e10vk
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) |
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal year ended December 31, 2005 |
|
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 |
|
33-0811062 |
|
(State or Other Jurisdiction of Incorporation or
Organization)
|
|
(I.R.S. Employer Identification No.) |
10307 Pacific Center Court, San Diego, CA |
|
92121 |
(Address of Principal Executive Offices) |
|
(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 is a well-known
seasoned issuer as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
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 þ 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act.
|
|
|
|
|
Large accelerated filerþ
|
|
Accelerated filero
|
|
Non-accelerated filero
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
As of June 30, 2005, the aggregate market value of the
registrants voting and nonvoting common stock held by
non-affiliates of the registrant was approximately
$1,201,188,000, based on the closing price of Leaps common
stock on the NASDAQ on June 30, 2005, of $27.75 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 þ No o
The number of shares of registrants common stock
outstanding on March 17, 2006 was 61,200,392.
Documents incorporated by reference: Portions of the definitive
Proxy Statement relating to the 2006 Annual Meeting of
Shareholders, which will be held on May 18, 2006 are
incorporated by reference into Part III of this report.
EXPLANATORY NOTE
Leap Wireless International, Inc. has restated the audited
consolidated financial statements as of and for the five months
ended December 31, 2004 previously included in our Annual
Report on
Form 10-K for the
year ended December 31, 2004, and the unaudited interim
consolidated financial information included in each of our
Quarterly Reports on
Form 10-Q for the
interim period ended September 30, 2004 and the quarterly
periods ended March 31, 2005, June 30, 2005 and
September 30, 2005. This Annual Report on
Form 10-K includes
the restated financial information for all such periods.
The restatements result from: (i) errors in the calculation
of the tax bases of certain wireless licenses and deferred taxes
associated with tax deductible goodwill, (ii) errors in the
accounting for the release of the valuation allowance on
deferred tax assets recorded in fresh-start reporting, and
(iii) the determination that the netting of deferred tax
assets associated with wireless licenses against deferred tax
liabilities associated with wireless licenses was not
appropriate, as well as the resulting error in the calculation
of the valuation allowance on the license-related deferred tax
assets. These errors arose in connection with our implementation
of fresh-start reporting on July 31, 2004. See Note 3
to our consolidated financial statements included in
Item 8. Financial Statements and Supplementary
Data of this report for additional information.
We plan to amend our Quarterly Reports on
Form 10-Q for the
fiscal quarters ended March 31, 2005, June 30, 2005
and September 30, 2005 to include the corresponding
restated financial information subsequent to the filing of this
report.
LEAP WIRELESS INTERNATIONAL, INC.
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2005
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 wholly owned subsidiaries, unless the context suggests
otherwise. Unless otherwise specified, information relating to
population and potential customers, or POPs, is based on 2006
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; |
|
|
|
changes in economic conditions that could adversely affect the
market for wireless services; |
|
|
|
the impact of competitors initiatives; |
|
|
|
our ability to successfully implement product offerings and
execute market expansion plans; |
|
|
|
our ability to comply with the covenants in our senior secured
credit facilities; |
|
|
|
our ability to attract, motivate and retain an experienced
workforce; |
|
|
|
failure of our network systems to perform according to
expectations; and |
|
|
|
other factors detailed in Item 1A. Risk Factors
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.
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 of
America under the brands
Cricket®
and
Jumptm
Mobile. Leap conducts operations through its subsidiaries
and has no independent operations or sources of operating
revenue other than through dividends and distributions, if any,
from its operating subsidiaries. The Cricket and Jump Mobile
services are offered by Leaps wholly owned subsidiary,
Cricket Communications, Inc., or Cricket. The Cricket and Jump
Mobile services are also offered in certain markets through
Alaska Native Broadband 1 License, LLC, or ANB 1 License, a
wholly-owned subsidiary of a joint venture in which Cricket
indirectly owns a 75% non-controlling interest. Although Cricket
does not control this entity, it has agreements with it which
allow Cricket to actively participate in the development of
these markets and the provision of Cricket and Jump Mobile
services in them.
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.
1
On April 13, 2003, Leap, Cricket and substantially all of
their subsidiaries filed voluntary petitions for relief under
Chapter 11 in federal bankruptcy court. On August 16,
2004, our plan of reorganization became effective and we emerged
from Chapter 11 bankruptcy. On that date, a new board of
directors of Leap was appointed, Leaps previously existing
stock, options and warrants were cancelled, and Leap issued
60 million shares of new Leap common stock for distribution
to two classes of creditors. See
Chapter 11 Proceedings Under the
Bankruptcy Code. On June 29, 2005, Leap became listed
on the Nasdaq National Market under the symbol LEAP.
Cricket Business Overview
Cricket Service
We offer wireless voice and data services primarily under the
brand Cricket on a flat-rate, unlimited-usage basis
without requiring fixed-term contracts. At December 31,
2005, Cricket operated in 19 states and had approximately
1,668,000 customers, and the total potential customers, or POPs,
covered by our networks in our operating markets was
approximately 27.7 million. As of December 31, 2005,
we and ANB 1 License owned wireless licenses covering a total
potential customer base of 70.0 million in the aggregate.
ANB 1 License is a wholly owned subsidiary of Alaska Native
Broadband 1, LLC, or ANB 1, an entity in which we own
a 75% non-controlling interest. We are currently building out
and launching the new markets that we and ANB 1 License have
acquired, and we anticipate that our combined network footprint
will cover over 42 million POPs by the end of 2006.
We believe that our business model is different from most other
wireless companies, and that our services primarily target
underserved market segments. Our Cricket service allows
customers to make and receive unlimited calls for a flat monthly
rate, without a fixed-term contract or credit check. Most other
wireless service providers offer customers a complex array of
rate plans that may include additional charges for minutes above
a set maximum. This approach may result in monthly service
charges that are higher than their customers expect or may cause
customers to use the services less than they desire to avoid
higher charges. We have designed the Cricket service to appeal
to customers who value unlimited mobile calling with a
predictable monthly bill and who make the majority of their
calls from within their local area. Results from our internal
customer surveys indicate that approximately 50% of our
customers use our service as their sole voice service and 90% as
their primary voice service. Our customers average minutes
of use per month of 1,450 for the year ended December 31,
2005 is substantially above the U.S. wireless national
carrier customer average of 803 minutes per month and slightly
above the U.S. wireline customer average of 1,300 minutes
per month. We believe we are able to serve this customer segment
and generate significant adjusted OIBDA (operating income before
depreciation and amortization) performance because of our high
quality networks and low customer acquisition and operating
costs.
Our premium Cricket service plan offers customers unlimited
local and domestic long distance service combined with unlimited
use of multiple calling features and messaging services for a
flat rate of $45 per month. We also offer a similar plan
without calling features and messaging services for $40 per
month and a service which allows customers to make unlimited
calls within a local calling area and receive unlimited calls
from any area for a flat rate of $35 per month. In June
2004 we began offering additional enhancements that include
games and other improved data services. In April 2005 we added
instant messaging and multimedia (picture) messaging to our
product portfolio. In May 2005 we introduced our Travel
Timetm
roaming option, for our customers who occasionally travel
outside their Cricket service area.
We sell our Cricket handsets and service primarily through two
channels: Crickets own retail locations and kiosks (the
direct channel); and authorized dealers and distributors,
including premier dealers, local market authorized dealers,
national retail chains and other indirect distributors (the
indirect channel). As of December 31, 2005, we had 90
direct locations and 1,607 indirect distributors. Our direct
sales locations were responsible for approximately 32% of our
gross customer additions in 2005. Premier dealers, which sell
Cricket products, usually exclusively, in stores that look and
function similar to our company-owned stores, enhance the
in-store experience for customers and expand our brand presence
within a market. We had approximately 80 premier dealers
deployed at December 31, 2005.
2
We believe that our business model can be expanded successfully
into adjacent and new markets because we offer a differentiated
service and an attractive value proposition to our customers at
costs significantly lower than most of our competitors. In 2005,
we acquired four wireless licenses covering approximately
11.3 million POPs in the FCCs Auction #58. In
addition, ANB 1 License acquired nine wireless licenses
covering approximately 10.2 million POPs in
Auction #58. In August 2005 we launched service in our
newly acquired Fresno, California market to form a cluster with
our existing Modesto and Visalia, California markets, which
doubled our Central Valley network footprint to 2.4 million
POPs. In November 2005 we entered into a series of agreements
with CSM Wireless, LLC, or CSM, and the controlling members of
Wiley Lake PCS Management, LLC, or WLPCS, to obtain a 73.3%
non-controlling equity interest in LCW Wireless, LLC, which
currently holds a license for the Portland, Oregon market. We
have agreed to contribute our existing Eugene and Salem, Oregon
markets to LCW Wireless to create a new Oregon market cluster
covering 3.2 million POPs. Completion of this transaction
is subject to customary closing conditions, including FCC
approval and other third party consents. For a further
discussion of our arrangements with ANB 1 and LCW Wireless, see
Arrangements with Alaska Native
Broadband and Arrangements with LCW
Wireless below.
Cricket Business Strategy
|
|
|
|
|
Target Underserved Customer Segments in Our Markets. Our
services are targeted primarily toward market segments
underserved by traditional communications companies. On average,
our customers tend to be younger and have lower incomes than the
customers of other wireless carriers. Moreover, our customer
base also reflects a greater percentage of ethnic minorities
than those of the national carriers. We believe these
underserved market segments are among the fastest growing
population segments in the U.S. With wireless penetration
in the U.S. estimated at approximately 70% as of
December 31, 2005, the majority of existing wireless
customers subscribe to post-pay services that require credit
approval and a contractual commitment from the subscriber for a
period of one year or greater. We believe that customers who
require a significantly larger amount of voice usage than
average, who are price-sensitive or who prefer not to enter into
fixed-term contracts represent a large portion of the remaining
growth potential in the U.S. wireless market. |
|
|
|
Continue to Develop and Evolve Products and Services. We
continue to develop and evolve our product and service offerings
to better meet the needs of our target customer segments. In
September 2005 we launched our first per-minute prepaid service,
Jump Mobile, to bring Crickets attractive value
proposition to customers who prefer active control over their
wireless usage and to better target the urban youth market. With
our deployment of 1xEV-DO technology, we believe we will be able
to offer an expanded array of services to our customers,
including high-demand wireless data services such as mobile
content, location-based services and high-quality music
downloads at speeds of up to 2.4 Megabits per second. We believe
these enhanced data offerings will be attractive to many of our
existing customers and will enhance our appeal to new
data-centric customers. In addition, during the last two years,
we have also added BREW-based enhancements, instant text
messaging, multimedia (picture) messaging and a roaming
option to our product portfolio. |
|
|
|
Build Our Brand and Strengthen Our Distribution. We are
focused on building our brand awareness in our markets and
improving the productivity of our distribution system. In April
2005 we introduced a new marketing and advertising approach that
reinforces the value differentiation of the Cricket brand. In
addition, since our target customer base is diversified
geographically, ethnically and demographically, we have
decentralized our marketing programs to support local
customization while optimizing our advertising expenses. We have
also redesigned and re-merchandized our stores and introduced a
new sales process aimed at improving both the customer
experience and our revenue per user. In addition, we have
initiated a new premier dealer program, under which dealers sell
Cricket products, usually exclusively, in stores that look and
function similar to our company-owned stores. In an effort to
drive more traffic to our dealers and to enhance the customer
experience, in 2006 we plan to enable our premier dealers and
other indirect dealers to provide greater customer support
services and to serve as customer payment locations. We expect
these changes will allow for a stronger |
3
|
|
|
|
|
relationship between our dealers and customers, while reducing
service traffic in our direct stores and call center. |
|
|
|
Enhance Market Clusters and Expand Into Attractive Strategic
Markets. We currently intend to seek additional
opportunities to enhance our current market clusters and expand
into new geographic markets, by acquiring spectrum in FCC
auctions, such as the upcoming auction allocated for
Advanced Wireless Services, or in the spectrum
aftermarket, or by participating in partnerships or joint
ventures. Our selection criteria for new markets are based on
the ability of a market to enhance an existing market cluster or
on the ability of the proposed new market or market cluster to
enable Cricket to offer service on a cost-competitive basis. By
building or enhancing market clusters, we are able to increase
the size of our unlimited local calling area for our customers,
while leveraging our existing network investments to improve our
economic returns. Examples of our market-cluster strategy
include the Fresno, California market we recently launched to
complement the Visalia and Modesto, California markets in our
Central Valley cluster and the Oregon cluster we intend to
create by contributing our Salem and Eugene, Oregon markets to a
new joint venture, LCW Wireless, which owns a license for
Portland, Oregon. Examples of our strategic market expansion
include the five licenses in central Texas, including Houston,
Austin and San Antonio, and the San Diego, California
license that we and ANB 1 License acquired in Auction #58,
all of which meet our internally developed criteria concerning
customer demographics and population density which we believe
will enable us to offer Cricket service on a cost-competitive
basis in those markets. |
Cricket Business Operations
Products and Services
Cricket Service Plans. 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 wireline services. Unlike traditional
wireless services, we offer service on a flat-rate,
unlimited-usage basis, without requiring fixed-term contracts,
early termination fees or credit checks. Our service plans allow
our customers to place unlimited calls within their Cricket
service area and receive unlimited calls from anywhere in the
world. In addition, our Unlimited Access and Unlimited Plus
service plans offer additional unlimited features, as described
in the table below.
|
|
|
|
|
|
|
Primary Cricket Plans |
|
Monthly Rate(a) | |
|
Additional Features Included |
|
|
| |
|
|
Unlimited Access
|
|
$ |
45 |
|
|
Unlimited U.S. domestic long distance(b) |
|
|
|
|
|
|
Unlimited text, multimedia (picture) and instant
messaging |
|
|
|
|
|
|
Voicemail, caller ID and call waiting |
|
Unlimited Plus
|
|
$ |
40 |
|
|
Unlimited U.S. domestic long distance(b) |
Unlimited Classic
|
|
$ |
35 |
|
|
|
|
|
|
(a) |
|
Before taxes and other service fees, which include
E-911 fees,
USF fees, regulatory recovery fees, optional
insurance fees and optional paper bill fees. |
|
(b) |
|
Excludes Alaska. |
Cricket Plan Upgrades. We continue to evaluate new
product and service offerings in order to enhance customer
satisfaction and attract new customers. A number of these
upgrades can currently be obtained as part of one of our service
plans, including the following:
|
|
|
|
|
International calls to Canada and/or Mexico on a prepaid basis
for $5 for 100 minutes, $15 for 300 minutes, and $25 for 550
minutes; |
4
|
|
|
|
|
Cricket Flex
Buckettm
service, which allows our customers with Cricket
Clickstm
enabled phones to purchase applications, including customized
ringtones, wallpapers, photos, greeting cards, games and news
and entertainment message deliveries, on a prepaid basis (in
increments of $5); |
|
|
|
Travel Time (roaming) service, which allows our customers
to use their Cricket phones outside of their Cricket service
areas on a prepaid basis for up to 30 minutes for $5 (and
$0.59 per minute for additional minutes); |
|
|
|
Voicemail, caller ID and call waiting for $5 per month
(included in our Unlimited Access service plan); and |
|
|
|
Unlimited text, multimedia (picture) and instant messaging
for $5 per month (included in our Unlimited Access service
plan). |
Handsets. Our handsets include models that provide color
screens, camera phones and other features to facilitate digital
data transmission. Currently, all of the handsets that we offer
are CDMA 1XRTT compliant. We currently provide 10 different
handsets that are available for purchase at our retail stores,
through our distributors and through our website. We also
facilitate warranty exchanges between our customers and the
handset manufacturers for handset issues that occur during the
applicable warranty period, and we work with a third party to
provide a handset insurance program. In addition, we
occasionally offer selective handset upgrade incentives for
customers who meet certain criteria.
Handset Replacement. Customers have limited rights to
return handsets and accessories based on time elapsed since
purchase and usage. Returns of handsets and accessories have
historically been insignificant.
Jump Mobile. In September 2005 we launched our first
per-minute prepaid service, Jump Mobile, to bring Crickets
attractive value proposition to customers who prefer active
control over their wireless usage and to better target the urban
youth market. Our Jump Mobile plan allows our customers to
receive unlimited calls from anywhere in the world at any time,
and to place calls to any place in the United States (except
Alaska) at a flat rate of $0.10 per minute, provided they
have a credit balance in their account. In addition, our Jump
Mobile customers receive unlimited inbound and outbound text
messaging, provided they have a credit balance in their account,
as well as access to Travel Time roaming service (for
$0.69 per minute), international long distance services,
and Cricket Clicks services.
Customer Care and Billing
Customer Care. We outsource our call center operations to
multiple call center vendors and take advantage of call centers
in the United States and abroad to continuously improve the
quality of our customer care and reduce the cost of providing
care to our customers.
Billing and Support Systems. We outsource our billing,
provisioning, and payment systems with external vendors and also
contract out our bill presentment, distribution and fulfillment
services to external vendors.
Our sales and distribution strategy is to continue to increase
our 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. We believe our sales costs are lower than
traditional wireless providers in part because of this
streamlined sales approach.
We sell our Cricket service primarily through two channels:
Crickets own retail locations and kiosks (the direct
channel); and authorized dealers and distributors, including
premier dealers, local market authorized dealers, national
retail chains and other indirect distributors (the indirect
channel). As of December 31, 2005, we had 90 direct
locations and 1,607 indirect distributors. Our direct sales
locations were responsible for approximately 32% of our gross
customer additions in 2005. Our service and wireless handsets
also are sold through our own websites and through Internet
dealers (the web channel). The costs of sales by the indirect
5
and web channels are largely variable costs, while the operation
of our direct channel locations involves substantial fixed costs.
Also in 2005, we initiated a new premier dealer program. Premier
dealers, which sell Cricket products, usually exclusively, in
stores that look and function similar to our company-owned
stores, enhance the in-store experience for customers and expand
our brand presence within a market. We had approximately 80
premier dealers deployed at December 31, 2005.
We are focused on building our brand awareness in our markets
and improving the productivity of our distribution system. We
combine mass and local marketing strategies to build brand
awareness of the Cricket and Jump Mobile services 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. We also maintain the 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, working with a
third party, we have also developed and launched Internet sales
on our Cricket website. In April 2005 we introduced a new
marketing and advertising campaign that reinforces the value
differentiation of the Cricket brand. In addition, since our
target customer base is diversified geographically, ethnically
and demographically, we have decentralized our marketing
programs to support local customization of advertising while
optimizing our advertising expenses. We also have redesigned and
re-merchandized our stores and introduced a new sales process
aimed at improving both the customer experience and our revenue
per user.
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. We believe that 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 elsewhere in this report.
We have deployed a
state-of-the-art, 100%
Code Division Multiple Access radio transmission technology, or
CDMA 1xRTT, network in each of our markets that delivers high
capacity and outstanding quality at a low cost and that can be
easily upgraded to support enhanced capacity. Our networks were
specifically designed to provide the capacity necessary to
satisfy the usage requirements of our potential customers. Our
networks regularly have been ranked by third party surveys as
one of the top networks in the markets where we offer service.
In addition, we believe our networks provide a better platform
than competing technologies to expand into other wireless
services based on advances in digital technology in the future.
We recently announced our plans to begin deploying CDMA2000(R)
1xEV-DO technology in certain existing and new Cricket markets
as appropriate to support next generation high-speed data
services, such as mobile content, location-based services and
high-quality music downloads at speeds of up to 2.4 Megabits per
second.
Our service is based on providing customers with levels of usage
equivalent to landline service at prices substantially lower
than those offered by most of our wireless competitors for
similar usage, and prices that are competitive with unlimited
wireline plans. We believe our success depends on operating our
CDMA 1xRTT networks to provide high quality, concentrated
coverage and capacity rather than the broad, geographically
dispersed coverage provided by traditional wireless carriers.
CDMA 1xRTT technology provides us substantially higher capacity
than other technologies, such as time division multiple access,
or TDMA, and global system for mobile communications, or GSM.
As of December 31, 2005, our core wireless networks
consisted of approximately 2,600 cell sites (most of which are
co-located on leased facilities), a Network Operations Center,
or NOC, and 27 switches in 24 switching centers. A switching
center serves several purposes, including routing calls,
managing call handoffs, managing access to and from the public
switched telephone network, or PSTN, and other value-added
services. These locations also house platforms that enable
services including text messaging, picture messaging, voice
mail, and data services. Our NOC provides dedicated,
24 hours per day monitoring capabilities every day of the
year for all network nodes to ensure highly reliable service to
our customers.
6
Our switches connect to the PSTN through fiber rings leased from
third party providers which facilitate the first leg of
origination and termination of traffic between our equipment and
both local exchange and long distance carriers. We have
negotiated interconnection agreements with relevant exchange
carriers in each of our markets. We currently use third party
providers for long distance services and for backhaul services
carrying traffic to and from our cell sites and switching
centers.
We constantly monitor network quality metrics, including dropped
call rates and blocked call rates. We also engage an independent
third party to test the network call quality offered by us and
our competitors in the markets where we offer service. According
to the most recent results, we rank first or second in network
quality within most of our core market footprints.
The appeal of our service in any given market is not dependent
on having ubiquitous coverage in the rest of the country or in
regions surrounding our markets. Our networks are in local
population centers of self-contained communities serving the
areas where our customers live, work, and play. We believe that
we can deploy our capital more efficiently by tailoring our
networks to our target population centers. We do, however,
provide Travel Time roaming services for those occasions when
our customers travel outside their local coverage area.
Chapter 11 Proceedings Under the Bankruptcy Code
On April 13, 2003, Leap, Cricket and substantially all of
their subsidiaries filed voluntary petitions for relief under
Chapter 11 in federal bankruptcy court. On August 16,
2004, our plan of reorganization became effective and we emerged
from bankruptcy. On that date a new board of directors of Leap
was appointed, Leaps previously existing stock, options
and warrants were cancelled, and Leap issued 60 million
shares of new Leap common stock for distribution to two classes
of creditors. Leap also issued warrants to
purchase 600,000 shares of new Leap common stock
pursuant to a settlement agreement. A creditor trust, referred
to as the Leap Creditor Trust, was formed for the benefit of
Leaps general unsecured creditors. The Leap Creditor Trust
received shares of new Leap common stock for distribution to
Leaps general unsecured creditors, and certain other
assets, as specified in our plan of reorganization, for
liquidation by the Leap Creditor Trust with the proceeds to be
distributed to holders of allowed Leap unsecured claims. 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 Leap will be distributed to the Leap
Creditor Trust.
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 indebtedness was reduced from a
book value of more than $2.4 billion to indebtedness 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
of the plan of reorganization, 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 of the plan of
reorganization). 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.
7
Wireless Licenses
The following tables show the wireless licenses that we and ANB
1 License owned at February 28, 2006, covering
approximately 70.0 million POPs. The tables include
wireless licenses won by our subsidiary Cricket Licensee
(Reauction), Inc. and by ANB 1 License in Auction #58.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Channel | |
Market |
|
Population | |
|
MHz | |
|
Block | |
|
|
| |
|
| |
|
| |
Houston, TX
|
|
|
5,693,661 |
|
|
|
10 |
|
|
|
C |
|
Phoenix, AZ(1)
|
|
|
4,055,495 |
|
|
|
10 |
|
|
|
C |
|
San Diego, CA
|
|
|
3,026,854 |
|
|
|
10 |
|
|
|
C |
|
Denver/ Boulder, CO(1)
|
|
|
2,948,779 |
|
|
|
10 |
|
|
|
F |
|
Pittsburgh/ Butler/ Uniontown/ Washington/ Latrobe, PA(1)
|
|
|
2,437,336 |
|
|
|
10 |
|
|
|
E |
|
Charlotte/ Gastonia, NC(1)
|
|
|
2,302,773 |
|
|
|
10 |
|
|
|
F |
|
Kansas City, MO
|
|
|
2,169,252 |
|
|
|
10 |
|
|
|
C |
|
Nashville/ Murfreesboro, TN(1)
|
|
|
1,889,365 |
|
|
|
15 |
|
|
|
C |
|
Salt Lake City/ Ogden, UT(1)
|
|
|
1,741,912 |
|
|
|
15 |
|
|
|
C |
|
Memphis, TN(1)
|
|
|
1,608,980 |
|
|
|
15 |
|
|
|
C |
|
Greensboro/ Winston-Salem/ High Point, NC(1)
|
|
|
1,528,564 |
|
|
|
10 |
|
|
|
F |
|
Dayton/ Springfield, OH(1)
|
|
|
1,218,322 |
|
|
|
10 |
|
|
|
F |
|
Buffalo, NY(1),(2)
|
|
|
1,195,157 |
|
|
|
10 |
|
|
|
E |
|
Knoxville, TN(1)
|
|
|
1,185,948 |
|
|
|
15 |
|
|
|
C |
|
Grand Rapids, MI
|
|
|
1,140,950 |
|
|
|
10 |
|
|
|
D |
|
Omaha, NE(1)
|
|
|
1,032,469 |
|
|
|
10 |
|
|
|
F |
|
Fresno, CA(1)
|
|
|
1,020,480 |
|
|
|
30 |
|
|
|
C |
|
Little Rock, AR(1)
|
|
|
998,263 |
|
|
|
15 |
|
|
|
C |
|
Tulsa, OK(1)
|
|
|
988,686 |
|
|
|
15 |
|
|
|
C |
|
Tucson, AZ(1)
|
|
|
941,615 |
|
|
|
15 |
|
|
|
C |
|
Albuquerque, NM(1)
|
|
|
897,787 |
|
|
|
15 |
|
|
|
C |
|
Toledo, OH(1),(3)
|
|
|
789,506 |
|
|
|
15 |
|
|
|
C |
|
Syracuse, NY(1)
|
|
|
788,466 |
|
|
|
15 |
|
|
|
C |
|
Spokane, WA(1)
|
|
|
786,557 |
|
|
|
15 |
|
|
|
C |
|
Ft. Wayne, IN
|
|
|
736,670 |
|
|
|
10 |
|
|
|
E |
|
Macon, GA(1)
|
|
|
694,451 |
|
|
|
30 |
|
|
|
C |
|
Wichita, KS(1)
|
|
|
673,043 |
|
|
|
15 |
|
|
|
C |
|
Boise, ID(1)
|
|
|
664,341 |
|
|
|
30 |
|
|
|
C |
|
Reno, NV(1)
|
|
|
661,047 |
|
|
|
10 |
|
|
|
C |
|
Saginaw-Bay City, MI
|
|
|
641,102 |
|
|
|
10 |
|
|
|
D |
|
Chattanooga, TN(1)
|
|
|
589,905 |
|
|
|
15 |
|
|
|
C |
|
Modesto, CA(1)
|
|
|
574,191 |
|
|
|
15 |
|
|
|
C |
|
Salem/ Corvallis, OR(1),(4)
|
|
|
564,062 |
|
|
|
20 |
|
|
|
C |
|
Visalia, CA(1)
|
|
|
548,177 |
|
|
|
15 |
|
|
|
C |
|
Lakeland, FL
|
|
|
531,706 |
|
|
|
10 |
|
|
|
F |
|
Evansville, IN
|
|
|
527,827 |
|
|
|
10 |
|
|
|
F |
|
Lansing, MI
|
|
|
526,606 |
|
|
|
10 |
|
|
|
D |
|
Appleton-Oshkosh, WI
|
|
|
475,841 |
|
|
|
10 |
|
|
|
E |
|
Peoria, IL
|
|
|
458,653 |
|
|
|
15 |
|
|
|
C |
|
Provo, UT(1)
|
|
|
434,151 |
|
|
|
15 |
|
|
|
C |
|
Fayetteville, AR(1)
|
|
|
379,468 |
|
|
|
20 |
|
|
|
C |
|
Temple, TX
|
|
|
378,197 |
|
|
|
10 |
|
|
|
C |
|
Columbus, GA(1)
|
|
|
373,094 |
|
|
|
15 |
|
|
|
C |
|
Lincoln, NE(1)
|
|
|
365,642 |
|
|
|
15 |
|
|
|
C |
|
Albany, GA
|
|
|
364,149 |
|
|
|
15 |
|
|
|
C |
|
Hickory, NC
|
|
|
355,795 |
|
|
|
10 |
|
|
|
F |
|
Fort Smith, AR(1)
|
|
|
339,088 |
|
|
|
20 |
|
|
|
C |
|
Eugene, OR(1),(4)
|
|
|
336,803 |
|
|
|
10 |
|
|
|
C |
|
La Crosse, WI, Winona, MN
|
|
|
325,933 |
|
|
|
10 |
|
|
|
D |
|
Pueblo, CO(1)
|
|
|
325,794 |
|
|
|
20 |
|
|
|
C |
|
Fargo, ND
|
|
|
320,715 |
|
|
|
15 |
|
|
|
C |
|
Utica, NY
|
|
|
297,672 |
|
|
|
10 |
|
|
|
F |
|
Ft. Collins, CO(1)
|
|
|
273,954 |
|
|
|
10 |
|
|
|
F |
|
Clarksville, TN(1)
|
|
|
273,730 |
|
|
|
15 |
|
|
|
C |
|
Merced, CA(1)
|
|
|
260,066 |
|
|
|
15 |
|
|
|
C |
|
Santa Fe, NM(1)
|
|
|
234,691 |
|
|
|
15 |
|
|
|
C |
|
Muskegon, MI
|
|
|
232,822 |
|
|
|
10 |
|
|
|
D |
|
Greeley, CO(1)
|
|
|
229,860 |
|
|
|
10 |
|
|
|
F |
|
Johnstown, PA
|
|
|
226,326 |
|
|
|
10 |
|
|
|
C |
|
Stevens Point, Marshfield, Wisconsin Rapids, WI
|
|
|
218,663 |
|
|
|
20 |
|
|
|
D,E |
|
Grand Forks, ND
|
|
|
194,679 |
|
|
|
15 |
|
|
|
C |
|
Jonesboro, AR(1)
|
|
|
186,556 |
|
|
|
10 |
|
|
|
C |
|
Lufkin, TX
|
|
|
167,326 |
|
|
|
10 |
|
|
|
C |
|
Owensboro, KY
|
|
|
166,891 |
|
|
|
10 |
|
|
|
F |
|
Pine Buff, AR(1)
|
|
|
149,995 |
|
|
|
20 |
|
|
|
C |
|
Hot Springs, AR(1)
|
|
|
144,727 |
|
|
|
15 |
|
|
|
C |
|
Gallup, NM
|
|
|
139,910 |
|
|
|
15 |
|
|
|
C |
|
Sandusky, OH(1),(3)
|
|
|
138,340 |
|
|
|
15 |
|
|
|
C |
|
Steubenville, OH-Weirton, WV(1)
|
|
|
126,335 |
|
|
|
10 |
|
|
|
C |
|
Eagle Pass, TX
|
|
|
124,186 |
|
|
|
15 |
|
|
|
C |
|
Lewiston, ID
|
|
|
123,933 |
|
|
|
15 |
|
|
|
C |
|
Marion, OH
|
|
|
101,577 |
|
|
|
10 |
|
|
|
C |
|
Roswell, NM
|
|
|
81,947 |
|
|
|
15 |
|
|
|
C |
|
Blytheville, AR
|
|
|
66,293 |
|
|
|
15 |
|
|
|
C |
|
Coffeyville, KS
|
|
|
59,053 |
|
|
|
15 |
|
|
|
C |
|
Nogales, AZ
|
|
|
41,728 |
|
|
|
20 |
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Cricket
|
|
|
59,814,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Channel | |
Market |
|
Population | |
|
MHz | |
|
Block | |
|
|
| |
|
| |
|
| |
Cincinnati, OH
|
|
|
2,243,257 |
|
|
|
10 |
|
|
|
C |
|
San Antonio, TX
|
|
|
2,047,158 |
|
|
|
10 |
|
|
|
C |
|
Louisville, KY
|
|
|
1,548,162 |
|
|
|
10 |
|
|
|
C |
|
Austin, TX
|
|
|
1,536,178 |
|
|
|
10 |
|
|
|
C |
|
Lexington, KY
|
|
|
972,910 |
|
|
|
10 |
|
|
|
C |
|
El Paso, TX(1)
|
|
|
795,224 |
|
|
|
10 |
|
|
|
C |
|
Colorado Springs, CO(1)
|
|
|
589,731 |
|
|
|
10 |
|
|
|
C |
|
Las Cruces, NM(1)
|
|
|
263,039 |
|
|
|
10 |
|
|
|
C |
|
Bryan, TX
|
|
|
203,606 |
|
|
|
10 |
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal ANB 1 License
|
|
|
10,199,265 |
|
|
|
10 |
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
Total Cricket and ANB 1 License
|
|
|
70,014,153 |
|
|
|
10 |
|
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Designates wireless licenses or portions of wireless licenses in
markets where Cricket service is offered. |
|
(2) |
Designates a wireless license which we have agreed, subject to
certain conditions, to exchange for a wireless license covering
the same market area with the same amount of MHz, but in a
different frequency block. |
8
|
|
(3) |
Designates wireless licenses or portions of wireless licenses
used in commercial operations that, subject to certain
conditions, we have agreed to sell to a third party along with
associated network assets and subscribers. Upon completion of
the sale, Cricket will no longer offer service in these
designated markets. |
|
(4) |
Designates wireless licenses used in commercial operations that,
subject to certain conditions, we have agreed to contribute,
along with associated network assets and subscribers, to LCW
Wireless. |
Arrangements with Alaska Native Broadband
In November 2004 we acquired a 75% non-controlling membership
interest in 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. ANB 1 is the
sole member and manager of ANB 1 License. ANB 1 License was
eligible to bid on certain restricted licenses offered by the
FCC in Auction #58 as a very small business
designated entity under FCC regulations. We have determined that
our investment in ANB 1 is required to be consolidated under
Financial Accounting Standards Board Interpretation, or FIN,
No. 46-R, Consolidation of Variable Interest
Entities.
Under the Credit Agreement governing our secured credit
facility, we are permitted to invest up to an aggregate of
$325 million in loans to and equity investments in ANB 1
and ANB 1 License (excluding capitalized interest).
Crickets aggregate equity capital contributions to ANB 1
were $3.0 million and $5.0 million as of
December 31, 2005 and February 28, 2006, respectively.
Cricket is also a secured lender to ANB 1 License. Under a
senior secured credit facility, as amended, Cricket has agreed
to loan ANB 1 License up to $150.0 million plus
capitalized interest, of which $96.1 million was drawn as
of December 31, 2005. We expect to increase this facility
and to make additional equity investments in ANB 1 during the
first half of 2006.
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 which, as amended by the parties, is
referred to in this report as the ANB 1 LLC Agreement. Under the
ANB 1 LLC Agreement, ANB, as the sole manager of ANB 1, 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 (other than the Bryan, TX,
El Paso, TX, and Las Cruces, NM licenses) or any material
network assets related thereto, or a sale of additional equity
interests in ANB 1. Subject to FCC approval, ANB can be removed
as the manager of ANB 1 in certain circumstances, including
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, during the first five 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, 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 an option until
the later of March 31, 2007 and 30 days after the date
ANB 1 License satisfies the build-out requirements to sell its
entire membership interests in ANB 1 to Cricket for a purchase
price of $2.7 million plus a specified return, 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 liquidation preference equal
to the put purchase price, payable prior to Crickets
equity and debt investments in ANB 1 and ANB 1
License. In addition, ANB 1 License has executed a guaranty
in favor of ANB with respect to payment of the put purchase
price. If ANB fails to maintain its qualification as an
entrepreneur and a very small business
under FCC rules, and as a result of such failure ANB 1
License ceases to retain the benefits it received in
Auction #58, ANB is in general liable to Cricket only to
the extent of ANBs equity capital contributions to
ANB 1.
9
Senior Secured Credit Agreement. Under a senior secured
credit agreement, as amended, Cricket has agreed to loan
ANB 1 License up to $150.0 million plus capitalized
interest. This facility consists of a fully drawn
$64.2 million sub-facility to finance ANB 1
Licenses purchase of wireless licenses in
Auction #58, and a $85.8 million sub-facility to
finance ANB 1 Licenses initial build-out costs and
working capital requirements. At February 28, 2006,
ANB 1 License had outstanding borrowings of
$64.2 million principal amount under the acquisition
sub-facility and outstanding borrowings of $32.3 million
principal amount under the working capital sub-facility.
Borrowings accrue interest at a rate of 12% per annum.
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. Amortization commences
under the facility on the later of March 31, 2007 and
30 days after the date ANB 1 License satisfies the
five-year build-out milestone requirements (or the closing date
of the ANB put, if later). Loans must be repaid in 16 quarterly
installments of principal plus accrued interest, commencing ten
days after the amortization commencement date. Loans may be
prepaid at any time without premium or penalty. 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.
Management Agreement. Cricket and ANB 1 License are
parties to a management services agreement, pursuant to which
Cricket provides 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.
Arrangements with LCW Wireless
In November 2005 we entered into a series of agreements with
CSM, Cleveland Unlimited, Inc. and the controlling members of
WLPCS to obtain equity interests in LCW Wireless, a designated
entity which owns a wireless license for Portland, Oregon. LCW
Wireless Portland license would complement our existing
markets in Salem and Eugene, Oregon, which we intend to
contribute to LCW Wireless. The three markets would form a new
market cluster covering 3.2 million POPs. Completion of
these transactions is subject to customary closing conditions,
including FCC approval and other third party consents. Although
we expect to receive FCC approval and satisfy the other
conditions, we cannot assure you that the FCC will grant such
approval or that the other conditions will be satisfied.
Following the completion of these transactions, LCW Wireless
will operate a wireless telecommunications business in the
Oregon market cluster using the Cricket business model and
brands. We anticipate that LCW Wireless working capital
needs will be funded through Crickets initial equity
contribution and through third party debt financing. However, if
LCW Wireless is unsuccessful in arranging this third party
financing, we may fund the additional capital required through
additional debt or equity investments in LCW Wireless.
Crickets principal agreements relating to the LCW Wireless
joint venture are summarized below.
Agreements to Obtain Equity Interests in LCW Wireless.
Under a contribution agreement, we have agreed to contribute up
to $25.0 million in cash and two wireless licenses for
Salem and Eugene, Oregon, together with related operating
assets, to LCW Wireless in exchange for an equity interest in
LCW Wireless. In a related agreement, we have also agreed to
sell our wireless licenses and operating assets in Toledo and
10
Sandusky, Ohio in exchange for cash and an additional equity
interest in LCW Wireless. WLPCS has agreed to contribute
$1.3 million in cash to LCW Wireless in exchange for a
controlling equity interest. Upon completion of all of these
transactions, the equity interests in LCW Wireless will be held
as follows: Cricket will hold a 73.3% non-controlling membership
interest, CSM will hold a 24.7% non-controlling membership
interest and WLPCS will hold a 2% controlling membership
interest.
Limited Liability Company Agreement. At the closing of
these transactions, we will also enter into an amended and
restated limited liability company agreement with CSM and WLPCS,
which is referred to in this report as the LCW LLC Agreement.
Under the LCW LLC Agreement, a board of managers will have the
right and power to manage, operate and control LCW Wireless and
its business and affairs, subject to certain protective
provisions for the benefit of Cricket and CSM, including among
others, their consent to the sale of any assets with a market
value in excess of $1.0 million. The board of managers
initially will be comprised of five members, with three members
designated by WLPCS, one member designated by CSM and one member
designated by Cricket. In the event that LCW Wireless fails to
qualify as an entrepreneur and a very small
business under FCC rules, then in certain circumstances,
subject to FCC approval, WLCPS will be required to sell its
entire equity interest to LCW Wireless or a third party
designated by the non-controlling members.
Under the LCW LLC Agreement, during the first five years
following the date of the agreement, members generally may not
transfer their membership interests, other than to specified
permitted transferees or through the exercise of put rights set
forth in the LCW LLC Agreement. Following such period, if a
member desires to transfer its interests in LCW Wireless to a
third party, the non-controlling members have a right of first
refusal to purchase such interests on a pro rata basis.
Under the LCW LLC Agreement, WLPCS will have the option to put
its entire equity interest in LCW Wireless to Cricket for a
purchase price not to exceed $3.0 million during a
30-day period
commencing on the earlier to occur of August 9, 2010 and
the date of a sale of all or substantially all of the assets, or
the liquidation, of LCW Wireless. If exercised, the consummation
of this sale will be subject to FCC approval. Alternatively,
WLPCS is entitled to receive a liquidation preference equal to
its capital contributions plus a specified rate of return,
together with any outstanding mandatory distributions owed to
WLPCS. Under the LCW LLC Agreement, CSM will also have the
option, during specified periods commencing on the date of the
launch of the Portland, Oregon market, to put its entire equity
interest in LCW Wireless to Cricket either in cash or in Leap
common stock, or a combination thereof, as determined by Cricket
in its discretion, for a purchase price calculated on a pro rata
basis using either the appraised value of LCW Wireless or a
multiple of Leaps enterprise value divided by its adjusted
earnings before interest, taxes, depreciation and amortization,
or EBITDA, and applied to LCW Wireless adjusted EBITDA to
impute an enterprise value and equity value for LCW Wireless.
Management Agreement. At the closing of these
transactions, Cricket and LCW Wireless will also enter into a
management services agreement, pursuant to which LCW Wireless
will have the right to obtain management services from Cricket
in exchange for a monthly management fee based on Crickets
costs of providing such services plus a
mark-up for
administrative overhead.
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, Sprint (and Sprint
affiliates), T-Mobile,
U.S. Cellular and Verizon Wireless. We also face
competition from resellers or MVNOs (Mobile Virtual Network
Operators), such as Virgin Mobile USA, TracFone Wireless, and
others, which provide wireless services to customers but do not
hold FCC licenses or own network facilities. In addition, there
are several MVNO operators that have either launched or have
announced plans to launch service offerings targeting
Crickets market segments in the near future. These
resellers purchase bulk wireless telephone services and capacity
from wireless providers and resell to the public under their own
brand name through mass-market retail outlets, including
Wal-Mart, Target, Radio Shack, and Best Buy. 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
11
available from personal communications service providers and
enhanced specialized mobile radio carriers. In many cases,
non-voice services are offered in conjunction with or as
adjuncts to voice services.
In the future, we may also face competition from entities
providing similar services using different technologies,
including Wi-Fi, Wi-Max, and Voice over Internet Protocol, or
VoIP. Additionally, some of the major Internet search engines
and service providers such as Google and Yahoo have announced
plans or intentions to enter the mobile market place by
providing free Internet and voice access through a fixed mobile
network in partnership with some major municipalities in the
U.S. 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. Cable operators
are providing telecommunications services to the home, and some
of these carriers are providing local and long distance voice
services using VoIP. In particular circumstances, these carriers
may be able to avoid payment of access charges to local exchange
carriers for the use of their networks on long distance calls.
Cost savings for these carriers could result in lower prices to
customers and increased competition for wireless services. Some
of our competitors offer these other services together with
their wireless communications service, which may make their
services more attractive to customers. In the future, we may
also face competition from mobile satellite service, or MSS,
providers, as well as from resellers of these services. The FCC
has granted, or may grant, MSS providers the flexibility to
deploy an ancillary terrestrial component to their satellite
services. This added flexibility may enhance MSS providers
ability to offer more competitive mobile services.
There has also been an increasing trend towards consolidation of
wireless service providers through joint ventures,
reorganizations and acquisitions. These consolidated carriers
may have substantially larger service areas, more capacity and
greater financial resources and bargaining power than we do. As
consolidation creates even larger competitors, the advantages
our competitors have may increase. For example, in connection
with the offering of our Travel Time roaming service, we have
encountered problems with certain large wireless carriers in
negotiating reasonable terms for roaming arrangements, and
believe that consolidation has contributed significantly to such
carriers control over the terms and conditions of
wholesale roaming services. We and a number of other small,
rural and regional carriers have asked the FCC in a current
pending FCC proceeding to impose an obligation on all commercial
mobile radio services providers to permit automatic roaming by
other providers on their networks on a just, reasonable and
non-discriminatory basis, but we cannot predict whether the FCC
will grant the relief requested.
The telecommunications industry is experiencing significant
technological changes, as evidenced by the increasing pace of
improvements in the capacity and quality of digital technology,
shorter cycles for new products and enhancements and changes in
consumer preferences and expectations. Accordingly, we expect
competition in the wireless telecommunications industry to be
dynamic and intense as a result of competitors and the
development of new technologies, products and services. We
compete for customers based on numerous factors, including
wireless system coverage and quality, service value proposition
(minutes and features relative to price), local market presence,
digital voice and features, customer service, distribution
strength, and brand name recognition. Some competitors also
market other services, such as landline local exchange and
Internet access services, with their wireless service offerings.
Competition has caused, and we anticipate it 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 we could offer. In addition, to
the extent that products or services that we offer, such as
roaming capability, may depend upon negotiations with other
wireless operators,
12
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.
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. In
addition, the FCC has announced that it intends to auction an
additional 90 MHz of nationwide spectrum in the
1700 MHz to 2100 MHz band for Advanced Wireless
Services, commonly referred to as the AWS Auction or
Auction #66, beginning in late June 2006. It is possible
that new companies, such as the cable television operators, will
purchase licenses and begin offering wireless services. In
addition, because the FCC has recently permitted the offering of
broadband services over power lines, it is possible that utility
companies will begin competing against us.
We believe that we are strategically positioned to compete with
other communications technologies that now exist. Continuing
technological advances in telecommunications and FCC policies
that encourage the development of new spectrum-based
technologies make it difficult, however, to predict the extent
of future competition.
Government Regulation
The licensing, construction, modification, operation, sale,
ownership and interconnection 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
All of the wireless licenses currently held by Cricket and ANB 1
License are PCS licenses. 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 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 maximum
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
13
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.
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 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. Our PCS licenses are in good standing with
the FCC.
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 licensee that
such licensee intends to activate 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, in some cases, ten years after the license grant date.
These initial requirements are met for most 10 MHz licenses
when a signal level sufficient to provide adequate service is
offered to at least one-quarter of the population of the
licensed area within five years, or in the alternative, a
showing of substantial service is made for the licensed area
within five years of being licensed. For 30 MHz licenses, a
signal level must be provided that is sufficient to offer
adequate service 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 the
14
alternative, 30 MHz licensees may provide substantial
service to their licensed area within the appropriate five- and
ten-year benchmarks. Substantial service is defined
by the FCC as service which is sound, favorable, and
substantially above a level of mediocre service which just might
minimally warrant renewal. In general, a failure to comply
with FCC coverage requirements could cause the revocation of the
relevant wireless license, with no eligibility to regain it, 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 PCS
license, 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 a PCS 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 a PCS 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 or leases.
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.
FCC Regulation
The FCC has a number of other complex requirements and
proceedings that affect our operations and that could increase
our costs or diminish our revenues. For example, the FCC
requires 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. On November 11, 2005, we filed a
petition with the FCC seeking limited relief from the
requirement that we achieve ninety-five percent penetration of
location-capable handsets among our subscribers by
December 31, 2005, as required by the FCCs rules.
Specifically, we sought to defer our obligation to comply with
the ninety-five percent penetration until March 31, 2006.
The FCC to date has not acted upon our request.
FCC rules also require that local exchange carriers and most
commercial mobile radio service providers, including PCS
providers like Cricket, 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 networks. 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 networks 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
15
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 networks
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, subscriber privacy and customer proprietary network
information; 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
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 federal, 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 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
16
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.
Intellectual Property
We have pursued registration of our primary trademarks and
service marks in the United States. Leap and the Leap logo
design are United States registered trademarks of Leap Wireless
International, Inc. Cricket is a United States registered
trademark of Cricket Communications, Inc. In addition, Cricket
Communications, Inc. has applied to register the following
trademarks or service marks in the United States: Unlimited
Access, Unlimited Plus, Unlimited Classic, Jump, Travel Time,
Cricket Clicks and the Cricket K.
As of December 31, 2005, we had two issued patents relating
to our local, unlimited wireless services offerings, and
numerous other issued patents relating to various technologies
we previously acquired. We also have several patent applications
pending in the United States relating to our wireless services
offerings. We cannot assure you that our pending, or any future,
patent applications will be granted, that any existing or future
patents will not be challenged, invalidated or circumvented,
that any existing or future patents will be enforceable, or that
the rights granted under any patent that may issue will provide
competitive advantages to us.
Our business is not substantially dependent upon any of our
patents, patent applications, service marks or trademarks. We
believe that our technical expertise, operational efficiency,
industry-leading cost structure and ability to introduce new
products in a timely manner are more critical to maintaining our
competitive position in the future.
Availability of Public Reports
As soon as is reasonably practicable after they are
electronically filed with or furnished to the SEC, our proxy
statements, 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. Our website is not part of this report.
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 100 F Street, NE, 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 our operating segment and the
geographic area in which we operate is set forth in Note 12
to the consolidated financial statements included in Item 8
of this report.
Employees
As of December 31, 2005, Cricket employed
1,507 full-time employees, and Leap had no employees.
Seasonality
Our customer activity is influenced by seasonal effects related
to traditional retail selling periods and other factors that
arise from our target customer base. Based on historical
results, we generally expect new sales activity to be highest in
the first and fourth quarters, and customer turnover, or churn,
to be highest in the third quarter and lowest in the first
quarter. However, sales activity and churn can be strongly
affected by the launch of new markets, promotional activity and
competitive actions, which have the ability to reduce or
outweigh certain seasonal effects.
17
Inflation
We believe that inflation has not had a material effect on our
results of operations.
Executive Officers of the Registrant
S. Douglas Hutcheson, 49, was appointed as our chief
executive officer, and president, and elected as a director, in
February 2005, having previously served as our president and
chief financial officer from January 2005 to February 2005, as
our executive vice president and chief financial officer from
January 2004 to January 2005, as our senior vice president and
chief financial officer from August 2002 to January 2004, as our
senior vice president and chief strategy officer from March 2002
to August 2002, as our senior vice president, product
development and strategic planning from July 2000 to March 2002,
as our senior vice president, business development from March
1999 to July 2000 and as our vice president, business
development from September 1998 to March 1999. From February
1995 to September 1998, Mr. Hutcheson served as vice
president, marketing in the Wireless Infrastructure Division at
Qualcomm Incorporated. Mr. Hutcheson holds a B.S. in
mechanical engineering from California Polytechnic University
and an M.B.A. from University of California, Irvine.
Albin F. Moschner, 53, has served as our executive
vice president and chief marketing officer since January 2005,
having previously served as senior vice president, marketing
from September 2004 to January 2005. Prior to this,
Mr. Moschner was president of Verizon Card Services from
December 2000 to November 2003. Prior to joining Verizon,
Mr. Moschner was president and chief executive officer of
OnePoint Services, Inc., a telecommunications company that he
founded and that was acquired by Verizon in December 2000.
Mr. Moschner also was a principal and the vice chairman of
Diba, Inc., a development stage Internet software company, and
served as senior vice president of operations, a member of the
board of directors and ultimately president and chief executive
officer of Zenith Electronics from October 1991 to July 1996.
Mr. Moschner holds a masters degree in electrical
engineering from Syracuse University and a B.E. in electrical
engineering from the City College of New York.
Glenn T. Umetsu, 56, has served as our executive vice
president and chief technical officer since January 2005, having
previously served as our executive vice president and chief
operating officer from January 2004 to January 2005, as our
senior vice president, engineering operations and launch
deployment from June 2002 to January 2004, and as vice
president, engineering operations and launch development from
April 2000 to June 2002. From September 1996 to April 2000,
Mr. Umetsu served as vice president, engineering and
technical operations for Cellular One in the San Francisco
Bay Area. Before Cellular One, Mr. Umetsu served in various
telecommunications operations roles for 24 years with
AT&T Wireless, McCaw Communications, RAM Mobile Data (now
Cingular Mobile Data), Honolulu Cellular, PacTel Cellular,
AT&T Advanced Mobile Phone Service, Northwestern Bell and
the United States Air Force. Mr. Umetsu holds a B.A. in
mathematics and economics from Brown University.
David B. Davis, 40, has served as our senior vice
president, operations since July 2001, having previously served
as our regional vice president, Midwest Region from March 2000
to July 2001. Before joining Leap, Mr. Davis spent six
years with Cellular One, CMT Kansas/ Missouri in various
management positions culminating in his role as vice president
and general manager. Before Cellular One, Mr. Davis was
market manager for the PacTel-McCaw joint venture.
Mr. Davis holds a B.S. from the University of Central
Arkansas.
Robert J. Irving, Jr., 50, has served as our senior
vice president, general counsel and secretary since May 2003,
having previously served as our vice president, legal from
August 2002 to May 2003, and as our senior legal counsel from
September 1998 to August 2002. Previously, Mr. Irving
served as administrative counsel for Rohr, Inc., a corporation
that designed and manufactured aerospace products from 1991 to
1998, and prior to that served as vice president, general
counsel and secretary for IRT Corporation, a corporation that
designed and manufactured x-ray inspection equipment. Before
joining IRT Corporation, Mr. Irving was an attorney at
Gibson, Dunn & Crutcher. Mr. Irving was admitted
to the California Bar Association in 1982. Mr. Irving holds
a B.A. from Stanford University, an M.P.P. from The John F.
Kennedy School of Government of Harvard University and a J.D.
from Harvard Law School, where he graduated cum laude.
18
Leonard C. Stephens, 49, has served as our senior
vice president, human resources since our formation in June
1998. From December 1995 to September 1998, Mr. Stephens
was vice president, human resources operations for Qualcomm
Incorporated. Before joining Qualcomm Incorporated,
Mr. Stephens was employed by Pfizer Inc., where he served
in a number of human resources positions over a
14-year career.
Mr. Stephens holds a B.A. from Howard University.
Linda K. Wokoun, 50, has served as our senior vice
president, marketing and customer care since June 2005. Prior to
joining Cricket, Ms. Wokoun was president and chief
executive officer of RiverStar Software from April 2003 to June
2005. From March 2000 to January 2002, Ms. Wokoun was chief
operating officer of iPCS, a Sprint PCS affiliate. Prior to
joining iPCS, Ms. Wokoun was a vice president of Ameritech
Cellular. She holds a B.A. in economics and an M.B.A. from
Indiana University.
Dean M. Luvisa, 44, has served as our acting chief
financial officer and vice president, finance since March 2006,
having previously served as our acting chief financial officer,
vice president, finance and treasurer from February 2005 to
March 2006, our vice president, finance, and treasurer from May
2002 to February 2005 and as our vice president, finance from
September 1998 to May 2002. Prior to joining Cricket,
Mr. Luvisa was director of project finance at Qualcomm
Incorporated, where he was responsible for Qualcomms
vendor financing activities worldwide. Before Qualcomm, he was
the chief financial officer of a finance company associated with
Galaxy Latin America, an affiliate of DirecTV and Hughes
Electronics. In other capacities at Hughes Electronics,
Mr. Luvisa was responsible for project finance, vendor
finance, mergers & acquisitions and corporate funding.
Mr. Luvisa graduated summa cum laude from Arizona State
University with a B.S. in economics, and earned an M.B.A. in
finance from The Wharton School at the University of
Pennsylvania.
Grant A. Burton, 41, has served as our vice president,
chief accounting officer and controller since June 2005. Prior
to his employment with Cricket, he served as assistant
controller of PETCO Animal Supplies, Inc. He previously served
as senior manager for PricewaterhouseCoopers, LLP, Assurance and
Business Advisory Services, in San Diego from 1996 to 2004.
Before joining PricewaterhouseCoopers, Mr. Burton served as
acting vice president, internal audit and manager merchandise
accounting for DFS Group Limited from 1993 to 1996.
Mr. Burton is a certified public accountant licensed in the
State of California, and was a Canadian chartered accountant
from 1990 to 2004. He holds a Bachelor of Commerce with
Distinction from the University of Saskatchewan.
19
Item 1A. Risk
Factors
Risks Related to Our Business and Industry
We Have Experienced Net Losses, and We May Not Be Profitable
in the Future.
We experienced net losses of $8.4 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 and $483.3 million for the year
ended December 31, 2001. Although we had net income of
$30.0 million for the year ended December 31, 2005, 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.
We May Not Be Successful in Increasing Our Customer Base
Which Would Negatively Affect Our Business Plans and Financial
Outlook.
Our growth on a quarter-by-quarter basis has varied
substantially in the past. We believe that this uneven growth
generally reflects seasonal trends in customer activity,
promotional activity, the competition in the wireless
telecommunications market, our reduction in 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 attract and retain a growing customer base, our current
business plans and financial outlook may be harmed.
If We Experience High Rates of Customer Turnover or Credit
Card Subscription or Dealer Fraud, Our Ability to Become
Profitable Will Decrease.
Because we do not require customers to sign fixed-term contracts
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 due to an inability to pay than the average industry
customer, particularly during economic downturns. In addition,
our rate of customer turnover may be affected by other factors,
including the size of our calling areas, our handset or service
offerings, 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 could have
a material adverse impact on our financial condition and results
of operations.
We Have Made Significant Investment, and Will Continue to
Invest, in Joint Ventures and Designated Entities, including ANB
1 and LCW Wireless, That We Do Not Control.
In November 2004, we acquired a 75% non-controlling interest in
ANB 1, whose wholly owned subsidiary was awarded certain
licenses in Auction #58. In November 2005, we entered into
an agreement pursuant to which we will acquire a 73.3%
non-controlling interest in LCW Wireless, which owns a wireless
license for the Portland, Oregon market and to which we expect
to contribute two wireless licenses and our operating assets in
Eugene and Salem, Oregon. Our participation in these joint
ventures is structured as a non-controlling interest in order to
comply with FCC rules and regulations. We have agreements with
our joint venture partner in ANB 1 and we plan to have similar
agreements in connection with future joint venture arrangements
we may enter into that are intended to allow us to actively
participate in the development of the business of the joint
venture. However, these agreements do not provide us with
control over the business strategy, financial goals, build-out
plans or other operational aspects of any such joint venture.
The FCCs rules restrict our
20
ability to acquire controlling interests in such entities during
the period that such entities must maintain their eligibility as
a designated entity, as defined by the FCC. The entities that
control the joint ventures may have interests and goals that are
inconsistent or different from ours which could result in the
joint venture taking actions that negatively impact our business
or financial condition. In addition, if any of the other members
of a joint venture files for bankruptcy or otherwise fails to
perform its obligations or does not manage the joint venture
effectively, we may lose our equity investment in, and any
present or future rights to acquire the assets (including
wireless licenses) of, such entity.
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 Crickets service plans (and have also introduced
products that consumers perceive to be similar to Crickets
service plans) 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 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 increase or maintain our 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. In addition, existing carriers and potential
non-traditional carriers are exploring or have announced the
launch of service using new technologies and/or alternative
delivery plans.
In addition, some of our competitors are able to offer their
customers roaming services on a nationwide basis and at lower
rates. We currently offer roaming services on a prepaid basis.
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, as well as their
bargaining power as wholesale providers of roaming services.
We also compete as a wireless alternative to landline service
providers in the telecommunications industry. Wireline carriers
are also offering unlimited national calling plans and bundled
offerings that include wireless and data services. We may not be
successful in the long term, or continue to 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.
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, which may increase the number
of our competitors.
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 All of
These Material Weaknesses, or If We Have Other Material
Weaknesses in Our Internal Control Over Financial Reporting.
In connection with their evaluations of our disclosure controls
and procedures, our CEO and CFO have concluded that certain
material weaknesses in our internal control over financial
reporting existed: (i) as of September 30, 2004,
December 31, 2004, March 31, 2005, June 30, 2005,
September 30, 2005 and December 31, 2005 with respect
to turnover and staffing levels in our accounting, financial
reporting and tax departments (arising in part in connection
with our now completed bankruptcy proceedings) and the
preparation of our income tax provision, and (ii) as of
December 31, 2004 and March 31, 2005 with respect to
21
the application of lease-related accounting principles,
fresh-start reporting oversight, and account reconciliation
procedures. We believe we have adequately remediated the
material weaknesses associated with lease accounting,
fresh-start reporting oversight and account reconciliation
procedures. We are engaged in remediation efforts with respect
to the material weaknesses related to staffing levels and income
tax provision preparation. For a description of these material
weaknesses and the steps we are undertaking to remediate them,
see Item 9A. Controls and Procedures contained
in Part II of this report. The existence of one or more
material weaknesses 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.
Our Internal Control Over Financial Reporting Was Not
Effective as of December 31, 2005, and Our Business May Be
Adversely Affected if We Are Not Able to Implement Effective
Control Over Financial Reporting.
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 are required to document and test our internal control over
financial reporting; our management is required to assess and
issue a report concerning our internal control over financial
reporting; and our independent registered public accounting firm
is required to attest to and report on managements
assessment. We are required to comply with Section 404 of
the Sarbanes-Oxley Act in connection with the filing of this
Annual Report on
Form 10-K for the
fiscal year ending December 31, 2005. We have conducted a
rigorous review of our internal control over financial reporting
in order to become compliant with the requirements of
Section 404. 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 identified the need for remediation of some aspects
of our internal control over financial reporting. Our internal
control over financial reporting has been subject to certain
material weaknesses in the past and is currently subject to
material weaknesses related to staffing levels and preparation
of our income tax provision as described above and in
Item 9A Controls and Procedures. Our management
concluded and our independent registered public accounting firm
has attested and reported that our internal control over
financial reporting was not effective as of December 31,
2005. If we are unable to implement effective control over
financial reporting, investors could lose confidence in our
reported financial information, we may be unable to obtain
additional financing to operate and expand our business, and our
business and financial condition could be harmed.
Our Primary Business Strategy May Not Succeed in the Long
Term.
A major element of our business strategy is to offer consumers
service plans that allow unlimited calls for a flat monthly rate
without entering into a fixed-term contract or passing a credit
check. However, unlike national wireless carriers, we do not
seek to provide ubiquitous coverage across the U.S. or all
major metropolitan centers, and instead have a smaller network
footprint covering only the principal population centers of our
various markets. 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.
We Expect to Incur Substantial Costs in Connection with the
Build-Out of Our New Markets, and any Delays in the Build-Out of
Our New Markets Could Adversely Affect Our Business.
Our ability to achieve our strategic objectives will depend in
part on the successful, timely and cost-effective build-out of
the networks associated with newly acquired FCC licenses,
including those owned by ANB 1 License and LCW Wireless, into
new markets that complement our clustering strategy or provide
strategic expansion opportunities. Large scale construction
projects such as the build-out of our new markets may suffer
cost-overruns. In addition, the build-out of the networks may be
delayed or adversely affected by a
22
variety of factors, uncertainties and contingencies, such as
natural disasters, difficulties in obtaining zoning permits or
other regulatory approvals, our relationships with our joint
venture partners, and the timely performance by third parties of
their contractual obligations to construct portions of the
networks. Any failure to complete the build-out of our new
markets on budget or on time could delay the implementation of
our clustering and strategic expansion strategies, and could
have a material adverse effect on our results of operations and
financial condition.
If We Are Unable to Manage Our Planned Growth, Our Operations
Could Be Adversely Impacted.
We have experienced growth in a relatively short period of time
and expect to continue to experience growth in the future in our
existing and new markets. The management of such growth will
require, among other things, continued development of our
financial and management controls and management information
systems, stringent control of costs, diligent management of our
network infrastructure and its growth, increased spending
associated with marketing activities and acquisition of new
customers, the ability to attract and retain qualified
management personnel and the training of new personnel. Failure
to successfully manage our expected growth and development could
have a material adverse effect on our business, financial
condition and results of operations.
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. In the future,
competitors may seek to provide competing wireless
telecommunications service through the use of developing
technologies such as Wi-Fi, Wi-Max, and Voice over Internet
Protocol, or VoIP. The cost of implementing or competing against
future technological innovations may be prohibitive to us, and
we may lose customers if we fail to keep up with these changes.
For example, we have committed a substantial amount of capital
to upgrade our network with 1xEV-DO technology to offer advanced
data services. However, if such upgrades, technologies or
services do not become commercially acceptable, our revenues and
competitive position could be materially and adversely affected.
We cannot assure you that there will be widespread demand for
advanced data services or that this demand will develop at a
level that will allow us to earn a reasonable return on our
investment.
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 attracting, motivating and retaining our
officers and other management and technical personnel. We do
not, however, generally provide employment contracts to our
employees. If we are unable to attract and retain the qualified
employees that we need, our business may be harmed.
We have experienced higher than normal employee turnover in the
past, in part because of our bankruptcy, including turnover of
individuals at the most senior management levels. We may have
difficulty attracting and retaining key personnel in future
periods, particularly if we were to experience poor operating or
financial performance. The loss of key individuals in the future
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 any harm
caused
23
by products we sell if such products 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
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
or are unable 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. In addition, we currently purchase a
substantial majority of the handsets we sell from one supplier.
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 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.
System Failures Could Result in Higher Churn, Reduced Revenue
and Increased Costs, and Could Harm Our Reputation.
Our technical infrastructure (including our network
infrastructure and ancillary functions supporting our network
such as billing and customer care) is vulnerable to damage or
interruption from technology failures, power loss, floods,
windstorms, fires, human error, terrorism, intentional
wrongdoing, or similar events. Unanticipated problems at our
facilities, system failures, hardware or software failures,
computer viruses or hacker attacks could affect the quality of
our services and cause service interruptions. In addition, we
are in the process of upgrading some of our internal network
systems, including our billing system, and we cannot assure you
that we will not experience delays or interruptions while we
transition our data and existing systems onto our new systems.
If any of the above events were to occur, we could experience
higher churn, reduced revenues and increased costs, any of which
could harm our reputation and have a material adverse effect on
our business.
24
We May Not be Successful in Protecting and Enforcing Our
Intellectual Property Rights.
We rely on a combination of patent, service mark, trademark, and
trade secret laws and contractual restrictions to establish and
protect our proprietary rights, all of which only offer limited
protection. We endeavor to enter into agreements with our
employees and contractors and agreements with parties with whom
we do business in order to limit access to and disclosure of our
proprietary information. Despite our efforts, the steps we have
taken to protect our intellectual property may not prevent the
misappropriation of our proprietary rights. Moreover, others may
independently develop processes and technologies that are
competitive to ours. The enforcement of our intellectual
property rights may depend on any legal actions that we may
undertake against such infringers being successful, but we
cannot be sure that any such actions will be successful, even
when our rights have been infringed.
We cannot assure you that our pending, or any future, patent
applications will be granted, that any existing or future
patents will not be challenged, invalidated or circumvented,
that any existing or future patents will be enforceable, or that
the rights granted under any patent that may issue will provide
competitive advantages to us. Similarly, we cannot assure you
that any trademark or service mark registrations will be issued
with respect to pending or future applications or that any
registered trademarks or service marks will be enforceable or
provide adequate protection of our brands.
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 network. 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 infringement claims. 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 are
evaluating 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.
Regulation by Government Agencies May Increase Our Costs of
Providing Service or Require Us to Change Our Services.
The FCC regulates the licensing, construction, modification,
operation, ownership, sale and interconnection of wireless
communications systems, as do some state and local regulatory
agencies. We cannot assure you that the FCC or any state or
local agencies having jurisdiction over our business will not
adopt regulations or take other enforcement or other actions
that would adversely affect our business, impose new costs or
require changes in current or planned operations. In particular,
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. In
addition, we cannot assure you that the Communications Act of
1934, as amended, or the Communications Act, from which the FCC
obtains its authority, will not be further amended in a manner
that could be adverse to us.
Our operations are subject to various other regulations,
including those regulations promulgated by the Federal Trade
Commission, the Federal Aviation Administration, the
Environmental Protection Agency, the
25
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.
Because of our smaller size, governmental regulations and orders
can significantly increase our costs and affect our competitive
position compared to other larger 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
1,450 minutes per month, and some markets are experiencing
substantially higher call volumes. We offer service plans that
bundle certain features, long distance and 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. Although we own less
spectrum in many of our markets than our competitors, we seek to
design our network to accommodate our expected high call volume,
and we consistently assess and try to implement technological
improvements to increase the efficiency of our wireless
spectrum. However, if future wireless use by Cricket customers
exceeds the capacity of our network, 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 May Be Unable to Acquire Additional Spectrum in the Future
at a Reasonable Cost or on a Timely Basis.
Because we offer unlimited calling services for a fixed fee, our
customers average minutes of use per month is
substantially above the U.S. wireless customer average. We
intend to meet this demand by utilizing spectrum efficient
technologies. There may come a point where we need to acquire
additional spectrum in order to maintain an acceptable grade of
service or provide new services to meet increasing customer
demands. However, we cannot assure you that additional spectrum
would be made available by the FCC on a timely basis or that we
will be able to acquire additional spectrum at auction or in the
after-market at a reasonable cost. If such additional spectrum
is not available to us at that time, our results of operations
could be 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. During the year ended
December 31, 2005, we recorded impairment charges of
$12.0 million.
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 allows or requires
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
upcoming FCC auctions, including the upcoming auction allocated
for Advanced Wireless Services. |
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, the value of our wireless licenses could
be subject to non-cash
26
impairment charges. 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 intangible assets. A significant
impairment loss could have a material adverse effect on our
operating results and on the carrying value of our goodwill or
wireless licenses and/or our long-lived assets on our balance
sheet.
We May Incur Higher Than Anticipated Intercarrier
Compensation Costs.
When our customers use our service to call customers of other
carriers, we are required under the current intercarrier
compensation scheme to pay the carrier that serves the called
party. Similarly, when a customer of another carrier calls one
of our customers, that carrier is required to pay us. While in
most cases we have been successful in negotiating agreements
with other carriers that impose reasonable reciprocal
compensation arrangements, some carriers have claimed a right to
unilaterally impose what we believe to be unreasonably high
charges on us. The FCC is actively considering possible
regulatory approaches to address this situation but we cannot
assure you that the FCC rulings will be beneficial to us. An
adverse ruling or FCC inaction could result in carriers
successfully collecting higher intercarrier fees from us, which
could adversely affect our business.
The FCC also is considering making various significant changes
to the intercarrier compensation scheme to which we are subject.
We cannot predict with any certainty the likely outcome of this
FCC proceeding. Some of the alternatives that are under active
consideration by the FCC could severely increase the
interconnection costs we pay. 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.
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 for Periods Prior to Our Emergence from
Bankruptcy.
As a result of adopting fresh-start reporting on July 31,
2004, the carrying values of our wireless licenses and our
property and equipment, 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.
Our Indebtedness Could Adversely Affect Our Financial
Health.
We have now and will continue to have a significant amount of
indebtedness. As of December 31, 2005, our total
outstanding indebtedness under our secured credit facility was
$594.4 million. We also had $110 million available for
borrowing under our revolving credit facility (which forms part
of our secured credit facility). To the extent we raise
additional funds in the future, we expect to obtain much of such
capital through debt financing. The existing indebtedness under
our secured credit facility bears interest at a variable rate,
but we have entered into interest rate swap agreements with
respect to $355 million of our indebtedness.
27
Our substantial indebtedness could have important consequences.
For example, it could:
|
|
|
|
|
make it more difficult for us to satisfy our debt obligations; |
|
|
|
increase our vulnerability to general adverse economic and
industry conditions; |
|
|
|
impair our ability to obtain additional financing in the future
for working capital needs, capital expenditures, building out
our network, acquisitions and general corporate purposes; |
|
|
|
require us to dedicate a substantial portion of our cash flows
from operations to the payment of principal and interest on our
indebtedness, thereby reducing the availability of our cash
flows to fund working capital needs, 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; |
|
|
|
place us at a disadvantage compared to our competitors that have
less indebtedness; and |
|
|
|
subject us to higher interest expense in the event of increases
in interest rates because our indebtedness under our secured
credit facility bears interest at a variable rate. For a
description of our secured credit facility, see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources Secured Credit
Facility. |
Despite Current Indebtedness Levels, We May Still Be Able to
Incur Substantially More Indebtedness. This Could Further
Increase the Risks Associated with Our Leverage.
We will be able to incur substantial additional indebtedness in
the future. Our secured credit facility permits us to incur
additional indebtedness under various financial ratio tests. As
of December 31, 2005, we had made no drawings under our
$110 million revolving credit facility (which forms part of
our secured credit facility). If new indebtedness is added to
our current levels of indebtedness, the related risks that we
now face could intensify. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Secured Credit Facility.
To Service Our Indebtedness and Fund Our Working Capital
and Capital Expenditures, We Will Require a Significant Amount
of Cash. Our Ability to Generate Cash Depends on Many Factors
Beyond Our Control.
Our ability to make payments on our indebtedness will depend
upon our future operating performance and on our ability to
generate cash flow in the future, which is subject to general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. We cannot assure you
that our business will generate sufficient cash flow from
operations, or that future borrowings, including borrowings
under our revolving credit facility, will be available to us in
an amount sufficient to enable us to pay our indebtedness or to
fund our other liquidity needs. If the cash flow from our
operating activities is insufficient, we may take actions, such
as delaying or reducing capital expenditures (including
expenditures to build out our newly acquired wireless licenses),
attempting to restructure or refinance our indebtedness prior to
maturity, selling assets or operations or seeking additional
equity capital. Any or all of these actions may be insufficient
to allow us to service our debt obligations. Further, we may be
unable to take any of these actions on commercially reasonable
terms, or at all.
Covenants in Our Secured Credit Agreement May Limit Our
Ability to Operate Our Business.
Under the Credit Agreement, we must comply, among other things,
with certain specified financial ratios, including a fixed
charge coverage ratio, a maximum total leverage ratio and a
maximum senior secured leverage ratio. If we default under the
Credit Agreement because of a covenant breach or otherwise, all
outstanding amounts could become immediately due and payable.
The restrictions in our Credit Agreement could limit our ability
to obtain debt financing, repurchase stock, refinance or pay
principal or interest on our outstanding indebtedness, complete
acquisitions for cash or debt or react to changes in our
operating environment.
28
Our failure to timely file our Annual Report on
Form 10-K for
fiscal year 2004 and our Quarterly Report on
Form 10-Q for the
fiscal quarter ended March 31, 2005 constituted defaults
under our secured credit agreement, and the restatement of
certain of the historical consolidated financial information
contained in this report may have constituted a default under
our secured credit agreement. Although we were able to obtain
limited waivers under our Credit Agreement with respect to these
events, we cannot assure you that we will be able to obtain a
waiver in the future should a default occur. See
Item 8. Financial Statements and Supplementary
Data.
Rises in Interest Rates Could Adversely Affect our Financial
Condition.
An increase in prevailing interest rates would have an immediate
effect on the interest rates charged on our variable rate of
debt, which rise and fall upon changes in interest rates. As of
December 31, 2005, we estimate that approximately 40% of
our debt was variable rate debt. If prevailing interest rates or
other factors result in higher interest rates, the increased
interest expense would adversely affect our cash flow and our
ability to service our debt.
Risks Related to Ownership of Our Common Stock
Our Stock Price May Be Volatile, and You May Lose All or Some
of Your Investment.
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; |
|
|
|
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. |
The 17,198,252 Shares of Leap Common Stock Registered
for Resale By Our Shelf Registration Statement on
Form S-1 May
Adversely Affect The Market Price of Leaps Common
Stock.
As of March 17, 2006, 61,200,392 shares of Leap common
stock were issued and outstanding. Our resale shelf Registration
Statement on
Form S-1, which
was declared effective on August 29, 2005, registered for
resale 17,198,252 shares, or approximately 28.1%, of
Leaps outstanding common stock. We are unable to predict
the potential effect that sales into the market of any material
portion of such shares may have on the then prevailing market
price of Leaps common stock. If any of Leaps
stockholders cause a large number of securities to be sold in
the public market, these sales could reduce the trading price of
Leaps common stock. These sales also could impede our
ability to raise future capital.
Your Ownership Interest in Leap Will Be Diluted Upon
Issuance of Shares We Have Reserved for Future Issuances, and
Future Issuances or Sales of Such Shares May Adversely Affect
The Market Price of Leaps Common Stock.
As of March 17, 2006, 61,200,392 shares of Leap common
stock were issued and outstanding, and 5,016,279 additional
shares of Leap common stock were reserved for issuance,
including 3,624,309 shares reserved for issuance upon
exercise of awards granted or available for grant under
Leaps 2004 Stock Option, Restricted Stock and Deferred
Stock Unit Plan, 791,970 shares reserved for issuance under
Leaps Employee Stock Purchase Plan, and
600,000 shares reserved for issuance upon exercise of
outstanding warrants.
29
In addition, upon the closing of the LCW Wireless transaction,
Leap will be obligated to reserve up to five percent of its
outstanding shares, or 3,060,020 shares as of
March 17, 2006, for potential issuance to CSM upon the
exercise of CSMs option to put its entire equity interest
in LCW Wireless to Cricket. Under the LCW LLC Agreement, the
purchase price for CSMs equity interest will be calculated
on a pro rata basis using either the appraised value of
LCW Wireless or a multiple of Leaps enterprise value
divided by its adjusted EBITDA and applied to LCW Wireless
adjusted EBITDA to impute an enterprise value and equity value
for LCW Wireless. Cricket may satisfy the put price either in
cash or in Leap common stock, or a combination thereof, as
determined by Cricket in its discretion. However, the covenants
in Crickets $710 million senior secured credit
facility do not permit Cricket to satisfy any substantial
portion of its put obligations to CSM in cash. If Cricket
satisfies its put obligations to CSM with Leap common stock, the
obligations of the parties are conditioned upon the block of
Leap common stock issuable to CSM not constituting more than
five percent of Leaps outstanding common stock at the time
of issuance. Dilution of the outstanding number of shares of
Leaps common stock could adversely affect prevailing
market prices for Leaps common stock.
We have agreed to prepare and file a resale shelf registration
statement for any shares of Leap common stock issued to CSM in
connection with the put, and to use our reasonable efforts to
cause such registration statement to be declared effective by
the SEC. In addition, we have registered all shares of common
stock that we may issue under our stock option, restricted stock
and deferred stock unit plan and under our employee stock
purchase plan. When we issue shares under these stock plans,
they can be freely sold in the public market. If any of
Leaps stockholders cause a large number of securities to
be sold in the public market, these sales could reduce the
trading price of Leaps common stock. These sales also
could impede our ability to raise future capital.
Our Directors and Affiliated Entities Have Substantial
Influence over Our Affairs.
Our directors and entities affiliated with them beneficially
owned in the aggregate approximately 27.9% of our common stock
as of December 31, 2005. 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
Leaps 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 our
stockholders 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
30
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.
Item 1B. Unresolved
Staff Comments
None.
As of February 28, 2006, Cricket leased space, totaling
approximately 113,000 square feet, in three office
buildings in San Diego, California for our headquarters. We
use these buildings for sales, marketing, product development,
engineering and administrative purposes.
As of February 28, 2006, Cricket leased regional offices in
Denver, Colorado and Nashville, Tennessee. These offices consist
of approximately 18,000 square feet and 3,500 square
feet, respectively. Cricket has 30 additional office leases in
its individual markets that range from 2,500 square feet to
13,618 square feet. Cricket also leases 91 retail locations
in its markets, including stores ranging in size from
1,050 square feet to 5,600 square feet, as well as
kiosks and retail spaces within another store. In addition,
Cricket currently leases approximately 2,709 cell site
locations, 27 switch locations and two 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 of February 28, 2006, ANB 1 License leased three retail
locations in its markets, consisting of stores ranging in size
from 2,975 square feet to 3,600 square feet. In
addition, ANB 1 License currently leases approximately 152 cell
site locations, two switch locations and two warehouse
facilities that are approximately 10,000 square feet each.
As we continue to develop existing Cricket markets, and as
additional markets are built out, additional or substitute
office facilities, retail stores, cell sites, switch sites and
warehouse facilities will be leased.
|
|
Item 3. |
Legal Proceedings |
Outstanding Bankruptcy Claims. Although our plan of
reorganization became effective and we emerged from bankruptcy
in August 2004, several claims asserted against us in connection
with the bankruptcy proceedings remain outstanding. The open
items, which are pending in the United States Bankruptcy Court
for the Southern District of California in Case Nos.
03-03470-All to 03-035335-All (jointly administered), consist
primarily of claims by governmental entities for payment of
taxes relating to periods prior to the date of the voluntary
petitions, including a claim of approximately $4.9 million
Australian dollars (approximately $3.5 million
U.S. dollars as of March 21, 2006) asserted by a
foreign governmental entity against Leap. We have objected to
the outstanding claims and are seeking to resolve the open
issues through negotiation and appropriate court proceedings. We
do not believe that the resolution of the outstanding claims
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. 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 with respect to its claim. The defendants in the
Whittington Lawsuit filed a motion to compel
31
arbitration, or in the alternative, to dismiss the Whittington
Lawsuit. The motion noted 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. The court denied defendants
motion and the defendants have appealed the denial of the motion
to the state supreme court.
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. 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. The motion was denied and the
defendants have appealed the ruling to the state supreme
court.
Although Leap is not a defendant in either the Whittington or
AWG Lawsuits, several of the defendants have indemnification
agreements with Leap. 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 Leaps
annual consolidated financial statements as of December 31,
2005 related to these contingencies.
In addition to the matters described above, we are often
involved in claims arising in the course of business, seeking
monetary damages and other relief. The amount of the liability,
if any, from such claims cannot currently be reasonably
estimated; therefore, no accruals have been made in Leaps
audited annual consolidated financial statements as of
December 31, 2005 for such claims. In the opinion of our
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
fourth quarter of the fiscal year ended December 31, 2005.
32
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 traded on the OTC Bulletin Board under the
symbol LEAP. Commencing on June 29, 2005, our
common stock became listed for trading on the Nasdaq National
Market under the symbol LEAP.
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 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 bid
quotations on the OTC Bulletin Board through
August 15, 2004. Prices for our new common stock are bid
quotations on the OTC Bulletin Board from August 16,
2004 through June 28, 2005 and sales prices on the Nasdaq
National Market on and after June 29, 2005.
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 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 |
|
Calendar Year 2005
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
29.87 |
|
|
|
25.01 |
|
|
Second Quarter
|
|
|
28.90 |
|
|
|
23.00 |
|
|
Third Quarter
|
|
|
37.47 |
|
|
|
25.87 |
|
|
Fourth Quarter
|
|
|
39.45 |
|
|
|
31.15 |
|
On March 17, 2006, the last reported sale price of
Leaps common stock on the Nasdaq National Market was
$43.89 per share. As of March 17, 2006, there were
61,200,392 shares of common stock outstanding held by
approximately 155 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.
33
Securities Authorized For Issuance Under Equity Compensation
Plans
The following table provides information as of December 31,
2005 with respect to compensation plans (including individual
compensation arrangements) under which Leaps common stock
is authorized for issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average | |
|
|
|
|
Number of securities to be | |
|
exercise price of | |
|
Number of securities | |
|
|
Issued upon exercise of | |
|
outstanding | |
|
remaining available for future | |
|
|
outstanding options, | |
|
options, warrants | |
|
issuance under equity | |
Plan Category |
|
warrants and rights | |
|
and rights | |
|
compensation plans | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by security holders(1)
|
|
|
|
|
|
$ |
|
|
|
|
791,970 |
|
Equity compensation plans not approved by security holders(2)
|
|
|
1,891,984 |
(3) |
|
$ |
26.50 |
|
|
|
1,739,017 |
(4) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,891,984 |
|
|
$ |
26.50 |
|
|
|
2,530,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Consists of shares reserved for issuance under the Leap Wireless
International, Inc. Employee Stock Purchase Plan. |
|
(2) |
Consists of shares reserved for issuance under the Leap Wireless
International, Inc. 2004 Stock Option, Restricted Stock and
Deferred Stock Unit Plan (the 2004 Plan) adopted by
the compensation committee of our board of directors on
December 30, 2004 as contemplated by our confirmed plan of
reorganization. The material features of the 2004 Plan are
described in Item 11-Executive Compensation
contained in Part III of this report. |
|
(3) |
Includes 948,292 shares of restricted stock issued under
the 2004 Plan which are subject to release upon vesting of the
shares. |
|
(4) |
Includes 25,777 shares of restricted stock issued under the
2004 Plan which are pending repurchase by Leap as a result of
termination of employment by employees. |
34
|
|
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
five months ended December 31, 2004 to reflect adjustments
that are further discussed in Note 3 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 2 to the consolidated financial statements included in
Item 8 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended December 31, | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(As Restated) | |
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
763,680 |
|
|
$ |
285,647 |
|
|
$ |
398,451 |
|
|
$ |
643,566 |
|
|
$ |
567,694 |
|
|
$ |
215,917 |
|
|
Equipment revenues
|
|
|
150,983 |
|
|
|
58,713 |
|
|
|
83,196 |
|
|
|
107,730 |
|
|
|
50,781 |
|
|
|
39,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
914,663 |
|
|
|
344,360 |
|
|
|
481,647 |
|
|
|
751,296 |
|
|
|
618,475 |
|
|
|
255,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(200,430 |
) |
|
|
(79,148 |
) |
|
|
(113,988 |
) |
|
|
(199,987 |
) |
|
|
(181,404 |
) |
|
|
(94,510 |
) |
|
Cost of equipment
|
|
|
(192,205 |
) |
|
|
(82,402 |
) |
|
|
(97,160 |
) |
|
|
(172,235 |
) |
|
|
(252,344 |
) |
|
|
(202,355 |
) |
|
Selling and marketing
|
|
|
(100,042 |
) |
|
|
(39,938 |
) |
|
|
(51,997 |
) |
|
|
(86,223 |
) |
|
|
(122,092 |
) |
|
|
(115,222 |
) |
|
General and administrative
|
|
|
(159,249 |
) |
|
|
(57,110 |
) |
|
|
(81,514 |
) |
|
|
(162,378 |
) |
|
|
(185,915 |
) |
|
|
(152,051 |
) |
|
Depreciation and amortization
|
|
|
(195,462 |
) |
|
|
(75,324 |
) |
|
|
(178,120 |
) |
|
|
(300,243 |
) |
|
|
(287,942 |
) |
|
|
(119,177 |
) |
|
Impairment of indefinite-lived intangible assets
|
|
|
(12,043 |
) |
|
|
|
|
|
|
|
|
|
|
(171,140 |
) |
|
|
(26,919 |
) |
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,054 |
) |
|
|
(16,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(859,431 |
) |
|
|
(333,922 |
) |
|
|
(522,779 |
) |
|
|
(1,116,260 |
) |
|
|
(1,072,939 |
) |
|
|
(683,315 |
) |
Gain on sale of wireless licenses and operating assets
|
|
|
14,587 |
|
|
|
|
|
|
|
532 |
|
|
|
4,589 |
|
|
|
364 |
|
|
|
143,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
69,819 |
|
|
|
10,438 |
|
|
|
(40,600 |
) |
|
|
(360,375 |
) |
|
|
(454,100 |
) |
|
|
(284,518 |
) |
Equity in net loss of and write-down of investments in and loans
receivable from unconsolidated wireless operating companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,000 |
) |
Minority interest in loss of consolidated subsidiary
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,957 |
|
|
|
1,812 |
|
|
|
|
|
|
|
779 |
|
|
|
6,345 |
|
|
|
26,424 |
|
Interest expense
|
|
|
(30,051 |
) |
|
|
(16,594 |
) |
|
|
(4,195 |
) |
|
|
(83,371 |
) |
|
|
(229,740 |
) |
|
|
(178,067 |
) |
Foreign currency transaction losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,257 |
) |
Gain on sale of unconsolidated wireless operating company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,518 |
|
|
|
|
|
Other income (expense), net
|
|
|
1,423 |
|
|
|
(117 |
) |
|
|
(293 |
) |
|
|
(176 |
) |
|
|
(3,001 |
) |
|
|
8,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items and income taxes
|
|
|
51,117 |
|
|
|
(4,461 |
) |
|
|
(45,088 |
) |
|
|
(443,143 |
) |
|
|
(640,978 |
) |
|
|
(482,975 |
) |
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
962,444 |
|
|
|
(146,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
51,117 |
|
|
|
(4,461 |
) |
|
|
917,356 |
|
|
|
(589,385 |
) |
|
|
(640,978 |
) |
|
|
(482,975 |
) |
Income taxes
|
|
|
(21,151 |
) |
|
|
(3,930 |
) |
|
|
(4,166 |
) |
|
|
(8,052 |
) |
|
|
(23,821 |
) |
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
29,966 |
|
|
$ |
(8,391 |
) |
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
$ |
(664,799 |
) |
|
$ |
(483,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share(1)
|
|
$ |
0.50 |
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
$ |
(14.91 |
) |
|
$ |
(14.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share(1)
|
|
$ |
0.49 |
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
$ |
(14.91 |
) |
|
$ |
(14.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,135 |
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
|
|
44,591 |
|
|
|
33,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
61,003 |
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
|
|
44,591 |
|
|
|
33,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(As Restated) | |
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
293,073 |
|
|
$ |
141,141 |
|
|
$ |
84,070 |
|
|
$ |
100,860 |
|
|
$ |
242,979 |
|
Working capital (deficit)(2)
|
|
|
240,862 |
|
|
|
145,762 |
|
|
|
(2,254,809 |
) |
|
|
(2,144,420 |
) |
|
|
189,507 |
|
Restricted cash, cash equivalents and short-term investments
|
|
|
13,759 |
|
|
|
31,427 |
|
|
|
55,954 |
|
|
|
25,922 |
|
|
|
40,755 |
|
Total assets
|
|
|
2,506,318 |
|
|
|
2,220,887 |
|
|
|
1,756,843 |
|
|
|
2,163,702 |
|
|
|
2,450,895 |
|
Long-term debt(2)
|
|
|
588,333 |
|
|
|
371,355 |
|
|
|
|
|
|
|
|
|
|
|
1,676,845 |
|
Total stockholders equity (deficit)
|
|
|
1,514,357 |
|
|
|
1,470,056 |
|
|
|
(893,356 |
) |
|
|
(296,786 |
) |
|
|
358,440 |
|
|
|
(1) |
Refer to Notes 3 and 6 to the consolidated financial
statements included in Item 8 of this report for an
explanation of the calculation of basic and diluted net income
(loss) per common share. |
|
(2) |
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. |
36
|
|
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 Audited Annual and
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 reported
consolidated financial statements for the five months ended
December 31, 2004 and consolidated financial information
for the interim period ended September 30, 2004 and the
quarterly periods ended March 31, 2005, June 30, 2005
and September 30, 2005. See Note 3 to the consolidated
financial statements in Item 8 of this report for
additional information.
Our Business. We offer wireless voice and data services
primarily under the brand Cricket on a flat-rate,
unlimited-usage basis without requiring fixed-term contracts. As
of December 31, 2005, we had approximately 1,668,000
customers and our networks covered 27.7 million POPs. As of
December 31, 2005, we and ANB 1 License owned wireless
licenses covering a total of 70.0 million POPs, including
licenses covering 22.5 million POPs that we and ANB 1
License acquired during 2005. We are currently building out or
have launched the new markets that we and ANB 1 License have
acquired, and we anticipate that our combined network footprint
will cover over 42 million POPs by the end of 2006.
Our premium Cricket service plan offers unlimited local and
domestic long distance combined with unlimited use of multiple
calling features and messaging services for a flat rate of
$45 per month. We also offer a similar plan without calling
features and messaging services for $40 per month and a
service which allows customers to make unlimited calls within a
local calling area and receive unlimited calls from any area for
a flat rate of $35 per month. In June 2004 we began
offering additional enhancements that include games and other
improved data services. In September 2005 we launched our first
per-minute prepaid service, Jump Mobile, to bring Crickets
attractive value proposition to customers who prefer active
control over their wireless usage and to better target the urban
youth market. In April 2005 we added instant messaging and
multimedia (picture) messaging to our product portfolio. In
May 2005 we introduced our Travel Time roaming
option for our customers who occasionally travel outside their
Cricket service area.
We believe that our business model can be expanded successfully
into adjacent and new markets because we offer a differentiated
service and attractive value proposition to our customers at
costs significantly lower than most of our competitors. In 2005
we acquired four wireless licenses in the FCCs
Auction #58 covering 11.3 million POPs and ANB 1
License acquired nine licenses covering 10.2 million POPs.
In August 2005 we launched service in our newly acquired Fresno,
California market to form a cluster with our existing Modesto
and Visalia, California markets, which doubled our Central
Valley network footprint to 2.4 million POPs. In November
2005 we entered into a series of agreements with CSM and the
controlling members of WLPCS to obtain a 73.3% non-controlling
equity interest in LCW Wireless, which currently holds a license
for the Portland, Oregon market. We have agreed to contribute
our existing Eugene and Salem, Oregon markets to LCW Wireless to
create a new Oregon market cluster covering 3.2 million
POPs. Completion of this transaction is subject to customary
closing conditions, including FCC approval and other third party
consents. For a further discussion of our arrangements with ANB
1 and LCW Wireless, see Item 1. Business
Arrangements with Alaska Native Broadband and
Item 1. Business Arrangements with LCW
Wireless above. In addition, in March 2006, Cricket
Licensee (Reauction), Inc., entered into an agreement with a
debtor-in-possession
for the purchase of 13 wireless licenses in North Carolina and
South Carolina for an aggregate purchase price of
$31.8 million. Completion of this transaction is subject to
customary closing conditions, including FCC approval and
approval of the court in which the sellers bankruptcy is
proceeding, as
37
well as the receipt of an FCC order agreeing to extend certain
build-out requirements with respect to certain of the licenses.
We currently intend to seek additional opportunities to enhance
our current market clusters and expand into new geographic
markets by participating in FCC spectrum auctions (including the
upcoming auction allocated for Advanced Wireless
Services), by acquiring spectrum and related assets from
third parties, or by participating in new partnerships or joint
ventures.
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
$110 million revolving credit facility (which was undrawn
at December 31, 2005). From time to time, we may also
generate additional liquidity through the sale of assets that
are not material to or are not required for the ongoing
operation of our business. We may also generate liquidity from
offerings of debt and/or equity securities.
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.
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
accounting principles generally accepted in the United States of
America. These principles require us to make estimates and
judgments that affect our reported amounts of assets and
liabilities, our disclosure of contingent assets and
liabilities, and our reported amounts of revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition and the valuation
of deferred tax assets, long-lived assets and indefinite-lived
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.
Principles of Consolidation
The consolidated financial statements include the accounts of
Leap and its wholly owned subsidiaries as well as the accounts
of ANB 1 and its wholly owned subsidiary ANB 1 License. We own a
75% non-controlling interest in ANB 1. We consolidate our
interest in ANB 1 in accordance with FASB Interpretation
No. 46-R, Consolidation of Variable Interest
Entities, because ANB 1 is a variable interest entity and
we will absorb a majority of ANB 1s expected losses. All
significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Revenues and Cost of Revenues
Crickets business revenues principally 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.
Service revenues for customers who pay in arrears are recognized
only after the service has been rendered and payment has been
received. This is because we do not require any of our customers
to sign fixed-term service commitments or submit to a credit
check, and therefore some of our customers may be more likely to
terminate service for inability to pay than the customers of
other wireless providers. 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. Activation fees
are allocated to the other elements of the multiple element
arrangement (including service and equipment) on a relative fair
value basis. Because
38
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, and activation fees as described above. 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. Sales of handsets to third-party dealers and
distributors are recognized as equipment revenues when service
is activated by customers, as we do not have sufficient relevant
historical experience to establish reasonable estimates of
returns by such dealers and distributors. 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. Returns of handsets and
accessories are insignificant.
Wireless Licenses
Wireless licenses are initially recorded at cost and are not
amortized. Wireless licenses are considered to be
indefinite-lived intangible assets 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. Wireless licenses to be
disposed of by sale are carried at the lower of carrying value
or fair value less costs to sell.
Goodwill and Other Intangible Assets
Goodwill represents the excess of reorganization value over the
fair value of identified tangible and intangible assets recorded
in connection with fresh-start reporting. Other intangible
assets were recorded upon adoption of fresh-start reporting and
consist of customer relationships and trademarks, which are
being amortized on a straight-line basis over their estimated
useful lives of four and fourteen years, respectively.
Impairment 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.
Impairment of Indefinite-Lived Intangible Assets
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.
Our wireless licenses in our operating markets are combined into
a single unit of accounting for purposes of testing impairment
because management believes that these wireless licenses as a
group represent the highest and best use of the assets, and 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. 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
39
operations. We conduct our annual tests for impairment during
the third quarter of each year. Estimates of the 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.
Income Taxes
We estimate income taxes in each of the jurisdictions in which
we operate. This process involves estimating the actual current
tax liability together with assessing temporary differences
resulting from differing treatments of items for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities. Deferred tax assets are also established
for the expected future tax benefit to be derived from tax loss
and tax credit carryforwards. We must then assess the likelihood
that our deferred tax assets will be recovered from future
taxable income. To the extent that we believe that recovery is
not likely, we 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. We
have recorded a full valuation allowance on our net deferred tax
assets for all periods presented because of uncertainties
related to the utilization of the 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. Pursuant to
SOP 90-7, future
decreases in the valuation allowance established in fresh-start
reporting are accounted for as a reduction in goodwill. Tax rate
changes are reflected in income in the period such changes are
enacted.
Subscriber Recognition and Disconnect Policies
We recognize a new customer as a gross addition in the month
that he or she activates service. The customer must pay his or
her monthly service amount by the payment due date or his or her
handset will be disabled after a grace period of up to three
days. When a handset is disabled, the customer is suspended and
will not be able to make or receive calls. Any call attempted by
a suspended customer is routed directly to our customer service
center in order to arrange payment. In order to re-establish
service, a customer must make all past-due payments and pay a
$15 reconnection charge to re-establish service. If a new
customer does not pay all amounts due on his or her first bill
within 30 days of the due date, the account is disconnected
and deducted from gross customer additions during the month in
which the customers service was discontinued. If a
customer has made payment on his or her first bill and in a
subsequent month does not pay all amounts due within
30 days of the due date, the account is disconnected and
counted as churn.
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 fixed-term contracts 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 have their service
terminated due to an inability to pay than the average industry
customer.
Seasonality
Our customer activity is influenced by seasonal effects related
to traditional retail selling periods and other factors that
arise from our target customer base. Based on historical
results, we generally expect new sales activity to be highest in
the first and fourth quarters, and customer turnover, or churn,
to be highest in the third quarter and lowest in the first
quarter. However, sales activity and churn can be strongly
affected by the launch of new markets, promotional activity and
competitive actions, which have the ability to reduce or
outweigh certain seasonal effects.
Costs and Expenses
Our costs and expenses include:
Cost of Service. The major components of cost of service
are: charges from other communications companies for long
distance, roaming and content download services provided to our
customers; charges from other communications companies for their
transport and termination of calls originated by our customers
and
40
destined for customers of other networks; and expenses for the
rent of towers, network facilities, engineering operations,
field technicians and related utility and maintenance charges
and the salary and overhead charges associated with these
functions.
Cost of Equipment. Cost of equipment includes the cost of
handsets and accessories purchased from third-party vendors and
resold to our customers in connection with our services, as well
as
lower-of-cost-or-market
write-downs associated with excess and damaged handsets and
accessories.
Selling and Marketing. Selling and marketing expenses
primarily include advertising and promotional costs associated
with acquiring new customers and store operating costs such as
rent and retail associates salaries and overhead charges.
General and Administrative Expenses. General and
administrative expenses primarily include salary and overhead
costs associated with our customer care, billing, information
technology, finance, human resources, accounting, legal and
executive functions.
Depreciation and Amortization. Depreciation of property
and equipment is applied using the straight-line method over the
estimated useful lives of our assets once the assets are placed
in service. The following table summarizes the depreciable lives
(in years):
|
|
|
|
|
|
|
|
Depreciable | |
|
|
Life | |
|
|
| |
Network equipment:
|
|
|
|
|
|
Switches
|
|
|
10 |
|
|
Switch power equipment
|
|
|
15 |
|
|
Cell site equipment, and site acquisitions and improvements
|
|
|
7 |
|
|
Towers
|
|
|
15 |
|
|
Antennae
|
|
|
3 |
|
Computer hardware and software
|
|
|
3-5 |
|
Furniture, fixtures and retail and office equipment
|
|
|
3-7 |
|
Amortization of intangible assets is applied using the
straight-line method over the estimated useful lives of four
years for customer relationships and fourteen years for
trademarks.
Stock-based Compensation. We measure compensation expense
for our employee and director stock-based compensation plans
using the intrinsic value method. Unearned compensation recorded
for the intrinsic value of restricted stock awards is amortized
on a straight-line basis over the maximum vesting period of the
awards of either three or five years. Stock-based compensation
is included in operating expenses (cost of service, selling and
marketing expense, or general and administrative expense) and
allocated to the appropriate line item based on employee
classification.
Results of Operations
As a result of our emergence from Chapter 11 bankruptcy and
the application of fresh-start reporting, we became a new entity
for financial reporting purposes. In this report, we are
referred to as the Predecessor Company for periods
on or prior to July 31, 2004, and we are referred to as the
Successor Company for periods 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 our plan of reorganization as well as the
adjustments for fresh-start reporting. 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 Successor
Companys results for the year ended December 31, 2005
and with the Predecessor Companys results for the year
ended December 31, 2003. For a more detailed description of
fresh-start reporting, see Note 2 to the consolidated
financial statements included in Item 8 of this report.
41
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(As Restated) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
763,680 |
|
|
$ |
684,098 |
|
|
$ |
643,566 |
|
|
Equipment revenues
|
|
|
150,983 |
|
|
|
141,909 |
|
|
|
107,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
914,663 |
|
|
|
826,007 |
|
|
|
751,296 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(200,430 |
) |
|
|
(193,136 |
) |
|
|
(199,987 |
) |
|
Cost of equipment
|
|
|
(192,205 |
) |
|
|
(179,562 |
) |
|
|
(172,235 |
) |
|
Selling and marketing
|
|
|
(100,042 |
) |
|
|
(91,935 |
) |
|
|
(86,223 |
) |
|
General and administrative
|
|
|
(159,249 |
) |
|
|
(138,624 |
) |
|
|
(162,378 |
) |
|
Depreciation and amortization
|
|
|
(195,462 |
) |
|
|
(253,444 |
) |
|
|
(300,243 |
) |
|
Impairment of indefinite-lived intangible assets
|
|
|
(12,043 |
) |
|
|
|
|
|
|
(171,140 |
) |
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
(24,054 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(859,431 |
) |
|
|
(856,701 |
) |
|
|
(1,116,260 |
) |
Gain on sale of wireless licenses and operating assets
|
|
|
14,587 |
|
|
|
532 |
|
|
|
4,589 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
69,819 |
|
|
|
(30,162 |
) |
|
|
(360,375 |
) |
Minority interest in loss of consolidated subsidiary
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,957 |
|
|
|
1,812 |
|
|
|
779 |
|
Interest expense
|
|
|
(30,051 |
) |
|
|
(20,789 |
) |
|
|
(83,371 |
) |
Other income (expense), net
|
|
|
1,423 |
|
|
|
(410 |
) |
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items and income taxes
|
|
|
51,117 |
|
|
|
(49,549 |
) |
|
|
(443,143 |
) |
Reorganization items, net
|
|
|
|
|
|
|
962,444 |
|
|
|
(146,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
51,117 |
|
|
|
912,895 |
|
|
|
(589,385 |
) |
Income taxes
|
|
|
(21,151 |
) |
|
|
(8,096 |
) |
|
|
(8,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
29,966 |
|
|
$ |
904,799 |
|
|
$ |
(597,437 |
) |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
At December 31, 2005, we had approximately
1,668,000 customers compared to approximately
1,570,000 customers at December 31, 2004. Gross
customer additions for the years ended December 31, 2005
and 2004 were approximately 872,000 and 808,000, respectively,
and net customer additions during these periods were
approximately 117,000 and 97,000, respectively. Net customer
additions for the year ended December 31, 2005 exclude the
effect of the transfer of approximately 19,000 customers as
a result of the sale of our operating markets in Michigan in
August 2005. The weighted average number of customers during the
year ended December 31, 2005 and 2004 was approximately
1,609,000 and 1,529,000, respectively. At December 31,
2005, the total POPs covered by our networks in our operating
markets was approximately 27.7 million.
42
During the year ended December 31, 2005, service revenues
increased $79.6 million, or 12%, compared to the year ended
December 31, 2004. The increase in service revenues
resulted from the higher average number of customers and higher
average revenues per customer compared to the prior year. The
higher average revenues per customer primarily reflects
increased customer adoption of higher-value, higher-priced
service offerings and reduced utilization of service-based
mail-in rebate promotions in 2005.
During the year ended December 31, 2005, equipment revenues
increased $9.1 million, or 6%, compared to the year ended
December 31, 2004. This increase resulted primarily from a
7% increase in handset sales due to customer additions and sales
to existing subscribers.
For the year ended December 31, 2005, cost of service
increased $7.3 million, or 4%, compared to the year ended
December 31, 2004, even though service revenues increased
by 12% during the same period. The increase in cost of service
was primarily attributable to $9.7 million in additional
long distance and other product usage costs, a $3.0 million
increase in lease costs and stock-based compensation expense of
$1.2 million. These increases were partially offset by
decreases of $3.3 million in software maintenance costs and
$1.3 million in labor and related costs. We generally
expect that cost of service in 2006 will increase with growth in
customers and product usage, and the introduction and customer
adoption of new products. In addition, new market launches in
2006 will contribute to increases in cost of service associated
with incremental fixed and variable network costs.
For the year ended December 31, 2005, cost of equipment
increased $12.6 million, or 7%, compared to the year ended
December 31, 2004. Cost of equipment increased by
$5.4 million due to increases in costs to support our
handset warranty exchange and replacement programs. The
remaining increase of $7.2 million was due primarily to the
increase in handsets sold, partially offset by slightly lower
handset costs.
For the year ended December 31, 2005, selling and marketing
expenses increased $8.1 million, or 9%, compared to the
year ended December 31, 2004. The increase in selling and
marketing expenses was primarily due to increases of
$4.4 million in store and staffing costs, $2.5 million
in media and advertising costs and $1.0 million in
stock-based compensation expense.
For the year ended December 31, 2005, general and
administrative expenses increased $20.6 million, or 15%,
compared to the year ended December 31, 2004. The increase
in general and administrative expenses consisted primarily of
increases of $12.3 million in professional services, which
includes costs incurred to meet our Sarbanes-Oxley
Section 404 requirements, $10.0 million in stock-based
compensation expense, $2.3 million in franchise taxes and
other related fees. These increases were partially offset by a
reduction in customer care, billing and other general and
administrative costs of $3.6 million and labor and related
costs of $1.2 million.
During the year ended December 31, 2005, we recorded
stock-based compensation expense of $12.2 million in
connection with the grant of restricted common shares and
deferred stock units exercisable for common stock. The total
intrinsic value of the deferred stock units of $6.9 million
was recognized as expense because they vested immediately upon
grant. The total intrinsic value of the restricted stock awards
as of the measurement date was recorded as unearned compensation
in the consolidated balance sheet as of December 31, 2005.
The unearned compensation is amortized on a straight-line basis
over the maximum vesting period of the awards of either three or
five years. Stock-based compensation expense of
$5.3 million was recorded for the amortization of the
unearned compensation for the year ended December 31, 2005.
During the year ended December 31, 2005, depreciation and
amortization expenses decreased $58.0 million, or 23%,
compared to the year ended December 31, 2004. 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 reporting at July 31, 2004. Depreciation and
amortization expense for the year ended December 31, 2005
also included amortization expense of $34.5 million related
to identifiable intangible assets recorded upon the adoption of
fresh-start reporting. As a result of the build-out and
operation of our planned new markets, we expect a significant
increase in depreciation and amortization expense in the future.
43
During the year ended December 31, 2005, we recorded
impairment charges of $12.0 million. Of this amount,
$0.6 million was recorded to reduce the carrying value of
certain non-operating wireless licenses to their estimated fair
market value as a result of our annual impairment test of
wireless licenses performed in the third fiscal quarter of 2005.
The remaining $11.4 million was recorded during the second
fiscal quarter of 2005 in connection with the sale of our
Anchorage, Alaska and Duluth, Minnesota wireless licenses. We
adjusted the carrying values of those licenses to their
estimated fair market values, which were based on the agreed
upon sales prices.
During the year ended December 31, 2005, interest income
increased $8.1 million, or 450%, compared to the year ended
December 31, 2004. The increase in interest income was
primarily due to increased average cash, cash equivalent and
investment balances in 2005 as compared to the prior year. In
addition, during the seven months ended July 31, 2004, we
classified interest earned during the bankruptcy proceedings as
a reorganization item, in accordance with
SOP 90-7.
During the year ended December 31, 2005, interest expense
increased $9.3 million, or 45%, compared to the year ended
December 31, 2004. The increase in interest expense
resulted from the application of
SOP 90-7 until our
emergence from bankruptcy, which required that, commencing on
April 13, 2003 (the date of the filing of the
Companys bankruptcy petition, or 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, which comprised substantially all of our debt. Upon
our emergence from bankruptcy, we began accruing interest on the
newly issued 13% senior secured
pay-in-kind notes. The
pay-in-kind notes were
repaid in January 2005 and replaced with a $500 million
term loan. The term loan was increased by $100 million on
July 22, 2005. At December 31, 2005, the effective
interest rate on the $600 million term loan was 6.6%,
including the effect of interest rate swaps described below. The
increase in interest expense resulting from our emergence from
bankruptcy was partially offset by the capitalization of
$8.7 million of interest during the year ended
December 31, 2005. We capitalize interest costs associated
with our wireless licenses and property and equipment during the
build-out of a new market. The amount of such capitalized
interest depends on the particular markets being built out, the
carrying values of the licenses and property and equipment
involved in those markets and the duration of the build-out. We
expect capitalized interest to be significant during the
build-out of our planned new markets.
During the year ended December 31, 2005, we completed the
sale of 23 wireless licenses and substantially all of our
operating assets in our Michigan markets for
$102.5 million, resulting in a gain of $14.6 million.
We also completed the sale of our Anchorage, Alaska and Duluth,
Minnesota licenses for $10.0 million. No gain or loss was
recorded on this sale as these licenses had already been written
down to the agreed upon sales price.
During the year ended December 31, 2005, there were no
reorganization items. Reorganization items for the year ended
December 31, 2004 represented amounts incurred by the
Predecessor Company as a direct result of the Chapter 11
filings and consisted primarily of the net gain on the discharge
of liabilities, the cancellation of equity upon our emergence
from bankruptcy, the application of fresh-start reporting,
income from the settlement of pre-petition liabilities and
interest income earned while we were in bankruptcy, partially
offset by professional fees for legal, financial advisory and
valuation services directly associated with our Chapter 11
filings and reorganization process.
During the year ended December 31, 2005, we recorded income
tax expense of $21.2 million compared to income tax expense
of $8.1 million for the year ended December 31, 2004.
Income tax expense for the year ended December 31, 2004
consisted primarily of the tax effect of the amortization, for
income tax purposes, of wireless licenses and tax-deductible
goodwill related to deferred tax liabilities. During the year
ended December 31, 2005, we recorded income tax expense at
an effective tax rate of 41.4%. Despite the fact that we record
a full valuation allowance on our deferred tax assets, we
recognized income tax expense for the year because the release
of valuation allowance associated with the reversal of deferred
tax assets recorded in fresh-start reporting is recorded as a
reduction of goodwill rather than as a reduction of income tax
expense. The effective tax rate for 2005 was higher than the
statutory tax rate due primarily to permanent items not
deductible for tax purposes. We incurred tax losses for the year
due to, among other things, tax deductions
44
associated with the repayment of the 13% senior secured
pay-in-kind notes and
tax losses and reversals of deferred tax assets associated with
the sale of wireless licenses and operating assets. Therefore,
we expect to pay only minimal cash taxes for 2005.
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. The weighted
average number of customers during the years ended
December 31, 2004 and 2003 was approximately 1,529,000 and
1,479,000, respectively. At December 31, 2004, the total
potential customer base covered by our networks in 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 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 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 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.
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.
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
45
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.
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.
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 reporting 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 reporting.
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, Inc. 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 reporting.
For the year ended December 31, 2004, income tax expense
remained consistent with the year ended December 31, 2003.
Deferred income tax expense related to the tax effect of the
amortization, for income tax purposes, of wireless licenses
decreased as a result of the conversion of certain
license-related deferred tax liabilities to deferred tax assets
upon the revaluation of the book bases of our wireless licenses
in fresh-start reporting. This decrease was largely offset by
the tax effect of the amortization, for income tax purposes, of
tax-deductible goodwill which arose in connection with the
adoption of fresh-start reporting as of July 31, 2004.
46
Summary of Quarterly Results of Operations
The following table presents our unaudited condensed
consolidated quarterly statement of operations data for 2005 (in
thousands). It has been derived from our unaudited consolidated
financial statements which have been restated for the interim
periods for the three months ended March 31, 2005,
June 30, 2005 and September 30, 2005 to reflect
adjustments that are further discussed in Note 3 to the
consolidated financial statements included in Item 8 of
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(As Restated) | |
|
(As Restated) | |
|
(As Restated) | |
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
185,981 |
|
|
$ |
189,704 |
|
|
$ |
193,675 |
|
|
$ |
194,320 |
|
|
Equipment revenues
|
|
|
42,389 |
|
|
|
37,125 |
|
|
|
36,852 |
|
|
|
34,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
228,370 |
|
|
|
226,829 |
|
|
|
230,527 |
|
|
|
228,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(50,197 |
) |
|
|
(49,608 |
) |
|
|
(50,304 |
) |
|
|
(50,321 |
) |
|
Cost of equipment
|
|
|
(49,178 |
) |
|
|
(42,799 |
) |
|
|
(49,576 |
) |
|
|
(50,652 |
) |
|
Selling and marketing
|
|
|
(22,995 |
) |
|
|
(24,810 |
) |
|
|
(25,535 |
) |
|
|
(26,702 |
) |
|
General and administrative
|
|
|
(36,035 |
) |
|
|
(42,423 |
) |
|
|
(41,306 |
) |
|
|
(39,485 |
) |
|
Depreciation and amortization
|
|
|
(48,104 |
) |
|
|
(47,281 |
) |
|
|
(49,076 |
) |
|
|
(51,001 |
) |
|
Impairment of indefinite-lived intangible assets
|
|
|
|
|
|
|
(11,354 |
) |
|
|
(689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(206,509 |
) |
|
|
(218,275 |
) |
|
|
(216,486 |
) |
|
|
(218,161 |
) |
Gain (loss) on sale of wireless licenses and operating assets
|
|
|
|
|
|
|
|
|
|
|
14,593 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
21,861 |
|
|
|
8,554 |
|
|
|
28,634 |
|
|
|
10,770 |
|
Minority interest in loss of consolidated subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
Interest income
|
|
|
1,903 |
|
|
|
1,176 |
|
|
|
2,991 |
|
|
|
3,887 |
|
Interest expense
|
|
|
(9,123 |
) |
|
|
(7,566 |
) |
|
|
(6,679 |
) |
|
|
(6,683 |
) |
Other income (expense), net
|
|
|
(1,286 |
) |
|
|
(39 |
) |
|
|
2,352 |
|
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
13,355 |
|
|
|
2,125 |
|
|
|
27,298 |
|
|
|
8,339 |
|
Income taxes
|
|
|
(5,839 |
) |
|
|
(1,022 |
) |
|
|
(10,901 |
) |
|
|
(3,389 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
7,516 |
|
|
$ |
1,103 |
|
|
$ |
16,397 |
|
|
$ |
4,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The following table presents the Predecessor and Successor
Companies unaudited combined condensed consolidated
quarterly statement of operations data for 2004 (in thousands).
It has been derived from our unaudited consolidated financial
statements which have been restated for the interim periods for
the two months ended September 30, 2004 and the three
months ended December 31, 2004 to reflect adjustments that
are further discussed in Note 3 to the consolidated
financial statements included in Item 8 of this report. For
purposes of 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) | |
|
(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 |
) |
|
|
(76,386 |
) |
|
|
(55,820 |
) |
|
|
(45,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(229,079 |
) |
|
|
(220,709 |
) |
|
|
(205,270 |
) |
|
|
(201,643 |
) |
Gain on sale of wireless licenses and operating assets
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
(2,851 |
) |
|
|
(1,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(28,030 |
) |
|
$ |
(18,145 |
) |
|
$ |
957,531 |
|
|
$ |
(6,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 SEC, 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
48
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 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. Other
companies may calculate this measure differently.
CPGA is selling and marketing costs (excluding applicable
stock-based compensation expense, the gain or loss on sale of
handsets (generally defined as cost of equipment less equipment
revenue) and 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. Other companies may calculate this measure
differently.
CCU is cost of service and general and administrative costs
(excluding applicable stock-based compensation expense, 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.
Other companies may calculate this measure differently.
Churn, which 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
49
customer retention over time and to compare our customer
retention to that of other wireless communications providers.
Other companies may calculate this measure differently.
The following table shows metric information for 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
| |
|
Year Ended | |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ARPU
|
|
$ |
39.03 |
|
|
$ |
39.24 |
|
|
$ |
40.22 |
|
|
$ |
39.74 |
|
|
$ |
39.56 |
|
CPGA
|
|
$ |
128 |
|
|
$ |
138 |
|
|
$ |
142 |
|
|
$ |
158 |
|
|
$ |
142 |
|
CCU
|
|
$ |
18.94 |
|
|
$ |
18.43 |
|
|
$ |
19.52 |
|
|
$ |
18.67 |
|
|
$ |
18.89 |
|
Churn
|
|
|
3.3 |
% |
|
|
3.9 |
% |
|
|
4.4 |
% |
|
|
4.1 |
% |
|
|
3.9 |
% |
Reconciliation of Non-GAAP Financial Measures
We utilize certain financial measures, as described above, that
are widely used in the industry but that 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 (in thousands, except gross customer
additions and CPGA):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
| |
|
Year Ended | |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Selling and marketing expense
|
|
$ |
22,995 |
|
|
$ |
24,810 |
|
|
$ |
25,535 |
|
|
$ |
26,702 |
|
|
$ |
100,042 |
|
|
Less stock-based compensation expense included in selling and
marketing expense
|
|
|
|
|
|
|
(693 |
) |
|
|
(203 |
) |
|
|
(125 |
) |
|
|
(1,021 |
) |
|
Plus cost of equipment
|
|
|
49,178 |
|
|
|
42,799 |
|
|
|
49,576 |
|
|
|
50,652 |
|
|
|
192,205 |
|
|
Less equipment revenue
|
|
|
(42,389 |
) |
|
|
(37,125 |
) |
|
|
(36,852 |
) |
|
|
(34,617 |
) |
|
|
(150,983 |
) |
|
Less net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
(4,012 |
) |
|
|
(3,484 |
) |
|
|
(4,917 |
) |
|
|
(3,775 |
) |
|
|
(16,188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPGA
|
|
$ |
25,772 |
|
|
$ |
26,307 |
|
|
$ |
33,139 |
|
|
$ |
38,837 |
|
|
$ |
124,055 |
|
Gross customer additions
|
|
|
201,467 |
|
|
|
191,288 |
|
|
|
233,699 |
|
|
|
245,817 |
|
|
|
872,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPGA
|
|
$ |
128 |
|
|
$ |
138 |
|
|
$ |
142 |
|
|
$ |
158 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
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
(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, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Cost of service
|
|
$ |
50,197 |
|
|
$ |
49,608 |
|
|
$ |
50,304 |
|
|
$ |
50,321 |
|
|
$ |
200,430 |
|
|
Plus general and administrative expense
|
|
|
36,035 |
|
|
|
42,423 |
|
|
|
41,306 |
|
|
|
39,485 |
|
|
|
159,249 |
|
|
Less stock-based compensation expense included in cost of
service and general and administrative expense
|
|
|
|
|
|
|
(6,436 |
) |
|
|
(2,518 |
) |
|
|
(2,270 |
) |
|
|
(11,224 |
) |
|
Plus net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
4,012 |
|
|
|
3,484 |
|
|
|
4,917 |
|
|
|
3,775 |
|
|
|
16,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CCU
|
|
$ |
90,244 |
|
|
$ |
89,079 |
|
|
$ |
94,009 |
|
|
$ |
91,311 |
|
|
$ |
364,643 |
|
Weighted-average number of customers
|
|
|
1,588,372 |
|
|
|
1,611,524 |
|
|
|
1,605,222 |
|
|
|
1,630,011 |
|
|
|
1,608,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCU
|
|
$ |
18.94 |
|
|
$ |
18.43 |
|
|
$ |
19.52 |
|
|
$ |
18.67 |
|
|
$ |
18.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
$110 million revolving credit facility (which was undrawn
at December 31, 2005). From time to time, we may also
generate additional liquidity through the sale of assets that
are not material to or are not required for the ongoing
operation of our business. We may also generate liquidity from
offerings of debt and/or equity in the capital markets. At
December 31, 2005, we had a total of $384.1 million in
unrestricted cash, cash equivalents and short-term investments.
As of December 31, 2005, we also had restricted cash, cash
equivalents and short-term investments of $13.8 million
that included funds set aside or pledged to satisfy remaining
administrative claims and priority claims against Cricket and
Leap, and cash restricted for other purposes. In August 2005, we
completed the sale of our Michigan markets and 23 wireless
licenses for $102.5 million. We believe that our existing
cash and investments, liquidity under our revolving credit
facility and anticipated cash flows from operations will be
sufficient to meet our operating and capital requirements
through at least the next twelve months.
We currently intend to seek opportunities to enhance our current
market clusters and expand into new geographic markets by
acquiring additional spectrum. For example, we may purchase
spectrum and related assets from third parties, and we are
considering participating (directly and/or by partnering with
another entity) as a bidder in the FCCs auction of
90 MHz of spectrum allocated for Advanced Wireless
Services, commonly referred to as the AWS Auction or
Auction #66. We anticipate financing any purchases of
spectrum or assets, and any related build-out and initial
operating costs, with cash from operations, our existing cash,
cash equivalents and short-term investments, borrowings under
our revolving credit facility, and proceeds from offerings of
debt and/or equity securities. The amounts we may seek to raise
through any such offerings may be substantial.
Operating Activities
Cash provided by operating activities was $308.2 million
during the year ended December 31, 2005 compared to cash
provided by operating activities of $190.4 million during
the year ended December 31, 2004. The increase was
primarily attributable to higher net income (net of income from
reorganization items, depreciation and amortization expense and
non-cash stock-based compensation expense) and the timing of
51
payments on accounts payable in the year ended December 31,
2005, partially offset by interest payments on Crickets
13% senior secured
pay-in-kind notes and
FCC debt.
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, partially
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, partially 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 during the bankruptcy.
Investing Activities
Cash used in investing activities was $332.1 million during
the year ended December 31, 2005 compared to
$96.6 million during the year ended December 31, 2004.
This increase was due primarily to an increase in payments by
subsidiaries of Cricket and ANB 1 for the purchase of
wireless licenses totaling $244.0 million, an increase in
purchases of property and equipment of $125.3 million, and
a decrease in restricted investment activity of
$22.6 million, partially offset by a net increase in the
sale of investments of $65.7 million and proceeds from the
sale of wireless licenses and operating assets of
$106.8 million.
Cash used in investing activities was $96.6 million during
the year ended December 31, 2004, compared to
$56.5 million for the year ended December 31, 2003,
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, partially offset by the purchase
of investments of $134.5 million and the purchase of
property and equipment of $77.2 million.
Financing Activities
Cash provided by financing activities during the year ended
December 31, 2005 was $175.8 million, which consisted
primarily of borrowings under our new term loan of
$600.0 million, less amounts which were used to repay the
FCC debt of $40.0 million, to repay the
pay-in-kind notes of
$372.7 million, to make quarterly payments under the term
loan totaling $5.5 million and to pay debt issuance costs
of $7.0 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 indebtedness upon our
emergence from bankruptcy.
Secured Credit Facility
Long-term debt as of December 31, 2005 consisted of a
senior secured credit agreement, referred to in this report as
the Credit Agreement, which included
$600 million of fully-drawn term loans and an undrawn
$110 million revolving credit facility available until
January 2010. Under our Credit Agreement, the term loans bear
interest at the London Interbank Offered Rate (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 $500 million of
the term loans must be repaid in 20 quarterly payments of
$1.25 million each, which commenced on March 31, 2005,
followed by four quarterly payments of $118.75 million
each, commencing March 31, 2010. Outstanding borrowings
under $100 million of the term loans must be repaid in
18 quarterly payments of approximately $278,000 each, which
commenced on September 30, 2005, followed by four quarterly
payments of $23.75 million each, commencing March 31,
2010.
The maturity date for outstanding borrowings under our revolving
credit facility is January 10, 2010. The commitment of the
lenders under the revolving credit facility may be reduced in
the event mandatory
52
prepayments are required under the Credit Agreement and by
one-twelfth of the original aggregate revolving credit
commitment on January 1, 2008 and by one-sixth of the
original aggregate revolving credit commitment on
January 1, 2009 (each such amount 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 would currently
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 consolidated leverage ratio.
The facilities under the Credit Agreement are guaranteed by Leap
and all of its direct and indirect domestic subsidiaries (other
than Cricket, which is the primary obligor, and ANB 1 and
ANB 1 License) and are secured by all present and future
personal property and owned real property of Leap, Cricket and
such direct and indirect domestic subsidiaries. Under the Credit
Agreement, we are subject to certain limitations, including
limitations on our ability to: incur additional debt or sell
assets, with restrictions on the use of proceeds; make certain
investments and acquisitions; grant liens; and 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 subject to
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. The
Credit Agreement allows us to invest up to $325 million in
ANB 1 and ANB 1 License and up to $60 million in
other joint ventures and allows us to provide limited guarantees
for the benefit of ANB 1 License and other joint ventures.
Affiliates of Highland Capital Management, L.P. (a beneficial
stockholder of Leap and an affiliate of James D. Dondero, a
director of Leap) participated in the syndication of the Credit
Agreement in the following amounts: $109 million of the
$600 million of term loans and $30 million of the
$110 million revolving credit facility.
At December 31, 2005, the effective interest rate on the
term loans was 6.6%, including the effect of interest rate
swaps, and the outstanding indebtedness was $594.4 million.
The terms of the Credit Agreement require us to enter into
interest rate hedging agreements in an amount equal to at least
50% of our outstanding indebtedness. In accordance with this
requirement, in April 2005 we entered into interest rate swap
agreements with respect to $250 million of our debt. These
swap agreements effectively fix the interest rate on
$250 million of the outstanding indebtedness at 6.7%
through June 2007. In July 2005, we entered into another
interest rate swap agreement with respect to a further
$105 million of our outstanding indebtedness. This swap
agreement effectively fixes the interest rate on
$105 million of the outstanding indebtedness at 6.8%
through June 2009. The $3.5 million fair value of the swap
agreements at December 31, 2005 was recorded in other
assets in our consolidated balance sheet with a corresponding
increase in other comprehensive income, net of tax.
Our restatement of our historical consolidated financial results
as described in Note 3 to the financial statements included
in Item 8 of this report may have resulted in defaults
under the Credit Agreement. On March 10, 2006, the required
lenders under the Credit Agreement granted a waiver of the
potential defaults, subject to conditions which we have met.
Capital Expenditures and Other Asset Acquisitions and
Dispositions
Capital Expenditures. During the year ended
December 31, 2005 we incurred approximately
$208.8 million in capital expenditures. These capital
expenditures were primarily for: (i) expansion and
improvement of our existing wireless networks, (ii) the
build-out and launch of the Fresno, California market and the
related expansion and network change-out of our existing Visalia
and Modesto/ Merced markets, (iii) costs associated with
the build-out of markets covered by licenses acquired in
Auction #58, (iv) costs incurred by ANB 1 License
in connection with the initial development of licenses
ANB 1 License acquired in the FCCs Auction #58,
and (v) initial expenditures for EVDO technology.
53
We currently expect to incur between $430 million and
$500 million in capital expenditures, including capitalized
interest, for the year ending December 31, 2006.
Auction #58 Properties and Build-Out. In May 2005,
our wholly owned subsidiary, Cricket Licensee (Reauction), Inc.,
completed the purchase of four wireless licenses covering
approximately 11.3 million POPs in the FCCs Auction
#58 for $166.9 million.
In September 2005, ANB 1 License completed the purchase of
nine wireless licenses covering approximately 10.2 million
POPs in Auction #58 for $68.2 million. We have made
acquisition loans under our senior secured credit facility with
ANB 1 License, as amended, in the aggregate amount of
$64.2 million, which were used by ANB 1 License,
together with $4.0 million of equity contributions, to
purchase the Auction #58 wireless licenses. In addition, we
have committed to loan ANB 1 License up to
$85.8 million in additional funds to finance its initial
build-out costs and working capital requirements, of which
$24.8 million was drawn as of December 31, 2005.
However, ANB 1 License will need to obtain additional
capital from Cricket or another third party to build out and
launch its networks. Under Crickets Credit Agreement, we
are permitted to invest up to an aggregate of $325 million
in loans to and equity investments in ANB 1 and ANB 1
License. We expect to increase availability under our senior
secured credit facility with ANB 1 License and to make
additional equity investments in ANB 1 during the first
half of 2006.
We currently expect to launch commercial operations in the
markets covered by the licenses we acquired in Auction #58
and we have commenced build-out activities. Pursuant to a
management services agreement, we are also providing services to
ANB 1 License with respect to the build-out and launch of
the licenses it acquired in Auction #58. See
Item 1. Business Arrangements with Alaska
Native Broadband above for further discussion of our
arrangements with ANB 1.
Other Acquisitions and Dispositions. In June 2005, we
completed the purchase of a wireless license to provide service
in Fresno, California and related assets for $27.6 million.
We launched service in Fresno on August 2, 2005.
On August 3, 2005, we completed the sale of 23 wireless
licenses and substantially all of the operating assets in our
Michigan markets for $102.5 million, resulting in a gain of
$14.6 million. We had not launched commercial operations in
most of the markets covered by the licenses sold.
In November 2005, we signed an agreement to sell our wireless
licenses and operating assets in our Toledo and Sandusky, Ohio
markets in exchange for $28.5 million and an equity
interest in LCW Wireless, a designated entity which owns a
wireless license in the Portland, Oregon market. We also agreed
to contribute to the joint venture approximately
$25 million and two wireless licenses and related operating
assets in Eugene and Salem, Oregon, which would increase our
non-controlling equity interest in LCW Wireless to 73.3%.
Completion of these transactions is subject to customary closing
conditions, including FCC approval and other third party
consents. Although we expect to receive FCC approval and satisfy
the other conditions, we cannot assure you that the FCC will
grant such approval or that the other conditions will be
satisfied. See Item 1. Business
Arrangements with LCW Wireless above for further
discussion of our arrangements with LCW Wireless.
In December 2005, we completed the sale of non-operating
wireless licenses in Anchorage, Alaska and Duluth, Minnesota
covering 0.9 million POPs for $10.0 million. During
the second quarter of fiscal 2005, we recorded impairment
charges of $11.4 million to adjust the carrying values of
these licenses to their estimated fair values, which were based
on the agreed upon sales prices.
On March 1, 2006, we entered into an agreement with a
debtor-in-possession
for the purchase of 13 wireless licenses in North Carolina and
South Carolina for an aggregate purchase price of
$31.8 million. Completion of this transaction is subject to
customary closing conditions, including FCC approval and
approval of the bankruptcy court in which the sellers
bankruptcy is proceeding, as well as the receipt of an FCC order
agreeing to extend certain build-out requirements with respect
to certain of the licenses. Although we expect to receive such
approvals and orders and to satisfy the other conditions, we
cannot assure you that such approvals and order will be granted
or that the other conditions will be satisfied.
54
Certain Contractual Obligations, Commitments and
Contingencies
The table below summarizes information as of December 31,
2005 regarding certain of our future minimum contractual
obligations for the next five years and thereafter (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
|
|
|
|
| |
|
|
|
|
Total | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt(1)
|
|
$ |
594,444 |
|
|
$ |
6,111 |
|
|
$ |
6,111 |
|
|
$ |
6,111 |
|
|
$ |
6,111 |
|
|
$ |
570,000 |
|
|
$ |
|
|
Contractual interest(2)
|
|
|
186,897 |
|
|
|
40,562 |
|
|
|
40,545 |
|
|
|
40,527 |
|
|
|
40,219 |
|
|
|
25,044 |
|
|
|
|
|
Origination fees for ANB 1 investment(3)
|
|
|
4,700 |
|
|
|
2,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
700 |
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
310,701 |
|
|
|
48,381 |
|
|
|
35,628 |
|
|
|
33,291 |
|
|
|
31,231 |
|
|
|
30,033 |
|
|
|
132,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,096,742 |
|
|
$ |
97,054 |
|
|
$ |
83,284 |
|
|
$ |
80,929 |
|
|
$ |
78,261 |
|
|
$ |
625,077 |
|
|
$ |
132,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amounts shown for Crickets term loans include principal
only. Interest on the term loans, calculated at the current
interest rate, is stated separately. |
|
(2) |
Contractual interest is based on the current interest rates in
effect at December 31, 2005 for debt outstanding as of that
date. |
|
(3) |
Reflects contractual obligation based on an amendment executed
on January 9, 2006. |
The table above does not include contractual obligations to
purchase a minimum of $90.5 million of products and
services from Nortel Networks Inc. from October 11, 2005
through October 10, 2008 and contractual obligations to
purchase a minimum of $119 million of products and services
from Lucent Technologies Inc. from October 1, 2005 through
September 30, 2008. The table also does not include the
contractual obligation to purchase wireless licenses in North
and South Carolina for $31.8 million.
The table above also does not include the following contractual
obligations relating to ANB 1: (1) Crickets
obligation to loan to ANB 1 License up to $85.8 million to
finance its initial build-out costs and working capital
requirements, of which approximately $24.8 million was
drawn at December 31, 2005, (2) Crickets
obligation to pay $2.7 million plus interest to ANB if ANB
exercises its right to sell its membership interest in ANB 1 to
Cricket following the initial build-out of ANB 1 Licenses
wireless licenses, and (3) ANB 1s obligation to
purchase a minimum of $39.5 million and $6.0 million
of products and services from Nortel Networks Inc. and Lucent
Technologies Inc., respectively, over the same three year terms
as those for Cricket.
The table above also does not include the following contractual
obligations relating to LCW Wireless which would arise at and
after the closing of the LCW Wireless transaction:
(1) Crickets obligation to contribute
$25.0 million to LCW Wireless in cash,
(2) Crickets obligation to contribute approximately
$3.0 million to LCW Wireless in the form of replacement
network equipment, (3) Crickets obligation to pay up
to $3.0 million to WLPCS if WLPCS exercises its right to
sell its membership interest in LCW Wireless to Cricket, and
(4) Crickets obligation to pay to CSM an amount equal
to CSMs pro rata share of the fair value of the
outstanding membership interests in LCW Wireless, determined
either through an appraisal or based on a multiple of
Leaps enterprise value divided by its adjusted EBITDA and
applied to LCW Wireless adjusted EBITDA to impute an
enterprise value and equity value for LCW Wireless, if CSM
exercises its right to sell its membership interest in LCW
Wireless to Cricket.
55
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements at
December 31, 2005.
Recent Accounting Pronouncements
In October 2005, the FASB issued FASB Staff Position, or FSP,
No. FAS 13-1,
Accounting for Rental Costs Incurred During a Construction
Period. This FSP requires that rental costs associated
with ground or building operating leases that are incurred
during a construction period should be recognized as rental
expense and included in income from continuing operations. This
applies to operating lease arrangements entered into prior to
the effective date of the FSP. Adoption of this FSP is required
for the first quarter beginning January 1, 2006. We
estimate that construction period rents will total between
$5.5 million and $6.5 million during fiscal 2006.
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 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 the 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 results of operations.
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, which
addresses the accounting and reporting for changes in accounting
principles and replaces APB 20 and SFAS 3.
SFAS 154 requires retrospective application of changes in
accounting principles to prior financial statements unless it is
impracticable to determine either the period-specific effects or
the cumulative effect of the change. When it is impracticable to
determine the period-specific effects of an accounting change on
one or more individual prior periods presented,
SFAS No. 154 requires that the new accounting
principle be applied to the balances of assets and liabilities
as of the beginning of the earliest period for which
retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of
retained earnings for that period rather than being reported in
the income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle
to all prior periods, SFAS No. 154 requires that the
new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable.
SFAS No. 154 becomes effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005.
In March 2005, the FASB issued Interpretation No. 47 which
serves as an interpretation of FASB Statement No. 143,
Accounting for Conditional Asset Retirement
Obligations. FIN No. 47 clarifies that the term
conditional asset retirement obligation as used in
SFAS 143 refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not
be within the control of the entity. Under FIN No. 47,
an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. The fair
value of a liability for the conditional asset retirement
obligation should be recognized when incurred, generally upon
acquisition, construction, or development or through the normal
operation of the asset. Uncertainty about the timing or method
of settlement of a conditional asset retirement obligation
should be factored into the measurement of the liability when
sufficient information exists. The fair
56
value of a liability for the conditional asset retirement
obligation should be recognized when incurred.
FIN No. 47 is effective for the year ended
December 31, 2005. Adoption of FIN No. 47 did not
have a material effect on our consolidated financial position or
results of operations for the year ended December 31, 2005.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Interest Rate Risk: As of December 31, 2005, we had
$600 million in floating rate debt under our secured Credit
Agreement. Changes in interest rates would not significantly
affect the fair value of our outstanding indebtedness. The terms
of our Credit Agreement require that we enter into interest rate
hedging agreements in an amount equal to at least 50% of our
outstanding indebtedness. In accordance with this requirement,
we entered into interest rate swap agreements with respect to
$250 million of our indebtedness in April 2005, and with
respect to an additional $105 million of our indebtedness
in July 2005. The swap agreements effectively fix the interest
rate on $250 million of our indebtedness at 6.7% through
June 2007, and on $105 million of our indebtedness at 6.8%
through June 2009.
As of December 31, 2005, net of the effect of the interest
rate swap agreements described above, our outstanding floating
rate indebtedness totaled $239.4 million. The primary base
interest rate is the three month LIBOR. Assuming the outstanding
balance on our floating rate indebtedness remains constant over
a year, a 100 basis point increase in the interest rate
would decrease pre-tax income and cash flow, net of the effect
of the swap agreements, by approximately $2.4 million.
Hedging Policy: Our policy is to maintain interest rate
hedges when required by credit agreements. We do not currently
engage in any hedging activities against foreign currency
exchange rates or for speculative purposes.
57
|
|
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.:
We have completed an integrated audit of Leap Wireless
International, Inc.s 2005 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2005 and an audit of its 2004
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated Financial Statements
In our opinion, the accompanying consolidated balance sheets 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 (Successor
Company) at December 31, 2005 and 2004, and the results of
their operations and their cash flows for the year ended
December 31, 2005 and the five months ended
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 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 of financial statements 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 2 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.
As discussed in Note 3, the Company has restated its 2004
consolidated financial statements.
Internal Control Over Financial Reporting
Also, we have audited managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A, that Leap Wireless
International, Inc. did not maintain effective internal control
over financial reporting as of December 31, 2005 because
(1) the Company did not maintain a sufficient complement of
personnel with the appropriate skills, training and
Company-specific experience in its accounting, financial
reporting and tax functions and (2) the Company did not
maintain effective internal controls surrounding the preparation
of its income tax provision based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express opinions on managements assessment and on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit of internal control over financial
reporting 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 effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
58
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
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. The
following material weaknesses have been identified and included
in managements assessment as of December 31, 2005:
|
|
|
|
|
The Company did not maintain a sufficient complement of
personnel with the appropriate skills, training and
Company-specific experience to identify and address the
application of generally accepted accounting principles in
complex or non-routine transactions. Specifically, the Company
has experienced staff turnover, and as a result, has experienced
a lack of knowledge transfer to new employees within its
accounting, financial reporting and tax functions. In addition,
the Company does not have a full-time director of its tax
function. This control deficiency contributed to the material
weakness described below. Additionally, this control deficiency
could result in a misstatement of accounts and disclosures that
would result in a material misstatement to the Companys
interim or annual consolidated financial statements that would
not be prevented or detected. Accordingly, management has
determined that this control deficiency constitutes a material
weakness. |
|
|
|
The Company did not maintain effective controls over its
accounting for income taxes. Specifically, the Company did not
have adequate controls designed and in place to ensure the
completeness and accuracy of the deferred income tax provision
and the related deferred tax assets and liabilities and the
related goodwill in conformity with generally accepted
accounting principles. This control deficiency resulted in the
restatement of the Companys consolidated financial
statements for the five months ended December 31, 2004 and
the consolidated financial statements for the two months ended
September 30, 2004 and the quarters ended March 31,
2005, June 30, 2005, and September 30, 2005, as well
as audit adjustments to the 2005 annual consolidated financial
statements. Additionally, this control deficiency could result
in a misstatement of income tax expense, deferred tax assets and
liabilities and the related goodwill that would result in a
material misstatement to the Companys interim or annual
consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined that this
control deficiency constitutes a material weakness. |
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the 2005 consolidated financial statements, and our opinion
regarding the effectiveness of the Companys internal
control over financial reporting does not affect our opinion on
those consolidated financial statements.
59
In our opinion, managements assessment that Leap Wireless
International, Inc. did not maintain effective internal control
over financial reporting as of December 31, 2005 is fairly
stated, in all material respects, based on criteria established
in Internal Control Integrated Framework
issued by the COSO. Also, in our opinion, because of the
effects of the material weaknesses described above on the
achievement of the objectives of the control criteria, Leap
Wireless International, Inc. has not maintained effective
internal control over financial reporting as of
December 31, 2005 based on criteria established in
Internal Control Integrated Framework issued
by the COSO.
PricewaterhouseCoopers LLP
San Diego, California
March 21, 2006
60
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 statements of
operations, of cash flows and of stockholders equity
(deficit) present fairly, in all material respects, the
results of operations and cash flows of Leap Wireless
International, Inc. and its subsidiaries (Predecessor Company)
for the seven months ended July 31, 2004 and the year 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 2 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
61
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
(See Note 3) | |
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
293,073 |
|
|
$ |
141,141 |
|
Short-term investments
|
|
|
90,981 |
|
|
|
113,083 |
|
Restricted cash, cash equivalents and short-term investments
|
|
|
13,759 |
|
|
|
31,427 |
|
Inventories
|
|
|
37,320 |
|
|
|
25,816 |
|
Other current assets
|
|
|
29,237 |
|
|
|
37,531 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
464,370 |
|
|
|
348,998 |
|
Property and equipment, net
|
|
|
621,946 |
|
|
|
575,486 |
|
Wireless licenses
|
|
|
821,288 |
|
|
|
652,653 |
|
Assets held for sale (Note 11)
|
|
|
15,145 |
|
|
|
|
|
Goodwill
|
|
|
431,896 |
|
|
|
457,637 |
|
Other intangible assets, net
|
|
|
113,554 |
|
|
|
151,461 |
|
Deposits for wireless licenses
|
|
|
|
|
|
|
24,750 |
|
Other assets
|
|
|
38,119 |
|
|
|
9,902 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,506,318 |
|
|
$ |
2,220,887 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
167,770 |
|
|
$ |
91,093 |
|
Current maturities of long-term debt (Note 7)
|
|
|
6,111 |
|
|
|
40,373 |
|
Other current liabilities
|
|
|
49,627 |
|
|
|
71,770 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
223,508 |
|
|
|
203,236 |
|
Long-term debt (Note 7)
|
|
|
588,333 |
|
|
|
371,355 |
|
Other long-term liabilities
|
|
|
178,359 |
|
|
|
176,240 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
990,200 |
|
|
|
750,831 |
|
|
|
|
|
|
|
|
Minority interest
|
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock authorized 10,000,000 shares,
$.0001 par value; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stock authorized 160,000,000 shares,
$.0001 par value; 61,202,806 and 60,000,000 shares
issued and outstanding at December 31, 2005 and 2004,
respectively
|
|
|
6 |
|
|
|
6 |
|
|
Additional paid-in capital
|
|
|
1,511,580 |
|
|
|
1,478,392 |
|
|
Unearned stock-based compensation
|
|
|
(20,942 |
) |
|
|
|
|
|
Retained earnings (accumulated deficit)
|
|
|
21,575 |
|
|
|
(8,391 |
) |
|
Accumulated other comprehensive income
|
|
|
2,138 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,514,357 |
|
|
|
1,470,056 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
2,506,318 |
|
|
$ |
2,220,887 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
62
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
|
|
|
|
(See Note 3) | |
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
763,680 |
|
|
$ |
285,647 |
|
|
$ |
398,451 |
|
|
$ |
643,566 |
|
|
Equipment revenues
|
|
|
150,983 |
|
|
|
58,713 |
|
|
|
83,196 |
|
|
|
107,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
914,663 |
|
|
|
344,360 |
|
|
|
481,647 |
|
|
|
751,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(200,430 |
) |
|
|
(79,148 |
) |
|
|
(113,988 |
) |
|
|
(199,987 |
) |
|
Cost of equipment
|
|
|
(192,205 |
) |
|
|
(82,402 |
) |
|
|
(97,160 |
) |
|
|
(172,235 |
) |
|
Selling and marketing
|
|
|
(100,042 |
) |
|
|
(39,938 |
) |
|
|
(51,997 |
) |
|
|
(86,223 |
) |
|
General and administrative
|
|
|
(159,249 |
) |
|
|
(57,110 |
) |
|
|
(81,514 |
) |
|
|
(162,378 |
) |
|
Depreciation and amortization
|
|
|
(195,462 |
) |
|
|
(75,324 |
) |
|
|
(178,120 |
) |
|
|
(300,243 |
) |
|
Impairment of indefinite-lived intangible assets
|
|
|
(12,043 |
) |
|
|
|
|
|
|
|
|
|
|
(171,140 |
) |
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,054 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(859,431 |
) |
|
|
(333,922 |
) |
|
|
(522,779 |
) |
|
|
(1,116,260 |
) |
Gain on sale of wireless licenses and operating assets
|
|
|
14,587 |
|
|
|
|
|
|
|
532 |
|
|
|
4,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
69,819 |
|
|
|
10,438 |
|
|
|
(40,600 |
) |
|
|
(360,375 |
) |
Minority interest in loss of consolidated subsidiary
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,957 |
|
|
|
1,812 |
|
|
|
|
|
|
|
779 |
|
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)
|
|
|
(30,051 |
) |
|
|
(16,594 |
) |
|
|
(4,195 |
) |
|
|
(83,371 |
) |
Other income (expense), net
|
|
|
1,423 |
|
|
|
(117 |
) |
|
|
(293 |
) |
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items and income taxes
|
|
|
51,117 |
|
|
|
(4,461 |
) |
|
|
(45,088 |
) |
|
|
(443,143 |
) |
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
962,444 |
|
|
|
(146,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
51,117 |
|
|
|
(4,461 |
) |
|
|
917,356 |
|
|
|
(589,385 |
) |
Income taxes
|
|
|
(21,151 |
) |
|
|
(3,930 |
) |
|
|
(4,166 |
) |
|
|
(8,052 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
29,966 |
|
|
$ |
(8,391 |
) |
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.50 |
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.49 |
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,135 |
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
61,003 |
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
63
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
|
|
|
|
(See Note 3) | |
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
29,966 |
|
|
$ |
(8,391 |
) |
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense
|
|
|
12,245 |
|
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
Depreciation and amortization
|
|
|
195,462 |
|
|
|
75,324 |
|
|
|
178,120 |
|
|
|
300,243 |
|
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
(962,444 |
) |
|
|
146,242 |
|
|
|
Deferred income tax expense
|
|
|
21,088 |
|
|
|
3,823 |
|
|
|
3,370 |
|
|
|
7,713 |
|
|
|
Impairment of indefinite-lived intangible assets
|
|
|
12,043 |
|
|
|
|
|
|
|
|
|
|
|
171,140 |
|
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,054 |
|
|
|
Gain on sale of wireless licenses and operating assets
|
|
|
(14,587 |
) |
|
|
|
|
|
|
(532 |
) |
|
|
(4,589 |
) |
|
|
Other
|
|
|
1,815 |
|
|
|
|
|
|
|
(805 |
) |
|
|
166 |
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(11,504 |
) |
|
|
8,923 |
|
|
|
(17,059 |
) |
|
|
12,723 |
|
|
|
|
Other assets
|
|
|
3,570 |
|
|
|
(21,132 |
) |
|
|
(5,343 |
) |
|
|
(5,910 |
) |
|
|
|
Accounts payable and accrued liabilities
|
|
|
57,101 |
|
|
|
(4,421 |
) |
|
|
4,761 |
|
|
|
24,575 |
|
|
|
|
Other liabilities
|
|
|
1,081 |
|
|
|
15,626 |
|
|
|
12,861 |
|
|
|
80,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities before reorganization
activities
|
|
|
308,280 |
|
|
|
69,752 |
|
|
|
126,119 |
|
|
|
159,562 |
|
|
|
Net cash used for reorganization activities
|
|
|
|
|
|
|
|
|
|
|
(5,496 |
) |
|
|
(115,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
308,280 |
|
|
|
69,752 |
|
|
|
120,623 |
|
|
|
44,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(208,808 |
) |
|
|
(49,043 |
) |
|
|
(34,456 |
) |
|
|
(37,488 |
) |
|
Prepayments for purchases of property and equipment
|
|
|
(9,828 |
) |
|
|
5,102 |
|
|
|
1,215 |
|
|
|
(7,183 |
) |
|
Purchases of wireless licenses
|
|
|
(243,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of wireless licenses and operating assets
|
|
|
108,800 |
|
|
|
|
|
|
|
2,000 |
|
|
|
4,722 |
|
|
Purchases of investments
|
|
|
(307,021 |
) |
|
|
(47,368 |
) |
|
|
(87,201 |
) |
|
|
(134,245 |
) |
|
Sales and maturities of investments
|
|
|
329,043 |
|
|
|
32,494 |
|
|
|
58,333 |
|
|
|
144,188 |
|
|
Restricted cash, cash equivalents and investments, net
|
|
|
(338 |
) |
|
|
12,537 |
|
|
|
9,810 |
|
|
|
(26,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(332,112 |
) |
|
|
(46,278 |
) |
|
|
(50,299 |
) |
|
|
(56,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(418,285 |
) |
|
|
(36,727 |
) |
|
|
|
|
|
|
(4,742 |
) |
|
Issuance of common stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
Minority interest
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(6,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
175,764 |
|
|
|
(36,727 |
) |
|
|
|
|
|
|
(4,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
151,932 |
|
|
|
(13,253 |
) |
|
|
70,324 |
|
|
|
(16,790 |
) |
Cash and cash equivalents at beginning of period
|
|
|
141,141 |
|
|
|
154,394 |
|
|
|
84,070 |
|
|
|
100,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
293,073 |
|
|
$ |
141,141 |
|
|
$ |
154,394 |
|
|
$ |
84,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
64
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
Retained | |
|
Other | |
|
|
|
|
Common Stock | |
|
Additional | |
|
Unearned | |
|
Earnings | |
|
Comprehensive | |
|
|
|
|
| |
|
Paid-In | |
|
Stock-Based | |
|
(Accumulated | |
|
Income | |
|
|
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Deficit) | |
|
(Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(597,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock-based compensation plans
|
|
|
35 |
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913,190 |
|
|
|
|
|
|
|
913,190 |
|
|
|
Net unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock-based compensation 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 Company common stock
|
|
|
(58,704,224 |
) |
|
|
(6 |
) |
|
|
(1,155,236 |
) |
|
|
53 |
|
|
|
|
|
|
|
873 |
|
|
|
(1,154,316 |
) |
|
|
Issuance of Successor Company common stock and fresh-start
adjustments
|
|
|
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 (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,391 |
) |
|
|
|
|
|
|
(8,391 |
) |
|
|
Net unrealized holding gains on investments (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company balance at December 31, 2004 (as restated)
|
|
|
60,000,000 |
|
|
|
6 |
|
|
|
1,478,392 |
|
|
|
|
|
|
|
(8,391 |
) |
|
|
49 |
|
|
|
1,470,056 |
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,966 |
|
|
|
|
|
|
|
29,966 |
|
|
|
Net unrealized holding losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57 |
) |
|
|
(57 |
) |
|
|
Unrealized gains on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146 |
|
|
|
2,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock-based compensation plans
|
|
|
1,202,806 |
|
|
|
|
|
|
|
6,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,871 |
|
|
Unearned stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,317 |
|
|
|
(26,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,375 |
|
|
|
|
|
|
|
|
|
|
|
5,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company balance at December 31, 2005
|
|
|
61,202,806 |
|
|
$ |
6 |
|
|
$ |
1,511,580 |
|
|
$ |
(20,942 |
) |
|
$ |
21,575 |
|
|
$ |
2,138 |
|
|
$ |
1,514,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
65
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
|
|
Note 1. |
The Company and Nature of Business |
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 of America under the brands
Cricket®
and
Jumptm
Mobile. 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. The Cricket and Jump Mobile services are offered
by Leaps wholly owned subsidiary, Cricket Communications,
Inc. (Cricket). Leap, Cricket and their subsidiaries
are collectively referred to herein as the Company.
The Cricket and Jump Mobile services are also offered in certain
markets through Alaska Native Broadband 1 License, LLC
(ANB 1 License), a joint venture in which Cricket
indirectly owns a 75% non-controlling interest, through a 75%
non-controlling interest in Alaska Native Broadband 1, LLC
(ANB 1). The Company consolidates its 75%
non-controlling interest in ANB 1 (see Note 3).
|
|
Note 2. |
Reorganization and Fresh-Start Reporting |
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). On
October 22, 2003, the Bankruptcy Court confirmed the Fifth
Amended Joint Plan of Reorganization (the Plan of
Reorganization) of Leap, Cricket and their debtor
subsidiaries. All material conditions to the effectiveness of
the Plan of Reorganization were resolved on August 5, 2004,
and on August 16, 2004 (the Effective Date),
the Plan of Reorganization became effective and the Company
emerged from Chapter 11 bankruptcy. On that date, a new
Board of Directors of Leap was appointed, Leaps previously
existing stock, options and warrants were cancelled, and Leap
issued 60 million shares of new Leap common stock for
distribution to two classes of creditors. 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 Federal Communications Commission (FCC) (net of
the repayment of $45 million of principal and accrued
interest to the FCC on the Effective Date).
As of the Petition Date and through the adoption of fresh-start
reporting on July 31, 2004, 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. In accordance with
SOP 90-7, the
Company separately reported 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 debt with a book value
totaling approximately $2.4 billion as of the Petition Date.
The Company adopted the fresh-start reporting provisions of
SOP 90-7 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 consolidated financial statements,
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, 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
66
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
because of the effects of the consummation of the Plan of
Reorganization as well as the adjustments for fresh-start
reporting.
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. In implementing fresh-start reporting,
the Company allocated its reorganization value of approximately
$2.3 billion to the fair value of its assets in conformity
with procedures specified by Statement of Financial Accounting
Standards (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 fair value of 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 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
could also result in the requirement to recognize impairment
charges in future periods.
|
|
Note 3. |
Summary of Significant Accounting Policies |
Restatement of Previously Reported Audited Consolidated
and Unaudited Interim Financial Information
The Company has restated its historical consolidated financial
statements as of and for the five months ended December 31,
2004 and consolidated financial information for the interim
period ended September 30, 2004 and the quarterly periods
ended March 31, 2005, June 30, 2005 and
September 30, 2005. The determination to restate these
consolidated financial statements and interim financial
information was made by the Companys Audit Committee upon
the recommendation of management as a result of the
identification of the following errors related to the accounting
for deferred income taxes:
|
|
|
|
|
The tax bases of several wireless licenses were inaccurately
compiled by the Company during its adoption of fresh-start
reporting as of July 31, 2004, which had the effect in the
aggregate of understating wireless license deferred tax
liabilities and overstating wireless license deferred tax
assets. In addition, the misstatement of the tax bases of
operating licenses with deferred tax liabilities had the net
effect of overstating deferred income tax expense in the periods
subsequent to July 31, 2004. |
|
|
|
The Company incorrectly accounted for tax-deductible goodwill
upon the adoption of fresh-start reporting as of July 31,
2004, which had the effect of understating deferred tax
liabilities and understating deferred income tax expense in the
periods subsequent to July 31, 2004. |
|
|
|
In connection with the adoption of fresh-start reporting as of
July 31, 2004, the Company adopted the practice of netting
deferred tax assets associated with wireless licenses against
deferred tax liabilities associated with wireless licenses and,
as a result, did not record valuation allowances on its wireless
license deferred tax assets. However, because the Companys
wireless licenses have indefinite useful lives, the deferred tax
liabilities related to the licenses will not reverse until some
indefinite future period when a license is either sold or
written down due to impairment. As a result, the wireless
license deferred tax liabilities may not be used to support the
realization of the wireless license deferred tax assets and,
thus, may not be used to offset the wireless license deferred
tax assets. Accordingly, the Company has now determined that the
netting of deferred tax assets associated with wireless licenses
against deferred tax liabilities associated with wireless
licenses was not appropriate. Instead, valuation allowances
should have been recorded on the wireless license deferred tax
assets. |
67
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
The Company incorrectly accounted for the release of valuation
allowances on deferred tax assets recorded in fresh-start
reporting. The Company previously concluded that there had been
no release of fresh-start valuation allowances during the five
months ended December 31, 2004 and the nine months ended
September 30, 2005. However, the reversal of deferred tax
assets recorded in fresh-start reporting resulted in a release
of the related fresh-start valuation allowances. As restated,
the release of fresh-start valuation allowances is recorded as a
reduction of goodwill and resulted in deferred income tax
expense for the five months ended December 31, 2004 and the nine
months ended September 30, 2005. |
The following tables present the effects of the restatements on
the Companys previously issued consolidated financial
statements and interim consolidated financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
33,394 |
|
|
$ |
2,903 |
|
|
$ |
36,297 |
|
Goodwill
|
|
$ |
329,619 |
|
|
$ |
128,649 |
|
|
$ |
458,268 |
|
Other long-term liabilities
|
|
$ |
23,577 |
|
|
$ |
131,552 |
|
|
$ |
155,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Two Months Ended | |
|
|
September 30, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
|
(Unaudited) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
33,656 |
|
|
$ |
2,903 |
|
|
$ |
36,559 |
|
Goodwill
|
|
$ |
328,820 |
|
|
$ |
128,225 |
|
|
$ |
457,045 |
|
Other current liabilities
|
|
$ |
67,271 |
|
|
$ |
(159 |
) |
|
$ |
67,112 |
|
Other long-term liabilities
|
|
$ |
31,194 |
|
|
$ |
131,139 |
|
|
$ |
162,333 |
|
Accumulated deficit
|
|
$ |
(1,982 |
) |
|
$ |
148 |
|
|
$ |
(1,834 |
) |
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
2,704 |
|
|
$ |
(148 |
) |
|
$ |
2,556 |
|
Net loss
|
|
$ |
(1,982 |
) |
|
$ |
148 |
|
|
$ |
(1,834 |
) |
Comprehensive loss
|
|
$ |
(2,092 |
) |
|
$ |
148 |
|
|
$ |
(1,944 |
) |
Basic and diluted net loss per share
|
|
$ |
(0.03 |
) |
|
$ |
0.00 |
|
|
$ |
(0.03 |
) |
68
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Three Months Ended | |
|
|
December 31, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
35,144 |
|
|
$ |
2,387 |
|
|
$ |
37,531 |
|
Goodwill
|
|
$ |
329,619 |
|
|
$ |
128,018 |
|
|
$ |
457,637 |
|
Other current liabilities
|
|
$ |
71,965 |
|
|
$ |
(195 |
) |
|
$ |
71,770 |
|
Other long-term liabilities
|
|
$ |
45,846 |
|
|
$ |
130,394 |
|
|
$ |
176,240 |
|
Accumulated deficit
|
|
$ |
(8,629 |
) |
|
$ |
238 |
|
|
$ |
(8,391 |
) |
Accumulated other comprehensive income
|
|
$ |
81 |
|
|
$ |
(32 |
) |
|
$ |
49 |
|
Consolidated Statement of Operations Data:
|
|
|
(Unaudited) |
|
|
|
(Unaudited |
) |
|
|
(Unaudited |
) |
Income tax expense
|
|
$ |
1,464 |
|
|
$ |
(90 |
) |
|
$ |
1,374 |
|
Net loss
|
|
$ |
(6,647 |
) |
|
$ |
90 |
|
|
$ |
(6,557 |
) |
Comprehensive loss
|
|
$ |
(6,456 |
) |
|
$ |
58 |
|
|
$ |
(6,398 |
) |
Basic and diluted net loss per share
|
|
$ |
(0.11 |
) |
|
$ |
0.00 |
|
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Five Months Ended | |
|
|
December 31, 2004 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
35,144 |
|
|
$ |
2,387 |
|
|
$ |
37,531 |
|
Goodwill
|
|
$ |
329,619 |
|
|
$ |
128,018 |
|
|
$ |
457,637 |
|
Other current liabilities
|
|
$ |
71,965 |
|
|
$ |
(195 |
) |
|
$ |
71,770 |
|
Other long-term liabilities
|
|
$ |
45,846 |
|
|
$ |
130,394 |
|
|
$ |
176,240 |
|
Accumulated deficit
|
|
$ |
(8,629 |
) |
|
$ |
238 |
|
|
$ |
(8,391 |
) |
Accumulated other comprehensive income
|
|
$ |
81 |
|
|
$ |
(32 |
) |
|
$ |
49 |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
4,168 |
|
|
$ |
(238 |
) |
|
$ |
3,930 |
|
Net loss
|
|
$ |
(8,629 |
) |
|
$ |
238 |
|
|
$ |
(8,391 |
) |
Comprehensive loss
|
|
$ |
(8,548 |
) |
|
$ |
206 |
|
|
$ |
(8,342 |
) |
Basic and diluted net loss per share
|
|
$ |
(0.14 |
) |
|
$ |
0.00 |
|
|
$ |
(0.14 |
) |
69
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Three Months Ended | |
|
|
March 31, 2005 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
|
(Unaudited) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
34,275 |
|
|
$ |
2,387 |
|
|
$ |
36,662 |
|
Goodwill
|
|
$ |
329,619 |
|
|
$ |
124,337 |
|
|
$ |
453,956 |
|
Other current liabilities
|
|
$ |
70,753 |
|
|
$ |
(242 |
) |
|
$ |
70,511 |
|
Other long-term liabilities
|
|
$ |
28,951 |
|
|
$ |
131,861 |
|
|
$ |
160,812 |
|
Retained earnings (accumulated deficit)
|
|
$ |
4,017 |
|
|
$ |
(4,892 |
) |
|
$ |
(875 |
) |
Accumulated other comprehensive income
|
|
$ |
6 |
|
|
$ |
(3 |
) |
|
$ |
3 |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
709 |
|
|
$ |
5,130 |
|
|
$ |
5,839 |
|
Net income
|
|
$ |
12,646 |
|
|
$ |
(5,130 |
) |
|
$ |
7,516 |
|
Comprehensive income
|
|
$ |
12,652 |
|
|
$ |
(5,182 |
) |
|
$ |
7,470 |
|
Basic net income per share
|
|
$ |
0.21 |
|
|
$ |
(0.08 |
) |
|
$ |
0.13 |
|
Diluted net income per share
|
|
$ |
0.21 |
|
|
$ |
(0.09 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Three Months Ended | |
|
|
June 30, 2005 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
|
(Unaudited) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
27,678 |
|
|
$ |
2,387 |
|
|
$ |
30,065 |
|
Goodwill
|
|
$ |
329,619 |
|
|
$ |
119,819 |
|
|
$ |
449,438 |
|
Other current liabilities
|
|
$ |
65,272 |
|
|
$ |
(481 |
) |
|
$ |
64,791 |
|
Other long-term liabilities
|
|
$ |
39,128 |
|
|
$ |
128,500 |
|
|
$ |
167,628 |
|
Retained earnings
|
|
$ |
6,546 |
|
|
$ |
(6,318 |
) |
|
$ |
228 |
|
Accumulated other comprehensive loss
|
|
$ |
(1,288 |
) |
|
$ |
505 |
|
|
$ |
(783 |
) |
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$ |
(404 |
) |
|
$ |
1,426 |
|
|
$ |
1,022 |
|
Net income
|
|
$ |
2,529 |
|
|
$ |
(1,426 |
) |
|
$ |
1,103 |
|
Comprehensive income
|
|
$ |
1,235 |
|
|
$ |
(918 |
) |
|
$ |
317 |
|
Basic and diluted net income per share
|
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
70
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Three Months Ended | |
|
|
September 30, 2005 | |
|
|
| |
|
|
Previously | |
|
|
|
|
Reported | |
|
Adjustment | |
|
As Restated | |
|
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
(Unaudited) | |
|
(Unaudited) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$ |
26,282 |
|
|
$ |
2,387 |
|
|
$ |
28,669 |
|
Goodwill
|
|
$ |
329,619 |
|
|
$ |
107,763 |
|
|
$ |
437,382 |
|
Other current liabilities
|
|
$ |
59,513 |
|
|
$ |
(447 |
) |
|
$ |
59,066 |
|
Other long-term liabilities
|
|
$ |
83,286 |
|
|
$ |
93,819 |
|
|
$ |
177,105 |
|
Retained earnings (accumulated deficit)
|
|
$ |
(1,016 |
) |
|
$ |
17,641 |
|
|
$ |
16,625 |
|
Accumulated other comprehensive income
|
|
$ |
2,207 |
|
|
$ |
(863 |
) |
|
$ |
1,344 |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
34,860 |
|
|
$ |
(23,959 |
) |
|
$ |
10,901 |
|
Net income (loss)
|
|
$ |
(7,562 |
) |
|
$ |
23,959 |
|
|
$ |
16,397 |
|
Comprehensive income (loss)
|
|
$ |
(4,148 |
) |
|
$ |
22,672 |
|
|
$ |
18,524 |
|
Basic and diluted net income (loss) per share
|
|
$ |
(0.13 |
) |
|
$ |
0.40 |
|
|
$ |
0.27 |
|
Basis of Presentation
The consolidated financial statements include the accounts of
Leap and its wholly owned subsidiaries as well as the accounts
of ANB 1 and its wholly owned subsidiary ANB 1
License. The Company consolidates its interest in ANB 1 in
accordance with Financial Accounting Standards Board
(FASB) Interpretation
No. 46-R,
Consolidation of Variable Interest Entities, because
ANB 1 is a variable interest entity and the Company will absorb
a majority of ANB 1s expected losses. All significant
intercompany accounts and transactions have been eliminated in
the consolidated financial statements.
The consolidated financial statements are prepared in conformity
with 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.
Certain prior period amounts have been reclassified to conform
to the current year presentation.
Revenues and Cost of Revenues
Crickets business revenues principally 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.
Service revenues for customers who pay in arrears are recognized
only after the service has been rendered and payment has been
received. This is because the Company does not require any of
its customers to sign fixed-term service commitments or submit
to a credit check, and therefore some of its customers may be
more likely to terminate service for inability to pay than the
customers of other wireless providers. 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. Activation fees are allocated to the other elements of
the multiple element arrangement (including service and
equipment) 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
71
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fees entirely to equipment revenues and recognizes the
activation fees when received. Activation fees included in
equipment revenues during the year ended December 31, 2005,
the five months ended December 31, 2004 and the seven
months ended July 31, 2004 totaled $19.9 million,
$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, and activation fees as described above. 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. Sales of handsets to third-party dealers and
distributors are recognized as equipment revenues when service
is activated by customers, as the Company does not have
sufficient relevant historical experience to establish
reasonable estimates of returns by such dealers and
distributors. 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 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 are insignificant.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
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.
Short-Term Investments
Short-term investments consist of highly liquid fixed-income
investments with an original maturity at the time of purchase 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.
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.
Restricted Cash, Cash Equivalents and Short-Term Investments
Restricted cash, cash equivalents and short-term investments
consist primarily of amounts that the Company has set aside to
satisfy remaining allowed administrative claims and allowed
priority claims against Leap and Cricket following their
emergence from bankruptcy and investments in money market
accounts or certificates of deposit that have been pledged to
secure operating obligations.
72
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Property and equipment are initially recorded at cost. Additions
and improvements, including interest and certain labor costs
incurred during the construction period, are capitalized, while
expenditures that do not enhance the asset or extend its useful
life are charged to operating expenses as incurred. Interest is
capitalized on the carrying values of both wireless licenses and
equipment during the construction period. Depreciation is
applied using the straight-line method over the estimated useful
lives of the assets once the assets are placed in service.
The following table summarizes the depreciable lives for
property and equipment (in years):
|
|
|
|
|
|
|
|
Depreciable Life | |
|
|
| |
Network equipment:
|
|
|
|
|
|
Switches
|
|
|
10 |
|
|
Switch power equipment
|
|
|
15 |
|
|
Cell site equipment, and site acquisitions and improvements
|
|
|
7 |
|
|
Towers
|
|
|
15 |
|
|
Antennae
|
|
|
3 |
|
Computer hardware and software
|
|
|
3-5 |
|
Furniture, fixtures, retail and office equipment
|
|
|
3-7 |
|
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, rent expense 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. The Company capitalized
$8.7 million of interest to property and equipment during
the year ended December 31, 2005.
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.
Property and equipment to be disposed of by sale is not
depreciated and is carried at the lower of carrying value or
fair value less costs to sell. At December 31, 2005,
property and equipment with a net book value of
$5.4 million was classified in assets held for sale (see
Note 11). At December 31, 2004, there was no material
property and equipment to be disposed of by sale.
Wireless licenses are initially recorded at cost and are not
amortized. Wireless licenses are considered to be
indefinite-lived 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. Wireless
licenses to be disposed of by sale are carried at the lower of
carrying value or fair value less costs to sell. At
December 31, 2005, wireless licenses with a carrying value
of $8.2 million were classified in assets held for sale
(see Note 11). At December 31, 2004, wireless licenses
to be disposed of by sale were not significant.
73
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill and Other Intangible Assets
Goodwill represents the excess of reorganization value over the
fair value of identified tangible and intangible assets recorded
in connection with fresh-start reporting. Other intangible
assets were recorded upon adoption of fresh-start reporting and
consist of customer relationships and trademarks, which are
being amortized on a straight-line basis over their estimated
useful lives of four and fourteen years, respectively. At
December 31, 2005, intangible assets with a net book value of
$1.5 million were classified in assets held for sale (see
Note 11).
Impairment 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.
Impairment of Indefinite-Lived Intangible Assets
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 Companys wireless licenses in its
operating markets are combined into a single unit of accounting
for purposes of testing impairment because management believes
that these wireless licenses as a group represent the highest
and best use of the assets, and 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. 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. The Successor Company conducts its
annual tests for impairment during the third quarter of each
year. Estimates of the 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.
During fiscal 2005, the Company recorded impairment charges of
$12.0 million to reduce the carrying value of certain
non-operating wireless licenses to their estimated fair values.
During fiscal 2003, the Company recorded impairment charges
totaling $171.1 million to reduce the carrying value of its
wireless licenses to their estimated fair values.
Derivative Instruments and Hedging Activities
From time to time, the Company hedges the cash flows and fair
values of a portion of its long-term debt using interest rate
swaps. The Company enters into these derivative contracts to
manage its exposure to interest rate changes by achieving a
desired proportion of fixed rate versus variable rate debt. In
an interest rate swap, the Company agrees to exchange the
difference between a variable interest rate and either a fixed
or another variable interest rate, multiplied by a notional
principal amount. The Company does not use derivative
instruments for trading or other speculative purposes.
The Company records all derivatives in other assets or other
liabilities on its consolidated balance sheet at their fair
values. If the derivative is designated as a fair value hedge
and the hedging relationship qualifies for hedge accounting,
changes in the fair values of both the derivative and the hedged
portion of the debt are
74
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognized in interest expense in the Companys
consolidated statement of operations. If the derivative is
designated as a cash flow hedge and the hedging relationship
qualifies for hedge accounting, the effective portion of the
change in fair value of the derivative is recorded in other
comprehensive income (loss) and reclassified to interest expense
when the hedged debt affects interest expense. The ineffective
portion of the change in fair value of the derivative qualifying
for hedge accounting and changes in the fair values of
derivative instruments not qualifying for hedge accounting are
recognized in interest expense in the period of the change.
At inception of the hedge and quarterly thereafter, the Company
performs a correlation assessment to determine whether changes
in the fair values or cash flows of the derivatives are deemed
highly effective in offsetting changes in the fair values or
cash flows of the hedged items. If at any time subsequent to the
inception of the hedge, the correlation assessment indicates
that the derivative is no longer highly effective as a hedge,
the Company discontinues hedge accounting and recognizes all
subsequent derivative gains and losses in results of operations.
Operating Leases
Rent expense is recognized 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 long-term liabilities in the consolidated balance
sheets. Rent expense totaled $59.3 million for the year
ended December 31, 2005, $24.1 million and
$31.7 million for the five months ended December 31,
2004 and the seven months ended July 31, 2004,
respectively, and $58.4 million for the year ended
December 31, 2003.
Asset Retirement Obligations
The Company recognizes an asset retirement obligation and an
associated asset retirement cost when it has a legal obligation
in connection with the retirement of tangible long-lived assets.
These obligations arise from certain of the Companys
leases and relate primarily to the cost of removing its
equipment from such lease sites and restoring the sites to their
original condition. When the liability is initially recorded,
the Company capitalizes the cost of the asset retirement
obligation by increasing the carrying amount of the related
long-lived asset. The liability is initially recorded at its
present value and is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of
the related asset. Upon settlement of the obligation, any
difference between the cost to retire the asset and the
liability recorded is recognized in operating expenses in the
statement of operations.
Debt Discounts and Debt Issuance Costs
Debt discounts and debt issuance costs are amortized and
recognized as interest expense under the effective interest
method over the expected term of the related debt.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Advertising costs totaled $25.8 million for the year ended
December 31, 2005, $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 for the
year ended December 31, 2003.
Costs and Expenses
The Companys costs and expenses include:
Cost of Service. The major components of cost of service
are: charges from other communications companies for long
distance, roaming and content download services provided to the
Companys customers;
75
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
charges from other communications companies for their transport
and termination of calls originated by the Companys
customers and destined for customers of other networks; and
expenses for the rent of towers, network facilities, engineering
operations, field technicians and related utility and
maintenance charges and the salary and overhead charges
associated with these functions.
Cost of Equipment. Cost of equipment includes the cost of
handsets and accessories purchased from third-party vendors and
resold to the Companys customers in connection with its
services, as well as
lower-of-cost-or-market
write-downs associated with excess and damaged handsets and
accessories.
Selling and Marketing. Selling and marketing expenses
primarily include advertising and promotional costs associated
with acquiring new customers and store operating costs such as
rent and retail associates salaries and overhead charges.
General and Administrative Expenses. General and
administrative expenses primarily include salary and overhead
costs associated with the Companys customer care, billing,
information technology, finance, human resources, accounting,
legal and executive functions.
Stock-based Compensation
The Company measures compensation expense for its employee and
director stock-based compensation plans using the intrinsic
value 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 issued or outstanding. The
Company adopted the Leap Wireless International, Inc. 2004 Stock
Option, Restricted Stock and Deferred Stock Unit Plan (the
2004 Plan) in December 2004. During the year ended
December 31, 2005, the Company granted a total of
2,250,894 non-qualified stock options, 948,292 shares
of restricted common stock, net, and 246,484 deferred stock
units under the 2004 Plan. The non-qualified stock options were
granted with an exercise price equal to the fair market value of
the common stock on the date of grant. The restricted shares of
common stock were granted with an exercise price of
$0.0001 per share, and the weighted-average grant date
market price of the restricted common stock was $28.52 per
share. The deferred stock units were vested immediately upon
grant and allowed the holders to purchase common stock at a
purchase price of $0.0001 per share in a
30-day period
commencing on the earlier of August 15, 2005 or the date
the holders employment was terminated. The
weighted-average grant date market price of the deferred stock
units was $27.87 per share.
The Company recorded $12.2 million in stock-based
compensation expense for the year ended December 31, 2005,
resulting from the grant of the restricted common stock and
deferred stock units. The total intrinsic value of the deferred
stock units of $6.9 million was recorded as stock-based
compensation expense during the year ended December 31,
2005 because the deferred stock units were immediately vested
upon grant. The total intrinsic value of the restricted stock
awards as of the measurement dates was recorded as unearned
compensation, which is included in stockholders equity in
the consolidated balance sheet as of December 31, 2005. The
unearned compensation is amortized on a straight-line basis over
the maximum vesting period of the awards of either three or five
years. For the year ended December 31, 2005,
$5.3 million was recorded in stock-based compensation
expense for the amortization of unearned compensation.
76
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the effects on net income (loss) and
net income (loss) per share if the Company measured compensation
expense for its stock-based compensation plans using a fair
value method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
As reported net income (loss)
|
|
$ |
29,966 |
|
|
$ |
(8,391 |
) |
|
$ |
913,190 |
|
|
$ |
(597,437 |
) |
|
Add back stock-based compensation expense (benefit) included in
net income (loss)
|
|
|
12,245 |
|
|
|
|
|
|
|
(837 |
) |
|
|
243 |
|
|
Less net pro forma compensation (expense) benefit
|
|
|
(20,085 |
) |
|
|
|
|
|
|
6,209 |
|
|
|
(10,805 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
22,126 |
|
|
$ |
(8,391 |
) |
|
$ |
918,562 |
|
|
$ |
(607,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.50 |
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.37 |
|
|
$ |
(0.14 |
) |
|
$ |
15.67 |
|
|
$ |
(10.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.49 |
|
|
$ |
(0.14 |
) |
|
$ |
15.58 |
|
|
$ |
(10.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.36 |
|
|
$ |
(0.14 |
) |
|
$ |
15.67 |
|
|
$ |
(10.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the amount of stock-based compensation
expense included in operating expenses (allocated to the
appropriate line item based on employee classification) in the
consolidated statement of operations for the year ended
December 31, 2005:
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
2005 |
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
Cost of service
|
|
$ |
1,204 |
|
|
Selling and marketing expenses
|
|
|
1,021 |
|
|
General and administrative expenses
|
|
|
10,020 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$ |
12,245 |
|
|
|
|
|
|
The weighted-average fair value per share on the grant date of
stock options granted during the year ended December 31,
2005 was $20.91, which was estimated using the Black-Scholes
option pricing model and the following weighted-average
assumptions:
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
|
|
2005 |
|
|
|
Risk-free interest rate
|
|
|
3.68 |
% |
Expected dividend yield
|
|
|
|
|
Expected volatility
|
|
|
86 |
% |
Expected life (in years)
|
|
|
5.8 |
|
77
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income Taxes
The Company estimates income taxes in each of the jurisdictions
in which it operates. This process involves estimating the
actual current tax liability together with assessing temporary
differences resulting from differing treatments of items for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities. Deferred tax assets are also
established for the expected future tax benefits to be derived
from tax loss and tax credit carryforwards. 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 assets for all
periods presented because of uncertainties related to the
utilization of the 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.
Pursuant to
SOP 90-7, future
decreases in the valuation allowance established in fresh-start
reporting are accounted for as a reduction in goodwill. Tax rate
changes are reflected in income in the period such changes are
enacted.
Basic and Diluted Net Income (Loss) Per Share
Basic earnings per share is calculated by dividing net income
(loss) by the weighted average number of common shares
outstanding during the reporting period. Diluted earnings per
share reflect the potential dilutive effect of additional common
shares that are issuable upon exercise of outstanding stock
options, restricted stock awards and warrants, calculated using
the treasury stock method.
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.
The following table summarizes the components of reorganization
items, net, in the Predecessor Companys consolidated
statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company | |
|
|
| |
|
|
Seven Months | |
|
Year Ended | |
|
|
Ended | |
|
December 31, | |
|
|
July 31, 2004 | |
|
2003 | |
|
|
| |
|
| |
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 of
application of fresh-start reporting
|
|
|
963,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reorganization items, net
|
|
$ |
962,444 |
|
|
$ |
(146,242 |
) |
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In October 2005, the FASB issued FASB Staff Position
(FSP)
No. FAS 13-1,
Accounting for Rental Costs Incurred During a Construction
Period. This FSP requires that rental costs associated
with ground or building operating leases that are incurred
during a construction period should be recognized as rental
expense and included in income from continuing operations. This
treatment also applies to operating lease arrange-
78
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ments entered into prior to the effective date of the FSP.
Adoption of this FSP is required for the first quarter beginning
January 1, 2006. The Company estimates that construction
period rents will total between $5.5 million and
$6.5 million during fiscal 2006.
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 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 the 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 results of operations.
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, which
addresses the accounting and reporting for changes in accounting
principles and replaces APB 20 and SFAS 3.
SFAS 154 requires retrospective application of changes in
accounting principles to prior periods financial
statements unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior
periods presented, SFAS No. 154 requires that the new
accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of
retained earnings for that period rather than being reported in
the income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle
to all prior periods, SFAS No. 154 requires that the
new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable.
SFAS No. 154 becomes effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005.
In March 2005, the FASB issued Interpretation No. 47 which
serves as an interpretation of FASB Statement No. 143,
Accounting for Conditional Asset Retirement
Obligations. FIN No. 47 clarifies that the term
conditional asset retirement obligation as used in
SFAS 143 refers to an unconditional legal obligation to
perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. Under
FIN No. 47, an entity is required to recognize a
liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably
estimated. Uncertainty about the timing or method of settlement
of a conditional asset retirement obligation should be factored
into the measurement of the liability when sufficient
information exists. FIN No. 47 is effective for the
year ended December 31, 2005. Adoption of
FIN No. 47 did not have a material effect on the
Companys consolidated financial position or results of
operations for the year ended December 31, 2005.
79
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4. |
Financial Instruments |
Short-Term Investments
As of December 31, 2005 and 2004, all of the Companys
short-term investments were debt securities with contractual
maturities of less than one year, and were classified as
available for sale. Available-for-sale securities were comprised
as follows at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized | |
|
Unrealized | |
|
|
Successor Company |
|
Cost | |
|
Gain | |
|
Loss | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
49,884 |
|
|
$ |
|
|
|
$ |
(2 |
) |
|
$ |
49,882 |
|
U.S. government or government agency securities
|
|
|
40,857 |
|
|
|
3 |
|
|
|
(11 |
) |
|
|
40,849 |
|
Other
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
90,991 |
|
|
$ |
3 |
|
|
$ |
(13 |
) |
|
$ |
90,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$ |
2,944 |
|
|
$ |
89 |
|
|
$ |
|
|
|
$ |
3,033 |
|
U.S. government or government agency securities
|
|
|
110,063 |
|
|
|
|
|
|
|
(13 |
) |
|
|
110,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
113,007 |
|
|
$ |
89 |
|
|
$ |
(13 |
) |
|
$ |
113,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The carrying value of the Companys
term loans approximate their fair value due to the floating
rates of interest on such loans.
80
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5. |
Supplementary Financial Information |
Supplementary Balance Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
(As Restated) | |
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
Network equipment
|
|
$ |
654,993 |
|
|
$ |
599,598 |
|
|
Computer equipment and other
|
|
|
38,778 |
|
|
|
26,285 |
|
|
Construction-in-progress
|
|
|
134,929 |
|
|
|
10,517 |
|
|
|
|
|
|
|
|
|
|
|
828,700 |
|
|
|
636,400 |
|
|
Accumulated depreciation
|
|
|
(206,754 |
) |
|
|
(60,914 |
) |
|
|
|
|
|
|
|
|
|
$ |
621,946 |
|
|
$ |
575,486 |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$ |
117,140 |
|
|
$ |
35,184 |
|
|
Accrued payroll and related benefits
|
|
|
13,185 |
|
|
|
13,579 |
|
|
Other accrued liabilities
|
|
|
37,445 |
|
|
|
42,330 |
|
|
|
|
|
|
|
|
|
|
$ |
167,770 |
|
|
$ |
91,093 |
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued property taxes
|
|
$ |
6,536 |
|
|
$ |
21,440 |
|
|
Accrued sales, telecommunications and other taxes payable
|
|
|
15,745 |
|
|
|
28,225 |
|
|
Deferred revenue
|
|
|
21,391 |
|
|
|
18,145 |
|
|
Other
|
|
|
5,955 |
|
|
|
3,960 |
|
|
|
|
|
|
|
|
|
|
$ |
49,627 |
|
|
$ |
71,770 |
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
$ |
141,935 |
|
|
$ |
145,673 |
|
|
Other
|
|
|
36,424 |
|
|
|
30,567 |
|
|
|
|
|
|
|
|
|
|
$ |
178,359 |
|
|
$ |
176,240 |
|
|
|
|
|
|
|
|
Other intangible assets, net:
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$ |
124,715 |
|
|
$ |
129,000 |
|
|
Trademarks
|
|
|
37,000 |
|
|
|
37,000 |
|
|
|
|
|
|
|
|
|
|
|
161,715 |
|
|
|
166,000 |
|
|
Accumulated amortization customer relationships
|
|
|
(44,417 |
) |
|
|
(13,438 |
) |
|
Accumulated amortization trademarks
|
|
|
(3,744 |
) |
|
|
(1,101 |
) |
|
|
|
|
|
|
|
|
|
$ |
113,554 |
|
|
$ |
151,461 |
|
|
|
|
|
|
|
|
Amortization expense for other intangible assets for the year
ended December 31, 2005 and the five months ended
December 31, 2004 was $34.5 million and
$14.5 million, respectively. Estimated amortization expense
for intangible assets for 2006 through 2010 is
$33.7 million, $33.7 million, $20.8 million,
$2.7 million and $2.7 million, respectively, and
$20.0 million thereafter.
81
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplementary Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Year | |
|
Five Months | |
|
Seven Months | |
|
Year | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
55,653 |
|
|
$ |
8,227 |
|
|
$ |
|
|
|
$ |
18,168 |
|
|
Cash paid for income taxes
|
|
|
305 |
|
|
|
240 |
|
|
|
76 |
|
|
|
372 |
|
|
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, net
|
|
|
|
|
|
|
|
|
|
|
1,984 |
|
|
|
(40,405 |
) |
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
1,485 |
|
|
|
2,940 |
|
Supplementary disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards under stock compensation plan
|
|
$ |
26,317 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Note 6. |
Earnings Per Share |
A reconciliation of weighted average shares outstanding used in
calculating basic and diluted net income (loss) per share for
the year ended December 31, 2005, the five months ended
December 31, 2004, the seven months ended July 31,
2004 and the year ended December 31, 2003 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
Year | |
|
Five Months | |
|
Seven Months | |
|
Year | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Weighted average shares outstanding basic earnings
per share
|
|
|
60,135 |
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock options
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares outstanding diluted
earnings per share
|
|
|
61,003 |
|
|
|
60,000 |
|
|
|
58,623 |
|
|
|
58,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of shares not included in the computation of diluted
net income (loss) per share because their effect would have been
antidilutive totaled 0.5 million for the year ended
December 31, 2005, 0.6 million for the five months
ended December 31, 2004, 11.7 million for the seven
months ended July 31, 2004, and 13.3 million for the
year ended December 31, 2003.
82
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit Agreement
Long-term debt as of December 31, 2005 consists of a senior
secured credit agreement (the Credit Agreement),
which includes $600 million of fully-drawn term loans and
an undrawn $110 million revolving credit facility available
until January 2010. Under the Credit Agreement, the term loans
bear interest at the London Interbank Offered Rate
(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 $500 million of the term loans must be repaid in
20 quarterly payments of $1.25 million each, which
commenced on March 31, 2005, followed by four quarterly
payments of $118.75 million each, commencing March 31,
2010. Outstanding borrowings under $100 million of the term
loans must be repaid in 18 quarterly payments of approximately
$278,000 each, which commenced on September 30, 2005,
followed by four quarterly payments of $23.75 million each,
commencing March 31, 2010.
The maturity date for outstanding borrowings under the revolving
credit facility is January 10, 2010. The commitment of the
lenders under the 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 revolving
credit commitment on January 1, 2008 and by one-sixth of
the original aggregate revolving credit commitment on
January 1, 2009 (each such amount 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 would currently
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 the Companys leverage ratio.
The facilities under the Credit Agreement are guaranteed by Leap
and all of its direct and indirect domestic subsidiaries (other
than Cricket, which is the primary obligor, and ANB 1 and ANB 1
License) and are secured by all present and future personal
property and owned real property of Leap, Cricket and such
direct and indirect domestic subsidiaries. Under the Credit
Agreement, the Company is subject to certain limitations,
including limitations on its ability to: incur additional debt
or sell assets, with restrictions on the use of proceeds; make
certain investments and acquisitions; grant liens; and pay
dividends and make certain other restricted payments. In
addition, the Company will be required to pay down the
facilities under certain circumstances if it issues debt or
equity, sells assets or property, receives certain extraordinary
receipts or generates excess cash flow (as defined in the Credit
Agreement). The Company is also subject to 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. The Credit Agreement allows
the Company to invest up to $325 million in ANB 1 and ANB 1
License and up to $60 million in other joint ventures and
allows the Company to provide limited guarantees for the benefit
of ANB 1 License and other joint ventures.
Affiliates of Highland Capital Management, L.P. (a beneficial
stockholder of Leap and an affiliate of James D. Dondero, a
director of Leap) participated in the syndication of the Credit
Agreement in the following amounts: $109 million of the
$600 million term loans and $30 million of the
$110 million revolving credit facility.
At December 31, 2005, the effective interest rate on the
term loans was 6.6%, including the effect of interest rate
swaps, and the outstanding indebtedness was $594.4 million.
The terms of the Credit Agreement require the Company to enter
into interest rate hedging agreements in an amount equal to at
least 50% of its outstanding indebtedness. In accordance with
this requirement, in April 2005 the Company entered into
interest rate swap agreements with respect to $250 million
of its debt. These swap agreements effectively fix
83
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the interest rate on $250 million of the outstanding
indebtedness at 6.7% through June 2007. In July 2005, the
Company entered into another interest rate swap agreement with
respect to a further $105 million of its outstanding
indebtedness. This swap agreement effectively fixes the interest
rate on $105 million of the outstanding indebtedness at
6.8% through June 2009. The $3.5 million fair value of the
swap agreements at December 31, 2005 was recorded in other
assets in the consolidated balance sheet with a corresponding
increase in other comprehensive income, net of tax.
The Companys restatement of its historical consolidated
financial results as described in Note 3 may have resulted
in defaults under the Credit Agreement. On March 10, 2006,
the required lenders under the Credit Agreement granted a waiver
of the potential defaults, subject to conditions which the
Company has met.
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. A
portion of the proceeds from the term loan facility under the
new Credit Agreement was used to redeem these notes in January
2005, which included a call premium of $21.4 million. Upon
repayment of these notes, the Company recorded a loss from debt
extinguishment of approximately $1.7 million which was
included in other income (expense) in the consolidated statement
of operations for the year ended December 31, 2005.
US Government Financing
The balance in current maturities of long-term debt at
December 31, 2004 consisted entirely of debt obligations to
the FCC incurred as part of the purchase price for wireless
licenses. At July 31, 2004, the remaining principal of the
FCC debt was revalued in connection with the Companys
adoption of fresh-start reporting. The carrying value of this
debt at December 31, 2004 was $40.4 million. The
balance was repaid in full in January 2005 with a portion of the
term loan borrowing under the new Credit Agreement. Upon
repayment of this debt, the Company recorded a gain from debt
extinguishment of approximately $0.4 million which was
included in other income (expense) in the consolidated statement
of operations for the year ended December 31, 2005.
84
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the Companys income tax provision are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company | |
|
Predecessor Company | |
|
|
| |
|
| |
|
|
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
State
|
|
|
63 |
|
|
|
107 |
|
|
|
13 |
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
107 |
|
|
|
13 |
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
17,571 |
|
|
|
3,186 |
|
|
|
3,725 |
|
|
|
6,920 |
|
|
State
|
|
|
3,517 |
|
|
|
637 |
|
|
|
428 |
|
|
|
795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,088 |
|
|
|
3,823 |
|
|
|
4,153 |
|
|
|
7,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,151 |
|
|
$ |
3,930 |
|
|
$ |
4,166 |
|
|
$ |
8,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the amounts computed by applying the
statutory federal income tax rate to income before income taxes
to the amounts recorded in the consolidated statements of
operations is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months | |
|
Seven Months | |
|
|
|
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(As Restated) | |
|
|
|
|
Amounts computed at statutory federal rate
|
|
$ |
17,891 |
|
|
$ |
(1,561 |
) |
|
$ |
321,075 |
|
|
$ |
(206,285 |
) |
State income tax, net of federal benefit
|
|
|
2,285 |
|
|
|
171 |
|
|
|
287 |
|
|
|
736 |
|
Non-deductible expenses
|
|
|
929 |
|
|
|
2,096 |
|
|
|
175 |
|
|
|
7,050 |
|
Amortization of wireless licenses and tax-deductible goodwill
|
|
|
|
|
|
|
3,224 |
|
|
|
|
|
|
|
|
|
Gain on reorganization and adoption of fresh-start reporting
|
|
|
|
|
|
|
|
|
|
|
(337,422 |
) |
|
|
|
|
Other
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
15,134 |
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
20,051 |
|
|
|
191,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,151 |
|
|
$ |
3,930 |
|
|
$ |
4,166 |
|
|
$ |
8,052 |
|
|
|
|
|
|
|