Leap Wireless International, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
|
|
|
(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, 2007
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
.
|
Commission file number 0-29752
LEAP WIRELESS INTERNATIONAL,
INC.
(Exact Name of Registrant as
Specified in its Charter)
|
|
|
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
10307 Pacific Center Court, San Diego, CA
(Address of Principal Executive
Offices)
|
|
33-0811062
(I.R.S. Employer Identification
No.)
92121
(Zip
Code)
|
(858) 882-6000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
Common Stock, $.0001 par value
|
|
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC
|
Securities registered pursuant to Section 12(g) of the
Act:
None.
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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
(Do not check if a smaller reporting company)
Smaller reporting company
o
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, 2007, the aggregate market value of the
registrants voting and nonvoting common stock held by
non-affiliates of the registrant was approximately
$4,079,005,970, based on the closing price of Leaps common
stock on the NASDAQ Global Select Market on June 29, 2007
of $84.50 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 February 22, 2008 was 68,713,151.
Documents incorporated by reference: Portions of the definitive
Proxy Statement relating to the 2008 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this report.
LEAP
WIRELESS INTERNATIONAL, INC.
ANNUAL REPORT ON
FORM 10-K
For the
Year Ended December 31, 2007
TABLE OF
CONTENTS
i
PART I
As used in this report, unless the context suggests otherwise,
the terms we, our, ours, and
us refer to Leap Wireless International, Inc., or
Leap, and its subsidiaries, including Cricket Communications,
Inc., or Cricket. Leap, Cricket and their subsidiaries are
sometimes collectively referred to herein as the
Company. Unless otherwise specified, information relating
to population and potential customers, or POPs, is based on 2008
population estimates provided by Claritas Inc.
Cautionary
Statement Regarding Forward-Looking Statements
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 our 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, including interest rates,
consumer credit conditions, unemployment and other
macro-economic factors that could adversely affect the demand
for the services we provide;
|
|
|
|
the impact of competitors initiatives;
|
|
|
|
our ability to successfully implement product offerings and
execute effectively on our planned coverage expansion, launches
of markets we acquired in the Federal Communications
Commissions, or FCCs, auction for Advanced Wireless
Services, or Auction #66, market trials and introductions
of higher-speed data services and other strategic activities;
|
|
|
|
our ability to obtain roaming services from other carriers at
cost-effective rates;
|
|
|
|
delays in our market expansion plans, including delays resulting
from any difficulties in funding such expansion through our
existing cash, cash generated from operations or additional
capital, delays in the availability of handsets for the Advanced
Wireless Services, or AWS, spectrum we acquired in
Auction #66, or delays by existing U.S. government and
other private sector wireless operations in clearing the AWS
spectrum, some of which users are permitted to continue using
the spectrum for several years;
|
|
|
|
our ability to attract, motivate and retain an experienced
workforce;
|
|
|
|
our ability to comply with the covenants in our senior secured
credit facilities, indenture and any future credit agreement,
indenture or similar instrument;
|
|
|
|
failure of our network or information technology 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.
1
Overview
We are a wireless communications carrier that offers digital
wireless service in the U.S. under the
Cricket®
brand. Our Cricket service offers customers unlimited wireless
service for a flat monthly rate without requiring a fixed-term
contract or credit check.
Cricket service is offered by Cricket, a wholly owned subsidiary
of Leap, and is also offered in Oregon by LCW Wireless
Operations, LLC, or LCW Operations, a designated entity under
FCC regulations. Cricket owns an indirect 73.3% non-controlling
interest in LCW Operations through a 73.3% non-controlling
interest in LCW Wireless, LLC, or LCW Wireless. Cricket also
owns an 82.5% non-controlling interest in Denali Spectrum, LLC,
or Denali, which purchased a wireless license in
Auction #66 covering the upper mid-west portion of the
U.S. as a designated entity through its wholly owned
subsidiary, Denali Spectrum License, LLC, or Denali License. We
consolidate our interests in LCW Wireless and Denali in
accordance with Financial Accounting Standards Board
Interpretation No., or FIN, 46(R), Consolidation of
Variable Interest Entities, because these entities are
variable interest entities and we will absorb a majority of
their expected losses.
Leap was formed as a Delaware corporation in 1998. Leaps
shares began trading publicly in September 1998 and we launched
our innovative Cricket service in March 1999. On April 13,
2003, we 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 below. On June 29, 2005, Leaps
common stock became listed for trading on the NASDAQ National
Market (now known as the NASDAQ Global Market) under the symbol
LEAP. Effective July 1, 2006, Leaps
common stock became listed for trading on the NASDAQ Global
Select Market, also under the symbol LEAP. Leap
conducts operations through its subsidiaries and has no
independent operations or sources of operating revenue other
than through dividends, if any, from its subsidiaries.
Cricket
Business Overview
Cricket
Service
At December 31, 2007, Cricket service was offered in
23 states and had approximately 2.9 million customers.
As of December 31, 2007, we, LCW License, LLC, or LCW
License (a wholly owned subsidiary of LCW Wireless), and Denali
License owned wireless licenses covering an aggregate of
186.5 million POPs (adjusted to eliminate duplication from
overlapping licenses). The combined network footprint in our
operating markets covered approximately 54 million POPs at
the end of 2007, which includes new markets launched in 2007 and
incremental POPs attributed to ongoing footprint expansion. The
licenses we and Denali License purchased in Auction #66,
together with the existing licenses we own, provide 20 MHz
of coverage and the opportunity to offer enhanced data services
in almost all markets in which we currently operate or are
building out, assuming Denali License were to make available to
us certain of its spectrum.
In addition to the approximately 54 million POPs we covered
at the end of 2007 with our combined network footprint, we
estimate that we and Denali License hold licenses in markets
that cover up to approximately 85 million additional POPs
that are suitable for Cricket service, and we and Denali License
have already begun the
build-out of
some of our Auction #66 markets. We and Denali License
expect to cover up to an additional 12 to 28 million POPs
by the end of 2008, bringing total covered POPs to between 66
and 82 million by the end of 2008. We and Denali License
may also develop some of the licenses covering these additional
POPs through partnerships with others.
The AWS spectrum that was auctioned in Auction #66
currently is used by U.S. federal government
and/or
incumbent commercial licensees. Several federal government
agencies have cleared or announced plans to promptly clear
spectrum covered by licenses we and Denali License purchased in
Auction #66. Other agencies, however, have not yet
finalized plans to relocate their use to alternative spectrum.
If these agencies do not relocate to alternative spectrum within
the next several months, their continued use of the spectrum
covered by licenses we and Denali License purchased in
Auction #66 could delay the launch of certain markets.
2
We continue to seek additional opportunities to enhance our
current market clusters and expand into new geographic markets
by participating in FCC spectrum auctions, by acquiring spectrum
and related assets from third parties,
and/or by
participating in new partnerships or joint ventures. We also
expect to continue to look for opportunities to optimize the
value of our spectrum portfolio. Because some of the licenses
that we and Denali License hold include large regional areas
covering both rural and metropolitan communities, we and Denali
License may sell some of this spectrum and pursue the deployment
of alternative products or services in portions of this spectrum.
We expect that we will continue to build out and launch new
markets and pursue other strategic expansion activities for the
next several years. We intend to be disciplined as we pursue
these expansion efforts and to remain focused on our position as
a low-cost leader in wireless telecommunications. We expect to
achieve increased revenues and incur higher operating expenses
as our existing business grows and as we build out and after we
launch service in new markets. Large-scale construction projects
for the build-out of our new markets will require significant
capital expenditures and may suffer cost overruns. Any such
significant capital expenditures or increased operating expenses
would decrease earnings, operating income before depreciation
and amortization, or OIBDA, and free cash flow for the periods
in which we incur such costs. However, we are willing to incur
such expenditures because we expect our expansion activities
will be beneficial to our business and create additional value
for our stockholders.
We believe that our business model is different from most other
wireless companies. Our services primarily target market
segments underserved by traditional communications companies:
our customers tend to be younger, have lower incomes and include
a greater percentage of ethnic minorities. 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 Cricket service areas. Our
internal customer surveys indicate that approximately 65% of our
customers use our service as their sole phone service and
approximately 90% as their primary phone service. For the year
ended December 31, 2007, our customers used our Cricket
service for an average of approximately 1,450 minutes per
month, which we believe was substantially above the
U.S. wireless national carrier customer average.
The majority of wireless customers in the U.S. subscribe to
post-pay
services that may require credit approval and a contractual
commitment from the subscriber for a period of at least
one year, and include overage charges for call volumes in
excess of a specified maximum. According to International Data
Corporation, U.S. wireless penetration was approximately
80% at December 31, 2007. We believe that a large portion
of the remaining growth potential in the U.S. wireless
market consists of customers who are price-sensitive, who have
lower credit scores or who prefer not to enter into fixed-term
contracts. We believe our services appeal strongly to these
customer segments. We believe that we are able to serve these
customers and generate significant OIBDA because of our
high-quality network and low customer acquisition and operating
costs.
We believe that our business model is scalable and 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. As part of this expansion strategy, for
example:
|
|
|
|
|
We increased our combined network footprint by approximately
6 million POPs during 2007. We and Denali License expect to
cover up to an additional 12 to 28 million POPs by the end
of 2008, and expect to cover up to an additional 28 to
50 million POPs by the end of 2010.
|
|
|
|
In January 2008, we agreed to exchange an aggregate of
20 MHz of disaggregated spectrum under certain of our
existing PCS licenses in Tennessee, Georgia and Arkansas for an
aggregate of 30 MHz of disaggregated and partitioned
spectrum in New Jersey and Mississippi under certain of Sprint
Nextels existing wireless licenses. Completion of this
transaction is subject to customary closing conditions,
including FCC approval.
|
|
|
|
In April 2007, Denali License was awarded a wireless license
covering 59.9 million POPs (which includes markets covering
5.8 million POPs which overlap with certain licenses we
purchased in Auction #66).
|
3
|
|
|
|
|
In December 2006, we purchased 99 wireless licenses in
Auction #66 covering 124.9 million POPs (adjusted to
eliminate duplication among certain overlapping Auction #66
licenses).
|
|
|
|
In November 2006, we completed the purchase of 13 wireless
licenses in the Carolinas for an aggregate purchase price of
$31.8 million. During 2007, we launched Cricket service in
select new markets in North and South Carolina, adding
approximately 1.9 million POPs to our network footprint.
|
|
|
|
In August 2006, we exchanged our wireless license in Grand
Rapids, Michigan for a wireless license in Rochester, New York
to form a new market cluster with our existing Buffalo and
Syracuse markets in upstate New York. In June 2007, we launched
Cricket service in Rochester, New York, resulting in an expanded
regional network footprint covering 2.4 million POPs.
|
|
|
|
In July 2006, we acquired a non-controlling membership interest
in LCW Wireless, which held a license for the Portland, Oregon
market and to which we contributed, among other things, our
existing Eugene and Salem, Oregon markets. LCW Wireless launched
Cricket service in the Portland, Oregon market in December 2006,
creating a new expanded network footprint in Oregon covering
2.7 million POPs.
|
Cricket
Business Strategy
|
|
|
|
|
Target Underserved Customer Segments. 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.
|
|
|
|
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. For example, during the last
two years, we began to offer unlimited wireless broadband
internet, added unlimited mobile web access to our product
portfolio, and introduced new higher-priced, higher-value rate
plans that allow unlimited calling from any Cricket calling
area. With the completion of our deployment of
CDMA2000®
1xEV-DO, or
EvDO, technology across all of our existing and new markets, we
are able to offer an expanded array of services to our
customers, including high-demand wireless data services such as
mobile content and high quality music downloads at speeds of up
to 2.4 Megabits per second. We believe these and other
enhanced data offerings will be attractive to many of our
existing customers and will enhance our appeal to new
data-centric customers. We expect to continue to develop our
voice and data product and service offerings in 2008 and beyond.
|
|
|
|
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. Since our target customer base is
diversified geographically, ethnically and demographically, we
have decentralized our marketing programs to support local
customization and better target our advertising expenses. We
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. We have also established
our premier dealer program, and we are in the process of
enabling our premier dealers and other indirect dealers to
provide greater customer support services. We expect these
changes will enhance the customer experience and improve
customer satisfaction.
|
|
|
|
Maintain Industry Leading Cost Structure. Our
networks and business model are designed to provide service to
our customers at a significantly lower cost than many of our
competitors. As we continue to build out new markets, we expect
to continue to spread our fixed costs over a growing customer
base. We seek to maintain low customer acquisition costs through
focused sales and marketing initiatives and cost-effective
distribution strategies.
|
|
|
|
Enhance Established Existing Markets. We
continue to expand our network coverage and capacity in many of
our existing established markets by deploying additional cell
sites, allowing us to offer our customers a larger local calling
area. During 2007, we deployed approximately 300 new cell sites
in our established existing markets, thereby adding
approximately 2 million POPs to our network footprint in
these markets. For example, in Arizona we significantly expanded
our network footprint in our Phoenix and
|
4
Tucson markets and are joining these two markets into a single,
contiguous local calling area for the first time. We expect to
deploy approximately 250 cell sites in our established
existing markets during 2008.
|
|
|
|
|
Develop Market Clusters and Expand Into Attractive Strategic
Markets. We continue to seek additional
opportunities to develop and enhance our market clusters and
expand into new geographic markets by participating in FCC
spectrum auctions, by acquiring spectrum and related assets from
third parties, or by participating in new partnerships or joint
ventures. An example of our market cluster strategy is the
Rochester, New York market we launched in 2007 to create a new
market cluster in upstate New York by connecting our existing
Buffalo and Syracuse markets. Examples of our strategic market
expansion include the central Texas market cluster (including
Houston, Austin and San Antonio) and the San Diego,
California market that we acquired and launched in 2006. All of
these markets meet our internally developed criteria concerning
customer demographics and population density which we believe
enable us to offer Cricket service on a cost-competitive basis
in these markets. We also anticipate that the licenses we and
Denali License purchased in Auction #66 will provide the
opportunity to substantially enhance our coverage area and allow
us and Denali License to launch Cricket service in numerous new
markets over time, with new market launches expected to begin in
2008.
|
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
Cricket service areas and receive unlimited calls from anywhere
in the world.
In April 2007, we launched a new suite of Cricket rate plans,
which all include unlimited wireless services, the foundation of
our business. Our new premium plans offer unlimited local and
U.S. long distance service from any Cricket service area
and unlimited use of multiple calling features and messaging
services, bundled with specified roaming minutes in the
continental U.S. (previously only available a la carte) or
unlimited mobile web access and directory assistance. Our most
popular plan combines unlimited local and U.S. long
distance service from any Cricket service area with unlimited
use of multiple calling features and messaging services. In
addition, we offer basic service plans that allow customers to
make unlimited calls within their Cricket service area and
receive unlimited calls from any area, combined with unlimited
messaging and unlimited U.S. long distance service options.
We have also launched a new weekly rate plan, Cricket By Week,
and a flexible payment option, BridgePay, which give our
customers greater flexibility in the use and payment of wireless
service and which we believe will help us to improve customer
retention.
With the completion of our deployment of EvDO technology across
all of our existing and new markets, we are able to offer an
expanded array of services to our customers, including
high-demand wireless data services such as mobile content and
high quality music downloads at speeds of up to
2.4 Megabits per second. We expect to continue to develop
our product and service offerings in 2008 and beyond to better
meet our customers needs.
Cricket Plan Upgrades. We continue to evaluate
new product and service offerings in order to enhance customer
satisfaction and attract new customers. Examples of services
that customers can add to their plans include: packages of
international calling minutes to Canada
and/or
Mexico; roaming service packages, which allow our customers to
use their Cricket phones outside of their Cricket service areas
on a prepaid basis; and Cricket Flex
Bucket®
service, which allows our customers to pre-purchase services
(including additional directory assistance calls, roaming
services, domestic and international long distance, ring tones,
premium short message service (SMS) and text messaging to
wireless users) and applications (including customized ring
tones, wallpapers, photos, greeting cards, games and news and
entertainment message deliveries) on a prepaid basis.
Handsets. Our handsets range from high-end to
budget low-cost models, and include models that provide mobile
web browsers, picture-enabled caller ID, color screens,
high-resolution cameras with digital zoom and flash,
5
integrated FM radio and MP3 stereo, USB, infrared and Bluetooth
connectivity, over 20MB of
on-board
memory, and other features to facilitate digital data
transmission. Currently, all of the handsets that we offer use
CDMA2000 1xRTT, or CDMA 1xRTT, technology. In addition, we
occasionally offer selective handset upgrade incentives for
customers who meet certain criteria.
Handset Replacement and Returns. We 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 who
provides our customers with an extended handset
warranty/insurance program. Customers have limited rights to
return handsets and accessories based on the time elapsed since
purchase and usage. Returns of handsets and accessories have
historically been negligible.
Cricket Wireless Internet Service. In
September 2007, we introduced our first unlimited wireless
broadband service in select markets. Like our Cricket unlimited
service plans, this service allows customers to access the
internet through their laptops for one low, flat rate with no
long-term commitments or credit checks, and brings low-cost
broadband data capability to the unlimited wireless segment.
During 2008, we expect to expand the availability of our
unlimited wireless broadband service.
Jump®
Mobile. Our per-minute prepaid service, Jump
Mobile, brings Crickets attractive value proposition to
customers who prefer active control over their wireless usage
and allows us 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 U.S. (excluding Alaska) at a flat rate of
$0.10 per minute, provided they have sufficient funds in their
account. In addition, our Jump Mobile customers receive free
unlimited inbound and outbound text messaging, provided they
have a credit balance in their account, as well as access to
roaming service (for $0.69 per minute), international long
distance service, and other services and applications.
Customer
Care and Billing
Customer Care. We outsource our call center
operations to multiple call center vendors and strive to take
advantage of call centers in the U.S. and abroad to
continuously improve the quality of our customer care and reduce
the cost of providing care to our customers. One of our
international call centers is located in Central America, which
facilitates the efficient provision of customer support to our
large and growing Spanish-speaking customer segment.
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.
Sales
and Distribution
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 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). Premier dealers are independent dealers that
sell Cricket products, usually exclusively, in stores that look
and function similar to our company-owned stores, enhancing the
in-store experience and the level of customer service for
customers and expanding our brand presence within a market. As
of December 31, 2007, we and LCW Operations had 152 direct
locations and 2,690 indirect distributors, including
approximately 790 premier dealers. Our direct sales
locations were responsible for approximately 22% of our gross
customer additions in 2007. Premier dealers tend to generate
significantly more business than other indirect dealers. We
strategically place our direct and indirect retail locations to
enable us to focus on our target customer demographic and
provide the most efficient market coverage while minimizing
cost. As a result of our product design and cost efficient
distribution system, we have been able to
6
achieve a cost per gross customer addition, or CPGA, which
measures the average cost of acquiring a new customer, that is
significantly lower than most of our competitors.
We are focused on building and maintaining 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 service within the communities we
serve. In order to reach our target segments, we advertise
primarily on radio stations and, to a lesser extent, on
television and 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. We also have redesigned
and
re-merchandized
our stores and introduced a new sales process aimed at improving
both the customer experience and our average revenue per user.
As a result of these marketing strategies and our unlimited
calling value proposition, we believe our advertising
expenditures are generally at much lower levels than those of
traditional wireless carriers. We also believe that our CPGA is
one of the lowest in the industry. See
Part II Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Performance Measures.
Network
and Operations
We have deployed in each of our markets a high quality CDMA
1xRTT network that delivers high capacity and outstanding
quality at a low cost that can be easily upgraded to support
enhanced capacity. During 2007, we completed the upgrade to EvDO
technology in all existing and new markets, providing us the
technical ability to support next generation high-speed data
services. Our network has regularly been ranked by third party
surveys commissioned by us as one of the top networks within the
advertised coverage area in the markets Cricket serves.
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 at prices that are competitive with unlimited
wireline plans. We believe our success depends on operating our
CDMA 1xRTT network 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 global system for mobile
communications (GSM).
As of December 31, 2007, our wireless network consisted of
approximately 5,100 cell sites (most of which are
co-located
on leased facilities), a Network Operations Center, or NOC, and
31 switches in 33 switching centers. A switching center serves
several purposes, including routing calls, supervising call
originations and terminations at cell sites, managing call
handoffs and 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.
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 use third party providers
for long distance services and for backhaul services carrying
traffic to and from our cell sites and switching centers.
We 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.
We generally build out our Cricket network in local population
centers of metropolitan communities serving the areas where our
customers live, work and play. During 2007, we expanded our
network coverage and capacity in many of our existing markets,
allowing us to offer our customers a larger local calling area.
During this period, we deployed approximately 300 new cell sites
in our established existing markets, thereby adding
approximately 2 million POPs to our network footprint in
these markets. For example, in Arizona we significantly expanded
our network footprint in our Phoenix and Tucson markets and are
joining these two markets into a
7
single, contiguous local calling area for the first time. We
expect to deploy approximately 250 cell sites in our established
existing markets during 2008.
Some of the Auction #66 licenses we and Denali License
purchased include large regional areas covering both rural and
metropolitan communities. Based on our preliminary analysis of
the potential new markets covered by these Auction #66
licenses, we believe that a significant portion of the POPs
included within such new licenses may not be well suited for
Cricket service. Therefore, among other things, we
and/or
Denali License may seek to partner with others, sell spectrum or
pursue alternative products or services to utilize or benefit
from the spectrum not otherwise used for Cricket service.
Arrangements
with LCW Wireless
In July 2006, we acquired a 72% non-controlling membership
interest in LCW Wireless. In December 2006, we completed the
replacement of certain network equipment of LCW Operations,
entitling us to receive additional membership interests in LCW
Wireless. The membership interests in LCW Wireless are now held
as follows: Cricket holds a 73.3% non-controlling membership
interest; CSM Wireless, LLC, or CSM, holds a 24.7%
non-controlling membership interest; and WLPCS Management, LLC,
or WLPCS, holds a 2% controlling membership interest. WLPCS
contributed $1.3 million in cash to LCW Wireless in
exchange for its controlling membership interest. LCW Wireless
is a very small business designated entity under FCC
regulations, which owned a wireless license for Portland, Oregon
and to which we contributed two wireless licenses in Salem and
Eugene, Oregon, related operating assets and approximately
$21 million in cash.
LCW Wireless, together with its wholly owned subsidiaries, is a
wireless communications carrier that offers digital wireless
service in the Oregon market cluster through its subsidiary, LCW
Operations, under the Cricket and Jump Mobile brands. LCW
Operations launched service in Portland, Oregon in December
2006, creating a market cluster with its existing Salem and
Eugene markets covering approximately 2.7 million POPs.
We anticipate that LCW Wireless working capital needs will
be funded through Crickets initial equity contribution and
through third party debt financing. In October 2006, LCW
Operations entered into a senior secured credit agreement
consisting of two term loans for $40 million in the
aggregate. The loans bear interest at LIBOR plus the applicable
margin ranging from 2.70% to 6.33%. The obligations under the
loans are guaranteed by LCW Wireless and LCW License.
Outstanding borrowings under the term loans must be repaid in
varying quarterly installments starting in June 2008, with an
aggregate final payment of $24.5 million due in June 2011.
Under the senior secured credit agreement, LCW Operations and
the guarantors are subject to certain limitations, including
limitations on their ability to: incur additional debt or sell
assets with restrictions on the use or proceeds; make certain
investments and acquisitions; grant liens; pay dividends; and
make certain other restricted payments. In addition, LCW
Operations will be required to pay down the facilities under
certain circumstances if it or the guarantors issue debt, sell
assets or generate excess cash flow. The senior secured credit
agreement requires that LCW Operations and the guarantors comply
with financial covenants related to adjusted earnings before
interest, taxes, depreciation and amortization, or EBITDA, gross
additions of subscribers, minimum cash and cash equivalents and
maximum capital expenditures, among other things.
Limited Liability Company Agreement. In July
2006, Cricket entered into the LLC Agreement of LCW Wireless,
LLC, or the LCW LLC Agreement, with CSM and WLPCS. Under the LCW
LLC Agreement, a board of managers has 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. The board of managers is currently
comprised of five members, with three members designated by
WLPCS (who have agreed to vote together as a block), 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, WLPCS is 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 interest, 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
8
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 has 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 the put option
is 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 also has the option, during
specified periods, to put its entire equity interest in LCW
Wireless to Cricket in exchange for either cash, Leap common
stock, or a combination thereof, as determined by Cricket at 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 EBITDA and
applied to LCW Wireless adjusted EBITDA to impute an
enterprise value and equity value for LCW Wireless. If Cricket
elects to satisfy 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.
Management Agreement. In July 2006, Cricket
and LCW Wireless entered into a management services agreement,
pursuant to which LCW Wireless has 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.
Arrangements
with Denali
In May 2006, Cricket and Denali Spectrum Manager, LLC, or DSM,
formed Denali as a joint venture to participate (through its
wholly owned subsidiary, Denali License) in Auction #66 as
a very small business designated entity under FCC
regulations. Cricket owns an 82.5% non-controlling membership
interest and DSM owns a 17.5% controlling membership interest in
Denali. DSM, as the sole manager of Denali, has the exclusive
right and power to manage, operate and control Denali and its
business and affairs, subject to certain protective provisions
for the benefit of Cricket. On April 30, 2007, Denali
purchased a wireless license in Auction #66 covering the
upper mid-west portion of the U.S. as a designated entity
through its wholly owned subsidiary Denali License.
Crickets principal agreements with the Denali entities are
summarized below.
Limited Liability Company Agreement. In July
2006, Cricket and DSM entered into an amended and restated
limited liability company agreement, or the Denali LLC
Agreement, under which Cricket and DSM made equity investments
in Denali of approximately $7.6 million and
$1.6 million, respectively. In October 2006, Cricket and
DSM made further equity investments in Denali of
$34.2 million and $7.3 million, respectively. In
September and October 2007, Cricket and Denali made further
equity investments in Denali of $41.8 million and
$8.9 million, respectively.
Under the Denali LLC Agreement, DSM, as the sole manager of
Denali, has the exclusive right and power to manage, operate and
control Denali and its business and affairs, subject to certain
protective provisions for the benefit of Cricket including,
among other things, Crickets consent to the acquisition of
wireless licenses or the sale of its wireless licenses or the
sale of any additional membership interests. DSM can be removed
as the manager of Denali in certain circumstances, including
DSMs fraud, gross negligence or willful misconduct,
DSMs insolvency or bankruptcy, or DSMs failure to
qualify as an entrepreneur and a very small
business under FCC regulations, or other limited
circumstances.
During the first ten years following the initial grant of
wireless licenses to Denali License, members of Denali generally
may not transfer their membership interests to non-affiliates
without Crickets prior written consent. Following such
period, if a member desires to transfer its interests in Denali
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. DSM
may offer to sell its entire membership interest in Denali to
Cricket on the fifth anniversary of the
9
initial grant of wireless licenses to Denali License and on each
subsequent anniversary thereof for a purchase price equal to
DSMs equity contributions in cash to Denali, plus a
specified return, payable in cash. If exercised, the
consummation of the sale will be subject to FCC approval.
Senior Secured Credit Agreement. In July 2006,
Cricket entered into a senior secured credit agreement with
Denali License and Denali. Pursuant to this agreement, as
amended, Cricket loaned to Denali License approximately
$223.4 million to fund the payment of its net winning bid
in Auction #66. Under the agreement, Cricket also agreed to
loan to Denali License an amount equal to $0.75 times the
aggregate number of POPs covered by the license for which it was
the winning bidder (approximately $44.5 million) to fund a
portion of the costs of the construction and operation of the
wireless network using such license, which build-out loan
sub-facility may be increased from time to time with
Crickets approval. As at December 31, 2007, Cricket
had loaned to Denali License approximately $6.0 million
under this build-out loan sub-facility. Loans under the credit
agreement accrue interest at the rate of 14% per annum and such
interest is added to principal quarterly. All outstanding
principal and accrued interest is due on the fourteenth
anniversary of the grant date of the wireless license awarded to
Denali License in Auction #66. Outstanding principal and
accrued interest is amortized in quarterly installments
commencing on the tenth anniversary of the license grant date.
However, if DSM makes an offer to sell its membership interest
in Denali to Cricket under the Denali LLC Agreement and Cricket
accepts such offer, then the amortization commencement date
under the credit agreement will be extended to the first
business day following the date on which Cricket has paid DSM
the offer price for its membership interest in Denali. Denali
License may prepay loans under the credit agreement at any time
without premium or penalty. In February 2008, Cricket entered
into a letter of credit and reimbursement agreement, under which
Cricket agreed to use reasonable efforts to procure stand-by
letters of credit from financial institutions in favor of
certain vendors and lessors of Denali in connection with its
build-out activities, the aggregate stated amount of which may
not exceed $7.5 million. Denali is required to reimburse
Cricket with respect to any drawing under a letter of credit,
and to pay interest with respect to any unreimbursed drawing.
The obligations of Denali License and Denali under these
agreements are secured by all of the personal property, fixtures
and owned real property of Denali License and Denali, subject to
certain permitted liens.
Management Agreement. In July 2006, Cricket
and Denali License entered into a management services agreement,
pursuant to which Cricket is to provide management services to
Denali License and its subsidiaries in exchange for a monthly
management fee based on Crickets costs of providing such
services plus overhead. Under the management services agreement,
Denali 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 ten years. The management
services agreement may be terminated by Denali License or
Cricket if the other party materially breaches its obligations
under the agreement.
Alaska
Native Broadband
In November 2004, we acquired a 75% non-controlling membership
interest in Alaska Native Broadband 1, LLC, or ANB 1,
whose wholly owned subsidiary, Alaska Native Broadband 1
License, LLC, or ANB 1 License, participated in the
FCCs Auction #58. Alaska Native Broadband, LLC, or
ANB, owned a 25% controlling membership interest in and was the
sole manager of ANB 1, and ANB 1 was 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 designated entity. In January 2007,
ANB exercised its option to sell its entire 25% controlling
interest in ANB 1 to Cricket. The FCC approved the
application to transfer control of ANB 1 License to
Cricket, we closed the sale transaction on March 5, 2007,
and ANB and ANB 1 License became guarantors under our
senior secured credit agreement, or Credit Agreement, and our
senior unsecured indenture. On December 31, 2007,
ANB 1 License transferred its wireless licenses to a
Cricket subsidiary and ANB 1 and ANB 1 License were
merged into Cricket, with Cricket as the surviving entity.
Competition
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, AT&T, Sprint Nextel (and Sprint Nextel affiliates),
T-Mobile,
U.S. Cellular and Verizon Wireless. AT&T, Sprint
Nextel,
T-Mobile
10
and Verizon Wireless have each recently announced flat-rate
unlimited service offerings. In addition, Sprint Nextel offers a
flat-rate
unlimited service offering under its Boost Unlimited brand,
which is very similar to the Cricket service. Sprint Nextel has
expanded and may further expand its Boost Unlimited service
offering into certain markets in which we provide service or in
which we plan to expand, and this service offering may present
additional strong competition to Cricket service in markets in
which our service offerings overlap. The competitive pressures
of the wireless telecommunications market have also caused other
carriers to offer service plans with unlimited service offerings
or 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 in our
current markets and in markets in which we may expand that are
strongly represented in Crickets customer base. For
example,
T-Mobile has
introduced a FlexPay plan which permits customers to pay in
advance for its post-pay plans and avoid overage charges. These
competitive offerings could adversely affect our ability to
maintain our pricing and increase or maintain our market
penetration and may have a material adverse effect on our
financial results.
We also face competition from resellers or mobile virtual
network operators, or MVNOs, 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. These resellers purchase bulk wireless telephone
services and capacity from wireless providers and resell to the
public under their own brand name generally through mass market
retail outlets. Wireless providers are also increasingly
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 now 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, WiMax, and Voice over Internet Protocol, or
VoIP. Additionally, some of the major internet search engines
and service providers have entered the mobile service market, or
announced plans or intentions to enter the mobile service
market, 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 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. Additionally, these agreements can
be terminated by the carriers.
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
11
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.
For example, T-Mobile has introduced an internet-based service
upgrade which permits wireless customers to make unlimited local
and long-distance calls from their home phone in place of a
traditional landline phone service. Competition has caused, and
we anticipate it will continue to cause, market prices for
two-way wireless products and services to decline. 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, 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 currently pursuing policies designed to increase the
number of wireless licenses available and new wireless provider
competition. For example, the FCC has adopted rules that allow
Personal Communications Service, or PCS, and other wireless
licenses to be partitioned, disaggregated and leased. The FCC
also continues to allocate and auction additional spectrum that
can be used for wireless services. 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 in 2006
auctioned an additional 90 MHz of nationwide spectrum in
the 1700 MHz to 2100 MHz band for AWS in
Auction #66, and in January 2008 began an auction of
62 MHz of additional spectrum in the 700 MHz band
(referred to in this report as Auctions #73 and #76).
New companies, such as cable television operators or satellite
operators, have purchased or may 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.
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 our 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 in 2011 with a face value of $350 million and
12
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.
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 our Wireless Service Systems
Cricket and LCW License hold PCS licenses, and Cricket and
Denali License hold AWS licenses. The licensing rules that apply
to these two services are summarized below.
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, or MTAs, which in turn are comprised of 493 smaller
regions called basic trading areas, or BTAs. The FCC awards two
broadband PCS licenses for each MTA and four licenses for each
BTA. Thus, generally, six licensees are authorized to compete in
each area. The two MTA licenses authorize the use of 30 MHz
of spectrum. One of the BTA licenses is for 30 MHz of
spectrum, and the other three BTA licenses 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.
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
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.
All PCS licenses have a
10-year
term, at the end of which they must be renewed. Our PCS licenses
began expiring in 2006 and will continue to expire through 2015.
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 of 1934, as
amended, or Communications Act. 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. If
the FCC does not grant a renewal expectancy with respect to one
or more of our licenses, or renew one or more of our licenses,
our business may be materially harmed.
13
AWS Licenses. Recognizing the increasing
consumer demand for wireless mobile services, the FCC has
allocated additional spectrum that can be used for two-way
mobile wireless voice and broadband services, including AWS
spectrum. The FCC has licensed six frequency blocks consisting
of one 20 MHz license in each of 734 cellular market areas,
or CMAs; one 20 MHz license and one 10 MHz license in
each of 176 economic areas, or EAs; and two 10 MHz licenses
and one 20 MHz license in each of 12 regional economic area
groupings, or REAGs. The FCC auctioned these licenses in
Auction #66. In that auction, we purchased 99 wireless
licenses for an aggregate purchase price of $710.2 million.
Denali License also acquired one wireless license on
April 30, 2007 for a net purchase price of
$274.1 million.
AWS licenses generally have a
15-year
term, at the end of which they must be renewed. With respect to
construction requirements, an AWS licensee must offer
substantial service to the public at the end of the
license term. As noted above, 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.
The AWS spectrum that was auctioned in Auction #66
currently is used by U.S. federal government and/or
incumbent commercial licensees. FCC rules require winning
bidders to avoid interfering with these existing users or to
clear the incumbent users from the spectrum through specified
relocation procedures. We and Denali License considered the
estimated cost and time frame required to clear the spectrum
which we and Denali License purchased in Auction #66 while
placing bids in the auction. However, the actual cost of
clearing the spectrum may exceed our estimated costs.
Furthermore, delays in the provision of federal funds to
relocate government users, or difficulties in negotiating with
incumbent commercial licensees, may extend the date by which the
auctioned spectrum can be cleared of existing operations, and
thus may also delay the date on which we can launch commercial
services using such licensed spectrum. In addition, certain
existing government operations are using the spectrum for
classified purposes. Although the government has agreed to clear
that spectrum to allow the holders to utilize their AWS licenses
in the affected areas, the government is only providing limited
information to spectrum holders about these classified uses
which creates additional uncertainty about the time at which
such spectrum will be available for commercial use. Several
federal government agencies have cleared or announced plans to
promptly clear spectrum covered by licenses we and Denali
License purchased in Auction #66. Other agencies, however,
have not yet finalized plans to relocate their use to
alternative spectrum. If these agencies do not relocate to
alternative spectrum within the next several months, their
continued use of the spectrum covered by licenses we and Denali
License purchased in Auction #66 could delay the launch of
certain markets.
Designated Entities. Since the early
1990s the FCC has pursued a policy in wireless licensing
of attempting to assist various types of designated entities.
The FCC generally 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.
These benefits can include eligibility to bid for certain
licenses set aside only for designated entities. For example,
the FCCs spectrum allocation for PCS generally includes
two licenses, a 30 MHz C-Block license and a 10 MHz
F-Block license, which are designated as
Entrepreneurs Blocks. The FCC generally
requires holders of these licenses to meet certain maximum
financial size qualifications. In addition, designated entities
are eligible for bidding credits in most spectrum auctions and
re-auctions (which has been the case in all PCS auctions to
date, and was the case in Auction #66), and, in some cases,
an installment loan from the federal government for a
significant portion of the dollar amount of the winning bids
(which was the case in the FCCs initial auctions of
C-Block and F-Block PCS licenses). A failure by an entity to
maintain its qualifications to own licenses won through the
designated entity program could cause a number of adverse
consequences, including the ineligibility to hold licenses for
which the FCCs minimum coverage requirements have not been
met, and the triggering of FCC unjust enrichment rules, which
could require the recapture of bidding credits and the
acceleration of any installment payments owed to the
U.S. Treasury.
The FCC has initiated a rulemaking proceeding focused on
addressing the alleged abuses of its designated entity program.
In that proceeding, the FCC has re-affirmed its goals of
ensuring that only legitimate small businesses benefit from the
program, and that such small businesses are not controlled or
manipulated by larger wireless carriers or other investors that
do not meet the small business qualification tests. As a result,
the FCC issued an initial round of changes aimed at curtailing
certain types of spectrum leasing and wholesale capacity
arrangements between wireless carriers and designated entities
that it felt called into question the designated entitys
overall control of the venture. The FCC also changed its unjust
enrichment rules, designed to trigger the repayment of
14
auction bidding credits, as follows: For the first five years of
its license term, if a designated entity loses its eligibility
or seeks to transfer its license or to enter into a de facto
lease with an entity that does not qualify for bidding
credits, 100 percent of the bidding credit amount, plus
interest, would be owed to the FCC. For years six and seven of
the license term, 75 percent of the bidding credit, plus
interest, would be owed. For years eight and nine,
50 percent of the bidding credit, plus interest, would be
owed, and for year ten, 25 percent of the bidding credit,
plus interest, would be owed. In addition, if a designated
entity seeks to transfer a license with a bidding credit to an
entity that does not qualify for bidding credits in advance of
filing the construction notification for the license, then
100 percent of the bidding credit amount, plus interest,
would be owed to the FCC. Designated entity structures are also
now subject to a new rule that requires them to seek approval
for any event that might affect ongoing eligibility (e.g.,
changes in agreements that the FCC has not previously reviewed),
as well as new annual reporting requirements, and a commitment
by the FCC to audit each designated entity at least once during
the license term.
The FCC has invited additional comment on other changes to its
designated entity rules, and recently affirmed its first round
of rule changes in response to certain parties petitions
for reconsideration. Several parties have petitioned for further
review of the recent rule changes at the FCC
and/or in
federal appellate court. We cannot predict the degree to which
the FCCs present or future rule changes or increased
regulatory scrutiny that may follow from this proceeding will
affect our current or future business ventures, including our
arrangements with respect to LCW Wireless and Denali, or our
participation in future FCC spectrum auctions.
Foreign Ownership. 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 wireless licenses are in good standing
with the FCC.
Transfer and Assignment. The Communications
Act and FCC rules require the FCCs prior approval of the
assignment or transfer of control of a commercial wireless
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 wireless
license generally may be bought or sold without FCC approval.
Although we cannot assure you that the FCC will approve or act
in a timely fashion upon any pending or future requests for
approval of assignment or transfer of control applications that
we file, in general we believe the FCC will approve or grant
such requests or applications in due course. Because an FCC
license is necessary to lawfully provide wireless 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 PCS
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. AWS
licenses acquired by designated entities in Auction #66 may
be transferred to non-designated entities at any time, subject
to certain costs and reimbursements to the government of any
bidding credit amounts owed.
Auctions #73
and #76
As the FCC transitions television broadcasters to digital
frequencies, it has reclaimed the
698-806 MHz
band, referred to as the 700 MHz band, to make available
for new commercial and public safety wireless services. The
15
FCC has already assigned licenses for certain licenses in the
700 MHz band, and on January 24, 2008 commenced the
auction of 1,099 additional licenses in Auction #73,
as follows: 176 EA licenses in the A Block,
734 CMA licenses in the B Block, 176 EA licenses
in the E Block, 12 REAG licenses in the C Block,
and 1 nationwide license, to be used as part of the
700 MHz Public/Private Partnership, in the D Block.
The FCC has set separate aggregate reserve prices for each block
of 700 MHz band licenses in Auction #73. If licenses
initially offered are not assigned because the auction results
do not satisfy the applicable block-specific aggregate reserve
price(s), the agency will offer alternative licenses for the
relevant blocks in a subsequent auction (which will be
designated as Auction #76), subject to the same reserve
prices. Only qualified bidders from Auction #73 will be
permitted to participate in Auction #76.
A wholly owned subsidiary of Leap is a participant in
Auctions #73 and #76. We cannot assure you that our
bidding strategy will be successful in Auctions #73
and #76 or that spectrum in the auction that meets our
internally developed criteria will be available to us at
acceptable prices. In addition, FCC anonymous bidding and
anti-collusion auction rules applicable to these auctions
restrict certain business communications that we can enter into
with other applicants, as well as the degree of public
disclosure we can make regarding our bidding activities. For
example, the FCC has indicated that discussions with other
carriers regarding roaming agreements, the partitioning of
markets or the disaggregation of spectrum, or the acquisition or
sale of licenses or licensees, may implicate the anti-collusion
rule if both parties to the discussions are competing applicants
in the auctions and, in the course of discussions, the parties
exchange information that could directly or indirectly affect
their bids, bidding strategy, or the post-auction market
structure. These restrictions may affect the normal conduct of
our business by inhibiting discussions and the conclusion of
beneficial transactions with other parties during the auctions,
which could last three to six months, or more.
FCC
Regulation Generally
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, or
E911, services, including enhanced E911 services that provide
the callers telephone number and detailed location
information to emergency responders, as well as a requirement
that E911 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 E911 services in their locales. Absent a waiver, a
failure to comply with these requirements could subject us to
significant penalties. Furthermore, the FCC has initiated a
comprehensive re-examination of E911 location accuracy and
reliability requirements. The FCC recently issued an order
requiring wireless carriers to satisfy E911 location and
reliability standards at a geographical level defined by the
coverage area of a Public Safety Answering Point (or PSAP) and
has indicated that further action may be taken in future
proceedings to establish more stringent, uniform location
accuracy requirements across technologies, and to promote
continuing development of technologies that might enable
carriers to provide public safety with better information for
locating persons in the event of an emergency. We cannot predict
whether or how such actions will affect our business, financial
condition or results of operations.
FCC rules also require that local exchange carriers and most
commercial mobile radio service providers, including 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. The FCC also has adopted rules governing the
porting of wireline telephone numbers to wireless carriers.
The FCC has the authority to order interconnection between
commercial mobile radio service operators and incumbent local
exchange carriers, and FCC rules provide that all local exchange
carriers must enter into compensation arrangements with
commercial mobile radio service carriers for the exchange of
local traffic, whereby each carrier compensates the other for
terminating local traffic originating on the other
carriers network. As a commercial mobile radio services
provider, we are required to pay compensation to a wireline
local exchange carrier that transports and terminates a local
call that originated on our network. Similarly, we are entitled
to receive compensation when we transport and terminate a local
call that originated on a wireline local exchange network. We
negotiate interconnection arrangements for our network with
major incumbent local exchange carriers and other independent
telephone companies. If an agreement cannot be reached, under
certain circumstances, parties to
16
interconnection negotiations can submit outstanding disputes to
state authorities for arbitration. Negotiated interconnection
agreements are subject to state approval. The FCCs
interconnection rules and rulings, as well as state arbitration
proceedings, will directly impact the nature and costs of
facilities necessary for the interconnection of our network with
other telecommunications networks. They will also determine the
amount 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.
The FCC recently adopted a report and order clarifying that
commercial mobile radio service providers are required to
provide automatic roaming for voice services on just, reasonable
and non-discriminatory terms. The FCC order, however, does not
address roaming for data services nor does it provide any
regulatory framework or scheme for determining roaming rates for
voice services and so our ability to obtain roaming services
from other carriers at attractive rates remains uncertain. In
addition, the FCC order indicates that a host carrier is not
required to provide roaming services to another carrier in areas
in which that other carrier holds wireless licenses or usage
rights that could be used to provide wireless services. Because
we and Denali License hold a significant number of spectrum
licenses for markets in which service has not yet been launched,
we believe that this in-market roaming restriction
could significantly and adversely affect our ability to receive
roaming services in areas where we hold licenses. We and other
wireless carriers have filed a petition with the FCC, asking
that it reconsider this in-market exception to its roaming
order. However, we can provide no assurances as to whether the
FCC will reconsider this exception or the timeframe in which it
might do so. Our inability to obtain roaming services on a
cost-effective basis may limit our ability to compete
effectively for wireless customers, which may increase our churn
and decrease our revenues, which could materially adversely
affect our business, financial condition and results of
operations.
The FCC recently released an order purporting to implement
certain recommendations of an independent panel reviewing the
impact of Hurricane Katrina on communications networks, which
requires wireless carriers to provide emergency
back-up
power sources for their equipment and facilities, including up
to 24 hours of emergency power for mobile switch offices
and up to eight hours for cell site locations. The order was
expected to become effective sometime in 2008. However, on
February 28, 2008, the United States Court of Appeals for
the District of Columbia Circuit stayed the effective date of
the order pending resolution of a petition for review of the
FCCs rules. In order for us to comply with the
requirements of the order, we would likely need to purchase
additional equipment, obtain additional state and local permits,
authorizations and approvals and incur additional operating
expenses. We are currently evaluating our compliance with this
order should it become effective and the potential costs that
may be incurred to achieve compliance could be material.
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.
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 commercial mobile
radio service 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
17
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 wireless 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 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 is a
U.S. registered trademark of Leap, and a trademark
application for the Leap logo is pending. Cricket, Jump, the
Cricket K and Flex Bucket are U.S. registered
trademarks of Cricket. In addition, the following are trademarks
or service marks of Cricket: BridgePay, Cricket By Week, Cricket
Choice, Cricket Connect and Cricket Nation.
As of December 31, 2007, 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, including an application to amend one of our issued
patents. 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 be issued will
provide competitive advantages to us. See Item 3.
Legal Proceedings Patent Litigation below.
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 Securities and
Exchange Commission, or 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. 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
18
Reference Room by calling the SEC at
1-800-SEC-0330.
The information on our website is not part of this report or any
other report that we furnish to or file with the SEC.
Financial
Information Concerning Segments and Geographical
Information
Financial information concerning our operating segment and the
geographic area in which we operate is included in
Part II Item 8. Financial Statements
and Supplementary Data of this report.
Employees
As of December 31, 2007, Cricket employed
2,425 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.
Inflation
We believe that inflation has not had a material effect on our
results of operations.
Executive
Officers of the Registrant
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with the Company
|
|
S. Douglas Hutcheson
|
|
|
51
|
|
|
Chief Executive Officer, President, Acting Chief Financial
Officer and Director
|
Albin F. Moschner
|
|
|
55
|
|
|
Executive Vice President and Chief Marketing Officer
|
Glenn T. Umetsu
|
|
|
58
|
|
|
Executive Vice President and Chief Technical Officer
|
William Ingram
|
|
|
50
|
|
|
Senior Vice President, Financial Operations and Strategy
|
Robert J. Irving, Jr.
|
|
|
52
|
|
|
Senior Vice President, General Counsel and Secretary
|
Steven R. Martin
|
|
|
47
|
|
|
Acting Chief Accounting Officer
|
Leonard C. Stephens
|
|
|
51
|
|
|
Senior Vice President, Human Resources
|
S. Douglas Hutcheson was appointed as our chief
executive officer, or CEO, and president in February 2005, and
has served as a member of our board of directors since then, and
has also served as our acting chief financial officer, or CFO,
since September 2007, having previously served as our president
and CFO from January 2005 to February 2005, as our executive
vice president and CFO from January 2004 to January 2005, as our
senior vice president and CFO 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 is on the board of
directors of the Childrens Museum of San Diego and of
San Diegos Regional Economic Development Corporation.
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 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
19
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 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,
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.
William Ingram has served as our senior vice president,
financial operations and strategy since February 2008, having
previously served as a consultant to us since August 2007. Prior
to joining us, Mr. Ingram served as vice president and
general manager of AudioCodes, Inc., a telecommunications
equipment company from July 2006 to March 2007. Prior to that,
Mr. Ingram served as the president and chief executive
officer of Nuera Communications, Inc., a provider of VoIP
infrastructure solutions, from September 1996 until it was
acquired by AudioCodes, Inc. in July 2006. Prior to joining
Nuera Communications in 1996, Mr. Ingram served as the
chief operating officer of the clarity products division of
Pacific Communication Sciences, Inc. a provider of wireless data
communications products, as president of Ivie Industries, Inc. a
computer security and hardware manufacturer, and as president of
KevTon, Inc. an electronics manufacturing company.
Mr. Ingram holds an A.B. in economics from Stanford
University and an M.B.A. from Harvard Business School.
Robert J. Irving, Jr. 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.
Steven R. Martin has served as our acting chief
accounting officer since February 2008, having previously served
as an accounting consultant to us and our Audit Committee since
October 2007. From July 2005 to September 2007, Mr. Martin
served as vice president and chief financial officer of
Stratagene Corporation, a publicly traded life sciences company,
and served as director of finance of Stratagene Corporation from
May 2004 to July 2005. From March 2001 to May 2003,
Mr. Martin served as controller of Gen-Probe Incorporated,
a publicly traded life sciences company. Prior to Gen-Probe,
Mr. Martin held various senior finance positions at two
other international manufacturing companies and was a senior
audit manager at the public accounting firm of
Deloitte & Touche. Mr. Martin is a certified
public accountant and holds a B.S. in accounting from
San Diego State University.
Leonard C. Stephens 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
period. Mr. Stephens holds a B.A. from Howard University.
20
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 $75.9 million for the year
ended December 31, 2007, $24.4 million for the year
ended December 31, 2006, $6.1 million and
$43.1 million (excluding reorganization items, net) for the
five months ended December 31, 2004 and the seven months
ended July 31, 2004, respectively, $597.4 million for
the year ended December 31, 2003 and $664.8 million
for the year ended December 31, 2002. Although we had net
income of $30.7 million for the year ended
December 31, 2005, we may not generate profits in the
future on a consistent basis, or at all. Our strategic
objectives depend, in part, on our ability to build out and
launch networks associated with newly acquired FCC licenses,
including the licenses that we and Denali License acquired in
Auction #66, and we will experience higher operating
expenses as we build out and after we launch our service in
these new markets. 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, competition in the wireless
telecommunications market, our pace of new market launches, 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.
Our
Business Could Be Adversely Affected By General Economic
Conditions; If We Experience Low Rates of Customer Acquisition
or High Rates of Customer Turnover, Our Ability to Become
Profitable Will Decrease.
Our business could be adversely affected in a number of ways by
general economic conditions, including interest rates, consumer
credit conditions, unemployment and other macro-economic
factors. 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 that served by many other wireless
providers. As a result, during economic downturns or during
periods of high gasoline prices, we may have greater difficulty
in gaining new customers within this base for our services and
some of our existing customers may be more likely to terminate
service due to an inability to pay than the average industry
customer. Recent disruptions in the sub-prime mortgage market
may also affect our ability to gain new customers or the ability
of our existing customers to pay for their service. In addition,
our rate of customer acquisition and turnover may be affected by
other factors, including the size of our calling areas, network
performance and reliability issues, our handset or service
offerings (including the ability of customers to
cost-effectively roam onto other wireless networks), customer
care concerns, phone number portability, higher deactivation
rates among less-tenured customers we gained as a result of our
new market launches, and other competitive factors. We have also
experienced an increasing trend of current customers upgrading
their handset by buying a new phone, activating a new line of
service, and letting their existing service lapse, which trend
has resulted in a higher churn rate as these customers are
counted as having disconnected service but have actually been
retained. Our strategies to acquire new customers and address
customer turnover may not be successful. A high rate of customer
turnover or low rate of new customer acquisition would reduce
revenues and increase the total marketing expenditures required
to attract the minimum number of 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.
We Have
Made Significant Investment, and Will Continue to Invest, in
Joint Ventures That We Do Not Control.
In July 2006, we acquired a 72% non-controlling interest in LCW
Wireless, which was awarded a wireless license for the Portland,
Oregon market in Auction #58 and to which we contributed,
among other things, two wireless licenses in Eugene and Salem,
Oregon and related operating assets. In December 2006, we
completed the
21
replacement of certain network equipment of a subsidiary of LCW
Wireless and, as a result, we now own a 73.3% non-controlling
membership interest in LCW Wireless. In July 2006, we acquired
an 82.5% non-controlling interest in Denali, an entity which
participated in Auction #66. LCW Wireless and Denali
acquired their wireless licenses as very small
business designated entities under FCC regulations. 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 partners
in LCW Wireless and Denali, and we plan to have similar
agreements in connection with any future designated entity joint
venture arrangements we may enter into, which are intended to
allow us to actively participate to a limited extent in the
development of the business through 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 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 or persons 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 opportunity to
acquire the assets (including wireless licenses) of, such entity.
The FCC recently implemented rule changes aimed at addressing
alleged abuses of its designated entity program, affirmed these
changes on reconsideration and sought comment on further rule
changes. In that proceeding, the FCC re-affirmed its goals of
ensuring that only legitimate small businesses reap the benefits
of the program, and that such small businesses are not
controlled or manipulated by larger wireless carriers or other
investors that do not meet the small business qualification
tests. While we do not believe that the FCCs recent rule
changes materially affect our current joint ventures with LCW
Wireless and Denali, the scope and applicability of these rule
changes to such current designated entity structures remain in
flux, and parties have already sought further reconsideration or
judicial review of these rule changes. In addition, we cannot
predict how further rule changes or increased regulatory
scrutiny by the FCC flowing from this proceeding will affect our
current or future business ventures with designated entities or
our participation with such entities in future FCC spectrum
auctions.
We Face
Increasing Competition Which Could Have a Material Adverse
Effect on Demand for the Cricket Service.
The telecommunications industry is very competitive. In general,
we compete with national facilities-based wireless providers and
their prepaid affiliates or brands, local and regional carriers,
non-facilities-based MVNOs, VoIP service providers and
traditional landline service providers.
Many of these competitors often have greater name and brand
recognition, access to greater amounts of capital and
established relationships with a larger base of current and
potential customers. 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. Prior to the
launch of a large market in 2006, disruptions by a competitor
interfered with our indirect dealer relationships, reducing the
number of dealers offering Cricket service during the initial
weeks of launch. In addition, some of our competitors are able
to offer their customers roaming services at lower rates. As
consolidation in the industry creates even larger competitors,
any purchasing advantages our competitors have, as well as their
bargaining power as wholesale providers of roaming services, may
increase. For example, in connection with the offering of our
nationwide roaming service, we have encountered problems with
certain large wireless carriers in negotiating terms for roaming
arrangements that we believe are reasonable, and we believe that
consolidation has contributed significantly to such
carriers control over the terms and conditions of
wholesale roaming services.
These competitors may also offer potential customers more
features and options in their service plans than those currently
provided by Cricket, as well as new technologies
and/or
alternative delivery plans.
Some of our competitors offer rate plans substantially similar
to Crickets service plans or products that customers may
perceive to be similar to Crickets service plans in
markets in which we offer wireless service. For example,
AT&T, Sprint Nextel,
T-Mobile and
Verizon Wireless have each recently announced flat-rate
unlimited service offerings. In addition, Sprint Nextel offers a
flat-rate unlimited service offering under its Boost Unlimited
brand, which is very similar to the Cricket service. Sprint
Nextel has expanded and may further expand its Boost
22
Unlimited service offering into certain markets in which we
provide service and could further expand service into other
markets in which we provide service or in which we plan to
expand, and this service offering may present additional strong
competition in markets in which our offerings overlap. The
competitive pressures of the wireless telecommunications market
have also 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 in our
current markets and in markets in which we may expand that are
strongly represented in Crickets customer base. For
example,
T-Mobile has
introduced a FlexPay plan which permits customers to pay in
advance for its post-pay plans and avoid overage charges, and an
internet-based service upgrade which permits wireless customers
to make unlimited local and long-distance calls from their home
phone in place of a traditional landline phone service. These
competitive offerings could adversely affect our ability to
maintain our pricing and increase or maintain our market
penetration and may have a material adverse effect on our
financial results.
We may also face additional competition from new entrants in the
wireless marketplace, many of whom may have significantly more
resources than we do. The FCC is pursuing policies designed to
increase the number of wireless licenses and spectrum available
for the provision of wireless voice and data services 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. The FCC has
also in recent years allowed satellite operators to free up
portions of their spectrum for ancillary terrestrial use, and
recently permitted the offering of broadband services over power
lines. In addition, the auction and licensing of new spectrum,
including the 700 MHz band licenses currently being
auctioned by the FCC, may result in new competitors
and/or allow
existing competitors to acquire additional spectrum, which could
allow them to offer services that we may not technologically or
cost effectively be able to offer with the licenses we hold or
to which we have access.
Our ability to remain competitive will depend, in part, on our
ability to anticipate and respond to various competitive factors
and to keep our costs low.
Recent
Disruptions in the Financial Markets Could Affect Our Ability to
Obtain Debt or Equity Financing On Reasonable Terms (or At All),
and Have Other Adverse Effects On Us.
We may wish to raise significant capital to finance business
expansion activities and our ability to raise debt or equity
capital in the public or private markets could be impaired by
various factors. For example, U.S. credit markets have recently
experienced significant dislocations and liquidity disruptions
which have caused the spreads on prospective debt financings to
widen considerably. These circumstances have materially impacted
liquidity in the debt markets, making financing terms for
borrowers less attractive, and in certain cases have resulted in
the unavailability of certain types of debt financing. Continued
uncertainty in the credit markets may negatively impact our
ability to access additional debt financing or to refinance
existing indebtedness on favorable terms (or at all). These
events in the credit markets have also had an adverse effect on
other financial markets in the U.S., which may make it more
difficult or costly for us to raise capital through the issuance
of common stock, preferred stock or other equity securities. If
we require additional capital to fund or accelerate the pace of
any of our business expansion efforts or other strategic
activities and were unable to obtain such capital on terms that
we found acceptable or at all, we would likely reduce our
investments in expansion activities or slow the pace of
expansion activities as necessary to match our capital
requirements to our available liquidity. Any of these risks
could impair our ability to fund our operations or limit our
ability to expand our business, which could have a material
adverse effect on our financial results. In addition, we
maintain investments in commercial paper and other short-term
investments, and any volatility or uncertainty in the financial
markets could result in losses from a decline in the value of
those investments.
We May Be
Unable to Obtain the Roaming Services We Need From Other
Carriers to Remain Competitive.
We believe that our customers prefer that we offer roaming
services that allow them to make calls automatically when they
are outside of their Cricket service area. Many of our
competitors have regional or national networks which enable them
to offer automatic roaming services to their subscribers at a
lower cost than we can
23
offer. We do not have a national network, and we must pay fees
to other carriers who provide roaming services to us. We
currently have roaming agreements with several other carriers
which allow our customers to roam on those carriers
networks. However, these roaming agreements generally cover
voice but not data services and some of these agreements may be
terminated on relatively short notice. In addition, we believe
that the rates charged to us by some of these carriers are
higher than the rates they charge to certain other roaming
partners.
The FCC recently adopted a report and order clarifying that
commercial mobile radio service providers are required to
provide automatic roaming for voice services on just, reasonable
and non-discriminatory terms. The FCC order, however, does not
address roaming for data services nor does it provide or mandate
any specific mechanism for determining the reasonableness of
roaming rates for voice services, and so our ability to obtain
roaming services from other carriers at attractive rates remains
uncertain. In addition, the FCC order indicates that a host
carrier is not required to provide roaming services to another
carrier in areas in which that other carrier holds wireless
licenses or usage rights that could be used to provide wireless
services. Because we and Denali License hold a significant
number of spectrum licenses for markets in which service has not
yet been launched, we believe that this in-market
roaming restriction could significantly and adversely affect our
ability to receive roaming services in areas where we hold
licenses. We and other wireless carriers have filed a petition
with the FCC, asking that it reconsider this in-market exception
to its roaming order. However, we can provide no assurances as
to whether the FCC will reconsider this exception or the
timeframe in which it might do so.
In light of the current FCC order, we cannot provide assurances
that we will be able to continue to provide roaming services for
our customers across the nation or that we will be able to
provide such services on a cost-effective basis. We may be
unable to enter into or maintain roaming arrangements for voice
services at reasonable rates, including in areas in which we
hold wireless licenses or have usage rights but have not yet
constructed wireless facilities, and we may be unable to secure
roaming arrangements for our data services. Our inability to
obtain these roaming services on a cost-effective basis may
limit our ability to compete effectively for wireless customers,
which may increase our churn and decrease our revenues, which
could materially adversely affect our business, financial
condition and results of operations.
We Are a
Participant in Auctions #73 and #76, Which May
Restrict Certain Business and Commercial Arrangements That We
May Enter Into.
We are a participant in Auctions #73 and #76, which
commenced on January 24, 2008. Our participation in these
auctions may require that we raise additional capital through a
combination of additional debt
and/or
equity financing. We cannot assure you that we will be able to
obtain any such additional financing on commercially reasonable
terms or at all. We intend to focus in the auctions on those
areas that we believe present attractive growth prospects for
our service offering based on an analysis of demographic,
economic and other factors and intend to be financially
disciplined with respect to prices we are willing to pay for any
such licenses. We cannot, however, assure you that our bidding
strategy will be successful in the auctions or that spectrum in
the auctions that meets our internally developed criteria will
be available to us at acceptable prices.
In addition, because we are a participant in these auctions,
applicable FCC rules restrict us from engaging in certain
business communications that we may desire to enter into with
other auction applicants or their affiliates. For example, the
FCC has indicated that discussions with other carriers regarding
roaming agreements, the partitioning of markets or the
disaggregation of spectrum, or the acquisition of licenses or
licensees, may implicate the anti-collusion rules if both
parties to the discussions are competing applicants in the
auctions and, in the course of the discussions, the parties
exchange information pertaining to or affecting their bids,
bidding strategy or the post-auction market structure. These
anti-collusion restrictions may affect the normal conduct of our
business by inhibiting discussions and the conclusion of
beneficial transactions with other carriers during the auction
process, which could last three to six months, or more.
We Have
Restated Our Prior Consolidated Financial Statements, Which Has
Led to Additional Risks and Uncertainties, Including Shareholder
Litigation.
As discussed in Note 2 to our consolidated financial
statements included in Part II
Item 8. Financial Statements and Supplementary Data
of our Annual Report on
Form 10-K,
as amended, for the year ended
24
December 31, 2006 filed with the SEC on December 26,
2007, we have restated our consolidated financial statements as
of and for the years ended December 31, 2006 and 2005
(including interim periods therein), for the period from
August 1, 2004 to December 31, 2004, and for the
period from January 1, 2004 to July 31, 2004. In
addition, we have restated our condensed consolidated financial
statements as of and for the quarterly periods ended
June 30, 2007 and March 31, 2007. The determination to
restate these consolidated financial statements and quarterly
condensed consolidated financial statements was made by
Leaps Audit Committee upon managements
recommendation following the identification of errors related to
(i) the timing of recognition of certain service revenues
prior to or subsequent to the period in which they were earned,
(ii) the recognition of service revenues for certain
customers that voluntarily disconnected service, (iii) the
classification of certain components of service revenues,
equipment revenues and operating expenses and (iv) the
determination of a tax valuation allowance during the second
quarter of 2007.
As a result of these events, we have become subject to a number
of additional risks and uncertainties, including substantial
unanticipated costs for accounting and legal fees in connection
with or related to the restatement. In particular, three
shareholder derivative actions have been filed, and we have also
recently been named in a number of alleged securities class
action lawsuits. The plaintiffs in these lawsuits may make
additional claims, expand existing claims
and/or
expand the time periods covered by the complaints. Other
plaintiffs may bring additional actions with other claims based
on the restatement. We may incur substantial defense costs with
respect to these claims, regardless of their outcome. Likewise,
these claims might cause a diversion of our managements
time and attention. If we do not prevail in any such actions, we
could be required to pay substantial damages or settlement costs.
Our
Business and Stock Price May Be Adversely Affected If Our
Internal Controls Are Not Effective.
Section 404 of the Sarbanes-Oxley Act of 2002 requires
companies to conduct 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 report on the effectiveness of
our internal control over financial reporting.
As described in Part II Item 9A.
Controls and Procedures of this report, our CEO and CFO
concluded that our disclosure controls and procedures were not
effective at the reasonable assurance level as of
December 31, 2007. Currently, our CEO, S. Douglas
Hutcheson, is also serving as acting CFO. The material weakness
we have identified in our internal control over financial
reporting related to the design of controls over the preparation
and review of the account reconciliations and analysis of
revenues, cost of revenue and deferred revenues, and ineffective
testing of changes made to our revenue and billing systems in
connection with the introduction or modification of service
offerings.
We have taken and are taking actions to remediate this material
weakness. In addition, management has developed and presented to
the Audit Committee a plan and timetable for the implementation
of remediation measures (to the extent not already implemented),
and the committee intends to monitor such implementation. We
believe that these actions will remediate the control
deficiencies we have identified and strengthen our internal
control over financial reporting.
We previously reported that certain material weaknesses in our
internal control over financial reporting existed at various
times during the period from September 30, 2004 through
September 30, 2007. These material weaknesses included
excessive turnover and inadequate staffing levels in our
accounting, financial reporting and tax departments, weaknesses
in the preparation of our income tax provision, and weaknesses
in our application of lease-related accounting principles,
fresh-start reporting oversight, and account reconciliation
procedures.
Although we believe we are taking appropriate actions to
remediate the control deficiencies we have identified and to
strengthen our internal control over financial reporting, we
cannot assure you that we will not discover other material
weaknesses in the future. 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
these or other internal control deficiencies. If we cannot
produce reliable financial reports, investors could lose
confidence in our reported financial information, the market
price of Leaps common stock could decline significantly,
we may be unable to
25
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 from within a Cricket
calling area 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 currently 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. Some companies that have offered this type of
service in the past have been unsuccessful. From time to time,
we also evaluate our service offerings and the demands of our
target customers and may modify, change, adjust or discontinue
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 or Cost Increases 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 the licenses that we and Denali License acquired in
Auction #66 and any licenses that we may acquire in
Auctions #73 or #76 or from third parties. Large-scale
construction projects for the build-out of our new markets will
require significant capital expenditures and may suffer cost
overruns. In addition, we expect to incur higher operating
expenses as our existing business grows and as we build out and
after we launch service in new markets. Any such significant
capital expenditures or increased operating expenses, including
in connection with the build-out and launch of markets for the
licenses that we and Denali License acquired in
Auction #66, would decrease earnings, OIBDA and free cash
flow for the periods in which we incur such costs. If we are
unable to fund the build-out of these new markets with our
existing cash and our cash generated from operations, we may be
required to raise additional equity capital or incur further
indebtedness, which we cannot guarantee would be available to us
on acceptable terms, or at all. In addition, the build-out of
the networks may be delayed or adversely affected by a 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.
The AWS spectrum that was auctioned in Auction #66
currently is used by U.S. federal government
and/or
incumbent commercial licensees. FCC rules require winning
bidders to avoid interfering with these existing users or to
clear the incumbent users from the spectrum through specified
relocation procedures. We and Denali License considered the
estimated cost and time frame required to clear the spectrum
which we and Denali License purchased in Auction #66 while
placing bids in the auction. However, the actual cost of
clearing the spectrum may exceed our estimated costs.
Furthermore, delays in the provision of federal funds to
relocate government users, or difficulties in negotiating with
incumbent commercial licensees, may extend the date by which the
auctioned spectrum can be cleared of existing operations, and
thus may also delay the date on which we can launch commercial
services using such licensed spectrum. In addition, certain
existing government operations are using the spectrum for
classified purposes. Although the government has agreed to clear
that spectrum to allow the holders to utilize their AWS licenses
in the affected areas, the government is only providing limited
information to spectrum holders about these classified uses
which creates additional uncertainty about the time at which
such spectrum will be available for commercial use. Several
federal government agencies have cleared or announced plans to
promptly clear spectrum covered by licenses we and Denali
License purchased in Auction #66. Other agencies, however,
have not yet finalized plans to relocate their use to
alternative spectrum. If these agencies do not relocate to
alternative spectrum within the next several months, their
continued use of the spectrum covered by licenses we and Denali
License purchased in Auction #66 could delay the launch of
certain markets, and as a result, could adversely affect our
competitive position and results of operations.
Although our vendors have announced their intention to
manufacture and supply handsets that operate in the AWS spectrum
bands, these handsets are not yet commercially available. If
handsets for the AWS spectrum do not
26
become commercially available on a timely basis in the future by
our suppliers, our proposed launches of new Auction #66
markets could be delayed, which would negatively impact our
earnings and cash flows. Any significant increase in our
expected capital expenditures in connection with the build-out
and launch of Auction #66 licenses could negatively impact
our earnings and free cash flow for those periods in which we
incur such capital expenditures.
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 substantial growth in a relatively short
period of time, and we 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 and
handset inventories, 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. In addition, continued growth
will eventually require the expansion of our billing, customer
care and sales systems and platforms, which will require
additional capital expenditures and may divert the time and
attention of management personnel who oversee any such
expansion. Furthermore, the implementation of any such systems
or platforms, including the transition to such systems or
platforms from our existing infrastructure, could result in
unpredictable technological or other difficulties. Failure to
successfully manage our expected growth and development, to
enhance our processes and management systems or to timely and
adequately resolve any such difficulties could have a material
adverse effect on our business, financial condition and results
of operations.
Our
Significant Indebtedness Could Adversely Affect Our Financial
Health and Prevent Us From Fulfilling Our Obligations.
We have now and will continue to have a significant amount of
indebtedness. As of December 31, 2007, our total
outstanding indebtedness under our Credit Agreement was
$886.5 million, and we also had a $200 million undrawn
revolving credit facility (which forms part of our senior
secured credit facility). Indebtedness under our senior 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. We have also issued
$1,100 million in unsecured senior notes due 2014. In
addition, looking forward we may raise significant capital to
finance business expansion activities, which could consist of
debt financing from the public
and/or
private capital markets.
Our significant indebtedness could have material 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
|
|
|
|
expose us to higher interest expense in the event of increases
in interest rates because indebtedness under our senior secured
credit facility bears interest at a variable rate.
|
27
Any of these risks could impair our ability to fund our
operations or limit our ability to expand our business, which
could have a material adverse effect on our financial results.
Despite
Current Indebtedness Levels, We May Incur Substantially More
Indebtedness. This Could Further Increase The Risks Associated
With Our Leverage.
We may incur significant additional indebtedness in the future
over time, as market conditions permit, to enable us to take
advantage of business expansion activities. The terms of our
senior unsecured indenture permit us, subject to specified
limitations, to incur additional indebtedness, including secured
indebtedness. In addition, our Credit Agreement permits us to
incur additional indebtedness under various financial ratio
tests.
If new indebtedness is added to our current levels of
indebtedness, the related risks that we now face could
intensify. Furthermore, the subsequent build-out of the networks
covered by the licenses we acquired in Auction #66 may
significantly reduce our free cash flow, increasing the risk
that we may not be able to service our indebtedness.
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 are 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, or at all. 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.
We May Be
Unable to Refinance Our Indebtedness.
We may need to refinance all or a portion of our indebtedness
before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness, including under our senior
unsecured indenture or our Credit Agreement, on commercially
reasonable terms, or at all. There can be no assurance that we
will be able to obtain sufficient funds to enable us to repay or
refinance our debt obligations on commercially reasonable terms,
or at all.
Covenants
in Our Indenture and Credit Agreement and Other Credit
Agreements or Indentures That We May Enter Into in the Future
May Limit Our Ability to Operate Our Business.
Our senior unsecured indenture and Credit Agreement contain
covenants that restrict the ability of Leap, Cricket and the
subsidiary guarantors to make distributions or other payments to
our investors or creditors until we satisfy certain financial
tests or other criteria. In addition, the indenture and our
Credit Agreement include covenants restricting, among other
things, the ability of Leap, Cricket and their restricted
subsidiaries to:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
create liens or other encumbrances;
|
|
|
|
place limitations on distributions from restricted subsidiaries;
|
|
|
|
pay dividends, make investments, prepay subordinated
indebtedness or make other restricted payments;
|
|
|
|
issue or sell capital stock of restricted subsidiaries;
|
|
|
|
issue guarantees;
|
|
|
|
sell or otherwise dispose of all or substantially all of our
assets;
|
28
|
|
|
|
|
enter into transactions with affiliates; and
|
|
|
|
make acquisitions or merge or consolidate with another entity.
|
Under our Credit Agreement, we must also comply with, among
other things, financial covenants with respect to a maximum
consolidated senior secured leverage ratio and, if a revolving
credit loan or uncollateralized letter of credit is outstanding
or requested, with respect to a minimum consolidated interest
coverage ratio, a maximum consolidated leverage ratio and a
minimum consolidated fixed charge coverage ratio. The
restrictions in our Credit Agreement could limit our ability to
make borrowings, 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. Any credit agreement or
indenture that we may enter into in the future may have similar
restrictions.
Our Credit Agreement also prohibits the occurrence of a change
of control, which includes the acquisition of beneficial
ownership of 35% or more of Leaps equity securities, a
change in a majority of the members of Leaps board of
directors that is not approved by the board and the occurrence
of a change of control under any of our other credit
instruments. Under our indenture, if a change of
control occurs (which includes the acquisition of
beneficial ownership of 35% or more of Leaps equity
securities, a sale of all or substantially all of the assets of
Leap and its restricted subsidiaries and a change in a majority
of the members of Leaps board of directors that is not
approved by the board), each holder of the notes may require
Cricket to repurchase all of such holders notes at a
purchase price equal to 101% of the principal amount of the
notes, plus accrued and unpaid interest.
If we default under our indenture or our Credit Agreement
because of a covenant breach or otherwise, all outstanding
amounts thereunder could become immediately due and payable. Our
failure to timely file our Quarterly Report on
Form 10-Q
for the fiscal quarter ended September 30, 2007 constituted
a default under our Credit Agreement, and the restatement of
certain of our historical consolidated financial information (as
described in Note 2 to our consolidated financial
statements included in Part II
Item 8. Financial Statements and Supplementary Data
of our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2006 filed with
the SEC on December 26, 2007) may have constituted a
default under our 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. We cannot
assure you that we would have sufficient funds to repay all of
the outstanding amounts under our indenture or our Credit
Agreement, and any acceleration of amounts due would have a
material adverse effect on our liquidity and financial condition.
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 debt,
which rise and fall upon changes in interest rates. As of
December 31, 2007, approximately 28% of our debt was
variable rate debt, after considering the effect of our interest
rate swap agreements. If prevailing interest rates or other
factors result in higher interest rates on our variable rate
debt, the increased interest expense would adversely affect our
cash flow and our ability to service our debt.
A
Majority of Our Assets Consists of Goodwill and Other Intangible
Assets.
As of December 31, 2007, 52.7% of our assets consisted of
goodwill and other intangibles, including wireless licenses. The
value of our assets, and in particular, our intangible assets,
will depend on market conditions, the availability of buyers and
similar factors. By their nature, our intangible assets may not
have a readily ascertainable market value or may not be saleable
or, if saleable, there may be substantial delays in their
liquidation. For example, prior FCC approval is required in
order for us to sell, or for any remedies to be exercised by our
lenders with respect to, our wireless licenses, and obtaining
such approval could result in significant delays and reduce the
proceeds obtained from the sale or other disposition of our
wireless licenses.
29
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, WiMax, and 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 expended a substantial amount of capital to
upgrade our network with EvDO 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.
In addition, CDMA2000 infrastructure networks could become less
popular in the future, which could raise the cost to us of
equipment and handsets that use that technology relative to the
cost of handsets and equipment that utilize other technologies.
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. In addition,
our business is managed by a small number of key executive
officers, including our CEO, S. Douglas Hutcheson. During
September 2007, Amin Khalifa resigned as our executive vice
president and CFO and the board of directors appointed
Mr. Hutcheson to serve as acting CFO until we find a
successor to Mr. Khalifa. 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 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
30
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 Upon 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. 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 service activation, 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 network service
interruptions. In addition, we are in the process of upgrading
some of our internal network systems, 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.
Any failure in or interruption of systems that we or third
parties maintain to support ancillary functions, such as
billing, customer care and financial reporting, could materially
impact our ability to timely and accurately record, process and
report information important to our business. 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.
To accommodate expected growth in our business, management has
been considering replacing our customer billing and activation
system, which we license from a third party. The vendor who
licenses the software to us and provides certain billing
services to us has a contract with us through 2010. The vendor
has developed a new billing product and has introduced that
product in a limited number of markets operated by another
wireless carrier. The vendor was working to adapt the new
billing product for our use, but we are now unlikely to use this
product because the vendor has announced that it intends to exit
the billing business. The vendor is currently exploring
alternative exit strategies, including selling its business to a
third party. If the vendor or its successor does not provide us
with an improved billing system in the future, we might choose
to terminate our contract for convenience and purchase a billing
system from a different vendor if we believed it was necessary
to do so to meet the requirements of our business. In such an
event, we may owe substantial termination fees.
31
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
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. For example, see
Item 3. Legal Proceedings Patent
Litigation for a description of our patent litigation with
MetroPCS Communications, Inc., or MetroPCS, and other affiliated
entities. We intend to vigorously defend against the matters
brought by the MetroPCS entities. Due to the complex nature of
the legal and factual issues involved, however, the outcome of
these matters is not presently determinable. If the MetroPCS
entities were to prevail in any of these matters, it could have
a material adverse effect on our business, financial condition
and results of operations.
In addition to these outstanding matters, 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. Our inability to
secure trademark or service mark protection with respect to our
brands could have a material adverse effect on our business,
financial condition and results of operations.
We and
Our Suppliers 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 or our
suppliers from time to time based on our or their general
business operations, the equipment, software or services that we
or they use or provide, or the specific operation of our
wireless networks. For example, see Item 3. Legal
Proceedings Patent Litigation for a
description of certain patent infringement lawsuits that have
been brought against us.
We generally have indemnification agreements with the
manufacturers, licensors and suppliers who provide us with the
equipment, software 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. Our suppliers may be
subject to infringement claims that could prevent or make it
more expensive for them to supply us with the products and
services we require to run our business. For example, we
purchase certain CDMA handsets that incorporate EvDO chipsets
manufactured by Qualcomm Incorporated, or Qualcomm, which are
the subject of patent infringement actions brought by Broadcom
Corporation in separate proceedings before the United States
International Trade Commission, or ITC, and the United States
District Court for the Central District of California. Both the
ITC and District Court have issued orders in their proceedings
that prevent or limit Qualcomms ability, subject to
various conditions and timelines, to sell, import or support the
infringing chips, and restrict third parties from importing the
handsets that incorporate the chips. Although these orders are
currently on appeal and the ITC order is stayed as to certain
third parties (including most of our handset suppliers), these
patent infringement actions could have the effect of slowing or
limiting our ability to introduce and offer EvDO handsets and
devices to our customers. Moreover, we may be subject to claims
that products, software and services provided by different
vendors which we combine to offer our services may infringe the
rights of third parties, and we may not have any indemnification
from our vendors for these claims. Whether or not an
infringement claim against us or a supplier 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
32
operations or systems to avoid claims of infringement. In
addition, infringement claims against our suppliers could also
require us to purchase products and services at higher prices or
from different suppliers and could adversely affect our business
by delaying our ability to offer certain products and services
to our customers.
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. For example,
the FCC recently released an order implementing certain
recommendations of an independent panel reviewing the impact of
Hurricane Katrina on communications networks, which requires
that wireless carriers provide emergency
back-up
power sources for their equipment and facilities, including up
to 24 hours of emergency power for mobile switch offices
and up to eight hours for cell site locations. As a result, in
order for us to comply with the new requirements should they
become effective, we may need to purchase additional equipment,
obtain additional state and local permits, authorizations and
approvals or incur additional operating expenses, and such costs
could be material. In addition, 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
from which the FCC obtains its authority, will not be further
amended in a manner that could be adverse to us. The FCC
recently implemented rule changes and sought comment on further
rule changes focused on addressing alleged abuses of its
designated entity program, which gives certain categories of
small businesses preferential treatment in FCC spectrum auctions
based on size. In that proceeding, the FCC has re-affirmed its
goals of ensuring that only legitimate small businesses benefit
from the program, and that such small businesses are not
controlled or manipulated by larger wireless carriers or other
investors that do not meet the small business qualification
tests. We cannot predict the degree to which rule changes or
increased regulatory scrutiny that may follow from this
proceeding will affect our current or future business ventures
or our participation in future FCC spectrum auctions.
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 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 Service Exceeds Our Expectations, Our
Costs of Providing Service Could Increase, Which Could Have a
Material Adverse Effect on Our Competitive Position.
Cricket customers generally use their handsets for an average of
approximately 1,450 minutes per month, and some markets
experience substantially higher call volumes. Our Cricket
service plans bundle certain features, long distance and
unlimited service in Cricket calling areas 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
33
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 spectrally efficient
technologies. Despite our recent spectrum purchases, 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. We also intend to
acquire additional spectrum in order to enter new strategic
markets. However, we cannot assure you that we will be able to
acquire additional spectrum at auction or in the after-market at
a reasonable cost or that additional spectrum would be made
available by the FCC on a timely basis. If such additional
spectrum is not available to us when required or at a reasonable
cost, our results of operations could be adversely affected.
Our
Wireless Licenses are Subject to Renewal, and May Be Revoked in
the Event that We Violate Applicable Laws.
Our existing wireless licenses are subject to renewal upon the
expiration of the
10-year or
15-year
period for which they are granted, which renewal period
commenced for some of our PCS wireless licenses in 2006. The FCC
will award a renewal expectancy to a wireless licensee that
timely files a renewal application, has provided
substantial service during its past license term and
has substantially complied with applicable FCC rules and
policies and the Communications Act. The FCC has routinely
renewed wireless licenses in the past. However, the
Communications Act provides that licenses may be revoked for
cause and license renewal applications denied if the FCC
determines that a renewal would not serve the public interest.
FCC rules provide that applications competing with a license
renewal application may be considered in comparative hearings,
and establish the qualifications for competing applications and
the standards to be applied in hearings. We cannot assure you
that the FCC will renew our wireless licenses upon their
expiration.
Future
Declines in the Fair Value of Our Wireless Licenses Could Result
in Future Impairment Charges.
As of December 31, 2007, the carrying value of our wireless
licenses and those of Denali License and LCW License was
approximately $1.9 billion. During the years ended
December 31, 2007, 2006 and 2005, we recorded impairment
charges of $1.0 million, $7.9 million and
$12.0 million, respectively.
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 sale prices in FCC
auctions.
|
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. For example, the FCC has recently auctioned an
additional 90 MHz of spectrum in the 1700 MHz to
2100 MHz band in Auction #66, is currently auctioning
additional spectrum in the 700 MHz band in
Auctions #73 and #76 and has announced that it intends
to auction additional spectrum in the 2.5 GHz band. If the
market value of wireless licenses were to decline significantly,
the value of our wireless licenses could be subject to non-cash
impairment charges.
We assess potential impairments to our indefinite-lived
intangible assets, including wireless licenses, annually and
when there is evidence that events or changes in circumstances
indicate that an impairment condition may exist. We conduct our
annual tests for impairment of our wireless licenses during the
third quarter of each year. Estimates
34
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, pricing trends among historical wireless license
transactions, our spectrum holdings within a given market
relative to other carriers holdings and qualitative
demographic and economic information concerning the areas that
comprise our markets. 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.
If We
Experience High Rates of Credit Card, Subscription or Dealer
Fraud, Our Ability to Generate Cash Flow Will
Decrease.
Our operating costs can increase substantially as a result of
customer credit card, subscription or 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, the resulting
loss of revenue or increased expenses could have a material
adverse impact on our financial condition and results of
operations.
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 Leap common stock has been, and is likely to be,
subject to wide fluctuations. Factors affecting the trading
price of Leap common stock may include, among other things:
|
|
|
|
|
variations in our operating results or those of our competitors;
|
|
|
|
announcements of technological innovations, new services or
service enhancements, strategic alliances or significant
agreements by us or by our competitors;
|
35
|
|
|
|
|
entry of new competitors into our markets;
|
|
|
|
significant developments with respect to our intellectual
property or related litigation;
|
|
|
|
the announcements and bidding of auctions for new spectrum;
|
|
|
|
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
Leap common stock;
|
|
|
|
any default under our Credit Agreement or our indenture because
of a covenant breach or otherwise; and
|
|
|
|
market conditions in our industry and the economy as a whole.
|
We May
Elect To Raise Additional Equity Capital Which May Dilute
Existing Stockholders.
We may raise significant capital to finance business expansion
activities, which could consist of debt
and/or
equity financing from the public
and/or
private capital markets. To the extent that we elect to raise
equity capital, this financing may not be available in
sufficient amounts or on terms acceptable to us and may be
dilutive to existing stockholders. In addition, these sales
could reduce the trading price of Leaps common stock and
impede our ability to raise future capital. If we required
additional financing in the capital markets to take advantage of
business expansion activities or to accelerate our pace of new
market launches and could not obtain such financing on terms we
found acceptable, we would likely reduce our investment in
expansion activities or slow the pace of expansion activities to
match our capital requirements to our available liquidity.
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 February 22, 2008, 68,713,151 shares of Leap
common stock were issued and outstanding, and
7,426,849 additional shares of Leap common stock were
reserved for issuance, including 6,094,410 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, as amended, 732,439 shares
reserved for issuance under Leaps Employee Stock Purchase
Plan, and 600,000 shares reserved for issuance upon
exercise of outstanding warrants.
In addition, Leap has reserved five percent of its outstanding
shares, which represented 3,435,658 shares of common stock
as of February 22, 2008, for potential issuance to CSM upon
the exercise of CSMs option to put its entire equity
interest in LCW Wireless to Cricket. Under the amended and
restated limited liability company agreement with CSM and WLPCS,
the purchase price for CSMs equity interest is 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 the Credit Agreement do not permit Cricket to satisfy any
substantial portion of its put obligations to CSM in cash. If
Cricket elects to satisfy 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.
36
Our
Directors and Affiliated Entities Have Substantial Influence
over Our Affairs, and Our Ownership Is Highly Concentrated.
Sales of a Significant Number of Shares by Large Stockholders
May Adversely Affect the Market Price of Leap Common
Stock.
Our directors and entities affiliated with them beneficially
owned in the aggregate approximately 23.1% of Leap common stock
as of February 22, 2008. Moreover, our four largest
stockholders and entities affiliated with them beneficially
owned in the aggregate approximately 58.1% of Leap common stock
as of February 22, 2008. 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.
Our resale shelf registration statement, as amended, registers
for resale 11,755,806 shares of Leap common stock held by
entities affiliated with one of our directors, or approximately
17.1% 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, or any of the other shares held
by our other large stockholders and entities affiliated with
them, may have on the then-prevailing market price of Leap
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 Leap common stock. These
sales could also impede our ability to raise future capital.
Provisions
in Our Amended and Restated Certificate of Incorporation and
Bylaws or Delaware Law, and Provisions in Our Credit Agreement
and Indenture, 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 Leap
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.
|
We are also subject to Section 203 of the Delaware General
Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business
combinations with any interested stockholder for a
period of three years following the date on which the
stockholder became an interested stockholder and
which may discourage, delay or prevent a change in control of
our company.
In addition, our Credit Agreement also prohibits the occurrence
of a change of control and, under our indenture, if a
change of control occurs, each holder of the notes
may require Cricket to repurchase all of such holders
notes at a purchase price equal to 101% of the principal amount
of the notes, plus accrued and unpaid interest. See
Part II Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
37
As of December 31, 2007, Cricket leased space, totaling
approximately 130,000 square feet, in three office
buildings in San Diego, California for our corporate
headquarters. We use these offices for engineering and
administrative purposes. Cricket also leases approximately
30,000 square feet of space in Denver, Colorado which is
used for sales and marketing, product development, information
technology and regional administrative purposes. In addition,
Cricket leased approximately 30,000 square feet of offices
in Nashville, Tennessee. We use these offices for engineering
and administrative purposes.
Cricket has approximately 60 additional office leases in its
individual markets that range from approximately
2,500 square feet to approximately 14,000 square feet.
Cricket also leases approximately 160 retail locations in its
markets, including stores ranging in size from approximately
1,000 square feet to 5,600 square feet, as well as six
kiosks and retail spaces within another store. In addition, as
of December 31, 2007, Cricket leased approximately 5,800
cell sites, 33 switching centers and two warehouse facilities
(which range in size from approximately 3,000 square feet
to 20,000 square feet). We do not own any real property.
As of December 31, 2007, LCW Operations leased five retail
locations in its markets, consisting of stores ranging in size
from approximately 1,900 square feet to 3,400 square
feet. In addition, as of December 31, 2007, LCW Operations
leased approximately 285 cell site locations and one office and
switch location. LCW Operations does not own any real property.
As of December 31, 2007, a wholly owned subsidiary of
Denali leased approximately 105 cell sites and one office and
two switch locations. Denali and its subsidiaries do not own any
real property.
As we and Denali continue to develop existing Cricket markets,
and as additional markets are built out, we and Denali will
lease additional or substitute office facilities, retail stores,
cell sites, switch sites and warehouse facilities.
|
|
Item 3.
|
Legal
Proceedings
|
Patent
Litigation
On June 14, 2006, we sued MetroPCS in the United States
District Court for the Eastern District of Texas, Marshall
Division, for infringement of U.S. Patent
No. 6,813,497 Method for Providing Wireless
Communication Services and Network and System for Delivering
Same, issued to us. Our complaint seeks damages and an
injunction against continued infringement. On August 3,
2006, MetroPCS (i) answered the complaint, (ii) raised
a number of affirmative defenses, and (iii) together with
certain related entities (referred to, collectively with
MetroPCS, as the MetroPCS entities), counterclaimed
against Leap, Cricket, numerous Cricket subsidiaries, Denali
License, and current and former employees of Leap and Cricket,
including our CEO, S. Douglas Hutcheson. MetroPCS has since
amended its complaint and Denali License has been dismissed,
without prejudice, as a counterclaim defendant. The countersuit
now alleges claims for breach of contract, misappropriation,
conversion and disclosure of trade secrets, fraud,
misappropriation of confidential information and breach of
confidential relationship, relating to information provided by
MetroPCS to such employees, including prior to their employment
by Leap, and asks the court to award attorneys fees and damages,
including punitive damages, impose an injunction enjoining us
from participating in any auctions or sales of wireless
spectrum, impose a constructive trust on our business and assets
for the benefit of the MetroPCS entities, transfer our business
and assets to MetroPCS, and declare that the MetroPCS entities
have not infringed U.S. Patent No. 6,813,497 and that
such patent is invalid. MetroPCSs claims allege that we
and the other counterclaim defendants improperly obtained, used
and disclosed trade secrets and confidential information of the
MetroPCS entities and breached confidentiality agreements with
the MetroPCS entities. On October 31, 2007, pursuant to a
stipulation between the parties, the court administratively
closed the case for a period not to exceed six months. The
parties stipulated that neither will move the court to reopen
the case until at least 90 days following the
administrative closure. On November 1, 2007, MetroPCS
formally withdrew its September 4, 2007 unsolicited merger
proposal, which our board of directors had previously rejected
on September 16, 2007. On February 14, 2008, in response to
our motion, the court re-opened the case. On September 22,
2006, Royal Street Communications, LLC, or Royal Street, an
entity affiliated with MetroPCS, filed an action in the United
States District Court for the Middle District of Florida, Tampa
Division, seeking a declaratory judgment that our
U.S. Patent No. 6,813,497 (the same patent that is the
subject of our infringement action
38
against MetroPCS) is invalid and is not being infringed by Royal
Street or its PCS systems. Upon our request, the court has
transferred the Royal Street case to the United States District
Court for the Eastern District of Texas due to the affiliation
between MetroPCS and Royal Street. On February 25, 2008, we
filed an answer to the Royal Street complaint, together with
counterclaims for patent infringement. We intend to vigorously
defend against the counterclaims filed by the MetroPCS entities
and the action brought by Royal Street. Due to the complex
nature of the legal and factual issues involved, however, the
outcome of these matters is not presently determinable. If the
MetroPCS entities were to prevail in these matters, it could
have a material adverse effect on our business, financial
condition and results of operations.
On August 17, 2006, we were served with a complaint filed
by certain MetroPCS entities, along with another affiliate,
MetroPCS California, LLC, in the Superior Court of the State of
California, which names Leap, Cricket, certain of its
subsidiaries, and certain current and former employees of Leap
and Cricket, including Mr. Hutcheson, as defendants. In
response to demurrers by us and by the court, two of the
plaintiffs amended their complaint twice, dropped the other
plaintiffs and have filed a third amended complaint. In the
current complaint, the plaintiffs allege statutory unfair
competition, statutory misappropriation of trade secrets, breach
of contract, intentional interference with contract, and
intentional interference with prospective economic advantage,
seek preliminary and permanent injunction, and ask the court to
award damages, including punitive damages, attorneys fees, and
restitution. We have filed a demurrer to the third amended
complaint. On October 25, 2007, pursuant to a stipulation
between the parties, the court entered a stay of the litigation
for a period of 90 days. On January 28, 2008, the
court ordered that the stay remain in effect for a further
120 days, or until May 27, 2008. If and when the case
proceeds, we intend to vigorously defend against these claims.
Due to the complex nature of the legal and factual issues
involved, however, the outcome of this matter is not presently
determinable. If the MetroPCS entities were to prevail in this
action, it could have a material adverse effect on our business,
financial condition and results of operations.
On June 6, 2007, we were sued by Minerva Industries, Inc.,
or Minerva, in the United States District Court for the Eastern
District of Texas, Marshall Division, for infringement of
U.S. Patent No. 6,681,120 entitled Mobile
Entertainment and Communication Device. Minerva alleges
that certain handsets sold by us infringe a patent relating to
mobile entertainment features, and the complaint seeks damages
(including enhanced damages), an injunction and attorneys
fees. We filed an answer to the complaint and counterclaims of
invalidity on January 7, 2008. On January 21, 2008,
Minerva filed another suit against us in the United States
District Court for the Eastern District of Texas, Marshall
Division, for infringement of its newly issued U.S. Patent
No. 7,321,738 entitled Mobile Entertainment and
Communication Device. This matter has been transferred to
the judge overseeing the first Minerva action, and it is likely
the two actions will be consolidated. On June 7, 2007, we
were sued by Barry W. Thomas, or Thomas, in the United States
District Court for the Eastern District of Texas, Marshall
Division, for infringement of U.S. Patent
No. 4,777,354 entitled System for Controlling the
Supply of Utility Services to Consumers. Thomas alleges
that certain handsets sold by us infringe a patent relating to
actuator cards for controlling the supply of a utility service,
and the complaint seeks damages (including enhanced damages) and
attorneys fees. We and other co-defendants have filed a
motion to stay the litigation pending the determination of
similar litigation in the Western District of North Carolina. We
intend to vigorously defend against these matters brought by
Minerva and Thomas. Due to the complex nature of the legal and
factual issues involved, however, the outcome of these matters
is not presently determinable. We have notified our handset
suppliers of these lawsuits, the majority of whom were also sued
by Minerva and Thomas in other actions, and we anticipate that
we will be indemnified by such suppliers for the costs of
defense and any damages arising with respect to such lawsuits.
On June 8, 2007, we were sued by Ronald A. Katz Technology
Licensing, L.P., or Katz, in the United States District Court
for the District of Delaware, for infringement of 19
U.S. patents, 15 of which have expired. Katz alleged that
we have infringed patents relating to automated telephone
systems, including customer service systems, and the complaint
sought damages (including enhanced damages), an injunction, and
attorneys fees. We have since settled this matter with
Katz.
On October 15, 2007, Leap was sued by Visual Interactive
Phone Concepts, Inc., or Visual Interactive, in the United
States District Court for the Southern District of California
for infringement of U.S. Patent No. 5,724,092 entitled
Videophone Mailbox Interactive Facility System and Method
of Processing Information and U.S. Patent
No. 5,606,361 entitled Videophone Mailbox Interactive
Facility System and Method of Processing Information.
Visual Interactive alleged that Leap infringed these patents
relating to interactive videophone systems, and the complaint
sought an accounting for damages under 35 U.S.C.
§ 284, an injunction and attorneys fees. We
filed our
39
answer to the complaint on December 13, 2007, and on the
same day, Cricket filed a complaint against Visual Interactive
in the United States District Court for the Southern District of
California seeking a declaration by the court that the patents
alleged against us are neither valid nor infringed by us. Visual
Interactive agreed to dismiss its complaint against Leap and
file an amended complaint against Cricket, and Cricket filed its
answer on January 23, 2008. We intend to vigorously defend
against this matter. Due to the complex nature of the legal and
factual issues involved, however, the outcome of this matter is
not presently determinable.
On December 10, 2007, we were sued by Freedom Wireless,
Inc., or Freedom Wireless, in the United States District Court
for the Eastern District of Texas, Marshall Division, for
infringement of U.S. Patent No. 5,722,067 entitled
Security Cellular Telecommunications System,
U.S. Patent No. 6,157,823 entitled Security
Cellular Telecommunications System, and U.S. Patent
No. 6,236,851 entitled Prepaid Security Cellular
Telecommunications System. Freedom Wireless alleges that
its patents claim a novel cellular system that enables prepaid
services subscribers to both place and receive cellular calls
without dialing access codes or using modified telephones. The
complaint seeks unspecified monetary damages, increased damages
under 35 U.S.C. § 284 together with interest,
costs and attorneys fees, and an injunction. On
February 15, 2008, we filed a motion to sever and stay the
proceedings against Cricket or, alternatively, to transfer the
case to the United States District Court for the Northern
District of California. We intend to vigorously defend against
this matter. Due to the complex nature of the legal and factual
issues involved, however, the outcome of this matter is not
presently determinable.
On February 4, 2008, we and certain other wireless carriers
were sued by Electronic Data Systems Corporation, or EDS, in the
United States District Court for the Eastern District of Texas,
Marshall Division, for infringement of U.S. Patent
No. 7,156,300 entitled System and Method for
Dispensing of a Receipt Reflecting Prepaid Phone Services
and U.S. Patent No. 7,255,268 entitled System
for Purchase of Prepaid Telephone Services. EDS alleges
that the sale and marketing by us of prepaid wireless cellular
telephone services infringes these patents, and the complaint
seeks an injunction against further infringement, damages
(including enhanced damages) and attorneys fees. We intend
to vigorously defend against this lawsuit. Due to the complex
nature of the legal and factual issues involved, however, the
outcome of this lawsuit is not presently determinable.
American
Wireless Group
On December 31, 2002, several members of American Wireless
Group, LLC, or 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 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 appealed the denial
of the motion to the Mississippi Supreme Court. On
November 15, 2007, the Mississippi Supreme Court issued an
opinion denying the appeal and remanded the action to the trial
court. The defendants have since filed a motion to stay the
remand pending application to the United States Supreme Court
for a writ of certiorari. The Mississippi Supreme Court granted
the motion and the remand is now stayed until at least
April 2, 2008.
In a related action to the action described above, in June 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
40
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. AWG has since agreed to arbitrate this lawsuit. The
arbitration is proceeding and a briefing schedule for motions
for summary judgment has been set.
Although Leap is not a defendant in either the Whittington or
AWG Lawsuits, several of the defendants have indemnification
agreements with us. Management believes that the
defendants liability, if any, from the AWG and Whittington
Lawsuits and any further indemnity claims of the defendants
against Leap is not presently determinable.
Securities
Litigation
Two shareholder derivative lawsuits were filed in the California
Superior Court for the County of San Diego in November 2007
and January 2008, and one shareholder derivative lawsuit was
filed in the United States District Court for the Southern
District of California in February 2008 against certain of our
current and former directors and executive officers, and against
Leap as a nominal defendant. Plaintiffs in one of the state
shareholder derivative lawsuits have indicated that they have
filed a notice of dismissal of the lawsuit. The claims asserted
in these lawsuits include breaches of fiduciary duty, gross
mismanagement, waste of corporate assets, unjust enrichment and
violations of the Securities Exchange Act of 1934, or the
Exchange Act, arising from Leaps restatement of its
financial statements as described in Note 2 to our
consolidated financial statements included in
Part II Item 8. Financial Statements
and Supplementary Data of our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2006, filed
with the SEC on December 26, 2007, the September 2007
unsolicited merger proposal from MetroPCS and sales of Leap
common stock by certain of the defendants between December 2004
and June 2007. The complaints variously seek unspecified
damages, equitable
and/or
injunctive relief, a constructive trust, disgorgement and
reasonable attorneys fees and costs. Due to the complex
nature of the legal and factual issues involved, the outcome of
these matters is not presently determinable.
We and certain of our current and former officers and directors
have been named as defendants in multiple securities class
action lawsuits filed in the United States District Court for
the Southern District of California between November 2007 and
February 2008 purportedly on behalf of investors who purchased
Leap common stock between May 16, 2004 and November 9,
2007. Our independent registered public accounting firm,
PricewaterhouseCoopers, LLP, has been named in one of these
lawsuits. The class action lawsuits allege that all defendants
violated Section 10(b) of the Exchange Act and
Rule 10b-5,
and allege the individual defendants violated Section 20(a)
of the Exchange Act, by making false and misleading statements
about our business and financial results arising from
Leaps November 9, 2007 announcement of its
restatement of its financial statements as described in
Note 2 to our consolidated financial statements included in
Part II Item 8. Financial Statements
and Supplementary Data of our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2006, filed
with the SEC on December 26, 2007. Some of these lawsuits
also allege false and misleading statements revealed by
Leaps August 7, 2007 second quarter 2007 earnings
release. The class action lawsuits seek, among other relief,
determinations that the actions are proper class actions,
unspecified damages and reasonable attorneys fees and
costs. Plaintiffs have filed motions for the appointment of lead
plaintiff, lead plaintiffs counsel and consolidation of
all related cases, and these motions are scheduled to be heard
on March 28, 2008. We intend to vigorously defend against
these lawsuits. Due to the complex nature of the legal and
factual issues involved, however, the outcome of these matters
is not presently determinable.
Other
Litigation
In addition to the matters described above, we are often
involved in certain other claims, arising in the ordinary course
of business, seeking monetary damages and other relief, none of
which claims, based upon current
41
information, is currently expected to have a material adverse
effect on our business, financial condition and results of
operations.
|
|
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 year ended December 31, 2007.
42
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 (now known as the NASDAQ Global Market) under the symbol
LEAP. Commencing on July 1, 2006, our common
stock became listed for trading on the NASDAQ Global Select
Market, also under the symbol LEAP.
The following table sets forth the high and low closing prices
per share of our common stock for the quarterly periods
indicated, which correspond to our quarterly fiscal periods for
financial reporting purposes. Through June 30, 2006, prices
for our common stock are sales prices on the NASDAQ National
Market. On and after July 1, 2006, prices for our common
stock are sales prices on the NASDAQ Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
High($)
|
|
|
Low($)
|
|
|
Calendar Year 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
43.89
|
|
|
|
34.87
|
|
Second Quarter
|
|
|
47.41
|
|
|
|
39.84
|
|
Third Quarter
|
|
|
48.18
|
|
|
|
40.87
|
|
Fourth Quarter
|
|
|
61.37
|
|
|
|
47.26
|
|
Calendar Year 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
68.24
|
|
|
|
58.00
|
|
Second Quarter
|
|
|
87.46
|
|
|
|
66.84
|
|
Third Quarter
|
|
|
98.33
|
|
|
|
54.47
|
|
Fourth Quarter
|
|
|
83.74
|
|
|
|
32.01
|
|
On February 22, 2008, the last reported sale price of
Leaps common stock on the NASDAQ Global Select Market was
$36.24 per share. As of February 22, 2008, there were
68,713,151 shares of common stock outstanding held by
approximately 241 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. As more fully described
in Part II Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, the terms of our Credit Agreement entered into
in June 2006 and the indenture governing our unsecured senior
notes entered into in October 2006 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.
43
Securities
Authorized For Issuance Under Equity Compensation
Plans
The following table provides information as of December 31,
2007 with respect to equity 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
|
|
|
3,374,051
|
(1)(2)
|
|
$
|
45.12
|
|
|
|
3,506,007
|
(3)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,374,051
|
|
|
$
|
45.12
|
|
|
|
3,506,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents shares reserved for issuance under the Leap Wireless
International, Inc. 2004 Stock Option, Restricted Stock and
Deferred Stock Unit Plan, or 2004 Plan, adopted by the
compensation committee of our board of directors on
December 30, 2004, as contemplated by our confirmed plan of
reorganization and as amended on March 8, 2007. Stock
options granted prior to May 17, 2007 were granted prior to
the approval of the 2004 Plan by Leap stockholders. The material
features of the 2004 Plan are described in our Definitive Proxy
Statement dated April 6, 2007, as filed with the SEC on
such date, which description is incorporated herein by reference. |
|
(2) |
|
Excludes 1,404,601 shares of restricted stock issued under the
2004 Plan which are subject to release upon vesting of the
shares. |
|
(3) |
|
Consists of 732,439 shares reserved for issuance under the
Leap Wireless International, Inc. Employee Stock Purchase Plan
and 2,773,568 shares reserved for issuance under the 2004
Plan. |
44
|
|
Item 6.
|
Selected
Financial Data (in thousands, except per share
data)
|
The following selected financial data were derived from our
audited consolidated financial statements. 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 included elsewhere in this report.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,630,803
|
|
|
$
|
1,167,187
|
|
|
$
|
957,771
|
|
|
$
|
350,847
|
|
|
$
|
492,756
|
|
|
$
|
752,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
60,262
|
|
|
|
23,725
|
|
|
|
71,002
|
|
|
|
12,729
|
|
|
|
(34,412
|
)
|
|
|
(360,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before reorganization items, income taxes and
cumulative effect of change in accounting principle
|
|
|
(38,561
|
)
|
|
|
(15,703
|
)
|
|
|
52,300
|
|
|
|
(2,170
|
)
|
|
|
(38,900
|
)
|
|
|
(443,682
|
)
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
962,444
|
|
|
|
(146,242
|
)
|
Income tax expense
|
|
|
(37,366
|
)
|
|
|
(9,277
|
)
|
|
|
(21,615
|
)
|
|
|
(3,930
|
)
|
|
|
(4,166
|
)
|
|
|
(8,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(75,927
|
)
|
|
|
(24,980
|
)
|
|
|
30,685
|
|
|
|
(6,100
|
)
|
|
|
919,378
|
|
|
|
(597,976
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(75,927
|
)
|
|
$
|
(24,357
|
)
|
|
$
|
30,685
|
|
|
$
|
(6,100
|
)
|
|
$
|
919,378
|
|
|
$
|
(597,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(1.13
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.51
|
|
|
$
|
(0.10
|
)
|
|
$
|
15.68
|
|
|
$
|
(10.20
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share(1)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.51
|
|
|
$
|
(0.10
|
)
|
|
$
|
15.68
|
|
|
$
|
(10.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(1.13
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.50
|
|
|
$
|
(0.10
|
)
|
|
$
|
15.68
|
|
|
$
|
(10.20
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share(1)
|
|
$
|
(1.13
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.50
|
|
|
$
|
(0.10
|
)
|
|
$
|
15.68
|
|
|
$
|
(10.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,100
|
|
|
|
61,645
|
|
|
|
60,135
|
|
|
|
60,000
|
|
|
|
58,623
|
|
|
|
58,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
67,100
|
|
|
|
61,645
|
|
|
|
61,003
|
|
|
|
60,000
|
|
|
|
58,623
|
|
|
|
58,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Successor Company
|
|
Predecessor Company
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
433,337
|
|
|
$
|
372,812
|
|
|
$
|
293,073
|
|
|
$
|
141,141
|
|
|
$
|
84,070
|
|
Working capital (deficit)(2)
|
|
|
380,384
|
|
|
|
185,191
|
|
|
|
245,366
|
|
|
|
150,868
|
|
|
|
(2,255,349
|
)
|
Restricted cash, cash equivalents and short-term investments
|
|
|
15,550
|
|
|
|
13,581
|
|
|
|
13,759
|
|
|
|
31,427
|
|
|
|
55,954
|
|
Total assets
|
|
|
4,432,998
|
|
|
|
4,084,947
|
|
|
|
2,499,946
|
|
|
|
2,213,312
|
|
|
|
1,756,843
|
|
Capital leases
|
|
|
61,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(2)
|
|
|
2,033,902
|
|
|
|
1,676,500
|
|
|
|
588,333
|
|
|
|
371,355
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
1,724,322
|
|
|
|
1,771,793
|
|
|
|
1,517,601
|
|
|
|
1,472,347
|
|
|
|
(893,895
|
)
|
|
|
|
(1) |
|
Refer to Notes 2 and 5 to the consolidated financial
statements included in Item 8. Financial Statements
and Supplementary Data of this report for an explanation
of the calculation of basic and diluted earnings (loss) per
share. |
|
(2) |
|
We have presented the principal and interest balances related to
our outstanding debt obligations as current liabilities in the
consolidated balance sheet as of December 31, 2003 as a
result of the then existing defaults under the underlying
agreements. |
46
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following information should be read in conjunction with the
audited consolidated financial statements and notes thereto
included in Item 8. Financial Statements and
Supplementary Data of this report.
Overview
We are a wireless communications carrier that offers digital
wireless service in the U.S. under the Cricket
brand. Our Cricket service offers customers unlimited wireless
service for a flat monthly rate without requiring a fixed-term
contract or credit check. Cricket service is offered by Cricket,
a wholly owned subsidiary of Leap, and is also offered in Oregon
by LCW Operations, a designated entity under FCC regulations.
Cricket owns an indirect 73.3% non-controlling interest in LCW
Operations through a 73.3% non-controlling interest in LCW
Wireless. Cricket also owns an 82.5% non-controlling interest in
Denali, which purchased a wireless license in Auction #66
covering the upper mid-west portion of the U.S. as a
designated entity through its wholly owned subsidiary, Denali
License. We consolidate our interests in LCW Wireless and Denali
in accordance with
FIN 46-R,
Consolidation of Variable Interest Entities, because
these entities are variable interest entities and we will absorb
a majority of their expected losses.
At December 31, 2007, Cricket service was offered in
23 states and had approximately 2.9 million customers.
As of December 31, 2007, we, LCW License (a wholly owned
subsidiary of LCW Operations) and Denali License owned wireless
licenses covering an aggregate of 186.5 million POPs
(adjusted to eliminate duplication from overlapping licenses).
The combined network footprint in our operating markets covered
approximately 54 million POPs at the end of 2007, which
includes new markets launched in 2007 and incremental POPs
attributed to ongoing footprint expansion. The licenses we and
Denali License purchased in Auction #66, together with the
existing licenses we own, provide 20 MHz of coverage and
the opportunity to offer enhanced data services in almost all
markets in which we currently operate or are building out,
assuming Denali License were to make available to us certain of
its spectrum.
In addition to the approximately 54 million POPs we covered
at the end of 2007 with our combined network footprint, we
estimate that we and Denali License hold licenses in markets
that cover up to approximately 85 million additional POPs
that are suitable for Cricket service, and we and Denali License
have already begun the build-out of some of our Auction #66
markets. We and Denali License expect to cover up to an
additional 12 to 28 million POPs by the end of 2008,
bringing total covered POPs to between 66 and 82 million by
the end of 2008. We and Denali License may also develop some of
the licenses covering these additional POPs through partnerships
with others.
The AWS spectrum that was auctioned in Auction #66
currently is used by U.S. federal government and/or
incumbent commercial licensees. Several federal government
agencies have cleared or announced plans to promptly clear
spectrum covered by licenses we and Denali License purchased in
Auction #66. Other agencies, however, have not yet
finalized plans to relocate their use to alternative spectrum.
If these agencies do not relocate to alternative spectrum within
the next several months, their continued use of the spectrum
covered by licenses we and Denali License purchased in
Auction #66 could delay the launch of certain markets.
Our Cricket rate plans are based on providing unlimited wireless
services to customers, and the value of unlimited wireless
services is the foundation of our business. Our premium rate
plans offer unlimited local and U.S. long distance service
from any Cricket service area and unlimited use of multiple
calling features and messaging services, bundled with specified
roaming minutes in the continental U.S. or unlimited mobile web
access and directory assistance. Our most popular plan combines
unlimited local and U.S. long distance service from any
Cricket service area with unlimited use of multiple calling
features and messaging services. In addition, we offer basic
service plans that allow customers to make unlimited calls
within their Cricket service area and receive unlimited calls
from any area, combined with unlimited messaging and unlimited
U.S. long distance service options. We have also launched a
new weekly rate plan, Cricket By Week, and a flexible payment
option, BridgePay, which give our customers greater flexibility
in the use and payment of wireless service and which we believe
will help us to improve customer retention. In September 2007,
we introduced our first unlimited wireless broadband service in
select markets, which allows customers to access the internet
through their laptops for one low, flat rate with no long-term
commitments or credit checks. Our per-minute prepaid service,
Jump Mobile,
47
brings Crickets attractive value proposition to customers
who prefer to actively control their wireless usage and to allow
us to better target the urban youth market. We expect to
continue to broaden our voice and data product and service
offerings in 2008 and beyond.
We believe that our business model is scalable and 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. We continue to seek additional
opportunities to enhance our current market clusters and expand
into new geographic markets by participating in FCC spectrum
auctions, acquiring spectrum and related assets from third
parties,
and/or
participating in new partnerships or joint ventures. We also
expect to continue to look for opportunities to optimize the
value of our spectrum portfolio. Because some of the licenses
that we and Denali License hold include large regional areas
covering both rural and metropolitan communities, we and Denali
License may sell some of this spectrum and pursue the deployment
of alternative products or services in portions of this spectrum.
Our principal sources of liquidity are our existing unrestricted
cash, cash equivalents and short-term investments, cash
generated from operations, and cash available from borrowings
under our $200 million revolving credit facility (which was
undrawn at December 31, 2007). From time to time, we may
also generate additional liquidity through capital markets
transactions or by selling assets that are not material to or
are not required for our ongoing business operations. See
Liquidity and Capital Resources below.
Among the most significant factors affecting our financial
condition and performance from period to period are our new
market expansions and growth in customers, the impacts of which
are reflected in our revenues and operating expenses. Throughout
2006 and 2007, we and our joint ventures continued expanding
existing market footprints and expanded into 20 new markets,
increasing the number of potential customers covered by our
networks from approximately 28 million covered POPs as of
December 31, 2005, to approximately 48 million covered
POPs as of December 31, 2006, to approximately
54 million covered POPs as of December 31, 2007. This
network expansion, together with organic customer growth in our
existing markets, has resulted in substantial additions of new
customers, as our total end-of-period customers increased from
1.67 million customers as of December 31, 2005, to
2.23 million customers as of December 31, 2006, to
2.86 million customers as of December 31, 2007. In
addition, our total revenues have increased from
$957.8 million for fiscal 2005, to $1.17 billion for
fiscal 2006, to $1.63 billion for fiscal 2007. During the
past two years, we also introduced several higher-priced,
higher-value service plans which have helped increase average
revenue per user per month over time, as customer acceptance of
the higher-priced plans has been favorable.
As our business activities have expanded, our operating expenses
have also grown, including increases in cost of service
reflecting: the increase in customers and the broader variety of
products and services provided to such customers; increased
depreciation expense related to our expanded networks; and
increased selling and marketing expenses and general and
administrative expenses generally attributable to expansion into
new markets, selling and marketing to a broader potential
customer base, and expenses required to support the
administration of our growing business. In particular, total
operating expenses increased from $901.4 million for fiscal
2005, to $1.17 billion for fiscal 2006, to
$1.57 billion for fiscal 2007. We also incurred substantial
additional indebtedness to finance the costs of our business
expansion and acquisitions of additional wireless licenses in
2006 and 2007. As a result, our interest expense has increased
from $30.1 million for fiscal 2005, to $61.3 million
for fiscal 2006, to $121.2 million for fiscal 2007. Also,
during the third quarter of 2007, we changed our tax accounting
method for amortizing wireless licenses, contributing
substantially to our income tax expense of $37.4 million
for the year ended December 31, 2007, compared to an income
tax expense of $9.3 million for the year ended
December 31, 2006.
Primarily as a result of the factors described above, our net
income of $30.7 million for fiscal 2005 decreased to a net
loss of $24.4 million for fiscal 2006. Our net loss
increased to $75.9 million for the year ended
December 31, 2007.
We expect that we will continue to build out and launch new
markets and pursue other strategic expansion activities for the
next several years. We intend to be disciplined as we pursue
these expansion efforts and to remain focused on our position as
a low-cost leader in wireless telecommunications. We expect to
achieve increased revenues and incur higher operating expenses
as our existing business grows and as we build out and after we
launch service in new markets. Large-scale construction projects
for the build-out of our new markets will require
48
significant capital expenditures and may suffer cost overruns.
Any such significant capital expenditures or increased operating
expenses would decrease earnings, operating income before
depreciation and amortization, or OIBDA, and free cash flow for
the periods in which we incur such costs. However, we are
willing to incur such expenditures because we expect our
expansion activities will be beneficial to our business and
create additional value for our stockholders.
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, or GAAP. 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 critical accounting policies and
estimates involve a higher degree of judgment or complexity than
others used in the preparation of our consolidated financial
statements.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Leap and its wholly owned subsidiaries as well as the accounts
of LCW Wireless and Denali and their wholly owned subsidiaries.
We consolidate our interests in LCW Wireless and Denali in
accordance with FIN 46(R), Consolidation of Variable
Interest Entities, because these entities are variable
interest entities and we will absorb a majority of their
expected losses. Prior to March 2007, we consolidated our
interests in ANB 1 and its wholly owned subsidiary
ANB 1 License in accordance with FIN 46(R). We
acquired the remaining interests in ANB 1 in March 2007 and
merged ANB 1 and ANB 1 License into Cricket in
December 2007. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial
statements.
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. New
and reactivating customers are required to pay for their service
in advance, and generally, customers who activated their service
prior to May 2006 pay in arrears. We do not require any of our
customers to sign fixed-term service commitments or submit to a
credit check. These terms generally appeal to less affluent
customers who are considered more likely to terminate service
for inability to pay than wireless customers in general.
Consequently, we have concluded that collectibility of our
revenues is not reasonably assured until payment has been
received. Accordingly, service revenues are recognized only
after services have been rendered and payment has been received.
When we activate a new customer, we frequently sell that
customer a handset and the first month of service in a bundled
transaction. Under the provisions of Emerging Issues Task Force,
or EITF, Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, the
sale of a handset along with a month of wireless service
constitutes a multiple element arrangement. Under EITF Issue
No. 00-21,
once a company has determined the fair value of the elements in
the sales transaction, the total consideration received from the
customer must be allocated among those elements on a relative
fair value basis. Applying EITF Issue
No. 00-21
to these transactions results in our recognition of the total
consideration received, less one month of wireless service
revenue (at the customers stated rate plan), as equipment
revenue.
Equipment 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
49
handsets and accessories sold are recorded in cost of equipment.
In addition to handsets that we sell directly to our customers
at Cricket-owned stores, we also sell handsets to third-party
dealers. These dealers then sell the handsets to the ultimate
Cricket customer, and that customer also receives the first
month of service in a bundled transaction (identical to the sale
made at a Cricket-owned store). Sales of handsets to third-party
dealers are recognized as equipment revenues only when service
is activated by customers, since the level of price reductions
ultimately available to such dealers is not reliably estimable
until the handsets are sold by such dealers to customers. Thus,
handsets sold to third-party dealers are recorded as consigned
inventory and deferred equipment revenue until they are sold to,
and service is activated by, customers.
Through a third-party provider, our customers may elect to
participate in an extended handset warranty/insurance program.
We recognize revenue on replacement handsets sold to our
customers under the program when the customer purchases a
replacement handset.
Sales incentives offered without charge to customers and
volume-based incentives paid to our third-party dealers 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; as a result, customer returns of handsets and accessories
have historically been negligible.
Amounts billed by us in advance of customers wireless
service periods are not reflected in accounts receivable or
deferred revenue as collectibility of such amounts is not
reasonably assured. Deferred revenue consists primarily of cash
received from customers in advance of their service period and
deferred equipment revenue related to handsets and accessories
sold to third-party dealers.
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, 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.
Short-Term
Investments
Short-term investments generally consist of highly liquid,
fixed-income investments with an original maturity at the time
of purchase of greater than three months. Such investments
consist of commercial paper, asset-backed commercial paper,
auction rate securities, obligations of the
U.S. government, and investment grade fixed-income
securities guaranteed by U.S. government agencies.
Investments are classified as available-for-sale and stated at
fair value. 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 investments.
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.
50
Wireless
Licenses
We and LCW Wireless operate broadband PCS networks under
wireless licenses granted by the FCC that are specific to a
particular geographic area on spectrum that has been allocated
by the FCC for such services. In addition, through our and
Denali Licenses participation in Auction #66 in
December 2006, we and Denali License acquired a number of AWS
licenses that can be used to provide services comparable to the
PCS services we currently provide, in addition to other advanced
wireless services. Wireless licenses are initially recorded at
cost and are not amortized. Although FCC licenses are issued
with a stated term, ten years in the case of PCS licenses and
fifteen years in the case of AWS licenses, wireless licenses are
considered to be indefinite-lived intangible assets because we
and LCW Wireless expect to continue to provide wireless service
using the relevant licenses for the foreseeable future, PCS and
AWS licenses are routinely renewed for a nominal fee, and
management has determined that no legal, regulatory,
contractual, competitive, economic, or other factors currently
exist that limit the useful life of our and our consolidated
joint ventures PCS and AWS licenses. On a quarterly basis,
we evaluate the remaining useful life of our indefinite lived
wireless licenses to determine whether events and circumstances,
such as any legal, regulatory, contractual, competitive,
economic or other factors, continue to support an indefinite
useful life. If a wireless license is subsequently determined to
have a finite useful life, we test the wireless license for
impairment in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 142, Goodwill and Other
Intangible Assets, or SFAS 142. The wireless license
would then be amortized prospectively over its estimated
remaining useful life. In addition to our quarterly evaluation
of the indefinite useful lives of our wireless licenses, we also
test our wireless licenses for impairment in accordance with
SFAS 142 on an annual basis. Wireless licenses to be
disposed of by sale are carried at the lower of carrying value
or fair value less costs to sell. The spectrum that we and
Denali License purchased in Auction #66 currently is used
by U.S. federal government
and/or
incumbent commercial licensees. FCC rules require winning
bidders to avoid interfering with these existing users or to
clear the incumbent users from the spectrum through specified
relocation procedures. The spectrum clearing costs we and Denali
License incur are capitalized to wireless licenses.
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 as of July 31,
2004. 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 wireless licenses and goodwill, on
an annual basis or when there is evidence that events or changes
in circumstances indicate that an impairment condition may
exist. The annual impairment test is conducted during the third
quarter of each year.
The wireless licenses in our operating markets are combined into
a single unit of accounting for purposes of testing impairment
because management believes that utilizing these wireless
licenses as a group represents 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. Our non-operating
licenses are tested for impairment on an individual basis. An
impairment loss is recognized when the fair value of a wireless
license is less than its carrying value and is measured as the
amount by which the licenses carrying value exceeds its
fair value. Estimates of the fair value of our wireless licenses
are based primarily on available market prices, including
51
successful bid prices in FCC auctions and selling prices
observed in wireless license transactions, pricing trends among
historical wireless license transactions and qualitative
demographic and economic information concerning the areas that
comprise our markets. Any required impairment losses are
recorded as a reduction in the carrying value of the wireless
license and charged to results of operations.
The goodwill impairment test involves a two-step process. First,
the book value of our net assets, which are combined into a
single reporting unit for purposes of the impairment test of
goodwill, is compared to the fair value of our net assets. If
the fair value was determined to be less than book value, a
second step would be performed to measure the amount of the
impairment, if any.
The accounting estimates for our wireless licenses and goodwill
require management to make significant assumptions about fair
value. Managements assumptions regarding fair value
require significant judgment about economic factors, industry
factors and technology considerations, as well as its views
regarding our business prospects. Changes in these judgments may
have a significant effect on the estimated fair values.
Share-Based
Compensation
We account for share-based awards exchanged for employee
services in accordance with SFAS No. 123(R),
Share-Based Payment, or SFAS 123(R). Under
SFAS 123(R), share-based compensation expense is measured
at the grant date, based on the estimated fair value of the
award, and is recognized as expense over the employees
requisite service period. Prior to adopting SFAS 123(R), we
recognized compensation expense for employee share-based awards
based on their intrinsic value on the grant date pursuant to
Accounting Principles Board Opinion, or APB, No. 25
Accounting for Stock Issued to Employees, and
provided the required pro forma disclosures of
SFAS No. 123, Accounting for Stock-Based
Compensation, or SFAS 123.
We adopted SFAS 123(R) using the modified prospective
approach under SFAS 123(R) and, as a result, have not
retroactively adjusted results from prior periods. The valuation
provisions of SFAS 123(R) apply to awards that have been
granted on or subsequent to January 1, 2006 or that were
outstanding on that date and subsequently modified or cancelled.
Compensation expense, net of estimated forfeitures, for awards
outstanding at the effective date is recognized over the
remaining service period using the compensation cost calculated
for pro forma disclosure purposes in prior periods.
Compensation expense is amortized on a straight-line basis over
the requisite service period for the entire award, which is
generally the maximum vesting period of the award. No
share-based compensation was capitalized as part of inventory or
fixed assets prior to or during 2007.
The determination of the fair value of stock options using an
option valuation model is affected by our stock price, as well
as assumptions regarding a number of complex and subjective
variables. The methods used to determine these variables are
generally similar to the methods used prior to fiscal 2006 for
purposes of our pro forma information under SFAS 123. The
volatility assumption is based on a combination of the
historical volatility of our common stock and the volatilities
of similar companies over a period of time equal to the expected
term of the stock options. The volatilities of similar companies
are used in conjunction with our historical volatility because
of the lack of sufficient relevant history for our common stock
equal to the expected term. The expected term of employee stock
options represents the weighted-average period the stock options
are expected to remain outstanding. The expected term assumption
is estimated based primarily on the options vesting terms
and remaining contractual life and employees expected
exercise and post-vesting employment termination behavior. The
risk-free interest rate assumption is based upon observed
interest rates during the period appropriate for the expected
term of the employee stock options. The dividend yield
assumption is based on the expectation of no future dividend
payouts by us.
As share-based compensation expense under SFAS 123(R) is
based on awards ultimately expected to vest, it is reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
At December 31, 2007, total unrecognized compensation cost
related to unvested stock options was $45.5 million, which
is expected to be recognized over a weighted-average period of
2.7 years. At December 31,
52
2007, total unrecognized compensation cost related to unvested
restricted stock awards was $33.0 million, which is
expected to be recognized over a weighted-average period of
2.3 years.
Income
Taxes
We calculate income taxes in each of the jurisdictions in which
we operate. This process involves calculating the actual current
tax expense and any deferred income tax expense resulting from
temporary differences arising from differing treatments of items
for tax and accounting purposes. These temporary differences
result in deferred tax assets and liabilities. Deferred tax
assets are also established for the expected future tax benefits
to be derived from net operating loss carryforwards, capital
loss carryforwards, and income tax credits.
We must then periodically assess the likelihood that our
deferred tax assets will be recovered from future taxable
income, which assessment requires significant judgment. To the
extent we believe it is more likely than not that our deferred
tax assets will not be recovered, we must establish a valuation
allowance. As part of this periodic assessment for the year
ended December 31, 2007, we weighed the positive and
negative factors with respect to this determination and, at this
time, except with respect to the realization of a
$2.5 million Texas Margins Tax, or TMT, credit, do not
believe there is sufficient positive evidence and sustained
operating earnings to support a conclusion that it is more
likely than not that all or a portion of our deferred tax assets
will be realized. We will continue to closely monitor the
positive and negative factors to determine whether our valuation
allowance should be released. Deferred tax liabilities
associated with wireless licenses, tax goodwill and investments
in certain joint ventures cannot be considered a source of
taxable income to support the realization of deferred tax assets
because these deferred tax liabilities will not reverse until
some indefinite future period. At such time as we determine that
it is more likely than not that all or a portion of the deferred
tax assets are realizable, the valuation allowance will be
reduced. Pursuant to American Institute of Certified Public
Accountants Statement of Position
No. 90-7,
Financial Reporting by Entities in Reorganization under
the Bankruptcy Code, or
SOP 90-7,
up to $218.5 million in future decreases in the valuation
allowance established in fresh-start reporting will be accounted
for as a reduction of goodwill rather than as a reduction of
income tax expense if the valuation allowance decrease occurs
prior to the effective date of SFAS No. 141 (revised
2007), Business Combinations, or SFAS 141(R).
Effective January 1, 2009, SFAS 141(R) provides that
any reduction to the valuation allowance established in
fresh-start reporting be accounted for as a reduction to income
tax expense.
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
service will be suspended after a grace period of up to three
days. When service is suspended, the customer 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
reactivation charge, in addition to the amount past due, 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.
53
Results
of Operations
Operating
Items
The following tables summarize operating data for our
consolidated operations (in thousands, except percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
% of 2007
|
|
|
Year Ended
|
|
|
% of 2006
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
Service
|
|
|
December 31,
|
|
|
Service
|
|
|
Prior Year
|
|
|
|
2007
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
1,395,667
|
|
|
|
|
|
|
$
|
956,365
|
|
|
|
|
|
|
$
|
439,302
|
|
|
|
45.9
|
%
|
Equipment revenues
|
|
|
235,136
|
|
|
|
|
|
|
|
210,822
|
|
|
|
|
|
|
|
24,314
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,630,803
|
|
|
|
|
|
|
|
1,167,187
|
|
|
|
|
|
|
|
463,616
|
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
384,128
|
|
|
|
27.5
|
%
|
|
|
264,162
|
|
|
|
27.6
|
%
|
|
|
119,966
|
|
|
|
45.4
|
%
|
Cost of equipment
|
|
|
405,997
|
|
|
|
29.1
|
%
|
|
|
310,834
|
|
|
|
32.5
|
%
|
|
|
95,163
|
|
|
|
30.6
|
%
|
Selling and marketing
|
|
|
206,213
|
|
|
|
14.8
|
%
|
|
|
159,257
|
|
|
|
16.7
|
%
|
|
|
46,956
|
|
|
|
29.5
|
%
|
General and administrative
|
|
|
271,536
|
|
|
|
19.5
|
%
|
|
|
196,604
|
|
|
|
20.6
|
%
|
|
|
74,932
|
|
|
|
38.1
|
%
|
Depreciation and amortization
|
|
|
302,201
|
|
|
|
21.7
|
%
|
|
|
226,747
|
|
|
|
23.7
|
%
|
|
|
75,454
|
|
|
|
33.3
|
%
|
Impairment of assets
|
|
|
1,368
|
|
|
|
0.1
|
%
|
|
|
7,912
|
|
|
|
0.8
|
%
|
|
|
(6,544
|
)
|
|
|
(82.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,571,443
|
|
|
|
112.6
|
%
|
|
|
1,165,516
|
|
|
|
121.9
|
%
|
|
|
405,927
|
|
|
|
34.8
|
%
|
Gain on sale or disposal of assets
|
|
|
902
|
|
|
|
0.1
|
%
|
|
|
22,054
|
|
|
|
2.3
|
%
|
|
|
(21,152
|
)
|
|
|
(95.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
60,262
|
|
|
|
4.3
|
%
|
|
$
|
23,725
|
|
|
|
2.5
|
%
|
|
$
|
36,537
|
|
|
|
154.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
% of 2006
|
|
|
Year Ended
|
|
|
% of 2005
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
Service
|
|
|
December 31,
|
|
|
Service
|
|
|
Prior Year
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
956,365
|
|
|
|
|
|
|
$
|
768,916
|
|
|
|
|
|
|
$
|
187,449
|
|
|
|
24.4
|
%
|
Equipment revenues
|
|
|
210,822
|
|
|
|
|
|
|
|
188,855
|
|
|
|
|
|
|
|
21,967
|
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,167,187
|
|
|
|
|
|
|
|
957,771
|
|
|
|
|
|
|
|
209,416
|
|
|
|
21.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
264,162
|
|
|
|
27.6
|
%
|
|
|
203,548
|
|
|
|
26.5
|
%
|
|
|
60,614
|
|
|
|
29.8
|
%
|
Cost of equipment
|
|
|
310,834
|
|
|
|
32.5
|
%
|
|
|
230,520
|
|
|
|
30.0
|
%
|
|
|
80,314
|
|
|
|
34.8
|
%
|
Selling and marketing
|
|
|
159,257
|
|
|
|
16.7
|
%
|
|
|
100,042
|
|
|
|
13.0
|
%
|
|
|
59,215
|
|
|
|
59.2
|
%
|
General and administrative
|
|
|
196,604
|
|
|
|
20.6
|
%
|
|
|
159,741
|
|
|
|
20.8
|
%
|
|
|
36,863
|
|
|
|
23.1
|
%
|
Depreciation and amortization
|
|
|
226,747
|
|
|
|
23.7
|
%
|
|
|
195,462
|
|
|
|
25.4
|
%
|
|
|
31,285
|
|
|
|
16.0
|
%
|
Impairment of assets
|
|
|
7,912
|
|
|
|
0.8
|
%
|
|
|
12,043
|
|
|
|
1.6
|
%
|
|
|
(4,131
|
)
|
|
|
(34.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,165,516
|
|
|
|
121.9
|
%
|
|
|
901,356
|
|
|
|
117.2
|
%
|
|
|
264,160
|
|
|
|
29.3
|
%
|
Gain on sale or disposal of assets
|
|
|
22,054
|
|
|
|
2.3
|
%
|
|
|
14,587
|
|
|
|
1.9
|
%
|
|
|
7,467
|
|
|
|
51.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
23,725
|
|
|
|
2.5
|
%
|
|
$
|
71,002
|
|
|
|
9.2
|
%
|
|
$
|
(47,277
|
)
|
|
|
(66.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes customer activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Gross customer additions
|
|
|
1,974,504
|
|
|
|
1,455,810
|
|
|
|
872,271
|
|
Net customer additions
|
|
|
633,693
|
|
|
|
592,237
|
|
|
|
117,376
|
|
Weighted-average number of customers
|
|
|
2,589,312
|
|
|
|
1,861,477
|
|
|
|
1,610,170
|
|
Total customers, end of period
|
|
|
2,863,519
|
|
|
|
2,229,826
|
|
|
|
1,668,293
|
|
Service
Revenues
Service revenues increased $439.3 million, or 45.9%, for
the year ended December 31, 2007 compared to the
corresponding period of the prior year. This increase resulted
from a 39.1% increase in average total customers due to new
market launches and existing market customer growth and a 4.9%
increase in average monthly revenues per customer. The increase
in average monthly revenues per customer was due primarily to
the continued increase in customer adoption of our higher-end
service plans and value added services.
Service revenues increased $187.4 million, or 24.4%, for
the year ended December 31, 2006 compared to the
corresponding period of the prior year. This increase resulted
from the 15.6% increase in average total customers and a 7.6%
increase in average revenues per customer. The increase in
average revenues per customer was due primarily to the continued
increase in customer adoption of our higher-end service plans
and value-added services.
Equipment
Revenues
Equipment revenues increased $24.3 million, or 11.5%, for
the year ended December 31, 2007 compared to the
corresponding period of the prior year. An increase of 36.4% in
handset sales volume was largely offset by increases in
promotional incentives for customers and an increased shift in
handset sales to our exclusive indirect distribution channel, to
which handsets are sold at lower prices.
55
Equipment revenues increased $22.0 million, or 11.6%, for
the year ended December 31, 2006 compared to the
corresponding period of the prior year. An increase of 58.5% in
handset sales volume was largely offset by lower net revenues
per handset sold as a result of bundling the first month of
service with the initial handset price, eliminating activation
fees for new customers purchasing equipment and a larger
proportion of total handset sales being activated through our
indirect channel partners.
Cost of
Service
Cost of service increased $120.0 million, or 45.4%, for the
year ended December 31, 2007 compared to the corresponding
period of the prior year. As a percentage of service revenues,
cost of service decreased to 27.5% from 27.6% in the prior year
period. Variable product costs increased by 1.9% as a percentage
of service revenues due to increased customer usage of our
value-added services. This increase was offset by a 0.9%
decrease in network infrastructure costs as a percentage of
service revenues and a 1.0% decrease in labor and related costs
as a percentage of service revenues due to the increase in
service revenues and consequent benefits of scale.
Cost of service increased $60.6 million, or 29.8%, for the
year ended December 31, 2006 compared to the corresponding
period of the prior year. As a percentage of service revenues,
cost of service increased to 27.6% from 26.5% in the prior year
period. Variable product costs increased by 0.6% of service
revenues due to increased customer usage of our value-added
services. In addition, labor and related costs increased by 0.4%
of service revenues due to new market launches during 2006. The
increased fixed network infrastructure costs associated with the
new market launches offset the benefits of scale we would
generally expect to experience with increasing customers and
service revenues.
Cost of
Equipment
Cost of equipment increased $95.2 million, or 30.6%, for
the year ended December 31, 2007 compared to the
corresponding period of the prior year. This increase was
primarily attributable to a 36.4% increase in handset sales
volume.
Cost of equipment increased $80.3 million, or 34.8%, for
the year ended December 31, 2006 compared to the
corresponding period of the prior year. This increase was
primarily attributable to the 58.5% increase in handset sales
volume, partially offset by reductions in costs to support our
handset replacement programs for existing customers.
Selling
and Marketing Expenses
Selling and marketing expenses increased $47.0 million, or
29.5%, for the year ended December 31, 2007 compared to the
corresponding period of the prior year. As a percentage of
service revenues, such expenses decreased to 14.8% from 16.7% in
the prior year period. This decrease was primarily attributable
to a 0.7% decrease in store and staffing and related costs as a
percentage of services revenues due to the increase in service
revenues and consequent benefits of scale and a 1.2% decrease in
media and advertising costs as a percentage of service revenues
reflecting large new market launches in the prior year and
consequent benefits of scale.
Selling and marketing expenses increased $59.2 million, or
59.2%, for the year ended December 31, 2006 compared to the
corresponding period of the prior year. As a percentage of
service revenues, such expenses increased to 16.7% from 13.0% in
the prior year period. This increase was primarily due to
increased media and advertising costs and labor and related
costs of 2.4% and 0.9% of service revenues, respectively, which
were primarily attributable to our new market launches.
General
and Administrative Expenses
General and administrative expenses increased
$74.9 million, or 38.1%, for the year ended
December 31, 2007 compared to the corresponding period of
the prior year. As a percentage of service revenues, such
expenses decreased to 19.5% from 20.6% in the prior year period.
Customer care expenses decreased by 0.5% as a percentage of
service revenues and employee related costs decreased by 0.8% as
a percentage of service revenues both due to the increase in
service revenues and consequent benefits of scale. These
decreases were partially offset by a 0.4%
56
increase in professional services fees and other expenses as a
percentage of service revenues due to costs incurred in
connection with the unsolicited merger proposal received from
MetroPCS during 2007 and other strategic merger and acquisition
activities. During the three months ended December 31,
2007, we amended the contract for our primary customer billing
and activation system. The amended contract has been accounted
for as a capital lease and, accordingly, amounts related to the
leased elements were classified as amortization expense and
interest expense, rather than as a general and administrative
expense under the previous contract. These amounts approximated
$4 million during the fourth quarter of 2007 and will
approximate $14 million per year from 2008 to 2010.
General and administrative expenses increased
$36.9 million, or 23.1%, for the year ended
December 31, 2006 compared to the corresponding period of
the prior year. As a percentage of service revenues, such
expenses decreased to 20.6% from 20.8% in the prior year period.
Customer care expenses decreased by 1.7% as a percentage of
service revenues due to decreases in call center and other
customer care-related program costs. Professional services fees
and other expenses decreased by 0.5% as a percentage of service
revenues in the aggregate due to the increase in service
revenues and consequent benefits in scale. Partially offsetting
these decreases were increases in labor and related costs of
1.6% as a percentage of service revenues due primarily to new
employee additions necessary to support our growth and the
increase in share-based compensation expense of 0.4% as a
percentage of service revenues due partially to our adoption of
SFAS 123(R) in 2006.
Depreciation
and Amortization
Depreciation and amortization expense increased
$75.5 million, or 33.3%, for the year ended
December 31, 2007 compared to the corresponding period of
the prior year. The increase in the dollar amount of
depreciation and amortization expense was due primarily to the
build-out and launch of our new markets and the improvement and
expansion of our existing markets. Such expenses decreased as a
percentage of service revenues compared to the corresponding
period of the prior year.
Depreciation and amortization expense increased
$31.3 million, or 16.0%, for the year ended
December 31, 2006 compared to the corresponding period of
the prior year. The increase in depreciation and amortization
expense was due primarily to the build-out of our new markets
and the upgrade of network assets in our other markets. Such
expenses decreased as a percentage of service revenues compared
to the corresponding period of the prior year.
Impairment
Charges
As a result of our annual impairment tests of wireless licenses,
we recorded impairment charges of $1.0 million,
$4.7 million and $0.7 million during the years ended
December 31, 2007, 2006 and 2005, respectively, to reduce
the carrying values of certain non-operating wireless licenses
to their estimated fair values. In addition, we recorded an
impairment charge of $3.2 million during the year ended
December 31, 2006 in connection with an agreement to sell
certain non-operating wireless licenses. We adjusted the
carrying values of those licenses to their estimated fair
values, which were based on the agreed upon sales prices.
Gains on
Sale or Disposal of Assets
During the year ended December 31, 2007, we completed the
sale of three wireless licenses that we were not using to offer
commercial service for an aggregate purchase price of
$9.5 million, resulting in a net gain of $1.3 million.
During the year ended December 31, 2006, we completed the
sale of our wireless licenses and operating assets in the Toledo
and Sandusky, Ohio markets to Cleveland Unlimited, Inc., or CUI,
in exchange for $28.0 million and CUIs equity
interest in LCW Wireless, resulting in a gain of
$21.6 million.
57
Non-Operating
Items
The following tables summarize non-operating data for the
Companys consolidated operations (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Minority interests in consolidated subsidiaries
|
|
$
|
1,817
|
|
|
$
|
1,493
|
|
|
$
|
324
|
|
Equity in net loss of investee
|
|
|
(2,309
|
)
|
|
|
|
|
|
$
|
(2,309
|
)
|
Interest income
|
|
|
28,939
|
|
|
|
23,063
|
|
|
|
5,876
|
|
Interest expense
|
|
|
(121,231
|
)
|
|
|
(61,334
|
)
|
|
|
(59,897
|
)
|
Other expense, net
|
|
|
(6,039
|
)
|
|
|
(2,650
|
)
|
|
|
(3,389
|
)
|
Income tax expense
|
|
|
(37,366
|
)
|
|
|
(9,277
|
)
|
|
|
(28,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2005
|
|
Change
|
|
Minority interests in consolidated subsidiaries
|
|
$
|
1,493
|
|
|
$
|
(31
|
)
|
|
$
|
1,524
|
|
Interest income
|
|
|
23,063
|
|
|
|
9,957
|
|
|
|
13,106
|
|
Interest expense
|
|
|
(61,334
|
)
|
|
|
(30,051
|
)
|
|
|
(31,283
|
)
|
Other income (expense), net
|
|
|
(2,650
|
)
|
|
|
1,423
|
|
|
|
(4,073
|
)
|
Income tax expense
|
|
|
(9,277
|
)
|
|
|
(21,615
|
)
|
|
|
12,338
|
|
Minority
Interests in Consolidated Subsidiaries
Minority interests in consolidated subsidiaries for the years
ended December 31, 2007 and 2006 reflected the shares of
net losses allocated to the other members of certain
consolidated entities, partially offset by accretion expense
associated with certain members put options. Minority
interests in consolidated subsidiaries for the year ended
December 31, 2005 reflected accretion expense only.
Equity in
Net Loss of Investee
Equity in net loss of investee reflects our share of losses in a
regional wireless service provider in which we previously made
an investment.
Interest
Income
Interest income increased $5.9 million for the year ended
December 31, 2007 compared to the corresponding period of
the prior year and $13.1 million for the year ended
December 31, 2006 compared to the corresponding period of
the prior year. These increases were primarily due to the
increases in the average cash and cash equivalents and
investment balances.
Interest
Expense
Interest expense increased $59.9 million for the year ended
December 31, 2007 compared to the corresponding period of
the prior year. The increase in interest expense resulted from
our issuance of $750 million and $350 million of
9.375% unsecured senior notes due 2014 during October 2006 and
June 2007, respectively. See Liquidity and
Capital Resources below. These increases were partially
offset by the capitalization of $45.6 million of interest
during the year ended December 31, 2007. We capitalize
interest costs associated with our wireless licenses and
property and equipment during the build-out of new markets. The
amount of such capitalized interest depends on 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 continue to be significant during the
build-out of our planned new markets in 2008. At
December 31, 2007, the effective interest rate on our
$895.5 million term loan was 7.9%, including the effect of
interest rate swaps, and the effective interest rate on LCW
Operations term loans was 9.1%. We expect that interest
expense will increase further in 2008 due to the additional
$350 million of 9.375% unsecured
58
senior notes due 2014 that we issued in June 2007 and the
increase in the interest rate applicable to our
$895.5 million term loan effective November 20, 2007.
See Liquidity and Capital Resources
below.
Interest expense increased $31.3 million for the year ended
December 31, 2006 compared to the corresponding period of
the prior year. The increase in interest expense resulted from
the increase in the amount of the term loan under our amended
and restated senior secured credit agreement, our issuance of
$750 million of 9.375% unsecured senior notes and the
issuance of $40 million of term loans under LCW
Operations senior secured credit agreement. These
increases were partially offset by the capitalization of
$16.7 million of interest during the year ended
December 31, 2006. We capitalize interest costs associated
with our wireless licenses and property and equipment during the
build-out of new markets. The amount of such capitalized
interest depends on the carrying values of the licenses and
property and equipment involved in those markets and the
duration of the build-out. At December 31, 2006, the
effective interest rate on our $900 million term loan was
7.7%, including the effect of interest rate swaps, and the
effective interest rate on LCW Operations term loans was
9.6%.
Other
Income (Expense), Net
Other expense, net of other income, increased by
$3.4 million for the year ended December 31, 2007
compared to the corresponding period of the prior year. During
2007, we recorded a $5.4 million impairment charge to
reduce the carrying value of certain investments in asset-backed
commercial paper. During January 2008, these investments
declined by an additional $0.9 million.
Other income, net of other expenses, decreased by
$4.1 million for the year ended December 31, 2006
compared to the corresponding period of the prior year. The
decrease was primarily attributed to a write off of unamortized
deferred debt issuance costs related to our previous financing
arrangements, partially offset by a sales tax refund and the
resolution of a tax contingency.
Income
Tax Expense
During the year ended December 31, 2007, we recorded income
tax expense of $37.4 million compared to income tax expense
of $9.3 million during the year ended December 31,
2006. Income tax expense for the year ended December 31,
2007 consisted primarily of the tax effect of changes in
deferred tax liabilities associated with wireless licenses, tax
goodwill and investments in certain joint ventures.
During the year ended December 31, 2007, we changed our tax
accounting method for amortizing wireless licenses. Under the
prior method, we began amortizing wireless licenses for tax
purposes on the date a license was placed into service. Under
the new tax accounting method, we generally begin amortizing
wireless licenses for tax purposes on the date the wireless
license is acquired. The new tax accounting method generally
allows us to amortize wireless licenses for tax purposes at an
earlier date and allows us to accelerate our tax deductions. At
the same time, the new method increases our income tax expense
due to the deferred tax effect of accelerating amortization on
wireless licenses. We have applied the new method as if it had
been in effect for all prior tax periods, and the resulting
cumulative increase to income tax expense of $28.9 million
was recorded during the year ended December 31, 2007. This
tax accounting method change also affects the characterization
of certain income tax gains and losses on the sale of
non-operating wireless licenses. Under the prior method, gains
or losses on the sale of non-operating licenses were
characterized as capital gains or losses; however, under the new
method, gains or losses on the sale of non-operating licenses
for which we had commenced tax amortization prior to the sale
are characterized as ordinary gains or losses. As a result of
this change, $64.7 million of net income tax losses
previously reported as capital loss carryforwards have been
recharacterized as net operating loss carryforwards. These net
operating loss carryforwards can be used to offset future
taxable income and reduce the amount of cash required to settle
future tax liabilities.
We recorded a $4.7 million income tax benefit during the
year ended December 31, 2007 related to a net reduction in
our effective state income tax rate. We carry a net deferred tax
liability that results from the valuation allowance recorded
against a majority of our deferred tax assets. A reduction to
our effective state income tax rate during the year ended
December 31, 2007 resulted in a reduction to our net
deferred tax liability and a corresponding decrease to our
income tax expense. This decrease in our effective state income
tax rate was primarily attributable to expansion of our
operating footprint into lower taxing states and state tax
planning. We
59
recorded an additional $2.5 million income tax benefit
during the year ended December 31, 2007 due to a TMT
credit, which has been recorded as a deferred tax asset. We
estimate that our future TMT liability will be based on our
gross revenues in Texas, rather than our apportioned taxable
income. Therefore, we believe that it is more likely than not
that our TMT credit will be recovered and, accordingly, we have
not established a valuation allowance against this asset.
We record deferred tax assets and liabilities arising from
differing treatments of items for tax and accounting purposes.
Deferred tax assets are also established for the expected future
tax benefits to be derived from net operating loss
carryforwards, capital loss carryforwards and income tax
credits. We then periodically assess the likelihood that our
deferred tax assets will be recovered from future taxable
income. This assessment requires significant judgment. To the
extent we believe it is more likely than not that our deferred
tax assets will not be recovered, we must establish a valuation
allowance. As part of this periodic assessment for the year
ended December 31, 2007, we weighed the positive and
negative factors with respect to this determination and, at this
time, except with respect to the realization of the TMT credit
discussed above, do not believe there is sufficient positive
evidence and sustained operating earnings to support a
conclusion that it is more likely than not that all or a portion
of our deferred tax assets will be realized. We will continue to
closely monitor the positive and negative factors to determine
whether its valuation allowance should be released. Deferred tax
liabilities associated with wireless licenses, tax goodwill and
investments in certain joint ventures cannot be considered a
source of taxable income to support the realization of deferred
tax assets because these deferred tax liabilities will not
reverse until some indefinite future period.
At such time as we determine that it is more likely than not
that all or a portion of the deferred tax assets are realizable,
the valuation allowance will be reduced. Pursuant to
SOP 90-7,
up to $218.5 million in future decreases in the valuation
allowance established in fresh-start reporting will be accounted
for as a reduction of goodwill rather than as a reduction of
income tax expense if the valuation allowance decrease occurs
prior to the effective date of SFAS 141(R). Effective
January 1, 2009, SFAS 141(R) provides that any
reduction in the valuation allowance established in fresh-start
reporting be accounted for as a reduction to income tax expense.
On January 1, 2007, we adopted the provisions of
FIN 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, or FIN 48. At the date of adoption and
during the year ended December 31, 2007, our unrecognized
income tax benefits and uncertain tax positions were not
material. Interest and penalties related to uncertain tax
positions are recognized by us as a component of income tax
expense but were immaterial on the date of adoption and for the
year ended December 31, 2007. All of our tax years from
1998 to 2006 remain open to examination by federal and state
taxing authorities.
During the years ended December 31, 2006 and 2005, we
recorded income tax expense of $9.3 million and
$21.6 million, respectively. Income tax expense for the
year ended December 31, 2006 consisted primarily of the tax
effect of changes in deferred tax liabilities associated with
wireless licenses, tax goodwill and investments in certain joint
ventures. During the year ended December 31, 2005, we
recorded income tax expense at an effective tax rate of 41.3%.
Despite the fact that we recorded a full valuation allowance on
our deferred tax assets, we recognized income tax expense for
2005 because the release of valuation allowance associated with
the reversal of deferred tax assets recorded in fresh-start
reporting was 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
associated with the repayment of our 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. We paid only minimal cash income taxes for 2006, and we
expect to pay $1.3 million in cash income taxes for the
year ended December 31, 2007.
60
Quarterly
Financial Data (Unaudited)
The following tables present summarized data for each interim
period for the years ended December 31, 2007 and 2006. The
following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary
for a fair statement of our results of operations for the
interim periods presented (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2007(1)
|
|
2007
|
|
2007
|
|
2007(2)
|
|
Revenues
|
|
$
|
393,425
|
|
|
$
|
397,914
|
|
|
$
|
409,656
|
|
|
$
|
429,808
|
|
Operating income (loss)
|
|
|
(1,543
|
)
|
|
|
30,704
|
|
|
|
9,393
|
|
|
|
21,708
|
|
Net income (loss)
|
|
|
(24,224
|
)
|
|
|
9,638
|
|
|
|
(43,289
|
)
|
|
|
(18,052
|
)
|
Basic earnings (loss) per share
|
|
|
(0.36
|
)
|
|
|
0.14
|
|
|
|
(0.64
|
)
|
|
|
(0.27
|
)
|
Diluted earnings (loss) per share
|
|
|
(0.36
|
)
|
|
|
0.14
|
|
|
|
(0.64
|
)
|
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006(3)
|
|
|
2006
|
|
|
Revenues
|
|
$
|
281,850
|
|
|
$
|
277,459
|
|
|
$
|
293,266
|
|
|
$
|
314,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
21,435
|
|
|
|
11,742
|
|
|
|
7,050
|
|
|
|
(16,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
18,658
|
|
|
|
2,800
|
|
|
|
(801
|
)
|
|
|
(45,637
|
)
|
Cumulative effect of change in accounting principle
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,281
|
|
|
$
|
2,800
|
|
|
$
|
(801
|
)
|
|
$
|
(45,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.69
|
)
|
Cumulative effect of change in accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.31
|
|
|
$
|
0.05
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.69
|
)
|
Cumulative effect of change in accounting principle
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.31
|
|
|
$
|
0.05
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the quarter ended March 31, 2007, we recognized a
net gain of $1.3 million from our sale of wireless licenses
in our Peoria, Illinois, Macon-Warner Robins, Georgia and
Johnstown, Pennsylvania markets. |
|
(2) |
|
For the three months ended December 31, 2007, we recorded
adjustments related to service revenues and interest income
previously reported in our 2006 annual and 2007 interim periods.
These adjustments resulted from an overstatement of service
revenues of $0.4 million in 2006, and $0.7 million and
$0.5 million for the quarterly periods ended March 31 and
June 30, 2007, respectively, and an overstatement of
interest income of $1.0 million and $0.3 million for
the quarterly periods ended June 30 and September 30, 2007,
respectively. These adjustments resulted in a $2.9 million
increase ($0.04 per share) to our net loss for the three
months ended December 31, 2007. We assessed the
quantitative and qualitative effects of these adjustments on
each of our previously reported periods and concluded that the
adjustments were not material to any period. |
61
|
|
|
(3) |
|
During the quarter ended September 30, 2006, we recognized
a gain of $21.6 million from our sale of wireless licenses
and operating assets in our Toledo and Sandusky, Ohio markets. |
Quarterly
Results of Operations Data (Unaudited)
The following table presents our unaudited condensed
consolidated quarterly statement of operations data for 2007 (in
thousands) which has been derived from our unaudited condensed
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007(1)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
321,691
|
|
|
$
|
347,253
|
|
|
$
|
354,495
|
|
|
$
|
372,228
|
|
Equipment revenues
|
|
|
71,734
|
|
|
|
50,661
|
|
|
|
55,161
|
|
|
|
57,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
393,425
|
|
|
|
397,914
|
|
|
|
409,656
|
|
|
|
429,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(90,440
|
)
|
|
|
(90,559
|
)
|
|
|
(100,907
|
)
|
|
|
(102,222
|
)
|
Cost of equipment
|
|
|
(122,665
|
)
|
|
|
(90,818
|
)
|
|
|
(97,218
|
)
|
|
|
(95,296
|
)
|
Selling and marketing
|
|
|
(48,769
|
)
|
|
|
(47,011
|
)
|
|
|
(54,265
|
)
|
|
|
(56,168
|
)
|
General and administrative
|
|
|
(65,234
|
)
|
|
|
(66,407
|
)
|
|
|
(68,686
|
)
|
|
|
(71,209
|
)
|
Depreciation and amortization
|
|
|
(68,800
|
)
|
|
|
(72,415
|
)
|
|
|
(77,781
|
)
|
|
|
(83,205
|
)
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(395,908
|
)
|
|
|
(367,210
|
)
|
|
|
(400,225
|
)
|
|
|
(408,100
|
)
|
Gain (loss) on sale or disposal of assets
|
|
|
940
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,543
|
)
|
|
|
30,704
|
|
|
|
9,393
|
|
|
|
21,708
|
|
Minority interests in consolidated subsidiaries
|
|
|
1,579
|
|
|
|
673
|
|
|
|
182
|
|
|
|
(617
|
)
|
Equity in net loss of investee
|
|
|
|
|
|
|
|
|
|
|
(807
|
)
|
|
|
(1,502
|
)
|
Interest income
|
|
|
5,285
|
|
|
|
7,134
|
|
|
|
10,148
|
|
|
|
6,372
|
|
Interest expense
|
|
|
(26,496
|
)
|
|
|
(27,090
|
)
|
|
|
(33,336
|
)
|
|
|
(34,309
|
)
|
Other expense, net
|
|
|
(637
|
)
|
|
|
|
|
|
|
(4,207
|
)
|
|
|
(1,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(21,812
|
)
|
|
|
11,421
|
|
|
|
(18,627
|
)
|
|
|
(9,543
|
)
|
Income tax expense
|
|
|
(2,412
|
)
|
|
|
(1,783
|
)
|
|
|
(24,662
|
)
|
|
|
(8,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(24,224
|
)
|
|
$
|
9,638
|
|
|
$
|
(43,289
|
)
|
|
$
|
(18,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See footnote 2 to the Quarterly Financial Data
(Unaudited) table above. |
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, or ARPU, which measures service
revenue per customer; CPGA, which measures the average cost of
acquiring a new customer; cash costs per user per month, or 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, which are included in the
most directly comparable measure calculated and presented in
accordance with generally accepted accounting principles in the
consolidated balance sheets, consolidated statements of
operations or consolidated statements of cash flows; or
(b) includes amounts, or is subject to adjustments that
have the effect of including amounts, which are excluded
62
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
share-based compensation expense included in selling and
marketing expense), and equipment subsidy (generally defined as
cost of equipment less equipment revenue), less the net loss on
equipment transactions unrelated to initial customer
acquisition, divided by the total number of gross new customer
additions during the period being measured. The net loss on
equipment transactions unrelated to initial customer acquisition
includes 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 share-based compensation expense included
in cost of service and general and administrative expense) plus
net loss on equipment transactions unrelated to initial customer
acquisition (which includes the gain or loss on the 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. Customers who
do not pay their first monthly bill are deducted from our gross
customer additions in the month that they are disconnected; as a
result, these customers are not included in churn. In addition,
customers are generally disconnected from service approximately
30 days after failing to pay a monthly bill. Beginning
during the quarter ended June 30, 2007,
pay-in-advance
customers who ask to terminate their service are disconnected
when their paid service period ends, whereas previously these
customers were generally disconnected on the date of their
request to terminate service. 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
63
changes in our 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 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Year Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2007
|
|
2007
|
|
2007
|
|
2007
|
|
ARPU
|
|
$
|
44.81
|
|
|
$
|
44.75
|
|
|
$
|
44.51
|
|
|
$
|
45.57
|
|
|
$
|
44.92
|
|
CPGA
|
|
$
|
166
|
|
|
$
|
182
|
|
|
$
|
199
|
|
|
$
|
178
|
|
|
$
|
180
|
|
CCU
|
|
$
|
21.27
|
|
|
$
|
19.87
|
|
|
$
|
21.24
|
|
|
$
|
21.00
|
|
|
$
|
20.84
|
|
Churn
|
|
|
3.4
|
%
|
|
|
4.3
|
%
|
|
|
5.2
|
%
|
|
|
4.2
|
%
|
|
|
4.3
|
%
|
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,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Selling and marketing expense
|
|
$
|
48,769
|
|
|
$
|
47,011
|
|
|
$
|
54,265
|
|
|
$
|
56,168
|
|
|
$
|
206,213
|
|
Less share-based compensation expense included in selling and
marketing expense
|
|
|
(1,001
|
)
|
|
|
(560
|
)
|
|
|
(843
|
)
|
|
|
(926
|
)
|
|
|
(3,330
|
)
|
Plus cost of equipment
|
|
|
122,665
|
|
|
|
90,818
|
|
|
|
97,218
|
|
|
|
95,296
|
|
|
|
405,997
|
|
Less equipment revenue
|
|
|
(71,734
|
)
|
|
|
(50,661
|
)
|
|
|
(55,161
|
)
|
|
|
(57,580
|
)
|
|
|
(235,136
|
)
|
Less net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
(4,762
|
)
|
|
|
(2,591
|
)
|
|
|
(5,747
|
)
|
|
|
(4,766
|
)
|
|
|
(17,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPGA
|
|
$
|
93,937
|
|
|
$
|
84,017
|
|
|
$
|
89,732
|
|
|
$
|
88,192
|
|
|
$
|
355,878
|
|
Gross customer additions
|
|
|
565,055
|
|
|
|
462,434
|
|
|
|
450,954
|
|
|
|
496,061
|
|
|
|
1,974,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPGA
|
|
$
|
166
|
|
|
$
|
182
|
|
|
$
|
199
|
|
|
$
|
178
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
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,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Cost of service
|
|
$
|
90,440
|
|
|
$
|
90,559
|
|
|
$
|
100,907
|
|
|
$
|
102,222
|
|
|
$
|
384,128
|
|
Plus general and administrative expense
|
|
|
65,234
|
|
|
|
66,407
|
|
|
|
68,686
|
|
|
|
71,209
|
|
|
|
271,536
|
|
Less share-based compensation expense included in cost of
service and general and administrative expense
|
|
|
(7,742
|
)
|
|
|
(5,335
|
)
|
|
|
(6,231
|
)
|
|
|
(6,701
|
)
|
|
|
(26,009
|
)
|
Plus net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
4,762
|
|
|
|
2,591
|
|
|
|
5,747
|
|
|
|
4,766
|
|
|
|
17,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CCU
|
|
$
|
152,694
|
|
|
$
|
154,222
|
|
|
$
|
169,109
|
|
|
$
|
171,496
|
|
|
$
|
647,521
|
|
Weighted-average number of customers
|
|
|
2,393,161
|
|
|
|
2,586,900
|
|
|
|
2,654,555
|
|
|
|
2,722,631
|
|
|
|
2,589,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCU
|
|
$
|
21.27
|
|
|
$
|
19.87
|
|
|
$
|
21.24
|
|
|
$
|
21.00
|
|
|
$
|
20.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Overview
Our principal sources of liquidity are our existing unrestricted
cash, cash equivalents and short-term investments, cash
generated from operations and cash available under our
$200 million revolving credit facility, which was undrawn
as of December 31, 2007. We had a total of
$612.6 million in unrestricted cash, cash equivalents and
short-term investments as of December 31, 2007. We
generated $316.2 million of net cash from operating
activities during the year ended December 31, 2007, and we
expect that cash from operations will continue to be a
significant and increasing source of liquidity as our markets
mature and our business continues to grow. We may also generate
liquidity through capital markets transactions or by selling
assets that are not material to or are not required for our
ongoing business operations. We believe that our existing
unrestricted cash, cash equivalents and short-term investments,
together with cash generated from operations, are sufficient to
meet the operating and capital requirements for our current
business operations and for the expansion of our business
described below.
Our business expansion efforts include our plans to launch
additional markets with spectrum licenses that we and Denali
License acquired in Auction #66, which will require the
expenditure of significant funds to complete the associated
construction and fund the initial operating costs. Aggregate
capital expenditures for build-out of new markets through their
first full year of operation after commercial launch are
currently anticipated to be approximately $26.00 per covered
POP, excluding capitalized interest. We and Denali License have
already begun the build-out of some of our Auction #66
markets. As part of our market expansion plans, we and Denali
License expect to cover up to an additional 12 to
28 million POPs by the end of 2008 and expect to cover up
to an additional 28 to 50 million POPs by the end of 2010.
If U.S. federal government incumbent licensees do not
relocate to alternative spectrum within the next several months,
their continued use of the spectrum covered by licenses we and
Denali License purchased in Auction #66 could delay the
launch of certain markets. If we determine to launch more than
12 million covered POPs during 2008, or if we determine to
launch more than 28 million covered POPs by the end of 2010
(or to accelerate the launch of those 28 million POPs), we
will need to raise additional debt
and/or
equity capital to help finance this further expansion. The
amount and timing of any capital requirements will depend upon
the pace of our planned market expansion.
We may also pursue other strategic activities to build our
business, which could include (without limitation) further
expansion of our existing market footprint, broader deployment
of our higher-speed data service offering,
65
the acquisition of additional spectrum through FCC auctions or
private transactions, or entering into partnerships with others
to help launch additional markets. If we pursued any of these
activities at a significant level, we would need to raise
additional funding or re-direct capital otherwise available for
the build-out of new markets.
We are a participant in Auctions #73 and #76. The
first of these auctions commenced on January 24, 2008. We
intend to focus in these auctions on those areas that we believe
present attractive growth prospects for our service offerings,
based on an analysis of demographic, economic and other factors,
and we intend to be financially disciplined with respect to
prices we are willing to pay for any such licenses. We cannot
assure you, however, that our bidding strategy will be
successful in the auctions or that spectrum in the auctions that
meets our internally developed criteria will be available to us
at acceptable prices.
In order to finance business expansion activities, we may raise
significant additional capital. This additional funding could
consist of debt
and/or
equity financing from the public
and/or
private capital markets. The amount, nature and timing of any
financing will depend on our operating performance and other
circumstances, our then-current commitments and obligations, the
amount, nature and timing of our capital requirements and
overall market conditions. If we require additional capital to
fund or accelerate the pace of any of our business expansion
efforts or other strategic activities, including any plans to
launch more than 12 million covered POPs during 2008 or
more than 28 million covered POPs by the end of 2010, and
we were unable to obtain such capital on terms that we found
acceptable or at all, we would likely reduce our investments in
expansion activities or slow the pace of expansion activities as
necessary to match our capital requirements to our available
liquidity.
Our total outstanding indebtedness under our senior secured
credit agreement was $886.5 million as of December 31,
2007. In addition, we had $200 million available for
borrowing under our undrawn revolving credit facility.
Outstanding term loan borrowings under the senior secured credit
agreement must be repaid in 22 quarterly payments of
$2.25 million each (which commenced on March 31,
2007) followed by four quarterly payments of
$211.5 million (which commence on September 30, 2012).
Commencing on November 20, 2007, the term loan under our
senior secured credit agreement bears interest at LIBOR plus
3.0% or the bank base rate plus 2.0%, as selected by us. In
addition to our senior secured credit agreement, we also had
$1,100 million in unsecured senior notes due 2014
outstanding as of December 31, 2007. Our
$1,100 million in unsecured senior notes have no principal
amortization and mature in October 2014. Of the
$1,100 million of unsecured senior notes, $750 million
principal amount of senior notes bears interest at 9.375% per
annum and $350 million principal amount of senior notes
(which were issued at a 106% premium) bears interest at an
effective rate of 8.6% per annum.
The Credit Agreement and the indenture governing our
$1,100 million in unsecured senior notes contain covenants
that restrict the ability of Leap, Cricket and the subsidiary
guarantors to take certain actions, including incurring
additional indebtedness. In addition, under certain
circumstances we are required to use some or all of the proceeds
we receive from incurring additional indebtedness to pay down
outstanding borrowings under our Credit Agreement. If we
determine to raise significant additional indebtedness, we would
likely seek to amend the Credit Agreement to remove this
requirement, although we cannot assure you that we will be
successful in doing so. Our Credit Agreement also contains
financial covenants with respect to a maximum consolidated
senior secured leverage ratio and, if a revolving credit loan or
uncollateralized letter of credit is outstanding or requested,
with respect to a minimum consolidated interest coverage ratio,
a maximum consolidated leverage ratio and a minimum consolidated
fixed charge coverage ratio. The Credit Agreement also prohibits
the occurrence of a change of control, which includes the
acquisition of beneficial ownership of 35% or more of
Leaps equity securities, a change in a majority of the
members of Leaps board of directors that is not approved
by the board and the occurrence of a change of
control under any of our other credit instruments. The
restatements of our historical consolidated financial statements
as described in Note 2 to our consolidated financial
statements included in Part II
Item 8. Financial Statements and Supplementary Data
of our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2006 (filed
with the SEC on December 26, 2007) and the associated
delay in filing our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 resulted in
defaults and potential defaults under our Credit Agreement that
were subsequently waived by the required lenders. The
restatements did not affect our compliance with our financial
covenants, and we were in compliance with these covenants as of
December 31, 2007.
66
Although our significant outstanding indebtedness results in
certain risks to our business that could materially affect our
financial condition and performance, we believe that these risks
are manageable and that we are taking appropriate actions to
monitor and address them. For example, in connection with our
financial planning process and capital raising activities, we
seek to maintain an appropriate balance between our debt and
equity capitalization and we review our business plans and
forecasts to monitor our ability to service our debt and to
comply with the financial covenants and debt incurrence and
other covenants in our Credit Agreement and unsecured senior
notes indenture. In addition, as the new markets that we have
launched over the past few years continue to develop and our
existing markets mature, we expect that increased cash flows
from such new and existing markets will result in improvements
in our leverage ratio and other ratios underlying our financial
covenants, although capital expenditures in existing markets may
adversely affect our fixed charge coverage ratio. Our
$1,100 million of unsecured senior notes bear interest at a
fixed rate and we have entered into interest rate swap
agreements covering $355 million of outstanding debt under
our term loan, which help to mitigate our exposure to interest
rate fluctuations. Due to the fixed rate on our
$1,100 million in unsecured senior notes and our interest
rate swaps, approximately 72% of our total indebtedness accrues
interest at a fixed rate. In light of the actions described
above, our expected cash flows from operations, and our ability
to reduce our investments in expansion activities or slow the
pace of our expansion activities as necessary to match our
capital requirements to our available liquidity, management
believes that it has the ability to effectively manage our
levels of indebtedness and address the risks to our business and
financial condition related to our indebtedness.
Cash
Flows
The following table shows cash flow information for the three
years ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net cash provided by operating activities
|
|
$
|
316,181
|
|
|
$
|
289,871
|
|
|
$
|
308,280
|
|
Net cash used in investing activities
|
|
|
(622,728
|
)
|
|
|
(1,550,624
|
)
|
|
|
(332,112
|
)
|
Net cash provided by financing activities
|
|
|
367,072
|
|
|
|
1,340,492
|
|
|
|
175,764
|
|
Operating
Activities
Net cash provided by operating activities increased by
$26.3 million, or 9.1%, for the year ended
December 31, 2007 compared to the corresponding period of
the prior year. This increase was primarily attributable to
higher depreciation, which more than offset the increase in our
pretax loss.
Net cash provided by operating activities decreased by
$18.4 million, or 6.0%, for the year ended
December 31, 2006 compared to the corresponding period of
the prior year. This decrease was primarily attributable to the
decrease in our net income offset by higher depreciation and
amortization expense.
Net cash provided by operating activities increased by
$117.9 million, or 61.9%, for the year ended
December 31, 2005 compared to the corresponding period of
the prior year. The increase was primarily attributable to
higher net income (net of income from reorganization items,
depreciation and amortization expense and non-cash share-based
compensation expense) and the timing of payments on accounts
payable for the year ended December 31, 2005, partially
offset by interest payments on our 13% senior secured
pay-in-kind
notes and FCC debt.
Investing
Activities
Net cash used in investing activities was $622.7 million
for the year ended December 31, 2007, which included the
effects of the following transactions:
|
|
|
|
|
During January 2007, we completed the sale of three wireless
licenses that we were not using to offer commercial service for
an aggregate sales price of $9.5 million.
|
|
|
|
During March 2007, Cricket acquired the remaining 25% of the
membership interests in ANB 1 for $4.7 million,
following ANBs exercise of its option to sell its entire
25% controlling interest in ANB 1 to Cricket.
|
67
|
|
|
|
|
During the year ended December 31, 2007, we purchased
approximately 20% of the outstanding membership units of a
regional wireless service provider for an aggregate purchase
price of $19.0 million.
|
|
|
|
During the year ended December 31, 2007, we made investment
purchases of $642.5 million from proceeds received from the
issuances of our unsecured senior notes due 2014, offset by
sales or maturities of investments of $531.0 million.
|
|
|
|
During the year ended December 31, 2007, we and our
consolidated joint ventures purchased $504.8 million of
property and equipment for the build-out of our new markets and
the expansion and improvement of our existing markets.
|
Net cash used in investing activities was $1,550.6 million
for the year ended December 31, 2006, which included the
effects of the following transactions:
|
|
|
|
|
During July and October 2006, we paid to the FCC
$710.2 million for the purchase of 99 licenses acquired in
Auction #66, and Denali License paid $274.1 million as
a deposit for a license it subsequently purchased in
Auction #66.
|
|
|
|
During November 2006, we purchased 13 wireless licenses in North
Carolina and South Carolina for an aggregate purchase price of
$31.8 million.
|
|
|
|
During the year ended December 31, 2006, we, ANB 1
License and LCW Operations made over $590 million in
purchases of property and equipment for the build-out of new
markets.
|
Net cash used in investing activities was $332.1 million
for the year ended December 31, 2005, which included the
effects of the following transactions:
|
|
|
|
|
During the year ended December 31, 2005, we paid
$208.8 million for the purchase of property and equipment.
|
|
|
|
During the year ended December 31, 2005, subsidiaries of
Cricket and ANB 1 paid $244.0 million for the purchase
of wireless licenses, partially offset by proceeds received of
$108.8 million from the sale of wireless licenses and
operating assets.
|
Financing
Activities
Net cash provided by financing activities was
$367.1 million for the year ended December 31, 2007,
which included the effects of the following transactions:
|
|
|
|
|
During the year ended December 31, 2007, we made payments
of $5.2 million on our capital lease obligations relating
to software licenses.
|
|
|
|
During the year ended December 31, 2007, we issued an
additional $350 million of unsecured senior notes due 2014
at an issue price of 106% of the principal amount, which
resulted in gross proceeds of $371 million, offset by
payments of $9.0 million on our $895.5 million senior
secured term loan.
|
|
|
|
During the year ended December 31, 2007, we issued common
stock upon the exercise of stock options held by our employees
and upon employee purchases of common stock under our Employee
Stock Purchase Plan, resulting in aggregate net proceeds of
$9.7 million.
|
Net cash provided by financing activities was
$1,340.5 million for the year ended December 31, 2006,
which included the effects of the following transactions:
|
|
|
|
|
In June 2006, we replaced our previous $710 million senior
secured credit facility with a new amended and restated senior
secured credit facility consisting of a $900 million term
loan and a $200 million revolving credit facility. The
replacement term loan generated net proceeds of approximately
$307 million, after repayment of the principal balances of
the old term loan and prior to the payment of fees and expenses.
See Senior Secured Credit
Facilities Cricket Communications below.
|
68
|
|
|
|
|
In October 2006, we physically settled 6,440,000 shares of
Leap common stock pursuant to our forward sale agreements and
received aggregate cash proceeds of $260 million (before
expenses) from such physical settlements. See
Forward Sale Agreements below.
|
|
|
|
In October 2006, we borrowed $570 million under our
$850 million unsecured bridge loan facility to finance a
portion of the remaining amounts owed by us and Denali License
to the FCC for Auction #66 licenses.
|
|
|
|
In October 2006, we issued $750 million of
9.375% senior notes due 2014, and we used a portion of the
approximately $739 million of cash proceeds (after
commissions and before expenses) from the sale to repay our
outstanding obligations, including accrued interest, under our
bridge loan facility. Upon repayment of our outstanding
indebtedness, the bridge loan facility was terminated. See
Senior Notes below.
|
|
|
|
In October 2006, LCW Operations entered into a senior secured
credit agreement consisting of two term loans for
$40 million in the aggregate. The loans bear interest at
LIBOR plus the applicable margin ranging from 2.70% to 6.33% and
must be repaid in varying quarterly installments beginning in
2008, with the final payment due in 2011. The loans are
non-recourse to Leap, Cricket and their other subsidiaries. See
Senior Secured Credit Facilities
LCW Operations below.
|
Net cash provided by financing activities for the year ended
December 31, 2005 was $175.8 million, which consisted
primarily of borrowings under our term loan of
$600 million, less repayments of our FCC debt of
$40 million and
pay-in-kind
notes of $372.7 million.
Senior
Secured Credit Facilities
Cricket
Communications
The senior secured credit facility under our Credit Agreement
consists of a six year $895.5 million term loan and an
undrawn $200 million revolving credit facility. As of
December 31, 2007, the outstanding indebtedness was
$886.5 million.
Outstanding borrowings under the term loan must be repaid in 22
quarterly payments of $2.25 million each (which commenced
on March 31, 2007) followed by four quarterly payments
of $211.5 million (which commence on September 30,
2012).
As of December 31, 2007, the interest rate on the term loan
was the London Interbank Offered Rate (LIBOR) plus 3.00% or the
bank base rate plus 2.00%, as selected by Cricket. This
represents an increase of 25 basis points to the interest
rate applicable to the term loan borrowings in effect on
December 31, 2006. As more fully described in Note 6
to the consolidated financial statements included in
Part II Item 8. Financial Statements
and Supplementary Data, on November 20, 2007, we
entered into a second amendment, or the Second Amendment, to our
Credit Agreement, in which the lenders waived defaults and
potential defaults under the Credit Agreement arising from our
breach and potential breach of representations regarding the
presentation of our prior consolidated financial statements and
the associated delay in filing our Quarterly Report on
Form 10-Q
for the three months ended September 30, 2007. In
connection with this waiver, the Second Amendment also amended
the applicable interest rates to term loan borrowings and our
revolving credit facility.
At December 31, 2007, the effective interest rate on our
term loan under the Credit Agreement was 7.9%, including the
effect of interest rate swaps. The terms of the Credit Agreement
require us to enter into interest rate swap agreements in a
sufficient amount so that at least 50% of our outstanding
indebtedness for borrowed money bears interest at a fixed rate.
We have entered into interest rate swap agreements with respect
to $355 million of our debt. These swap agreements
effectively fix the LIBOR interest rate on $150 million of
our indebtedness at 8.3% and $105 million of our
indebtedness at 7.3% through June 2009 and $100 million of
indebtedness at 8.0% through September 2010. The fair value of
the swap agreements at December 31, 2007 and 2006 was an
aggregate loss of $7.2 million and an aggregate gain of
$3.2 million, respectively, and was recorded in other
liabilities and other assets, respectively, in the consolidated
balance sheets.
Outstanding borrowings under the revolving credit facility, to
the extent that there are any borrowings, are due in June 2011.
As of December 31, 2007, the revolving credit facility was
undrawn. The commitment of the lenders
69
under the revolving credit facility may be reduced in the event
mandatory prepayments are required under our Credit Agreement.
As of December 31, 2007, borrowings under the revolving
credit facility accrued interest at LIBOR plus 3.00% or the bank
base rate plus 2.00%, as selected by Cricket. This represents an
increase of 25 basis points to the interest rate applicable
to the revolving credit facility in effect on December 31,
2006, which increase was made under the Second Amendment, as
described above.
The facilities under the Credit Agreement are guaranteed by us
and all of our direct and indirect domestic subsidiaries (other
than Cricket, which is the primary obligor, and LCW Wireless and
Denali and their respective subsidiaries) and are secured by
substantially all of the present and future personal property
and real property owned by us, 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; 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, sell assets or property, receive certain extraordinary
receipts or generate excess cash flow (as defined in the Credit
Agreement). We are also subject to a financial covenant with
respect to a maximum consolidated senior secured leverage ratio
and, if a revolving credit loan or uncollateralized letter of
credit is outstanding or requested, with respect to a minimum
consolidated interest coverage ratio, a maximum consolidated
leverage ratio and a minimum consolidated fixed charge coverage
ratio. The Credit Agreement also prohibits the occurrence of a
change of control, which includes the acquisition of beneficial
ownership of 35% or more of Leaps equity securities, a
change in a majority of the members of Leaps board of
directors that is not approved by the board and the occurrence
of a change of control under any of our other credit
instruments. In addition to investments in the Denali joint
venture, the Credit Agreement allows us to invest up to
$85 million in LCW Wireless and its subsidiaries and up to
$150 million plus an amount equal to an available cash flow
basket in other joint ventures, and allows us to provide limited
guarantees for the benefit of Denali, LCW Wireless and other
joint ventures.
The restatements of our historical consolidated financial
statements as described in Note 2 to our consolidated
financial statements included in Part II
Item 8. Financial Statements and Supplementary Data
of our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2006 (filed
with the SEC on December 26, 2007) and the associated
delay in filing our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 resulted in
defaults and potential defaults under our Credit Agreement that
were subsequently waived by the required lenders. The
restatements did not affect our compliance with our financial
covenants, and we were in compliance with these covenants as of
December 31, 2007.
Affiliates of Highland Capital Management, L.P. (a beneficial
stockholder of Leap and an affiliate of James D. Dondero, a
former director of Leap) participated in the syndication of the
term loan in an amount equal to $222.9 million.
Additionally, Highland Capital Management continues to hold a
$40 million commitment under the $200 million
revolving credit facility.
LCW
Operations
LCW Operations has a senior secured credit agreement consisting
of two term loans for $40 million in the aggregate. The
loans bear interest at LIBOR plus the applicable margin ranging
from 2.7% to 6.3%. At December 31, 2007, the effective
interest rate on the term loans was 9.1%, and the outstanding
indebtedness was $40 million. In January 2007, LCW
Operations entered into an interest rate cap agreement which
effectively caps the three month LIBOR interest rate at 7.0%
with respect to $20 million of its outstanding borrowings.
The obligations under the loans are guaranteed by LCW Wireless
and LCW Wireless License, LLC (and are non-recourse to Leap,
Cricket and their other subsidiaries). Outstanding borrowings
under the term loans must be repaid in varying quarterly
installments starting in June 2008, with an aggregate final
payment of $24.5 million due in June 2011. Under the senior
secured credit agreement, LCW Operations and the guarantors are
subject to certain limitations, including limitations on their
ability to: incur additional debt or sell assets with
restrictions on the use of proceeds; make certain investments
and acquisitions; grant liens; pay dividends; and make certain
other restricted payments. In addition, LCW Operations will be
required to pay down the facilities under certain circumstances
if it or the guarantors issue debt, sell assets or generate
excess cash flow. The senior secured credit agreement requires
that LCW Operations and the guarantors comply with financial
covenants related to EBITDA, gross additions of
70
subscribers, minimum cash and cash equivalents and maximum
capital expenditures, among other things. LCW was in compliance
with the covenants as of December 31, 2007.
Forward
Sale Agreements
In August 2006, in connection with a public offering of Leap
common stock, Leap entered into forward sale agreements for the
sale of an aggregate of 6,440,000 shares of its common
stock, including an amount equal to the underwriters
over-allotment option in the public offering (which was fully
exercised). The initial forward sale price was $40.11 per share,
which was equivalent to the public offering price less the
underwriting discount, and was subject to daily adjustment based
on a floating interest factor equal to the federal funds rate,
less a spread of 1.0%. In October 2006, Leap issued
6,440,000 shares of its common stock to physically settle
its forward sale agreements and received aggregate cash proceeds
of $260 million (before expenses) from such physical
settlements. Upon such full settlement, the forward sale
agreements were fully performed.
Senior
Notes
In October 2006, Cricket issued $750 million of unsecured
senior notes due in 2014 in a private placement to institutional
buyers. During the second quarter of 2007, we offered to
exchange the notes for identical notes that had been registered
with the Securities and Exchange Commission, or SEC, and all
notes were tendered for exchange.
The notes bear interest at the rate of 9.375% per year, payable
semi-annually in cash in arrears, which interest payments
commenced in May 2007. The notes are guaranteed on an unsecured
senior basis by Leap and each of its existing and future
domestic subsidiaries (other than Cricket, which is the issuer
of the notes, and LCW Wireless and Denali and their respective
subsidiaries) that guarantee indebtedness for money borrowed of
Leap, Cricket or any subsidiary guarantor. The notes and the
guarantees are Leaps, Crickets and the
guarantors general senior unsecured obligations and rank
equally in right of payment with all of Leaps,
Crickets and the guarantors existing and future
unsubordinated unsecured indebtedness. The notes and the
guarantees are effectively junior to Leaps, Crickets
and the guarantors existing and future secured
obligations, including those under the Credit Agreement, to the
extent of the value of the assets securing such obligations, as
well as to future liabilities of Leaps and Crickets
subsidiaries that are not guarantors, and of LCW Wireless and
Denali and their respective subsidiaries. In addition, the notes
and the guarantees are senior in right of payment to any of
Leaps, Crickets and the guarantors future
subordinated indebtedness.
Prior to November 1, 2009, Cricket may redeem up to 35% of
the aggregate principal amount of the notes at a redemption
price of 109.375% of the principal amount thereof, plus accrued
and unpaid interest and additional interest, if any, thereon to
the redemption date, from the net cash proceeds of specified
equity offerings. Prior to November 1, 2010, Cricket may
redeem the notes, in whole or in part, at a redemption price
equal to 100% of the principal amount thereof plus the
applicable premium and any accrued and unpaid interest. The
applicable premium is calculated as the greater of (i) 1.0%
of the principal amount of such notes and (ii) the excess
of (a) the present value at such date of redemption of
(1) the redemption price of such notes at November 1,
2010 plus (2) all remaining required interest payments due
on such notes through November 1, 2010 (excluding accrued
but unpaid interest to the date of redemption), computed using a
discount rate equal to the Treasury Rate plus 50 basis
points, over (b) the principal amount of such notes. The
notes may be redeemed, in whole or in part, at any time on or
after November 1, 2010, at a redemption price of 104.688%
and 102.344% of the principal amount thereof if redeemed during
the twelve months ending October 31, 2011 and 2012,
respectively, or at 100% of the principal amount thereof if
redeemed during the twelve months ending October 31, 2013
or thereafter, plus accrued and unpaid interest.
If a change of control occurs (which includes the
acquisition of beneficial ownership of 35% or more of
Leaps equity securities, a sale of all or substantially
all of the assets of Leap and its restricted subsidiaries and a
change in a majority of the members of Leaps board of
directors that is not approved by the board), each holder of the
notes may require Cricket to repurchase all of such
holders notes at a purchase price equal to 101% of the
principal amount of the notes, plus accrued and unpaid interest.
The indenture governing the notes limits, among other things,
our ability to: incur additional debt; create liens or other
encumbrances; place limitations on distributions from restricted
subsidiaries; pay dividends; make
71
investments; prepay subordinated indebtedness or make other
restricted payments; issue or sell capital stock of restricted
subsidiaries; issue guarantees; sell assets; enter into
transactions with our affiliates; and make acquisitions or merge
or consolidate with another entity.
Affiliates of Highland Capital Management, L.P. (a beneficial
stockholder of Leap and an affiliate of James D. Dondero, a
former director of Leap) purchased an aggregate of
$25 million principal amount of unsecured senior notes in
the October 2006 private placement. In March 2007, these notes
were sold by the Highland entities to a third party.
In June 2007, Cricket issued an additional $350 million of
unsecured senior notes due 2014 in a private placement to
institutional buyers at an issue price of 106% of the principal
amount. These notes are an additional issuance of the 9.375%
unsecured senior notes due 2014 discussed above and are treated
as a single class with these notes. The terms of these
additional notes are identical to the existing notes, except for
certain applicable transfer restrictions. The $21 million
premium that we received in connection with the issuance of the
notes has been recorded in long-term debt in the consolidated
financial statements and will be amortized as a reduction to
interest expense over the term of the notes. At
December 31, 2007, the effective interest rate on the
$350 million of unsecured senior notes was 8.6%, which
included the effect of the premium amortization.
In connection with the private placement of the additional
senior notes, we entered into a registration rights agreement
with the purchasers in which we agreed to file a registration
statement with the SEC to permit the holders to exchange or
resell the notes. We must use reasonable best efforts to file
such registration statement within 150 days after the
issuance of the notes, have the registration statement declared
effective within 270 days after the issuance of the notes
and then consummate any exchange offer within 30 business days
after the effective date of the registration statement. In the
event that the registration statement is not filed or declared
effective or the exchange offer is not consummated within these
deadlines, the agreement provides that additional interest will
accrue on the principal amount of the notes at a rate of 0.50%
per annum during the
90-day
period immediately following any of these events and will
increase by 0.50% per annum at the end of each subsequent
90-day
period, but in no event will the penalty rate exceed 1.50% per
annum. There are no other alternative settlement methods and,
other than the 1.50% per annum maximum penalty rate, the
agreement contains no limit on the maximum potential amount of
penalty interest that could be paid in the event the Company
does not meet the registration statement filing requirements.
Due to the restatement of our historical consolidated financial
results during the fourth quarter of 2007, we were unable to
file the registration statement within 150 days after
issuance of the notes. Based on the anticipated filing date of
the registration statement and the penalty rate applicable to
the associated registration default event, we accrued additional
interest expense of approximately $1.1 million as of
December 31, 2007.
System
Equipment Purchase Agreements
In June 2007, we entered into certain system equipment purchase
agreements. The agreements generally have a term of three years
pursuant to which we agreed to purchase
and/or
license wireless communications systems, products and services
designed to be AWS functional at a current estimated cost to us
of approximately $266 million, which commitments are
subject, in part, to the necessary clearance of spectrum in the
markets to be built. Under the terms of the agreements, we are
entitled to certain pricing discounts, credits and incentives,
which discounts, credits and incentives are subject to our
achievement of our purchase commitments, and to certain
technical training for our personnel. If the purchase commitment
levels per the agreements are not achieved, we may be required
to refund previous credits and incentives we applied to
historical purchases.
Capital
Expenditures and Other Asset Acquisitions and
Dispositions
Capital
Expenditures
As part of our market expansion plans, we and Denali License
expect to cover up to an additional 12 to 28 million POPs
by the end of 2008 and expect to cover up to an additional 28 to
50 million POPs by the end of 2010 (see below, under
Auction #66 Properties and Build-Out
Plans). Aggregate capital expenditures for build-out of
new markets through their first full year of operation after
commercial launch are currently anticipated to be approximately
$26.00 per covered POP, excluding capitalized interest. The
amount and timing of any capital requirements will depend upon
the pace of our planned market expansion. Ongoing capital
expenditures to support
72
the growth and development of our markets after their first year
of commercial operation are expected to be in the mid-teens as a
percentage of service revenue.
During the year ended December 31, 2007, we and our
consolidated joint ventures made approximately
$504.8 million in capital expenditures. These capital
expenditures were primarily for: (i) the build-out of new
markets, including related capitalized interest,
(ii) expansion and improvement of our and their existing
wireless networks, and (iii) expenditures for EvDO
technology.
During the year ended December 31, 2006, we, ANB 1
License and LCW Operations made $591.3 million in capital
expenditures. These capital expenditures were primarily for:
(i) expansion and improvement of our existing wireless
network, (ii) the build-out and launch of our new markets,
(iii) costs incurred by ANB 1 License and LCW
Operations in connection with the build-out of their new
markets, and (iv) expenditures for EvDO technology.
During the year ended December 31, 2005, we and ANB 1
License made $208.8 million in capital expenditures. These
capital expenditures were primarily for: (i) expansion and
improvement of our existing wireless network, (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 our new markets, (iv) costs incurred by
ANB 1 License in connection with the build out of its new
markets and (v) initial expenditures for EvDO technology.
Auction #66
Properties and Build-Out Plans
In December 2006, we completed the purchase of 99 wireless
licenses in Auction #66 covering 124.9 million POPs
(adjusted to eliminate duplication among certain overlapping
Auction #66 licenses) for an aggregate purchase price of
$710.2 million. In April 2007, Denali License completed the
purchase of one wireless license in Auction #66 covering
59.9 million POPs (which includes markets covering
5.8 million POPs which overlap with certain licenses we
purchased in Auction #66) for a net purchase price of
$274.1 million. We and Denali License have already begun
the build-out of some of our Auction #66 markets. As part
of our market expansion plans, we and Denali License expect to
cover 12 to 28 million additional POPs by the end of 2008
and expect to cover 28 to 50 million additional POPs by
2010. If U.S. federal government incumbent licensees do not
relocate to alternative spectrum within the next several months,
their continued use of the spectrum covered by licenses we and
Denali License purchased in Auction #66 could delay the
launch of certain markets. The licenses we and Denali License
purchased in Auction #66, together with the licenses we
currently own, provide 20 MHz coverage and the opportunity
to offer enhanced data services in almost all markets that we
currently operate or are building out, assuming Denali License
were to make available to us certain of its spectrum.
Other
Acquisitions and Dispositions
In January 2007, we completed the sale of three wireless
licenses that we were not using to offer commercial service for
an aggregate sales price of $9.5 million, resulting in a
net gain of $1.3 million.
In June and August 2007, we purchased approximately 20% of the
outstanding membership units of a regional wireless service
provider for an aggregate purchase price of $18.0 million.
In October 2007, we contributed an additional $1.0 million.
We use the equity method to account for our investment. Our
equity in net earnings or losses are recorded two months in
arrears to facilitate the timely inclusion of such equity in net
earnings or losses in our consolidated financial statements.
During the year ended December 31, 2007, our share of net
losses of the entity was $2.3 million.
In December 2007, we agreed to purchase Hargray Communications
Groups wireless subsidiary for $30 million. This
subsidiary owns a 15 MHz wireless license covering
approximately 0.8 million POPs and operates a wireless
business in Georgia and South Carolina, which complements our
existing market in Charleston, South Carolina. Completion of
this transaction is subject to customary closing conditions,
including FCC approval. The FCC issued its approval of the
transaction in February 2008, but this approval has not yet
become final.
In January 2008, we agreed to exchange an aggregate of
20 MHz of disaggregated spectrum under certain of our
existing PCS licenses in Tennessee, Georgia and Arkansas for an
aggregate of 30 MHz of disaggregated and
73
partitioned spectrum in New Jersey and Mississippi under certain
of Sprint Nextels existing wireless licenses. Completion
of this transaction is subject to customary closing conditions,
including FCC approval.
Contractual
Obligations
The following table sets forth our best estimates as to the
amounts and timing of minimum contractual payments for some of
our contractual obligations as of December 31, 2007 for the
next five years and thereafter (in thousands). Future events,
including refinancing of our long-term debt, could cause actual
payments to differ significantly from these amounts.
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt(1)
|
|
$
|
12,748
|
|
|
$
|
35,093
|
|
|
$
|
469,008
|
|
|
$
|
1,529,451
|
|
|
$
|
2,046,300
|
|
Capital leases(2)
|
|
|
16,716
|
|
|
|
33,432
|
|
|
|
4,932
|
|
|
|
6,458
|
|
|
|
61,538
|
|
Operating leases
|
|
|
121,712
|
|
|
|
242,658
|
|
|
|
230,206
|
|
|
|
461,518
|
|
|
|
1,056,094
|
|
Purchase obligations(3)
|
|
|
291,032
|
|
|
|
128,034
|
|
|
|
16,197
|
|
|
|
1,877
|
|
|
|
437,039
|
|
Contractual interest(4)
|
|
|
174,852
|
|
|
|
346,610
|
|
|
|
334,546
|
|
|
|
206,742
|
|
|
|
1,062,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
617,060
|
|
|
$
|
785,827
|
|
|
$
|
1,054,889
|
|
|
$
|
2,206,046
|
|
|
$
|
4,663,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts shown for Crickets long-term debt include
principal only. Interest on the debt, calculated at the current
interest rate, is stated separately. |
|
(2) |
|
Amounts shown for the Companys capital leases include
principal and interest. |
|
(3) |
|
Purchase obligations are defined as agreements to purchase goods
or services that are enforceable and legally binding on us and
that specify all significant terms including (a) fixed or
minimum quantities to be purchased, (b) fixed, minimum or
variable price provisions, and (c) the approximate timing
of the transaction. |
|
(4) |
|
Contractual interest is based on the current interest rates in
effect at December 31, 2007, after giving effect to our
interest rate swaps, for debt outstanding as of that date. |
The table above also does not include the following contractual
obligations relating to LCW Wireless: (1) 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 (2) 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 equal to 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.
The table above does not include the following contractual
obligations relating to Denali: (1) Crickets
obligation to loan to Denali License an amount equal to $0.75
times the aggregate number of POPs covered by the wireless
license acquired by Denali License in Auction #66,
approximately $38.5 million of which is unused, and
(2) Crickets payment of an amount equal to DSMs
equity contributions in cash to Denali plus a specified return
to DSM, if DSM offers to sell its membership interest in Denali
to Cricket on or following the fifth anniversary of the initial
grant to Denali License of any wireless licenses it acquires in
Auction #66 and if Cricket accepts such offer.
The table above also does not include Crickets contingent
obligation to fund an additional $4.2 million of the
operations of a regional wireless service provider of which it
owns approximately 20% of the outstanding membership units.
Short-Term
Investments
As of December 31, 2007, through our non-controlled
consolidated subsidiary, Denali, we held investments in
asset-backed commercial paper, which were purchased as highly
rated investment grade securities, with a par value of
$32.9 million. These securities, which are collateralized,
in part, by residential mortgages, have declined in value. As a
result, we recognized an other-than-temporary impairment loss
related to these investments in asset-backed commercial paper of
approximately $5.4 million to other income (expense), net,
in our consolidated statements of operations during the year
ended December 31, 2007 to bring the carrying value to
$27.5 million. The impairment
74
loss was calculated based on market valuations provided by our
investment broker as well as an analysis of the underlying
collateral.
As of January 31, 2008, after an additional
$11.3 million in asset-backed commercial paper matured, we
held investments in asset-backed commercial paper with a par
value of $21.6 million. During January 2008, the value of
these securities declined by an additional $0.9 million to
bring the carrying value to $15.3 million. Additionally,
during January, we liquidated our remaining investments in
auction rate securities. We did not realize any losses on the
sale or maturity of these auction rate securities. Future
volatility and uncertainty in the financial markets could result
in additional losses.
Off-Balance
Sheet Arrangements
We do not have and have not had any material off-balance sheet
arrangements.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS 157, which
defines fair value for accounting purposes, establishes a
framework for measuring fair value in accounting principles
generally accepted in the United States of America and expands
disclosure regarding fair value measurements. In February 2008,
the FASB deferred for one year the requirement to adopt
SFAS 157 for nonfinancial assets and liabilities that are
not remeasured on a recurring basis. However, we will be
required to adopt SFAS 157 in the first quarter of 2008
with respect to financial assets and liabilities and
nonfinancial assets and liabilities that are remeasured at fair
value on a recurring basis. We do not expect adoption of
SFAS 157 to have a material impact to our consolidated
financial statements with respect to financial assets and
liabilities and nonfinancial assets and liabilities that are
remeasured on a recurring basis and we are currently evaluating
what impact SFAS 157 will have on our consolidated
financial statements with respect to nonfinancial assets and
liabilities that are not remeasured on a recurring basis.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115, or SFAS 159, which permits all entities
to choose, at specified election dates, to measure eligible
items at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types
of assets and liabilities. We will be required to adopt
SFAS 159 in the first quarter of 2008. We are currently
evaluating what impact, if any, SFAS 159 will have on our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS 141(R), which expands the definition of a business and
a business combination, requires the fair value of the purchase
price of an acquisition including the issuance of equity
securities to be determined on the acquisition date, requires
that all assets, liabilities, contingent consideration,
contingencies and in-process research and development costs of
an acquired business be recorded at fair value at the
acquisition date, requires that acquisition costs generally be
expensed as incurred, requires that restructuring costs
generally be expensed in periods subsequent to the acquisition
date, and requires changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after
the measurement period to impact income tax expense. We will be
required to adopt SFAS 141(R) on January 1, 2009. We
are currently evaluating what impact, if any, SFAS 141(R)
may have on our consolidated financial statements; however,
since we have significant deferred tax assets recorded through
fresh-start reporting for which full valuation allowances were
recorded at the date of our emergence from bankruptcy, this
standard could materially affect our results of operations if
changes in the valuation allowances occur once we adopt the
standard.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51, or
SFAS 160, which changes the accounting and reporting for
minority interests such that minority interests will be
recharacterized as noncontrolling interests and will be required
to be reported as a component of equity, and requires that
purchases or sales of equity interests that do not result in a
change in control be accounted for as equity transactions and,
upon a loss of control, requires the interest sold, as well as
any interest retained, to be recorded at fair value with any
gain or loss recognized in earnings. We will be
75
required to adopt SFAS 160 on January 1, 2009. We are
currently evaluating what impact SFAS 160 will have on our
consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest Rate Risk. The terms of our Credit
Agreement require us to enter into interest rate swap agreements
in a sufficient amount so that at least 50% of our total
outstanding indebtedness for borrowed money bears interest at a
fixed rate. As of December 31, 2007, approximately 72% of
our indebtedness for borrowed money accrued interest at a fixed
rate. The fixed rate debt consisted of $1,100 million of
unsecured senior notes which bear interest at a fixed rate of
9.375% per year. In addition, $355 million of the
$886.5 million in outstanding floating rate debt under our
Credit Agreement is covered by interest rate swap agreements. As
of December 31, 2007, we had interest rate swap agreements
with respect to $355 million of our debt which effectively
fixed the LIBOR interest rate on $150 million of
indebtedness at 8.3% and $105 million of indebtedness at
7.3% through June 2009 and which effectively fixed the LIBOR
interest rate on $100 million of additional indebtedness at
8.0% through September 2010. In addition to the outstanding
floating rate debt under our Credit Agreement, LCW Operations
had $40 million in outstanding floating rate debt as of
December 31, 2007, consisting of two term loans. In January
2007, LCW Operations entered into an interest rate cap agreement
which effectively caps the three month LIBOR interest rate at
7.0% on $20 million of its outstanding borrowings.
As of December 31, 2007, net of the effect of these
interest rate swap agreements, our outstanding floating rate
indebtedness totaled approximately $571.5 million. The
primary base interest rate is three month LIBOR plus an
applicable margin. 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, or increase pre-tax loss, and cash
flow, net of the effect of the interest rate swap agreements, by
approximately $5.7 million.
As described in Note 6 to the consolidated financial
statements in Item 8. Financial Statements and
Supplementary Data of this report, we amended our Credit
Agreement on November 20, 2007. This Second Amendment
increased the primary base interest rate for our term loan to
three month LIBOR plus a margin of 3.0% beginning on
November 20, 2007. In addition, in connection with the
execution of the Second Amendment, we paid a fee equal to
25 basis points on the aggregate principal amount of the
commitments and loans of each lender that executed the Second
Amendment on or before 5:00 p.m. on November 19, 2007,
together with the legal expenses of the administrative agent,
which represented an aggregate payment of $2.7 million.
Hedging Policy. Our policy is to maintain
interest rate hedges to the extent that we believe them to be
fiscally prudent, and as required by our credit agreements. We
do not engage in any hedging activities for speculative purposes.
76
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Stockholders of Leap Wireless International,
Inc.:
In our opinion, the accompanying consolidated balance 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 at December 31,
2007 and December 31, 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company did not maintain, in
all material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) because a material weakness in
internal control over financial reporting related to the
existence, completeness and accuracy of revenues, cost of
revenues and deferred revenues existed as of that date. A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis. The material
weakness referred to above is described in Managements
Report on Internal Control over Financial Reporting appearing
under Item 9A. We considered this material weakness in
determining the nature, timing, and extent of audit tests
applied in our audit of the December 31, 2007 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. The Companys management
is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting included in managements report
referred to above. Our responsibility is to express opinions on
these financial statements and on the Companys internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
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. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007. As discussed in Note 2
and Note 9 to the consolidated financial statements, the
Company changed the manner in which it accounts for share-based
compensation in 2006. As discussed in Note 9 to the
consolidated financial statements, the Company changed the
manner in which it accounts for site rental costs incurred
during the construction period in 2006.
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.
77
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.
PricewaterhouseCoopers LLP
San Diego, California
February 28, 2008
78
LEAP
WIRELESS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
433,337
|
|
|
$
|
372,812
|
|
Short-term investments
|
|
|
179,233
|
|
|
|
66,400
|
|
Restricted cash, cash equivalents and short-term investments
|
|
|
15,550
|
|
|
|
13,581
|
|
Inventories
|
|
|
65,208
|
|
|
|
90,185
|
|
Other current assets
|
|
|
38,099
|
|
|
|
52,981
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
731,427
|
|
|
|
595,959
|
|
Property and equipment, net
|
|
|
1,316,657
|
|
|
|
1,078,521
|
|
Wireless licenses
|
|
|
1,866,353
|
|
|
|
1,563,958
|
|
Assets held for sale
|
|
|
|
|
|
|
8,070
|
|
Goodwill
|
|
|
425,782
|
|
|
|
425,782
|
|
Other intangible assets, net
|
|
|
46,102
|
|
|
|
79,828
|
|
Deposits for wireless licenses
|
|
|
|
|
|
|
274,084
|
|
Other assets
|
|
|
46,677
|
|
|
|
58,745
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,432,998
|
|
|
$
|
4,084,947
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
225,735
|
|
|
$
|
317,093
|
|
Current maturities of long-term debt
|
|
|
10,500
|
|
|
|
9,000
|
|
Other current liabilities
|
|
|
114,808
|
|
|
|
84,675
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
351,043
|
|
|
|
410,768
|
|
Long-term debt
|
|
|
2,033,902
|
|
|
|
1,676,500
|
|
Deferred tax liabilities
|
|
|
182,835
|
|
|
|
148,335
|
|
Other long-term liabilities
|
|
|
90,172
|
|
|
|
47,608
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,657,952
|
|
|
|
2,283,211
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
50,724
|
|
|
|
29,943
|
|
|
|
|
|
|
|
|
|
|
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;
68,674,435 and 67,892,512 shares issued and outstanding at
December 31, 2007 and 2006, respectively
|
|
|
7
|
|
|
|
7
|
|
Additional paid-in capital
|
|
|
1,808,689
|
|
|
|
1,769,772
|
|
Retained earnings (accumulated deficit)
|
|
|
(75,699
|
)
|
|
|
228
|
|
Accumulated other comprehensive income (loss)
|
|
|
(8,675
|
)
|
|
|
1,786
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,724,322
|
|
|
|
1,771,793
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,432,998
|
|
|
$
|
4,084,947
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
79
LEAP
WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
1,395,667
|
|
|
$
|
956,365
|
|
|
$
|
768,916
|
|
Equipment revenues
|
|
|
235,136
|
|
|
|
210,822
|
|
|
|
188,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,630,803
|
|
|
|
1,167,187
|
|
|
|
957,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
(384,128
|
)
|
|
|
(264,162
|
)
|
|
|
(203,548
|
)
|
Cost of equipment
|
|
|
(405,997
|
)
|
|
|
(310,834
|
)
|
|
|
(230,520
|
)
|
Selling and marketing
|
|
|
(206,213
|
)
|
|
|
(159,257
|
)
|
|
|
(100,042
|
)
|
General and administrative
|
|
|
(271,536
|
)
|
|
|
(196,604
|
)
|
|
|
(159,741
|
)
|
Depreciation and amortization
|
|
|
(302,201
|
)
|
|
|
(226,747
|
)
|
|
|
(195,462
|
)
|
Impairment of assets
|
|
|
(1,368
|
)
|
|
|
(7,912
|
)
|
|
|
(12,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(1,571,443
|
)
|
|
|
(1,165,516
|
)
|
|
|
(901,356
|
)
|
Gain on sale or disposal of assets
|
|
|
902
|
|
|
|
22,054
|
|
|
|
14,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
60,262
|
|
|
|
23,725
|
|
|
|
71,002
|
|
Minority interests in consolidated subsidiaries
|
|
|
1,817
|
|
|
|
1,493
|
|
|
|
(31
|
)
|
Equity in net loss of investee
|
|
|
(2,309
|
)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
28,939
|
|
|
|
23,063
|
|
|
|
9,957
|
|
Interest expense
|
|
|
(121,231
|
)
|
|
|
(61,334
|
)
|
|
|
(30,051
|
)
|
Other income (expense), net
|
|
|
(6,039
|
)
|
|
|
(2,650
|
)
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of
change in accounting principle
|
|
|
(38,561
|
)
|
|
|
(15,703
|
)
|
|
|
52,300
|
|
Income tax expense
|
|
|
(37,366
|
)
|
|
|
(9,277
|
)
|
|
|
(21,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(75,927
|
)
|
|
|
(24,980
|
)
|
|
|
30,685
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(75,927
|
)
|
|
$
|
(24,357
|
)
|
|
$
|
30,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(1.13
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.51
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(1.13
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(1.13
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
0.50
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(1.13
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,100
|
|
|
|
61,645
|
|
|
|
60,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
67,100
|
|
|
|
61,645
|
|
|
|
61,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
80
LEAP
WIRELESS INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(75,927
|
)
|
|
$
|
(24,357
|
)
|
|
$
|
30,685
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
29,339
|
|
|
|
19,725
|
|
|
|
12,479
|
|
Depreciation and amortization
|
|
|
302,201
|
|
|
|
226,747
|
|
|
|
195,462
|
|
Accretion of asset retirement obligations
|
|
|
1,666
|
|
|
|
1,617
|
|
|
|
1,323
|
|
Non-cash interest items, net
|
|
|
(4,425
|
)
|
|
|
(266
|
)
|
|
|
(620
|
)
|
Loss on extinguishment of debt
|
|
|
669
|
|
|
|
6,897
|
|
|
|
1,219
|
|
Deferred income tax expense
|
|
|
36,084
|
|
|
|
8,831
|
|
|
|
21,552
|
|
Impairment of assets
|
|
|
1,368
|
|
|
|
7,912
|
|
|
|
12,043
|
|
Impairment of short-term investments
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
Gain on sale or disposal of assets
|
|
|
(902
|
)
|
|
|
(22,054
|
)
|
|
|
(14,587
|
)
|
Gain on extinguishment of asset retirement obligations
|
|
|
(6,089
|
)
|
|
|
|
|
|
|
|
|
Minority interest activity
|
|
|
(1,817
|
)
|
|
|
(1,493
|
)
|
|
|
31
|
|
Equity in net loss of investee
|
|
|
2,309
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(623
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
24,977
|
|
|
|
(52,898
|
)
|
|
|
(11,504
|
)
|
Other assets
|
|
|
31,164
|
|
|
|
(26,912
|
)
|
|
|
5,408
|
|
Accounts payable and accrued liabilities
|
|
|
(53,310
|
)
|
|
|
95,502
|
|
|
|
57,514
|
|
Other liabilities
|
|
|
23,434
|
|
|
|
51,243
|
|
|
|
(2,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
316,181
|
|
|
|
289,871
|
|
|
|
308,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(504,770
|
)
|
|
|
(591,295
|
)
|
|
|
(208,808
|
)
|
Change in prepayments for purchases of property and equipment
|
|
|
12,831
|
|
|
|
(3,846
|
)
|
|
|
(9,828
|
)
|
Purchases of and deposits for wireless licenses and spectrum
clearing costs
|
|
|
(5,292
|
)
|
|
|
(1,018,832
|
)
|
|
|
(243,960
|
)
|
Proceeds from sale of wireless licenses and operating assets
|
|
|
9,500
|
|
|
|
40,372
|
|
|
|
108,800
|
|
Purchases of investments
|
|
|
(642,513
|
)
|
|
|
(150,488
|
)
|
|
|
(307,021
|
)
|
Sales and maturities of investments
|
|
|
530,956
|
|
|
|
177,932
|
|
|
|
329,043
|
|
Purchase of minority interest
|
|
|
(4,706
|
)
|
|
|
|
|
|
|
|
|
Purchase of membership units
|
|
|
(18,955
|
)
|
|
|
|
|
|
|
|
|
Changes in restricted cash, cash equivalents and short-term
investments, net
|
|
|
221
|
|
|
|
(4,467
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(622,728
|
)
|
|
|
(1,550,624
|
)
|
|
|
(332,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligation
|
|
|
(5,213
|
)
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
370,480
|
|
|
|
2,260,000
|
|
|
|
600,000
|
|
Repayment of long-term debt
|
|
|
(9,000
|
)
|
|
|
(1,168,944
|
)
|
|
|
(418,285
|
)
|
Payment of debt issuance costs
|
|
|
(7,765
|
)
|
|
|
(22,864
|
)
|
|
|
(6,951
|
)
|
Minority interest contributions
|
|
|
8,880
|
|
|
|
12,402
|
|
|
|
1,000
|
|
Proceeds from issuance of common stock, net
|
|
|
9,690
|
|
|
|
1,119
|
|
|
|
|
|
Proceeds from physical settlement of forward equity sale
|
|
|
|
|
|
|
260,036
|
|
|
|
|
|
Payment of fees related to forward equity sale
|
|
|
|
|
|
|
(1,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
367,072
|
|
|
|
1,340,492
|
|
|
|
175,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
60,525
|
|
|
|
79,739
|
|
|
|
151,932
|
|
Cash and cash equivalents at beginning of period
|
|
|
372,812
|
|
|
|
293,073
|
|
|
|
141,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
433,337
|
|
|
$
|
372,812
|
|
|
$
|
293,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
81
LEAP
WIRELESS INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Unearned
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Share-Based
|
|
|
(Accumulated
|
|
|
Income
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit)
|
|
|
(Loss)
|
|
|
Total
|
|
|
Successor Company balance at December 31, 2004
|
|
|
60,000,000
|
|
|
$
|
6
|
|
|
$
|
1,478,392
|
|
|
$
|
|
|
|
$
|
(6,100
|
)
|
|
$
|
49
|
|
|
$
|
1,472,347
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,685
|
|
|
|
|
|
|
|
30,685
|
|
Net unrealized holding losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Unrealized gains on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146
|
|
|
|
2,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under share-based compensation plans,
net of repurchases
|
|
|
1,202,806
|
|
|
|
|
|
|
|
7,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,105
|
|
Unearned share-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,317
|
|
|
|
(26,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,375
|
|
|
|
|
|
|
|
|
|
|
|
5,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
61,202,806
|
|
|
|
6
|
|
|
|
1,511,814
|
|
|
|
(20,942
|
)
|
|
|
24,585
|
|
|
|
2,138
|
|
|
|
1,517,601
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,357
|
)
|
|
|
|
|
|
|
(24,357
|
)
|
Net unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Unrealized losses on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(356
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(623
|
)
|
Reclassification of unearned share-based compensation related to
the adoption of SFAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
(20,942
|
)
|
|
|
20,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under forward sale agreements
|
|
|
6,440,000
|
|
|
|
1
|
|
|
|
258,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258,680
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
19,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,725
|
|
Issuance of common stock under share-based compensation plans,
net of repurchases
|
|
|
249,706
|
|
|
|
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
67,892,512
|
|
|
|
7
|
|
|
|
1,769,772
|
|
|
|
|
|
|
|
228
|
|
|
|
1,786
|
|
|
|
1,771,793
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,927
|
)
|
|
|
|
|
|
|
(75,927
|
)
|
Net unrealized holding losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
(70
|
)
|
Unrealized losses on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,391
|
)
|
|
|
(10,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
29,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,227
|
|
Issuance of common stock under share-based compensation plans,
net of repurchases
|
|
|
781,923
|
|
|
|
|
|
|
|
9,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
68,674,435
|
|
|
$
|
7
|
|
|
$
|
1,808,689
|
|
|
$
|
|
|
|
$
|
(75,699
|
)
|
|
$
|
(8,675
|
)
|
|
$
|
1,724,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
82
LEAP
WIRELESS INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The
Company
Leap Wireless International, Inc. (Leap), a Delaware
corporation, together with its subsidiaries, is a wireless
communications carrier that offers digital wireless service in
the United States of America under the
Cricket®
brand. Cricket service offers customers unlimited wireless
service for a flat monthly rate without requiring a fixed-term
contract or credit check. Leap conducts operations through its
subsidiaries and has no independent operations or sources of
operating revenue other than through dividends, if any, from its
subsidiaries. Cricket service is offered by Cricket
Communications, Inc. (Cricket), a wholly owned
subsidiary of Leap, and is also offered in Oregon by LCW
Wireless Operations, LLC (LCW Operations), a wholly
owned subsidiary of LCW Wireless, LLC (LCW Wireless)
and a designated entity under Federal Communications Commission
(FCC) regulations. Cricket owns an indirect 73.3%
non-controlling interest in LCW Operations through a 73.3%
non-controlling interest in LCW Wireless. Cricket also owns an
82.5% non-controlling interest in Denali Spectrum, LLC
(Denali), which purchased a wireless license in the
FCCs auction for Advanced Wireless Service licenses
(Auction #66), covering the upper mid-west
portion of the United States, as a designated entity through its
wholly owned subsidiary, Denali Spectrum License, LLC
(Denali License). Leap, Cricket, and their
subsidiaries, including LCW Wireless and Denali, are
collectively referred to herein as the Company.
The Company operates in a single operating segment as a wireless
communications carrier that offers digital wireless service in
the United States of America.
|
|
Note 2.
|
Basis of
Presentation and Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of Leap and its wholly owned subsidiaries as well as
the accounts of LCW Wireless and Denali and their wholly owned
subsidiaries. The Company consolidates its interests in LCW
Wireless and Denali in accordance with Financial Accounting
Standards Board (FASB) Interpretation No.
(FIN) 46(R), Consolidation of Variable
Interest Entities, because these entities are variable
interest entities and the Company will absorb a majority of
their expected losses. Prior to March 2007, the Company
consolidated its interests in Alaska Native Broadband 1, LLC
(ANB 1) and its wholly owned subsidiary Alaska
Native Broadband 1 License, LLC (ANB 1 License)
in accordance with FIN 46(R). The Company acquired the
remaining interests in ANB 1 in March 2007 and merged
ANB 1 and ANB 1 License into Cricket in December 2007.
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 (GAAP). 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
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. New
and reactivating customers are required to pay for their service
in advance, and generally, customers who activated their service
prior to May 2006 pay in arrears. The Company does not require
any of its customers to sign fixed-term service commitments or
submit to a credit check. These terms generally appeal to less
affluent customers who are considered more likely to terminate
service for inability to pay than wireless customers in general.
Consequently, the Company has concluded that collectibility of
its revenues is not reasonably assured until payment has been
received. Accordingly, service revenues are recognized only
after services have been rendered and payment has been received.
83
LEAP
WIRELESS INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When the Company activates a new customer, it frequently sells
that customer a handset and the first month of service in a
bundled transaction. Under the provisions of Emerging Issues
Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables,
(EITF 00-21)
the sale of a handset along with a month of wireless service
constitutes a multiple element arrangement. Under
EITF 00-21,
once a company has determined the fair value of the elements in
the sales transaction, the total consideration received from the
customer must be allocated among those elements on a relative
fair value basis. Applying
EITF 00-21
to these transactions results in the Company recognizing the
total consideration received, less one month of wireless service
revenue (at the customers stated rate plan), as equipment
revenue.
Equipment 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. In addition to handsets that
the Company sells directly to its customers at Cricket-owned
stores, the Company also sells handsets to third-party dealers.
These dealers then sell the handsets to the ultimate Cricket
customer, and that customer also receives the first month of
service in a bundled transaction (identical to the sale made at
a Cricket-owned store). Sales of handsets to third-party dealers
are recognized as equipment revenues only when service is
activated by customers, since the level of price reductions
ultimately available to such dealers is not reliably estimable
until the handsets are sold by such dealers to customers. Thus,
handsets sold to third-party dealers are recorded as consigned
inventory and deferred equipment revenue until they are sold to,
and service is activated by, customers.
Through a third-party provider, the Companys customers may
elect to participate in an extended handset warranty/insurance
program. The Company recognizes revenue on replacement handsets
sold to its customers under the program when the customer
purchases a replacement handset.
Sales incentives offered without charge to customers and
volume-based incentives paid to the Companys third-party
dealers 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; as a result, customer returns of handsets and accessories
have historically been negligible.
Amounts billed by the Company in advance of customers
wireless service periods are not reflected in accounts
receivable or deferred revenue as collectibility of such amounts
is not reasonably assured. Deferred revenue consists primarily
of cash received from customers in advance of their service
period and deferred equipment revenue related to handsets and
accessories sold to third-party dealers.
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; 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 tower and network
facility rent, engineering operations, field technicians and
related utility and maintenance charges, and salary and overhead
charges associated with these functions.
Cost of Equipment. Cost of equipment primarily
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 the 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 expenses, promotional and
public relations costs associated with acquiring new customers,
store operating costs (such as retail associates salaries
and rent), and overhead charges associated with selling and
marketing functions.
84
LEAP
WIRELESS INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
General and Administrative. General and
administrative expenses primarily include call center and other
customer care program costs and salary, overhead and outside
consulting costs associated with the Companys customer
care, billing, information technology, finance, human resources,
accounting, legal and executive functions.
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 generally consist of highly liquid,
fixed-income investments with an original maturity at the time
of purchase of greater than three months. Such investments
consist of commercial paper, asset-backed commercial paper,
auction rate securities, obligations of the
U.S. government, and investment grade fixed-income
securities guaranteed by U.S. government agencies.
Investments are classified as available-for-sale and stated at
fair value. 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 investments.
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.
Inventories
Inventories consist of handsets and accessories not yet placed
into service and units designated for the replacement of damaged
customer handsets, and are stated at the lower of cost or market
using the
first-in,
first-out method.
Property
and Equipment
Property and equipment are initially recorded at cost. Additions
and improvements are capitalized, while expenditures that do not
enhance the asset or extend its useful life are charged to
operating expenses as incurred. Depreciation is applied using
the straight-line method over the estimated useful lives of the
assets once the assets are placed in service.
85
LEAP
WIRELESS INTERNATIONAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 or
equipment category. The Company capitalizes salaries and related
costs of engineering and technical operations employees as
components of
construction-in-progress
during the construction period to the extent time and expense
are contributed to the construction effort. The Company also
capitalizes certain telecommunications and other related costs
as
construction-in-progress
during the construction period to the extent they are
incremental and directly related to the network under
construction. In addition, interest is capitalized on the
carrying values of both wireless licenses and equipment during
the construction period and is depreciated over an estimated
useful life of ten years. During the years ended
December 31, 2007 and 2006, the Company capitalized
interest of $45.6 million and $16.7 million,
respectively, to property and equipment.
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. As of December 31, 2007 and
2006, there was no property or equipment classified as assets
held for sale.
Wireless
Licenses
The Company and LCW Wireless operate broadband PCS networks
under wireless licenses granted by the FCC that are specific to
a particular geographic area on spectrum that has been allocated
by the FCC for such services. In addition, through the
Companys and Denali Licenses participation in
Auction #66 in December 2006, it and Denali License
acquired a number of AWS licenses that can be used to provide
services comparable to the PCS services the Company currently
provides, in addition to other advanced wireless services.
Wireless licenses are initially recorded at cost and are not
amortized. Although FCC licenses are issued with a stated term,
ten years in the case of PCS licenses and fifteen years in the
case of AWS licenses, wireless licenses are considered to be
indefinite-lived intangible assets because the Company and LCW
Wireless expect to continue to provide wireless service using
the relevant licenses for the foreseeable future, PCS and AWS
licenses are routinely renewed for a nominal fee, and management
has determined that no legal, regulatory, contractual,
competitive, economic, or other factors currently exist that
limit the useful life of the Companys or its consolidated
joint ventures PCS and AWS licenses. On a quarterly basis,
the Company evaluates the remaining useful life of its
indefinite lived wireless licenses to determine whether events
and circumstances, such as any legal, regulatory, contractual,
competitive, economic or other factors, continue to support an
indefinite useful life. If a wireless license is subsequently
determined to have a finite useful life, the Company tests the
wireless license for impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets,
(SFAS 142). The wireless license would then be
amortized prospectively over its estimated remaining useful
life. In addition to its quarterly evaluation of the indefinite
useful lives of its wireless licenses, the Company also tests
its wireless licenses for impairment in accordance with
SFAS 142 on an annual basis. As of December 31, 2007
and 2006, the carrying value of the Companys and its
consolidated joint ventures wireless licenses was
$1.9 billion and $1.6 billion,
86