area and receive
virtually unlimited calls from any area for a flat monthly rate.
Cricket customers may sign up for additional feature packages
and may also make long distance calls on a per-minute basis or
as part of packaged offerings. In addition to our basic Cricket
service, we also offer a plan that bundles domestic long
distance at a higher price. Additionally, we offer a premium
plan, which includes virtually unlimited local and domestic long
distance service, and virtually unlimited use of multiple
calling features and messaging services for a flat rate. We also
offer a plan that provides discounts on additional lines of
service that are added to an existing qualified account.
2
Our business model is different from most other wireless
cellular and PCS business models. Most other wireless cellular
and PCS service providers offer consumers a complex array of
rate plans that typically include additional charges for minutes
above a set maximum. This approach may result in monthly service
charges that are higher than their customers expect. We have
designed the Cricket service to appeal to consumers who value
virtually unlimited mobile calling with a predictable monthly
bill, and who make the majority of their calls from within their
local areas. We intend, however, to introduce an away-from-home
calling option (roaming) in the first half of 2005 for our
customers who occasionally travel away from their home calling
area.
Commencing in the second quarter of 2004, we began upgrading our
networks to permit us to offer our customers a number of
additional features to enhance the Cricket service. These
enhancements, which are now available in most of our markets,
include games and applications that utilize the BREW (a
registered trademark of Qualcomm) handset application software
platform, improved data services, and customized ringtones.
Early in 2005, we expanded our available international long
distance destinations to many additional countries and enhanced
our product portfolio by adding instant messaging and multimedia
(picture) messaging.
In addition, in March 2005, we launched our first per-minute
prepaid service,
Jumptm
by Cricket, to bring Crickets value proposition to
customers who prefer active control over their wireless usage.
Our Jump service allows customers to place local as well as
domestic and international long distance calls to more than 70
countries at per-minute costs that are among the lowest in the
industry. Unlike most other prepaid wireless offerings,
Crickets Jump service prepaid customers can also receive
free unlimited inbound calls as long as there is a balance in
their prepaid account. Jump service prepaid customers also
receive voicemail, caller ID, call waiting, and three-way
calling at no additional charge.
Cricket Business Strategy
Simple, Understandable Service. Our innovative Cricket
service is designed to attract new customers by removing the
price and complexity barriers that we believe have prevented
many potential customers from using wireless service. We believe
many potential customers view wireless service as expensive,
feel that they cannot control the cost of service, or find
existing service offerings too confusing. As a result, our
service plans are designed to attract customers by offering
simple, predictable and affordable wireless services that are a
competitive alternative to traditional wireless and landline
services. In addition, Cricket does not require credit checks or
term commitments with early termination fees for customers
subscribing to its service.
Appealing Value Proposition. Our offerings combine high
quality service in simple packages at highly competitive prices
that provide a high value/low price proposition for
customers. We continually focus on enhancing our Cricket service
with new offerings to meet the needs of our growing customer
base.
Control and Minimize Costs. To become one of the lowest
cost providers in the industry, we minimize our capital costs by
engineering high-quality, efficient networks that cover only the
urban and suburban areas of our markets where most of our
potential customers live, work and play, while avoiding rural
areas and corridors between markets. This strategy allows us to
realize higher utilization rates on our networks for more
efficient use of network capital and also reduces our network
operating costs. In addition, this strategy allows us to more
efficiently purchase wireless licenses for new markets because
it allows us to acquire only those wireless licenses that we
deem to be appropriately priced and to avoid acquiring wireless
licenses simply to provide continuous geographic coverage across
broad areas. We also reduce our general operating costs through
streamlined billing procedures and the control of customer care
expenses. In addition, we are focused on streamlining marketing
and distribution operations and maintaining lower customer
acquisition costs. These strategies allow us to be a low-cost
provider of wireless services in each of our markets.
Leverage CDMA Technology. We have deployed numerous
state-of-the-art CDMA networks that deliver high capacity and
outstanding quality and that can be easily upgraded to support
enhanced capacity. We believe this enables us to operate
superior networks that support planned customer growth and high
usage. In addition, we believe our CDMA networks provide a
better platform than competing technologies to expand into other
wireless services based on advances in digital technology in the
future.
3
Strategic Expansion. We intend to seek additional
opportunities for market expansion, with our selection of
potential new markets based upon our evaluation of criteria such
as: (1) does the market enhance an existing Cricket market
cluster; (2) does the market satisfy internally developed
criteria that indicate attractive penetration potential; and
(3) does the market contain sufficient population density
for Cricket to offer services on a cost competitive basis. The
Fresno, California license which we have agreed to purchase and
the licenses we acquired in Auction #58 reflect this expansion
strategy.
Cricket Business Operations
Market Opportunity. Wireless penetration was
approximately 62% in the U.S. as of December 31, 2004.
The majority of existing wireless customers in the
U.S. subscribe to post-pay services that require credit
approval and a contractual commitment from the subscriber for a
period of one year or greater. Those customers typically use
700 minutes per month on plans that have price penalties
for minutes used in excess of the amount allocated as their
monthly limit. Cricket service does not require a credit check
or long-term service commitment, and Crickets customers
use an average of 1,500 minutes per month on plans that do
not have monthly usage limits for calls within a customers
home calling area. Cricket believes, and industry analysis
indicates, that consumers who are not likely to meet credit
approval or enter into long-term contractual commitments
represent a large portion of the remaining growth potential in
the U.S. wireless market. The highest rate of growth in the
U.S. wireless market in 2004 occurred in the prepaid
segment, where customers do not submit to credit checks or sign
long-term commitments. Cricket believes that its strategy of not
requiring credit approvals or long-term commitments, along with
the value pricing associated with its unlimited plans, positions
Cricket well for continued growth.
Sales and Distribution. Crickets approach is to
continue increasing existing market penetration while minimizing
expenses associated with sales, distribution and marketing by
focusing on improving the sales process for customers and by
offering easy to understand service plans and attractive handset
pricing and promotions. Crickets service and its wireless
handsets are sold through three main channels: Crickets
own retail locations and kiosks (the direct channel); Cricket
authorized dealers and distributors, including local market
authorized dealers, national retail chains and distributors (the
indirect channel); and Crickets own website and Internet
dealers (the web channel). Crickets direct channel sells
approximately 35% of the new Cricket handsets sold, while
Crickets indirect channel and web channel generate the
other 65% of sales. For Cricket, the costs of sales by the
indirect and web channels are largely variable costs, while the
operation of our direct channel locations involves substantial
fixed costs.
Crickets service plans are designed so that a potential
customer can make a purchase decision with little or no sales
assistance. Customers can read about the Cricket service at the
point of sale and learn virtually all they need to know about
the service without consulting a complicated plan summary or a
specialized salesperson. We believe our sales costs are lower
than traditional wireless providers in part because of this
streamlined sales approach.
We combine mass and local marketing strategies and tactics to
build brand awareness of the Cricket service within the
communities we serve. In order to reach our target segments, we
advertise primarily on radio stations and, to a lesser extent,
in local publications and television commercials. We also
maintain a Cricket website (www.mycricket.com) for
informational, e-commerce, and customer service purposes. Some
third-party Internet retailers sell the Cricket service over the
Internet and, together with one such retailer, we have also
developed and launched Internet sales on our Cricket website. As
a result of these marketing strategies and our unlimited calling
value proposition, we believe our expenditures on advertising
are generally at much lower levels than those of traditional
wireless carriers. Our customer acquisition cost, or CPGA, is
one of the lowest in the industry. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Performance
Measures, contained in this report.
Network and Operations. Crickets service is based
on providing customers with levels of usage equivalent to
landline service at prices substantially lower than most of our
wireless competitors for similar usage. We believe our success
depends on operating our CDMA networks to provide high,
concentrated
4
capacity with good in-building coverage rather than the broad,
geographically dispersed coverage provided by traditional
wireless carriers. The appeal of our service in any given market
is not dependent on the Cricket service having ubiquitous
coverage in the rest of the country or in regions surrounding
our markets. Many of our Cricket networks are in local
population centers of self-contained communities where we
believe roaming is not an important component of wireless
service for our existing target customers. We believe that we
can deploy our capital more efficiently by tailoring our
networks only to our target population centers and by omitting
underutilized cell sites that connect those population centers.
We engage an independent third party to test the network call
quality offered by Cricket and its competitors. According to the
most current results, Cricket regularly ranks first or second in
network quality within its core market footprints.
Capital Requirements and Projected Investments. A Leap
subsidiary was the winning bidder in FCCs Auction #58 for
four wireless licenses covering approximately 11.1 million
potential customers. We currently plan to build-out and launch
commercial operations in these markets, and we expect to seek
additional capital to increase our liquidity and help assure we
have sufficient funds for the build-out and initial operation of
these markets. For a more detailed description of our capital
requirements and liquidity, see Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources contained in this report.
Chapter 11 Proceedings Under the Bankruptcy Code
Plan of Reorganization
On April 13, 2003, Leap, Cricket and substantially all of
their subsidiaries filed voluntary petitions for relief under
Chapter 11 in the United States Bankruptcy Court for the
Southern District of California (jointly administered as Case
Nos. 03-03470-A11 to 03-03535-A11). While reorganizing
under Chapter 11, each of the debtors continued to manage
its properties and operate its business as a
debtor-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with Sections 1107(a)
and 1108 of Chapter 11. Our Plan of Reorganization was
confirmed by the Bankruptcy Court on October 22, 2003. On
August 5, 2004, we received the regulatory approvals from
the FCC required for our emergence from bankruptcy. Leap and
Cricket satisfied the remaining conditions to the Plan of
Reorganization and the Plan of Reorganization became effective
on August 16, 2004 (referred to as the Effective Date).
Our Plan of Reorganization implemented a comprehensive financial
reorganization that significantly reduced our outstanding
indebtedness. On the Effective Date of the Plan of
Reorganization, our long-term debt was reduced from a book value
of more than $2.4 billion to debt with an estimated fair
value of approximately $412.8 million, consisting of
Cricket 13% senior secured pay-in-kind notes due 2011 with a
face value of $350 million and an estimated fair value of
$372.8 million, issued on the Effective Date, and
approximately $40 million in principal amount of remaining
indebtedness to the FCC (net of the repayment of
$45 million of principal and accrued interest to the FCC on
the Effective Date). We entered into new syndicated senior
secured credit facilities in January 2005, and we used a portion
of the proceeds from the $500 million term loan included as
a part of such facilities to redeem Crickets 13% senior
secured pay-in-kind notes, to repay our remaining approximately
$41 million of outstanding indebtedness and accrued
interest to the FCC and to pay transaction fees and expenses of
$6.4 million. The balance of the proceeds of approximately
$60 million will be used for general corporate purposes.
For a description of the terms of the revolving credit facility
and term loan under the Credit Agreement, see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations New Credit
Agreement.
The following is a summary of the material actions that occurred
as of the Effective Date of the Plan of Reorganization:
|
|
|
|
|
A new board of directors of Leap was appointed. |
|
|
|
All of the outstanding shares of Leap common stock, warrants and
options were cancelled. The holders of Leap common stock,
warrants and options did not receive any distributions under the
Plan of Reorganization. |
5
|
|
|
|
|
Leap issued 60 million shares of new Leap common stock for
distribution to two classes of our creditors, as described
below. Leap also issued warrants to purchase 600,000 shares
of new Leap common stock pursuant to a settlement agreement. |
|
|
|
The holders of Crickets senior secured vendor debt claims
received, on a pro rata basis, 96.5% of the issued and
outstanding shares of new Leap common stock, or an aggregate of
57.9 million shares, as well as new Cricket 13% senior
secured pay-in-kind notes due 2011. The notes were guaranteed by
Leap and its direct and indirect domestic subsidiaries and
secured by all of their personal property and owned real
property. Cricket redeemed these notes in January 2005. |
|
|
|
The Leap Creditor Trust, which was formed for the benefit of
Leaps general unsecured creditors as contemplated by the
Plan of Reorganization, received 3.5% of the issued and
outstanding shares of new Leap common stock, or 2.1 million
shares, for distribution to holders of allowed Leap general
unsecured claims on a pro rata basis. Leap also transferred
other assets as specified in the Plan of Reorganization, which
were to be liquidated by the Leap Creditor Trust, with the cash
proceeds from such liquidation to be distributed to the holders
of allowed Leap general unsecured claims. These other assets
included a $35 million note receivable from Endesa, S.A.,
currently in litigation in Chile, nine wireless licenses with a
net book value of approximately $1.1 million at
August 16, 2004, Leaps equity interest in IAT
Communications, Inc., which had no carrying value at
August 16, 2004, certain causes of action, and
approximately $2.3 million of cash. Prior to
August 16, 2004, Leap had transferred $68.8 million of
funds to the Leap Creditor Trust to be distributed to holders of
allowed Leap general unsecured claims. |
|
|
|
Certain executory contracts and unexpired leases were assumed by
the reorganized debtors, with reorganized Cricket responsible
for paying the cure amounts associated with such contracts and
leases. |
|
|
|
The holders of general unsecured claims against Cricket and
Leaps other direct and indirect subsidiaries received no
distributions under the Plan of Reorganization. |
|
|
|
All of the debtors pre-petition indebtedness, other than
indebtedness owed to the FCC, was cancelled in full, including
approximately $1.6 billion net book value of debt
outstanding under Crickets senior secured vendor credit
facilities and approximately $738.2 million net book value
of debt outstanding under Leaps 12.5% senior notes, or
Senior Notes, 14.5% senior discount notes, or Senior Discount
Notes, note payable to GLH, Inc. and Qualcomm term loan. |
|
|
|
We paid the FCC approximately $36.7 million of unpaid
principal and approximately $8.3 million of accrued
interest in connection with the reinstatement of our FCC debt,
and approximately $278,000 of unjust enrichment penalties. We
agreed to repay the approximately $40 million remaining
outstanding principal amount of FCC debt, plus accrued interest,
in installments scheduled for April and July 2005. This
remaining FCC debt was repaid in January 2005. |
|
|
|
Leap entered into a Registration Rights Agreement with Highland
Capital Management, L.P. (a beneficial stockholder of Leap
and an affiliate of James D. Dondero, a director of Leap), and
MHR Institutional Partners II LP and MHR Institutional Partners
IIA LP (beneficial stockholders of Leap and affiliates of
Dr. Mark H. Rachesky, a director of Leap) pursuant to which
Leap granted demand registration rights to such entities and
agreed to prepare and file a resale shelf registration statement
relating to the shares of new Leap common stock received by such
entities under the Plan of Reorganization. |
Also, on the Effective Date of the Plan of Reorganization, Leap,
Cricket and their subsidiaries implemented certain restructuring
transactions intended to streamline their corporate structure.
As a result, Leap owns 100% of the issued and outstanding shares
of reorganized Cricket and certain other reorganized
subsidiaries, and Cricket owns 100% of the issued and
outstanding shares of each of the reorganized wireless license
holding companies and the reorganized property holding companies.
Any cash held in reserve by Leap immediately prior to the
Effective Date of the Plan of Reorganization that remains
following satisfaction of all allowed administrative claims and
allowed priority claims against
6
Leap will be distributed to the Leap Creditor Trust. At
December 31, 2004, approximately $9.6 million remained
in reserve by Leap and was included in restricted cash. On the
same date, Cricket had restricted cash and cash equivalents of
$20.8 million that included funds set aside or pledged to
satisfy payments and administrative and priority claims against
the Cricket Companies following their emergence from bankruptcy,
and cash restricted for other purposes.
Wireless Licenses
The following table shows the wireless licenses that we owned at
December 31, 2004, including licenses we have agreed to
sell to a third party. The wireless licenses set forth in the
table cover approximately 53.0 million potential customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Channel | |
Market |
|
Population | |
|
MHz | |
|
Block | |
|
|
| |
|
| |
|
| |
Anchorage, AK
|
|
|
490,179 |
|
|
|
30 |
|
|
|
C |
|
Birmingham, AL(2)
|
|
|
1,351,186 |
|
|
|
15 |
|
|
|
C |
|
Tuscaloosa, AL(2)
|
|
|
257,010 |
|
|
|
15 |
|
|
|
C |
|
Blytheville, AR
|
|
|
68,363 |
|
|
|
15 |
|
|
|
C |
|
Fayetteville, AR(1)(2)
|
|
|
370,274 |
|
|
|
30 |
|
|
|
C |
|
Fort Smith, AR(1)(2)
|
|
|
338,239 |
|
|
|
30 |
|
|
|
C |
|
Hot Springs, AR(1)
|
|
|
143,487 |
|
|
|
15 |
|
|
|
C |
|
Jonesboro, AR(1)
|
|
|
185,781 |
|
|
|
10 |
|
|
|
C |
|
Little Rock, AR(1)(2)
|
|
|
992,571 |
|
|
|
20 |
|
|
|
C |
|
Pine Buff, AR(1)
|
|
|
150,064 |
|
|
|
20 |
|
|
|
C |
|
Russellville, AR(2)
|
|
|
101,576 |
|
|
|
15 |
|
|
|
C |
|
Nogales, AZ
|
|
|
41,578 |
|
|
|
20 |
|
|
|
C |
|
Phoenix, AZ(1)
|
|
|
3,976,491 |
|
|
|
10 |
|
|
|
C |
|
Tucson, AZ(1)
|
|
|
930,985 |
|
|
|
15 |
|
|
|
C |
|
Merced, CA(1)
|
|
|
254,495 |
|
|
|
15 |
|
|
|
C |
|
Modesto, CA(1)
|
|
|
567,167 |
|
|
|
15 |
|
|
|
C |
|
Visalia, CA(1)
|
|
|
535,660 |
|
|
|
15 |
|
|
|
C |
|
Denver/Boulder, CO(1)
|
|
|
2,917,977 |
|
|
|
10 |
|
|
|
F |
|
Ft. Collins, CO(1)
|
|
|
273,168 |
|
|
|
10 |
|
|
|
F |
|
Greeley, CO(1)
|
|
|
226,084 |
|
|
|
10 |
|
|
|
F |
|
Pueblo, CO(1)
|
|
|
324,364 |
|
|
|
20 |
|
|
|
C |
|
Lakeland, FL
|
|
|
521,582 |
|
|
|
10 |
|
|
|
F |
|
Albany, GA
|
|
|
361,612 |
|
|
|
15 |
|
|
|
C |
|
Columbus, GA(1)
|
|
|
366,475 |
|
|
|
15 |
|
|
|
C |
|
Macon, GA(1)
|
|
|
685,916 |
|
|
|
30 |
|
|
|
C |
|
Boise, ID(1)
|
|
|
658,846 |
|
|
|
30 |
|
|
|
C |
|
Lewiston, ID
|
|
|
123,131 |
|
|
|
15 |
|
|
|
C |
|
Peoria, IL
|
|
|
456,972 |
|
|
|
15 |
|
|
|
C |
|
Evansville, IN
|
|
|
524,333 |
|
|
|
10 |
|
|
|
F |
|
Ft. Wayne, IN
|
|
|
733,097 |
|
|
|
10 |
|
|
|
E |
|
Coffeyville, KS
|
|
|
58,997 |
|
|
|
15 |
|
|
|
C |
|
Wichita, KS(1)
|
|
|
675,514 |
|
|
|
15 |
|
|
|
C |
|
Owensboro, KY
|
|
|
166,507 |
|
|
|
10 |
|
|
|
F |
|
Adrian, MI(2)
|
|
|
101,407 |
|
|
|
25 |
|
|
|
C,D |
|
Battle Creek, MI(1)(2)
|
|
|
244,365 |
|
|
|
25 |
|
|
|
C,D |
|
Flint, MI(1)(2)
|
|
|
519,000 |
|
|
|
10 |
|
|
|
D |
|
Grand Rapids, MI(2)
|
|
|
1,134,931 |
|
|
|
25 |
|
|
|
C,D |
|
Jackson, MI(1)(2)
|
|
|
210,889 |
|
|
|
25 |
|
|
|
C,D |
|
Kalamazoo, MI(1)(2)
|
|
|
385,037 |
|
|
|
10 |
|
|
|
D |
|
Lansing, MI
|
|
|
524,057 |
|
|
|
10 |
|
|
|
D |
|
Mount Pleasant, MI(2)
|
|
|
140,410 |
|
|
|
10 |
|
|
|
D |
|
Muskegon, MI(2)
|
|
|
231,233 |
|
|
|
25 |
|
|
|
C,D |
|
Saginaw-Bay City, MI
|
|
|
640,197 |
|
|
|
10 |
|
|
|
D |
|
Traverse City, MI(2)
|
|
|
262,867 |
|
|
|
10 |
|
|
|
D |
|
Duluth, MN
|
|
|
413,433 |
|
|
|
10 |
|
|
|
E |
|
Jackson, MS(2)
|
|
|
693,772 |
|
|
|
10 |
|
|
|
E |
|
Vicksburg, MS(2)
|
|
|
60,944 |
|
|
|
10 |
|
|
|
E |
|
Charlotte/Gastonia, NC(1)
|
|
|
2,276,558 |
|
|
|
10 |
|
|
|
F |
|
Greensboro/Winston- Salem/High Point, NC(1)
|
|
|
1,519,582 |
|
|
|
10 |
|
|
|
F |
|
Hickory, NC
|
|
|
355,284 |
|
|
|
10 |
|
|
|
F |
|
Fargo, ND
|
|
|
317,884 |
|
|
|
15 |
|
|
|
C |
|
Grand Forks, ND
|
|
|
195,544 |
|
|
|
15 |
|
|
|
C |
|
Lincoln, NE(1)
|
|
|
363,161 |
|
|
|
15 |
|
|
|
C |
|
Omaha, NE(1)
|
|
|
1,024,692 |
|
|
|
10 |
|
|
|
F |
|
Albuquerque, NM(1)
|
|
|
890,052 |
|
|
|
15 |
|
|
|
C |
|
Gallup, NM
|
|
|
141,038 |
|
|
|
15 |
|
|
|
C |
|
Roswell, NM
|
|
|
79,523 |
|
|
|
15 |
|
|
|
C |
|
Santa Fe, NM(1)
|
|
|
233,370 |
|
|
|
15 |
|
|
|
C |
|
Reno, NV(1)
|
|
|
649,556 |
|
|
|
10 |
|
|
|
C |
|
Buffalo, NY(1)(3)
|
|
|
1,195,970 |
|
|
|
10 |
|
|
|
E |
|
Plattsburgh, NY(2)
|
|
|
121,413 |
|
|
|
10 |
|
|
|
C |
|
Syracuse, NY(1)
|
|
|
785,746 |
|
|
|
15 |
|
|
|
C |
|
Utica, NY
|
|
|
296,949 |
|
|
|
10 |
|
|
|
F |
|
Watertown, NY(2)
|
|
|
290,418 |
|
|
|
15 |
|
|
|
C |
|
Dayton/Springfield, OH(1)
|
|
|
1,214,649 |
|
|
|
10 |
|
|
|
F |
|
Marion, OH
|
|
|
100,055 |
|
|
|
10 |
|
|
|
C |
|
Sandusky, OH(1)
|
|
|
138,820 |
|
|
|
15 |
|
|
|
C |
|
Steubenville, OH
|
|
|
127,682 |
|
|
|
10 |
|
|
|
C |
|
Toledo, OH(1)
|
|
|
788,491 |
|
|
|
15 |
|
|
|
C |
|
Tulsa, OK(1)
|
|
|
991,073 |
|
|
|
15 |
|
|
|
C |
|
Eugene, OR(1)
|
|
|
334,079 |
|
|
|
10 |
|
|
|
C |
|
Salem/Corvallis, OR(1)
|
|
|
555,514 |
|
|
|
20 |
|
|
|
C |
|
Johnstown, PA
|
|
|
227,336 |
|
|
|
10 |
|
|
|
C |
|
Pittsburgh/Butler/Uniontown/Washington/Latrobe, PA(1)
|
|
|
2,453,075 |
|
|
|
10 |
|
|
|
E |
|
Chattanooga, TN(1)
|
|
|
585,065 |
|
|
|
15 |
|
|
|
C |
|
Clarksville, TN(1)
|
|
|
270,836 |
|
|
|
15 |
|
|
|
C |
|
Knoxville, TN(1)
|
|
|
1,173,529 |
|
|
|
15 |
|
|
|
C |
|
Memphis, TN(1)
|
|
|
1,607,311 |
|
|
|
15 |
|
|
|
C |
|
Nashville/Murfreesboro, TN(1)
|
|
|
1,868,575 |
|
|
|
15 |
|
|
|
C |
|
Eagle Pass, TX
|
|
|
123,835 |
|
|
|
15 |
|
|
|
C |
|
Lufkin, TX
|
|
|
167,104 |
|
|
|
10 |
|
|
|
C |
|
Provo, UT(1)
|
|
|
424,646 |
|
|
|
15 |
|
|
|
C |
|
Salt Lake City/Ogden, UT(1)
|
|
|
1,731,411 |
|
|
|
15 |
|
|
|
C |
|
Spokane, WA(1)
|
|
|
777,420 |
|
|
|
15 |
|
|
|
C |
|
Appleton-Oshkosh, WI
|
|
|
473,062 |
|
|
|
10 |
|
|
|
E |
|
Eau Claire, WI(2)
|
|
|
203,153 |
|
|
|
10 |
|
|
|
E |
|
La Crosse, WI, Winona, MN
|
|
|
324,597 |
|
|
|
10 |
|
|
|
D |
|
Stevens Point, Marshfield, Wisconsin Rapids, WI
|
|
|
218,272 |
|
|
|
20 |
|
|
|
D,E |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
53,008,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Designates markets where we offer Cricket service. |
|
(2) |
Designates markets with respect to which we have agreed to sell
the related wireless license (or a portion of the related
wireless license) to a third party. Details are shown in the
table below. |
|
(3) |
Designates a wireless license which we have agreed to exchange
for a wireless license covering the same market area with the
same amount of MHz, but in a different frequency block. |
7
Cricket has agreed to purchase a wireless license for Fresno,
California covering approximately 1.0 million potential
customers. We have begun to invest significant resources in
building out the Fresno market. Our application to the FCC for
consent to acquire this license, although initially opposed by a
third party, was granted on May 13, 2005. The FCCs
order approving the transfer may be challenged during the 40-day
period following the date of such approval.
The following table shows wireless licenses covering
approximately 8.0 million potential customers that we have
agreed to sell to a third party. The transfers of these licenses
are subject to FCC approval and other closing conditions,
including obtaining third party consents and finalizing and
signing a transition services agreement. Although we expect to
obtain such approval and satisfy such conditions, we cannot
assure you that the FCC will grant such approval or that the
other conditions will be satisfied.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Channel | |
Market |
|
Population | |
|
MHz | |
|
Block | |
|
|
| |
|
| |
|
| |
Birmingham, AL
|
|
|
1,351,186 |
|
|
|
15 |
|
|
|
C |
|
Tuscaloosa, AL
|
|
|
257,010 |
|
|
|
15 |
|
|
|
C |
|
Fayetteville, AR
|
|
|
370,274 |
|
|
|
10 |
|
|
|
C |
|
Fort Smith, AR
|
|
|
338,239 |
|
|
|
10 |
|
|
|
C |
|
Little Rock, AR
|
|
|
992,571 |
|
|
|
5 |
|
|
|
C |
|
Russellville, AR
|
|
|
101,576 |
|
|
|
15 |
|
|
|
C |
|
Adrian, MI
|
|
|
101,407 |
|
|
|
25 |
|
|
|
C,D |
|
Battle Creek, MI(1)
|
|
|
244,365 |
|
|
|
25 |
|
|
|
C,D |
|
Flint, MI(1)
|
|
|
519,000 |
|
|
|
10 |
|
|
|
D |
|
Grand Rapids, MI
|
|
|
1,134,931 |
|
|
|
15 |
|
|
|
C |
|
Jackson, MI(1)
|
|
|
210,889 |
|
|
|
25 |
|
|
|
C,D |
|
Kalamazoo, MI(1)
|
|
|
385,037 |
|
|
|
10 |
|
|
|
D |
|
Mount Pleasant, MI
|
|
|
140,410 |
|
|
|
10 |
|
|
|
D |
|
Muskegon, MI
|
|
|
231,233 |
|
|
|
15 |
|
|
|
C |
|
Traverse City, MI
|
|
|
262,867 |
|
|
|
10 |
|
|
|
D |
|
Jackson, MS
|
|
|
693,772 |
|
|
|
10 |
|
|
|
E |
|
Vicksburg, MS
|
|
|
60,944 |
|
|
|
10 |
|
|
|
E |
|
Plattsburgh, NY
|
|
|
121,413 |
|
|
|
10 |
|
|
|
C |
|
Watertown, NY
|
|
|
290,418 |
|
|
|
15 |
|
|
|
C |
|
Eau Claire, WI
|
|
|
203,153 |
|
|
|
10 |
|
|
|
E |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,010,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Designates wireless licenses or portions of wireless licenses
used in commercial operations that we have agreed to sell along
with associated network assets and subscribers. Upon completion
of the sale, Cricket will no longer offer service in these
designated markets. |
The following table shows wireless licenses covering
approximately 11.1 million potential customers for which
our subsidiary Cricket Licensee (Reauction), Inc. was named the
winning bidder in Auction #58 in February 2005 with an aggregate
purchase price of $166.9 million. The grants of these
licenses were subject to FCC approval. The FCC approved the
grants of these licenses on May 13, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Channel | |
Market |
|
Population | |
|
MHz | |
|
Block | |
|
|
| |
|
| |
|
| |
San Diego, CA
|
|
|
3,010,095 |
|
|
|
10 |
|
|
|
C |
|
Kansas City, MO
|
|
|
2,161,000 |
|
|
|
10 |
|
|
|
C |
|
Houston, TX
|
|
|
5,579,503 |
|
|
|
10 |
|
|
|
C |
|
Temple, TX
|
|
|
377,712 |
|
|
|
10 |
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,128,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrangements with Alaska Native Broadband
In November 2004 we acquired a 75% non-controlling membership
interest in, and we are a secured lender to, ANB 1, whose
wholly-owned subsidiary ANB 1 License participated in
Auction #58. Alaska Native Broadband, LLC, or ANB, owns a 25%
controlling membership interest in ANB 1 and is the sole
manager of ANB 1. We have determined that our investment in
ANB 1 is required to be consolidated under FASB
Interpretation, or FIN, No. 46-R, Consolidation of
Variable Interest Entities. The following table shows
wireless licenses covering approximately 10.1 million
potential customers for which ANB 1 License was named the
winning bidder in Auction #58 in February 2005 with an aggregate
purchase price of $68.2 million. The transfers of these
licenses are subject to FCC approval, including a determination
by the FCC that ANB 1 License is qualified as a small
business or very small business, as defined by FCC regulations,
entitled to hold licenses designated by the FCC as
Entrepreneurs Block licenses. Although we
expect ANB 1
8
License will receive such approval in the normal course, we
cannot assure you that such approval will be granted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Channel | |
Market |
|
Population | |
|
MHz | |
|
Block | |
|
|
| |
|
| |
|
| |
Colorado Springs, CO.
|
|
|
583,582 |
|
|
|
10 |
|
|
|
C |
|
Lexington, KY
|
|
|
964,000 |
|
|
|
10 |
|
|
|
C |
|
Louisville, KY
|
|
|
1,543,214 |
|
|
|
10 |
|
|
|
C |
|
Las Cruces, NM
|
|
|
256,591 |
|
|
|
10 |
|
|
|
C |
|
Cincinnati, OH
|
|
|
2,241,105 |
|
|
|
10 |
|
|
|
C |
|
Austin, TX
|
|
|
1,539,235 |
|
|
|
10 |
|
|
|
C |
|
Bryan, TX
|
|
|
196,292 |
|
|
|
10 |
|
|
|
C |
|
El Paso, TX
|
|
|
785,293 |
|
|
|
10 |
|
|
|
C |
|
San Antonio, TX
|
|
|
2,013,655 |
|
|
|
10 |
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,122,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2005, ANB and Cricket increased their aggregate
equity capital contributions to ANB 1 to $1.0 million
and $3.0 million, respectively. In turn, ANB 1
contributed these funds to its subsidiary, ANB 1 License.
Also in March 2005, Cricket made loans under its senior secured
credit facility with ANB 1 License in the aggregate
principal amount of $56.2 million. ANB 1 License paid
these borrowed funds, together with the $4.0 million of
equity contributions, to the FCC to increase its total FCC
payments to $68.2 million, the aggregate purchase price for
the nine licenses. Cricket previously loaned ANB 1 License
$8.0 million to fund ANB 1 Licenses auction
eligibility deposit with the FCC. Under the senior secured
credit facility, Cricket has committed to loan ANB 1
License up to $4.5 million in additional funds to finance
its initial working capital requirements.
Crickets principal agreements with the ANB entities
are summarized below.
Limited Liability Company Agreement. In December 2004,
Cricket and ANB entered into an amended and restated limited
liability company agreement, referred to in this report as the
ANB 1 LLC Agreement, which governs the parties rights
and interests with respect to their investments in ANB 1.
Under the ANB 1 LLC Agreement, ANB and Cricket agreed
to make aggregate equity investments in ANB 1 of up to
$1.0 million and $3.0 million, respectively, which
investments were completed in March 2005. Under the ANB 1
LLC Agreement, ANB, as the sole manager of the company, has the
exclusive right and power to manage, operate and control
ANB 1 and its business and affairs, subject to certain
protective provisions for the benefit of Cricket, including
among others, Crickets consent to the sale of any of
ANB 1 Licenses wireless licenses or a sale of equity
interests in ANB 1. Subject to FCC approval, Cricket has
the right to remove ANB as the manager of ANB 1 in the
event of ANBs fraud, gross negligence or willful
misconduct, ANBs insolvency or bankruptcy, ANBs
failure to qualify as an entrepreneur and a
very small business under FCC rules, or other
limited circumstances.
Under the ANB 1 LLC Agreement, if ANB 1 or ANB 1
License proposes to transfer any wireless licenses or other
material assets to a third party, Cricket has a right of first
refusal to purchase such licenses or assets on the same terms as
those negotiated with the third party. During the first seven
years following the initial grant of wireless licenses to
ANB 1 License, members of ANB 1 generally may not
transfer their membership interests without Crickets prior
consent. Following such period, if a member desires to transfer
its interests in ANB 1 to a third party, Cricket has a
right of first refusal to purchase such interests on the same
terms as those negotiated with the third party, or in lieu of
exercising this right, Cricket has a tag-along right to
participate in the sale.
Under the ANB 1 LLC Agreement, once ANB 1 License
satisfies the FCCs initial five-year build-out milestone
requirements with respect to its wireless licenses, ANB has a
30-day option to sell its entire membership interests in
ANB 1 to Cricket for a purchase price of $2.0 million,
payable in cash. If exercised, the consummation of the sale will
be subject to FCC approval. If Cricket breaches its obligation
to pay the purchase price, several of Crickets protective
provisions cease to apply, and ANB receives a $2.0 million
liquidation preference, payable prior to Crickets equity
and debt investments in ANB 1 and ANB 1 License. If
ANB fails to qualify as an entrepreneur and a
very small business under FCC rules (other than due
to a change in FCC rules), and as a result of such failure
ANB 1 License ceases to retain the benefits it received in
Auction #58, ANB is liable to Cricket only to the extent of
ANBs $1.0 million equity capital contribution to
ANB 1.
9
Senior Secured Credit Agreement. ANB 1 License,
ANB 1, and Cricket are parties to a senior secured credit
agreement, referred to in this report as the Cricket Credit
Agreement, pursuant to which Cricket has agreed to loan
ANB 1 License up to $89.0 million plus capitalized
interest. The facility consists of an $84.5 million
sub-facility to finance the purchase of wireless licenses in
Auction #58 and a $4.5 million sub-facility to finance
ANB 1 Licenses initial working capital requirements.
At April 30, 2005, ANB 1 License had outstanding
borrowings of $64.2 million principal amount under the
acquisition sub-facility and no borrowings outstanding under the
working capital sub-facility. ANB 1 License will need to
obtain additional capital from Cricket or another third party to
build out and launch its networks.
Borrowings under the Cricket Credit Agreement are guaranteed by
ANB 1 and are secured by a first priority security interest
in all of the assets of ANB 1 and ANB 1 License,
including a pledge of ANB 1s membership interests in
ANB 1 License. ANB also has entered into a negative pledge
agreement with respect to its entire membership interests in
ANB 1, agreeing to keep such membership interests free and
clear of all liens and encumbrances.
Under the Cricket Credit Agreement, borrowings accrue interest
at a rate of 12% per annum, with all accrued interest added to
the outstanding principal balance of loans until the
amortization commencement date. The amortization commencement
date under the facility occurs 30 days after the date that
ANB 1 License satisfies the FCCs initial five-year
build-out milestone requirements with respect to its wireless
licenses, subject to extension until the closing of the sale if
ANB has then exercised its right to sell its entire membership
interests in ANB 1 to Cricket. Loans under the Cricket
Credit Agreement must be repaid in 16 quarterly
installments of principal plus accrued interest, commencing at
the end of the first quarter following the amortization
commencement date. Loans may be prepaid at any time without
premium or penalty. Loans must be prepaid with the proceeds of
any refunds received by ANB 1 License from the FCC.
Crickets commitment under the working capital sub-facility
expires on the earliest to occur of: (1) the amortization
commencement date; (2) the termination by Cricket of the
management services agreement between Cricket and ANB 1
License due to a breach by ANB 1 License; or (3) the
termination by ANB 1 License of the management services
agreement for convenience. If ANB 1 License terminates the
management services agreement for convenience, all borrowings,
accrued interest and other amounts owing under the Cricket
Credit Agreement become due and payable following expiration of
the applicable one-year notice period for termination.
Management Agreement. Cricket and ANB 1 License are
parties to a management services agreement, pursuant to which
Cricket will provide management services to ANB 1 License
in exchange for a monthly management fee based on Crickets
costs of providing such services plus a mark-up for
administrative overhead. Under the management services
agreement, ANB 1 License retains full control and authority
over its business strategy, finances, wireless licenses, network
equipment, facilities and operations, including its product
offerings, terms of service and pricing. The initial term of the
management services agreement is eight years. The management
services agreement may be terminated by ANB 1 License or
Cricket if the other party materially breaches its obligations
under the agreement. The management services agreement also may
be terminated by ANB 1 License if Cricket fails to pay the
purchase price for ANBs membership interests under the
ANB 1 LLC Agreement or by ANB 1 License for
convenience with one years prior written notice to Cricket.
Competition
Generally, the telecommunications industry is very competitive.
We believe that our primary competition in the
U.S. wireless market is with national and regional wireless
service providers including Alltel, Cingular, Nextel and Nextel
Partners, Sprint (and Sprint affiliates), T-Mobile,
U.S. Cellular and Verizon Wireless. We also face
competition from resellers, such as Virgin Mobile, Qwest
Wireless and others, which provide wireless services to
customers but do not hold FCC licenses or own facilities.
Instead, resellers buy wireless telephone capacity from a
licensed carrier and resell services through their own
distribution network to the public. In addition, wireless
providers increasingly are competing in the provision of both
voice and non-voice services. Non-voice services, including data
transmission, text messaging, e-mail and Internet access, are
also now available from personal communications service
providers and enhanced specialized mobile radio carriers such
10
as Nextel. In many cases, non-voice services are offered in
conjunction with or as adjuncts to voice services. There has
also been an increasing trend towards consolidation of wireless
service providers through joint ventures, reorganizations and
acquisitions. Over time, we expect these types of consolidations
to lead to the creation of larger competitors with considerable
spectrum resources, extensive network coverage and vast
financial resources and we may be unable to compete successfully
with these larger companies.
Competition for subscribers among wireless communications
providers is based principally upon the services and features
offered, the technical quality of their wireless systems,
customer service, system coverage, capacity and price.
Competition has caused, and we anticipate that competition will
continue to cause, market prices for two-way wireless products
and services to decline. In addition, some competitors have
announced unlimited service plans at rates similar to
Crickets service plan rates in markets in which we have
launched service. Our ability to compete successfully will
depend, in part, on our ability to distinguish our Cricket
service from competitors through marketing and through our
ability to anticipate and respond to other competitive factors
affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends,
economic conditions and competitors discount pricing and
bundling strategies, all of which could adversely affect our
operating margins, market penetration and customer retention.
Because many of the wireless operators in our markets have
substantially greater financial resources than we do, they may
be able to offer prospective customers discounts or equipment
subsidies that are substantially greater than those that could
be offered by us. In addition, to the extent that products or
services that we offer, such as roaming capability, may depend
upon negotiations with such wireless operators, discriminatory
behavior by such operators or their refusal to negotiate with us
could adversely affect our business. While we believe that our
cost structure, combined with the differentiated value
proposition that our Cricket service represents in the wireless
marketplace, provides us with the means to react effectively to
price competition, we cannot predict the effect that the market
forces or the conduct of other operators in the industry will
have on our business.
The FCC is pursuing policies designed to increase the number of
wireless licenses available in each of our markets. For example,
the FCC has adopted rules that allow the partitioning,
disaggregation or leasing of PCS and other wireless licenses,
and continues to allocate and auction additional spectrum that
can be used for wireless services. Continuing technological
advances in the communications field make it difficult to
predict the nature and extent of additional future competition.
Also, in February 2005, the FCC completed Auction #58, in
which additional PCS spectrum was auctioned in numerous markets,
including many markets where we currently provide service.
As wireless service is becoming a viable alternative to
traditional landline phone service, we are also increasingly
competing directly with traditional landline telephone companies
for customers. Competition is also increasing from local and
long distance wireline carriers who have begun to aggressively
advertise in the face of increasing competition from wireless
carriers, cable operators and other competitors. We may also
compete in the future with companies that offer new
technologies, such as Voice over Internet Protocol or VoIP, and
that market other services, including cable television access,
landline telephone service and Internet access, that we do not
currently intend to market. Some of our competitors offer these
other services together with their wireless communications
service, which may make their services more attractive to
customers.
Government Regulation
The licensing, construction, modification, operation, sale,
ownership and interconnection arrangements of wireless
communications networks are regulated to varying degrees by the
FCC, Congress, state regulatory agencies, the courts and other
governmental bodies. Decisions by these bodies could have a
significant impact on the competitive market structure among
wireless providers and on the relationships between wireless
providers and other carriers. These mandates may impose
significant financial obligations on us and other wireless
providers. We are unable to predict the scope, pace or financial
impact of legal or policy changes that could be adopted in these
proceedings.
Licensing of PCS Systems. A broadband PCS system operates
under a license granted by the FCC for a particular market on
one of six frequency blocks allocated for broadband PCS.
Broadband PCS systems
11
generally are used for two-way voice applications. Narrowband
PCS systems, in contrast, generally are used for non-voice
applications such as paging and data service and are separately
licensed. The FCC has segmented the U.S. PCS markets into
51 large regions called major trading areas, which are comprised
of 493 smaller regions called basic trading areas, or BTAs.
The FCC awards two broadband PCS licenses for each major trading
area and four licenses for each BTA. Thus, generally, six
licensees are authorized to compete in each area. The two major
trading area licenses authorize the use of 30 MHz of spectrum.
One of the basic trading area licenses is for 30 MHz of
spectrum, and the other three are for 10 MHz each. The FCC
permits licensees to split their licenses and assign a portion
to a third party on either a geographic or frequency basis or
both. Over time, the FCC has also further split licenses in
connection with re-auctions of PCS spectrum, creating additional
15 MHz and 10 MHz licenses.
The FCCs spectrum allocation for PCS includes two
licenses, a 30 MHz C-Block license and a 10 MHz F-Block license,
that are designated as Entrepreneurs Blocks.
The FCC generally requires holders of these licenses to meet
certain threshold financial size qualifications. In addition,
the FCC has determined that designated entities who qualify as
small businesses or very small businesses, as defined by a
complex set of FCC rules, can receive additional benefits, such
as bidding credits in C-Block or F-Block spectrum auctions or
re-auctions, and in some cases, an installment loan from the
federal government for a significant portion of the dollar
amount of the winning bids in the FCCs initial auctions of
C-Block and F-Block licenses. The FCCs rules also allow
for publicly traded corporations with widely dispersed voting
power, as defined by the FCC, to hold C-Block and F-Block
licenses and to qualify as small or very small businesses. A
failure by an entity to maintain its qualifications to own
C-Block and F-Block licenses could cause a number of adverse
consequences, including the ineligibility to hold licenses for
which the FCCs minimum coverage requirements have not been
met, the triggering of FCC unjust enrichment rules and the
acceleration of installment payments owed to the
U.S. Treasury.
In July 1999, the FCC determined that we were entitled to
acquire C-Block and F-Block licenses as a publicly traded
corporation with widely dispersed voting power and a very small
business under FCC rules. In July 2000, the FCC affirmed its
July 1999 order. Subsequently, the FCC approved the transfer to
us of a number of other PCS licenses, the majority of them
C-Block and F-Block licenses. Because our emergence from
bankruptcy involved a change in control of the Company, we were
required to seek FCC consent to the change in control of our FCC
spectrum licenses. In connection with its review of our
application seeking such consent, the FCC determined that as a
result of our restructuring in bankruptcy: we were no longer
qualified as an Entrepreneur to hold several of our
C- and F-Block licenses, we would owe approximately
$2-$4 million in unjust enrichment penalties, and
$76.7 million of indebtedness to the FCC would become
immediately due and payable. We were able to successfully
negotiate a settlement of these consequences with the FCC and
the Department of Justice which provided for an immediate
payment of $45 million to the FCC with the balance of
monies payable in April and July 2005. The settlement further
required us to use reasonable efforts to complete a refinancing
on or prior to January 31, 2005 which generated sufficient
proceeds to repay the senior secured pay-in-kind notes that we
issued upon our emergence from bankruptcy and our remaining
indebtedness to the FCC. On August 5, 2004, the FCC
approved the transfer of our licenses and we subsequently
emerged from the bankruptcy process. On January 10, 2005,
we paid the FCC the remaining principal and accrued interest
balance of approximately $41 million as called for by our
settlement agreement. Our PCS licenses are in good standing with
the FCC.
All PCS licenses have a 10-year term, at the end of which they
must be renewed. The FCCs rules provide a formal
presumption that a PCS license will be renewed, called a
renewal expectancy, if the PCS licensee (1) has
provided substantial service during its past license term, and
(2) has substantially complied with applicable FCC rules
and policies and the Communications Act. The FCC defines
substantial service as service which is sound, favorable and
substantially above a level of mediocre service that might only
minimally warrant renewal. If a licensee does not receive a
renewal expectancy, then the FCC will accept competing
applications for the license renewal period and, subject to a
comparative hearing, may award the license to another party.
Under existing law, no more than 20% of an FCC licensees
capital stock may be owned, directly or indirectly, or voted by
non-U.S. citizens or their representatives, by a foreign
government or its representatives
12
or by a foreign corporation. If an FCC licensee is controlled by
another entity (as is the case with Leaps ownership and
control of subsidiaries that hold FCC licenses), up to 25% of
that entitys capital stock may be owned or voted by
non-U.S. citizens or their representatives, by a foreign
government or its representatives or by a foreign corporation.
Foreign ownership above the 25% holding company level may be
allowed if the FCC finds such higher levels consistent with the
public interest. The FCC has ruled that higher levels of foreign
ownership, even up to 100%, are presumptively consistent with
the public interest with respect to investors from certain
nations. If our foreign ownership were to exceed the permitted
level, the FCC could revoke our wireless licenses, although we
could seek a declaratory ruling from the FCC allowing the
foreign ownership or could take other actions to reduce our
foreign ownership percentage in order to avoid the loss of our
licenses. We have no knowledge of any present foreign ownership
in violation of these restrictions.
Since 1996, PCS licensees have been required to coordinate
frequency usage with existing fixed microwave licensees in the
1850 to 1990 MHz band. In an effort to balance the competing
interests of existing microwave users and newly authorized PCS
licensees, the FCC has adopted a transition plan to relocate
such microwave operators to other spectrum blocks and a cost
sharing plan so that if the relocation of an incumbent benefits
more than one PCS licensee, those licensees will share the cost
of the relocation. The transition and cost sharing plans expired
on April 4, 2005. Subsequent to that date, remaining
microwave incumbents in the PCS spectrum are responsible for
avoiding interference with a PCS licensees network. Absent
an agreement with affected broadband PCS entities or an
extension, incumbent microwave licensees will be required to
return their operating authorizations to the FCC following six
months written notice from a PCS entity that such entity intends
to turn on a PCS system within the interference range of the
incumbent microwave licensee. To secure a sufficient amount of
unencumbered spectrum to operate our PCS systems efficiently and
with adequate population coverage within an appropriate time
period, we have previously needed to relocate one or more of
these incumbent fixed microwave licensees and have also been
required (and may continue to be required) to participate in the
cost sharing related to microwave licenses that have been
voluntarily relocated by other PCS licensees or the existing
microwave operators.
PCS Construction Requirements. All PCS licensees must
satisfy minimum geographic coverage requirements within five
and/or ten years after the license grant date. These initial
requirements are met for most 10 MHz licenses when adequate
service is offered to at least one-quarter of the population of
the licensed area within five years, and for 30 MHz licenses
when adequate service is offered to at least one-third of the
population within five years and two-thirds of the population
within ten years after the license grant date. In general, a
failure to comply with FCC coverage requirements could cause the
revocation of the relevant wireless license or the imposition of
fines and/or other sanctions.
Transfer and Assignment of PCS Licenses. The
Communications Act and FCC rules require the FCCs prior
approval of the assignment or transfer of control of a license
for a PCS system, with limited exceptions. The FCC may prohibit
or impose conditions on assignments and transfers of control of
licenses. Non-controlling interests in an entity that holds an
FCC license generally may be bought or sold without FCC
approval. Although we cannot assure you that the FCC will
approve or act in a timely fashion upon any pending or future
requests for approval of assignment or transfer of control
applications that we file, in general we believe the FCC will
approve or grant such requests or applications in due course.
Because an FCC license is necessary to lawfully provide PCS
service, if the FCC were to disapprove any such filing, our
business plans would be adversely affected.
Pursuant to an order released in December 2001, as of
January 1, 2003, the FCC no longer limits the amount of PCS
and other commercial mobile radio spectrum that an entity may
hold in a particular geographic market. The FCC now engages in a
case-by-case review of transactions that involve the
consolidation of spectrum licenses.
A C-Block or F-Block license may be transferred to
non-designated entities once the licensee has met its five-year
coverage requirement. Such transfers will remain subject to
certain costs and reimbursements to the government of any
bidding credits or outstanding principal and interest payments
owed to the FCC.
General FCC Obligations. The FCC has a number of other
complex requirements and proceedings that affect our operations
and that could increase our cost or diminish our revenues. For
example, the FCC requires
13
wireless carriers to make available emergency 911 services,
including enhanced emergency 911 services that provide the
callers telephone number and detailed location information
to emergency responders, as well as a requirement that emergency
911 services be made available to users with speech or hearing
disabilities. Our obligations to implement these services occur
on a market-by-market basis as emergency service providers
request the implementation of enhanced emergency 911 services in
their locales. Absent a waiver, a failure to comply with these
requirements could subject us to significant penalties.
FCC rules also require that local exchange carriers and most
commercial mobile radio service providers, including PCS
providers like Leap, allow customers to change service providers
without changing telephone numbers. For wireless service
providers, this mandate is referred to as wireless local number
portability, or WLNP. The FCC also has adopted rules governing
the porting of wireline telephone numbers to wireless carriers.
The FCC has the authority to order interconnection between
commercial mobile radio service operators and incumbent local
exchange carriers, and FCC rules provide that all local exchange
carriers must enter into compensation arrangements with
commercial mobile radio service carriers for the exchange of
local traffic, whereby each carrier compensates the other for
terminating local traffic originating on the other
carriers network. As a commercial mobile radio services
provider, we are required to pay compensation to a wireline
local exchange carrier that transports and terminates a local
call that originated on our network. Similarly, we are entitled
to receive compensation when we transport and terminate a local
call that originated on a wireline local exchange network. We
negotiate interconnection arrangements for our network with
major incumbent local exchange carriers and other independent
telephone companies. If an agreement cannot be reached, under
certain circumstances, parties to interconnection negotiations
can submit outstanding disputes to state authorities for
arbitration. Negotiated interconnection agreements are subject
to state approval. The FCCs interconnection rules and
rulings, as well as state arbitration proceedings, will directly
impact the nature and costs of facilities necessary for the
interconnection of our network with other telecommunications
networks. They will also determine the amount of revenue we
receive for terminating calls originating on the networks of
local exchange carriers and other telecommunications carriers.
The FCC is currently considering changes to the local
exchange-commercial mobile radio service interconnection and
other intercarrier compensation arrangements, and the outcome of
such proceedings may affect the manner in which we are charged
or compensated for the exchange of traffic.
We also are subject or potentially subject to universal service
obligations; number pooling rules; rules governing billing and
subscriber privacy; rules governing wireless resale and roaming
obligations; rules that require wireless service providers to
configure their networks to facilitate electronic surveillance
by law enforcement officials; rate averaging and integration
requirements; rules governing spam, telemarketing and
truth-in-billing and rules requiring us to offer equipment and
services that are accessible to and usable by persons with
disabilities, among others. Some of these requirements pose
technical and operational challenges to which we, and the
industry as a whole, have not yet developed clear solutions.
These requirements are all the subject of pending FCC or
judicial proceedings, and we are unable to predict how they may
affect our business, financial condition or results of
operations.
State, Local and Other Regulation. Congress has given the
FCC the authority to preempt states from regulating rates or
entry into commercial mobile radio service, including PCS. The
FCC, to date, has denied all state petitions to regulate the
rates charged by commercial mobile radio service providers.
State and local governments are permitted to manage public
rights of way and can require fair and reasonable compensation
from telecommunications providers, on a competitively neutral
and nondiscriminatory basis, for the use of such rights of way
by telecommunications carriers, including PCS providers, so long
as the compensation required is publicly disclosed by the state
or local government. States may also impose competitively
neutral requirements that are necessary for universal service,
to protect the public safety and welfare, to ensure continued
service quality and to safeguard the rights of consumers. While
a state may not impose requirements that effectively function as
barriers to entry or create a competitive disadvantage, the
scope of state authority to maintain existing requirements or to
adopt new requirements is unclear. State legislators, public
utility commissions and other state agencies are becoming
increasingly active in efforts to regulate wireless carriers and
the service they provide, including efforts to conserve
numbering resources and efforts
14
aimed at regulating service quality, advertising, warranties and
returns, rebates, and other consumer protection measures.
The location and construction of our PCS antennas and base
stations and the towers we lease on which such antennas are
located are subject to FCC and Federal Aviation Administration
regulations; federal, state and local environmental and historic
preservation regulations; and state and local zoning, land use
or other requirements. We cannot assure you that any state or
local regulatory requirements currently applicable to our
systems will not be changed in the future or that regulatory
requirements will not be adopted in those states and localities
that currently have none. Such changes could impose new
obligations on us that could adversely affect our operating
results.
Privacy. We are obligated to comply with a variety of
federal and state privacy and consumer protection requirements.
The Communications Act and FCC rules, for example, impose
various rules on us intended to protect against the disclosure
of customer proprietary network information. Other FCC and
Federal Trade Commission rules also regulate the disclosure and
sharing of subscriber information. We have developed and comply
with a policy designed to protect the privacy of our customers
and their personal information. State legislatures and
regulators are considering imposing additional requirements on
companies to further protect the privacy of wireless customers.
Our need to comply with these rules, and to address complaints
by subscribers invoking them, could adversely affect our
operating results.
Availability of Public Reports
As soon as is reasonably practicable after they are
electronically filed with or furnished to the Securities and
Exchange Commission, or SEC, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports,
are available free of charge at www.leapwireless.com.
This website is not part of this filing. They are also available
free of charge on the SECs website at www.sec.gov.
In addition, any materials filed with the SEC may be read and
copied by the public at the SECs Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330.
Financial Information Concerning Segments and Geographical
Information
Financial information concerning the Companys operating
segment and the geographic area in which it operates is set
forth in Note 14 to the consolidated financial statements
included in Item 8 of this report.
Employees
As of December 31, 2004, Cricket employed approximately
1,400 full time employees, and Leap had no employees.
Seasonality
The Companys customer activity is influenced by seasonal
effects related to traditional retail selling periods and other
factors that arise from Crickets target customer base. As
a result, new sales activity is generally highest in the first
and fourth quarters, and customer turnover, or churn, has tended
to be higher in the second and third quarters. However, our
business is sensitive to promotional activity and competitive
actions, both of which have the ability to reduce or outweigh
certain seasonal effects.
Inflation
We believe that inflation has not had a material effect on our
results of operations.
15
RISK FACTORS
Risks Related to Our Business and Industry
We Have Experienced Net Losses Since Inception And We May Not
Be Profitable In The Future
We experienced losses of $8.6 million and
$49.3 million (excluding reorganization items, net) for the
five months ended December 31, 2004 and the seven months
ended July 31, 2004, respectively. In addition, we
experienced net losses of $597.4 million for the year ended
December 31, 2003, $664.8 million for the year ended
December 31, 2002, $483.3 million for the year ended
December 31, 2001, $0.2 million for the year ended
December 31, 2000, $75.8 million for the transition
period from September 1, 1999 to December 31, 1999,
and $164.6 million for the fiscal year ended
August 31, 1999. We may not generate profits in the future
on a consistent basis or at all. If we fail to achieve
consistent profitability, that failure could have a negative
effect on our financial condition and on the value of the common
stock of Leap.
We Face Increasing Competition Which Could Have A Material
Adverse Effect On Demand For The Cricket Service
In general, the telecommunications industry is very competitive.
Some competitors have announced rate plans substantially similar
to the Cricket service plan (and have also introduced products
that consumers perceive to be similar to Crickets service
plan) in markets in which we offer wireless service. In
addition, the competitive pressures of the wireless
telecommunications market have caused other carriers to offer
service plans with large bundles of minutes of use at low prices
which are competing with the predictable and virtually unlimited
Cricket calling plans. Some competitors also offer prepaid
wireless plans that are being advertised heavily to demographic
segments that are strongly represented in Crickets
customer base. These competitive offerings could adversely
affect our ability to maintain our pricing and market
penetration. Our competitors may attract more customers because
of their stronger market presence and geographic reach.
Potential customers may perceive the Cricket service to be less
appealing than other wireless plans, which offer more features
and options, including the ability to roam outside of the home
service area.
We compete as a mobile alternative to landline service providers
in the telecommunications industry. Wireline carriers have begun
to advertise aggressively in the face of increasing competition
from wireless carriers, cable operators and other competitors.
Wireline carriers are also offering unlimited national calling
plans and bundled offerings that include wireless and data
services. We may not be successful in our efforts to persuade
potential customers to adopt our wireless service in addition
to, or in replacement of, their current landline service.
Many competitors have substantially greater financial and other
resources than we have, and we may not be able to compete
successfully. Because of their size and bargaining power, our
larger competitors may be able to purchase equipment, supplies
and services at lower prices than we can. As consolidation in
the industry creates even larger competitors, any purchasing
advantages our competitors have may increase.
We May Not Be Successful In Increasing Our Customer Base
Which Would Force Us To Change Our Business Plans And Financial
Outlook And Would Likely Negatively Affect The Price Of Our
Stock
Our growth on a quarter by quarter basis has varied
substantially in the recent past. In the first quarter of 2003,
we gained approximately 1,000 net customers but we lost
approximately 54,000 net customers in the second quarter of
2003. Net customers increased by approximately 18,000 in the
third quarter of 2003, but decreased by approximately 4,000
during the fourth quarter of 2003. During the first and second
quarters of 2004, we experienced a net increase of approximately
65,700 customers and 9,000 customers, respectively, but
lost approximately 8,000 net customers in the third quarter
of 2004. During the fourth quarter of 2004, we gained
approximately 30,000 net customers. We believe that this uneven
growth over the last several quarters generally reflects
seasonal trends in customer activity, promotional activity, the
competition in the wireless telecommunications market, our
attenuated spending on capital investments and advertising while
we were in bankruptcy, and varying national economic conditions.
Our current business plans assume that we will increase our
customer base over time, providing us with increased economies
of scale. If we are unable to
16
attract and retain a growing customer base, we would be forced
to change our current business plans and financial outlook and
there would likely be a material negative affect on the price of
our common stock.
We Have Identified Material Weaknesses In Our Internal
Control Over Financial Reporting, And Our Business And Stock
Price May Be Adversely Affected If We Do Not Remediate These
Material Weaknesses, Or If We Have Other Material Weaknesses Or
Significant Deficiencies In Our Internal Control Over Financial
Reporting
Following publication of a letter regarding accounting for
leases issued by the Office of the Chief Accountant of the
U.S. Securities and Exchange Commission on February 7,
2005, we reviewed our accounting for leases, including our site
retirement and remediation obligations. As a result of this
review, and in connection with preparing for our annual audit,
we identified accounting errors in our unaudited interim
financial statements included in the Companys Quarterly
Report on Form 10-Q for the three months ended
September 30, 2004. As more fully described in Note 2
to our consolidated financial statements included in this
report, our management and Audit Committee concluded that the
Companys unaudited interim financial statements for the
one and seven month periods ended July 31, 2004 and the two
month period ended September 30, 2004 should be restated to
correct these accounting errors.
According to the PCAOBs Auditing Standard No. 2,
An Audit of Internal Control over Financial Reporting
Performed in Conjunction with an Audit of Financial
Statements, restatement of financial statements in prior
filings with the SEC is a strong indicator of the existence of a
material weakness in internal control over financial reporting.
A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
In connection with their evaluation of our disclosure controls
and procedures, our CEO and CFO concluded that certain material
weaknesses in our internal control over financial reporting
existed as of December 31, 2004 with respect to turnover
and staffing levels in our accounting and financial reporting
departments (arising in part in connection with the
Companys now completed bankruptcy proceedings), the
application of lease-related accounting principles, fresh-start
reporting oversight, and account reconciliation procedures. As a
result of these material weaknesses, our CEO and CFO concluded
that our disclosure controls and procedures were not effective
at the reasonable assurance level as of the end of the period
covered by this report. For a description of these material
weaknesses and the steps we are undertaking to remediate these
material weaknesses, see Item 9A. Controls and
Procedures contained in this report. The existence of one
or more material weaknesses or significant deficiencies could
result in errors in our financial statements, and substantial
costs and resources may be required to rectify any internal
control deficiencies. If we cannot produce reliable financial
reports, investors could lose confidence in our reported
financial information, the market price of our stock could
decline significantly, we may be unable to obtain additional
financing to operate and expand our business, and our business
and financial condition could be harmed.
If Our Internal Control Over Financial Reporting Does Not
Comply With The Requirements Of The Sarbanes-Oxley Act Of 2002,
Our Business And Stock Price May Be Adversely Affected
Section 404 of the Sarbanes-Oxley Act of 2002 requires
companies to do a comprehensive evaluation of their internal
control over financial reporting. To comply with this statute,
we will be required to document and test our internal control
over financial reporting; our management will be required to
assess and issue a report concerning our internal control over
financial reporting; and our independent auditors will be
required to attest to and report on managements
assessment. Reporting on our compliance with Section 404 of
the Sarbanes-Oxley Act will first be required in connection with
the filing of our Annual Report on Form 10-K for the fiscal
year ending December 31, 2005. We have been conducting a
rigorous review of our internal control over financial reporting
in order to become compliant with the requirements of
Section 404. However, the standards that must be met for
management to assess our internal control over financial
reporting are new and require significant documentation and
testing. Our assessment may identify the need for remediation of
our internal control over financial reporting. We recently
concluded that certain material weaknesses existed in our
internal control over financial reporting. See
Item 9A. Controls and Procedures. If management
cannot
17
favorably assess the effectiveness of our internal control over
financial reporting as of December 31, 2005, or if our
auditors cannot timely attest to managements assessment or
if they identify significant deficiencies or material weaknesses
in our internal control over financial reporting as of
December 31, 2005, investors could lose confidence in our
reported financial information, the market price of our stock
could decline significantly, we may be unable to obtain
additional financing to operate and expand our business, and our
business and financial condition could be harmed.
If We Experience High Rates Of Customer Turnover or Credit
Card, Subscription or Dealer Fraud, Our Ability To Become
Profitable Will Decrease
Customer turnover, frequently referred to as churn,
is an important business metric in the telecommunications
industry because it can have significant financial effects.
Because we do not require customers to sign long-term
commitments or pass a credit check, our service is available to
a broader customer base than many other wireless providers and,
as a result, some of our customers may be more likely to
terminate service for inability to pay than the average industry
customer. In addition, our rate of customer turnover may be
affected by other factors, including the size of our calling
areas, inability to make calls while outside of the home service
calling area, handset issues, customer care concerns, number
portability and other competitive factors. Our strategies to
address customer turnover may not be successful. A high rate of
customer turnover would reduce revenues and increase the total
marketing expenditures required to attract the minimum number of
replacement customers required to sustain our business plan,
which, in turn, could have a material adverse effect on our
business, financial condition and results of operations.
Our operating costs can also increase substantially as a result
of customer credit card and subscription fraud and dealer fraud.
We have implemented a number of strategies and processes to
detect and prevent efforts to defraud us, and we believe that
our efforts have substantially reduced the types of fraud we
have identified. However, if our strategies are not successful
in detecting and controlling fraud in the future, it would have
a material adverse impact on our financial condition and results
of operations.
Our Primary Business Strategy May Not Succeed In The Long
Term
A major element of our business strategy is to offer consumers a
service that allows them to make virtually unlimited calls
within their Cricket service area and receive unlimited calls
from any area for a flat monthly rate without entering into a
long-term service commitment or passing a credit check. This
strategy may not prove to be successful in the long term. From
time to time, we also evaluate our service offerings and the
demands of our target customers and may modify, change or adjust
our service offerings or offer new services. We cannot assure
you that these service offerings will be successful or prove to
be profitable.
Our Indebtedness Could Adversely Affect Our Financial Health,
And If We Fail To Maintain Compliance With The Covenants Under
Our Senior Secured Credit Facilities, Any Such Failure Could
Materially Adversely Affect Our Liquidity And Financial
Condition
As of April 30, 2005, we had approximately
$500 million of outstanding indebtedness and, to the extent
we raise additional capital in the future, we expect to obtain
much of such capital through debt financing. This existing
indebtedness bears interest at a variable rate, but we have
entered into interest rate hedging agreements with respect to
$250 million of our debt which mitigates the interest rate
risk. Our present and future debt financing could have important
consequences. For example, it could:
|
|
|
|
|
Increase our vulnerability to general adverse economic and
industry conditions; |
|
|
|
Require us to dedicate a substantial portion of our cash flows
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flows to fund working
capital, capital expenditures, acquisitions and other general
corporate purposes; |
|
|
|
Limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; and |
18
|
|
|
|
|
Reduce the value of stockholders investments in Leap
because debt holders have priority regarding our assets in the
event of a bankruptcy or liquidation. |
In addition, the Credit Agreement governing our senior secured
credit facilities contains restrictive covenants that limit our
ability to engage in activities that may be in our long-term
best interest. The Credit Agreement also contains various
affirmative and negative covenants, including covenants that
require us to maintain compliance with certain financial
leverage and coverage ratios. Our failure to comply with any of
these covenants could result in an event of default that, if not
cured or waived, could result in the acceleration of all of our
debt. Any such acceleration would have a material adverse affect
on our liquidity and financial condition and on the value of the
common stock of Leap. Our failure to timely file this Annual
Report on Form 10-K constituted a default under the Credit
Agreement. Although we were able to obtain a limited waiver of
this default, we cannot assure you that we will be able to
obtain a waiver in the future should a default occur.
We Expect To Be Able To Incur Substantially More Debt; This
Could Increase The Risks Associated With Our Leverage
The covenants in our Credit Agreement allow us to incur
substantial additional indebtedness in the future. If we incur
additional indebtedness, the risks associated with our leverage
could increase substantially.
The Wireless Industry Is Experiencing Rapid Technological
Change, And We May Lose Customers If We Fail To Keep Up With
These Changes
The wireless communications industry is experiencing significant
technological change, as evidenced by the ongoing improvements
in the capacity and quality of digital technology, the
development and commercial acceptance of wireless data services,
shorter development cycles for new products and enhancements and
changes in end-user requirements and preferences. The cost of
implementing future technological innovations may be prohibitive
to us, and we may lose customers if we fail to keep up with
these changes.
The Loss Of Key Personnel And Difficulty Attracting And
Retaining Qualified Personnel Could Harm Our Business
We believe our success depends heavily on the contributions of
our employees and on maintaining our experienced workforce. We
do not, however, generally provide employment contracts to our
employees and the uncertainties associated with our bankruptcy
and our emergence from bankruptcy have caused many employees to
consider or pursue alternative employment. Since we announced
reorganization discussions and filed for Chapter 11, we
have experienced higher than normal employee turnover, including
turnover of individuals at the chief executive officer,
president and chief operating officer, senior vice president,
vice president and other management levels. The loss of key
individuals, and particularly the cumulative effect of such
losses, may have a material adverse impact on our ability to
effectively manage and operate our business.
Risks Associated With Wireless Handsets Could Pose Product
Liability, Health And Safety Risks That Could Adversely Affect
Our Business
We do not manufacture handsets or other equipment sold by us and
generally rely on our suppliers to provide us with safe
equipment. Our suppliers are required by applicable law to
manufacture their handsets to meet certain governmentally
imposed safety criteria. However, even if the handsets we sell
meet the regulatory safety criteria, we could be held liable
with the equipment manufacturers and suppliers for products we
sell if they are later found to have design or manufacturing
defects. We generally have indemnification agreements with the
manufacturers who supply us with handsets to protect us from
direct losses associated with product liability, but we cannot
guarantee that we will be fully protected against all losses
associated with a product that is found to be defective.
Media reports have suggested that the use of wireless handsets
may be linked to various health concerns, including cancer, and
may interfere with various electronic medical devices, including
hearing aids and pacemakers. Certain class action lawsuits have
been filed in the industry claiming damages for alleged health
19
problems arising from the use of wireless handsets. In addition,
interest groups have requested that the FCC investigate claims
that wireless technologies pose health concerns and cause
interference with airbags, hearing aids and other medical
devices. The media has also reported incidents of handset
battery malfunction, including reports of batteries that have
overheated. Malfunctions have caused at least one major handset
manufacturer to recall certain batteries used in its handsets,
including batteries in a handset sold by Cricket and other
wireless providers.
Concerns over radio frequency emissions and defective products
may discourage the use of wireless handsets, which could
decrease demand for our services. In addition, if one or more
Cricket customers were harmed by a defective product provided to
us by the manufacturer and subsequently sold in connection with
our services, our ability to add and maintain customers for
Cricket service could be materially adversely affected by
negative public reactions.
There also are some safety risks associated with the use of
wireless handsets while driving. Concerns over these safety
risks and the effect of any legislation that has been and may be
adopted in response to these risks could limit our ability to
sell our wireless service.
We Rely Heavily On Third Parties To Provide Specialized
Services; A Failure By Such Parties To Provide The Agreed
Services Could Materially Adversely Affect Our Business, Results
Of Operations And Financial Condition
We depend heavily on suppliers and contractors with specialized
expertise in order for us to efficiently operate our business.
In the past, our suppliers, contractors and third-party
retailers have not always performed at the levels we expect or
at the levels required by their contracts. If key suppliers,
contractors or third-party retailers fail to comply with their
contracts, fail to meet our performance expectations or refuse
to supply us in the future, our business could be severely
disrupted. Generally, there are multiple sources for the types
of products we purchase. However, some suppliers, including
software suppliers, are the exclusive sources of their specific
products. Because of the costs and time lags that can be
associated with transitioning from one supplier to another, our
business could be substantially disrupted if we were required to
replace the products or services of one or more major,
specialized suppliers with products or services from another
source, especially if the replacement became necessary on short
notice. Any such disruption could have a material adverse affect
on our business, results of operations and financial condition.
We May Be Subject To Claims Of Infringement Regarding
Telecommunications Technologies That Are Protected By Patents
And Other Intellectual Property Rights
Telecommunications technologies are protected by a wide array of
patents and other intellectual property rights. As a result,
third parties may assert infringement claims against us from
time to time based on our general business operations or the
specific operation of our wireless networks. We generally have
indemnification agreements with the manufacturers and suppliers
who provide us with the equipment and technology that we use in
our business to protect us against possible infringement claims,
but we cannot guarantee that we will be fully protected against
all losses associated with an infringement claim. Whether or not
an infringement claim was valid or successful, it could
adversely affect our business by diverting management attention,
involving us in costly and time-consuming litigation, requiring
us to enter into royalty or licensing agreements (which may not
be available on acceptable terms, or at all), or requiring us to
redesign our business operations or systems to avoid claims of
infringement.
A third party with a large patent portfolio has contacted us and
suggested that we need to obtain a license under a number of its
patents in connection with our current business operations. We
understand that the third party has initiated similar
discussions with other telecommunications carriers. We have
begun to evaluate the third partys position but have not
yet reached a conclusion as to the validity of its position. If
we cannot reach a mutually agreeable resolution with the third
party, we may be forced to enter into a licensing or royalty
agreement with the third party. We do not currently expect that
such an agreement would materially adversely affect our
business, but we cannot provide assurance to our investors about
the effect of any such license.
20
Regulation By Government Agencies May Increase Our Costs
Of Providing Service Or Require Us To Change Our Services
Our operations are subject to varying degrees of regulation by
the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the
Occupational Safety and Health Administration and state and
local regulatory agencies and legislative bodies. Adverse
decisions or regulations of these regulatory bodies could
negatively impact our operations and costs of doing business.
State regulatory agencies are increasingly focused on the
quality of service and support that wireless carriers provide to
their customers and several agencies have proposed or enacted
new and potentially burdensome regulations in this area.
Governmental regulations and orders can significantly increase
our costs and affect our competitive position compared to other
telecommunications providers. We are unable to predict the
scope, pace or financial impact of regulations and other policy
changes that could be adopted by the various governmental
entities that oversee portions of our business.
If Call Volume Under Our Cricket Flat Price Plans Exceeds Our
Expectations, Our Costs Of Providing Service Could Increase,
Which Could Have A Material Adverse Effect On Our Competitive
Position
Cricket customers currently use their handsets approximately
1,500 minutes per month, and some markets are experiencing
substantially higher call volumes. We own less spectrum in many
of our markets than our competitors, but we design our networks
to accommodate our expected high call volume, and we
consistently assess and implement technological improvements to
increase the efficiency of our wireless spectrum. However, if
future wireless use by Cricket customers exceeds the capacity of
our networks, service quality may suffer. We may be forced to
raise the price of Cricket service to reduce volume or otherwise
limit the number of new customers, or incur substantial capital
expenditures to improve network capacity.
We offer service plans that bundle certain features, long
distance and virtually unlimited local service for a fixed
monthly fee to more effectively compete with other
telecommunications providers. If customers exceed expected
usage, we could face capacity problems and our costs of
providing the services could increase. Further, long distance
rates and the charges for interconnecting telephone call traffic
between carriers can be affected by governmental regulatory
actions (and in some cases are subject to regulatory control)
and, as a result, could increase with limited warning. If we are
unable to cost-effectively provide our products and services to
customers, our competitive position and business prospects could
be materially adversely affected.
Future Declines In The Fair Value Of Our Wireless Licenses
Could Result In Future Impairment Charges
During the three months ended June 30, 2003, we recorded an
impairment charge of $171.1 million to reduce the carrying
value of our wireless licenses to their estimated fair value.
However, as a result of our adoption of fresh-start reporting
under American Institute of Certified Public Accountants
Statement of Position 90-7, Financial Reporting by
Entities in Reorganization under the Bankruptcy Code, or
SOP 90-7, we increased the carrying value of our wireless
licenses to $652.6 million at July 31, 2004, the fair
value estimated by management based in part on information
provided by an independent valuation consultant. The fair values
of our wireless licenses are based primarily on available market
prices, including successful bid prices in FCC auctions and
selling prices observed in wireless license transactions.
The market values of wireless licenses have varied dramatically
over the last several years, and may vary significantly in the
future. In particular, valuation swings could occur if:
|
|
|
|
|
consolidation in the wireless industry allowed or required
carriers to sell significant portions of their wireless spectrum
holdings; |
|
|
|
a sudden large sale of spectrum by one or more wireless
providers occurs; or |
|
|
|
market prices decline as a result of the bidding activity in
recently concluded or upcoming FCC auctions. |
21
In addition, the price of wireless licenses could decline as a
result of the FCCs pursuit of policies designed to
increase the number of wireless licenses available in each of
our markets. If the market value of wireless licenses were to
decline significantly in the future, the value of our wireless
licenses could be subject to non-cash impairment charges in the
future. A significant impairment loss could have a material
adverse effect on our operating income and on the carrying value
of our wireless licenses on our balance sheet.
Declines In Our Operating Performance Could Ultimately Result
In An Impairment Of Our Indefinite-Lived Assets, Including
Goodwill, Or Our Long-Lived Assets, Including Property and
Equipment
We assess potential impairments to our long-lived assets,
including property and equipment and certain intangible assets,
when there is evidence that events or changes in circumstances
indicate that the carrying value may not be recoverable. We
assess potential impairments to indefinite-lived intangible
assets, including goodwill and wireless licenses, annually and
when there is evidence that events or changes in circumstances
indicate that an impairment condition may exist. If we do not
achieve our planned operating results, this may ultimately
result in a non-cash impairment charge related to our long-lived
and/or our indefinite-lived assets. A significant impairment
loss could have a material adverse effect on our operating
results and on the carrying value of our goodwill or other
indefinite-lived assets and/or our long-lived assets on our
balance sheet.
Because Our Consolidated Financial Statements Reflect
Fresh-Start Reporting Adjustments Made Upon Our Emergence From
Bankruptcy, Financial Information In Our Current And Future
Financial Statements Will Not Be Comparable To Our Financial
Information From Prior Periods
As a result of adopting fresh-start reporting on July 31,
2004, the carrying values of our wireless licenses and our
long-lived assets and the related depreciation and amortization
expense, among other things, changed considerably from that
reflected in our historical consolidated financial statements.
Thus, our current and future balance sheets and results of
operations will not be comparable in many respects to our
balance sheets and consolidated statements of operations data
for periods prior to our adoption of fresh-start reporting. You
are not able to compare information reflecting our
post-emergence balance sheet data, results of operations and
changes in financial condition to information for periods prior
to our emergence from bankruptcy, without making adjustments for
fresh-start reporting.
Risks Related to Our Common Stock
Our Shares Are Not Listed With the NASDAQ National Market Or
A National Securities Exchange And May Have Limited Trading
On the Effective Date of our Plan of Reorganization, Leap issued
60 million shares of common stock for distribution to two
classes of our creditors. Leaps outstanding shares of
common stock are not currently listed on the NASDAQ National
Market or any national securities exchange and Leap cannot
guarantee that an application to list its shares will be
granted. Leaps common shares are quoted for trading by
market makers on the OTC Bulletin Board, but the shares may be
less liquid in that market than they would be on the NASDAQ
National Market or a national securities exchange. Our ability
to access equity capital markets may be restricted in the future
if the trading market for Leaps common stock lacks
sufficient liquidity.
Our Stock Price May Be Volatile
The trading prices of the securities of telecommunications
companies have been highly volatile. Accordingly, the trading
price of our common stock is likely to be subject to wide
fluctuations. Factors affecting the trading price of our common
stock may include, among other things:
|
|
|
|
|
variations in our operating results; |
|
|
|
announcements of technological innovations, new services or
service enhancements, strategic alliances or significant
agreements by us or by our competitors; |
|
|
|
recruitment or departure of key personnel; |
22
|
|
|
|
|
changes in the estimates of our operating results or changes in
recommendations by any securities analysts that elect to follow
our common stock; and |
|
|
|
market conditions in our industry and the economy as a whole. |
Our Directors and Affiliated Entities Have Substantial
Influence Over Our Affairs
Our directors and entities affiliated with them beneficially own
in the aggregate approximately 28.7% of our common stock. These
stockholders have the ability to exert substantial influence
over all matters requiring approval by our stockholders. These
stockholders will be able to influence the election and removal
of directors and any merger, consolidation or sale of all or
substantially all of our assets and other matters. This
concentration of ownership could have the effect of delaying,
deferring or preventing a change in control or impeding a merger
or consolidation, takeover or other business combination.
Provisions In Our Amended And Restated Certificate Of
Incorporation And Bylaws Or Delaware Law Might Discourage, Delay
Or Prevent A Change In Control Of Our Company Or Changes In Our
Management And Therefore Depress The Trading Price Of Our Common
Stock.
Our amended and restated certificate of incorporation and bylaws
contain provisions that could depress the trading price of our
common stock by acting to discourage, delay or prevent a change
in control of our company or changes in our management that the
stockholders of Leap may deem advantageous. These provisions:
|
|
|
|
|
require super-majority voting to amend some provisions in our
amended and restated certificate of incorporation and bylaws; |
|
|
|
authorize the issuance of blank check preferred
stock that our board of directors could issue to increase the
number of outstanding shares to discourage a takeover attempt; |
|
|
|
prohibit stockholder action by written consent, and require that
all stockholder actions be taken at a meeting of our
stockholders; |
|
|
|
provide that the board of directors is expressly authorized to
make, alter or repeal our bylaws; and |
|
|
|
establish advance notice requirements for nominations for
elections to our board or for proposing matters that can be
acted upon by stockholders at stockholder meetings. |
Additionally, we are subject to Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business
combinations with any interested stockholder for a
period of three years following the date on which the
stockholder became an interested stockholder and
which may discourage, delay or prevent a change in control of
our company.
Leap currently leases space, totaling approximately 99,100
square feet, in two office buildings in San Diego,
California for our headquarters. We use these buildings for
sales, marketing, product development, engineering and
administrative purposes.
As of April 30, 2005, Cricket had leased regional offices
in Denver, Colorado and Nashville, Tennessee. These offices
consist of approximately 15,600 square feet and 17,900 square
feet, respectively. Cricket has 22 additional office leases
in its individual markets that range from 2,500 square feet to
13,618 square feet. Cricket also leases approximately 90
retail locations in its markets, including stores ranging in
size from 1,050 square feet to 4,600 square feet, as well
as kiosks and retail spaces within another store. In addition,
we currently lease approximately 2,600 cell site locations, 26
switch locations and three warehouse facilities that range in
size from approximately 3,000 square feet to approximately
20,000 square feet. We do not own any real property.
As we continue to develop existing Cricket markets, and as we
build-out additional markets, we will lease additional or
substitute office facilities, retail stores, cell sites and
switch and warehouse facilities.
23
|
|
Item 3. |
Legal Proceedings |
Bankruptcy Proceedings
On the Petition Date, Leap, Cricket and substantially all of
their subsidiaries filed voluntary petitions for relief under
Chapter 11 in the United States Bankruptcy Court for the
Southern District of California. On October 22, 2003, the
Bankruptcy Court entered an order confirming the Plan of
Reorganization. The effectiveness of the Plan of Reorganization
was conditioned upon, among other things, the receipt of
required regulatory approvals from the FCC for the transfer of
wireless licenses associated with the change of control that
occurred upon Leaps emergence from bankruptcy. Leap
received the requisite approvals from the FCC on August 5,
2004. On August 16, 2004, Leap and Cricket satisfied the
remaining conditions to the Plan of Reorganization, the Plan of
Reorganization became effective, and the Company emerged from
Chapter 11 bankruptcy. The Leap Creditor Trust is defending
unsecured claims asserted against Leap in bankruptcy, and the
Leap Creditor Trust will pay settlements or judgments, if any,
from Leap Creditor Trust funds.
In connection with the Chapter 11 proceedings, the
Bankruptcy Court established deadlines by which the holders of
pre-emergence claims against us were required to file proofs of
claim. The final deadline for such claims, relating to claims
that arose during the course of the bankruptcy, was
October 15, 2004, 60 days after the Effective Date of
the Plan of Reorganization. Parties who were required to, but
who failed to, file proofs of claim before the applicable
deadlines are barred from asserting such claims against us in
the future. Generally, our obligations have been discharged with
respect to general unsecured claims for pre-petition
obligations, although the holders of allowed general unsecured
pre-petition claims against Leap have (and holders of pending
general unsecured claims against Leap may have) a pro rata
beneficial interest in the assets of the Leap Creditor Trust. We
reviewed the remaining claims filed against us (consisting
primarily of claims for pre-petition taxes and for obligations
incurred by us during the course of the Chapter 11
proceedings) and filed further objections by the Bankruptcy
Court deadline of January 17, 2005. We do not believe that
the resolution of the outstanding claims filed against us in
bankruptcy will have a material adverse impact on the
Companys consolidated financial statements.
Foreign governmental authorities have asserted or are likely to
assert tax claims of approximately $6.3 million, including
interest, against Leap with respect to periods prior to the
bankruptcy, although the Company believes that the true value of
these asserted or potential claims is lower. Leap likely did not
mail notice of its bankruptcy filings or the proceedings in the
Bankruptcy Court to these governmental authorities. We are
exploring methods to bring the claims of these foreign
authorities within the bankruptcy claims resolution process. If
the claims are resolved through the Bankruptcy Court, we expect
any payment on the claims will be paid from restricted cash
previously reserved to satisfy allowed administrative claims and
allowed priority claims against Leap. In any event, we do not
believe that the resolution of these issues will have a material
adverse effect on our consolidated financial statements.
Securities Litigation
On December 31, 2002, several members of American Wireless
Group, LLC, referred to in this report as AWG, filed a lawsuit
against various officers and directors of Leap in the Circuit
Court of the First Judicial District of Hinds County,
Mississippi, referred to herein as the Whittington Lawsuit. Leap
purchased certain FCC wireless licenses from AWG and paid for
those licenses with shares of Leap stock. The complaint alleges
that Leap failed to disclose to AWG material facts regarding a
dispute between Leap and a third party relating to that
partys claim that it was entitled to an increase in the
purchase price for certain wireless licenses it sold to Leap. In
their complaint, plaintiffs seek rescission and/or damages
according to proof at trial of not less than the aggregate
amount paid for the Leap stock (alleged in the complaint to have
a value of approximately $57.8 million in June 2001 at the
closing of the license sale transaction), plus interest,
punitive or exemplary damages in the amount of not less than
three times compensatory damages, and costs and expenses. Leap
is not a defendant in the Whittington Lawsuit. Plaintiffs
contend that the named defendants are the controlling group that
was responsible for Leaps alleged failure to disclose the
material facts regarding the third party dispute and the risk
that the shares held by the plaintiffs might be diluted if the
third party was successful in an arbitration proceeding.
Defendants filed a motion to compel arbitration, or in the
alternative, to dismiss the
24
Whittington Lawsuit, noting that plaintiffs as members of AWG
agreed to arbitrate disputes pursuant to the license purchase
agreement, that they failed to plead facts that show that they
are entitled to relief, that Leap made adequate disclosure of
the relevant facts regarding the third party dispute, and that
any failure to disclose such information did not cause any
damage to the plaintiffs.
In a related action to the action described above, on
June 6, 2003, AWG filed a lawsuit in the Circuit Court of
the First Judicial District of Hinds County, Mississippi,
referred to herein as the AWG Lawsuit, against the same
individual defendants named in the Whittington Lawsuit. The
complaint generally sets forth the same claims made by the
plaintiffs in the Whittington Lawsuit. Leap is not a defendant
in the AWG Lawsuit. In its complaint, plaintiff seeks rescission
and/or damages according to proof at trial of not less than the
aggregate amount paid for the Leap stock (alleged in the
complaint to have a value of approximately $57.8 million in
June 2001 at the closing of the license sale transaction), plus
interest, punitive or exemplary damages in the amount of not
less than three times compensatory damages, and costs and
expenses. Defendants filed a motion to compel arbitration or, in
the alternative, to dismiss the AWG Lawsuit, making arguments
similar to those made in their motion to dismiss the Whittington
Lawsuit.
Although Leap is not a defendant in either the Whittington or
AWG Lawsuits, several of the defendants have indemnification
agreements with the Company. Leaps D&O insurers have
not filed a reservation of rights letter and have been paying
defense costs. Management believes that the liability, if any,
from the AWG and Whittington Lawsuits and the related indemnity
claims of the defendants against Leap is not probable and
estimable; therefore, no accrual has been made in our
consolidated financial statements as of December 31, 2004
related to these contingencies.
On December 5, 2003, nine securities class action lawsuits
were filed against Leap, and certain of its officers and
directors, in the United States District Court for the Southern
District of California on behalf of all persons who purchased or
otherwise acquired Leaps common stock from
February 11, 2002 through July 24, 2002. Those
lawsuits were all virtually identical to one another. The
plaintiffs alleged that the defendants were responsible for the
dissemination of a series of material misrepresentations to the
market during the class period, thereby artificially inflating
the price of Leaps common stock. The complaint sought an
unspecified amount of damages, plus costs and expenses related
to bringing the actions. No class was certified in the lawsuit.
The defendants filed a motion to dismiss the amended complaint,
stating that the amended complaint failed to plead any facts
which show that any representations were made by Leap or any
other defendants or that any of the alleged misrepresentations
caused a change in the value of Leaps shares. On
August 26, 2004, the court granted the defendants
motion to dismiss, but granted the plaintiffs leave to amend
their complaint. The plaintiffs did not file an amended
complaint and a court order voluntarily dismissing the action
with prejudice was issued on January 7, 2005.
Leap is often involved in various claims arising in the course
of business, seeking monetary damages and other relief. The
amount of the liability, if any, from such claims cannot be
determined with certainty. However, in the opinion of
Leaps management, the ultimate liability for such claims
will not have a material adverse effect on Leaps
consolidated financial statements.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of Leaps stockholders,
through the solicitation of proxies or otherwise, during the
year ended December 31, 2004.
25
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Market Price of and Dividends on the Registrants Common
Equity and Related Stockholder Matters
Our common stock traded on the OTC Bulletin Board until
August 16, 2004 under the symbol LWINQ. When we
emerged from our Chapter 11 proceedings on August 16,
2004, all of our formerly outstanding common stock was cancelled
in accordance with our Plan of Reorganization and our former
common stockholders ceased to have any ownership interest in us.
The new shares of our common stock issued under our Plan of
Reorganization now trade on the OTC Bulletin Board under the
symbol LEAP. Prior to December 11, 2002, our
common stock was listed on the NASDAQ under the symbol
LWIN.
Because the value of one share of our new common stock bears no
relation to the value of one share of our old common stock, the
trading prices of our new common stock are set forth separately
from the trading prices of our old common stock.
The following table sets forth the high and low sales prices per
share of our common stock for the quarterly periods indicated,
which correspond to our quarterly fiscal periods for financial
reporting purposes. Prices for our old common stock are prices
on the OTC Bulletin Board through August 15, 2004. Prices
for our new common stock are prices on the OTC Bulletin Board
from August 16, 2004 through December 31, 2004.
Over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
High($) | |
|
Low($) | |
|
|
| |
|
| |
Old Common Stock
|
|
|
|
|
|
|
|
|
Calendar Year 2003
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
0.21 |
|
|
|
0.11 |
|
|
Second Quarter
|
|
|
0.21 |
|
|
|
0.05 |
|
|
Third Quarter
|
|
|
0.07 |
|
|
|
0.02 |
|
|
Fourth Quarter
|
|
|
0.09 |
|
|
|
0.01 |
|
Calendar Year 2004
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
0.06 |
|
|
|
0.03 |
|
|
Second Quarter
|
|
|
0.04 |
|
|
|
0.01 |
|
|
Third Quarter through August 15, 2004
|
|
|
0.02 |
|
|
|
0.01 |
|
New Common Stock
|
|
|
|
|
|
|
|
|
|
Third Quarter beginning August 16, 2004
|
|
|
27.80 |
|
|
|
19.75 |
|
|
Fourth Quarter
|
|
|
28.10 |
|
|
|
19.00 |
|
On May 11, 2005, the last reported sale price of
Leaps common stock on the OTC Bulletin Board was
$24.05 per share. As of May 11, 2005, there were
60,000,000 shares of common stock outstanding held by
approximately 35 holders of record.
Dividends
Leap has never paid or declared any cash dividends on its common
stock and we do not anticipate paying any cash dividends on our
common stock in the foreseeable future. The terms of our senior
secured credit facilities entered into in January 2005 restrict
our ability to declare or pay dividends. We intend to retain
future earnings, if any, to fund our growth. Any future payment
of dividends to our stockholders will depend on decisions that
will be made by our board of directors and will depend on then
existing conditions, including our financial condition,
contractual restrictions, capital requirements and business
prospects.
26
Securities Authorized For Issuance Under Equity Compensation
Plans
The following table provides information as of December 31,
2004 with respect to compensation plans (including individual
compensation arrangements) under which Leaps common stock
is authorized for issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities | |
|
|
Number of securities to be | |
|
Weighted-average |
|
remaining available for | |
|
|
issued upon exercise of | |
|
exercise price of |
|
future issuance under | |
Plan Category |
|
outstanding options(1) | |
|
outstanding options |
|
equity compensation plans(1) | |
|
|
| |
|
|
|
| |
Equity compensation plans approved by security holders
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Equity compensation plans not approved by security holders(2)
|
|
|
|
|
|
$ |
|
|
|
|
4,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$ |
|
|
|
|
4,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
All of the Leap common stock, warrants and options outstanding
immediately prior to the effectiveness of our Plan of
Reorganization were cancelled as of August 16, 2004
pursuant to our Plan of Reorganization. Following our emergence
from bankruptcy, in accordance with Section 5.07 of our
Plan of Reorganization, the compensation committee of our board
of directors, acting pursuant to a delegation of authority from
the board of directors, approved the Leap Wireless
International, Inc. 2004 Stock Option, Restricted Stock and
Deferred Stock Unit Plan effective December 30, 2004. The
2004 Plan authorizes discretionary grants to our employees,
consultants and independent directors, and to the employees and
consultants of our subsidiaries, of stock options, restricted
stock and deferred stock units. The aggregate number of shares
of common stock subject to awards under the 2004 Plan will be no
more than 4,800,000. For a description of the terms of the 2004
Plan, see Item 11. Executive Compensation
Employee Benefit Plans contained in this report. |
|
(2) |
Reflects shares authorized for issuance under Leaps 2004
Stock Option, Restricted Stock and Deferred Stock Unit Plan
adopted by the compensation committee of our board of directors
on December 30, 2004 as contemplated by the Companys
confirmed Plan of Reorganization. |
27
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data are derived from our
consolidated financial statements and have been restated for the
seven months ended July 31, 2004 to reflect adjustments
that are further discussed in Note 2 to the consolidated
financial statements included in Item 8 of this report.
These tables should be read in conjunction with
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and
Item 8. Financial Statements and Supplementary
Data. References in these tables to Predecessor
Company refer to the Company on or prior to July 31,
2004. References to Successor Company refer to the
Company after July 31, 2004, after giving effect to the
implementation of fresh-start reporting. The financial
statements of the Successor Company are not comparable in many
respects to the financial statements of the Predecessor Company
because of the effects of the consummation of the Plan of
Reorganization as well as the adjustments for fresh-start
reporting. For a description of fresh-start reporting, see
Note 3 to the consolidated financial statements included in
Item 8 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Ended | |
|
Ended | |
|
Year Ended December 31, | |
|
|
December 31, | |
|
July 31, | |
|
| |
|
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000(4) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
|
|
|
|
Statement of Operations Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
285,647 |
|
|
$ |
398,451 |
|
|
$ |
643,566 |
|
|
$ |
567,694 |
|
|
$ |
215,917 |
|
|
$ |
40,599 |
|
|
Equipment revenues
|
|
|
58,713 |
|
|
|
83,196 |
|
|
|
107,730 |
|
|
|
50,781 |
|
|
|
39,247 |
|
|
|
9,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
344,360 |
|
|
|
481,647 |
|
|
|
751,296 |
|
|
|
618,475 |
|
|
|
255,164 |
|
|
|
50,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(79,148 |
) |
|
|
(113,988 |
) |
|
|
(199,987 |
) |
|
|
(181,404 |
) |
|
|
(94,510 |
) |
|
|
(20,821 |
) |
|
Cost of equipment
|
|
|
(82,402 |
) |
|
|
(97,160 |
) |
|
|
(172,235 |
) |
|
|
(252,344 |
) |
|
|
(202,355 |
) |
|
|
(54,883 |
) |
|
Selling and marketing
|
|
|
(39,938 |
) |
|
|
(51,997 |
) |
|
|
(86,223 |
) |
|
|
(122,092 |
) |
|
|
(115,222 |
) |
|
|
(31,709 |
) |
|
General and administrative
|
|
|
(57,110 |
) |
|
|
(81,514 |
) |
|
|
(162,378 |
) |
|
|
(185,915 |
) |
|
|
(152,051 |
) |
|
|
(85,640 |
) |
|
Depreciation and amortization
|
|
|
(75,324 |
) |
|
|
(177,494 |
) |
|
|
(300,243 |
) |
|
|
(287,942 |
) |
|
|
(119,177 |
) |
|
|
(24,563 |
) |
|
Impairment of indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
(171,140 |
) |
|
|
(26,919 |
) |
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets and related charges
|
|
|
|
|
|
|
(626 |
) |
|
|
(24,054 |
) |
|
|
(16,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(333,922 |
) |
|
|
(522,779 |
) |
|
|
(1,116,260 |
) |
|
|
(1,072,939 |
) |
|
|
(683,315 |
) |
|
|
(217,616 |
) |
Gains on sale of wireless licenses
|
|
|
|
|
|
|
532 |
|
|
|
4,589 |
|
|
|
364 |
|
|
|
143,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
10,438 |
|
|
|
(40,600 |
) |
|
|
(360,375 |
) |
|
|
(454,100 |
) |
|
|
(284,518 |
) |
|
|
(167,299 |
) |
Equity in net loss of and write-down of investments in and loans
receivable from unconsolidated wireless operating companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,000 |
) |
|
|
(78,624 |
) |
Interest income
|
|
|
1,812 |
|
|
|
|
|
|
|
779 |
|
|
|
6,345 |
|
|
|
26,424 |
|
|
|
48,477 |
|
Interest expense
|
|
|
(16,594 |
) |
|
|
(4,195 |
) |
|
|
(83,371 |
) |
|
|
(229,740 |
) |
|
|
(178,067 |
) |
|
|
(112,358 |
) |
Foreign currency transaction gains (losses), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,257 |
) |
|
|
13,966 |
|
Gain on sale of wholly owned subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,432 |
|
Gain on issuance of stock by unconsolidated wireless operating
company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,602 |
|
Gain on sale of unconsolidated wireless operating company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,518 |
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(117 |
) |
|
|
(293 |
) |
|
|
(176 |
) |
|
|
(3,001 |
) |
|
|
8,443 |
|
|
|
(2,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items and income taxes
|
|
|
(4,461 |
) |
|
|
(45,088 |
) |
|
|
(443,143 |
) |
|
|
(640,978 |
) |
|
|
(482,975 |
) |
|
|
47,372 |
|
Reorganization items, net
|
|
|
|
|
|
|
962,444 |
|
|
|
(146,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(4,461 |
) |
|
|
917,356 |
|
|
|
(589,385 |
) |
|
|
(640,978 |
) |
|
|
(482,975 |
) |
|
|
47,372 |
|
Income taxes
|
|
|
(4,168 |
) |
|
|
(4,166 |
) |
|
|
(8,052 |
) |
|
|
(23,821 |
) |
|
|
(322 |
) |
|
|
(47,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(8,629 |
) |
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
$ |
(664,799 |
) |
|
$ |
(483,297 |
) |
|
$ |
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share(2)
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
$ |
(14.91 |
) |
|
$ |
(14.27 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
|
|
44,591 |
|
|
|
33,861 |
|
|
|
25,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance Sheet Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
141,141 |
|
|
$ |
84,070 |
|
|
$ |
100,860 |
|
|
$ |
242,979 |
|
|
$ |
338,878 |
|
Working capital (deficit)(3)
|
|
|
142,404 |
|
|
|
(2,254,809 |
) |
|
|
(2,144,420 |
) |
|
|
189,507 |
|
|
|
602,373 |
|
Restricted cash, cash equivalents and short-term investments
|
|
|
31,427 |
|
|
|
55,954 |
|
|
|
25,922 |
|
|
|
40,755 |
|
|
|
65,471 |
|
Total assets
|
|
|
2,090,482 |
|
|
|
1,756,843 |
|
|
|
2,163,702 |
|
|
|
2,450,895 |
|
|
|
1,647,407 |
|
Long-term debt(3)
|
|
|
371,355 |
|
|
|
|
|
|
|
|
|
|
|
1,676,845 |
|
|
|
897,878 |
|
Total stockholders equity (deficit)
|
|
|
1,469,850 |
|
|
|
(893,356 |
) |
|
|
(296,786 |
) |
|
|
358,440 |
|
|
|
583,258 |
|
|
|
(1) |
For the first six months of the year ended December 31,
2000, the financial results of Smartcom are included in the
selected consolidated financial data as a result of our
acquisition of the remaining 50% interest in Smartcom that we
did not already own on April 19, 1999. We subsequently
divested our entire interest in Smartcom on June 2, 2000. |
|
(2) |
Refer to Notes 2 and 5 to the consolidated financial
statements included in Item 8 of this report for an
explanation of the calculation of basic and diluted net loss per
common share. |
|
(3) |
We have presented the principal and interest balances related to
our outstanding debt obligations as current liabilities in the
consolidated balance sheets as of December 31, 2003 and
2002, as a result of the then existing defaults under the
underlying agreements. |
|
(4) |
We have reclassified a $4.7 million loss on early
extinguishment of debt from extraordinary items to other income
(expense) as a result of our adoption of Statement of Financial
Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. |
29
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is based upon our
consolidated financial statements as of the dates and for the
periods presented in this report. This discussion and analysis
should be read in conjunction with our consolidated financial
statements and related notes included in Item 8 of this
report.
Overview
Restatement of Previously Reported Unaudited Interim
Consolidated Financial Information. The accompanying
Managements Discussion and Analysis of Financial Condition
and Results of Operations gives effect to certain restatement
adjustments made to the previously unaudited interim financial
information of the Predecessor Company for the one and seven
month periods ended July 31, 2004 and the Successor Company
for the two months ended September 30, 2004. See
Note 2 to the consolidated financial statements in
Item 8 of this report for additional information.
Our Business. We conduct our business primarily through
the Cricket Companies. Cricket provides mobile wireless services
targeted to meet the needs of customers who are under-served by
traditional communications companies. Our Cricket service is a
simple and affordable wireless alternative to traditional
landline service. Cricket service offers customers virtually
unlimited anytime minutes within the Cricket calling area over a
high-quality, all-digital CDMA network. Our revenues come from
the sale of wireless services, handsets and accessories to
customers. Our liquidity and capital resources come primarily
from the operations and assets of Cricket, from borrowings under
our revolving credit facility and from offerings of debt and/or
equity in the capital markets from time to time.
Cricket operates in 39 markets in 20 states stretching
from New York to California. At December 31, 2004, we had
approximately 1,570,000 customers. Factors we consider when
expanding our Cricket service into new markets include whether
the new market will complement an existing Cricket market
cluster, whether we believe we can obtain sufficient customer
penetration in the market and whether the market is sufficiently
densely populated for us to offer services on a cost competitive
basis. For a more detailed description of our business, see
Item 1. Business above.
Voluntary Reorganization Under Chapter 11. On
April 13, 2003, Leap, Cricket and substantially all of
their subsidiaries filed voluntary petitions for relief under
Chapter 11 in the U.S. Bankruptcy Court for the
Southern District of California. On August 16, 2004, Leap
and Cricket satisfied the final conditions to our Plan of
Reorganization and it became effective. On that date, a new
Board of Directors of Leap was appointed, our previously
existing stock, options and warrants were cancelled, and we
issued 60 million shares of new Leap common stock for
distribution to two classes of creditors. For a more detailed
description of our bankruptcy proceedings, see
Item 1. Business Chapter 11
Proceedings Under the Bankruptcy Code and Note 1 to
the consolidated financial statements included in Item 8 of
this report.
Our Plan of Reorganization implemented a comprehensive financial
reorganization that significantly reduced our outstanding
indebtedness. When the Plan of Reorganization became effective
on August 16, 2004, we issued new Cricket 13% senior
secured pay-in-kind notes due 2011 with a face value of
$350 million and an estimated fair value of
$372.8 million and had approximately $40 million of
remaining indebtedness to the FCC. On January 10, 2005, we
entered into new senior secured credit facilities and used a
portion of the proceeds from the $500 million term loan
included as a part of such facilities to redeem Crickets
13% senior secured pay-in-kind notes and to repay the remaining
indebtedness to the FCC. The new facilities consist of a
six-year $500 million term loan and a five-year,
$110 million revolving credit facility. See Liquidity
and Capital Resources below.
Fresh-Start Reporting. In connection with our emergence
from Chapter 11, we adopted the fresh-start reporting
provisions of SOP 90-7. Under SOP 90-7, we were
required to apply fresh-start reporting because
30
(i) the reorganization value of our assets immediately
before the date of confirmation was less than the sum of all the
allowed claims and post petition liabilities, and
(ii) holders of Leap common shares immediately before the
bankruptcy court confirmed our Plan of Reorganization received
less than fifty percent of the common stock issued by Leap on
the date it emerged from bankruptcy. All material conditions to
the effectiveness of the Plan of Reorganization were satisfied
on August 5, 2004. In light of the proximity of
August 5, 2004 to the month ended July 31, 2004 and
the immateriality of the results of operations for the period
from August 1, 2004 through August 5, 2004, we
recorded the effects of the consummation of the Plan of
Reorganization as well as adjustments for fresh-start reporting
in our consolidated financial statements as of July 31,
2004.
Under SOP 90-7, reorganization value represents the fair
value of the entity before considering liabilities and
approximates the amount a willing buyer would pay for the assets
of the entity immediately after the reorganization. Consistent
with fresh-start reporting, the enterprise value (i.e. debt
plus equity) may be used to calculate our reorganization value.
We engaged a third party valuation consultant to assist
management in estimating our enterprise value as of
July 31, 2004. The valuation consultant and two other
valuation firms engaged by us also provided management with
information that management utilized in determining the fair
market value of our network assets and wireless licenses, and
the fair value of our trademarks and customer relationships.
Management used these values in connection with the allocation
process described below.
In implementing fresh-start reporting, we allocated our
reorganization value to our assets in conformity with procedures
specified by SFAS No. 141, Business
Combinations, and stated our liabilities, other than
deferred taxes, at the present value of amounts expected to be
paid. The amount remaining after allocation of the
reorganization value to our identified tangible and intangible
assets is reflected as goodwill, which is subject to periodic
evaluation for impairment. In addition, under fresh-start
reporting, our accumulated deficit was eliminated and new equity
was issued according to the Plan of Reorganization.
This overview is intended to be only a summary of significant
matters concerning our results of operations and financial
condition. It should be read in conjunction with the management
discussion below and all of the business and financial
information contained in this report, including the consolidated
financial statements in Item 8.
Results of Operations
As a result of our emergence from Chapter 11 bankruptcy and
the application of fresh-start reporting, we are deemed to be a
new entity for financial reporting purposes. In this report, the
Company is referred to as the Predecessor Company
for periods on or prior to July 31, 2004, and is referred
to as the Successor Company for periods after
July 31, 2004. The financial statements of the Successor
Company are not comparable in many respects to the financial
statements of the Predecessor Company because of the effects of
the consummation of the Plan of Reorganization as well as the
adjustments for fresh-start accounting. However, for purposes of
this discussion, the Predecessor Companys results for the
period from January 1, 2004 through July 31, 2004 have
been combined with the Successor Companys results for the
period from August 1, 2004 through December 31, 2004.
These combined results are compared to the Predecessor
Companys results for the year ended December 31,
2003. For a more detailed description of fresh-start reporting,
see Note 3 to the consolidated financial statements
included in Item 8 of this report.
31
The following table presents the consolidated statement of
operations data for the periods indicated (in thousands). The
financial data for the year ended December 31, 2004
presented below represents the combination of the Predecessor
and Successor Companies results for that period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
684,098 |
|
|
$ |
643,566 |
|
|
$ |
567,694 |
|
|
Equipment revenues
|
|
|
141,909 |
|
|
|
107,730 |
|
|
|
50,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
826,007 |
|
|
|
751,296 |
|
|
|
618,475 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(193,136 |
) |
|
|
(199,987 |
) |
|
|
(181,404 |
) |
|
Cost of equipment
|
|
|
(179,562 |
) |
|
|
(172,235 |
) |
|
|
(252,344 |
) |
|
Selling and marketing
|
|
|
(91,935 |
) |
|
|
(86,223 |
) |
|
|
(122,092 |
) |
|
General and administrative
|
|
|
(138,624 |
) |
|
|
(162,378 |
) |
|
|
(185,915 |
) |
|
Depreciation and amortization
|
|
|
(252,818 |
) |
|
|
(300,243 |
) |
|
|
(287,942 |
) |
|
Impairment of indefinite-lived intangible assets
|
|
|
|
|
|
|
(171,140 |
) |
|
|
(26,919 |
) |
|
Impairment of long-lived assets and related charges
|
|
|
(626 |
) |
|
|
(24,054 |
) |
|
|
(16,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(856,701 |
) |
|
|
(1,116,260 |
) |
|
|
(1,072,939 |
) |
Gains on sale of wireless licenses
|
|
|
532 |
|
|
|
4,589 |
|
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(30,162 |
) |
|
|
(360,375 |
) |
|
|
(454,100 |
) |
Interest income
|
|
|
1,812 |
|
|
|
779 |
|
|
|
6,345 |
|
Interest expense
|
|
|
(20,789 |
) |
|
|
(83,371 |
) |
|
|
(229,740 |
) |
Gain on sale of unconsolidated wireless operating company
|
|
|
|
|
|
|
|
|
|
|
39,518 |
|
Other income (expense), net
|
|
|
(410 |
) |
|
|
(176 |
) |
|
|
(3,001 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items and income taxes
|
|
|
(49,549 |
) |
|
|
(443,143 |
) |
|
|
(640,978 |
) |
Reorganization items, net
|
|
|
962,444 |
|
|
|
(146,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
912,895 |
|
|
|
(589,385 |
) |
|
|
(640,978 |
) |
Income taxes
|
|
|
(8,334 |
) |
|
|
(8,052 |
) |
|
|
(23,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
904,561 |
|
|
$ |
(597,437 |
) |
|
$ |
(664,799 |
) |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
At December 31, 2004, we had approximately 1,570,000
customers compared to approximately 1,473,000 customers at
December 31, 2003. Gross customer additions for the years
ended December 31, 2004 and 2003 were 808,000 and 735,000,
respectively, and net customer additions (losses) during these
periods were approximately 97,000 and (39,000), respectively. At
December 31, 2004, the total potential customer base
covered under our 39 operating markets was approximately
26.7 million.
During the year ended December 31, 2004, service revenues
increased $40.5 million, or 6%, compared to the year ended
December 31, 2003. The increase in service revenues was due
to a combination of the increase in net customers and an
increase in average revenue per customer. Our basic Cricket
service offers customers virtually unlimited calls within their
Cricket service area at a flat price and in November 2003 we
added two other higher priced plans which include different
levels of bundled features. In March 2004, we introduced a plan
that provides virtually unlimited local and long distance
calling for a flat rate and also introduced a plan that provides
discounts on additional lines added to an existing qualified
account. Since their introduction, the
32
higher priced service plans have represented a significant
portion of our gross customer additions and have increased our
average service revenue per subscriber. The increase in service
revenues resulting from the higher priced service offerings for
the year ended December 31, 2004, as compared to the year
ended December 31, 2003, was partially offset by the
impacts of increased promotional activity in 2004 and by the
elimination of activation fees as an element of service revenue.
Activation fees were included in service revenues for the first
two quarters of fiscal 2003, until our adoption of Emerging
Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables in July 2003, at which time they began to be
included in equipment revenues.
During the year ended December 31, 2004, equipment revenues
increased $34.2 million, or 32%, compared to the year ended
December 31, 2003. Approximately $24.9 million of the
increase in equipment revenues resulted from higher average net
revenue per handset sold, of which higher prices contributed
$15.9 million of the $24.9 million increase, and
higher handset sales volumes contributed the remaining
$9.0 million of the $24.9 million increase. The
primary driver of the increase in revenue per handset sold was
the implementation of a policy to increase handset prices
commencing in the fourth quarter of 2003, offset in part by
increases in promotional activity and in dealer compensation
costs in 2004. Additionally, activation fees included in
equipment revenue increased by $9.3 million for the year
ended December 31, 2004 compared to the year ended
December 31, 2003 due to the inclusion of activation fees
in equipment revenue for all of 2004 versus only the last two
quarters in 2003 as a result of our adoption of EITF Issue
No. 00-21 in July 2003. In 2005, we expect that the change
in equipment revenues will generally reflect changes in the
volume of handsets sold, subject to potential decreases in
average selling prices caused by future promotions or in
response to pricing actions from competitors.
For the year ended December 31, 2004, cost of service
decreased $6.9 million, or 3%, compared to the year ended
December 31, 2003, even though service revenues increased
by 6%. The decrease in cost of service resulted from a net
decrease of $5.8 million in network related costs,
generally resulting from the renegotiation of several supply
agreements during the course of our bankruptcy, a net decrease
of $2.3 million in cell site costs as a result of our
rejection of surplus cell site leases in the bankruptcy
proceedings, and a $3.3 million reduction in property tax
related to the decreased value of fixed assets as a result of
the bankruptcy. These decreases were offset in part by increases
of $2.1 million in employee-related costs and
$6.1 million in software maintenance expenses in the
current year. We generally expect that cost of service in 2005
will increase with growth in customers, usage, and the
introduction and customer adoption of new products.
For the year ended December 31, 2004, cost of equipment
increased $7.3 million, or 4%, compared to the year ended
December 31, 2003. Equipment costs increased by
$22.5 million due primarily to increased handset sales
volume and an increase in the average cost per handset as our
sales mix shifted from moderately priced to higher end handsets.
This increase in equipment cost was offset by cost-reduction
initiatives in reverse logistics and other equipment-related
activities of approximately $15.1 million. Although
equipment revenue growth significantly outpaced equipment cost
increases in 2004 due to the reasons discussed above, we
generally expect changes in equipment revenue in 2005 to more
closely track changes in equipment cost.
For the year ended December 31, 2004, selling and marketing
expenses increased $5.7 million, or 7%, compared to the
year ended December 31, 2003. The increase in selling and
marketing expenses was primarily due to increases of
$6.0 million in employee and facility related costs. During
the latter half of 2003 and throughout 2004, we invested in
additional staffing and resources to improve the customer sales
and service experience in our retail locations.
For the year ended December 31, 2004, general and
administrative expenses decreased $23.8 million, or 15%,
compared to the year ended December 31, 2003. The decrease
in general and administrative expenses was primarily due to a
decrease of $4.7 million in insurance costs and a reduction
of $15.2 million in call center and billing costs resulting
from improved operating efficiencies and cost reductions
negotiated during the course of our bankruptcy, partially offset
by a $2.9 million increase in employee-related expenses. In
addition, for the year ended December 31, 2004, there was a
decrease of $9.2 million in legal costs compared to the
corresponding period in the prior year, primarily reflecting the
classification of costs directly related to our bankruptcy
filings and incurred after the Petition Date as reorganization
expenses.
33
During the year ended December 31, 2004, depreciation and
amortization expenses decreased $47.4 million, or 16%,
compared to the year ended December 31, 2003. The decrease
in depreciation expense was primarily due to the revision of the
estimated useful lives of network equipment and the reduction in
the carrying value of property and equipment as a result of
fresh-start accounting at July 31, 2004. In addition,
depreciation and amortization expense for the year ended
December 31, 2004 included amortization expense of
$14.5 million related to identifiable intangible assets
recorded upon the adoption of fresh-start accounting.
During the year ended December 31, 2004, interest expense
decreased $62.6 million, or 75%, compared to the year ended
December 31, 2003. The decrease in interest expense
resulted from the application of SOP 90-7 which required
that, commencing on the Petition Date, we cease to accrue
interest and amortize debt discounts and debt issuance costs on
pre-petition liabilities that were subject to compromise. As a
result, we ceased to accrue interest and to amortize our debt
discounts and debt issuance costs for our senior notes, senior
discount notes, senior secured vendor credit facilities, note
payable to GLH, and Qualcomm term loan. Upon our emergence from
bankruptcy, we began accruing interest on the newly issued 13%
senior secured pay-in-kind notes. The 13% notes were refinanced
in January 2005 and replaced with a $500 million term loan
that accrues interest at a variable rate.
During the year ended December 31, 2004, reorganization
items consisted primarily of $5.0 million of professional
fees for legal, financial advisory and valuation services and
related expenses directly associated with our Chapter 11
filings and reorganization process, partially offset by
$2.1 million of income from the settlement of certain
pre-petition liabilities, and $1.4 million of interest
income earned while we were in bankruptcy, with the balance of
$963.9 million attributable to net gain on the discharge of
liabilities, the cancellation of equity upon our emergence from
bankruptcy and the application of fresh-start accounting.
During the year ended December 31, 2004, income tax expense
increased by $0.3 million, or 4%, compared to the year
ended December 31, 2003. The increase in income tax expense
resulted primarily from increased deferred tax liabilities
resulting from higher amortization of wireless licenses for
income tax purposes for the year ended December 31, 2004
compared to the prior year. The Successor Company can utilize
available Predecessor Company net operating losses to reduce its
taxable income. However, utilization of Predecessor Company NOLs
generally offsets goodwill rather than reducing book tax expense.
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002
At December 31, 2003, we had approximately 1,473,000
customers compared to approximately 1,512,000 at
December 31, 2002. During the year ended December 31,
2003, gross customer additions were approximately 735,000 and
net customers declined by approximately 39,000, which included a
decline of approximately 2,800 customers as a result of our
discontinuation of service in Hickory, North Carolina as of
September 30, 2003. At December 31, 2003, the total
potential customer base covered under our 39 operating markets
was approximately 25.9 million.
At March 31, 2003, Cricket had 1,513,000 customers, a net
addition of 1,000 customers from December 31, 2002. During
the three months ended June 30, 2003, the quarter in which
Leap, Cricket and substantially all of their subsidiaries filed
voluntary petitions for relief under Chapter 11, we
experienced a net decline of approximately 54,000 in the number
of Cricket customers. Previously, we had not experienced a
decline in total customers from one quarter to another. We
believe that this decline was due in part to the uncertainty
caused by our announcement of filing for bankruptcy protection
and our anticipated reorganization. The effect of these events
was compounded by a significant reduction in our advertising
campaigns during the first and second quarters of 2003. Although
promotional activity resulted in a net increase in our customers
of approximately 18,000 during the three months ended
September 30, 2003, we experienced a net decrease of
approximately 4,000 customers during the final three months of
the year.
During the year ended December 31, 2003, we performed an
analysis of the operating performance of our third-party dealers
and distributors, and we continued to analyze their performance
as we worked to improve our handset distribution strategies. As
a result of our analysis, we discontinued our relationship with
a substantial number of dealers and distributors who represented
a small portion of our equipment sales and who were not
performing to our standards. In addition, we revised our
incentive structure with our third-party
34
dealers and distributors to benefit high performing dealers and
distributors. In connection with these changes, we increased
incentives for sales of higher-priced monthly service plans and
increased incentives for sales that utilize our cost saving
strategies such as Web activation and automatic bill payments
via a customers credit card. In addition, we focused our
rebate program on customers who remained on service for several
months.
During the year ended December 31, 2003, service revenues
increased $75.9 million, or 13%, compared to the year ended
December 31, 2002. The increase in service revenues was
primarily due to an increase in our average service revenue per
customer resulting from the launch of a new higher-priced,
bundled plan during the third quarter of 2002, combined with an
increase in average subscribers to 1,479,000 for the year ended
December 31, 2003 from 1,414,000 average subscribers for
the year ended December 31, 2002 and, to a lesser extent,
approximately $6.2 million of activation fees which we
commenced charging during the fourth quarter of 2002 and which
were included in service revenues until our adoption of EITF
Issue No. 00-21 in July 2003. The effect of these factors
was partially offset by a change in our handset sales practices
which eliminated any allocation of the handset price to service
revenues. This change is discussed in greater detail below.
During the year ended December 31, 2003, equipment revenues
increased $57.0 million, or 112%, compared to the year
ended December 31, 2002. The largest portion of this
increase, $39.1 million, occurred because we stopped
including the first month of service in the handset purchase
price in the fourth quarter of 2002. As a result, we no longer
allocate any portion of the handset price to service revenues.
Equipment revenues for the year ended December 31, 2003
also increased approximately $9.8 million because we
changed our practice of offering instant or in-store handset
rebates to customers and instead began offering mail-in rebates
to new customers that were only redeemable if the customer
continued on Cricket service for three months. (Mail-in rebates
have a lower redemption rate than instant rebates.) Equipment
revenues also increased approximately $9.6 million because
we began immediately recognizing activation fees as equipment
revenues after our adoption of EITF Issue No. 00-21 on
July 1, 2003. In addition, equipment revenues rose because
we increased the selling prices of our handsets so that the
selling price for the majority of our handsets was at or near
the cost of the handset. However, sales incentives offered to
customers and volume-based sales incentives offered to our
third-party dealers and distributors are included as reductions
to equipment revenue, and fulfillment costs and warranty repair
costs are included in cost of equipment, which together result
in a negative gross margin on the sale of handsets. These
increases in equipment revenue were partially offset by a
decrease in the number of handsets sold to new customers or sold
as replacement handsets for existing customers of 636,000, or
35%, for the year ended December 31, 2003, compared to the
prior year.
During the year ended December 31, 2003, cost of service
increased $18.6 million, or 10%, compared to the year ended
December 31, 2002. The increase in cost of service was
primarily attributable to an increase of approximately
$10.4 million in our long distance costs as a result of the
increased long distance usage resulting from the introduction of
service plans that include large bundles of available long
distance minutes each month. Cost of service also rose as a
result of an increase in the number of average subscribers, an
increase in software maintenance expenses of approximately
$8.5 million and an increase in engineering and other
operational costs of approximately $7.1 million, partially
offset by a decrease in payroll related costs of approximately
$9.2 million. In conjunction with the bankruptcy
proceedings, we renegotiated several of our executory contracts
with our vendors.
During the year ended December 31, 2003, cost of equipment
decreased $80.1 million, or 32%, compared to the year ended
December 31, 2002. The decrease in cost of equipment was
due to a 35% decrease in the number of handsets sold (partially
as a result of our efforts commencing in 2002 to reduce
fraudulent sales) and, to a lesser extent, a decrease in amounts
paid for handsets. During the year ended December 31, 2003,
$57.2 million of our total losses on equipment revenues of
$64.5 million were directly related to acquiring new
customers.
Equipment revenues increased sharply in 2003 while at the same
time cost of equipment declined, in each case for the reasons
described above. We do not believe that this change represented
a trend in the relationship between equipment revenues and cost
of equipment.
For the year ended December 31, 2003, selling and marketing
expenses decreased $35.9 million, or 29%, compared to the
year ended December 31, 2002. The decrease in selling and
marketing expenses was primarily
35
due to a decrease in advertising and related costs of
approximately $27.6 million resulting from
managements increased focus on the effective use of
advertising and from cash conservation during the course of our
bankruptcy proceedings, a decrease of $4.6 million in
co-operative advertising reimbursements to our third-party
dealers and distributors and a decrease of approximately
$2.1 million in payroll and related costs.
For the year ended December 31, 2003, general and
administrative expenses decreased $23.5 million, or 13%,
compared to the year ended December 31, 2002. The decrease
in general and administrative expenses was primarily due to a
reduction of approximately $5.2 million in payroll and
related costs, a decrease of approximately $5.0 million in
call center costs, a decrease of approximately $5.8 million
in legal costs (excluding legal costs directly associated with
our reorganization proceedings after the Petition Date), and a
decrease of approximately $3.2 million in excise taxes,
partially offset by an increase of approximately
$3.2 million in insurance costs.
For the year ended December 31, 2003, depreciation and
amortization increased $12.3 million, or 4%, compared to
the year ended December 31, 2002. The increase in
depreciation and amortization resulted from a larger base of
network, computer and other equipment in service.
During the year ended December 31, 2003, we recorded an
impairment charge of $171.1 million to reduce the carrying
value of our wireless licenses to their estimated fair value.
Management estimated the fair value of our wireless licenses
based on the information available to it, including a valuation
report prepared by a third-party consultant in connection with
the confirmation hearing for our Plan of Reorganization. During
the year ended December 31, 2002, we also recorded an
impairment charge of $26.9 million to our then remaining
goodwill balance. The goodwill related to our June 2000
acquisition of the remaining interest in Cricket Communications
Holdings that we did not already own.
During the year ended December 31, 2003, we recorded
charges of $20.7 million in connection with the disposal of
certain network assets and the write-off of capitalized costs
associated with cell sites that we no longer expected to use in
the business. In addition, we recognized $3.4 million in
expense for accrued costs related to certain leases that we
ceased using before the contractual termination date.
For the year ended December 31, 2003, interest income
decreased $5.6 million, or 88%, compared to the year ended
December 31, 2002. The decrease in interest income resulted
from the application of SOP 90-7 which requires that we
classify interest earned during the bankruptcy proceedings as a
reorganization item.
For the year ended December 31, 2003, interest expense
decreased $146.4 million, or 64%, compared to the year
ended December 31, 2002. The decrease in interest expense
resulted from the application of SOP 90-7 which requires
that, commencing on the Petition Date, we cease accruing
interest and amortizing debt discounts and debt issuance costs
on pre-petition liabilities that are subject to compromise. As a
result, we ceased to accrue interest and to amortize our debt
discounts and debt issuance costs for our senior notes, senior
discount notes, senior secured vendor credit facilities, the
note payable to GLH, Inc., and the Qualcomm term loan.
Reorganization items for the year ended December 31, 2003
consisted of $174.1 million related to the write-off of
debt discounts and capitalized debt issuance costs associated
with our long-term debt subject to compromise in accordance with
SOP 90-7 and $12.1 million of professional fees for
legal, financial advisory and valuation services and related
expenses directly associated with our Chapter 11 filings
and reorganization process, offset by $34.8 million of debt
forgiveness income from the settlement of certain pre-petition
liabilities, $2.3 million of income from the reversal of
certain pre-petition liabilities related to contracts rejected
in bankruptcy, and $2.9 million of interest income earned
while we were in bankruptcy.
For the year ended December 31, 2003, income tax expense
decreased $15.8 million compared to the year ended
December 31, 2002. The decrease in income tax expense was
related primarily to a one-time income tax expense of
$15.9 million recorded during the three months ended
March 31, 2002 to increase the valuation allowance on our
deferred tax assets in connection with ceasing amortization of
wireless licenses pursuant to our adoption of SFAS No. 142,
Goodwill and Other Intangible Assets.
36
Performance Measures
In managing our business and assessing our financial
performance, management supplements the information provided by
financial statement measures with several customer focused
performance metrics that are widely used in the
telecommunications industry. These metrics include average
revenue per user per month (ARPU), which measures service
revenue per customer; cost per gross customer addition (CPGA),
which measures the average cost of acquiring a new customer;
cash costs per user per month (CCU), which measures the
non-selling cash cost of operating our business on a per
customer basis; and churn, which measures turnover in our
customer base. CPGA and CCU are non-GAAP financial measures. A
non-GAAP financial measure, within the meaning of Item 10
of Regulation S-K promulgated by the Securities and
Exchange Commission, is a numerical measure of a companys
financial performance or cash flows that (a) excludes
amounts, or is subject to adjustments that have the effect of
excluding amounts, that are included in the most directly
comparable measure calculated and presented in accordance with
generally accepted accounting principles in the consolidated
balance sheet, consolidated statement of operations or
consolidated statement of cash flows; or (b) includes
amounts, or is subject to adjustments that have the effect of
including amounts, that are excluded from the most directly
comparable measure so calculated and presented. See
Reconciliation of Non-GAAP Financial Measures below
for a reconciliation of CPGA and CCU to the most directly
comparable GAAP financial measures.
ARPU is an industry metric that measures service revenue divided
by the weighted average number of customers, divided by the
number of months during the period being measured. Management
uses ARPU to identify average revenue per customer, to track
changes in average customer revenues over time, to help evaluate
how changes in our business, including changes in our service
offerings and fees, affect average revenue per customer, and to
forecast future service revenue. In addition, ARPU provides
management with a useful measure to compare our subscriber
revenue to that of other wireless communications providers. We
believe investors use ARPU primarily as a tool to track changes
in our average revenue per customer and to compare our per
customer service revenues to those of other wireless
communications providers.
CPGA is an industry metric that represents selling and marketing
costs and the gain or loss on sale of handsets (generally
defined as cost of equipment less equipment revenue), excluding
costs unrelated to initial customer acquisition, divided by the
total number of gross new customer additions during the period
being measured. Costs unrelated to initial customer acquisition
include the revenues and costs associated with the sale of
handsets to existing customers as well as costs associated with
handset replacements and repairs (other than warranty costs
which are the responsibility of the handset manufacturers). We
deduct customers who do not pay their first monthly bill from
our gross customer additions, which tends to increase CPGA
because we incur the costs associated with this customer without
receiving the benefit of a gross customer addition. Management
uses CPGA to measure the efficiency of our customer acquisition
efforts, to track changes in our average cost of acquiring new
subscribers over time, and to help evaluate how changes in our
sales and distribution strategies affect the cost-efficiency of
our customer acquisition efforts. In addition, CPGA provides
management with a useful measure to compare our per customer
acquisition costs with those of other wireless communications
providers. We believe investors use CPGA primarily as a tool to
track changes in our average cost of acquiring new customers and
to compare our per customer acquisition costs to those of other
wireless communications providers.
CCU is an industry metric that measures cost of service, general
and administrative costs, gain or loss on sale of handsets to
existing customers and costs associated with handset
replacements and repairs (other than warranty costs which are
the responsibility of the handset manufacturers), divided by the
weighted average number of customers, divided by the number of
months during the period being measured. CCU does not include
any depreciation and amortization expense. Management uses CCU
as a tool to evaluate the non-selling cash expenses associated
with ongoing business operations on a per customer basis, to
track changes in these non-selling cash costs over time, and to
help evaluate how changes in our business operations affect
non-selling cash costs per customer. In addition, CCU provides
management with a useful measure to compare our non-selling cash
costs per customer with those of other wireless communications
providers. We believe investors use CCU primarily as a tool to
track changes in our non-selling cash costs over time and to
compare our non-selling cash costs to those of other wireless
communications providers.
37
Churn, an industry metric that measures customer turnover, is
calculated as the net number of customers that disconnect from
our service divided by the weighted average number of customers
divided by the number of months during the period being
measured. As noted above, customers who do not pay their first
monthly bill are deducted from our gross customer additions; as
a result, these customers are not included in churn. Management
uses churn to measure our retention of customers, to measure
changes in customer retention over time, and to help evaluate
how changes in our business affect customer retention. In
addition, churn provides management with a useful measure to
compare our customer turnover activity to that of other wireless
communications providers. We believe investors use churn
primarily as a tool to track changes in our customer retention
over time and to compare our customer retention to that of other
wireless communications providers.
The following table shows metric information for 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
| |
|
Year Ended | |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(As Restated) | |
|
|
|
|
ARPU
|
|
$ |
37.45 |
|
|
$ |
37.28 |
|
|
$ |
36.97 |
|
|
$ |
37.29 |
|
|
$ |
37.28 |
|
CPGA
|
|
$ |
124 |
|
|
$ |
141 |
|
|
$ |
141 |
|
|
$ |
159 |
|
|
$ |
142 |
|
CCU
|
|
$ |
20.08 |
|
|
$ |
18.47 |
|
|
$ |
18.38 |
|
|
$ |
18.74 |
|
|
$ |
18.91 |
|
Churn
|
|
|
3.1 |
% |
|
|
3.7 |
% |
|
|
4.5 |
% |
|
|
4.1 |
% |
|
|
3.9 |
% |
Summary of Quarterly Results of Operations
The following table presents the Predecessor and Successor
Companies combined condensed consolidated quarterly
statement of operations data for 2004 (unaudited) (in
thousands). It has been derived from our consolidated financial
statements which have been restated for the interim periods for
the one month ended July 31, 2004 and the two months ended
September 30, 2004 to reflect adjustments that are further
discussed in Note 2 to the consolidated financial
statements included in Item 8 of this report. For purposes
of
38
this discussion, the financial data for the three months ended
September 30, 2004 presented below represents the
combination of the Predecessor and Successor Companies
results for that period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(As Restated) | |
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
169,051 |
|
|
$ |
172,025 |
|
|
$ |
170,386 |
|
|
$ |
172,636 |
|
|
Equipment revenues
|
|
|
37,771 |
|
|
|
33,676 |
|
|
|
36,521 |
|
|
|
33,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
206,822 |
|
|
|
205,701 |
|
|
|
206,907 |
|
|
|
206,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(48,000 |
) |
|
|
(47,827 |
) |
|
|
(51,034 |
) |
|
|
(46,275 |
) |
|
Cost of equipment
|
|
|
(43,755 |
) |
|
|
(40,635 |
) |
|
|
(44,153 |
) |
|
|
(51,019 |
) |
|
Selling and marketing
|
|
|
(23,253 |
) |
|
|
(21,939 |
) |
|
|
(23,574 |
) |
|
|
(23,169 |
) |
|
General and administrative
|
|
|
(38,610 |
) |
|
|
(33,922 |
) |
|
|
(30,689 |
) |
|
|
(35,403 |
) |
|
Depreciation and amortization
|
|
|
(75,461 |
) |
|
|
(76,026 |
) |
|
|
(55,554 |
) |
|
|
(45,777 |
) |
|
Impairment of long-lived assets and related charges
|
|
|
|
|
|
|
(360 |
) |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(229,079 |
) |
|
|
(220,709 |
) |
|
|
(205,270 |
) |
|
|
(201,643 |
) |
Gains on sale of wireless licenses
|
|
|
|
|
|
|
|
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(22,257 |
) |
|
|
(15,008 |
) |
|
|
2,169 |
|
|
|
4,934 |
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
608 |
|
|
|
1,204 |
|
Interest expense
|
|
|
(1,823 |
) |
|
|
(1,908 |
) |
|
|
(6,009 |
) |
|
|
(11,049 |
) |
Other income (expense), net
|
|
|
19 |
|
|
|
(615 |
) |
|
|
458 |
|
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items and income taxes
|
|
|
(24,061 |
) |
|
|
(17,531 |
) |
|
|
(2,774 |
) |
|
|
(5,183 |
) |
Reorganization items, net
|
|
|
(2,025 |
) |
|
|
1,313 |
|
|
|
963,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(26,086 |
) |
|
|
(16,218 |
) |
|
|
960,382 |
|
|
|
(5,183 |
) |
Income taxes
|
|
|
(1,944 |
) |
|
|
(1,927 |
) |
|
|
(2,999 |
) |
|
|
(1,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(28,030 |
) |
|
$ |
(18,145 |
) |
|
$ |
957,383 |
|
|
$ |
(6,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Non-GAAP Financial Measures
We utilize certain financial measures, as described above, that
are calculated based on industry conventions and are not
calculated based on GAAP. Certain of these financial measures
are considered non-GAAP financial measures within
the meaning of Item 10 of Regulation S-K promulgated
by the SEC.
CPGA The following table reconciles total costs used
in the calculation of CPGA to selling and marketing expense,
which we consider to be the most directly comparable GAAP
financial measure to CPGA. The financial data for the three
months ended September 30, 2004 and for the year ended
December 31, 2004
39
presented below represents the combination of the Predecessor
and Successor Companies results for those periods (in
thousands, except gross customer additions and CPGA):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
| |
|
Year Ended | |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(As Restated) | |
|
|
|
|
Selling and marketing expense
|
|
$ |
23,253 |
|
|
$ |
21,939 |
|
|
$ |
23,574 |
|
|
$ |
23,169 |
|
|
$ |
91,935 |
|
|
Plus cost of equipment
|
|
|
43,755 |
|
|
|
40,635 |
|
|
|
44,153 |
|
|
|
51,019 |
|
|
|
179,562 |
|
|
Less equipment revenue
|
|
|
(37,771 |
) |
|
|
(33,676 |
) |
|
|
(36,521 |
) |
|
|
(33,941 |
) |
|
|
(141,909 |
) |
|
Less net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
(3,667 |
) |
|
|
(3,453 |
) |
|
|
(2,971 |
) |
|
|
(5,090 |
) |
|
|
(15,181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPGA
|
|
$ |
25,570 |
|
|
$ |
25,445 |
|
|
$ |
28,235 |
|
|
$ |
35,157 |
|
|
$ |
114,407 |
|
Gross customer additions
|
|
|
206,941 |
|
|
|
180,128 |
|
|
|
200,315 |
|
|
|
220,484 |
|
|
|
807,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPGA
|
|
$ |
124 |
|
|
$ |
141 |
|
|
$ |
141 |
|
|
$ |
159 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCU The following table reconciles total costs used
in the calculation of CCU to cost of service, which we consider
to be the most directly comparable GAAP financial measure to
CCU. The financial data for the three months ended
September 30, 2004 and for the year ended December 31,
2004 presented below represents the combination of the
Predecessor and Successor Companies results for those
periods (in thousands, except weighted-average number of
customers and CCU):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
| |
|
Year Ended | |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(As Restated) | |
Cost of service
|
|
$ |
48,000 |
|
|
$ |
47,827 |
|
|
$ |
51,034 |
|
|
$ |
46,275 |
|
|
$ |
193,136 |
|
|
Plus general and administrative expense
|
|
|
38,610 |
|
|
|
33,922 |
|
|
|
30,689 |
|
|
|
35,403 |
|
|
|
138,624 |
|
|
Plus net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
3,667 |
|
|
|
3,453 |
|
|
|
2,971 |
|
|
|
5,090 |
|
|
|
15,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CCU
|
|
$ |
90,277 |
|
|
$ |
85,202 |
|
|
$ |
84,694 |
|
|
$ |
86,768 |
|
|
$ |
346,941 |
|
Weighted-average number of customers
|
|
|
1,498,449 |
|
|
|
1,537,957 |
|
|
|
1,536,314 |
|
|
|
1,543,362 |
|
|
|
1,529,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCU
|
|
$ |
20.08 |
|
|
$ |
18.47 |
|
|
$ |
18.38 |
|
|
$ |
18.74 |
|
|
$ |
18.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash
equivalents and short-term investments, cash generated from
operations, and cash available from borrowings under our
revolving credit facility. From time to time, we may also
generate additional liquidity through the sale of assets that
are not required for the on-going operation of our business. We
may also generate liquidity from offerings of debt and/or equity
in the capital markets. At December 31, 2004, we had a
total of $254.2 million in unrestricted cash, cash
equivalents and short-term investments. As of December 31,
2004, we also had restricted cash, cash equivalents and
short-term investments of $31.4 million that included funds
set aside or pledged to satisfy remaining administrative claims
and priority claims against Leap and the Cricket Companies, and
cash restricted for other purposes. We believe that our existing
cash and investments, anticipated cash flows from operations,
and available credit facilities will be sufficient to meet our
operating and capital requirements through at least the next
12 months.
40
Cash provided by operating activities was $190.4 million
during the year ended December 31, 2004 compared to cash
provided by operating activities of $44.4 million during
the year ended December 31, 2003. The increase was
primarily attributable to a decrease in the net loss, offset by
adjustments for non-cash items including depreciation,
amortization and non-cash interest expense of
$92.0 million, a $55.6 million reduction in changes in
working capital compared to the corresponding period of the
prior year and a decrease of $109.6 million in cash used
for reorganization activities. Cash used for reorganization
items consisted primarily of a cash payment to the Leap Creditor
Trust in accordance with the Plan of Reorganization of
$1.0 million and payments of $8.0 million for
professional fees for legal, financial advisory and valuation
services directly associated with our Chapter 11 filings
and reorganization process, offset by $2.0 million of cash
received from vendor settlements (net of cure payments) made in
connection with assumed and settled executory contracts and
leases, and $1.5 million of interest income earned while
the Company was in bankruptcy.
Cash used in investing activities was $96.6 million during
the year ended December 31, 2004 and consisted primarily of
the sale and maturity of investments of $90.8 million, a
net decrease in restricted investments of $22.3 million and
net proceeds from the sale of wireless licenses of
$2.0 million, offset by the purchase of investments of
$134.5 million and the purchase of property and equipment
of $77.2 million.
Cash used in financing activities during the year ended
December 31, 2004 was $36.7 million which consisted of
the partial repayment of the FCC debt upon our emergence from
bankruptcy.
In connection with the Plan of Reorganization, all of our
pre-petition indebtedness, other than indebtedness owed to the
FCC, was cancelled in full. This discharged indebtedness
included approximately $1.6 billion net book value of debt
outstanding under Crickets senior secured vendor credit
facilities and approximately $738.2 million net book value
of debt outstanding under Leaps senior notes, senior
discount notes, note payable to GLH, Inc. and Qualcomm term loan.
On January 10, 2005, Cricket entered into a new senior
secured credit agreement referred to as the Credit Agreement,
with a syndicate of lenders and Bank of America, N.A. (as
administrative agent and letter of credit issuer). The new
facilities under the Credit Agreement consist of a six-year
$500 million term loan, which was fully drawn at closing,
and a five-year $110 million revolving credit facility,
which was undrawn at closing. At April 30, 2005, there were
no borrowings outstanding under the revolving credit facility.
In January 2005, we used a portion of the proceeds from the
$500 million term loan to redeem Crickets 13% senior
secured pay-in-kind notes for $372.8 million (including
call premium) plus accrued interest of $20.1 million, to
repay approximately $41 million in principal amount of debt
and accrued interest owed to the FCC, and to pay transaction
fees and expenses of $6.4 million. The balance of the
proceeds of approximately $60 million will be used for
general corporate purposes. For a description of the terms of
the revolving credit facility and term loan under the Credit
Agreement, see New Credit Agreement
below.
|
|
|
Capital Expenditures and Other Asset Acquisitions and
Dispositions |
During the year ended December 31, 2004, we incurred
approximately $77.2 million in capital expenditures. We
currently expect to incur between $175 million and
$230 million in capital expenditures for the year ending
December 31, 2005, primarily for maintenance and
improvement of our existing wireless networks, for the build-out
and launch of the Fresno, California market and the related
expansion and network change-out of the Companys existing
Visalia and Modesto/ Merced markets, and costs associated with
the initial development of markets covered by licenses acquired
or to be acquired as a result of Auction #58 (including
costs to be incurred by ANB 1 in connection with the
initial development of licenses ANB 1
41
expects to acquire as a result of its participation in
Auction #58, because our investment in ANB 1 is
required to be consolidated under FIN No. 46-R). We expect
to finance these $175 to $230 million of capital
expenditures with our existing cash, cash equivalents and
short-term investments, cash obtained from borrowings under our
revolving credit facility and cash generated from operations and
other transactions.
Cricket has agreed to purchase a wireless license to provide
service in Fresno, California for approximately
$27.1 million (of which $1.8 million was paid as a
deposit as of December 31, 2004), plus the reimbursement of
certain construction expenses not to exceed $500,000. We have
begun to invest significant resources in building out this
market. Our application to the FCC for consent to acquire this
license, although initially opposed by a third party involved in
the bankruptcy of the seller, was granted on May 13, 2005.
We currently expect that the capital expenditures for the
build-out and launch of the Fresno market, as well as for the
related expansion of the Visalia and Modesto/ Merced markets,
will be between $20-$25 million (excluding the cost of
purchasing the license). Additional cash requirements for the
launch are expected to be less than $8 million. We expect
to finance these costs in 2005 with our existing cash, cash
equivalents and short-term investments, cash obtained from
borrowings under our revolving credit facility and cash
generated from operations and other transactions.
In February 2005, our wholly-owned subsidiary, Cricket Licensee
(Reauction), Inc., was named the winning bidder in the
FCCs Auction #58 for four wireless licenses covering
approximately 11.1 million potential customers. In March
2005, we paid $151.9 million to the FCC, increasing the
total amount paid to the FCC for Auction #58 to
$166.9 million, the aggregate purchase price for the four
licenses. The FCC approved the grants of these licenses on
May 13, 2005.
In addition, in November 2004 we acquired a 75% non-controlling
membership interest in Alaska Native Broadband 1 LLC, or
ANB 1, whose wholly-owned subsidiary Alaska Native
Broadband 1 License LLC, or ANB 1 License, was named the
winning bidder in Auction #58 for nine wireless licenses
covering approximately 10.1 million potential customers. In
March 2005, we made a $3.0 million equity contribution to
ANB 1, which in turn contributed such amounts to ANB 1
License. Also in March 2005, we made loans under our senior
secured credit facility with ANB 1 License in the aggregate
amount of $56.2 million. ANB 1 License paid such
monies to the FCC, together with a $1.0 million equity
contribution from its controlling member, Alaska Native
Broadband, LLC, to increase its total amounts paid to the FCC to
$68.2 million, the aggregate purchase price for its nine
licenses. Under our senior secured credit facility with
ANB 1 License, we have committed to loan ANB 1 License
up to $4.5 million in additional funds to finance its
initial build-out costs and working capital requirements.
ANB 1 License will need to obtain additional capital from
Cricket or another third party to build out and launch its
networks. For a description of the terms of the ANB 1
limited liability company agreement and our senior secured
credit facility with ANB 1 License, see Item 1.
Business Arrangements with Alaska Native
Broadband.
We currently expect to build out and launch commercial
operations in the markets covered by the licenses we expect to
acquire as a result of Auction #58. We are currently developing
plans for such build-outs. We expect that we will seek
additional capital to increase our liquidity and help assure we
have sufficient funds for the build-out and initial operation of
the new markets.
In March 2005, subsidiaries of Leap signed an agreement to sell
23 wireless licenses and our operating assets in our
Michigan markets for $102.5 million. Completion of the
transaction is subject to FCC approval and other customary
closing conditions, including obtaining third party consents and
finalizing a transition services agreement. Although we expect
to receive such approval and satisfy such conditions, we cannot
assure you that the FCC will grant such approval or that the
other conditions will be satisfied.
In March 2005, we also announced an agreement for the sale of
approximately 140 cell towers and cell tower related assets
for approximately $18 million. Under the agreement, we will
lease back space at the tower sites for our networks. The
closing of the sale is subject to the purchasers
completion of due diligence and other conditions customary for a
sale of this type.
42
|
|
|
Certain Contractual Obligations, Commitments and
Contingencies |
The table below summarizes information as of December 31,
2004 regarding certain future minimum contractual obligations
for Leap and the Cricket Companies for the next five years and
thereafter (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
|
|
|
|
| |
|
|
|
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt(1)
|
|
$ |
389,979 |
|
|
$ |
39,979 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
350,000 |
|
Fresno license purchase
|
|
|
25,800 |
|
|
|
25,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination fees for ANB 1 investment
|
|
|
5,500 |
|
|
|
5,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
180,078 |
|
|
|
54,745 |
|
|
|
33,941 |
|
|
|
18,457 |
|
|
|
15,950 |
|
|
|
13,122 |
|
|
|
43,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
601,357 |
|
|
$ |
126,024 |
|
|
$ |
33,941 |
|
|
$ |
18,457 |
|
|
$ |
15,950 |
|
|
$ |
13,122 |
|
|
$ |
393,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amounts shown for Crickets senior secured pay-in-kind
notes and U.S. government financing include principal only.
As noted elsewhere in this report, this debt was repaid in
January 2005. |
Subsequent to December 31, 2004, we incurred the following
additional contractual obligations which are not included in the
table above:
|
|
|
|
|
Future minimum contractual obligations for the $500 million
term loan under the new credit facilities executed on
January 10, 2005, consisting of principal payments of
$5.0 million for each year 2005 through 2009 and
$475.0 million in 2010. |
|
|
|
Contractual obligations to purchase wireless licenses for which
we were the winning bidder in Auction #58 for an aggregate
purchase price of approximately $166.9 million; we
increased our payment to the FCC to $166.9 million, the
full amount of the purchase price, in March 2005. |
The table above also does not include the following contractual
obligations relating to ANB 1, a company which we
consolidate under FIN No. 46-R: (1) Crickets
obligation to contribute to ANB 1 $3.0 million in
equity capital, which contribution was made in March 2005;
(2) Crickets obligation to loan up to
$84.5 million to ANB 1 License to finance its purchase
of wireless licenses in Auction #58, under which
$56.2 million was loaned to ANB 1 License in March
2005 in full satisfaction of such contractual obligations;
(3) Crickets obligation to loan to ANB 1 License
up to $4.5 million to finance its initial build-out costs
and working capital requirements, which commitment remained
undrawn at April 30, 2005; and (4) Crickets
obligation to pay $2.0 million to ANB if ANB exercises its
right to sell its membership interests in ANB 1 to Cricket
following the initial build-out of ANB 1 Licenses
wireless licenses.
|
|
|
Off-Balance Sheet Arrangements |
We had no material off-balance sheet arrangements at
December 31, 2004.
On January 10, 2005, we entered into a new senior secured
Credit Agreement with a syndicate of lenders and Bank of
America, N.A. (as administrative agent and letter of credit
issuer).
The facilities under the new Credit Agreement consist of a
six-year $500 million term loan, which was fully drawn at
closing, and a five-year $110 million revolving credit
facility, which was undrawn at closing. Under the Credit
Agreement, the term loan bears interest at LIBOR plus
2.5 percent, with interest periods of one, two, three or
six months, or bank base rate plus 1.5 percent, as selected
by Cricket. Outstanding borrowings under the term loan must be
repaid in 20 quarterly payments of $1.25 million each,
commencing March 31, 2005, followed by four quarterly
payments of $118.75 million each, commencing March 31,
2010. The commitment of the lenders under the $110 million
revolving credit facility may be reduced in the event mandatory
prepayments are required under the Credit Agreement and by
one-twelfth of the original aggregate
43
revolving credit commitment on January 1, 2008 and by
one-sixth of the original aggregate revolving credit commitment
on January 1, 2009 (each such fractional reduction to be
net of all prior reductions) based on certain leverage ratios
and other tests. The commitment fee on the revolving credit
facility is payable quarterly at a rate of 1.0 percent per
annum when the utilization of the facility (as specified in the
Credit Agreement) is less than 50 percent and at
0.75 percent per annum when the utilization exceeds
50 percent. Borrowings under the revolving credit facility
will accrue interest at LIBOR plus 2.5 percent, with
interest periods of one, two, three or six months, or bank
base rate plus 1.5 percent, as selected by Cricket, with
the rate subject to adjustment based on our leverage ratio. The
new credit facilities are guaranteed by Leap and all of its
direct and indirect domestic subsidiaries (other than ANB 1
and its subsidiary) and are secured by all present and future
personal property and owned real property of Leap, Cricket and
all of their direct and indirect domestic subsidiaries.
Proceeds from the term loan borrowing were used by us to redeem
Crickets $350 million 13% senior secured pay-in-kind
notes, to pay approximately $43 million of call premium and
accrued interest on such notes, to repay approximately
$41 million in principal amount of debt and accrued
interest owed to the FCC, and to pay transaction fees and
expenses. The remaining proceeds from the term loan borrowing of
approximately $60 million will be used for general
corporate purposes.
Under the Credit Agreement, we are subject to certain
limitations, including limitations on our ability: (1) to
incur additional debt or sell assets, with restrictions on the
use of proceeds; (2) to make certain investments and
acquisitions; (3) to grant liens; and (4) to pay
dividends and make certain other restricted payments. In
addition, we will be required to pay down the facilities under
certain circumstances if we issue debt or equity, sell assets or
property, receive certain extraordinary receipts or generate
excess cash flow (as defined in the Credit Agreement). We are
also required to maintain compliance with financial covenants
which include a minimum interest coverage ratio, a maximum total
leverage ratio, a maximum senior secured leverage ratio and a
minimum fixed charge coverage ratio.
Affiliates of Highland Capital Management, L.P. (a beneficial
shareholder of Leap and an affiliate of James D. Dondero, a
director of Leap) participated in the syndication of our new
Credit Agreement in the following amounts: $100 million of
the $500 million term loan and $30 million of the
$110 million revolving credit facility.
On April 15, 2005, we obtained a waiver of certain defaults
and potential defaults under the Credit Agreement. We had not
completed the preparation of our audited financial statements
for the year ended December 31, 2004 by March 31, 2005
and, as a result, we were not able to deliver such financial
statements to the administrative agent under the Credit
Agreement by such date. The failure to deliver such financial
statements by March 31, 2005 was a default under the Credit
Agreement. Accordingly, we have requested and received from the
required lenders under the Credit Agreement a waiver of our
obligations to provide such audited financial statements to the
administrative agent until May 16, 2005. The waiver also
extended our obligation to provide our unaudited financial
statements for the quarter ended March 31, 2005 to the
administrative agent until June 15, 2005, and waived any
default that may occur under the Credit Agreement if we amend
our financial statements for the fiscal quarter ended
September 30, 2004 or for any earlier period, provided that
(i) such amendment does not reduce EBITDA, as defined in
the Credit Agreement, to less than $217 million for the
four quarters ended September 30, 2004 and
(ii) neither Indebtedness, as defined in the
Credit Agreement, nor total liabilities, each as reflected in
any such amended financial statements, may be more than
$10 million greater than the amounts previously reported by
us in the original financial statements for the corresponding
period. We expect that we will meet all of the requirements of
the waiver in a timely manner.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations and
liquidity and capital resources are based on our consolidated
financial statements which have been prepared in accordance with
GAAP. These principles require us to make estimates and
judgments that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses.
On an
44
ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition and the valuation
of long-lived and intangible assets. We base our estimates on
historical and anticipated results and trends and on various
other assumptions that we believe are reasonable under the
circumstances, including assumptions as to future events. These
estimates form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. By their nature, estimates are subject to an
inherent degree of uncertainty. Actual results may differ from
our estimates. We believe that the following significant
accounting policies and estimates involve a higher degree of
judgment and complexity than others.
Revenues and Cost Recognition
Crickets business revenues arise from the sale of wireless
services, handsets and accessories. Wireless services are
generally provided on a month-to-month basis. Amounts received
in advance for wireless services from customers who pay in
advance are initially recorded as deferred revenues and are
recognized as service revenue as services are rendered. Because
we do not require any of our customers to sign long-term service
commitments or submit to a credit check, some of our customers
may be more likely to terminate service for inability to pay
than the customers of other wireless providers. Accordingly,
service revenues for customers who pay in arrears are recognized
only after the service has been rendered and payment has been
received. We also charge customers for service plan changes,
activation fees and other service fees. Revenues from service
plan change fees are deferred and recorded to revenue over the
estimated customer relationship period, and other service fees
are recognized when received. Upon our adoption of EITF Issue
No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables, on July 1, 2003, we began
allocating activation fees to the other elements of the multiple
element arrangement on a relative fair value basis. Because the
fair values of our handsets are higher than the total
consideration received for the handsets and activation fees
combined, we allocate the activation fees entirely to equipment
revenues and recognize the activation fees when received. Direct
costs associated with customer activations are expensed as
incurred. Cost of service generally includes direct costs and
related overhead, excluding depreciation and amortization, of
operating our networks.
Equipment revenues arise from the sale of handsets and
accessories. Revenues and related costs from the sale of
handsets are recognized when service is activated by customers.
Revenues and related costs from the sale of accessories are
recognized at the point of sale. The costs of handsets and
accessories sold are recorded in cost of equipment. Amounts due
from third-party dealers and distributors for handsets are
recorded as deferred revenue upon shipment of the handsets by us
to such dealers and distributors and are recognized as equipment
revenues when service is activated by customers. Handsets sold
by third-party dealers and distributors are recorded as
inventory until they are sold to and activated by customers.
Sales incentives offered without charge to customers and
volume-based incentives paid to our third-party dealers and
distributors are recognized as a reduction of revenue and as a
liability when the related service or equipment revenue is
recognized. Customers have limited rights to return handsets and
accessories based on time and/or usage. We record an estimate
for returns of handsets and accessories at the time of
recognizing revenue. Returns of handsets and accessories have
historically been insignificant.
Wireless Licenses
Wireless licenses are initially recorded at cost (i.e., the
purchase price paid for the wireless licenses at the time of
acquisition, together with other capitalized costs including
legal costs and microwave relocation costs). We have determined
that our wireless licenses meet the definition of
indefinite-lived intangible assets under SFAS No. 142
because we expect to continue to provide wireless service using
the relevant licenses for the foreseeable future and the
wireless licenses may be renewed every ten years for a nominal
fee, provided that we continue to meet the service and
geographic coverage provisions required by the FCC. Therefore,
upon the adoption of SFAS No. 142 on January 1, 2002,
we ceased amortizing our wireless license costs.
Goodwill and Other Intangible Assets
Goodwill represents the excess of reorganization value over the
fair value of identified tangible and intangible net assets
recorded in connection with fresh-start accounting. Other
intangible assets were recorded
45
upon adoption of fresh-start accounting and consist of
trademarks, which are being amortized on a straight-line basis
over their estimated useful lives of fourteen years, and
customer relationships, which are being amortized on a
straight-line basis over their estimated useful lives of four
years.
Impairment of Indefinite-Lived Intangible Assets
In accordance with SFAS No. 142, we assess potential
impairments to our indefinite-lived intangible assets, including
goodwill and wireless licenses, annually and when there is
evidence that events or changes in circumstances indicate that
an impairment condition may exist. We have chosen to conduct our
annual test for impairment during the third quarter of each
year. An impairment loss is recognized when the fair value of
the asset is less than its carrying value, and would be measured
as the amount by which the assets carrying value exceeds
its fair value. Any required impairment loss would be recorded
as a reduction in the carrying value of the related asset and
charged to results of operations. Estimates of fair value of our
wireless licenses are based primarily on available market
prices, including successful bid prices in FCC auctions and
selling prices observed in wireless license transactions.
We previously adopted EITF Issue No. 02-07, Unit of
Accounting for Testing Impairment of Indefinite-Lived Intangible
Assets. EITF Issue No. 02-07 requires that separately
recorded indefinite-lived intangible assets be combined into a
single unit of accounting for purposes of testing impairment if
they are operated as a single asset and, as such, are
essentially inseparable from one another. Management concluded
that our wireless licenses in our operating markets should be
combined into a single unit of accounting because these wireless
licenses as a group represent the highest and best use of the
assets, and that the value of the wireless licenses would not be
significantly impacted by a sale of one or a portion of the
wireless licenses, among other factors.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we assess
potential impairments to our long-lived assets, including
property and equipment and certain intangible assets, when there
is evidence that events or changes in circumstances indicate
that the carrying value may not be recoverable. An impairment
loss may be required to be recognized when the undiscounted cash
flows expected to be generated by a long-lived asset (or group
of such assets) is less than its carrying value. Any required
impairment loss would be measured as the amount by which the
assets carrying value exceeds its fair value and would be
recorded as a reduction in the carrying value of the related
asset and charged to results of operations.
Income Taxes
The Company calculates income tax expense for each jurisdiction
in which it operates. This process involves calculating the
actual current tax liability together with deferred income taxes
associated with temporary differences resulting from differing
treatments of items for tax and accounting purposes. The Company
must then assess the likelihood that its deferred tax assets
will be recovered from future taxable income. To the extent that
the Company believes that recovery is not likely, it must
establish a valuation allowance. Significant management judgment
is required in determining the provision for income taxes,
deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. The Company has
recorded a full valuation allowance on its net deferred tax
asset balances for all periods presented because of its history
of losses and due to uncertainties related to utilization of
deferred tax assets. At such time as it is determined that it is
more likely than not that the deferred tax assets are
realizable, the valuation allowance will be reduced with a
corresponding offset to goodwill.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123R,
Share-Based Payment, which revises SFAS
No. 123. SFAS No. 123R requires that a company measure
the cost of equity-based service awards based on the grant-date
fair value of the award (with limited exceptions). That cost
will be
46
recognized as compensation expense over the period during which
an employee is required to provide service in exchange for the
award or the requisite service period (usually the vesting
period). No compensation expense is recognized for the cost of
equity-based awards for which employees do not render the
requisite service. A company will initially measure the cost of
each liability based service award based on the awards
initial fair value; the fair value of that award will be
remeasured subsequently at each reporting date through the
settlement date. Changes in fair value during the requisite
service period will be recognized as compensation expense over
that period. The grant-date fair value of employee stock options
and similar instruments will be estimated using option-pricing
models adjusted for the unique characteristics of those
instruments. If an equity-based award is modified after the
grant date, incremental compensation expense will be recognized
in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award
immediately before the modification. Adoption of SFAS
No. 123R is required for our first quarter beginning
January 1, 2006. We have not yet determined the impact that
the adoption of SFAS No. 123R will have on our consolidated
financial position or our results of operations.
On December 15, 2004 the FASB issued Statement
No. 153, Exchanges of Nonmonetary Assets, and
amended Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transactions. SFAS
No. 153 is based on the principle that nonmonetary asset
exchanges should be recorded and measured at the fair value of
the assets exchanged, with certain exceptions. This standard
requires exchanges of productive assets to be accounted for at
fair value, rather than at carryover basis, unless
(1) neither the asset received nor the asset surrendered
has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance (as
defined). In addition, the Board decided to retain the guidance
in APB 29 for assessing whether the fair value of a nonmonetary
asset is determinable within reasonable limits. Adoption of SFAS
No. 153 is required for nonmonetary exchanges occurring in
the third quarter beginning July 1, 2005. We have not yet
determined the impact that the adoption of SFAS No. 153
will have on our consolidated financial position or our results
of operations.
In March 2004, the FASB ratified the consensus of the EITF
regarding the recognition and measurement of other-than
temporary impairments of certain investments. The effective date
of the recognition and measurement guidance in EITF Issue
No. 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, has
been delayed until the implementation guidance provided by a
FASB staff position on the issue has been finalized. The
disclosure guidance was unaffected by the delay and is effective
for fiscal years ending after June 15, 2004. We implemented
the disclosure provisions of EITF Issue No. 03-01 in our
annual financial statements for the fiscal year ended
December 31, 2004 and do not anticipate that the
implementation of the recognition and measurement guidance, when
released, will have a material effect on our consolidated
financial position or our results of operations.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Interest Rate Risk. Pursuant to the Plan of
Reorganization, the Company emerged from bankruptcy with fixed
rate debt only. On January 10, 2005 we refinanced our fixed
rate debt with floating rate debt. As a result, changes in
interest rates would not significantly affect the fair value of
the debt. The terms of the Credit Agreement require that we
enter into interest rate hedging agreements in an amount equal
to at least 50% of our outstanding indebtedness for borrowed
money. In accordance with this requirement, we entered into an
interest rate hedging agreement with respect to
$250 million of our debt in April 2005.
After completion of the refinancing, our outstanding floating
rate debt totaled $500 million. The primary base interest
rate is the three month LIBOR. Assuming the outstanding balance
on the new floating rate debt remains constant over a year, a
100 basis point increase in the interest rate would increase
pre-tax loss and decrease cash flow by $5 million.
Hedging Policy. Leaps policy is to maintain
interest rate hedges when required by credit agreements. Leap
does not currently engage in any hedging activities against
foreign currency exchange rates.
47
|
|
Item 8. |
Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Leap Wireless
International, Inc.:
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of cash flows
and of stockholders equity present fairly, in all material
respects, the financial position of Leap Wireless International,
Inc. and its subsidiaries (Successor Company) at
December 31, 2004 and the results of their operations and
their cash flows for the period from August 1, 2004 to
December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, the United States Bankruptcy Court for the Southern
District of California confirmed the Companys Fifth
Amended Joint Plan of Reorganization (the plan) on
October 22, 2003. Consummation of the plan terminated all
rights and interests of equity security holders as provided for
in the plan. The plan was consummated on August 16, 2004
and the Company emerged from bankruptcy. In connection with its
emergence from bankruptcy, the Company adopted fresh-start
accounting as of July 31, 2004.
PricewaterhouseCoopers LLP
San Diego, California
May 16, 2005
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Leap Wireless
International, Inc.:
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, of cash flows
and of stockholders equity (deficit) present fairly, in
all material respects, the financial position of Leap Wireless
International, Inc. and its subsidiaries (Predecessor Company)
at December 31, 2003 and the results of their operations
and their cash flows for the period from January 1, 2004 to
July 31, 2004, and for each of the two years in the period
ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, the Company and substantially all of its
subsidiaries voluntarily filed a petition on April 13, 2003
with the United States Bankruptcy Court for the Southern
District of California for reorganization under the provisions
of Chapter 11 of the Bankruptcy Code. The Companys
Plan of Reorganization was consummated on August 16, 2004
and the Company emerged from bankruptcy. In connection with its
emergence from bankruptcy, the Company adopted fresh-start
accounting as of July 31, 2004.
PricewaterhouseCoopers LLP
San Diego, California
May 16, 2005
49
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
Predecessor | |
|
|
Company | |
|
Company | |
|
|
| |
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
141,141 |
|
|
$ |
84,070 |
|
Short-term investments
|
|
|
113,083 |
|
|
|
65,811 |
|
Restricted cash, cash equivalents and short-term investments
|
|
|
31,427 |
|
|
|
55,954 |
|
Funds distributed to Leap Creditor Trust (Note 1)
|
|
|
|
|
|
|
67,800 |
|
Inventories
|
|
|
25,816 |
|
|
|
17,680 |
|
Other current assets
|
|
|
35,144 |
|
|
|
39,145 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
346,611 |
|
|
|
330,460 |
|
Property and equipment, net
|
|
|
576,352 |
|
|
|
817,075 |
|
Wireless licenses, net
|
|
|
652,653 |
|
|
|
560,056 |
|
Goodwill
|
|
|
329,619 |
|
|
|
|
|
Other intangible assets, net
|
|
|
151,461 |
|
|
|
|
|
Other assets
|
|
|
33,786 |
|
|
|
49,252 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,090,482 |
|
|
$ |
1,756,843 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
91,093 |
|
|
$ |
64,485 |
|
Current maturities of long-term debt (Note 7)
|
|
|
40,373 |
|
|
|
74,112 |
|
Other current liabilities
|
|
|
72,741 |
|
|
|
54,923 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
204,207 |
|
|
|
193,520 |
|
Long-term debt (Note 7)
|
|
|
371,355 |
|
|
|
|
|
Other long-term liabilities
|
|
|
45,070 |
|
|
|
55,157 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
620,632 |
|
|
|
248,677 |
|
Liabilities subject to compromise (Note 6)
|
|
|
|
|
|
|
2,401,522 |
|
Commitments and contingencies (Notes 1 and 11)
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
Predecessor Company and Successor Company preferred
stock authorized 10,000,000 shares, $.0001 par
value; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Predecessor Company common stock authorized
300,000,000 shares, $.0001 par value; 58,704,224 shares issued
and outstanding
|
|
|
|
|
|
|
6 |
|
|
Successor Company common stock authorized
160,000,000 shares, $.0001 par value; 60,000,000 shares issued
and outstanding
|
|
|
6 |
|
|
|
|
|
|
Additional paid-in capital
|
|
|
1,478,392 |
|
|
|
1,156,410 |
|
|
Unearned stock-based compensation
|
|
|
|
|
|
|
(421 |
) |
|
Accumulated deficit
|
|
|
(8,629 |
) |
|
|
(2,048,431 |
) |
|
Accumulated other comprehensive income (loss)
|
|
|
81 |
|
|
|
(920 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
1,469,850 |
|
|
|
(893,356 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$ |
2,090,482 |
|
|
$ |
1,756,843 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Ended | |
|
Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
|
|
|
|
(See Note 2) | |
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
285,647 |
|
|
$ |
398,451 |
|
|
$ |
643,566 |
|
|
$ |
567,694 |
|
|
Equipment revenues
|
|
|
58,713 |
|
|
|
83,196 |
|
|
|
107,730 |
|
|
|
50,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
344,360 |
|
|
|
481,647 |
|
|
|
751,296 |
|
|
|
618,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(79,148 |
) |
|
|
(113,988 |
) |
|
|
(199,987 |
) |
|
|
(181,404 |
) |
|
Cost of equipment
|
|
|
(82,402 |
) |
|
|
(97,160 |
) |
|
|
(172,235 |
) |
|
|
(252,344 |
) |
|
Selling and marketing
|
|
|
(39,938 |
) |
|
|
(51,997 |
) |
|
|
(86,223 |
) |
|
|
(122,092 |
) |
|
General and administrative
|
|
|
(57,110 |
) |
|
|
(81,514 |
) |
|
|
(162,378 |
) |
|
|
(185,915 |
) |
|
Depreciation and amortization
|
|
|
(75,324 |
) |
|
|
(177,494 |
) |
|
|
(300,243 |
) |
|
|
(287,942 |
) |
|
Impairment of indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
(171,140 |
) |
|
|
(26,919 |
) |
|
Impairment of long-lived assets and related charges
|
|
|
|
|
|
|
(626 |
) |
|
|
(24,054 |
) |
|
|
(16,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(333,922 |
) |
|
|
(522,779 |
) |
|
|
(1,116,260 |
) |
|
|
(1,072,939 |
) |
Gains on sale of wireless licenses
|
|
|
|
|
|
|
532 |
|
|
|
4,589 |
|
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
10,438 |
|
|
|
(40,600 |
) |
|
|
(360,375 |
) |
|
|
(454,100 |
) |
Interest income
|
|
|
1,812 |
|
|
|
|
|
|
|
779 |
|
|
|
6,345 |
|
Interest expense (contractual interest expense was
$156.3 million for the seven months ended July 31,
2004 and $257.5 million for the year ended
December 31, 2003)
|
|
|
(16,594 |
) |
|
|
(4,195 |
) |
|
|
(83,371 |
) |
|
|
(229,740 |
) |
Gain on sale of unconsolidated wireless operating company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,518 |
|
Other income (expense), net
|
|
|
(117 |
) |
|
|
(293 |
) |
|
|
(176 |
) |
|
|
(3,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items and income taxes
|
|
|
(4,461 |
) |
|
|
(45,088 |
) |
|
|
(443,143 |
) |
|
|
(640,978 |
) |
Reorganization items, net
|
|
|
|
|
|
|
962,444 |
|
|
|
(146,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(4,461 |
) |
|
|
917,356 |
|
|
|
(589,385 |
) |
|
|
(640,978 |
) |
Income taxes
|
|
|
(4,168 |
) |
|
|
(4,166 |
) |
|
|
(8,052 |
) |
|
|
(23,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(8,629 |
) |
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
$ |
(664,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per common share
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
$ |
(14.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
|
|
44,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
51
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Ended | |
|
Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
|
|
|
|
(See Note 2) | |
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(8,629 |
) |
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
$ |
(664,799 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
75,324 |
|
|
|
177,494 |
|
|
|
300,243 |
|
|
|
287,942 |
|
|
|
Gain on sale of unconsolidated wireless operating company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,518 |
) |
|
|
Equity in net loss of and write-down of investments in
unconsolidated wireless operating company
|
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
Interest accrued to loans receivable and payable, net
|
|
|
16,021 |
|
|
|
4,166 |
|
|
|
82,010 |
|
|
|
194,761 |
|
|
|
Non-cash compensation
|
|
|
|
|
|
|
(805 |
) |
|
|
243 |
|
|
|
2,051 |
|
|
|
Gains on sale of wireless licenses
|
|
|
|
|
|
|
(532 |
) |
|
|
(4,589 |
) |
|
|
(364 |
) |
|
|
Reorganization items, net
|
|
|
|
|
|
|
(962,444 |
) |
|
|
146,242 |
|
|
|
|
|
|
|
Change in deferred tax liability
|
|
|
3,865 |
|
|
|
3,370 |
|
|
|
7,713 |
|
|
|
(22,772 |
) |
|
|
Long-lived asset impairment charge
|
|
|
|
|
|
|
626 |
|
|
|
24,054 |
|
|
|
16,323 |
|
|
|
Indefinite-lived intangible asset impairment charge
|
|
|
|
|
|
|
|
|
|
|
171,140 |
|
|
|
26,919 |
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993 |
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
8,923 |
|
|
|
(17,059 |
) |
|
|
12,723 |
|
|
|
14,935 |
|
|
|
|
Other assets
|
|
|
(22,247 |
) |
|
|
(5,343 |
) |
|
|
(5,910 |
) |
|
|
(5,675 |
) |
|
|
|
Accounts payable and accrued liabilities
|
|
|
(4,421 |
) |
|
|
4,761 |
|
|
|
24,575 |
|
|
|
(62,338 |
) |
|
|
|
Other liabilities
|
|
|
916 |
|
|
|
8,695 |
|
|
|
(1,611 |
) |
|
|
67,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities before
reorganization activities
|
|
|
69,752 |
|
|
|
126,119 |
|
|
|
159,562 |
|
|
|
(183,816 |
) |
|
|
Net cash used for reorganization activities
|
|
|
|
|
|
|
(5,496 |
) |
|
|
(115,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
69,752 |
|
|
|
120,623 |
|
|
|
44,433 |
|
|
|
(183,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(43,941 |
) |
|
|
(33,241 |
) |
|
|
(44,671 |
) |
|
|
(102,181 |
) |
|
Refund of deposits for wireless licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,731 |
|
|
Net proceeds from sale of wireless licenses
|
|
|
|
|
|
|
2,000 |
|
|
|
4,722 |
|
|
|
380 |
|
|
Net proceeds from sale of unconsolidated wireless operating
company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,069 |
|
|
Purchase of investments
|
|
|
(47,368 |
) |
|
|
(87,201 |
) |
|
|
(134,245 |
) |
|
|
(260,615 |
) |
|
Sale and maturity of investments
|
|
|
32,494 |
|
|
|
58,333 |
|
|
|
144,188 |
|
|
|
255,735 |
|
|
Restricted cash, cash equivalents and investments, net
|
|
|
12,537 |
|
|
|
9,810 |
|
|
|
(26,525 |
) |
|
|
15,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(46,278 |
) |
|
|
(50,299 |
) |
|
|
(56,531 |
) |
|
|
31,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loans payable to banks and long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,897 |
|
|
Repayment of loans payable to banks, notes payable and long-term
debt
|
|
|
(36,727 |
) |
|
|
|
|
|
|
(4,742 |
) |
|
|
(20,178 |
) |
|
Issuance of common stock, net
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
463 |
|
|
Payment of debt financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(36,727 |
) |
|
|
|
|
|
|
(4,692 |
) |
|
|
10,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(13,253 |
) |
|
|
70,324 |
|
|
|
(16,790 |
) |
|
|
(142,119 |
) |
Cash and cash equivalents at beginning of period
|
|
|
154,394 |
|
|
|
84,070 |
|
|
|
100,860 |
|
|
|
242,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
141,141 |
|
|
$ |
154,394 |
|
|
$ |
84,070 |
|
|
$ |
100,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
Common Stock | |
|
Additional | |
|
Unearned | |
|
|
|
Comprehensive | |
|
|
|
|
| |
|
Paid-In | |
|
Stock-Based | |
|
Accumulated | |
|
Income | |
|
|
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
(Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Predecessor Company balance at
December 31, 2001
|
|
|
36,979,664 |
|
|
$ |
4 |
|
|
$ |
1,148,337 |
|
|
$ |
(5,138 |
) |
|
$ |
(786,195 |
) |
|
$ |
1,432 |
|
|
$ |
358,440 |
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(664,799 |
) |
|
|
|
|
|
|
(664,799 |
) |
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,449 |
) |
|
|
(1,449 |
) |
|
|
Net unrealized holding losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,174 |
) |
|
|
(1,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(667,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbitration award
|
|
|
21,020,431 |
|
|
|
2 |
|
|
|
8,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,660 |
|
|
|
Employee stock options and benefit plans
|
|
|
704,094 |
|
|
|
|
|
|
|
2,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,967 |
|
|
Unearned stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(3,583 |
) |
|
|
3,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569 |
|
|
|
|
|
|
|
|
|
|
|
569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company balance at
December 31, 2002
|
|
|
58,704,189 |
|
|
|
6 |
|
|
|
1,156,379 |
|
|
|
(986 |
) |
|
|
(1,450,994 |
) |
|
|
(1,191 |
) |
|
|
(296,786 |
) |
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(597,437 |
) |
|
|
|
|
|
|
(597,437 |
) |
|
|
Net unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(597,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued to employees
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and benefit plans
|
|
|
|
|
|
|
|
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353 |
|
|
Unearned stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(322 |
) |
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company balance at
December 31, 2003
|
|
|
58,704,224 |
|
|
|
6 |
|
|
|
1,156,410 |
|
|
|
(421 |
) |
|
|
(2,048,431 |
) |
|
|
(920 |
) |
|
|
(893,356 |
) |
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913,190 |
|
|
|
|
|
|
|
913,190 |
|
|
|
Net unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and benefit plans
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
Unearned stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(1,205 |
) |
|
|
1,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(837 |
) |
|
|
|
|
|
|
|
|
|
|
(837 |
) |
|
Application of fresh-start reporting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of Predecessor equity securities, As Restated
|
|
|
(58,704,224 |
) |
|
|
(6 |
) |
|
|
(1,155,236 |
) |
|
|
53 |
|
|
|
|
|
|
|
873 |
|
|
|
(1,154,316 |
) |
|
|
Issuance of Successor equity securities and fresh-start
adjustments, As Restated
|
|
|
60,000,000 |
|
|
|
6 |
|
|
|
1,478,392 |
|
|
|
|
|
|
|
1,135,241 |
|
|
|
|
|
|
|
2,613,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company balance at August 1, 2004
|
|
|
60,000,000 |
|
|
|
6 |
|
|
|
1,478,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,478,398 |
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,629 |
) |
|
|
|
|
|
|
(8,629 |
) |
|
|
Net unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company balance at December 31, 2004
|
|
|
60,000,000 |
|
|
$ |
6 |
|
|
$ |
1,478,392 |
|
|
$ |
|
|
|
$ |
(8,629 |
) |
|
$ |
81 |
|
|
$ |
1,469,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1. |
The Company and its Emergence from Chapter 11 |
Leap Wireless International, Inc. (Leap), a Delaware
corporation, together with its wholly owned subsidiaries, is a
wireless communications carrier that offers digital wireless
service in the United States under the brand
Cricket®. Leap conducts
operations through its subsidiaries and has no independent
operations or sources of operating revenue other than through
dividends, if any, from its operating subsidiaries. Cricket
service is operated by Leaps wholly owned subsidiary,
Cricket Communications, Inc. (Cricket). Cricket and
its subsidiaries that operate Crickets wireless
communications business are collectively referred to herein as
the Cricket Companies. Leap and the Cricket
Companies are collectively referred to herein as the
Company. As of December 31 2004, the Company provided
wireless service in 39 markets. As discussed in
Note 3, references in these financial statements to
Predecessor Company refer to the Company on or prior
to July 31, 2004. References to Successor
Company refer to the Company after July 31, 2004,
after giving effect to the implementation of fresh-start
reporting. The Company believes that its existing cash and
investments, anticipated cash flows from operations, and
available credit facilities will be sufficient to meet its
operating and capital requirements through the next
12 months.
Chapter 11 Proceedings Under the Bankruptcy Code
On April 13, 2003 (the Petition Date), Leap,
Cricket and substantially all of their subsidiaries filed
voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code (Chapter 11) in
the United States Bankruptcy Court for the Southern District of
California (the Bankruptcy Court) (jointly
administered as Case Nos. 03-03470-A11 to 03-03535-A11).
While in bankruptcy, each of the debtors continued to manage its
properties and operate its business as a
debtor-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with Sections 1107(a)
and 1108 of Chapter 11.
On October 22, 2003, the Bankruptcy Court entered an order
confirming the Fifth Amended Joint Plan of Reorganization dated
as of July 30, 2003, including certain technical amendments
thereto (the Plan of Reorganization), of Leap,
Cricket and their debtor subsidiaries. The effectiveness of the
Plan of Reorganization was conditioned upon, among other things,
the receipt of required regulatory approvals from the Federal
Communications Commission (the FCC) for the transfer
of wireless licenses associated with the change of control that
occurred upon Leaps emergence from bankruptcy. Leap
received the requisite approvals from the FCC on August 5,
2004. On August 16, 2004 (the Effective Date),
Leap and Cricket satisfied the remaining conditions to the Plan
of Reorganization, the Plan of Reorganization became effective,
and the Company emerged from Chapter 11 bankruptcy.
The Plan of Reorganization implemented a comprehensive financial
reorganization that significantly reduced the Companys
outstanding indebtedness. On the Effective Date of the Plan of
Reorganization, the Companys long-term debt was reduced
from a book value of more than $2.4 billion to debt with an
estimated fair value of $412.8 million, consisting of new
Cricket 13% senior secured pay-in-kind notes due 2011 with a
face value of $350 million and an estimated fair value of
$372.8 million, issued on the Effective Date, and
approximately $40 million of remaining indebtedness to the
FCC (net of the repayment of $45 million of principal and
accrued interest to the FCC on the Effective Date).
The following is a summary of the material actions that occurred
as of the Effective Date of the Plan of Reorganization:
|
|
|
|
|
A new board of directors of Leap was appointed. |
|
|
|
All of the outstanding shares of Leap common stock, warrants and
options were cancelled. The holders of Leap common stock,
warrants and options did not receive any distributions under the
Plan of Reorganization. |
54
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
Leap issued 60 million shares of new Leap common stock for
distribution to two classes of the Companys
creditors, as described below. Leap also issued warrants to
purchase 600,000 shares of new Leap common stock pursuant
to a settlement agreement. |
|
|
|
The holders of Crickets senior secured vendor debt claims
received, on a pro rata basis, 96.5% of the issued and
outstanding shares of new Leap common stock, or an aggregate of
57.9 million shares, as well as new Cricket 13% senior
secured pay-in-kind notes due 2011. The notes were guaranteed by
Leap and its direct and indirect domestic subsidiaries and the
notes were secured by all of their personal property and owned
real property. As discussed in Note 15 of these consolidated
financial statements, Cricket redeemed these notes in January
2005. |
|
|
|
The Leap Creditor Trust, which was formed for the benefit of
Leaps general unsecured creditors as contemplated by the
Plan of Reorganization, received 3.5% of the issued and
outstanding shares of new Leap common stock, or 2.1 million
shares, for distribution to holders of allowed Leap general
unsecured claims on a pro rata basis. Leap also transferred
other assets as specified in the Plan of Reorganization, which
were to be liquidated by the Leap Creditor Trust, with the cash
proceeds from such liquidation to be distributed to the holders
of allowed Leap general unsecured claims. These other assets
included a $35 million note receivable from Endesa, S.A.,
currently in litigation in Chile, nine wireless licenses with a
net book value of approximately $1.1 million at
August 16, 2004, Leaps equity interest in IAT
Communications, Inc. which had no carrying value at
August 16, 2004, certain causes of action, and
approximately $2.3 million of cash. Prior to
August 16, 2004, Leap had transferred $68.8 million of
funds to the Leap Creditor Trust to be distributed to holders of
allowed Leap general unsecured claims. |
|
|
|
Certain executory contracts and unexpired leases were assumed by
the reorganized debtors, with reorganized Cricket responsible
for paying the cure amounts associated with such contracts and
leases. |
|
|
|
The holders of general unsecured claims against Cricket and
Leaps other direct and indirect subsidiaries received no
distributions under the Plan of Reorganization. |
|
|
|
All of the debtors pre-petition indebtedness, other than
indebtedness owed to the FCC, was cancelled in full, including
approximately $1.6 billion net book value of debt
outstanding under Crickets senior secured vendor credit
facilities and approximately $738.2 million net book value
of debt outstanding under Leaps 12.5% senior notes
(Senior Notes), 14.5% senior discount notes
(Senior Discount Notes), note payable to GLH, Inc.
(GLH) and Qualcomm term loan. |
|
|
|
The Company paid the FCC approximately $36.7 million of
unpaid principal and approximately $8.3 million of accrued
interest in connection with the reinstatement of the
Companys FCC debt, and approximately $278,000 of unjust
enrichment penalties. The Company agreed to repay the
approximately $40 million remaining outstanding principal
amount of FCC debt, plus accrued interest, in installments
scheduled for April and July 2005. As discussed in Note 15 of
these consolidated financial statements, the Company repaid the
remaining FCC debt in January 2005. |
|
|
|
Leap entered into a Registration Rights Agreement with Highland
Capital Management, L.P. (a beneficial shareholder of Leap
and an affiliate of James D. Dondero, a director of Leap)
and MHR Institutional Partners II LP and MHR Institutional
Partners IIA LP (beneficial shareholders of Leap and
affiliates of Dr. Mark H. Rachesky, a director of
Leap) pursuant to which Leap granted demand registration rights
to such entities and agreed to prepare and file a resale shelf
registration statement relating to the shares of new Leap common
stock received by such entities under the Plan of Reorganization. |
Also, on the Effective Date of the Plan of Reorganization, Leap,
Cricket and their subsidiaries implemented certain restructuring
transactions intended to streamline their corporate structure.
As a result,
55
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Leap owns 100% of the issued and outstanding shares of
reorganized Cricket and certain other reorganized subsidiaries,
and Cricket owns 100% of the issued and outstanding shares of
each of the reorganized wireless license holding companies and
the reorganized property holding companies.
Cash held in reserve by Leap immediately prior to the Effective
Date of the Plan of Reorganization that remains following
satisfaction of all allowed administrative claims and allowed
priority claims against Leap will be distributed to the Leap
Creditor Trust. At December 31, 2004, approximately
$9.6 million remained in reserve by Leap and was included
in restricted cash. On the same date, Cricket had restricted
cash and cash equivalents of $20.8 million that included
funds set aside or pledged to satisfy payments and
administrative and priority claims against the Cricket Companies
following their emergence from bankruptcy, and cash restricted
for other purposes.
Accounting Under Chapter 11
As of the Petition Date, the Company implemented American
Institute of Certified Public Accountants Statement of
Position (SOP) 90-7, Financial Reporting
by Entities in Reorganization under the Bankruptcy Code.
SOP 90-7 requires that the Companys pre-petition
liabilities that were subject to compromise be reported
separately on the balance sheet at an estimate of the amount
that would ultimately be allowed by the Bankruptcy Court.
SOP 90-7 also requires separate reporting of certain
expenses, realized gains and losses and provisions for losses
related to the Chapter 11 filings as reorganization items.
In addition, commencing as of the Petition Date and continuing
while in bankruptcy, the Company ceased accruing interest and
amortizing debt discounts and debt issuance costs for its
pre-petition debt that was subject to compromise, which included
its Senior Notes, Senior Discount Notes, senior secured vendor
credit facilities, note payable to GLH and Qualcomm term loan.
In accordance with SOP 90-7, changes in accounting
principles required to be adopted under accounting principles
generally accepted in the United States within twelve months of
emerging from bankruptcy are required to be adopted at the date
of emergence. However, there were none that had a significant
effect on the Companys financial statements as of the date
of emergence.
|
|
Note 2. |
Summary of Significant Accounting Policies |
Restatement of Previously Reported Unaudited Interim
Consolidated Financial Information
Restatement adjustments relating to the Predecessor Company
as of July 31, 2004, the date of adoption of fresh-start
reporting, and for the one and seven month periods then
ended:
In connection with the Companys emergence from bankruptcy
and adoption of fresh-start reporting, the Company overstated
its liabilities by a net amount of $4.9 million as of
July 31, 2004. The adjustments necessary to correct these
overstatements include: reversing $3.0 million related to
the inadvertent duplicate recording of liabilities to certain
creditors upon recording the effect of the Plan of
Reorganization; recording the discharge through the
Chapter 11 proceeding of $1.7 million of vendor
obligations; reducing deferred revenue by $3.5 million to
its fair value as of the fresh-start date, an adjustment to
correct errors arising from inadequate account reconciliation
procedures; and reducing $4.8 million of deferred rent
liability to $0 as required by fresh-start reporting. The two
following additional adjustments partially offset the impact of
these items. In connection with a review of the Companys
leases, management determined that incorrect assumptions,
principally related to the expected remediation date, were used
to estimate and record the liability for future asset retirement
obligations, resulting in a $7.9 million understatement of
the liability as of July 31, 2004. Management also
determined that the deferred income tax liability associated
with wireless licenses revalued upon the adoption of fresh-start
reporting was understated by $0.2 million. The per share
effects of each of the above adjustments were not material.
56
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The impact of the above adjustments required to correct the
errors in the Predecessor Company consolidated financial
statements as of and for the seven month period ended
July 31, 2004 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
As Restated | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
$ |
500,548 |
|
|
$ |
495,619 |
|
Accounts payable and accrued liabilities
|
|
$ |
99,168 |
|
|
$ |
95,314 |
|
Other current liabilities
|
|
$ |
84,811 |
|
|
$ |
74,601 |
|
Other long-term liabilities
|
|
$ |
14,440 |
|
|
$ |
23,577 |
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months Ended | |
|
|
July 31, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
As Restated | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Reorganization gain, net
|
|
$ |
957,516 |
|
|
$ |
962,444 |
|
Net income
|
|
$ |
908,262 |
|
|
$ |
913,190 |
|
Basic and diluted net income per common share
|
|
$ |
15.49 |
|
|
$ |
15.58 |
|
The impact of the above adjustments required to correct the
errors relating to the unaudited interim financial information
of the Predecessor Company presented in Note 16, Quarterly
Financial Data, for the one month period ended
July 31, 2004 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
One Month Ended | |
|
|
July 31, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
As Restated | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
Revenues
|
|
$ |
69,124 |
|
|
$ |
69,124 |
|
Operating loss
|
|
$ |
(3,335 |
) |
|
$ |
(3,335 |
) |
Net income
|
|
$ |
954,437 |
|
|
$ |
959,365 |
|
Basic and diluted net income per common share
|
|
$ |
16.28 |
|
|
$ |
16.36 |
|
Restatement adjustments relating to the Successor
Companys results of operations for the two month unaudited
interim period ended September 30, 2004:
During the course of the Companys bankruptcy, the Company
amended certain leases. For such leases, as well as new and
renewed leases, the Company re-assessed the lease term and lease
classification. As a result, the terms of certain leases were
revised for accounting purposes, and the related rent expense,
which is reflected in cost of service, was increased by
$0.4 million for the two months ended
September 30, 2004 to give effect to previously
unrecognized rent expense arising in connection with fixed rent
escalation provisions over the applicable lease term. In
addition, an adjustment of $0.1 million was recorded to
cost of service for the two month period ended
September 30, 2004 relating to an increase in the asset
retirement obligation from July 31, 2004.
In preparing for its annual audit, the Company also identified
other errors in the previously reported unaudited interim
financial information for the two months ended
September 30, 2004. These errors resulted from inadequate
account reconciliation procedures and led to the understatement
of service revenue by
57
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$0.9 million, the understatement of equipment revenue by
$0.3 million and the understatement of realized investment
gains by $0.3 million. The Company also recorded additional
income tax expense of $0.4 million for the two months ended
September 30, 2004 relating to the above adjustments. The
per share effects of each of the above adjustments were not
material.
The impact of the above adjustments required to correct the
errors relating to the unaudited interim financial information
of the Successor Company presented in Note 16, Quarterly
Financial Data, for the two month period ended
September 30, 2004 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Two Months Ended | |
|
|
September 30, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
As Restated | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
Revenues
|
|
$ |
136,586 |
|
|
$ |
137,783 |
|
Operating income
|
|
$ |
4,882 |
|
|
$ |
5,504 |
|
Net loss
|
|
$ |
(2,572 |
) |
|
$ |
(1,982 |
) |
Basic and diluted net loss per common share
|
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
Principles of Consolidation
The consolidated financial statements include the accounts of
Leap and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
the consolidated financial statements.
While in bankruptcy, the Company continued to present the
financial statements of Leap and its wholly owned subsidiaries
on a consolidated basis because: (i) Leap and each of its
subsidiaries that had filed for bankruptcy continued to manage
its properties and operate its business as a
debtor-in-possession; (ii) management expected, and the
Plan of Reorganization contemplated, that Leap would remain the
ultimate parent of each of its subsidiaries (other than two
subsidiaries whose stock was pledged as collateral for the GLH
note and the Qualcomm term loan, respectively); (iii) Leap
had the power to elect or cause the election of the Board of
Directors of each of its subsidiaries during the course of the
bankruptcy; and (iv) except for assets that were to be
transferred to the Leap Creditor Trust, management expected that
Leap and its subsidiaries would retain substantially all of
their assets through the date of the Companys emergence
from bankruptcy.
Use of Estimates in Financial Statement Preparation
The consolidated financial statements are prepared using
accounting principles generally accepted in the United States of
America. These principles require management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses.
By their nature, estimates are subject to an inherent degree of
uncertainty. Actual results could differ from managements
estimates.
Reorganization Items
Reorganization items represent amounts incurred by the
Predecessor Company as a direct result of the Chapter 11
reorganization and are presented separately in the Predecessor
Companys consolidated statements of operations.
58
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the components of reorganization
items, net, in the Predecessor Companys consolidated
statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company | |
|
|
| |
|
|
Seven Months | |
|
|
|
|
Ended | |
|
Year Ended | |
|
|
July 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(As Restated) | |
|
|
Professional fees
|
|
$ |
(5,005 |
) |
|
$ |
(12,073 |
) |
Gain on settlement of liabilities
|
|
|
2,500 |
|
|
|
36,954 |
|
Adjustment of liabilities to allowed amounts
|
|
|
(360 |
) |
|
|
(174,063 |
) |
Post-petition interest income
|
|
|
1,436 |
|
|
|
2,940 |
|
Net gain on discharge of liabilities and the net effect from
application of fresh-start accounting
|
|
|
963,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reorganization items, net
|
|
$ |
962,444 |
|
|
$ |
(146,242 |
) |
|
|
|
|
|
|
|
Revenues and Cost of Revenues
Crickets business revenues arise from the sale of wireless
services, handsets and accessories. Wireless services are
generally provided on a month-to-month basis. Amounts received
in advance for wireless services from customers who pay in
advance are initially recorded as deferred revenues and are
recognized as service revenue as services are rendered. Because
the Company does not require any of its customers to sign
long-term service commitments or submit to a credit check, some
of its customers may be more likely to terminate service for
inability to pay than the customers of other wireless providers.
Accordingly, service revenues for customers who pay in arrears
are recognized only after the service has been rendered and
payment has been received. The Company also charges customers
for service plan changes, activation fees and other service
fees. Revenues from service plan change fees are deferred and
recorded to revenue over the estimated customer relationship
period, and other service fees are recognized when received. In
connection with the adoption of Emerging Issues Task Force
(EITF) Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables, on
July 1, 2003, the Company began allocating activation fees
to the other elements of the multiple element arrangement on a
relative fair value basis. Because the fair values of the
Companys handsets are higher than the total consideration
received for the handsets and activation fees combined, the
Company allocates the activation fees entirely to equipment
revenues and recognizes the activation fees when received.
Activation fees included in equipment revenues during the five
months ended December 31, 2004 and the seven months ended
July 31, 2004 totaled $7.1 million and $11.8 million,
respectively. Activation fees included in equipment revenues for
the year ended December 31, 2003 totaled $9.6 million.
Direct costs associated with customer activations are expensed
as incurred. Cost of service generally includes direct costs and
related overhead, excluding depreciation and amortization, of
operating the Companys networks.
Equipment revenues arise from the sale of handsets and
accessories. Revenues and related costs from the sale of
handsets are recognized when service is activated by customers.
Revenues and related costs from the sale of accessories are
recognized at the point of sale. The costs of handsets and
accessories sold are recorded in cost of equipment. Amounts due
from third-party dealers and distributors for handsets are
recorded as deferred revenue upon shipment of the handsets by
the Company to such dealers and distributors and are recognized
as equipment revenues when service is activated by customers.
Handsets sold by third-party dealers and distributors are
recorded as inventory until they are sold to and activated by
customers. Sales incentives offered without charge to customers
and volume-based incentives paid to the Companys
third-party dealers and distributors are recognized as a
reduction of revenue and as a liability when the related
59
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
service or equipment revenue is recognized. Customers have
limited rights to return handsets and accessories based on time
and/or usage. Returns of handsets and accessories have
historically been insignificant.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
maturity at the time of purchase of three months or less to be
cash equivalents. The Company invests its cash with major
financial institutions in money market funds, short-term
U.S. Treasury securities, obligations of
U.S. Government agencies and other securities such as
prime-rated short-term commercial paper and investment grade
corporate fixed-income securities. The Company has not
experienced any significant losses on its cash and cash
equivalents.
Investments
Short-term investments consists of highly liquid fixed-income
investments with an original maturity of greater than three
months such as U.S. Treasury securities, obligations of U.S.
Government agencies, and other securities such as prime-rated
commercial paper and investment grade corporate fixed-income
securities.
Restricted cash, cash equivalents and short-term investments
consist primarily of amounts that the Company has set aside to
satisfy allowed administrative claims and allowed priority
claims against the Company through the Effective Date of the
Plan of Reorganization and investments in money market accounts
or certificates of deposit that have been pledged to secure
operating obligations.
The Company applies Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, to account for
its investments in marketable securities. Investments are
classified as available-for-sale and stated at fair value as
determined by the most recently traded price of each security at
each balance sheet date. The net unrealized gains or losses on
available-for-sale securities are reported as a component of
comprehensive income (loss). The specific identification method
is used to compute the realized gains and losses on debt and
equity securities. Investments are periodically reviewed for
impairment. If the carrying value of an investment exceeds its
fair value and the decline in value is determined to be
other-than-temporary, an impairment loss is recognized for the
difference.
Inventories
Inventories consist of handsets and accessories not yet placed
into service and units designated for the replacement of damaged
customer handsets, and are stated at the lower of cost or market
using the first-in, first-out method.
Investments in Unconsolidated Wireless Operating
Companies
For certain foreign investments in corporate entities held until
divested in 2002, the Company used the equity method when it
exercised significant influence but did not control the entity.
Under the equity method, the investment is originally recorded
at cost and adjusted to recognize the Companys share of
net earnings or losses of the investee, limited to the extent of
the Companys investment in, advances to and financial
guarantees for the investee. Such earnings or losses of the
Companys investees were adjusted to reflect the
amortization of any differences between the carrying value of
the investment and the Companys equity in the net assets
of the investee.
Property and Equipment
Property and equipment are initially recorded at cost. Additions
and improvements, including certain labor costs, are
capitalized, while expenditures that do not enhance the asset or
extend its useful life are
60
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
charged to operating expenses as incurred. Depreciation is
applied using the straight-line method over the estimated useful
lives of the assets once the assets are placed in service.
Upon emergence from Chapter 11 and adoption of fresh-start
reporting, the Company re-assessed the carrying values and
useful lives of its property and equipment. As a result of this
re-assessment, which included a review of the Companys
historical usage of and expected future service from existing
property and equipment, and a review of industry averages for
similar property and equipment, the Company changed the
depreciable lives for certain network equipment assets. These
network equipment assets that were previously depreciated over
periods ranging from two to five years are now depreciated over
periods ranging from three to fifteen years. As a result of this
change, depreciation expense and net loss were reduced by
approximately $51.3 million, or $0.86 per share, for the
five months ended December 31, 2004 compared to what they
would have been if the useful lives had not been revised. The
estimated useful lives for the Companys other property and
equipment, which have remained unchanged, are three to five
years for computer hardware and software, and three to seven
years for furniture, fixtures and retail and office equipment.
Property and equipment to be disposed of by sale or exchange is
carried at the lower of carrying value or fair value less costs
to sell.
The following table summarizes the depreciable lives for network
equipment (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average | |
|
|
Prior | |
|
Revised | |
|
Remaining Life | |
|
|
Depreciable Life | |
|
Depreciable Life | |
|
at July 31, 2004 | |
|
|
| |
|
| |
|
| |
Network equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Switches
|
|
|
5 |
|
|
|
10 |
|
|
|
6.8 |
|
|
Switch power equipment
|
|
|
5 |
|
|
|
15 |
|
|
|
11.8 |
|
|
Cell site equipment, and site acquisitions and improvements
|
|
|
5 |
|
|
|
7 |
|
|
|
3.8 |
|
|
Towers
|
|
|
5 |
|
|
|
15 |
|
|
|
11.8 |
|
|
Antennae
|
|
|
2 |
|
|
|
3 |
|
|
|
1.8 |
|
The Companys network construction expenditures are
recorded as construction-in-progress until the network or assets
are placed in service, at which time the assets are transferred
to the appropriate property and equipment category. As a
component of construction-in-progress, the Company capitalizes
interest and salaries and related costs of engineering and
technical operations employees, to the extent time and expense
are contributed to the construction effort, during the
construction period.
In connection with the adoption of fresh-start reporting, the
Company reduced the carrying value of property and equipment to
its estimated fair market value.
Internal Use Software
Costs associated with the acquisition or development of software
for internal use are capitalized and amortized using the
straight-line method over the expected useful life of the
software, which ranges from three to five years.
Wireless Licenses
Wireless licenses are initially recorded at cost. The Company
determined that its wireless licenses met the definition of
indefinite-lived intangible assets under SFAS No. 142,
Goodwill and Other Intangible Assets because the
Company expects to continue to provide wireless service using
the relevant licenses for the foreseeable future and the
wireless licenses may be renewed every ten years for a nominal
fee, provided that the Company continues to meet the service and
geographic coverage provisions required by the FCC. Therefore,
upon the adoption of SFAS No. 142 on January 1, 2002,
the Company ceased amortizing its
61
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
wireless license costs. Wireless licenses to be disposed of by
sale or exchange are carried at the lower of carrying value or
fair value less costs to sell. At December 31, 2004 and
2003, wireless licenses to be disposed of by sale or exchange
were not significant.
In connection with the adoption of fresh-start reporting, the
Company increased the carrying value of wireless licenses to
their estimated fair market values.
Goodwill and Other Intangible Assets
Goodwill represents the excess of reorganization value over the
fair value of identified tangible and intangible net assets
recorded in connection with fresh-start accounting. Other
intangible assets were recorded upon adoption of fresh-start
accounting and consist of trademarks, which are being amortized
on a straight-line basis over their estimated useful lives of
fourteen years, and customer relationships, which are being
amortized on a straight-line basis over their estimated useful
lives of four years.
Impairment of Indefinite-Lived Intangible Assets
In accordance with SFAS No. 142, the Company assesses
potential impairments to its indefinite-lived intangible assets,
including goodwill and wireless licenses, annually and when
there is evidence that events or changes in circumstances
indicate that an impairment condition may exist. The Successor
Company has chosen to conduct its annual test for impairment
during the third quarter of each year. An impairment loss is
recognized when the fair value of the asset is less than its
carrying value, and would be measured as the amount by which the
assets carrying value exceeds its fair value. Any required
impairment loss would be recorded as a reduction in the carrying
value of the related asset and charged to results of operations.
Estimates of fair value of the Companys wireless licenses
are based primarily on available market prices, including
successful bid prices in FCC auctions and selling prices
observed in wireless license transactions.
Due to a decline in the value of the Companys wireless
licenses, it recorded an impairment charge of
$171.1 million during the year ended December 31, 2003 to
reduce the carrying value of its wireless licenses to their
estimated fair value. Management estimated the fair value of the
Companys wireless licenses based on the information
available to it, including a valuation report prepared by a
third-party consultant in connection with the confirmation
hearing for the Companys Plan of Reorganization.
In developing its valuation, the firm the Company engaged
utilized a market-based approach. The firm considered
then-current market conditions, including information on
recently announced wireless license sale transactions, the
strategic significance of the Companys wireless licenses
to potential acquirers, the size of the markets covered by the
Companys wireless licenses, the amount of spectrum
included in each wireless license and the availability of
spectrum from other sellers in the markets covered by such
wireless licenses. The firms valuation assumed that the
Companys licenses would be sold in an orderly manner
between a willing seller and a willing buyer rather than in a
liquidation or forced sale scenario.
In its valuation report, the firm noted that market conditions
for wireless licenses were weak and that recent wireless license
sale transactions had been arranged at large discounts to the
prices for comparable licenses auctioned by the FCC in
Auction 35, which concluded more than two and one-half
years prior to the date at which the firm valued the
Companys wireless licenses. The report also stated that
significant amounts of spectrum were for sale and that the pool
of potential buyers was generally limited to national and
regional carriers with highly specific needs. In addition, the
firms report noted that there was a significant lack of
debt financing available for the build-out of new markets, and
that the national and regional carriers were generally focused
on improving their balance sheets and were generally deferring
opportunities to acquire spectrum to fill expected future needs.
In preparing its valuation, the firm analyzed the market for
each of the Companys licenses and, based on its analysis,
estimated the value of each license at a discount to the winning
net bids in Auction 35 for
62
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
license(s) covering the same market or, if licenses for the same
market were not included in Auction 35, at a discount to
the average of the winning net bids in Auction 35 for
wireless licenses covering markets of comparable size. These
discounts generally ranged from approximately 18% to 90% of
comparable winning net bids in Auction 35. In the
aggregate, the firms valuation of the Companys
wireless licenses implied a discount to Auction 35 values
of approximately 70%.
During the year ended December 31, 2002, the Company also
recorded an impairment charge of $26.9 million to its then
remaining goodwill balance. The goodwill related to the
Companys June 2000 acquisition of the remaining interest
in Cricket Communications Holdings that it did not already own.
The Company previously adopted EITF Issue No. 02-07,
Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets. EITF Issue
No. 02-07 requires that separately recorded
indefinite-lived intangible assets be combined into a single
unit of accounting for purposes of testing impairment if they
are operated as a single asset and, as such, are essentially
inseparable from one another. Management concluded that the
Companys wireless licenses in its operating markets should
be combined into a single unit of accounting because these
wireless licenses as a group represent the highest and best use
of the assets, and that the value of the wireless licenses would
not be significantly impacted by a sale of one or a portion of
the wireless licenses, among other factors.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
assesses potential impairments to its long-lived assets,
including property and equipment and certain intangible assets,
when there is evidence that events or changes in circumstances
indicate that the carrying value may not be recoverable. An
impairment loss may be required to be recognized when the
undiscounted cash flows expected to be generated by a long-lived
asset (or group of such assets) is less than its carrying value.
Any required impairment loss would be measured as the amount by
which the assets carrying value exceeds its fair value and
would be recorded as a reduction in the carrying value of the
related asset and charged to results of operations.
During the seven months ended July 31, 2004 and the years
ended December 31, 2003 and 2002, the Company recorded
impairment charges of $0.6 million, $24.1 million and
$16.3 million, respectively, related to the disposal of
certain network assets, capitalized costs and related charges
associated with cell sites that the Company no longer expects to
use in its business.
Operating Leases
The Company accounts for its operating leases in accordance with
SFAS No. 13 and FASB Technical Bulletin No. 85-3.
Rent expense is recorded on a straight-line basis over the
initial lease term and those renewal periods that are reasonably
assured as determined at lease inception. The difference between
rent expense and rent paid is recorded as deferred rent included
in other current liabilities in the consolidated balance sheets.
Debt Discount and Deferred Financing Costs
Debt discount and deferred financing costs are amortized and
recognized as interest expense under the effective interest
method over the expected term of the related debt. During the
year ended December 31, 2003, the Company ceased amortizing
debt discounts and deferred financing costs related to debt in
default subject to compromise and expensed the remaining
unamortized debt discounts and debt issuance costs totaling
$174.1 million related to debt in default, subject to
compromise.
63
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Advertising costs totaled $13.4 million for the five months
ended December 31, 2004, $12.5 million for the seven months
ended July 31, 2004 and $29.6 million and $57.0
million, respectively, for the years ended December 31,
2003 and 2002.
Stock-based Compensation
The Company measures compensation expense for its employee and
director stock-based compensation plans using the intrinsic
value method. Stock-based compensation is amortized over the
related vesting periods of the stock awards using an accelerated
method. All outstanding stock options of the Predecessor Company
were cancelled upon emergence from bankruptcy in accordance with
the Plan of Reorganization. For the period from August 1,
2004 through December 31, 2004, no stock-based compensation
awards were outstanding.
The following table shows the effects on net income
(loss) and income (loss) per share as if the
Predecessor Company had applied the fair value provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company | |
|
|
| |
|
|
Seven Months | |
|
|
|
|
Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
July 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(As Restated) | |
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
$ |
(664,799 |
) |
|
Add back stock-based compensation expense (benefit) included in
net income (loss)
|
|
|
(837 |
) |
|
|
243 |
|
|
|
569 |
|
|
Less pro forma compensation (expense) benefit, net
|
|
|
6,209 |
|
|
|
(10,805 |
) |
|
|
(17,280 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
918,562 |
|
|
$ |
(607,999 |
) |
|
$ |
(681,510 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
$ |
(14.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
15.67 |
|
|
$ |
(10.37 |
) |
|
$ |
(15.28 |
) |
|
|
|
|
|
|
|
|
|
|
Income Taxes
Current income tax benefit (expense) is the amount expected
to be receivable (payable) for the current year. A deferred
tax asset and/or liability is computed for both the expected
future impact of differences between the financial statement and
tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be more likely than not realized. Tax rate
changes are reflected in income in the period such changes are
enacted.
Basic and Diluted Net Income (Loss) Per Common
Share
Basic earnings per common share is calculated by dividing net
income (loss) by the weighted average number of common shares
outstanding during the reporting period. Diluted earnings per
common share reflect the potential dilutive effect of additional
common shares that are issuable upon exercise of outstanding
stock options and warrants calculated using the treasury stock
method.
64
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications
Certain prior period amounts have been reclassified to conform
to the current year presentation.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which revises SFAS
No. 123. SFAS No. 123R requires that a company measure
the cost of equity-based service awards based on the grant-date
fair value of the award (with limited exceptions). That cost
will be recognized as compensation expense over the period
during which an employee is required to provide service in
exchange for the award or the requisite service period (usually
the vesting period). No compensation expense is recognized for
the cost of equity-based awards for which employees do not
render the requisite service. A company will initially measure
the cost of each liability based service award based on the
awards current fair value; the fair value of that award
will be remeasured subsequently at each reporting date through
the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation expense over
that period. The grant-date fair value of employee stock options
and similar instruments will be estimated using option-pricing
models adjusted for the unique characteristics of those
instruments. If an equity-based award is modified after the
grant date, incremental compensation expense will be recognized
in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award
immediately before the modification. Adoption of SFAS
No. 123R is required for the Companys first quarter
beginning January 1, 2006. The Company has not yet
determined the impact that the adoption of SFAS No. 123R
will have on its consolidated financial position or its results
of operations.
On December 15, 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets, and amended
Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transactions. SFAS
No. 153 is based on the principle that nonmonetary asset
exchanges should be recorded and measured at the fair value of
the assets exchanged, with certain exceptions. This standard
requires exchanges of productive assets to be accounted for at
fair value, rather than at carryover basis, unless
(1) neither the asset received nor the asset surrendered
has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance (as
defined). Adoption of SFAS No. 153 is required for
nonmonetary asset exchanges occurring in the third quarter
beginning July 1, 2005. The Company has not yet determined
the impact that the adoption of SFAS No. 153 will have on
its consolidated financial position or its results of operations.
In March 2004, the FASB ratified the consensus of the EITF
regarding the recognition and measurement of other-than
temporary impairments of certain investments. The effective date
of the recognition and measurement guidance in EITF Issue
No. 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, has
been delayed until the implementation guidance provided by a
FASB staff position on the issue has been finalized. The
disclosure guidance was unaffected by the delay and is effective
for fiscal years ending after June 15, 2004. The Company
implemented the disclosure provisions of EITF Issue
No. 03-01 in its annual financial statements for the fiscal
year ended December 31, 2004 and does not anticipate that
the implementation of the recognition and measurement guidance,
when released, will have a material effect on the Companys
consolidated financial position or its results of operations.
Note 3. Fresh-Start Reporting
The Company has adopted the fresh-start accounting provisions of
SOP 90-7. Under SOP 90-7, the Company was required to
apply fresh-start reporting because (i) the reorganization
value of the assets of the Company immediately before the date
of confirmation was less than the sum of all the allowed claims
and post petition liabilities, and (ii) holders of
Leaps common shares immediately before the Bankruptcy
Court confirmed the Companys Plan of Reorganization
received less than fifty percent of the common stock issued by
Leap on the date it emerged from bankruptcy. All material
conditions to the effectiveness of the Plan of Reorganization
were resolved on August 5, 2004 and the Plan of
Reorganization became effective on
65
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
August 16, 2004. In light of the proximity of
August 5, 2004 to the month ended July 31, 2004 and
the immateriality of the results of operations for the period
from August 1, 2004 through August 5, 2004, the
Company recorded the effects of the consummation of the Plan of
Reorganization as well as adjustments for fresh-start reporting
in the Companys consolidated financial statements as of
July 31, 2004. Under fresh-start reporting, a new entity is
deemed to be created for financial reporting purposes.
Therefore, as used in these financial statements, the term
Company refers to the Predecessor Company and its
operations for periods on or prior to July 31, 2004, and
refers to the Successor Company and its operations for periods
after July 31, 2004, after giving effect to the
implementation of fresh-start reporting. The financial
statements of the Company after July 31, 2004 are not
comparable in many respects to the Companys financial
statements for prior periods.
Under SOP 90-7, reorganization value represents the fair value
of the entity before considering liabilities and approximates
the amount a willing buyer would pay for the assets of the
entity immediately after the reorganization. Consistent with
fresh-start reporting, enterprise value (i.e., debt plus equity)
may be used to calculate the reorganization value of the
Company. The Company engaged a third party valuation consultant
to assist the Company in estimating the Companys
enterprise value as of July 31, 2004. In formulating its
estimate, the valuation consultant reviewed information about
the Company and conducted a discounted cash flow analysis using
projected financial information supplied by the Company and an
analysis of the market value and trading multiples of selected
publicly-held companies in lines of business similar to the
Companys business. The valuation consultant estimated that
the Companys enterprise value at July 31, 2004 was
between $1.9 billion and $2.2 billion. The Company
selected the mid-point of the range, $2.05 billion, to represent
managements best estimate of the Companys enterprise
value for purposes of SOP 90-7. The Company then adjusted the
enterprise value for cash in excess of that necessary for normal
operations and for the value of non-debt operating liabilities,
each as of the date of adoption of fresh-start reporting, to
determine that the reorganization value of the Successor
Companys assets was approximately $2.1 billion.
The Company engaged valuation firms to provide management with
information that management utilized in determining the fair
market value of the Companys network assets and wireless
licenses, and the fair value of the Companys trademarks,
and customer relationships and to evaluate other potential
intangible assets. Management used such information in
connection with the allocation process described below.
In implementing fresh-start reporting, the Company allocated its
reorganization value to its assets in conformity with procedures
specified by SFAS No. 141, Business
Combinations, and stated its liabilities, other than
deferred taxes, at the present value of amounts expected to be
paid. The amount remaining after allocation of the
reorganization value to the Companys identified tangible
and intangible assets is reflected as goodwill, which is subject
to periodic evaluation for impairment. In addition, under
fresh-start reporting, the Companys accumulated deficit
was eliminated and new equity was issued according to the Plan
of Reorganization.
The adjustments to the Predecessor Companys consolidated
balance sheet at July 31, 2004 resulting from the
application of fresh-start accounting are summarized below. The
summary should be reviewed in
66
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
conjunction with the Companys consolidated financial
statements and corresponding notes contained elsewhere in this
report (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
|
|
|
Successor | |
|
|
Company | |
|
|
|
|
|
Company | |
|
|
| |
|
Reorganization | |
|
Fresh-Start | |
|
| |
|
|
July 31, 2004 | |
|
Adjustments | |
|
Adjustments | |
|
July 31, 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
(As Restated) | |
|
(As Restated) | |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
152,742 |
|
|
$ |
1,652 |
a |
|
$ |
|
|
|
$ |
154,394 |
|
Short-term investments
|
|
|
94,741 |
|
|
|
|
|
|
|
|
|
|
|
94,741 |
|
Restricted cash, cash equivalents and short-term investments
|
|
|
48,655 |
|
|
|
(1,652 |
)a |
|
|
|
|
|
|
47,003 |
|
Funds distributed to Leap Creditor Trust
|
|
|
68,790 |
|
|
|
(68,790 |
)a |
|
|
|
|
|
|
|
|
Inventories
|
|
|
34,739 |
|
|
|
|
|
|
|
|
|
|
|
34,739 |
|
Other current assets
|
|
|
36,235 |
|
|
|
(1,464 |
)a |
|
|
(1,377 |
)e |
|
|
33,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
435,902 |
|
|
|
(70,254 |
) |
|
|
(1,377 |
) |
|
|
364,271 |
|
Property and equipment, net
|
|
|
675,347 |
|
|
|
|
|
|
|
(82,352 |
)e |
|
|
592,995 |
|
Wireless licenses, net
|
|
|
558,913 |
|
|
|
(1,100 |
)a |
|
|
94,791 |
e |
|
|
652,604 |
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
329,619 |
e |
|
|
329,619 |
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
166,000 |
e |
|
|
166,000 |
|
Other assets
|
|
|
52,998 |
|
|
|
(36,400 |
)a |
|
|
(14 |
)e |
|
|
16,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,723,160 |
|
|
$ |
(107,754 |
) |
|
$ |
506,667 |
|
|
$ |
2,122,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
69,140 |
|
|
$ |
27,898 |
b |
|
$ |
(1,724 |
)e |
|
$ |
95,314 |
|
Current maturities of long-term debt
|
|
|
74,799 |
|
|
|
(4 |
)b |
|
|
2,638 |
e |
|
|
77,433 |
|
Other current liabilities
|
|
|
66,584 |
|
|
|
14,403 |
b |
|
|
(6,386 |
)e |
|
|
74,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
210,523 |
|
|
|
42,297 |
|
|
|
(5,472 |
) |
|
|
247,348 |
|
Long-term debt
|
|
|
|
|
|
|
372,750 |
c |
|
|
|
|
|
|
372,750 |
|
Other long-term liabilities
|
|
|
59,052 |
|
|
|
1,094 |
b |
|
|
(36,569 |
)e |
|
|
23,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
269,575 |
|
|
|
416,141 |
|
|
|
(42,041 |
) |
|
|
643,675 |
|
Liabilities subject to compromise
|
|
|
2,398,230 |
|
|
|
(2,398,230 |
)b |
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
6 |
|
|
|
|
d |
|
|
|
|
|
|
6 |
|
|
Additional paid-in capital
|
|
|
1,155,236 |
|
|
|
909,689 |
d |
|
|
(586,533 |
)e |
|
|
1,478,392 |
|
|
Unearned stock-based compensation
|
|
|
(53 |
) |
|
|
53 |
d |
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(2,098,961 |
) |
|
|
963,720 |
a-d |
|
|
1,135,241 |
e |
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(873 |
) |
|
|
873 |
d |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(944,645 |
) |
|
|
1,874,335 |
|
|
|
548,708 |
|
|
|
1,478,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$ |
1,723,160 |
|
|
$ |
(107,754 |
) |
|
$ |
506,667 |
|
|
$ |
2,122,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adjustments reflected in the condensed consolidated balance
sheet above are as follows:
|
|
(a) |
To record the transfer of Leap assets to the Leap Creditor Trust. |
|
(b) |
To record the assumption or discharge of liabilities subject to
compromise and the cancellation of Predecessor Company debt and
other liabilities compromised pursuant to the Plan of
Reorganization. |
|
(c) |
To record the issuance of new senior secured pay-in-kind notes,
in accordance with the Plan of Reorganization. |
|
(d) |
To record the cancellation of the old common stock and other
equity and the issuance of new common stock and warrants in
accordance with the Plan of Reorganization. |
|
(e) |
To adjust the carrying value of assets, liabilities and
stockholders deficit to fair value, in accordance with
fresh-start reporting, and record goodwill and other intangible
assets for the reorganization value in excess of net assets. |
The fair values of goodwill and intangible assets reported in
the Successor Companys consolidated balance sheet were
estimated based upon the Companys estimates of future cash
flows and other factors including discount rates. If these
estimates or the assumptions underlying these estimates change
in the future, the Company may be required to record impairment
charges. In addition, a permanent and sustained decline in the
market value of the Companys outstanding common stock
below the Companys enterprise value less debt could also
result in the requirement to recognize impairment charges in
future periods.
Note 4. Financial Instruments
Investments
Investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
Predecessor | |
|
|
Company | |
|
Company | |
|
|
| |
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Short-term Investments:
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
|
|
|
$ |
1,130 |
|
Mutual funds
|
|
|
3,033 |
|
|
|
|
|
U.S. government or government agency securities
|
|
|
110,050 |
|
|
|
64,681 |
|
|
|
|
|
|
|
|
|
|
$ |
113,083 |
|
|
$ |
65,811 |
|
|
|
|
|
|
|
|
Restricted Cash, Cash Equivalents and Short-term
Investments:
|
|
|
|
|
|
|
|
|
Bank deposits
|
|
$ |
1,150 |
|
|
$ |
1,773 |
|
Cash, cash equivalents and short-term investments restricted
pursuant to Plan of Reorganization
|
|
|
24,680 |
|
|
|
40,440 |
|
U.S. government or government agency securities restricted
pursuant to the Plan of Reorganization
|
|
|
4,531 |
|
|
|
3,386 |
|
Money market funds
|
|
|
1,066 |
|
|
|
10,355 |
|
|
|
|
|
|
|
|
|
|
$ |
31,427 |
|
|
$ |
55,954 |
|
|
|
|
|
|
|
|
As of December 31, 2004 and 2003, all of the Companys
short-term investments were debt securities with contractual
maturities of less than one year, classified as available for
sale.
68
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Available-for-sale securities were comprised as follows at
December 31, 2004 and 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
|
Successor Company |
|
Cost | |
|
Gain | |
|
Loss | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$ |
2,944 |
|
|
$ |
89 |
|
|
$ |
|
|
|
$ |
3,033 |
|
U.S. government or government agency securities
|
|
|
110,063 |
|
|
|
|
|
|
|
(13 |
) |
|
|
110,050 |
|
U.S. government or government agency restricted pursuant to the
Plan of Reorganization
|
|
|
4,534 |
|
|
|
|
|
|
|
(3 |
) |
|
|
4,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
117,541 |
|
|
$ |
89 |
|
|
$ |
(16 |
) |
|
$ |
117,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
|
Predecessor Company |
|
Cost | |
|
Gain | |
|
Loss | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
1,170 |
|
|
$ |
|
|
|
$ |
(40 |
) |
|
$ |
1,130 |
|
U.S. government or government agency securities
|
|
|
64,805 |
|
|
|
209 |
|
|
|
(333 |
) |
|
|
64,681 |
|
U.S. government or government agency restricted pursuant to the
Plan of Reorganization
|
|
|
3,394 |
|
|
|
3 |
|
|
|
(11 |
) |
|
|
3,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,369 |
|
|
$ |
212 |
|
|
$ |
(384 |
) |
|
$ |
69,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
The carrying values of certain of the Companys financial
instruments, including cash equivalents and short-term
investments, accounts receivable and accounts payable and
accrued liabilities, approximate fair value due to their
short-term maturities. Crickets 13% senior secured credit
facilities had a carrying value, which approximates its fair
value, of $371.4 million as of December 31, 2004.
Loans payable to the U.S. government carry fixed rates of
interest and the carrying value approximates the fair value.
69
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Note 5. |
Supplementary Financial Information |
Supplementary Balance Sheet Information (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
Predecessor | |
|
|
Company | |
|
Company | |
|
|
| |
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
Network equipment
|
|
$ |
599,598 |
|
|
$ |
1,385,919 |
|
|
Computer equipment and other
|
|
|
26,285 |
|
|
|
100,031 |
|
|
Construction-in-progress
|
|
|
11,383 |
|
|
|
24,723 |
|
|
|
|
|
|
|
|
|
|
|
637,266 |
|
|
|
1,510,673 |
|
|
Accumulated depreciation
|
|
|
(60,914 |
) |
|
|
(693,598 |
) |
|
|
|
|
|
|
|
|
|
$ |
576,352 |
|
|
$ |
817,075 |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$ |
35,184 |
|
|
$ |
15,300 |
|
|
Accrued payroll and related benefits
|
|
|
13,579 |
|
|
|
9,358 |
|
|
Other accrued liabilities
|
|
|
42,330 |
|
|
|
39,827 |
|
|
|
|
|
|
|
|
|
|
$ |
91,093 |
|
|
$ |
64,485 |
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued taxes
|
|
$ |
49,860 |
|
|
$ |
21,718 |
|
|
Deferred revenue
|
|
|
18,145 |
|
|
|
23,532 |
|
|
Accrued interest
|
|
|
1,025 |
|
|
|
4,502 |
|
|
Other
|
|
|
3,711 |
|
|
|
5,171 |
|
|
|
|
|
|
|
|
|
|
$ |
72,741 |
|
|
$ |
54,923 |
|
|
|
|
|
|
|
|
Supplementary Information for Other Intangible Assets (in
thousands):
|
|
|
|
|
|
|
|
Successor | |
|
|
Company | |
|
|
| |
|
|
December 31, | |
|
|
2004 | |
|
|
| |
Other intangible assets, net:
|
|
|
|
|
|
Customer relationships
|
|
$ |
129,000 |
|
|
Trademarks
|
|
|
37,000 |
|
|
|
|
|
|
|
|
166,000 |
|
|
Accumulated amortization customer relationships
|
|
|
(13,438 |
) |
|
Accumulated amortization trademarks
|
|
|
(1,101 |
) |
|
|
|
|
|
|
$ |
151,461 |
|
|
|
|
|
Amortization expense for the five months ended December 31,
2004 was $14.5 million. Estimated amortization expense for
intangible assets for 2005 through 2009 is $34.9 million,
$34.9 million, $34.9 million, $21.5 million and
$2.6 million, respectively, and $22.7 million thereafter.
70
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplementary Cash Flow Information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Five Months | |
|
Seven Months | |
|
Year Ended | |
|
|
Ended | |
|
Ended | |
|
December 31, | |
|
|
December 31, | |
|
July 31, | |
|
| |
|
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
8,227 |
|
|
$ |
|
|
|
$ |
18,168 |
|
|
$ |
36,006 |
|
|
Cash paid for income taxes
|
|
|
240 |
|
|
|
76 |
|
|
|
372 |
|
|
|
774 |
|
|
Cash provided by (paid for) reorganization activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments to Leap Creditor Trust
|
|
|
|
|
|
|
(990 |
) |
|
|
(67,800 |
) |
|
|
|
|
|
|
Payments for professional fees
|
|
|
|
|
|
|
(7,975 |
) |
|
|
(9,864 |
) |
|
|
|
|
|
|
Cure payments
|
|
|
|
|
|
|
1,984 |
|
|
|
(40,405 |
) |
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
1,485 |
|
|
|
2,940 |
|
|
|
|
|
Supplementary disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term financing to purchase equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,390 |
|
|
Issuance of common stock related to purchase price adjustment
for wireless licenses (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,660 |
|
|
Deferred income tax liabilities on purchase of wireless licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,690 |
|
Supplementary Basic and Diluted Net Income (Loss) per
Common Share Information:
The weighted average number of shares outstanding were the same
for the calculation of basic net earnings (loss) per common
share and diluted net earnings (loss) per common share for
all periods presented in the statement of operations. The
following shares were not included in the computation of diluted
net earnings (loss) per share as their effect would be
antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Five Months | |
|
Seven Months | |
|
Year Ended | |
|
|
Ended | |
|
Ended | |
|
December 31, | |
|
|
December 31, | |
|
July 31, | |
|
| |
|
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
Employee stock options
|
|
|
|
|
|
|
5,312 |
|
|
|
6,935 |
|
|
|
8,402 |
|
Non-vested restricted stock
|
|
|
|
|
|
|
76 |
|
|
|
86 |
|
|
|
|
|
Senior Note and Senior Discount Note warrants
|
|
|
|
|
|
|
2,830 |
|
|
|
2,830 |
|
|
|
2,830 |
|
Qualcomm warrant
|
|
|
|
|
|
|
3,375 |
|
|
|
3,375 |
|
|
|
3,375 |
|
Warrant to Chase Telecommunications Holdings
|
|
|
|
|
|
|
95 |
|
|
|
95 |
|
|
|
95 |
|
Warrant to MCG
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the Plan of Reorganization, all outstanding options
and warrants to purchase Leap common stock were cancelled in
connection with the cancellation of the Predecessor
Companys common stock as of the Effective Date of the Plan
of Reorganization.
71
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Note 6. |
Liabilities Subject to Compromise |
Liabilities subject to compromise refer to liabilities of the
Predecessor Company incurred prior to the Petition Date that are
with unrelated parties. Substantially all of the Predecessor
Companys pre-petition liabilities, other than principal
and interest payable to the FCC, have been classified as
liabilities subject to compromise in the Predecessor
Companys consolidated balance sheet. Adjustments to
liabilities subject to compromise resulted from negotiations,
actions of the Bankruptcy Court, rejection of certain executory
contracts and certain unexpired leases, implementation of the
Plan of Reorganization, or other events.
The following table summarizes the components of liabilities
subject to compromise in the Predecessor Companys
consolidated balance sheet (in thousands):
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Company | |
|
|
| |
|
|
December 31, | |
|
|
2003 | |
|
|
| |
Accounts payable and accrued liabilities
|
|
$ |
18,590 |
|
Debt in default subject to compromise
|
|
|
2,357,484 |
|
Other current liabilities
|
|
|
15,675 |
|
Other long-term liabilities
|
|
|
9,773 |
|
|
|
|
|
|
Total liabilities subject to compromise
|
|
$ |
2,401,522 |
|
|
|
|
|
Senior Secured Pay-in-Kind Notes Issued Under Plan of
Reorganization
On the Effective Date of the Plan of Reorganization, Cricket
issued new 13% senior secured pay-in-kind notes due 2011 with a
face value of $350 million and an estimated fair value of
$372.8 million. As of December 31, 2004, the carrying
value of the notes was $371.4 million. As noted below, in
January 2005, Cricket entered into a new Credit Agreement and a
portion of the proceeds from the term loan facility under the
Credit Agreement was used to redeem Crickets 13% senior
secured pay-in-kind notes. The pay-in-kind notes were scheduled
to mature on August 16, 2011, the seventh anniversary of
the Effective Date of the Plan of Reorganization. The notes bore
interest at 13% per annum. Interest on the notes was payable
semi-annually in February and August.
The notes were secured by all of the personal property and owned
real property of Leap and its direct and indirect subsidiaries
and by all of the stock of Leaps direct and indirect
subsidiaries. The notes were guaranteed by Leap and all of its
direct and indirect subsidiaries (other than Cricket which was
the primary obligor under the notes).
U.S. Government Financing
The balance in current maturities of long-term debt at
December 31, 2003 consisted entirely of debt obligations to
the FCC of $74.1 million (net of a $2.6 million
discount) incurred as part of the purchase price for wireless
licenses. The original terms of the notes included interest
rates generally ranging from 6.25% to 7.0% per annum (9.75% per
annum on the note associated with the Denver license) and
quarterly principal and interest payments until the originally
scheduled maturities ranging from September 2006 to June 2007.
The Company classified the principal and interest balances
outstanding under its U.S. government financing as a short-term
obligation as of December 31, 2003 as a result of the
Companys Chapter 11 filings, which constituted an
event of default of the underlying notes. Payments of principal
and interest under the Companys U.S. government financing
were stayed during the pendency of the Chapter 11
proceedings.
72
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In its order approving the change of control of the
Companys wireless licenses, the FCC denied Leaps
request for a waiver of certain FCC regulations relating to
Leaps status as a small business or very
small business, and determined that Leap would not be a
small business or very small business
following its emergence from bankruptcy. Pursuant to the Plan of
Reorganization and a settlement agreement between Cricket,
certain license subsidiaries and the FCC, the Company paid the
FCC, on the Effective Date of the Plan of Reorganization,
approximately $36.7 million for unpaid principal and
approximately $8.3 million of accrued interest in connection
with the reinstatement of its FCC debt, and approximately
$278,000 of unjust enrichment penalties. The FCCs order
and settlement agreement also required the applicable license
subsidiaries to repay approximately $40 million in
principal amount that remained outstanding on the Effective
Date, plus accrued interest, to the FCC in installments
scheduled for April and July 2005. The Company also agreed in
the settlement agreement to use reasonable efforts to complete a
refinancing on or prior to January 31, 2005 generating net
proceeds sufficient to redeem the 13% senior secured pay-in-kind
notes that Cricket issued upon emergence from bankruptcy and to
repay the Companys remaining indebtedness to the FCC. The
remaining obligation to the FCC was secured by the wireless
licenses that were originally purchased with installment payment
financing from the FCC. The Company repaid the remaining FCC
debt in January 2005.
New Credit Agreement
As described in Note 15, the Company entered into two credit
facilities under a new senior secured credit agreement on
January 10, 2005 which consists of a term loan and a
revolving credit facility. A portion of the proceeds from the
term loan borrowing was used by the Company to redeem
Crickets $350 million of 13% senior secured pay-in-kind
notes, to pay approximately $43 million of call premium and
accrued interest on such notes, to repay approximately
$41 million in principal and accrued interest owed to the
FCC, and to pay transaction fees and expenses.
Debt in Default Subject to Compromise
Predecessor Company debt in default subject to compromise, which
is included in liabilities subject to compromise at
December 31, 2003, is summarized as follows (in thousands):
|
|
|
|
|
|
|
Predecessor | |
|
|
Company | |
|
|
| |
|
|
December 31, | |
|
|
2003 | |
|
|
| |
Senior Notes
|
|
$ |
224,623 |
|
Senior Discount Notes
|
|
|
504,393 |
|
Senior secured vendor credit facilities
|
|
|
1,618,284 |
|
Note payable to GLH
|
|
|
8,643 |
|
Qualcomm term loan
|
|
|
1,541 |
|
|
|
|
|
|
|
$ |
2,357,484 |
|
|
|
|
|
Amounts presented for the Senior Notes, the note payable to GLH
and the Qualcomm term loan include principal and interest
accrued through the Petition Date. Amounts presented for the
Senior Discount Notes include accreted principal and interest
accrued through the Petition Date. Amounts presented for the
senior secured vendor credit facilities include principal,
interest and fees accrued through the Petition Date. On the
Effective Date of the Plan of Reorganization, all of the
Companys pre-petition indebtedness, other than
indebtedness owed to the FCC, was cancelled in full.
73
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Companys income tax provision are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Five Months | |
|
Seven Months | |
|
Year Ended | |
|
|
Ended | |
|
Ended | |
|
December 31, | |
|
|
December 31, | |
|
July 31, | |
|
| |
|
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(618 |
) |
|
State
|
|
|
302 |
|
|
|
13 |
|
|
|
337 |
|
|
|
20 |
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302 |
|
|
|
13 |
|
|
|
337 |
|
|
|
1,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,468 |
|
|
|
3,725 |
|
|
|
6,920 |
|
|
|
20,337 |
|
|
State
|
|
|
398 |
|
|
|
428 |
|
|
|
795 |
|
|
|
2,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,866 |
|
|
|
4,153 |
|
|
|
7,715 |
|
|
|
22,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,168 |
|
|
$ |
4,166 |
|
|
$ |
8,052 |
|
|
$ |
23,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the amount computed by applying the
statutory federal income tax rate to the income tax provision is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
|
|
Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Ended | |
|
Ended | |
|
Year Ended December 31, | |
|
|
December 31, | |
|
July 31, | |
|
| |
|
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
Amounts computed at statutory federal rate
|
|
$ |
(1,561 |
) |
|
$ |
321,075 |
|
|
$ |
(206,285 |
) |
|
$ |
(224,001 |
) |
Loss on sale of foreign investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,697 |
) |
State income tax, net of federal benefit
|
|
|
455 |
|
|
|
287 |
|
|
|
736 |
|
|
|
1,596 |
|
Foreign income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,647 |
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,422 |
|
Non-deductible expenses
|
|
|
1,573 |
|
|
|
175 |
|
|
|
7,050 |
|
|
|
1,419 |
|
Gain on reorganization and adoption of fresh-start reporting
|
|
|
|
|
|
|
(337,422 |
) |
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
15,134 |
|
|
|
118 |
|
Change in valuation allowance
|
|
|
3,701 |
|
|
|
20,051 |
|
|
|
191,417 |
|
|
|
276,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,168 |
|
|
$ |
4,166 |
|
|
$ |
8,052 |
|
|
$ |
23,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Companys deferred tax assets
(liabilities) are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
Predecessor | |
|
|
Company | |
|
Company | |
|
|
| |
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
189,271 |
|
|
$ |
666,427 |
|
|
Capital loss carryforwards
|
|
|
29,533 |
|
|
|
32,041 |
|
|
Goodwill
|
|
|
|
|
|
|
15,424 |
|
|
Debt discounts and issue costs
|
|
|
13,434 |
|
|
|
91,087 |
|
|
Deferred charges
|
|
|
4,250 |
|
|
|
16,845 |
|
|
Reserves and allowances
|
|
|
11,100 |
|
|
|
273 |
|
|
Property and equipment
|
|
|
19,559 |
|
|
|
|
|
|
Other
|
|
|
37,352 |
|
|
|
966 |
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
304,499 |
|
|
|
823,063 |
|
Valuation allowance
|
|
|
(245,399 |
) |
|
|
(779,135 |
) |
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Wireless licenses
|
|
|
(15,281 |
) |
|
|
(58,752 |
) |
|
Property and equipment
|
|
|
|
|
|
|
(40,333 |
) |
|
Intangible assets
|
|
|
(59,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
(15,281 |
) |
|
$ |
(55,157 |
) |
|
|
|
|
|
|
|
The Companys net deferred tax assets at December 31,
2004 are subject to a full valuation allowance. Pursuant to SOP
90-7, future decreases in the valuation allowance will be
accounted for as a reduction in goodwill. Management has
established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of
such assets. The valuation allowance is based on available
evidence, including the Companys historical operating
losses.
In August 2002, Leap issued 21,020,431 shares of common stock to
MCG PCS, Inc. (MCG) pursuant to a binding
arbitration award. The Companys issuance of these shares
caused an ownership change as defined under Internal
Revenue Code Section 382. Accordingly, the Companys
ability to utilize its net operating loss and capital loss
carryforwards is subject to an annual limitation. In connection
with the Companys emergence from bankruptcy, there was a
significant reduction of its outstanding indebtedness and an
additional ownership change. As a result, the Company realized
cancellation of indebtedness income of approximately
$232 million which reduced its NOLs. The additional
ownership change further limits the Companys ability to
utilize its net operating losses and capital loss carryforwards.
At December 31, 2004, the Company estimates it had federal
NOLs of approximately $468 million which begin to expire in
2022, as well as certain state NOLs. In addition, the Company
has federal capital loss carryforwards of approximately
$75 million which expire in 2007.
|
|
Note 9. |
Stockholders Equity |
|
|
|
Predecessor Company Stockholder Rights Plan |
In September 1998, the Companys Board of Directors adopted
a Stockholder Rights Plan (the Rights Plan), as
amended. Pursuant to the Rights Plan, the Board of Directors
declared a dividend, payable on September 16, 1998, of one
preferred purchase right (a Right) for each
share of common stock, $.0001 par
75
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value, of the Company outstanding at the close of business on
September 11, 1998. Similar Rights generally were issued in
respect of shares of common stock subsequently issued. Each
Right entitled the registered holder to purchase from the
Company a one one-thousandth share of Series A Junior
Participating Preferred Stock, $.0001 par value, at a purchase
price of $350 (subject to adjustment). The Rights were
exercisable only if a person or group (an Acquiring
Person), other than Qualcomm with respect to its exercise
of the warrants granted to it or acquired by it in connection
with the Companys February 2000 units offering, acquired
beneficial ownership of 15% or more of the Companys
outstanding shares of common stock. Upon exercise, holders other
than an Acquiring Person would have had the right (subject to
termination) to receive the Companys common stock or other
securities having a market value (as defined) equal to twice the
purchase price of the Right. The Rights, which would have
expired on September 10, 2008, were redeemable in whole,
but not in part, at the Companys option at any time for a
price of $.01 per Right. In conjunction with the distribution of
the Rights, the Companys Board of Directors designated
300,000 shares of Preferred Stock as Series A Junior
Participating Preferred Stock and reserved such shares for
issuance upon exercise of the Rights. In August 2002, the
Company amended the Rights Plan to permit the issuance of
21,548,415 shares of its common stock to pay a purchase
price adjustment to MCG, as ordered by an arbitrator, in
connection with its acquisition of wireless licenses in Buffalo
and Syracuse, New York. At December 31, 2003, no shares of
Preferred Stock were outstanding.
On the Effective Date of the Plan of Reorganization, the
Companys Rights Plan was terminated and all rights
thereunder were cancelled.
The Predecessor Company had the following warrants outstanding
at December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
Shares Issuable | |
|
Exercise | |
|
|
Upon Exercise | |
|
Price | |
|
|
| |
|
| |
Warrant to Chase Telecommunications Holdings, Inc
|
|
|
94,999 |
|
|
$ |
4.94 |
|
Warrant to Senior and Senior Discount noteholders
|
|
|
2,829,854 |
|
|
|
96.80 |
|
Warrant to Qualcomm
|
|
|
3,375,000 |
|
|
|
6.11 |
|
|
|
|
|
|
|
|
|
|
|
6,299,853 |
|
|
|
|
|
|
|
|
|
|
|
|
On the Effective Date of the Plan of Reorganization, all of the
Predecessor Companys outstanding warrants were cancelled.
Also on the Effective Date, the Successor Company issued
warrants to MCG to purchase 600,000 shares of common stock
of reorganized Leap at an exercise price of $16.83 per share,
which warrants expire on March 23, 2009. All of MCGs
warrants were outstanding as of December 31, 2004.
|
|
Note 10. |
Stock-Based Compensation and Benefit Plans |
|
|
|
Employee Savings and Retirement Plan |
The Companys 401(k) plan allows eligible employees to
contribute up to 30% of their salary, subject to annual limits.
The Company matches a portion of the employee contributions and
may, at its discretion, make additional contributions based upon
earnings. The Companys contribution expenses for the
five months ended December 31, 2004 and the seven
months ended July 31, 2004 were $428,000 and $613,000,
respectively, and for the years ended December 31, 2003 and
2002, were $1,043,000, and $1,632,000, respectively.
|
|
|
Successor Company Stock Option Plan |
In December 2004, Leap adopted the Leap Wireless International,
Inc. 2004 Stock Option, Restricted Stock and Deferred Stock Unit
Plan (the 2004 Plan), which allows the Board of
Directors (or the compensation committee thereof) to grant
incentive stock options, non-qualified stock options, restricted
stock
76
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and deferred stock units to the Companys employees,
consultants and independent directors, and to the employees and
consultants of the Companys subsidiaries. A total of
4,800,000 shares of Leap common stock are reserved for issuance
under the 2004 Plan. At December 31, 2004, no options or
other awards were outstanding under the 2004 Plan.
|
|
|
Predecessor Company Stock Option Plans |
Prior to the Effective Date, Leap had adopted and granted
options under various option plans. On the Effective Date of the
Plan of Reorganization, all options to purchase Leap common
stock issued under such plans and outstanding immediately prior
to the Effective Date were cancelled. The following paragraphs
describe these other plans, which are no longer effective.
Leaps 1998 Stock Option Plan (the 1998 Plan)
allowed the Board of Directors to grant options to selected
employees, directors and consultants of the Company to purchase
shares of Leaps common stock. A total of 8,000,000 shares
of common stock were reserved for issuance under the 1998 Plan.
The 1998 Plan provided for the grant of both incentive and
non-qualified stock options. Incentive stock options were
exercisable at a price not less than 100% of the fair market
value of the common stock on the date of grant. Non-qualified
stock options were exercisable at a price not less than 85% of
the fair market value of the common stock on the date of grant.
Generally, options under the 1998 Plan vested over a five-year
period and were exercisable for up to ten years from the grant
date. Under Leaps 1998 Non-Employee Directors Stock Option
Plan (the 1998 Non-Employee Directors Plan), options
to purchase common stock were granted to non-employee directors
on an annual basis. A total of 500,000 shares of common
stock were reserved for issuance under the 1998 Non-Employee
Directors Plan. The options were exercisable at a price equal to
the fair market value of the common stock on the date of grant,
vested over a five-year period and were exercisable for up to
ten years from the grant date.
In June 1999, Cricket Communications Holdings, which
subsequently merged into Cricket, adopted the 1999 Stock Option
Plan (the 1999 Cricket Plan) that allowed the
Cricket Communications Holdings Board of Directors to grant
options to selected employees, directors and consultants to
purchase shares of Cricket Communications Holdings common stock.
A total of 7,600,000 shares of Cricket Communications
Holdings common stock were reserved for issuance under the 1999
Cricket Plan. The 1999 Cricket Plan provided for the grant of
both incentive and non-qualified stock options. Incentive stock
options were exercisable at a price not less than 100% of the
fair market value of the common stock on the date of grant.
Non-qualified stock options were exercisable at a price not less
than 85% of the fair market value of the common stock on the
date of grant. Generally, options vested over a five-year period
and were exercisable for up to ten years from the grant date. In
connection with Leaps purchase of the remaining 5.11% of
Cricket Communications Holdings that it did not already own in a
subsidiary merger on June 15, 2000, each outstanding
unexpired and unexercised option under the 1999 Cricket Plan was
converted into a stock option to purchase 0.315 shares of Leap
common stock. Subsequent to June 15, 2000, the 1999 Cricket
Plan was used to grant options in Leap common stock.
Under Leaps 2000 Stock Option Plan (the 2000
Plan), a total of 2,250,000 shares of common stock were
reserved for issuance. Terms of the 2000 Plan were
comparable to the terms of the 1998 Plan.
Leaps 2001 Non-Qualified Stock Option Plan (the 2001
Plan) allowed the Board of Directors to grant
non-qualified options to selected employees, directors and
consultants to the Company to purchase shares of Leaps
common stock. A total of 2,500,000 shares of common stock
were reserved for issuance under the 2001 Plan.
Non-qualified stock options were exercisable at a price not less
than 85% of the fair market value of the common stock on the
date of grant. Generally, options vested over a four-year period
and were exercisable for up to ten years from the grant date.
The number of options that could have been granted to officers
and directors of the Company under the 2001 Plan was
limited.
77
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option transactions for the 1998 Plan, 1998
Non-Employee Directors Plan, 1999 Cricket Plan, 2000 Plan, and
2001 Plan follows (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
| |
|
|
Options Available | |
|
Number of | |
|
Weighted Average | |
|
|
for Grant | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
December 31, 2001
|
|
|
3,810 |
|
|
|
8,529 |
|
|
$ |
23.15 |
|
Options granted
|
|
|
(2,185 |
) |
|
|
2,185 |
|
|
|
2.51 |
|
Options cancelled
|
|
|
2,170 |
|
|
|
(2,170 |
) |
|
|
31.84 |
|
Options exercised
|
|
|
|
|
|
|
(142 |
) |
|
|
5.76 |
< |