e10vq
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
quarterly period ended March 31,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number:
000-29752
Leap Wireless International,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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33-0811062
(I.R.S. Employer
Identification No.)
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5887 Copley Drive, San Diego, CA
(Address of Principal Executive
Offices)
Delaware
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92111
(Zip Code)
33-0811062
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(858) 882-6000
(Registrants telephone
number, including area code)
Not
Applicable
(Former name, former address and
former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
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. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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
The number of shares outstanding of the registrants common
stock on April 30, 2010 was 78,216,420.
LEAP
WIRELESS INTERNATIONAL, INC.
QUARTERLY REPORT ON
FORM 10-Q
For the Quarter Ended March 31, 2010
TABLE OF CONTENTS
PART I
FINANCIAL
INFORMATION
Item 1. Financial
Statements.
LEAP
WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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Assets
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Cash and cash equivalents
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$
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173,121
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$
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174,999
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Short-term investments
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352,807
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389,154
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Restricted cash, cash equivalents and short-term investments
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3,866
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3,866
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Inventories
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55,189
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107,912
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Deferred charges
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35,998
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38,872
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Other current assets
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83,956
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73,204
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Total current assets
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704,937
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788,007
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Property and equipment, net
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2,093,904
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2,121,094
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Wireless licenses
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1,923,097
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1,921,973
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Assets held for sale
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2,381
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Goodwill
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430,101
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430,101
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Intangible assets, net
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23,399
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24,535
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Other assets
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84,268
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83,630
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Total assets
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$
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5,259,706
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$
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5,371,721
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Liabilities and Stockholders Equity
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Accounts payable and accrued liabilities
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$
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228,575
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$
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310,386
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Current maturities of long-term debt
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16,096
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8,000
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Other current liabilities
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231,363
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196,647
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Total current liabilities
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476,034
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515,033
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Long-term debt
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2,725,772
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2,735,318
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Deferred tax liabilities
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271,369
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259,512
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Other long-term liabilities
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105,357
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99,696
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Total liabilities
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3,578,532
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3,609,559
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Redeemable non-controlling interests
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51,768
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71,632
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Commitments and contingencies (Note 9)
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Stockholders equity:
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Preferred stock authorized 10,000,000 shares;
$.0001 par value, no shares issued and outstanding
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Common stock authorized 160,000,000 shares;
$.0001 par value, 78,226,957 and 77,524,040 shares
issued and outstanding at March 31, 2010 and
December 31, 2009, respectively
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8
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8
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Additional paid-in capital
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2,152,772
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2,148,194
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Accumulated deficit
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(524,132
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)
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(458,685
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Accumulated other comprehensive income
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758
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1,013
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Total stockholders equity
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1,629,406
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1,690,530
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Total liabilities and stockholders equity
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$
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5,259,706
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$
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5,371,721
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See accompanying notes to condensed consolidated financial
statements.
1
LEAP
WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share data)
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Three Months Ended
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March 31,
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2010
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2009
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Revenues:
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Service revenues
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$
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584,822
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$
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514,005
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Equipment revenues
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69,132
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72,982
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Total revenues
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653,954
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586,987
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Operating expenses:
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Cost of service (exclusive of items shown separately below)
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165,934
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144,344
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Cost of equipment
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168,053
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157,796
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Selling and marketing
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111,884
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103,523
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General and administrative
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92,256
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96,177
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Depreciation and amortization
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109,246
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89,733
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Total operating expenses
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647,373
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591,573
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Gain (loss) on sale or disposal of assets
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(1,453
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3,581
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Operating income (loss)
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5,128
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(1,005
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Equity in net income of investees, net
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571
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1,479
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Interest income
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428
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945
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Interest expense
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(60,295
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(41,851
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Other income (expense), net
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15
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(63
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Loss before income taxes
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(54,153
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(40,495
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Income tax expense
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(11,294
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(6,865
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Net loss
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(65,447
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(47,360
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Accretion of redeemable non-controlling interests, net of tax
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(2,587
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(2,936
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Net loss attributable to common stockholders
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$
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(68,034
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$
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(50,296
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Loss per share attributable to common stockholders:
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Basic
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$
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(0.90
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$
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(0.74
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Diluted
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$
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(0.90
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$
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(0.74
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Shares used in per share calculations:
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Basic
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75,794
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68,189
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Diluted
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75,794
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68,189
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See accompanying notes to condensed consolidated financial
statements.
2
LEAP
WIRELESS INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited
and in thousands)
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Three Months Ended
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March 31,
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2010
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2009
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Operating activities:
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Net cash provided by operating activities
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$
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93,551
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$
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99,952
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Investing activities:
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Purchases of property and equipment
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(107,206
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)
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(201,785
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Change in prepayments for purchases of property and equipment
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234
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(1,494
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)
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Purchases of and deposits for wireless licenses and spectrum
clearing costs
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(1,124
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)
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(2,545
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)
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Proceeds from sale of wireless licenses and operating assets
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2,965
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Purchases of investments
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(122,483
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)
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(234,563
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)
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Sales and maturities of investments
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158,425
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165,914
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Change in restricted cash
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185
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(1,134
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Net cash used in investing activities
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(71,969
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)
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(272,642
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Financing activities:
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Repayment of long-term debt
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(2,000
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)
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(3,654
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)
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Purchase of non-controlling interest
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(20,973
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)
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Proceeds from the issuance of common stock, net
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853
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Other
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(487
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)
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(334
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)
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Net cash used in financing activities
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(23,460
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)
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(3,135
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)
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Net decrease in cash and cash equivalents
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(1,878
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)
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(175,825
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)
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Cash and cash equivalents at beginning of period
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174,999
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357,708
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Cash and cash equivalents at end of period
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$
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173,121
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$
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181,883
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Supplementary disclosure of cash flow information:
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Cash paid for interest
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$
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20,993
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$
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41,187
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Cash paid for income taxes
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$
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79
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$
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3
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Non-cash investing and financing activities:
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Contribution of wireless licenses in exchange for an equity
interest
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$
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2,381
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$
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See accompanying notes to condensed consolidated financial
statements.
3
LEAP
WIRELESS INTERNATIONAL, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Leap Wireless International, Inc. (Leap), a Delaware
corporation, together with its subsidiaries, is a wireless
communications carrier that offers digital wireless services in
the United States under the
Cricket®
brand. Cricket service offerings provide customers with
unlimited wireless services for a flat rate without requiring a
fixed-term contract or a credit check. The Companys
primary service is Cricket Wireless, which offers customers
unlimited wireless voice and data services for a flat monthly
rate. Leap conducts operations through its subsidiaries and has
no independent operations or sources of income other than
interest income and 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 in the upper Midwest by Denali Spectrum
Operations, LLC (Denali Operations), an indirect
wholly owned subsidiary of Denali Spectrum, LLC
(Denali). LCW Wireless and Denali are designated
entities under Federal Communications Commission
(FCC) regulations. Cricket owns an indirect 94.6%
non-controlling interest in LCW Operations through a 94.6%
non-controlling interest in LCW Wireless, and owns an indirect
82.5% non-controlling interest in Denali Operations through an
82.5% non-controlling interest in Denali. Leap, Cricket and
their subsidiaries and consolidated joint ventures, including
LCW Wireless and Denali, are collectively referred to herein as
the Company.
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Note 2.
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Basis of
Presentation and Significant Accounting Policies
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Basis
of Presentation
The accompanying interim condensed consolidated financial
statements have been prepared without audit, in accordance with
the instructions to
Form 10-Q
and therefore do not include all information and footnotes
required by accounting principles generally accepted in the
United States of America (GAAP) for a complete set
of financial statements. These condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2009. In the opinion of
management, the unaudited financial information for the interim
periods presented reflects all adjustments necessary for a fair
presentation of the Companys results for the periods
presented, with such adjustments consisting only of normal
recurring adjustments. GAAP requires 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 and operating results for interim periods are not
necessarily indicative of operating results for an entire fiscal
year.
The condensed consolidated financial statements include the
operating results and financial position of Leap and its wholly
owned subsidiaries as well as the operating results and
financial position of LCW Wireless and Denali and their wholly
owned subsidiaries. The Company consolidates its non-controlling
interests in LCW Wireless and Denali in accordance with the
authoritative guidance for the consolidation of variable
interest entities because these entities are variable interest
entities and the Company has entered into agreements with the
entities other members which establish a specified,
minimum purchase price in the event that they offer or elect to
sell their membership interests to the Company. All intercompany
accounts and transactions have been eliminated in the condensed
consolidated financial statements.
Segment
and Geographic Data
The Company operates in a single operating segment and a single
reporting unit as a wireless communications carrier that offers
digital wireless services in the United States. As of and for
the three months ended March 31, 2010, all of the
Companys revenues and long-lived assets related to
operations in the United States.
4
Revenues
The Companys business revenues principally arise from the
sale of wireless services, devices (including handsets and
broadband modems) and accessories. Wireless services are
generally provided on a
month-to-month
basis. In general, the Companys customers are required to
pay for their service in advance. Because the Company does not
require customers to sign fixed-term contracts or pass a credit
check, its services are available to a broader customer base
than many other wireless providers and, as a result, some of its
customers may be more likely to have service terminated due to
an inability to pay. Consequently, the Company has concluded
that collectability 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.
When the Company activates service for a new customer, it
frequently sells that customer a device bundled with a period of
free service. Under the authoritative guidance for revenue
arrangements with multiple deliverables, the sale of a device
along with a free period of service constitutes a multiple
element arrangement. Under the guidance, 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 the guidance to these transactions results in
the Company recognizing the total consideration received, less
revenue for the free wireless service period (at the
customers stated rate plan), as equipment revenue.
Equipment revenues and related costs from the sale of devices
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 devices and accessories sold are
recorded in cost of equipment. In addition to devices that the
Company sells directly to its customers at Cricket-owned stores,
the Company also sells devices to third-party dealers, including
mass-merchant retailers. These dealers then sell the devices to
the ultimate Cricket customer, and that customer receives a free
period of service in a bundled transaction (similar to the sale
made at a Cricket-owned store). Sales of devices 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 devices are sold by such dealers to customers. Thus,
revenues from devices sold to third-party dealers are recorded
as deferred equipment revenue and the related costs of the
devices are recorded as deferred charges upon shipment by the
Company. The deferred charges are recognized as equipment costs
when the related equipment revenue is recognized, which occurs
when service is activated by the customer.
Through a third-party provider, the Companys customers may
elect to participate in an extended-warranty program for devices
they purchase. The Company recognizes revenue on replacement
devices sold to its customers under the program when the
customer purchases the device.
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 when the
related service or equipment revenue is recognized. Customers
have limited rights to return devices and accessories based on
time and/or
usage, and customer returns of devices and accessories have
historically been insignificant.
Amounts billed by the Company in advance of customers
wireless service periods are not reflected in accounts
receivable or deferred revenue since 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 devices
sold to third-party dealers.
Universal Service Fund,
E-911 and
other fees are assessed by various governmental authorities in
connection with the services that the Company provides to its
customers. The Company reports these fees, as well as sales, use
and excise taxes that are assessed and collected, net of amounts
remitted, in the condensed consolidated statements of operations.
Fair
Value of Financial Instruments
The authoritative guidance for fair value measurements defines
fair value for accounting purposes, establishes a framework for
measuring fair value and provides disclosure requirements
regarding fair value measurements. The guidance defines fair
value as an exit price, which is the price that would be
received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants
at the measurement date. The
5
degree of judgment utilized in measuring the fair value of
assets and liabilities generally correlates to the level of
pricing observability. Assets and liabilities with readily
available, actively quoted prices or for which fair value can be
measured from actively quoted prices in active markets generally
have more pricing observability and require less judgment in
measuring fair value. Conversely, assets and liabilities that
are rarely traded or not quoted have less pricing observability
and are generally measured at fair value using valuation models
that require more judgment. These valuation techniques involve
some level of management estimation and judgment, the degree of
which is dependent on the price transparency of the asset,
liability or market and the nature of the asset or liability.
The Company has categorized its assets and liabilities measured
at fair value into a three-level hierarchy in accordance with
this guidance. See Note 5 for a further discussion
regarding the Companys measurement of assets and
liabilities at fair value.
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.
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 improvements
|
|
|
7
|
|
Towers
|
|
|
15
|
|
Antennae
|
|
|
5
|
|
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 other asset is placed in service, at which
time the asset is 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 three months ended
March 31, 2010 the Company did not capitalize interest to
property and equipment. During the three months ended
March 31, 2009, the Company capitalized interest of
$12.2 million to property and equipment.
In accordance with the authoritative guidance for accounting for
costs of computer software developed or obtained for internal
use, certain costs related to the development of internal use
software are capitalized and amortized over the estimated useful
life of the software. For the three months ended March 31,
2010 and 2009, the Company capitalized approximately
$24.5 million and $10.9 million, respectively, of
these costs. The Company amortized software costs of
approximately $6.1 million and $5.0 million for the
three months ended March 31, 2010 and 2009, respectively.
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 March 31, 2010 and
December 31, 2009, there was no property or equipment
classified as assets held for sale.
6
Wireless
Licenses
The Company, LCW Wireless and Denali operate Personal
Communications Services (PCS) and Advanced Wireless
Services (AWS) networks under PCS and AWS 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. 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 expects its subsidiaries and consolidated joint
ventures to provide wireless service using the relevant licenses
for the foreseeable future, PCS and AWS licenses are routinely
renewed for either no or 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 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 would first
test the wireless license for impairment and the wireless
license would then be amortized prospectively over its estimated
remaining useful life. In addition, on a quarterly basis, the
Company evaluates the triggering event criteria outlined in the
authoritative guidance for the impairment or disposal of
long-lived assets to determine whether events or changes in
circumstances indicate that an impairment condition may exist.
In addition to these quarterly evaluations, the Company also
tests its wireless licenses for impairment on an annual basis in
accordance with the authoritative guidance for goodwill and
other intangible assets. As of March 31, 2010 and
December 31, 2009, the carrying value of the Companys
and its consolidated joint ventures wireless licenses was
$1.9 billion. Wireless licenses to be disposed of by sale
are carried at the lower of their carrying value or fair value
less costs to sell. As of December 31, 2009, wireless
licenses with a carrying value of $2.4 million were
classified as assets held for sale, as more fully described in
Note 7. As of March 31, 2010, there were no wireless
licenses classified as assets held for sale.
Portions of the AWS spectrum that the Company and Denali
Spectrum License Sub, LLC (Denali License Sub) (an
indirect wholly owned subsidiary of Denali) were awarded in
Auction #66 were subject to use 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. In connection with the launch of new
markets over the past two years, the Company and Denali worked
with several incumbent government and commercial licensees to
clear AWS spectrum. The Companys and Denalis
spectrum clearing costs have been capitalized to wireless
licenses as incurred. During the three months ended
March 31, 2010 and 2009, the Company and Denali incurred
approximately $1.1 million and $2.5 million,
respectively, in spectrum clearing costs.
Goodwill
and Other Intangible Assets
Goodwill primarily 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. Certain of the Companys other
intangible assets were also recorded upon adoption of
fresh-start reporting and now consist of trademarks which are
being amortized on a straight-line basis over their estimated
useful lives of fourteen years. Customer relationships acquired
in connection with the Companys acquisition of Hargray
Wireless, LLC (Hargray Wireless) in 2008 are
amortized on an accelerated basis over a useful life of up to
four years.
Impairment
of Indefinite-Lived Intangible Assets
The Company assesses potential impairments to its
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. In addition, and as more fully described
below, on a quarterly basis, the Company evaluates the
triggering event criteria outlined in the authoritative guidance
for goodwill and other intangible assets to determine whether
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.
7
Wireless
Licenses
The Companys wireless licenses in its operating markets
are combined into a single unit of account 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. The
Companys non-operating licenses are tested for impairment
on an individual basis because these licenses are not
functioning as part of a group with licenses in the
Companys operating markets. As of March 31, 2010, the
carrying values of the Companys operating and
non-operating wireless licenses were $1,892.0 million and
$31.1 million, respectively. An impairment loss is
recognized on the Companys operating wireless licenses
when the aggregate fair value of the wireless licenses is less
than their aggregate carrying value and is measured as the
amount by which the licenses aggregate carrying value
exceeds their aggregate fair value. An impairment loss is
recognized on the Companys non-operating wireless licenses
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. Any
required impairment loss is recorded as a reduction in the
carrying value of the relevant wireless license and charged to
results of operations.
The valuation method the Company uses to determine the fair
value of its wireless licenses is the market approach. Under
this method, the Company determines fair value by comparing its
wireless licenses to sales prices of other wireless licenses of
similar size and type that have been recently sold through
government auctions and private transactions. As part of this
market-level analysis, the fair value of each wireless license
is evaluated and adjusted for developments or changes in legal,
regulatory and technical matters, and for demographic and
economic factors, such as population size, composition, growth
rate and density, household and disposable income, and
composition and concentration of the markets workforce in
industry sectors identified as wireless-centric (e.g., real
estate, transportation, professional services, agribusiness,
finance and insurance).
As more fully described above, the most significant assumption
used to determine the fair value of the Companys wireless
licenses is comparable sales transactions. Other assumptions
used in determining fair value include developments or changes
in legal, regulatory and technical matters as well as
demographic and economic factors. Changes in comparable sales
prices would generally result in a corresponding change in fair
value. For example, a ten percent decline in comparable sales
prices would generally result in a ten percent decline in fair
value. However, a decline in comparable sales would likely
require further adjustment to fair value to capture more recent
macro-economic changes and changes in the demographic and
economic characteristics unique to the Companys wireless
licenses, such as population size, composition, growth rate and
density, household and disposable income, and the extent of the
wireless-centric workforce in the markets covered by the
Companys wireless licenses.
As of September 30, 2009, the date of the Companys
annual impairment test, the aggregate fair value and aggregate
carrying value of its individual operating wireless licenses was
$2,388.5 million and $1,889.3 million, respectively.
If the fair value of the Companys operating wireless
licenses had declined by 10% in such impairment test, it would
not have recognized any impairment loss. As of
September 30, 2009, the aggregate fair value and aggregate
carrying value of its individual non-operating wireless licenses
was $36.6 million and $30.0 million, respectively. If
the fair value of each of the Companys non-operating
wireless licenses had declined by 10% in such impairment test,
it would have recognized an impairment loss of approximately
$1.7 million.
As of March 31, 2010, the Company evaluated whether any
triggering events or changes in circumstances occurred
subsequent to its 2009 annual impairment test of its wireless
licenses that indicated that an impairment condition may exist.
This evaluation included consideration of whether there had been
any significant adverse change in legal factors or in the
Companys business climate, adverse action or assessment by
a regulator, unanticipated competition, loss of key personnel or
likely sale or disposal of all or a significant portion of an
asset group. Based upon this evaluation, the Company concluded
that there had not been any triggering events or changes in
circumstances that indicated that an impairment condition
existed as of March 31, 2010.
Goodwill
The Company assesses its goodwill for impairment annually at the
reporting unit level by applying a fair value test. This fair
value test involves a two-step process. The first step is to
compare the book value of the Companys net
8
assets to its fair value. If the fair value is determined to be
less than book value, a second step is performed to measure the
amount of the impairment, if any.
In connection with the annual test in 2009, the Company based
its determination of fair value primarily upon its average
market capitalization for the month of August, plus a control
premium. Average market capitalization is calculated based upon
the average number of shares of Leap common stock outstanding
during such month and the average closing price of Leap common
stock during such month. The Company considered the month of
August to be an appropriate period over which to measure average
market capitalization in 2009 because trading prices during that
period reflected market reaction to the Companys most
recently announced financial and operating results, announced
early in the month of August.
In conducting the annual impairment test during the third
quarter of 2009, the Company applied a control premium of 30% to
its average market capitalization. The Company believes that
consideration of a control premium is customary in determining
fair value, and is contemplated by the applicable accounting
guidance. The Company believes that its consideration of a
control premium was appropriate because it believes that its
market capitalization does not fully capture the fair value of
its business as a whole or the additional amount an assumed
purchaser would pay to obtain a controlling interest in the
Company. The Company determined the amount of the control
premium as part of its third quarter 2009 testing based upon its
relevant transactional experience, a review of recent comparable
telecommunications transactions and an assessment of market,
economic and other factors. Depending on the circumstances, the
actual amount of any control premium realized in any transaction
involving the Company could be higher or lower than the control
premium the Company applied. Based upon the Companys
annual impairment test conducted during the third quarter of
2009, the Company determined that no impairment existed.
The carrying value of the Companys goodwill was
$430.1 million as of March 31, 2010. As of
March 31, 2010, the Company evaluated whether any
triggering events or changes in circumstances had occurred
subsequent to its annual impairment test that would indicate an
impairment condition may exist. This evaluation included
consideration of whether there had been any significant adverse
changes in legal factors or in the Companys business
climate, adverse action or assessment by a regulator,
unanticipated competition, loss of key personnel or likely sale
or disposal of all or a significant portion of a reporting unit.
Based upon this evaluation, the Company concluded that there had
not been any triggering events or changes in circumstances that
indicated an impairment condition existed as of March 31,
2010.
If competition or other factors were to cause significant
changes in the Companys actual or projected financial or
operating performance, this could constitute a triggering event
which would require the Company to perform an interim goodwill
impairment test prior to its next annual impairment test. If the
first step of the interim impairment test were to indicate that
a potential impairment existed, the Company would be required to
perform the second step of the goodwill impairment test, which
would require it to determine the fair value of its net assets
and could require it to recognize a material non-cash impairment
charge that could reduce all or a portion of the carrying value
of its goodwill of $430.1 million.
Investments
in Other Entities
The Company uses the equity method to account for investments in
common stock of corporations in which it has a voting interest
of between 20% and 50% or in which the Company otherwise has the
ability to exercise significant influence, and in limited
liability companies that maintain specific ownership accounts in
which it has more than a minor but not greater than a 50%
ownership interest. Under the equity method, the investment is
originally recorded at cost and is adjusted to recognize the
Companys share of net earnings or losses of the investee.
The Companys ownership interest in equity method investees
ranges from approximately 7% to 20% of outstanding membership
units. The carrying value of the Companys equity method
investees was $24.4 million and $21.3 million as of
March 31, 2010 and December 31, 2009, respectively.
During the three months ended March 31, 2010 and 2009, the
Companys share of the income of its equity method
investees (net of its share of their losses) was
$0.6 million and $1.5 million, respectively.
The Company regularly monitors and evaluates the realizable
value of its investments. When assessing an investment for an
other-than-temporary
decline in value, the Company considers such factors as, among
other
9
things, the performance of the investee in relation to its
business plan, the investees revenue and cost trends,
liquidity and cash position, market acceptance of the
investees products or services, any significant news that
has been released regarding the investee and the outlook for the
overall industry in which the investee operates. If events and
circumstances indicate that a decline in the value of these
assets has occurred and is
other-than-temporary,
the Company records a reduction to the carrying value of its
investment and a corresponding charge to the consolidated
statements of operations.
Concentrations
The Company generally relies on one key vendor for billing
services, a limited number of vendors for device logistics, a
limited number of vendors for its voice and data communications
transport services and a limited number of vendors for payment
processing services. Loss or disruption of these services could
materially adversely affect the Companys business.
The networks the Company operates do not, by themselves, provide
national coverage and it must pay fees to other carriers who
provide roaming services to the Company. The Company currently
relies on roaming agreements with several carriers for the
majority of its roaming services. If the Company were unable to
obtain cost-effective roaming services for its customers in
geographically desirable service areas, the Companys
competitive position, business, financial condition and results
of operations could be materially adversely affected.
Share-Based
Compensation
The Company accounts for share-based awards exchanged for
employee services in accordance with the authoritative guidance
for share-based payments. Under the guidance, share-based
compensation expense is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense,
net of estimated forfeitures, over the employees requisite
service period.
Total share-based compensation expense related to all of the
Companys share-based awards for the three months ended
March 31, 2010 and 2009 was allocated in the condensed
consolidated statements of operations as follows (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cost of service
|
|
$
|
597
|
|
|
$
|
844
|
|
Selling and marketing expenses
|
|
|
1,106
|
|
|
|
1,583
|
|
General and administrative expenses
|
|
|
5,462
|
|
|
|
9,228
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
$
|
7,165
|
|
|
$
|
11,655
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
The computation of the Companys annual effective tax rate
includes a forecast of the Companys estimated
ordinary income (loss), which is its annual income
(loss) from continuing operations before tax, excluding unusual
or infrequently occurring (discrete) items. Significant
management judgment is required in projecting the Companys
ordinary income (loss). The Companys projected ordinary
income tax expense for the full year 2010 consists primarily of
the deferred tax effect of the Companys investments in
joint ventures that are in a deferred tax liability position and
the amortization of wireless licenses and goodwill for income
tax purposes. Because the Companys projected 2010 income
tax expense is a relatively fixed amount, a small change in the
ordinary income (loss) projection can produce a significant
variance in the effective tax rate, therefore making it
difficult to determine a reliable estimate of the annual
effective tax rate. As a result and in accordance with the
authoritative guidance for accounting for income taxes in
interim periods, the Company has computed its provision for
income
10
taxes for the three months ended March 31, 2010 and 2009 by
applying the actual effective tax rate to the
year-to-date
income.
The Company calculates income taxes in each of the jurisdictions
in which it operates. This process involves calculating the
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 (NOL) carryforwards, capital loss carryforwards
and income tax credits.
The Company must then periodically assess the likelihood that
its deferred tax assets will be recovered from future taxable
income, which assessment requires significant judgment. Included
in the Companys deferred tax assets as of March 31,
2010 were federal NOL carryforwards of approximately
$1.6 billion (which begin to expire in 2022) and state
NOL carryforwards of approximately $1.7 billion
($21.9 million of which will expire at the end of 2010),
which could be used to offset future ordinary taxable income and
reduce the amount of cash required to settle future tax
liabilities. While these NOL carryforwards have a potential
value of approximately $610.0 million in cash tax savings,
there is no assurance that the Company will be able to realize
such tax savings.
If the Company were to experience an ownership
change, as defined in Section 382 of the Internal
Revenue Code and similar state provisions, at a time when its
market capitalization was below a certain level, its ability to
utilize these NOLs to offset future taxable income could be
significantly limited. In general terms, a change in ownership
can occur whenever there is a shift in the ownership of a
company by more than 50 percentage points by one or more
5% stockholders within a three-year period.
The determination of whether an ownership change has occurred is
complex and requires significant judgment. If an ownership
change for purposes of Section 382 were to occur, it could
significantly limit the amount of NOL carryforwards that the
Company could utilize on an annual basis, thus accelerating cash
tax payments it would have to make and possibly causing these
NOLs to expire before it could fully utilize them. As a result,
any restriction on the Companys ability to utilize these
NOL carryforwards could have a material impact on its future
cash flows.
None of the Companys NOL carryforwards are being
considered as an uncertain tax position or disclosed as an
unrecognized tax benefit. Any carryforwards that expire prior to
utilization as a result of a Section 382 limitation will be
removed from deferred tax assets with a corresponding reduction
to valuation allowance. Since the Company currently maintains a
full valuation allowance against its federal and state NOL
carryforwards, it is not expected that any possible limitation
would have a current impact on its net income.
To the extent the Company believes it is more likely than not
that its deferred tax assets will not be recovered, it must
establish a valuation allowance. As part of this periodic
assessment for the three months ended March 31, 2010, the
Company weighed the positive and negative factors with respect
to this determination and, at this time, does 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 its deferred tax assets will be realized, except
with respect to the realization of a $2.0 million Texas
Margins Tax (TMT) credit. The Company will continue
to closely monitor the positive and negative factors to assess
whether it is required to continue to maintain a valuation
allowance. At such time as the Company determines 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
or released in its entirety, with the corresponding benefit
reflected in the Companys tax provision. 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 when these assets
are either sold or impaired for book purposes.
In accordance with the authoritative guidance for business
combinations any reduction in the valuation allowance, including
the valuation allowance established in fresh-start reporting,
will be accounted for as a reduction of income tax expense.
The Companys unrecognized income tax benefits and
uncertain tax positions have not been material in any period.
Interest and penalties related to uncertain tax positions are
recognized by the Company as a component of income tax expense;
however, such amounts have not been significant in any period.
All of the Companys tax years from 1998 to 2009 remain
open to examination by federal and state taxing authorities. In
July 2009, the federal
11
examination of the Companys 2005 tax year was concluded
and the results did not have a material impact on the
consolidated financial statements.
Comprehensive
Loss
Comprehensive loss consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net loss
|
|
$
|
(65,447
|
)
|
|
$
|
(47,360
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) on investments, net of tax
|
|
|
(255
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(65,702
|
)
|
|
$
|
(47,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Supplementary
Balance Sheet Information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net(1)
|
|
$
|
30,832
|
|
|
$
|
37,456
|
|
Prepaid expenses
|
|
|
38,219
|
|
|
|
21,109
|
|
Other
|
|
|
14,905
|
|
|
|
14,639
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,956
|
|
|
$
|
73,204
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net(2):
|
|
|
|
|
|
|
|
|
Network equipment
|
|
$
|
2,774,644
|
|
|
$
|
2,722,863
|
|
Computer hardware and software
|
|
|
264,675
|
|
|
|
246,546
|
|
Construction-in-progress
|
|
|
305,721
|
|
|
|
303,167
|
|
Other
|
|
|
103,862
|
|
|
|
101,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,448,902
|
|
|
|
3,374,192
|
|
Accumulated depreciation
|
|
|
(1,354,998
|
)
|
|
|
(1,253,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,093,904
|
|
|
$
|
2,121,094
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
7,347
|
|
|
$
|
7,347
|
|
Trademarks
|
|
|
37,000
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,347
|
|
|
|
44,347
|
|
Accumulated amortization of customer relationships
|
|
|
(5,971
|
)
|
|
|
(5,496
|
)
|
Accumulated amortization of trademarks
|
|
|
(14,977
|
)
|
|
|
(14,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,399
|
|
|
$
|
24,535
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
82,978
|
|
|
$
|
180,711
|
|
Accrued payroll and related benefits
|
|
|
57,098
|
|
|
|
47,651
|
|
Other accrued liabilities
|
|
|
88,499
|
|
|
|
82,024
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
228,575
|
|
|
$
|
310,386
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
Deferred service revenue(3)
|
|
$
|
94,140
|
|
|
$
|
82,403
|
|
Deferred equipment revenue(4)
|
|
|
22,904
|
|
|
|
28,218
|
|
Accrued sales, telecommunications, property and other taxes
payable
|
|
|
24,852
|
|
|
|
33,712
|
|
Accrued interest
|
|
|
83,883
|
|
|
|
47,101
|
|
Other
|
|
|
5,584
|
|
|
|
5,213
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
231,363
|
|
|
$
|
196,647
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
(1) |
|
Accounts receivable, net consists primarily of amounts billed to
third-party dealers for devices and accessories net of an
allowance for doubtful accounts. |
|
(2) |
|
As of March 31, 2010 and December 31, 2009,
approximately $8.5 million of assets were held by the
Company under capital lease arrangements. Accumulated
amortization relating to these assets totaled $4.0 million
and $3.8 million as of March 31, 2010 and
December 31, 2009, respectively. |
|
(3) |
|
Deferred service revenue consists primarily of cash received
from customers in advance of their service period. |
|
(4) |
|
Deferred equipment revenue relates to devices sold to
third-party dealers. |
|
|
Note 4.
|
Basic and
Diluted Earnings (Loss) Per Share
|
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is
computed by dividing net income by the sum of the
weighted-average number of common shares outstanding during the
period and the weighted-average number of dilutive common share
equivalents outstanding during the period, using the treasury
stock method and the if-converted method, where applicable.
Dilutive common share equivalents are comprised of stock
options, restricted stock awards, employee stock purchase rights
and convertible senior notes.
Since the Company incurred net losses for the three months ended
March 31, 2010 and 2009, 9.7 million common share
equivalents were excluded from the computation of diluted
earnings (loss) per share for the three months ended
March 31, 2010, and 9.0 million common share
equivalents were excluded in the computation of diluted earnings
(loss) per share for the three months ended March 31, 2009,
as their effect would be antidilutive.
|
|
Note 5.
|
Fair
Value of Financial Instruments
|
The Company has categorized its assets and liabilities measured
at fair value into a three-level hierarchy in accordance with
the authoritative guidance for fair value measurements. Assets
and liabilities measured at fair value using quoted prices in
active markets for identical assets or liabilities are generally
categorized as Level 1; assets and liabilities measured at
fair value using observable market-based inputs or unobservable
inputs that are corroborated by market data for similar assets
or liabilities are generally categorized as Level 2; and
assets and liabilities measured at fair value using unobservable
inputs that cannot be corroborated by market data are generally
categorized as Level 3. Assets and liabilities presented at
fair value in the Companys condensed consolidated balance
sheets are generally categorized as follows:
|
|
|
|
Level 1:
|
Quoted prices in active markets for identical assets or
liabilities. The Company did not have any Level 1 assets or
liabilities as of March 31, 2010 or December 31, 2009.
|
|
|
Level 2:
|
Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, quoted prices in
markets that are not active or other inputs that are observable
or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. The
Companys Level 2 assets as of March 31, 2010 and
December 31, 2009 included its cash equivalents, its
short-term investments in obligations of the
U.S. government and government agencies and a majority of
its short-term investments in commercial paper.
|
|
|
Level 3:
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the
assets or liabilities. Such assets and liabilities may have
values determined using pricing models, discounted cash flow
methodologies, or similar techniques, and include instruments
for which the determination of fair value requires significant
management judgment or estimation. The Companys
Level 3 asset as of March 31, 2010 and
December 31, 2009 was a short-term investment in
asset-backed commercial paper.
|
13
The following table sets forth by level within the fair value
hierarchy the Companys assets and liabilities that were
recorded at fair value as of March 31, 2010 and
December 31, 2009 (in thousands). As required by the
guidance for fair value measurements, financial assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement. Thus, assets and liabilities categorized as
Level 3 may be measured at fair value using inputs that are
observable (Levels 1 and 2) and unobservable
(Level 3). Managements assessment of the significance
of a particular input to the fair value measurement requires
judgment, which may affect the valuation of assets and
liabilities and their placement within the fair value hierarchy
levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Fair Value as of March 31, 2010
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money markets and certificates of deposit
|
|
$
|
|
|
|
$
|
85,697
|
|
|
$
|
|
|
|
$
|
85,697
|
|
Commercial paper
|
|
|
|
|
|
|
69,195
|
|
|
|
|
|
|
|
69,195
|
|
Asset-backed commercial paper
|
|
|
|
|
|
|
|
|
|
|
2,498
|
|
|
|
2,498
|
|
U.S. government or government agency securities
|
|
|
|
|
|
|
353,319
|
|
|
|
|
|
|
|
353,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
508,211
|
|
|
$
|
2,498
|
|
|
$
|
510,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Fair Value as of December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money markets and certificates of deposit
|
|
$
|
|
|
|
$
|
81,432
|
|
|
$
|
|
|
|
$
|
81,432
|
|
Commercial paper
|
|
|
|
|
|
|
108,952
|
|
|
|
|
|
|
|
108,952
|
|
Asset-backed commercial paper
|
|
|
|
|
|
|
|
|
|
|
2,731
|
|
|
|
2,731
|
|
U.S. government or government agency securities
|
|
|
|
|
|
|
350,435
|
|
|
|
|
|
|
|
350,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
540,819
|
|
|
$
|
2,731
|
|
|
$
|
543,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets in the tables above are reported in the condensed
consolidated balance sheets as components of cash and cash
equivalents, short-term investments, restricted cash, cash
equivalents and short-term investments and other assets.
The following table provides a summary of the changes in the
fair value of the Companys Level 3 assets (in
thousands).
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
Beginning balance, January 1
|
|
$
|
2,731
|
|
Total gains (losses):
|
|
|
|
|
Included in net loss
|
|
|
67
|
|
Included in comprehensive loss
|
|
|
(223
|
)
|
Purchases and Sales:
|
|
|
|
|
Purchases
|
|
|
|
|
Sales
|
|
|
(77
|
)
|
Transfers into Level 3
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31
|
|
$
|
2,498
|
|
|
|
|
|
|
Unrealized gains (losses) are presented in accumulated other
comprehensive income (loss) in the condensed consolidated
balance sheets. Realized gains (losses) are presented in other
income (expense), net in the condensed consolidated statements
of operations.
Cash
Equivalents and Short-Term Investments
As of March 31, 2010 and December 31, 2009, all of the
Companys short-term investments were debt securities with
contractual maturities of less than one year and were classified
as
available-for-sale.
The fair value of
14
the Companys cash equivalents, short-term investments in
obligations of the U.S. government and government agencies
and a majority of its short-term investments in commercial paper
is determined using observable market-based inputs for similar
assets, which primarily include yield curves and
time-to-maturity
factors. Such investments are therefore considered to be
Level 2 items. The fair value of the Companys
investment in asset-backed commercial paper is determined using
primarily unobservable inputs that cannot be corroborated by
market data, primarily consisting of indicative bids from
potential purchasers, and is therefore considered to be a
Level 3 item.
Available-for-sale
securities were comprised as follows as of March 31, 2010
and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Money markets and certificates of deposits
|
|
$
|
85,697
|
|
|
$
|
85,697
|
|
Commercial paper
|
|
|
69,195
|
|
|
|
69,195
|
|
Asset-backed commercial paper
|
|
|
1,041
|
|
|
|
2,498
|
|
U.S. government or government agency securities
|
|
|
353,320
|
|
|
|
353,319
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
509,253
|
|
|
$
|
510,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Money markets and certificates of deposits
|
|
$
|
81,432
|
|
|
$
|
81,432
|
|
Commercial paper
|
|
|
108,955
|
|
|
|
108,952
|
|
Asset-backed commercial paper
|
|
|
1,051
|
|
|
|
2,731
|
|
U.S. government or government agency securities
|
|
|
350,402
|
|
|
|
350,435
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
541,840
|
|
|
$
|
543,550
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
The Company continues to report its long-term debt obligations
at amortized cost; however, for disclosure purposes, the Company
is required to measure the fair value of outstanding debt on a
recurring basis. The fair value of the Companys
outstanding long-term debt is determined using quoted prices in
active markets and was $2,778.1 million and
$2,715.7 million as of March 31, 2010 and
December 31, 2009, respectively.
Long-term debt as of March 31, 2010 and December 31,
2009 was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Unsecured senior notes due 2014 and 2015
|
|
$
|
1,400,000
|
|
|
$
|
1,400,000
|
|
Unamortized premium on $350 million unsecured senior notes
due 2014
|
|
|
14,468
|
|
|
|
15,111
|
|
Senior secured notes due 2016
|
|
|
1,100,000
|
|
|
|
1,100,000
|
|
Unamortized discount on $1,100 million senior secured notes
due 2016
|
|
|
(38,696
|
)
|
|
|
(39,889
|
)
|
Convertible senior notes due 2014
|
|
|
250,000
|
|
|
|
250,000
|
|
Term loans under LCW senior secured credit agreement
|
|
|
16,096
|
|
|
|
18,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,741,868
|
|
|
|
2,743,318
|
|
Current maturities of long-term debt
|
|
|
(16,096
|
)
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,725,772
|
|
|
$
|
2,735,318
|
|
|
|
|
|
|
|
|
|
|
15
Senior
Notes
Unsecured
Senior Notes Due 2014
In 2006, Cricket issued $750 million of 9.375% unsecured
senior notes due 2014 in a private placement to institutional
buyers, which were exchanged in 2007 for identical notes that
had been registered with the Securities and Exchange Commission
(SEC). In June 2007, Cricket issued an additional
$350 million of 9.375% unsecured senior notes due 2014 in a
private placement to institutional buyers at an issue price of
106% of the principal amount, which were exchanged in June 2008
for identical notes that had been registered with the SEC. These
notes are all treated as a single class and have identical
terms. The $21 million premium the Company received in
connection with the issuance of the second tranche of notes has
been recorded in long-term debt in the condensed consolidated
financial statements and is being amortized as a reduction to
interest expense over the term of the notes using the effective
interest rate method. At March 31, 2010, the effective
interest rate on the $350 million of senior notes was 9.0%,
which includes the effect of the premium amortization.
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 senior secured notes
described below, to the extent of the value of the assets
securing such obligations, as well as to existing and 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, 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, if any, thereon to the redemption
date. 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 beginning on
November 1, 2010 and 2011, respectively, or at 100% of the
principal amount if redeemed during the twelve months beginning
on November 1, 2012 or thereafter, plus accrued and unpaid
interest, if any, thereon to the redemption date.
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 any, thereon to the repurchase date.
Convertible
Senior Notes Due 2014
In June 2008, Leap issued $250 million of unsecured
convertible senior notes due 2014 in a private placement to
institutional buyers. The notes bear interest at the rate of
4.50% per year, payable semi-annually in cash in arrears, which
interest payments commenced in January 2009. The notes are
Leaps general unsecured obligations and rank equally in
right of payment with all of Leaps existing and future
senior unsecured indebtedness and senior in right of payment to
all indebtedness that is contractually subordinated to the
notes. The notes are structurally subordinated to the existing
and future claims of Leaps subsidiaries creditors,
including under the secured and unsecured senior notes described
above and below. The notes are effectively junior to all of
Leaps existing and
16
future secured obligations, including those under the senior
secured notes described below, to the extent of the value of the
assets securing such obligations.
Holders may convert their notes into shares of Leap common stock
at any time on or prior to the third scheduled trading day prior
to the maturity date of the notes, July 15, 2014. If, at
the time of conversion, the applicable stock price of Leap
common stock is less than or equal to approximately $93.21 per
share, the notes will be convertible into 10.7290 shares of
Leap common stock per $1,000 principal amount of the notes
(referred to as the base conversion rate), subject
to adjustment upon the occurrence of certain events. If, at the
time of conversion, the applicable stock price of Leap common
stock exceeds approximately $93.21 per share, the conversion
rate will be determined pursuant to a formula based on the base
conversion rate and an incremental share factor of
8.3150 shares per $1,000 principal amount of the notes,
subject to adjustment.
Leap may be required to repurchase all outstanding notes in cash
at a repurchase price of 100% of the principal amount of the
notes, plus accrued and unpaid interest, if any, thereon to the
repurchase date if (1) any person acquires beneficial
ownership, directly or indirectly, of shares of Leaps
capital stock that would entitle the person to exercise 50% or
more of the total voting power of all of Leaps capital
stock entitled to vote in the election of directors,
(2) Leap (i) merges or consolidates with or into any
other person, another person merges with or into Leap, or Leap
conveys, sells, transfers or leases all or substantially all of
its assets to another person or (ii) engages in any
recapitalization, reclassification or other transaction in which
all or substantially all of Leaps common stock is
exchanged for or converted into cash, securities or other
property, in each case subject to limitations and excluding in
the case of (1) and (2) any merger or consolidation
where at least 90% of the consideration consists of shares of
common stock traded on NYSE, ASE or NASDAQ, (3) a majority
of the members of Leaps board of directors ceases to
consist of individuals who were directors on the date of
original issuance of the notes or whose election or nomination
for election was previously approved by the board of directors,
(4) Leap is liquidated or dissolved or holders of common
stock approve any plan or proposal for its liquidation or
dissolution or (5) shares of Leap common stock are not
listed for trading on any of the New York Stock Exchange, the
NASDAQ Global Market or the NASDAQ Global Select Market (or any
of their respective successors). Leap may not redeem the notes
at its option.
Unsecured
Senior Notes Due 2015
In June 2008, Cricket issued $300 million of 10.0%
unsecured senior notes due 2015 in a private placement to
institutional buyers. The notes bear interest at the rate of
10.0% per year, payable semi-annually in cash in arrears, which
interest payments commenced in January 2009. 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 senior secured notes
described below, to the extent of the value of the assets
securing such obligations, as well as to existing and 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 July 15, 2011, Cricket may redeem up to 35% of the
aggregate principal amount of the notes at a redemption price of
110.0% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the redemption date, from the net
cash proceeds of specified equity offerings. Prior to
July 15, 2012, 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, if any, thereon to the redemption date. 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 July 15,
2012 plus (2) all remaining required interest payments due
on such notes through July 15, 2012 (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 July 15, 2012, at a redemption price of 105.0% and
102.5% of the principal amount thereof if redeemed during the
twelve months beginning on July 15, 2012
17
and 2013, respectively, or at 100% of the principal amount if
redeemed during the twelve months beginning on July 15,
2014 or thereafter, plus accrued and unpaid interest, if any,
thereon to the redemption date.
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 any, thereon to the repurchase date.
Senior
Secured Notes Due 2016
On June 5, 2009, Cricket issued $1,100 million of
7.75% senior secured notes due 2016 in a private placement
to institutional buyers at an issue price of 96.134% of the
principal amount, which notes were exchanged in December 2009
for identical notes that had been registered with the SEC. The
$42.5 million discount to the net proceeds the Company
received in connection with the issuance of the notes has been
recorded in long-term debt in the condensed consolidated
financial statements and is being accreted as an increase to
interest expense over the term of the notes using the effective
interest rate method. At March 31, 2010, the effective
interest rate on the notes was 8.03%, which includes the effect
of the discount accretion.
The notes bear interest at the rate of 7.75% per year, payable
semi-annually in cash in arrears, which interest payments
commenced in November 2009. The notes are guaranteed on a senior
secured basis by Leap and each of its direct and indirect
existing domestic subsidiaries (other than Cricket, which is the
issuer of the notes, and LCW Wireless and Denali and their
respective subsidiaries) and any future wholly owned domestic
restricted subsidiary that guarantees any indebtedness of
Cricket or a guarantor of the notes. The notes and the
guarantees are Leaps, Crickets and the
guarantors senior secured obligations and are equal in
right of payment with all of Leaps, Crickets and the
guarantors existing and future unsubordinated indebtedness.
The notes and the guarantees are effectively senior to all of
Leaps, Crickets and the guarantors existing
and future unsecured indebtedness (including Crickets
$1.4 billion aggregate principal amount of unsecured senior
notes and, in the case of Leap, Leaps $250 million
aggregate principal amount of convertible senior notes), as well
as to all of Leaps, Crickets and the
guarantors obligations under any permitted junior lien
debt that may be incurred in the future, in each case to the
extent of the value of the collateral securing the senior
secured notes and the guarantees.
The notes and the guarantees are secured on a pari passu
basis with all of Leaps, Crickets and the
guarantors obligations under any permitted parity lien
debt that may be incurred in the future. Leap, Cricket and the
guarantors are permitted to incur debt under existing and future
secured credit facilities in an aggregate principal amount
outstanding (including the aggregate principal amount
outstanding of the senior secured notes) of up to the greater of
$1,500 million and 3.5 times Leaps consolidated cash
flow (excluding the consolidated cash flow of LCW Wireless and
Denali) for the prior four fiscal quarters through
December 31, 2010, stepping down to 3.0 times such
consolidated cash flow for any such debt incurred after
December 31, 2010 but on or prior to December 31,
2011, and to 2.5 times such consolidated cash flow for any such
debt incurred after December 31, 2011.
The notes and the guarantees are effectively junior to all of
Leaps, Crickets and the guarantors obligations
under any permitted priority debt that may be incurred in the
future (up to the lesser of 0.30 times Leaps consolidated
cash flow (excluding the consolidated cash flow of LCW Wireless
and Denali) for the prior four fiscal quarters and
$300 million in aggregate principal amount outstanding), to
the extent of the value of the collateral securing such
permitted priority debt, as well as to existing and 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.
The notes and the guarantees are secured on a first-priority
basis, equally and ratably with any future parity lien debt, by
liens on substantially all of the present and future personal
property of Leap, Cricket and the guarantors, except for certain
excluded assets and subject to permitted liens (including liens
on the collateral securing any future permitted priority debt).
Prior to May 15, 2012, Cricket may redeem up to 35% of the
aggregate principal amount of the notes at a redemption price of
107.750% of the principal amount thereof, plus accrued and
unpaid interest thereon to the
18
redemption date, from the net cash proceeds of specified equity
offerings. Prior to May 15, 2012, 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 thereon to the redemption date.
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
May 15, 2012 plus (2) all remaining required interest
payments due on such notes through May 15, 2012 (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 May 15, 2012, at a redemption price of
105.813%, 103.875% and 101.938% of the principal amount thereof
if redeemed during the twelve months beginning on May 15,
2012, 2013 and 2014, respectively, or at 100% of the principal
amount if redeemed during the twelve months beginning on
May 15, 2015 or thereafter, plus accrued and unpaid
interest thereon to the redemption date.
If a change of control occurs (which includes the
acquisition of beneficial ownership of 35% or more of
Leaps equity securities (other than a transaction where
immediately after such transaction Leap will be a wholly owned
subsidiary of a person of which no person or group is the
beneficial owner of 35% or more of such a persons voting
stock), 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 thereon to the
repurchase date.
LCW
Operations Senior Secured Credit Agreement
LCW Operations has a senior secured credit agreement, as
amended, consisting of two term loans with an aggregate
outstanding principal amount of approximately $16.1 million
as of March 31, 2010. The loans bear interest at LIBOR plus
the applicable margin (ranging from 2.70% to 6.33%). At
March 31, 2010, the effective interest rate on the term
loans was 5.12%. Outstanding borrowings under the senior secured
credit agreement are due in quarterly installments of
$2 million with an aggregate final payment of approximately
$10 million due in March 2011. LCW Wireless working
capital needs and debt service requirements are expected to be
met through cash generated from its operations.
The obligations under the senior secured credit agreement are
guaranteed by LCW Wireless and LCW License (a wholly owned
subsidiary of LCW Operations) and are non-recourse to Leap,
Cricket and their other subsidiaries. The obligations under the
senior secured credit agreement are secured by substantially all
of the present and future assets of LCW Wireless and its
subsidiaries. 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 or sell assets. The senior secured credit
agreement requires that LCW Operations and the guarantors comply
with financial covenants related to earnings before interest,
taxes, depreciation and amortization (EBITDA), gross
additions of subscribers, minimum cash and cash equivalents and
maximum capital expenditures, among other things. LCW Operations
was in compliance with these covenants as of March 31, 2010.
|
|
Note 7.
|
Significant
Acquisitions and Dispositions
|
On January 8, 2010, the Company contributed certain
non-operating wireless licenses in West Texas with a carrying
value of approximately $2.4 million to a regional wireless
service provider in exchange for a 6.6% ownership interest in
the company.
On February 22, 2010, the Company entered into an asset
purchase and contribution agreement with various entities doing
business as Pocket Communications, or (collectively)
Pocket, pursuant to which it and Pocket agreed to
contribute substantially all of their wireless spectrum and
operating assets in South Texas to a joint venture controlled by
the Company. The Company will own approximately 76% of the joint
venture and Pocket will own approximately 24%. Immediately prior
to the closing the Company will purchase specified assets from
Pocket for
19
approximately $38 million in cash, which assets will also
be contributed to the joint venture. Following the closing,
Pocket will have the right to put, and the Company will have the
right to call, all of Pockets membership interests in the
joint venture (which rights will generally be exercisable by
either party after
31/2
years). In addition, in the event of a change of control of
Leap, Pocket will be obligated to sell to the Company all of its
membership interests in the joint venture. The closing of the
transaction is subject to customary closing conditions,
including the consent of the FCC.
On March 30, 2010, Cricket acquired an additional 23.9%
membership interest in LCW Wireless from CSM Wireless, LLC
(CSM), following CSMs exercise of its option
to sell its interest in LCW Wireless to Cricket for
$21.0 million, which increased Crickets
non-controlling interest in LCW Wireless to 94.6%.
|
|
Note 8.
|
Arrangements
with Variable Interest Entities
|
As described in Note 2, the Company consolidates its
non-controlling interests in LCW Wireless and Denali in
accordance with the authoritative guidance for the consolidation
of variable interest entities because these entities are
variable interest entities and the Company has entered into
agreements with the entities other members which establish
a specified, minimum purchase price in the event that they offer
or elect to sell their membership interests to the Company. All
intercompany accounts and transactions have been eliminated in
the condensed consolidated financial statements. LCW Wireless,
Denali and their respective subsidiaries are not guarantors of
the Companys secured and unsecured senior notes, and the
carrying amount and classification of their assets and
liabilities is presented in Note 10. Both entities offer
(through wholly owned subsidiaries) Cricket service and,
accordingly, are generally subject to the same risks in
conducting operations as the Company.
Arrangements
with LCW Wireless
On March 30, 2010 Cricket acquired an additional 23.9%
membership interest in LCW Wireless following CSMs
exercise of its option to sell its interest in LCW Wireless to
Cricket for $21.0 million. As a result, the membership
interests in LCW Wireless are held as follows: Cricket holds a
94.6% non-controlling membership interest; WLPCS Management, LLC
(WLPCS) holds a 1.9% controlling membership
interest; and the remaining membership interests are held by
employees of LCW Wireless. As of March 31, 2010,
Crickets equity contributions to LCW totaled
$67.9 million.
Limited
Liability Company Agreement
Under the amended and restated limited liability company
agreement of LCW Wireless, LLC, WLPCS has the option to put its
entire membership interest in LCW Wireless to Cricket for a
purchase price not to exceed $3.8 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. The Company has recorded this obligation to WLPCS,
including related accretion charges, as a component of
redeemable non-controlling interests in the condensed
consolidated balance sheets. As of March 31, 2010 and
December 31, 2009, this non-controlling interest had a
carrying value of $3.0 million and $2.9 million,
respectively.
Line of
Credit Agreement
LCW Wireless has a line of credit agreement with Cricket,
whereby Cricket has agreed to lend to LCW Wireless a maximum of
$5 million during the
30-day
period immediately preceding the senior secured credit agreement
maturity date of March 2011.
Management
Agreement
Cricket and LCW Wireless are party to 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.
20
Other
LCW Wireless working capital requirements have been
satisfied to date through the members initial equity
contributions, third party debt financing and cash provided by
operating activities. Leap, Cricket and their wholly owned
subsidiaries are not required to provide financial support to
LCW Wireless.
Arrangements
with Denali
Cricket and Denali Spectrum Manager, LLC (DSM)
formed Denali as a joint venture to participate (through a
wholly owned subsidiary) in FCC Auction #66. Cricket owns
an 82.5% non-controlling membership interest and DSM owns a
17.5% controlling membership interest in Denali. As of
March 31, 2010, Crickets equity contributions to
Denali totaled $83.6 million.
Limited
Liability Company Agreement
Under the amended and restated limited liability company
agreement of Denali, DSM may offer to sell its entire membership
interest in Denali to Cricket in April 2012 and each year
thereafter for a purchase price equal to DSMs equity
contributions in cash to Denali, plus a specified return,
payable in cash. If DSM makes a sale offer each year and Cricket
does not accept any such sale offer, then DSM may put its
membership interest to a subsidiary of Denali in 2017. The
consummation of any sale offer that is accepted by Cricket, or
any put transaction that may be exercised by DSM, will be
subject to FCC approval. The Company has recorded this
obligation to DSM, including related accretion charges, as a
component of redeemable non-controlling interests in the
condensed consolidated balance sheets. As of March 31, 2010
and December 31, 2009, this non-controlling interest had a
carrying value of $48.8 million and $47.7 million,
respectively.
Senior
Secured Credit Agreement
Cricket entered into a senior secured credit agreement with
Denali and its subsidiaries to fund the payment to the FCC for
the AWS license acquired by Denali in Auction #66 and to
fund a portion of the costs of the construction and operation of
the wireless network using such license. As of March 31,
2010, borrowings under the credit agreement totaled
$542.9 million, including borrowings under the build-out
sub-facility
of $319.5 million. As of March 31, 2010, the build-out
sub-facility
commitment with Denali was $334.5 million,
$15.0 million of which was unused at such date. Leaps
board of directors has authorized the Company to increase the
build-out sub-facility to $394.5 million. The Company does
not anticipate making any future increases to the size of the
build-out
sub-facility
beyond the amount authorized by Leaps board of directors.
Additional funding requests would be subject to approval by
Leaps board of directors. 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 in April 2021. Outstanding principal and
accrued interest are amortized in quarterly installments
commencing April 2017.
Management
Agreement
Cricket and Denali Spectrum License, LLC, a wholly owned
subsidiary of Denali (Denali License), are party to
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 license, network equipment, facilities and operations,
including its product offerings, terms of service and pricing.
The initial term of the management services agreement expires in
2016. The management services agreement may be terminated by
Denali License or Cricket if the other party materially breaches
its obligations under the agreement, or by Denali License for
convenience upon prior written notice to Cricket.
On March 17, 2010, Cricket and Denali License agreed,
subject to certain conditions, to waive the obligation of Denali
License to pay a share of the Companys corporate and
regional overhead costs with respect to the services provided by
Cricket under the management services agreement during 2010 and
2011. Cricket and Denali License also
21
agreed, subject to certain conditions, to waive the payment of
royalty fees due to Cricket for use of its trademarks during
2010 and 2011.
The Company is currently discussing with DSM differences between
the parties regarding the performance and financial condition of
the joint venture. As indicated above, the parties have entered
into agreements to waive certain obligations of Denali License
during 2010 and 2011 to pay a share of the Companys
corporate and regional overhead costs and certain royalty fees
for use of Crickets trademarks. Differences between the
parties, however, have continued. Although the Company continues
to engage in discussions with DSM in hopes of resolving these
differences, the Company may not be successful in doing so. If
the Company is not successful in resolving these matters, the
Company may seek to purchase all or a portion of DSMs
interest in the joint venture. Alternatively, as the controlling
member of Denali, DSM could seek to terminate the management
services agreement
and/or
trademark license between Denali and Cricket and obtain
management services from a third party, or it could take other
actions that the Company believes could negatively impact
Denalis business. DSM could also attempt to sell or
dispose of all or a portion of Denalis wireless license or
other assets, although the Company would have the right under
agreements with Denali to consent to any such sale or disposal.
Any transition to another party of the services the Company
currently provides to Denali, any sale or disposal of all or a
portion of Denalis wireless license or other assets, or
any other material operational or financial disruption to the
joint venture could significantly disrupt its business,
negatively impact its financial and operational performance and
result in significant expenses for the Companys business.
The following table provides a summary of the changes in value
of the Companys redeemable non-controlling interests (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance, January 1
|
|
$
|
71,632
|
|
|
$
|
71,879
|
|
Purchase of CSM membership units
|
|
|
(20,973
|
)
|
|
|
|
|
Accretion of redeemable non-controlling interests, before tax
|
|
|
1,109
|
|
|
|
2,936
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31
|
|
$
|
51,768
|
|
|
$
|
74,815
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9.
|
Commitments
and Contingencies
|
As more fully described below, the Company is involved in a
variety of lawsuits, claims, investigations and proceedings
concerning intellectual property, securities, commercial and
other matters. Due in part to the growth and expansion of its
business operations, the Company has become subject to increased
amounts of litigation, including disputes alleging intellectual
property infringement.
The Company believes that any damage amounts alleged in the
matters discussed below are not necessarily meaningful
indicators of its potential liability. The Company determines
whether it should accrue an estimated loss for a contingency in
a particular legal proceeding by assessing whether a loss is
deemed probable and whether the amount can be reasonably
estimated. The Company reassesses its views on estimated losses
on a quarterly basis to reflect the impact of any developments
in the matters in which it is involved.
Legal proceedings are inherently unpredictable, and the matters
in which the Company is involved often present complex legal and
factual issues. The Company vigorously pursues defenses in legal
proceedings and engages in discussions where possible to resolve
these matters on favorable terms. The Companys policy is
to recognize legal costs as incurred. It is possible, however,
that the Companys business, financial condition and
results of operations in future periods could be materially
adversely affected by increased litigation expense, significant
settlement costs
and/or
unfavorable damage awards.
Patent
Litigation
Freedom
Wireless
On December 10, 2007, the Company was sued by Freedom
Wireless, Inc. (Freedom Wireless), in the
United States District Court for the Eastern District of
Texas, Marshall Division, for alleged 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
22
Cellular Telecommunications System. Freedom Wireless
alleged that its patents claim a novel cellular system that
enables subscribers of prepaid services to both place and
receive cellular calls without dialing access codes or using
modified telephones. The complaint sought unspecified monetary
damages, increased damages under 35 U.S.C. § 284
together with interest, costs and attorneys fees, and an
injunction. On September 3, 2008, Freedom Wireless amended
its infringement contentions to assert that the Companys
Cricket unlimited voice service, in addition to its
Jump®
Mobile and Cricket by
Weektm
services, infringes claims under the patents at issue. On
January 19, 2009, the Company and Freedom Wireless entered
into an agreement to settle this lawsuit and agreed to enter
into a license agreement which will provide Freedom Wireless
with royalties on certain of the Companys products and
services. Pursuant to the terms of the settlement, an
arbitration hearing was held on December 15, 2009 to
finalize the terms of the settlement and license agreements. The
decision of the arbitrator is pending. On April 7, 2010,
the parties received the preliminary decision of the arbitrator,
which reaffirmed the financial terms of the settlement and
license agreement.
DNT
On May 1, 2009, the Company was sued by DNT LLC
(DNT) in the United States District Court for the
Eastern District of Virginia, Richmond Division, for alleged
infringement of U.S. Reissued Patent No. RE37,660
entitled Automatic Dialing System. DNT alleges that
the Company uses, encourages the use of, sells, offers for sale
and/or
imports voice and data service and wireless modem cards for
computers designed to be used in conjunction with cellular
networks and that such acts constitute both direct and indirect
infringement of DNTs patent. DNT alleges that the
Companys infringement is willful, and the complaint seeks
an injunction against further infringement, unspecified damages
(including enhanced damages) and attorneys fees. On
July 23, 2009, the Company filed an answer to the complaint
as well as counterclaims. On December 14, 2009, DNTs
patent was determined to be invalid in a case it brought against
other wireless providers. DNTs lawsuit against the Company
has been stayed, pending resolution of that other case.
Digital
Technology Licensing
On April 21, 2009, the Company and certain other wireless
carriers (including Hargray Wireless, a company which Cricket
acquired in April 2008 and which was merged with and into
Cricket in December 2008) were sued by Digital Technology
Licensing LLC (DTL) in the United States District
Court for the Southern District of New York, for alleged
infringement of U.S. Patent No. 5,051,799 entitled
Digital Output Transducer. DTL alleges that the
Company and Hargray Wireless sell
and/or offer
to sell
Bluetooth®
devices or digital cellular telephones, including Kyocera and
Sanyo telephones, and that such acts constitute direct
and/or
indirect infringement of DTLs patent. DTL further alleges
that the Company and Hargray Wireless directly
and/or
indirectly infringe its patent by providing cellular telephone
service and by using and inducing others to use a patented
digital cellular telephone system by using cellular telephones,
Bluetooth devices, and cellular telephone infrastructure made by
companies such as Kyocera and Sanyo. DTL alleges that the
asserted infringement is willful, and the complaint seeks a
permanent injunction against further infringement, unspecified
damages (including enhanced damages), attorneys fees, and
expenses. On January 5, 2010, this matter was stayed,
pending final resolution of another case that DTL brought
against another wireless provider in which it alleges
infringement of the patent that is at issue in this matter. That
other case has been settled and dismissed but the stay in the
Companys matter has not been lifted.
On The
Go
On February 22, 2010, a matter brought against the Company
by On The Go, LLC (OTG) was dismissed with
prejudice. The Company and certain other wireless carriers were
sued by OTG in the United States District Court for the Northern
District of Illinois, Eastern Division, on July 9, 2009,
for alleged infringement of U.S. Patent No. 7,430,554
entitled Method and System For Telephonically Selecting,
Addressing, and Distributing Messages. OTGs
complaint alleged that the Company directly and indirectly
infringes OTGs patent by making, offering for sale,
selling, providing, maintaining, and supporting the
Companys PAYGo prepaid mobile telephone service and
system. The complaint sought injunctive relief and unspecified
damages, including interest and costs.
DownUnder
Wireless
On November 20, 2009, the Company and a number of other
parties were sued by DownUnder Wireless, LLC, or DownUnder, in
the United States District Court for the Eastern District of
Texas, Marshall Division, for alleged infringement of
U.S. Patent No. 6,741,215 entitled Inverted
Safety Antenna for Personal Communications
23
Devices. DownUnder alleges that the Company uses, sells,
and offers to sell wireless communication devices, including
PCD, Cal-Comp, and Motorola devices, comprising a housing, a
microphone, a speaker earpiece, a user interface mounted in an
upright orientation on the communication device, and a
transmitting antenna, where the transmitting antenna is mounted
in a lower portion of the housing, and further the housing
defines an obtuse angle between the top of the upper housing
portion and the bottom of the lower housing portion of the
devices, and that such acts constitute direct and indirect
infringement of DownUnders patent. DownUnder alleges that
the Companys infringement is willful, and the complaint
seeks a permanent injunction against further infringement,
unspecified damages (including enhanced damages), and
attorneys fees. The Company filed an answer to the
complaint on February 19, 2010. On April 29, 2010, the
Company and certain other defendants filed a motion to sever the
claims against them and dismiss the matter or, in the
alternative, to stay the litigation.
Securities
and Derivative Litigation
Leap is a nominal defendant in two shareholder derivative suits
and a consolidated securities class action lawsuit. As indicated
further below, the Company has reached an agreement in principle
to settle the derivative suits and has received preliminary
court approval to settle the class action.
The two shareholder derivative suits purport to assert claims on
behalf of Leap against certain of its current and former
directors and officers. One of the shareholder derivative
lawsuits was filed in the California Superior Court for the
County of San Diego on November 13, 2007 and the other
shareholder derivative lawsuit was filed in the United States
District Court for the Southern District of California on
February 7, 2008. The state action was stayed on
August 22, 2008 pending resolution of the federal action.
The plaintiff in the federal action filed an amended complaint
on September 12, 2008 asserting, among other things, claims
for alleged breach of fiduciary duty, gross mismanagement, waste
of corporate assets, unjust enrichment, and proxy violations
based on the November 9, 2007 announcement that the Company
was restating certain of its financial statements, claims
alleging breach of fiduciary duty based on the September 2007
unsolicited merger proposal from MetroPCS Communications, Inc.
and claims alleging illegal insider trading by certain of the
individual defendants. The derivative complaints seek a judicial
determination that the claims may be asserted derivatively on
behalf of Leap, and unspecified damages, equitable
and/or
injunctive relief, imposition of a constructive trust,
disgorgement, and attorneys fees and costs. Leap and the
individual defendants filed motions to dismiss the amended
federal complaint, and on September 29, 2009, the district
court granted Leaps motion to dismiss the derivative
complaint for failure to plead that a presuit demand on
Leaps board was excused. The parties have agreed in
principle to settle the derivative suits subject to
documentation and court approval. The settlement is contemplated
to be a non-monetary settlement based upon the Companys
agreement to make various corporate and operational changes, and
to fund, through its insurance carriers, an award of
attorneys fees to plaintiffs counsel. The parties
are in the process of documenting their agreement and preparing
a motion for preliminary court approval and a settlement
fairness hearing.
Leap and certain current and former officers and directors, and
Leaps independent registered public accounting firm,
PricewaterhouseCoopers LLP, also were named as defendants in a
consolidated securities class action lawsuit filed in the United
States District Court for the Southern District of California
which consolidated several securities class action lawsuits
initially filed between September 2007 and January 2008.
Plaintiffs allege that the defendants violated
Section 10(b) of the Exchange Act and
Rule 10b-5,
and Section 20(a) of the Exchange Act. The consolidated
complaint alleges that the defendants made false and misleading
statements about Leaps internal controls, business and
financial results, and customer count metrics. The claims are
based primarily on the November 9, 2007 announcement that
the Company was restating certain of its financial statements
and statements made in its August 7, 2007 second quarter
2007 earnings release. The lawsuit seeks, among other relief, a
determination that the alleged claims may be asserted on a
class-wide
basis and unspecified damages and attorneys fees and
costs. On January 9, 2009, the federal court granted
defendants motions to dismiss the complaint for failure to
state a claim. On February 23, 2009, defendants were served
with an amended complaint which did not name
PricewaterhouseCoopers LLP or any of Leaps outside
directors. Leap and the remaining individual defendants moved to
dismiss the amended complaint.
The parties reached an agreement in principle to settle the
class action. The settlement is contingent upon court approval
and provides for, among other things, dismissal of the lawsuits
with prejudice, releases in favor of the defendants, and payment
to the class of $13.75 million, including the award of
attorneys fees to class plaintiffs counsel. On
February 18, 2010, the lead plaintiff filed a motion
seeking preliminary approval by the court of the settlement and
approval of a form of notice to potential settlement class
members, which was granted on March 24,
24
2010. The district court set a settlement fairness hearing for
October 4, 2010. Following preliminary approval, the entire
settlement amount was paid into an escrow account by the
Companys insurance carriers pursuant to the terms of the
settlement agreement.
Department
of Justice Inquiry
On January 7, 2009, the Company received a letter from the
Civil Division of the United States Department of Justice (the
DOJ). In its letter, the DOJ alleges that between
approximately 2002 and 2006, the Company failed to comply with
certain federal postal regulations that required it to update
customer mailing addresses in exchange for receiving certain
bulk mailing rate discounts. As a result, the DOJ has asserted
that the Company violated the False Claims Act (the
FCA) and is therefore liable for damages. On
November 18, 2009, the DOJ presented the Company with a
calculation that single damages in this matter were
$2.7 million for the period from June 2003 through June
2006, which amount may be trebled under the FCA. The FCA also
provides for statutory penalties, which the DOJ has previously
asserted could total up to $11,000 per mailing. The DOJ had also
previously asserted as an alternative theory of liability that
the Company is liable on a basis of unjust enrichment for
estimated single damages.
Other
Litigation, Claims and Disputes
In addition to the matters described above, the Company is often
involved in certain other claims, including disputes alleging
intellectual property infringement, which arise in the ordinary
course of business or are otherwise immaterial and which seek
monetary damages and other relief. Based upon information
currently available to the Company, none of these other claims
is expected to have a material adverse effect on the
Companys business, financial condition or results of
operations.
Indemnification
Agreements
From time to time, the Company enters into indemnification
agreements with certain parties in the ordinary course of
business, including agreements with manufacturers, licensors and
suppliers who provide it with equipment, software and technology
that it uses in its business, as well as with purchasers of
assets, lenders, lessors and other vendors. Indemnification
agreements are generally entered into in commercial and other
transactions in an attempt to allocate potential risk of loss.
Tower
Provider Commitments
The Company has entered into master lease agreements with
certain national tower vendors. These agreements generally
provide for discounts, credits or incentives if the Company
reaches specified lease commitment levels. If the commitment
levels under the agreements are not achieved, the Company may be
obligated to pay remedies for shortfalls in meeting these
levels. These remedies would have the effect of increasing the
Companys rent expense.
Outstanding
Letters of Credit and Surety Bonds
As of March 31, 2010 and December 31, 2009, the
Company had approximately $10.5 million of letters of
credit outstanding, which were collateralized by restricted
cash, related to contractual commitments under certain of its
administrative facility leases and surety bond programs and its
workers compensation insurance program. The restricted
cash collateralizing the letters of credit outstanding is
reported in both restricted cash, cash equivalents and
short-term investments and other long-term assets in the
condensed consolidated balance sheets.
As of March 31, 2010 and December 31, 2009, the
Company had approximately $5.5 million of surety bonds
outstanding to guarantee the Companys performance with
respect to certain of its contractual obligations.
|
|
Note 10.
|
Guarantor
Financial Information
|
The $2,500 million of senior notes issued by Cricket (the
Issuing Subsidiary) are comprised of
$1,100 million of unsecured senior notes due 2014,
$300 million of unsecured senior notes due 2015 and
$1,100 million of senior secured notes due 2016. The notes
are jointly and severally guaranteed on a full and unconditional
basis by Leap (the Guarantor Parent Company) and
Cricket License Company, LLC, a wholly owned subsidiary of
Cricket (the Guarantor Subsidiary).
The indentures governing these notes limit, among other things,
the Guarantor Parent Companys, Crickets and the
Guarantor Subsidiarys ability to: incur additional debt;
create liens or other encumbrances; place
25
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 assets; enter
into transactions with affiliates; and make acquisitions or
merge or consolidate with another entity.
Condensed consolidating financial information of the Guarantor
Parent Company, the Issuing Subsidiary, the Guarantor
Subsidiary, non-Guarantor Subsidiaries and total consolidated
Leap and subsidiaries as of March 31, 2010 and
December 31, 2009 and for the three months ended
March 31, 2010 and 2009 is presented below. The equity
method of accounting is used to account for ownership interests
in subsidiaries, where applicable.
Condensed
Consolidating Balance Sheet as of March 31, 2010 (unaudited
and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Parent
|
|
|
Issuing
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminating
|
|
|
|
|
|
|
Company
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48
|
|
|
$
|
154,560
|
|
|
$
|
|
|
|
$
|
18,513
|
|
|
$
|
|
|
|
$
|
173,121
|
|
Short-term investments
|
|
|
|
|
|
|
350,309
|
|
|
|
|
|
|
|
2,498
|
|
|
|
|
|
|
|
352,807
|
|
Restricted cash, cash equivalents and short-term investments
|
|
|
2,231
|
|
|
|
1,625
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
3,866
|
|
Inventories
|
|
|
|
|
|
|
52,043
|
|
|
|
|
|
|
|
3,146
|
|
|
|
|
|
|
|
55,189
|
|
Deferred charges
|
|
|
|
|
|
|
35,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,998
|
|
Other current assets
|
|
|
53
|
|
|
|
80,469
|
|
|
|
|
|
|
|
5,192
|
|
|
|
(1,758
|
)
|
|
|
83,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,332
|
|
|
|
675,004
|
|
|
|
|
|
|
|
29,359
|
|
|
|
(1,758
|
)
|
|
|
704,937
|
|
Property and equipment, net
|
|
|
2
|
|
|
|
1,837,797
|
|
|
|
|
|
|
|
256,105
|
|
|
|
|
|
|
|
2,093,904
|
|
Investments in and advances to affiliates and consolidated
subsidiaries
|
|
|
1,905,358
|
|
|
|
2,167,243
|
|
|
|
23,837
|
|
|
|
7,778
|
|
|
|
(4,104,216
|
)
|
|
|
|
|
Wireless licenses
|
|
|
|
|
|
|
7,890
|
|
|
|
1,580,994
|
|
|
|
334,213
|
|
|
|
|
|
|
|
1,923,097
|
|
Goodwill
|
|
|
|
|
|
|
430,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,101
|
|
Other intangible assets, net
|
|
|
|
|
|
|
23,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,399
|
|
Other assets
|
|
|
6,332
|
|
|
|
75,909
|
|
|
|
|
|
|
|
2,027
|
|
|
|
|
|
|
|
84,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,914,024
|
|
|
$
|
5,217,343
|
|
|
$
|
1,604,831
|
|
|
$
|
629,482
|
|
|
$
|
(4,105,974
|
)
|
|
$
|
5,259,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
28
|
|
|
$
|
223,672
|
|
|
$
|
|
|
|
$
|
4,875
|
|
|
$
|
|
|
|
$
|
228,575
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,096
|
|
|
|
|
|
|
|
16,096
|
|
Intercompany payables
|
|
|
32,261
|
|
|
|
279,234
|
|
|
|
|
|
|
|
8,200
|
|
|
|
(319,695
|
)
|
|
|
|
|
Other current liabilities
|
|
|
2,329
|
|
|
|
212,656
|
|
|
|
|
|
|
|
18,136
|
|
|
|
(1,758
|
)
|
|
|
231,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,618
|
|
|
|
715,562
|
|
|
|
|
|
|
|
47,307
|
|
|
|
(321,453
|
)
|
|
|
476,034
|
|
Long-term debt
|
|
|
250,000
|
|
|
|
2,475,772
|
|
|
|
|
|
|
|
744,215
|
|
|
|
(744,215
|
)
|
|
|
2,725,772
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
271,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,369
|
|
Other long-term liabilities
|
|
|
|
|
|
|
93,954
|
|
|
|
|
|
|
|
11,403
|
|
|
|
|
|
|
|
105,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
284,618
|
|
|
|
3,556,657
|
|
|
|
|
|
|
|
802,925
|
|
|
|
(1,065,668
|
)
|
|
|
3,578,532
|
|
Redeemable non-controlling interests
|
|
|
|
|
|
|
2,951
|
|
|
|
|
|
|
|
48,817
|
|
|
|
|
|
|
|
51,768
|
|
Stockholders equity (deficit)
|
|
|
1,629,406
|
|
|
|
1,657,735
|
|
|
|
1,604,831
|
|
|
|
(222,260
|
)
|
|
|
(3,040,306
|
)
|
|
|
1,629,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,914,024
|
|
|
$
|
5,217,343
|
|
|
$
|
1,604,831
|
|
|
$
|
629,482
|
|
|
$
|
(4,105,974
|
)
|
|
$
|
5,259,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Condensed
Consolidating Balance Sheet as of December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Parent
|
|
|
Issuing
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminating
|
|
|
|
|
|
|
Company
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66
|
|
|
$
|
160,834
|
|
|
$
|
|
|
|
$
|
14,099
|
|
|
$
|
|
|
|
$
|
174,999
|
|
Short-term investments
|
|
|
|
|
|
|
386,423
|
|
|
|
|
|
|
|
2,731
|
|
|
|
|
|
|
|
389,154
|
|
Restricted cash, cash equivalents and short-term investments
|
|
|
2,231
|
|
|
|
1,625
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
3,866
|
|
Inventories
|
|
|
|
|
|
|
102,883
|
|
|
|
|
|
|
|
5,029
|
|
|
|
|
|
|
|
107,912
|
|
Deferred charges
|
|
|
|
|
|
|
38,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,872
|
|
Other current assets
|
|
|
83
|
|
|
|
69,009
|
|
|
|
|
|
|
|
3,619
|
|
|
|
493
|
|
|
|
73,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,380
|
|
|
|
759,646
|
|
|
|
|
|
|
|
25,488
|
|
|
|
493
|
|
|
|
788,007
|
|
Property and equipment, net
|
|
|
2
|
|
|
|
1,853,898
|
|
|
|
|
|
|
|
267,194
|
|
|
|
|
|
|
|
2,121,094
|
|
Investments in and advances to affiliates and consolidated
subsidiaries
|
|
|
1,965,842
|
|
|
|
2,233,669
|
|
|
|
86,405
|
|
|
|
7,381
|
|
|
|
(4,293,297
|
)
|
|
|
|
|
Wireless licenses
|
|
|
|
|
|
|
7,889
|
|
|
|
1,580,174
|
|
|
|
333,910
|
|
|
|
|
|
|
|
1,921,973
|
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
2,381
|
|
Goodwill
|
|
|
|
|
|
|
430,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,101
|
|
Intangible assets, net
|
|
|
|
|
|
|
24,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,535
|
|
Other assets
|
|
|
6,663
|
|
|
|
74,558
|
|
|
|
|
|
|
|
2,409
|
|
|
|
|
|
|
|
83,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,974,887
|
|
|
$
|
5,384,296
|
|
|
$
|
1,668,960
|
|
|
$
|
636,382
|
|
|
$
|
(4,292,804
|
)
|
|
$
|
5,371,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
16
|
|
|
$
|
303,520
|
|
|
$
|
|
|
|
$
|
6,850
|
|
|
$
|
|
|
|
$
|
310,386
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
8,000
|
|
Intercompany payables
|
|
|
29,194
|
|
|
|
347,468
|
|
|
|
|
|
|
|
19,416
|
|
|
|
(396,078
|
)
|
|
|
|
|
Other current liabilities
|
|
|
5,147
|
|
|
|
172,202
|
|
|
|
|
|
|
|
18,803
|
|
|
|
495
|
|
|
|
196,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,357
|
|
|
|
823,190
|
|
|
|
|
|
|
|
53,069
|
|
|
|
(395,583
|
)
|
|
|
515,033
|
|
Long-term debt
|
|
|
250,000
|
|
|
|
2,475,222
|
|
|
|
|
|
|
|
714,640
|
|
|
|
(704,544
|
)
|
|
|
2,735,318
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
259,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,512
|
|
Other long-term liabilities
|
|
|
|
|
|
|
90,233
|
|
|
|
|
|
|
|
9,463
|
|
|
|
|
|
|
|
99,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
284,357
|
|
|
|
3,648,157
|
|
|
|
|
|
|
|
777,172
|
|
|
|
(1,100,127
|
)
|
|
|
3,609,559
|
|
Redeemable non-controlling interests
|
|
|
|
|
|
|
23,981
|
|
|
|
|
|
|
|
47,651
|
|
|
|
|
|
|
|
71,632
|
|
Stockholders equity (deficit)
|
|
|
1,690,530
|
|
|
|
1,712,158
|
|
|
|
1,668,960
|
|
|
|
(188,441
|
)
|
|
|
(3,192,677
|
)
|
|
|
1,690,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,974,887
|
|
|
$
|
5,384,296
|
|
|
$
|
1,668,960
|
|
|
$
|
636,382
|
|
|
$
|
(4,292,804
|
)
|
|
$
|
5,371,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Condensed
Consolidating Statement of Operations for the Three Months Ended
March 31, 2010 (unaudited and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Parent
|
|
|
Issuing
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminating
|
|
|
|
|
|
|
Company
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
|
|
|
$
|
536,808
|
|
|
$
|
|
|
|
$
|
47,998
|
|
|
$
|
16
|
|
|
$
|
584,822
|
|
Equipment revenues
|
|
|
|
|
|
|
62,702
|
|
|
|
|
|
|
|
6,430
|
|
|
|
|
|
|
|
69,132
|
|
Other revenues
|
|
|
|
|
|
|
(103
|
)
|
|
|
23,925
|
|
|
|
754
|
|
|
|
(24,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
599,407
|
|
|
|
23,925
|
|
|
|
55,182
|
|
|
|
(24,560
|
)
|
|
|
653,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
|
|
|
|
175,023
|
|
|
|
|
|
|
|
15,574
|
|
|
|
(24,663
|
)
|
|
|
165,934
|
|
Cost of equipment
|
|
|
|
|
|
|
150,636
|
|
|
|
|
|
|
|
17,417
|
|
|
|
|
|
|
|
168,053
|
|
Selling and marketing
|
|
|
|
|
|
|
98,363
|
|
|
|
|
|
|
|
13,521
|
|
|
|
|
|
|
|
111,884
|
|
General and administrative
|
|
|
3,119
|
|
|
|
84,199
|
|
|
|
173
|
|
|
|
4,662
|
|
|
|
103
|
|
|
|
92,256
|
|
Depreciation and amortization
|
|
|
|
|
|
|
98,071
|
|
|
|
|
|
|
|
11,175
|
|
|
|
|
|
|
|
109,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,119
|
|
|
|
606,292
|
|
|
|
173
|
|
|
|
62,349
|
|
|
|
(24,560
|
)
|
|
|
647,373
|
|
Gain on sale or disposal of assets
|
|
|
|
|
|
|
(705
|
)
|
|
|
|
|
|
|
(748
|
)
|
|
|
|
|
|
|
(1,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,119
|
)
|
|
|
(7,590
|
)
|
|
|
23,752
|
|
|
|
(7,915
|
)
|
|
|
|
|
|
|
5,128
|
|
Equity in net loss of consolidated subsidiaries
|
|
|
(67,834
|
)
|
|
|
(10,004
|
)
|
|
|
|
|
|
|
|
|
|
|
77,838
|
|
|
|
|
|
Equity in net income of investees, net
|
|
|
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
Interest income
|
|
|
6,063
|
|
|
|
25,096
|
|
|
|
|
|
|
|
351
|
|
|
|
(31,082
|
)
|
|
|
428
|
|
Interest expense
|
|
|
(3,144
|
)
|
|
|
(63,206
|
)
|
|
|
|
|
|
|
(25,027
|
)
|
|
|
31,082
|
|
|
|
(60,295
|
)
|
Other expense, net
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(68,034
|
)
|
|
|
(55,118
|
)
|
|
|
23,752
|
|
|
|
(32,591
|
)
|
|
|
77,838
|
|
|
|
(54,153
|
)
|
Income tax expense
|
|
|
|
|
|
|
(11,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(68,034
|
)
|
|
|
(66,412
|
)
|
|
|
23,752
|
|
|
|
(32,591
|
)
|
|
|
77,838
|
|
|
|
(65,447
|
)
|
Accretion of redeemable non-controlling interests
|
|
|
|
|
|
|
(1,422
|
)
|
|
|
|
|
|
|
(1,165
|
)
|
|
|
|
|
|
|
(2,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(68,034
|
)
|
|
$
|
(67,834
|
)
|
|
$
|
23,752
|
|
|
$
|
(33,756
|
)
|
|
$
|
77,838
|
|
|
$
|
(68,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Condensed
Consolidating Statement of Operations for the Three Months Ended
March 31, 2009 (unaudited and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Parent
|
|
|
Issuing
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminating
|
|
|
|
|
|
|
Company
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
|
|
|
$
|
497,505
|
|
|
$
|
|
|
|
$
|
16,500
|
|
|
$
|
|
|
|
$
|
514,005
|
|
Equipment revenues
|
|
|
|
|
|
|
69,120
|
|
|
|
|
|
|
|
3,862
|
|
|
|
|
|
|
|
72,982
|
|
Other revenues
|
|
|
|
|
|
|
340
|
|
|
|
21,854
|
|
|
|
333
|
|
|
|
(22,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
566,965
|
|
|
|
21,854
|
|
|
|
20,695
|
|
|
|
(22,527
|
)
|
|
|
586,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of items shown separately below)
|
|
|
|
|
|
|
165,958
|
|
|
|
|
|
|
|
476
|
|
|
|
(22,090
|
)
|
|
|
144,344
|
|
Cost of equipment
|
|
|
|
|
|
|
145,010
|
|
|
|
|
|
|
|
12,786
|
|
|
|
|
|
|
|
157,796
|
|
Selling and marketing
|
|
|
|
|
|
|
99,198
|
|
|
|
|
|
|
|
4,325
|
|
|
|
|
|
|
|
103,523
|
|
General and administrative
|
|
|
1,101
|
|
|
|
87,386
|
|
|
|
243
|
|
|
|
7,884
|
|
|
|
(437
|
)
|
|
|
96,177
|
|
Depreciation and amortization
|
|
|
|
|
|
|
82,416
|
|
|
|
|
|
|
|
7,317
|
|
|
|
|
|
|
|
89,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,101
|
|
|
|
579,968
|
|
|
|
243
|
|
|
|
32,788
|
|
|
|
(22,527
|
)
|
|
|
591,573
|
|
Loss on sale or disposal of assets
|
|
|
|
|
|
|
3,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,101
|
)
|
|
|
(9,422
|
)
|
|
|
21,611
|
|
|
|
(12,093
|
)
|
|
|
|
|
|
|
(1,005
|
)
|
Equity in net loss of consolidated subsidiaries
|
|
|
(52,171
|
)
|
|
|
(4,678
|
)
|
|
|
|
|
|
|
|
|
|
|
56,849
|
|
|
|
|
|
Equity in net loss of investees, net
|
|
|
|
|
|
|
1,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,479
|
|
Interest income
|
|
|
6,064
|
|
|
|
19,056
|
|
|
|
|
|
|
|
1,326
|
|
|
|
(25,501
|
)
|
|
|
945
|
|
Interest expense
|
|
|
(3,088
|
)
|
|
|
(49,797
|
)
|
|
|
|
|
|
|
(14,467
|
)
|
|
|
25,501
|
|
|
|
(41,851
|
)
|
Other income (expense), net
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(50,296
|
)
|
|
|
(43,425
|
)
|
|
|
21,611
|
|
|
|
(25,234
|
)
|
|
|
56,849
|
|
|
|
(40,495
|
)
|
Income tax expense
|
|
|
|
|
|
|
(6,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(50,296
|
)
|
|
|
(50,290
|
)
|
|
|
21,611
|
|
|
|
(25,234
|
)
|
|
|
56,849
|
|
|
|
(47,360
|
)
|
Accretion of redeemable non-controlling interests
|
|
|
|
|
|
|
(1,881
|
)
|
|
|
|
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
(2,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(50,296
|
)
|
|
$
|
(52,171
|
)
|
|
$
|
21,611
|
|
|
$
|
(26,289
|
)
|
|
$
|
56,849
|
|
|
$
|
(50,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Condensed
Consolidating Statement of Cash Flows for the Three Months Ended
March 31, 2010 (unaudited and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Parent
|
|
|
Issuing
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminating
|
|
|
|
|
|
|
Company
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(18
|
)
|
|
$
|
101,052
|
|
|
$
|
|
|
|
$
|
(7,416
|
)
|
|
$
|
(67
|
)
|
|
$
|
93,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
(106,381
|
)
|
|
|
|
|
|
|
(825
|
)
|
|
|
|
|
|
|
(107,206
|
)
|
Changes in prepayments for purchases of property and equipment
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
Purchases of and deposits for wireless licenses and spectrum
clearing costs
|
|
|
|
|
|
|
(821
|
)
|
|
|
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
(1,124
|
)
|
Purchases of investments
|
|
|
|
|
|
|
(122,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,483
|
)
|
Sales and maturities of investments
|
|
|
|
|
|
|
158,400
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
158,425
|
|
Change in restricted cash
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(70,866
|
)
|
|
|
|
|
|
|
(1,103
|
)
|
|
|
|
|
|
|
(71,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of related party debt
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
(2,000
|
)
|
Minority interest distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
67
|
|
|
|
|
|
Purchase of non-controlling interest
|
|
|
|
|
|
|
(20,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,973
|
)
|
Other
|
|
|
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
|
|
|
(36,460
|
)
|
|
|
|
|
|
|
12,933
|
|
|
|
67
|
|
|
|
(23,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(18
|
)
|
|
|
(6,274
|
)
|
|
|
|
|
|
|
4,414
|
|
|
|
|
|
|
|
(1,878
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
66
|
|
|
|
160,834
|
|
|
|
|
|
|
|
14,099
|
|
|
|
|
|
|
|
174,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
48
|
|
|
$
|
154,560
|
|
|
$
|
|
|
|
$
|
18,513
|
|
|
$
|
|
|
|
$
|
173,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Condensed
Consolidating Statement of Cash Flows for the Three Months Ended
March 31, 2009 (unaudited and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Parent
|
|
|
Issuing
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminating
|
|
|
|
|
|
|
Company
|
|
|
Subsidiary
|
|
|
Subsidiary
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
53
|
|
|
$
|
122,581
|
|
|
$
|
|
|
|
$
|
(22,651
|
)
|
|
$
|
(31
|
)
|
|
$
|
99,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases property and equipment
|
|
|
|
|
|
|
(170,696
|
)
|
|
|
|
|
|
|
(31,089
|
)
|
|
|
|
|
|
|
(201,785
|
)
|
Changes in prepayments for purchases of property and equipment
|
|
|
|
|
|
|
(1,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,494
|
)
|
Purchases of and deposits for wireless licenses and spectrum
clearing costs
|
|
|
|
|
|
|
(1,775
|
)
|
|
|
|
|
|
|
(770
|
)
|
|
|
|
|
|
|
(2,545
|
)
|
Proceeds from the sale of wireless licenses
|
|
|
|
|
|
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,965
|
|
Purchases of investments
|
|
|
|
|
|
|
(234,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,563
|
)
|
Sales and maturities of investments
|
|
|
|
|
|
|
165,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,914
|
|
Investments in and advances to affiliates and consolidated
subsidiaries
|
|
|
(853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
853
|
|
|
|
|
|
Change in restricted cash
|
|
|
(1
|
)
|
|
|
(1,163
|
)
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
(1,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(854
|
)
|
|
|
(240,812
|
)
|
|
|
|
|
|
|
(31,829
|
)
|
|
|
853
|
|
|
|
(272,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
(60,000
|
)
|
|
|
|
|
Issuance of related party debt
|
|
|
|
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
(2,250
|
)
|
|
|
|
|
|
|
(1,404
|
)
|
|
|
|
|
|
|
(3,654
|
)
|
Capital contributions, net
|
|
|
853
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
|
(853
|
)
|
|
|
853
|
|
Non-controlling interests distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
31
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
853
|
|
|
|
(61,731
|
)
|
|
|
|
|
|
|
58,565
|
|
|
|
(822
|
)
|
|
|
(3,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
52
|
|
|
|
(179,962
|
)
|
|
|
|
|
|
|
4,085
|
|
|
|
|
|
|
|
(175,825
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
27
|
|
|
|
333,119
|
|
|
|
|
|
|
|
24,562
|
|
|
|
|
|
|
|
357,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
79
|
|
|
$
|
153,157
|
|
|
$
|
|
|
|
$
|
28,647
|
|
|
$
|
|
|
|
$
|
181,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
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 and
consolidated joint ventures are sometimes collectively referred
to herein as the Company. Unless otherwise
specified, information relating to population and potential
customers, or POPs, is based on 2010 population estimates
provided by Claritas Inc., a market research company.
The following information should be read in conjunction with the
unaudited condensed consolidated financial statements and notes
thereto included in Item 1 of this Quarterly Report and the
audited consolidated financial statements and notes thereto and
Managements Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on
Form 10-K
for the year ended December 31, 2009 filed with the
Securities and Exchange Commission, or SEC, on February 26,
2010.
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 generally identify
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 in or implied by 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;
|
|
|
|
the duration and severity of the current economic downturn in
the United States and changes in economic conditions, including
interest rates, consumer credit conditions, consumer debt
levels, consumer confidence, unemployment rates, energy costs
and other macro-economic factors that could adversely affect
demand for the services we provide;
|
|
|
|
the impact of competitors initiatives;
|
|
|
|
our ability to successfully implement product offerings and
execute effectively on our other strategic activities;
|
|
|
|
our ability to obtain roaming services from other carriers at
cost-effective rates;
|
|
|
|
our ability to maintain effective internal control over
financial reporting;
|
|
|
|
our ability to attract, motivate and retain an experienced
workforce;
|
|
|
|
our ability to comply with the covenants in any credit
agreement, indenture or similar instrument governing any of our
existing or future indebtedness;
|
|
|
|
failure of our network or information technology systems to
perform according to expectations and risks associated with the
upgrade or transition of certain of those systems, including our
customer billing system; and
|
|
|
|
other factors detailed in Part II
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.
32
Overview
Company
Overview
We are a wireless communications carrier that offers digital
wireless services in the U.S. under the
Cricket®
brand. Our Cricket service offerings provide customers with
unlimited wireless services for a flat rate without requiring a
fixed-term contract or a 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, and in the upper Midwest by
Denali Spectrum Operations, LLC, or Denali Operations. Cricket
owns an indirect 94.6% non-controlling interest in LCW
Operations through a 94.6% non-controlling interest in LCW
Wireless, LLC, or LCW Wireless, and owns an indirect 82.5%
non-controlling interest in Denali Operations through an 82.5%
non-controlling interest in Denali Spectrum LLC, or Denali. LCW
Wireless and Denali are designated entities under Federal
Communications Commission, or FCC, regulations. We consolidate
our non-controlling interests in LCW Wireless and Denali in
accordance with the authoritative guidance for the consolidation
of variable interest entities because these entities are
variable interest entities and we have entered into agreements
with the entities other members which establish a
specified, minimum purchase price in the event that they offer
or elect to sell their membership interests to us.
As of March 31, 2010, Cricket service was offered in
35 states and the District of Columbia and had
approximately 5.4 million customers. As of March 31,
2010, we, LCW Wireless License, LLC, or LCW License (a wholly
owned subsidiary of LCW Operations), and Denali Spectrum License
Sub, LLC, or Denali License Sub (an indirect wholly owned
subsidiary of Denali) owned wireless licenses covering an
aggregate of approximately 184.2 million POPs (adjusted to
eliminate duplication from overlapping licenses). The combined
network footprint in our operating markets covered approximately
94.2 million POPs as of March 31, 2010, which includes
incremental POPs attributed to ongoing footprint expansion in
existing markets. The licenses we and Denali own provide
20 MHz of coverage and the opportunity to offer enhanced
data services in almost all markets in which we currently
operate, assuming Denali License Sub were to make available to
us certain of its spectrum. In addition, we have entered into
voice-based roaming relationships that have enabled us to offer
customers purchasing our Cricket Wireless and most Cricket PAYGo
service plans a nationwide, extended calling area covering
approximately 277 million POPs.
Our Cricket service offerings are based on providing unlimited
wireless services to customers, and the value of unlimited
wireless services is the foundation of our business. Our primary
Cricket service is Cricket Wireless, which offers customers
unlimited wireless voice and data services for a flat monthly
rate. Our most popular Cricket Wireless rate plans include
unlimited local and U.S. long distance service and
unlimited text messaging. In addition to our Cricket Wireless
voice and data services, we offer Cricket Broadband, our
unlimited mobile broadband service, which allows customers to
access the internet through their computers for one low, flat
rate with no long-term commitments or credit checks. We also
offer Cricket PAYGo, a pay-as-you-go unlimited prepaid wireless
service designed for customers who prefer the flexibility and
control offered by traditional prepaid services but who are
seeking greater value for their dollar.
We believe that our business is scalable because we offer an
attractive value proposition to our customers while utilizing a
cost structure that is significantly lower than most of our
competitors. As a result, we have continued to pursue activities
to expand our business. These expansion activities have included
the broadening of our product portfolio, which has included the
introduction of our Cricket Broadband and Cricket PAYGo products
over the past few years. We have also enhanced our network
coverage and capacity. In 2009, we and Denali Operations
launched new markets in Chicago, Philadelphia,
Washington, D.C., Baltimore and Lake Charles covering
approximately 24.2 million additional POPs. We have also
continued to enhance our network coverage and capacity in many
of our existing markets. Future business expansion activities
could include the acquisition of additional spectrum through
private transactions or FCC auctions, the build-out and launch
of Cricket services in additional markets, entering into
partnerships with others, the acquisition of other wireless
communications companies or complementary businesses, the
purchase of all or a portion of the remaining membership
interests in our joint ventures, LCW Wireless and Denali, or the
deployment of next-generation network technology over the longer
term. 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 Sub hold include large
regional areas covering both rural and metropolitan
33
communities, we and Denali may seek to partner with others, sell
some of this spectrum or pursue alternative products or services
to utilize or benefit from the spectrum not otherwise used for
Cricket service. We intend to be disciplined as we pursue any
expansion efforts and to remain focused on our position as a
low-cost leader in wireless telecommunications.
Our customer activity is influenced by seasonal effects related
to traditional retail selling periods and other factors that
arise in connection with our target customer base. Based on
historical results, we generally expect new sales activity to be
highest in the first and fourth quarters for markets in
operation for one year or longer, and customer turnover, or
churn, to be highest in the third quarter and lowest in the
first quarter. In newly launched markets, we expect to initially
experience a greater degree of customer turnover due to the
number of customers new to Cricket service, but generally expect
that churn will gradually improve as the average tenure of
customers in such markets increases. Sales activity and churn,
however, can be strongly affected by other factors, including
promotional activity, economic conditions and competitive
actions, any of which may have the ability to reduce or outweigh
certain seasonal effects or the relative amount of time a market
has been in operation. From time to time, we offer programs to
help promote customer activity for our wireless services. For
example, we utilize a program which allows existing customers to
activate an additional line of voice service on a previously
activated Cricket device not currently in service. Customers
accepting this offer receive a free month of service on the
additional line of service after paying an activation fee. We
believe that this kind of program and other promotions provide
important long-term benefits to us by extending the period of
time over which customers use our wireless services.
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 mobile virtual network operators, or MVNOs,
voice-over-internet-protocol
service providers, traditional landline service providers and
cable companies. The competitive pressures of the wireless
telecommunications industry have continued to increase and have
caused a number of our competitors to offer competitively-priced
unlimited prepaid and postpaid service offerings. These service
offerings have presented additional strong competition in
markets in which our offerings overlap. 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. We have recently revised a number of our Cricket Wireless
service plans to provide additional features previously only
available in our higher-priced plans and have eliminated certain
fees we previously charged customers who changed their service
plans. These changes, which were made in response to the
competitive and economic environment, have resulted in lower
average monthly revenue per customer. In addition, a number of
our competitors have introduced all-inclusive rate
plans which are priced to include applicable regulatory fees and
taxes. In the event that we were to transition the pricing of
our rate plans to generally include regulatory fees and taxes,
this change could further impact our revenues. In addition, high
unemployment levels have impacted our customer base, including,
in particular, the lower-income segment of our customer base,
decreasing their discretionary income.
Our principal sources of liquidity are our existing unrestricted
cash, cash equivalents and short-term investments and cash
generated from operations. From time to time, we may also
generate additional liquidity through capital markets
transactions. See Liquidity and Capital Resources
below.
Among the most significant factors affecting our financial
condition and performance in prior periods have been our market
expansions and growth in customers, the impacts of which have
been reflected in our revenues and operating expenses. Since
2005, we and our consolidated joint ventures have expanded
existing market footprints and launched additional markets,
increasing the number of potential customers covered by our
networks from approximately 27.7 million covered POPs as of
December 31, 2005 to approximately 94.2 million
covered POPs as of March 31, 2010. 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 1.7 million customers as of
December 31, 2005 to 5.4 million customers as of
March 31, 2010. As our business has expanded, our total
revenues have continued to increase, rising from
$957.8 million for fiscal 2005 to $2.38 billion for
fiscal 2009, and from $587.0 million for the three months
ended March 31, 2009 to $654.0 million for the three
months ended March 31, 2010. Our operating expenses have
similarly increased from $901.4 million for fiscal 2005 to
$2.35 billion for fiscal 2009, and from $591.6 million
for the three months ended March 31, 2009 to
$647.4 million for the three months ended March 31,
2010. During this period, we also incurred substantial
additional indebtedness
34
to finance the costs of our business expansion and acquisitions
of additional wireless licenses. As a result, our interest
expense has increased from $30.1 million for fiscal 2005 to
$210.4 million for fiscal 2009, and from $41.9 million
for the three months ended March 31, 2009 to
$60.3 million for the three months ended March 31,
2010. 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 $238.0 million for fiscal 2009, and our net
loss of $47.4 million for the three months ended
March 31, 2009 increased to a net loss of
$65.4 million for the three months ended March 31,
2010. We believe, however, that the significant initial costs
associated with new markets we have built out and launched and
the further expansion of our existing business will provide
substantial future benefits as these new markets continue to
develop, our existing markets mature and we continue to add
subscribers and generate additional revenues.
The evolving competitive landscape has negatively impacted our
financial and operating results during the past year, and we
expect that continued significant competition in the markets in
which we operate may result in more competitive pricing, slower
growth, higher costs and increased customer turnover, as well as
the possibility of requiring us to further modify our service
plans, increase our device subsidies or increase our dealer
compensation in response to competition. Any of these results or
actions could have a material adverse effect on our business,
financial condition and operating results. We believe that our
cost structure provides us with a significant advantage in
responding to changing competitive and economic conditions and
enables us to revise our product and service offerings to
attract and retain customers. Evolving competition or continuing
unfavorable unemployment levels, however, could continue to
adversely impact average monthly revenue per customer, increase
churn and decrease operating income before depreciation and
amortization, or OIBDA, and free cash flow.
Results
of Operations
Operating
Items
The following table summarizes operating data for our
consolidated operations for the three months ended
March 31, 2010 and 2009 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
% of 2010
|
|
|
|
|
|
% of 2009
|
|
|
Change from
|
|
|
|
|
|
|
Service
|
|
|
|
|
|
Service
|
|
|
Prior Year
|
|
|
|
2010
|
|
|
Revenues
|
|
|
2009
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$
|
584,822
|
|
|
|
|
|
|
$
|
514,005
|
|
|
|
|
|
|
$
|
70,817
|
|
|
|
13.8
|
%
|
Equipment revenues
|
|
|
69,132
|
|
|
|
|
|
|
|
72,982
|
|
|
|
|
|
|
|
(3,850
|
)
|
|
|
(5.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
653,954
|
|
|
|
|
|
|
|
586,987
|
|
|
|
|
|
|
|
66,967
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service
|
|
|
165,934
|
|
|
|
28.4
|
%
|
|
|
144,344
|
|
|
|
28.1
|
%
|
|
|
21,590
|
|
|
|
15.0
|
%
|
Cost of equipment
|
|
|
168,053
|
|
|
|
28.7
|
%
|
|
|
157,796
|
|
|
|
30.7
|
%
|
|
|
10,257
|
|
|
|
6.5
|
%
|
Selling and marketing
|
|
|
111,884
|
|
|
|
19.1
|
%
|
|
|
103,523
|
|
|
|
20.1
|
%
|
|
|
8,361
|
|
|
|
8.1
|
%
|
General and administrative
|
|
|
92,256
|
|
|
|
15.8
|
%
|
|
|
96,177
|
|
|
|
18.7
|
%
|
|
|
(3,921
|
)
|
|
|
(4.1
|
)%
|
Depreciation and amortization
|
|
|
109,246
|
|
|
|
18.7
|
%
|
|
|
89,733
|
|
|
|
17.5
|
%
|
|
|
19,513
|
|
|
|
21.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
647,373
|
|
|
|
110.7
|
%
|
|
|
591,573
|
|
|
|
115.1
|
%
|
|
|
55,800
|
|
|
|
9.4
|
%
|
Gain (loss) on sale or disposal of assets
|
|
|
(1,453
|
)
|
|
|
(0.2
|
)%
|
|
|
3,581
|
|
|
|
0.7
|
%
|
|
|
(5,034
|
)
|
|
|
(140.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
5,128
|
|
|
|
0.9
|
%
|
|
$
|
(1,005
|
)
|
|
|
(0.2
|
)%
|
|
$
|
6,133
|
|
|
|
610.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The following table summarizes customer activity for the three
months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
For the Three Months Ended March 31(1):
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
Gross customer additions
|
|
|
1,132,998
|
|
|
|
889,911
|
|
|
|
243,087
|
|
|
|
27.3
|
%
|
Net customer additions
|
|
|
445,768
|
|
|
|
492,753
|
|
|
|
(46,985
|
)
|
|
|
(9.5
|
)%
|
Weighted-average number of customers
|
|
|
5,135,102
|
|
|
|
4,058,819
|
|
|
|
1,076,283
|
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total customers
|
|
|
5,399,872
|
|
|
|
4,337,426
|
|
|
|
1,062,446
|
|
|
|
24.5
|
%
|
|
|
|
(1) |
|
We recognize a gross customer addition for each Cricket
Wireless, Cricket Broadband and Cricket PAYGo line of service
activated by a customer. |
Three
Months Ended March 31, 2010 Compared to Three Months Ended
March 31, 2009
Service
Revenues
Service revenues increased $70.8 million, or 13.8%, for the
three months ended March 31, 2010 compared to the
corresponding period of the prior year. This increase resulted
from a 26.5% increase in average total customers due to new
market launches and existing market customer growth. This
increase was partially offset by a 10.1% decline in average
monthly revenues per customer. The decline in average monthly
revenues per customer was primarily attributable to continued
customer acceptance of our Cricket Broadband and Cricket PAYGo
services, which are generally priced lower than our most popular
wireless service plans, and customer acceptance of the
higher-value, lower-priced rate plans we introduced in August
2009.
Equipment
Revenues
Equipment revenues decreased $3.9 million, or 5.3%, for the
three months ended March 31, 2010 compared to the
corresponding period of the prior year. A 38% increase in the
number of devices sold was offset by a reduction in the average
revenue per device sold. The reduction in the average revenue
per device sold was primarily due to various device promotions
offered to customers and an increase in the number of customers
using our Cricket Broadband and Cricket PAYGo services.
Cost of
Service
Cost of service increased $21.6 million, or 15.0%, for the
three months ended March 31, 2010 compared to the
corresponding period of the prior year. The most significant
factor contributing to the increase in cost of service was the
increase in our fixed costs due to our recently launched markets
and the resultant increase in our network footprint and
supporting infrastructure
quarter-over-quarter.
The number of potential customers covered by our networks
increased from approximately 83.8 million covered POPs as
of March 31, 2009 to approximately 94.2 million
covered POPs as of March 31, 2010. As a percentage of
service revenues, cost of service was 28.4% compared to 28.1% in
the prior year period.
Cost of
Equipment
Cost of equipment increased $10.3 million, or 6.5%, for the
three months ended March 31, 2010 compared to the
corresponding period of the prior year. A 38% increase in the
number of devices sold was partially offset by a reduction in
the average cost per device sold, primarily due to benefits of
scale and an increase in the number of customers using our
Cricket Broadband and Cricket PAYGo services.
Selling
and Marketing Expenses
Selling and marketing expenses increased $8.4 million, or
8.1%, for the three months ended March 31, 2010 compared to
the corresponding period of the prior year. As a percentage of
service revenues, such expenses decreased to 19.1% from 20.1% in
the prior year period. This percentage decrease was largely
attributable to a 1.9%
36
decrease in media and advertising costs as a percentage of
service revenues reflecting the launch of our two largest
markets during the first quarter of 2009, and the increase in
service revenues and consequent benefits of scale.
General
and Administrative Expenses
General and administrative expenses decreased $3.9 million,
or 4.1%, for the three months ended March 31, 2010 compared
to the corresponding period of the prior year. As a percentage
of service revenues, such expenses decreased to 15.8% from 18.7%
in the prior year period primarily due to the increase in
service revenues and consequent benefits of scale.
Depreciation
and Amortization
Depreciation and amortization expense increased
$19.5 million, or 21.7%, for the three months ended
March 31, 2010 compared to the corresponding period of the
prior year. The increase in depreciation and amortization
expense was due primarily to an increase in property and
equipment, net from approximately $1,956.6 million as of
March 31, 2009 to approximately $2,093.9 million as of
March 31, 2010, in connection with the build-out and launch
of our new markets throughout 2009 and the improvement and
expansion of our networks in existing markets.
Gain
(Loss) on Sale or Disposal of Assets
Gain (loss) on sale or disposal of assets decreased
$5.0 million for the three months ended March 31, 2010
compared to the corresponding period of the prior year. During
the three months ended March 31, 2010, we recognized losses
of approximately $1.5 million upon the disposal of certain
of our property and equipment. In March 2009 we recognized a
non-monetary net gain of approximately $4.4 million upon
the closing of a license exchange transaction. This net gain was
partially offset by approximately $0.8 million in losses we
recognized upon the disposal of certain of our property and
equipment during the three months ended March 31, 2009.
Non-Operating
Items
The following table summarizes non-operating data for our
consolidated operations for the three months ended
March 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Equity in net income of investees, net
|
|
$
|
571
|
|
|
$
|
1,479
|
|
|
$
|
(908
|
)
|
Interest income
|
|
|
428
|
|
|
|
945
|
|
|
|
(517
|
)
|
Interest expense
|
|
|
(60,295
|
)
|
|
|
(41,851
|
)
|
|
|
(18,444
|
)
|
Other income (expense), net
|
|
|
15
|
|
|
|
(63
|
)
|
|
|
78
|
|
Income tax expense
|
|
|
(11,294
|
)
|
|
|
(6,865
|
)
|
|
|
(4,429
|
)
|
Three
Months Ended March 31, 2010 Compared to Three Months Ended
March 31, 2009
Equity in
Net Income of Investees, Net
Equity in net income of investees, net reflects our share of net
income and net losses of regional wireless service providers in
which we hold investments.
Interest
Income
Interest income decreased $0.5 million during the three
months ended March 31, 2010 compared to the corresponding
period of the prior year. This decrease was primarily
attributable to a decline in interest rates from the
corresponding period of the prior year.
37
Interest
Expense
Interest expense increased $18.4 million during the three
months ended March 31, 2010 compared to the corresponding
period of the prior year. The increase in interest expense
resulted primarily from our issuance of $1,100 million of
senior secured notes in June 2009. In addition, we did not
capitalize interest during the three months ended March 31,
2010 compared to $12.2 million of capitalized interest
during the corresponding period of the prior year. 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 wireless licenses and property and equipment
involved in those markets and the duration of the build-out.
Income
Tax Expense
The computation of our annual effective tax rate includes a
forecast of our estimated ordinary income (loss),
which is our annual income (loss) from continuing operations
before tax, excluding unusual or infrequently occurring
(discrete) items. Significant management judgment is required in
projecting our ordinary income (loss). Our projected ordinary
income tax expense for the full year 2010, which excludes the
effect of discrete items, consists primarily of the deferred tax
effect of our investments in joint ventures that are in a
deferred tax liability position and the amortization of wireless
licenses and tax goodwill for income tax purposes. Because our
projected 2010 income tax expense is a relatively fixed amount,
a small change in the ordinary income (loss) projection can
produce a significant variance in the effective tax rate and
therefore it is difficult to make a reliable estimate of the
annual effective tax rate. As a result and in accordance with
the authoritative guidance for accounting for income taxes in
interim periods, we have computed our provision for income taxes
for the three months ended March 31, 2010 and 2009 by
applying the actual effective tax rate to the
year-to-date
income.
During the three months ended March 31, 2010, we recorded
income tax expense of $11.3 million compared to income tax
expense of $6.9 million for the three months ended
March 31, 2009. The increase in income tax expense during
the three months ended March 31, 2010 compared to the prior
year period was primarily caused by increased state income tax
expense. Our state tax rate for the three months ended
March 31, 2010 increased as a result of the expansion of
our operating footprint in fiscal 2009 into new, higher-taxing
states. During the period ended March 31, 2009, our state
tax rate decreased as a result of the enactment of the
California Budget Act of 2008, which was signed into law on
February 20, 2009, and which will permit taxpayers to elect
an alternative method to attribute taxable income to California
for tax years beginning on or after January 1, 2011.
We expect that we will recognize income tax expense for the full
year 2010 despite the fact that we have recorded a full
valuation allowance on almost all of our deferred tax assets.
This result is because of the deferred tax effect of our
investment in certain joint ventures as well as the amortization
of wireless licenses and tax basis goodwill for income tax
purposes.
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, or NOL,
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. Included
in our deferred tax assets as of March 31, 2010 were
federal NOL carryforwards of approximately $1.6 billion
(which begin to expire in 2022) and state NOL carryforwards
of approximately $1.7 billion ($21.9 million of which
will expire at the end of 2010), which could be used to offset
future ordinary taxable income and reduce the amount of cash
required to settle future tax liabilities. 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 three months ended
March 31, 2010, we weighed the positive and negative
factors with respect to this determination and, at this time, we
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 the deferred tax
assets will be realized, except with respect to the realization
of a $2.0 million Texas Margins Tax credit. We will
continue to closely monitor the positive and negative factors to
assess whether we are required to maintain a valuation
allowance. 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 or released
in its entirety, with the corresponding benefit reflected in our
tax provision.
38
Subscriber
Recognition and Disconnect Policies
We recognize a new customer as a gross addition in the month
that he or she activates a Cricket service. We recognize a gross
customer addition for each Cricket Wireless, Cricket Broadband
and Cricket PAYGo line of service activated. Customers for our
Cricket Wireless and Cricket Broadband services must generally
pay their service amount by the payment due date or their
service will be suspended. Cricket Wireless customers, however,
may elect to purchase our BridgePay service, which would entitle
them to an additional seven days of service. When service is
suspended, the customer is generally not able to make or receive
calls or access the internet via our Cricket Broadband service,
as applicable. Calls attempted by suspended customers are
directed to our customer service center in order to arrange
payment. In order to re-establish Cricket Wireless or Cricket
Broadband service, a customer must generally make all past-due
payments and pay a reactivation charge. For our Cricket Wireless
and Cricket Broadband services, 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 Cricket Wireless
or Cricket Broadband 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. For Cricket Wireless
customers who have elected to use BridgePay to receive an
additional seven days of service, those customers must still pay
all amounts otherwise due on their Cricket Wireless account
within 30 days of the original due date or their account
will also be disconnected and counted as churn.
Pay-in-advance
customers who ask to terminate their service are disconnected
when their paid service period ends. Customers of our Cricket
PAYGo service are generally disconnected from service and
counted as churn if they have not replenished or topped
up their account within 60 days after the end of
their current term of service.
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 broad customer base
and, as a result, some of our customers may be more likely to
have their service terminated due to an inability to pay.
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; cost per gross customer addition, or 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; churn, which measures turnover in our customer
base; and adjusted OIBDA, which measures operating performance.
CPGA, CCU and adjusted OIBDA 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 from
the most directly comparable measure so calculated and
presented. See Reconciliation of Non-GAAP Financial
Measures below for a reconciliation of CPGA, CCU and
adjusted OIBDA 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 do not recognize service revenue
until payment has been received and services have been provided
to the customer. In addition, customers of our Cricket Wireless
and Cricket Broadband service are generally disconnected from
service approximately 30 days after failing to pay a
monthly
39
bill. Customers of our Cricket PAYGo service are generally
disconnected from service if they have not replenished or
topped up their account within 60 days after
the end of their current term of service. Therefore, because our
calculation of weighted-average number of customers includes
customers who have yet to disconnect service because they have
either not paid their last bill or have not replenished or
topped up their account, ARPU may appear lower
during periods in which we have significant disconnect activity.
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
wireless devices to existing customers as well as costs
associated with device replacements and repairs (other than
warranty costs which are the responsibility of the device
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
devices to existing customers and costs associated with device
replacements and repairs (other than warranty costs which are
the responsibility of the device 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 in which they are disconnected;
as a result, these customers are not included in churn.
Customers of our Cricket Wireless and Cricket Broadband service
are generally disconnected from service approximately
30 days after failing to pay a monthly bill, and
pay-in-advance
customers who ask to terminate their service are disconnected
when their paid service period ends. Customers of our Cricket
PAYGo service are generally disconnected from service if they
have not replenished or topped up their account
within 60 days after the end of their current term of
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 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.
40
Adjusted OIBDA is a non-GAAP financial measure defined as
operating income (loss) before depreciation and amortization,
adjusted to exclude the effects of: gain/(loss) on sale/disposal
of assets; impairment of assets; and share-based compensation
expense. Adjusted OIBDA should not be construed as an
alternative to operating income or net income as determined in
accordance with GAAP, or as an alternative to cash flows from
operating activities as determined in accordance with GAAP or as
a measure of liquidity.
In a capital-intensive industry such as wireless
telecommunications, management believes that adjusted OIBDA and
the associated percentage margin calculations are meaningful
measures of our operating performance. We use adjusted OIBDA as
a supplemental performance measure because management believes
it facilitates comparisons of our operating performance from
period to period and comparisons of our operating performance to
that of other companies by backing out potential differences
caused by the age and book depreciation of fixed assets
(affecting relative depreciation expenses) as well as the items
described above for which additional adjustments were made.
While depreciation and amortization are considered operating
costs under generally accepted accounting principles, these
expenses primarily represent the non-cash current period
allocation of costs associated with long-lived assets acquired
or constructed in prior periods. Because adjusted OIBDA
facilitates internal comparisons of our historical operating
performance, management also uses this metric for business
planning purposes and to measure our performance relative to
that of our competitors. In addition, we believe that adjusted
OIBDA and similar measures are widely used by investors,
financial analysts and credit rating agencies as measures of our
financial performance over time and to compare our financial
performance with that of other companies in our industry.
Adjusted OIBDA has limitations as an analytical tool, and should
not be considered in isolation or as a substitute for analysis
of our results as reported under GAAP. Some of these limitations
include:
|
|
|
|
|
it does not reflect capital expenditures;
|
|
|
|
although it does not include depreciation and amortization, the
assets being depreciated and amortized will often have to be
replaced in the future and adjusted OIBDA does not reflect cash
requirements for such replacements;
|
|
|
|
it does not reflect costs associated with share-based awards
exchanged for employee services;
|
|
|
|
it does not reflect the interest expense necessary to service
interest or principal payments on current or future indebtedness;
|
|
|
|
it does not reflect expenses incurred for the payment of income
taxes and other taxes; and
|
|
|
|
other companies, including companies in our industry, may
calculate this measure differently than we do, limiting its
usefulness as a comparative measure.
|
Management understands these limitations and considers adjusted
OIBDA as a financial performance measure that supplements but
does not replace the information provided to management by our
GAAP results.
The following table shows metric information for the three
months ended March 31, 2010 and 2009 (in thousands, except
ARPU, CPGA, CCU and Churn):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ARPU
|
|
$
|
37.96
|
|
|
$
|
42.21
|
|
CPGA
|
|
$
|
171
|
|
|
$
|
195
|
|
CCU
|
|
$
|
17.41
|
|
|
$
|
20.03
|
|
Churn
|
|
|
4.5
|
%
|
|
|
3.3
|
%
|
Adjusted OIBDA
|
|
$
|
122,992
|
|
|
$
|
96,802
|
|
41
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
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Selling and marketing expense
|
|
$
|
111,884
|
|
|
$
|
103,523
|
|
Less share-based compensation expense included in selling and
marketing expense
|
|
|
(1,106
|
)
|
|
|
(1,583
|
)
|
Plus cost of equipment
|
|
|
168,053
|
|
|
|
157,796
|
|
Less equipment revenue
|
|
|
(69,132
|
)
|
|
|
(72,982
|
)
|
Less net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
(16,141
|
)
|
|
|
(13,448
|
)
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPGA
|
|
$
|
193,558
|
|
|
$
|
173,306
|
|
Gross customer additions
|
|
|
1,132,998
|
|
|
|
889,911
|
|
|
|
|
|
|
|
|
|
|
CPGA
|
|
$
|
171
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cost of service
|
|
$
|
165,934
|
|
|
$
|
144,344
|
|
Plus general and administrative expense
|
|
|
92,256
|
|
|
|
96,177
|
|
Less share-based compensation expense included in cost of
service and general and administrative expense
|
|
|
(6,059
|
)
|
|
|
(10,072
|
)
|
Plus net loss on equipment transactions unrelated to initial
customer acquisition
|
|
|
16,141
|
|
|
|
13,448
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CCU
|
|
$
|
268,272
|
|
|
$
|
243,897
|
|
Weighted-average number of customers
|
|
|
5,135,102
|
|
|
|
4,058,819
|
|
|
|
|
|
|
|
|
|
|
CCU
|
|
$
|
17.41
|
|
|
$
|
20.03
|
|
|
|
|
|
|
|
|
|
|
42
Adjusted OIBDA The following table reconciles
adjusted OIBDA to operating income (loss), which we consider to
be the most directly comparable GAAP financial measure to
adjusted OIBDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating income (loss)
|
|
$
|
5,128
|
|
|
$
|
(1,005
|
)
|
Plus depreciation and amortization
|
|
|
109,246
|
|
|
|
89,733
|
|
|
|
|
|
|
|
|
|
|
OIBDA
|
|
$
|
114,374
|
|
|
$
|
88,728
|
|
Less (gain) loss on sale or disposal of assets
|
|
|
1,453
|
|
|
|
(3,581
|
)
|
Plus share-based compensation expense
|
|
|
7,165
|
|
|
|
11,655
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
122,992
|
|
|
$
|
96,802
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Overview
Our principal sources of liquidity are our existing unrestricted
cash, cash equivalents and short-term investments and cash
generated from operations. We had a total of $525.9 million
in unrestricted cash, cash equivalents and short-term
investments as of March 31, 2010. We generated
$93.6 million of net cash from operating activities during
the three months ended March 31, 2010, 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. From time to time, we may generate
additional liquidity through future capital markets transactions.
We believe that our existing unrestricted cash, cash equivalents
and short-term investments, together with cash generated from
operations, provide us with sufficient liquidity to meet the
future operating and capital requirements for our current
business operations and our current business expansion efforts.
These current business expansion efforts, which are described
below, include activities to broaden our product portfolio and
to enhance our network coverage and capacity.
We determine our future capital and operating requirements and
liquidity based, in large part, upon our projected financial and
operating performance, and we regularly review and update these
projections due to changes in general economic conditions, our
current and projected financial and operating results, the
competitive landscape and other factors. In evaluating our
liquidity and managing our financial resources, we plan to
maintain what we consider to be at least a reasonable surplus of
unrestricted cash, cash equivalents and short-term investments
to be available, if necessary, to address unanticipated
variations or changes in working capital, operating and capital
requirements, and our financial and operating performance. If
cash generated from operations were to be adversely impacted by
substantial changes in our projected financial and operating
performance (for example, as a result of unexpected effects
associated with the current economic downturn, further changes
in general economic conditions, higher interest rates, increased
competition in our markets,
slower-than-anticipated
growth or customer acceptance of our products or services,
increased churn or other factors), we believe that we could
manage our expenditures, including capital expenditures, to the
extent we deemed necessary, to match our capital requirements to
our available liquidity. Our projections regarding future
capital and operating requirements and liquidity are based upon
current operating, financial and competitive information and
projections regarding our business and its financial
performance. There are a number of risks and uncertainties
(including the risks to our business described above and others
set forth in this report in Part II
Item 1A. under the heading entitled Risk
Factors) that could cause our financial and operating
results and capital requirements to differ materially from our
projections and that could cause our liquidity to differ
materially from the assessment set forth above.
Our current business expansion efforts include activities to
broaden our product portfolio and to enhance our network
coverage and capacity. We have introduced two new product
offerings, Cricket Broadband and Cricket PAYGo, in all of our
and our consolidated joint ventures markets to complement
our Cricket Wireless service. In addition, we recently began
distributing Cricket Broadband and daily and monthly
pay-as-you-go versions of our Cricket PAYGo product through
national mass-market retailers. We also continue to enhance our
network coverage and capacity in many of our existing markets.
43
Our business operations and expansion efforts have historically
required significant expenditures. Our operating expenses for
the year ended December 31, 2009 and for the three months
ended March 31, 2010 were $2,351.6 million and
$647.4 million, respectively. In addition, we and our
consolidated joint ventures made approximately
$699.5 million and $107.2 million in capital
expenditures, including related capitalized interest costs,
during the year ended December 31, 2009 and the three
months ended March 31, 2010, respectively, primarily to
support the build-out and launch of new markets, the expansion
and improvement of our existing wireless networks and other
planned capital projects. Capital expenditures for fiscal year
2010, however, are expected to be significantly less than our
capital expenditures for fiscal years 2008 and 2009 and are
primarily expected to reflect expenditures required to support
the ongoing growth and development of markets in commercial
operation. As described above, we believe that our existing
unrestricted cash, cash equivalents and short-term investments,
together with cash generated from operations, provide us with
sufficient liquidity to meet the future operating and capital
requirements for our current business operations and our current
business expansion efforts.
In addition to our current business expansion efforts, we may
pursue other activities to build our business. Future business
expansion efforts could include the launch of new product and
service offerings, the acquisition of additional spectrum
through private transactions or FCC auctions, the build-out and
launch of Cricket services in additional markets, entering into
partnerships with others, the acquisition of other wireless
communications companies or complementary businesses, the
purchase of all or a portion of the remaining membership
interests in our joint ventures, LCW Wireless and Denali, or the
deployment of next-generation network technology over the longer
term. We do not intend to pursue any of these other business
expansion activities at a significant level unless we believe we
have sufficient liquidity to support the operating and capital
requirements for our current business operations, our current
business expansion efforts and any such other activities.
As of March 31, 2010, we had $2,750 million in senior
indebtedness outstanding, which comprised $1,100 million of
9.375% unsecured senior notes due 2014, $250 million of
4.5% convertible senior notes due 2014, $300 million of
10.0% unsecured senior notes due 2015 and $1,100 million of
7.75% senior secured notes due 2016, as more fully
described below. The indentures governing Crickets secured
and unsecured senior notes contain covenants that restrict the
ability of Leap, Cricket and the subsidiary guarantors to take
certain actions, including incurring additional indebtedness
beyond specified thresholds.
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
assess our capacity to incur additional debt under the
indentures governing Crickets secured and unsecured senior
notes. In addition, as the new markets and product offerings
that we have launched continue to develop and our existing
markets mature, we expect that increased cash flows will
ultimately result in improvements in our consolidated leverage
ratio. Our $2,750 million of secured and unsecured senior
notes and convertible senior notes all bear interest at a fixed
rate; however, we continue to review changes and trends in
interest rates to evaluate possible hedging activities we could
consider implementing. In light of the actions described above,
our expected cash flows from operations, and our ability to
manage our capital expenditures and other business expenses 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
Operating
Activities
Net cash provided by operating activities decreased
$6.4 million, or 6.4%, for the three months ended
March 31, 2010 compared to the corresponding period of the
prior year. This decrease was primarily attributable to changes
in working capital, partially offset by increased operating
income, exclusive of non-cash items such as depreciation and
amortization.
44
Investing
Activities
Net cash used in investing activities was $72.0 million
during the three months ended March 31, 2010, which
included the effects of the following transactions:
|
|
|
|
|
During the three months ended March 31, 2010, we and our
consolidated joint ventures purchased $107.2 million of
property and equipment for the ongoing growth and development of
markets in commercial operation and other internal capital
projects.
|
|
|
|
During the three months ended March 31, 2010, we made
investment purchases of $122.5 million, offset by sales or
maturities of investments of $158.4 million.
|
Financing
Activities
Net cash used in financing activities was $23.5 million
during the three months ended March 31, 2010, primarily
reflecting the effects of the $21.0 million we paid to
acquire an additional 23.9% membership interest in LCW Wireless.
Senior
Notes
Unsecured
Senior Notes Due 2014
In 2006, Cricket issued $750 million of 9.375% unsecured
senior notes due 2014 in a private placement to institutional
buyers, which were exchanged in 2007 for identical notes that
had been registered with the SEC. In June 2007, Cricket issued
an additional $350 million of 9.375% unsecured senior notes
due 2014 in a private placement to institutional buyers at an
issue price of 106% of the principal amount, which were
exchanged in June 2008 for identical notes that had been
registered with the SEC. These notes are all treated as a single
class and have identical terms. The $21 million premium we
received in connection with the issuance of the second tranche
of notes has been recorded in long-term debt in the condensed
consolidated financial statements and is being amortized as a
reduction to interest expense over the term of the notes. At
March 31, 2010, the effective interest rate on the
$350 million of senior notes was 9.0%, which includes the
effect of the premium amortization.
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 senior secured notes
described below, to the extent of the value of the assets
securing such obligations, as well as to existing and 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, 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, if any, thereon to the redemption
date. 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 beginning on
November 1, 2010 and 2011, respectively, or at 100% of the
principal amount if redeemed during the twelve months beginning
on November 1, 2012 or thereafter, plus accrued and unpaid
interest, if any, thereon to the redemption date.
45
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 any, thereon to the repurchase date.
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 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.
Convertible
Senior Notes Due 2014
In June 2008, Leap issued $250 million of unsecured
convertible senior notes due 2014 in a private placement to
institutional buyers. The notes bear interest at the rate of
4.50% per year, payable semi-annually in cash in arrears, which
interest payments commenced in January 2009. The notes are
Leaps general unsecured obligations and rank equally in
right of payment with all of Leaps existing and future
senior unsecured indebtedness and senior in right of payment to
all indebtedness that is contractually subordinated to the
notes. The notes are structurally subordinated to the existing
and future claims of Leaps subsidiaries creditors,
including under the secured and unsecured senior notes described
above and below. The notes are effectively junior to all of
Leaps existing and future secured obligations, including
those under the senior secured notes described below, to the
extent of the value of the assets securing such obligations.
Holders may convert their notes into shares of Leap common stock
at any time on or prior to the third scheduled trading day prior
to the maturity date of the notes, July 15, 2014. If, at
the time of conversion, the applicable stock price of Leap
common stock is less than or equal to approximately $93.21 per
share, the notes will be convertible into 10.7290 shares of
Leap common stock per $1,000 principal amount of the notes
(referred to as the base conversion rate), subject
to adjustment upon the occurrence of certain events. If, at the
time of conversion, the applicable stock price of Leap common
stock exceeds approximately $93.21 per share, the conversion
rate will be determined pursuant to a formula based on the base
conversion rate and an incremental share factor of
8.3150 shares per $1,000 principal amount of the notes,
subject to adjustment.
Leap may be required to repurchase all outstanding notes in cash
at a repurchase price of 100% of the principal amount of the
notes, plus accrued and unpaid interest, if any, thereon to the
repurchase date if (1) any person acquires beneficial
ownership, directly or indirectly, of shares of Leaps
capital stock that would entitle the person to exercise 50% or
more of the total voting power of all of Leaps capital
stock entitled to vote in the election of directors,
(2) Leap (i) merges or consolidates with or into any
other person, another person merges with or into Leap, or Leap
conveys, sells, transfers or leases all or substantially all of
its assets to another person or (ii) engages in any
recapitalization, reclassification or other transaction in which
all or substantially all of Leaps common stock is
exchanged for or converted into cash, securities or other
property, in each case subject to limitations and excluding in
the case of (1) and (2) any merger or consolidation
where at least 90% of the consideration consists of shares of
common stock traded on NYSE, ASE or NASDAQ, (3) a majority
of the members of Leaps board of directors ceases to
consist of individuals who were directors on the date of
original issuance of the notes or whose election or nomination
for election was previously approved by the board of directors,
(4) Leap is liquidated or dissolved or holders of common
stock approve any plan or proposal for its liquidation or
dissolution or (5) shares of Leap common stock are not
listed for trading on any of the New York Stock Exchange, the
NASDAQ Global Market or the NASDAQ Global Select Market (or any
of their respective successors). Leap may not redeem the notes
at its option.
Unsecured
Senior Notes Due 2015
In June 2008, Cricket issued $300 million of 10.0%
unsecured senior notes due 2015 in a private placement to
institutional buyers. The notes bear interest at the rate of
10.0% per year, payable semi-annually in cash in arrears, which
interest payments commenced in January 2009. The notes are
guaranteed on an unsecured senior basis by
46
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 senior secured notes described below, to the extent of the
value of the assets securing such obligations, as well as to
existing and 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 July 15, 2011, Cricket may redeem up to 35% of the
aggregate principal amount of the notes at a redemption price of
110.0% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the redemption date, from the net
cash proceeds of specified equity offerings. Prior to
July 15, 2012, 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, if any, thereon to the redemption date. 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 July 15,
2012 plus (2) all remaining required interest payments due
on such notes through July 15, 2012 (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 July 15, 2012, at a redemption price of 105.0% and
102.5% of the principal amount thereof if redeemed during the
twelve months beginning on July 15, 2012 and 2013,
respectively, or at 100% of the principal amount if redeemed
during the twelve months beginning on July 15, 2014 or
thereafter, plus accrued and unpaid interest, if any, thereon to
the redemption date.
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 any, thereon to the repurchase date.
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 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.
Senior
Secured Notes Due 2016
On June 5, 2009, Cricket issued $1,100 million of
7.75% senior secured notes due 2016 in a private placement
to institutional buyers at an issue price of 96.134% of the
principal amount, which notes were exchanged in December 2009
for identical notes that had been registered with the SEC. The
$42.5 million discount to the net proceeds we received in
connection with the issuance of the notes has been recorded in
long-term debt in the condensed consolidated financial
statements and is being accreted as an increase to interest
expense over the term of the notes. At March 31, 2010, the
effective interest rate on the notes was 8.03%, which includes
the effect of the discount accretion.
The notes bear interest at the rate of 7.75% per year, payable
semi-annually in cash in arrears, which interest payments
commenced in November 2009. The notes are guaranteed on a senior
secured basis by Leap and each of its direct and indirect
existing domestic subsidiaries (other than Cricket, which is the
issuer of the notes, and LCW Wireless and Denali and their
respective subsidiaries) and any future wholly owned domestic
restricted subsidiary that guarantees any indebtedness of
Cricket or a guarantor of the notes. The notes and the
guarantees are Leaps, Crickets and the
guarantors senior secured obligations and are equal in
right of payment with all of Leaps, Crickets and the
guarantors existing and future unsubordinated indebtedness.
47
The notes and the guarantees are effectively senior to all of
Leaps, Crickets and the guarantors existing
and future unsecured indebtedness (including Crickets
$1.4 billion aggregate principal amount of unsecured senior
notes and, in the case of Leap, Leaps $250 million
aggregate principal amount of convertible senior notes), as well
as to all of Leaps, Crickets and the
guarantors obligations under any permitted junior lien
debt that may be incurred in the future, in each case to the
extent of the value of the collateral securing the senior
secured notes and the guarantees.
The notes and the guarantees are secured on a pari passu
basis with all of Leaps, Crickets and the
guarantors obligations under any permitted parity lien
debt that may be incurred in the future. Leap, Cricket and the
guarantors are permitted to incur debt under existing and future
secured credit facilities in an aggregate principal amount
outstanding (including the aggregate principal amount
outstanding of the senior secured notes) of up to the greater of
$1,500 million and 3.5 times Leaps consolidated cash
flow (excluding the consolidated cash flow of LCW Wireless and
Denali) for the prior four fiscal quarters through
December 31, 2010, stepping down to 3.0 times such
consolidated cash flow for any such debt incurred after
December 31, 2010 but on or prior to December 31,
2011, and to 2.5 times such consolidated cash flow for any such
debt incurred after December 31, 2011.
The notes and the guarantees are effectively junior to all of
Leaps, Crickets and the guarantors obligations
under any permitted priority debt that may be incurred in the
future (up to the lesser of 0.30 times Leaps consolidated
cash flow (excluding the consolidated cash flow of LCW Wireless
and Denali) for the prior four fiscal quarters and
$300 million in aggregate principal amount outstanding), to
the extent of the value of the collateral securing such
permitted priority debt, as well as to existing and 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.
The notes and the guarantees are secured on a first-priority
basis, equally and ratably with any future parity lien debt, by
liens on substantially all of the present and future personal
property of Leap, Cricket and the guarantors, except for certain
excluded assets and subject to permitted liens (including liens
on the collateral securing any future permitted priority debt).
Prior to May 15, 2012, Cricket may redeem up to 35% of the
aggregate principal amount of the notes at a redemption price of
107.750% of the principal amount thereof, plus accrued and
unpaid interest thereon to the redemption date, from the net
cash proceeds of specified equity offerings. Prior to
May 15, 2012, 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 thereon to the redemption date. 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 May 15, 2012
plus (2) all remaining required interest payments due on
such notes through May 15, 2012 (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 May 15, 2012, at a redemption price of 105.813%,
103.875% and 101.938% of the principal amount thereof if
redeemed during the twelve months beginning on May 15,
2012, 2013 and 2014, respectively, or at 100% of the principal
amount if redeemed during the twelve months beginning on
May 15, 2015 or thereafter, plus accrued and unpaid
interest thereon to the redemption date.
If a change of control occurs (which includes the
acquisition of beneficial ownership of 35% or more of
Leaps equity securities (other than a transaction where
immediately after such transaction Leap will be a wholly owned
subsidiary of a person of which no person or group is the
beneficial owner of 35% or more of such a persons voting
stock), 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 thereon to the
repurchase date.
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
48
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.
LCW
Operations Senior Secured Credit Agreement
LCW Operations has a senior secured credit agreement, as
amended, consisting of two term loans with an aggregate
outstanding principal amount of approximately $16.1 million
as of March 31, 2010. The loans bear interest at LIBOR plus
the applicable margin (ranging from 2.70% to 6.33%). At
March 31, 2010, the effective interest rate on the term
loans was 5.12%. Outstanding borrowings under the senior secured
credit agreement are due in quarterly installments of
$2 million with an aggregate final payment of approximately
$10 million due in March 2011. LCW Wireless working
capital needs and debt service requirements are expected to be
met through cash generated from its operations.
The obligations under the senior secured credit agreement are
guaranteed by LCW Wireless and LCW License (a wholly owned
subsidiary of LCW Operations) and are non-recourse to Leap,
Cricket and their other subsidiaries. The obligations under the
senior secured credit agreement are secured by substantially all
of the present and future assets of LCW Wireless and its
subsidiaries. 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 or sell assets. The senior secured credit
agreement requires that LCW Operations and the guarantors comply
with financial covenants related to earnings before interest,
taxes, depreciation and amortization (EBITDA), gross
additions of subscribers, minimum cash and cash equivalents and
maximum capital expenditures, among other things. LCW Operations
was in compliance with these covenants as of March 31, 2010.
Fair
Value of Financial Instruments
As more fully described in Note 2 and Note 5 to our
condensed consolidated financial statements included in
Part I Item 1. Financial
Statements of this report, we apply the authoritative
guidance for fair value measurements to our assets and
liabilities. The guidance defines fair value as an exit price,
which is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The degree of
judgment utilized in measuring the fair value of assets and
liabilities generally correlates to the level of pricing
observability. Assets and liabilities with readily available,
actively quoted prices or for which fair value can be measured
from actively quoted prices in active markets generally have
more pricing observability and less judgment utilized in
measuring fair value. Conversely, assets and liabilities rarely
traded or not quoted have less pricing observability and are
generally measured at fair value using valuation models that
require more judgment. These valuation techniques involve some
level of management estimation and judgment, the degree of which
is dependent on the price transparency or market for the asset
or liability and the complexity of the asset or liability.
We have categorized our assets and liabilities measured at fair
value into a three-level hierarchy in accordance with the
guidance for fair value measurements. Assets and liabilities
that use quoted prices in active markets for identical assets or
liabilities are generally categorized as Level 1, assets
and liabilities that use observable market-based inputs or
unobservable inputs that are corroborated by market data for
similar assets or liabilities are generally categorized as
Level 2 and assets and liabilities that use unobservable
inputs that cannot be corroborated by market data are generally
categorized as Level 3. Such Level 3 assets and
liabilities have values determined using pricing models and
indicative bids from potential purchasers for which the
determination of fair value requires judgment and estimation. As
of March 31, 2010, $2.5 million of our financial
assets required fair value to be measured using Level 3
inputs.
Generally, our results of operations are not significantly
impacted by our assets and liabilities accounted for at fair
value due to the nature of each asset and liability. However,
through our non-controlled consolidated subsidiary Denali, we
hold an investment in asset-backed commercial paper, which was
purchased as a highly rated investment
49
grade security. Future volatility and uncertainty in the
financial markets could result in additional losses and
difficulty in monetizing our remaining investment. We continue
to report our long-term debt obligations at amortized cost and
disclose the fair value of such obligations.
Capital
Expenditures and Other Asset Acquisitions and
Dispositions
Capital
Expenditures
During the three months ended March 31, 2010, we and our
consolidated joint ventures made approximately
$107.2 million in capital expenditures. These capital
expenditures were primarily for the ongoing growth and
development of markets in commercial operations and other
internal capital projects.
Total capital expenditures for fiscal year 2010 are expected to
be significantly less than our capital expenditures for fiscal
years 2008 and 2009. Capital expenditures for fiscal year 2010
are primarily expected to reflect expenditures required to
support the ongoing growth and development of markets in
commercial operation.
During the year ended December 31, 2009, we and Denali
Operations launched new markets in Chicago, Philadelphia,
Washington, D.C., Baltimore and Lake Charles covering
approximately 24.2 million additional POPs. We have
identified new markets covering approximately 16 million
additional POPs that we could elect to build out and launch with
Cricket service in the future using our wireless licenses,
although we have not established a timeline for any such
build-out or launch. We also continue to enhance our network
coverage and capacity in many of our existing markets.
Other
Acquisitions and Dispositions
On January 8, 2010, we contributed certain non-operating
wireless licenses in West Texas with a carrying value of
approximately $2.4 million to a regional wireless service
provider in exchange for a 6.6% ownership interest in the
company.
On February 22, 2010, we entered into an asset purchase and
contribution agreement with various entities doing business as
Pocket Communications, referred to collectively as Pocket,
pursuant to which we and Pocket agreed to contribute
substantially all of our wireless spectrum and operating assets
in South Texas to a joint venture controlled by us. We will own
approximately 76% of the joint venture and Pocket will own
approximately 24%. Immediately prior to the closing we will
purchase specified assets from Pocket for approximately
$38 million in cash, which assets will also be contributed
to the joint venture. Following the closing, Pocket will have
the right to put, and we will have the right to call, all of
Pockets membership interests in the joint venture (which
rights will generally be exercisable by either party after
31/2
years). In addition, in the event of a change of control of
Leap, Pocket will be obligated to sell to us all of its
membership interests in the joint venture.
The operations of the joint venture will be funded primarily
from cash generated from operations of the joint venture. In
addition to quarterly distributions for taxes, the joint venture
will make cash distributions to its members on a pro rata basis
at such times and in such amounts as we, as sole manager, may
determine. In addition, in the event of a partial closing of a
Pocket put or mandatory buyout, the joint venture will be
required to make quarterly distributions to its members on a pro
rata basis thereafter in an amount that would result in Pocket
receiving the lesser of the balance of the purchase price for
the sale to us of Pockets membership interests in the
joint venture and Pockets pro rata share of the joint
ventures excess cash. In the event that Pocket so receives
the balance of the purchase price, then Pockets remaining
membership interests in the joint venture will be automatically
cancelled. At the closing, the joint venture will also enter
into a loan and security agreement with Pocket pursuant to
which, commencing eighteen months after the closing, the joint
venture will make quarterly loans to Pocket in an aggregate
principal amount of up to $30 million (or, if lesser, the
then-applicable
purchase price (whether or not a put, call or mandatory buyout
has been triggered) or the joint ventures excess cash).
Such loans will bear interest at 8% per annum (compounded
annually), and will mature on the tenth anniversary of the
closing date. We will have the right to set off all outstanding
principal and interest under this loan facility against the
payment of the purchase price in the event of a put, call or
mandatory buyout. The closing of the transaction is subject to
customary closing conditions, including the consent of the FCC.
50
On March 30, 2010, Cricket acquired an additional 23.9%
membership interest in LCW Wireless from CSM, following
CSMs exercise of its option to sell its interest in LCW
Wireless to Cricket for $21.0 million, which increased
Crickets non-controlling interest in LCW Wireless to 94.6%.
Off-Balance
Sheet Arrangements
We do not have and have not had any material off-balance sheet
arrangements.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Interest
Rate Risk
As of March 31, 2010, approximately 0.6% of our
indebtedness accrued interest at a variable rate, which
comprised $16.1 million in outstanding term loans under LCW
Operations senior secured credit facility, compared to
approximately 0.7% of our indebtedness for borrowed money as of
December 31, 2009. Our senior secured, senior and
convertible senior notes all bear interest at a fixed rate. As a
result, we do not expect fluctuations in interest rates to have
a material adverse effect on our business, financial condition
or results of operations.
Our investment portfolio consists primarily of highly liquid,
fixed-income investments with contractual maturities of less
than one year. The fair value of such a portfolio is less
sensitive to market fluctuations than a portfolio of longer term
securities. Accordingly, we believe that a sharp change in
interest rates would not have a material effect on our
investment portfolio.
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Item 4.
|
Controls
and Procedures.
|
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified by the SEC and that
such information is accumulated and communicated to management,
including our chief executive officer, or CEO, and chief
financial officer, or CFO, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Management, with participation by our CEO and CFO, has designed
our disclosure controls and procedures to provide reasonable
assurance of achieving desired objectives. As required by SEC
Rule 13a-15(b),
in connection with filing this Quarterly Report on
Form 10-Q,
management conducted an evaluation, with the participation of
our CEO and our CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures, as such
term is defined under
Rule 13a-15(e)
promulgated under the Exchange Act, as of March 31, 2010,
the end of the period covered by this report. Based upon that
evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective at the reasonable
assurance level as of March 31, 2010.
(b) Changes in Internal Control over Financial
Reporting
There were no changes in our internal control over financial
reporting during the fiscal quarter ended March 31, 2010
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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|
Item 4T.
|
Controls
and Procedures.
|
Not applicable.
51
PART II
OTHER
INFORMATION
|
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Item 1.
|
Legal
Proceedings.
|
As more fully described below, we are involved in a variety of
lawsuits, claims, investigations and proceedings concerning
intellectual property, securities, commercial and other matters.
Due in part to the growth and expansion of our business
operations, we have become subject to increased amounts of
litigation, including disputes alleging intellectual property
infringement.
We believe that any damage amounts alleged in the matters
discussed below are not necessarily meaningful indicators of our
potential liability. We determine whether we should accrue an
estimated loss for a contingency in a particular legal
proceeding by assessing whether a loss is deemed probable and
whether the amount can be reasonably estimated. We reassess our
views on estimated losses on a quarterly basis to reflect the
impact of any developments in the matters in which we are
involved.
Legal proceedings are inherently unpredictable, and the matters
in which we are involved often present complex legal and factual
issues. We vigorously pursue defenses in legal proceedings and
engage in discussions where possible to resolve these matters on
terms favorable to us. It is possible, however, that our
business, financial condition and results of operations in
future periods could be materially adversely affected by
increased litigation expense, significant settlement costs
and/or
unfavorable damage awards.
Patent
Litigation
Freedom
Wireless
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
alleged 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 alleged that its patents claim a novel cellular system
that enables subscribers of prepaid services to both place and
receive cellular calls without dialing access codes or using
modified telephones. The complaint sought unspecified monetary
damages, increased damages under 35 U.S.C. § 284
together with interest, costs and attorneys fees, and an
injunction. On September 3, 2008, Freedom Wireless amended
its infringement contentions to assert that our Cricket
unlimited voice service, in addition to our
Jump®
Mobile and Cricket by
Weektm
services, infringes claims under the patents at issue. On
January 19, 2009, we and Freedom Wireless entered into an
agreement to settle this lawsuit and agreed to enter into a
license agreement which will provide Freedom Wireless with
royalties on certain of our products and services. Pursuant to
the terms of the settlement, an arbitration hearing was held on
December 15, 2009 to finalize the terms of the settlement
and license agreements. The decision of the arbitrator is
pending. On April 7, 2010, the parties received the
preliminary decision of the arbitrator, which reaffirmed the
financial terms of the settlement and license agreement.
DNT
On May 1, 2009, we were sued by DNT LLC, or DNT, in the
United States District Court for the Eastern District of
Virginia, Richmond Division, for alleged infringement of
U.S. Reissued Patent No. RE37,660 entitled
Automatic Dialing System. DNT alleges that we use,
encourage the use of, sell, offer for sale
and/or
import voice and data service and wireless modem cards for
computers designed to be used in conjunction with cellular
networks and that such acts constitute both direct and indirect
infringement of DNTs patent. DNT alleges that our
infringement is willful, and the complaint seeks an injunction
against further infringement, unspecified damages (including
enhanced damages) and attorneys fees. On July 23,
2009, we filed an answer to the complaint as well as
counterclaims. On December 14, 2009, DNTs patent was
determined to be invalid in a case it brought against other
wireless providers. DNTs lawsuit against us has been
stayed, pending resolution of that other case.
52
Digital
Technology Licensing
On April 21, 2009, we and certain other wireless carriers
(including Hargray Wireless LLC, or Hargray Wireless, a company
which Cricket acquired in April 2008 and which was merged with
and into Cricket in December 2008) were sued by Digital
Technology Licensing LLC, or DTL, in the United States District
Court for the Southern District of New York, for alleged
infringement of U.S. Patent No. 5,051,799 entitled
Digital Output Transducer. DTL alleges that we and
Hargray Wireless sell
and/or offer
to sell
Bluetooth®
devices or digital cellular telephones, including Kyocera and
Sanyo telephones, and that such acts constitute direct
and/or
indirect infringement of DTLs patent. DTL further alleges
that we and Hargray Wireless directly
and/or
indirectly infringe its patent by providing cellular telephone
service and by using and inducing others to use a patented
digital cellular telephone system by using cellular telephones,
Bluetooth devices, and cellular telephone infrastructure made by
companies such as Kyocera and Sanyo. DTL alleges that the
asserted infringement is willful, and the complaint seeks a
permanent injunction against further infringement, unspecified
damages (including enhanced damages), attorneys fees, and
expenses. On January 5, 2010, this matter was stayed,
pending final resolution of another case that DTL brought
against another wireless provider in which it alleges
infringement of the patent that is at issue in our matter. That
other case has been settled and dismissed but the stay in our
matter has not been lifted.
On The
Go
On February 22, 2010, a matter brought against us by On The
Go, LLC, or OTG, was dismissed with prejudice. We and certain
other wireless carriers were sued by OTG in the United States
District Court for the Northern District of Illinois, Eastern
Division, on July 9, 2009, for alleged infringement of
U.S. Patent No. 7,430,554 entitled Method and
System For Telephonically Selecting, Addressing, and
Distributing Messages. OTGs complaint alleged that
we directly and indirectly infringe OTGs patent by making,
offering for sale, selling, providing, maintaining, and
supporting our PAYGo prepaid mobile telephone service and
system. The complaint sought injunctive relief and unspecified
damages, including interest and costs.
DownUnder
Wireless
On November 20, 2009, we and a number of other parties were
sued by DownUnder Wireless, LLC, or DownUnder, in the United
States District Court for the Eastern District of Texas,
Marshall Division, for alleged infringement of U.S. Patent
No. 6,741,215 entitled Inverted Safety Antenna for
Personal Communications Devices. DownUnder alleges that we
use, sell, and offer to sell wireless communication devices,
including PCD, Cal-Comp, and Motorola devices, comprising a
housing, a microphone, a speaker earpiece, user interface
mounted in an upright orientation on the communication device,
and a transmitting antenna, where the transmitting antenna is
mounted in a lower portion of the housing, and further the
housing defines an obtuse angle between the top of the upper
housing portion and the bottom of the lower housing portion of
the devices, and that such acts constitute direct and indirect
infringement of DownUnders patent. DownUnder alleges that
our infringement is willful, and the complaint seeks a permanent
injunction against further infringement, unspecified damages
(including enhanced damages), and attorneys fees. We filed
an answer to the complaint on February 19, 2010. On
April 29, 2010, we and certain other defendants filed a
motion to sever the claims against us and dismiss the matter or,
in the alternative, to stay the litigation.
Securities
and Derivative Litigation
Leap is a nominal defendant in two shareholder derivative suits
and a consolidated securities class action lawsuit. As indicated
further below, we have reached an agreement in principle to
settle the derivative suits and have received preliminary court
approval to settle the class action.
The two shareholder derivative suits purport to assert claims on
behalf of Leap against certain of its current and former
directors and officers. One of the shareholder derivative
lawsuits was filed in the California Superior Court for the
County of San Diego on November 13, 2007 and the other
shareholder derivative lawsuit was filed in the United States
District Court for the Southern District of California on
February 7, 2008. The state action was stayed on
August 22, 2008 pending resolution of the federal action.
The plaintiff in the federal action filed an amended complaint
on September 12, 2008 asserting, among other things, claims
for alleged breach of fiduciary duty, gross mismanagement, waste
of corporate assets, unjust enrichment, and proxy violations
based on the November 9, 2007
53
announcement that we were restating certain of our financial
statements, claims alleging breach of fiduciary duty based on
the September 2007 unsolicited merger proposal from MetroPCS
Communications, Inc. and claims alleging illegal insider trading
by certain of the individual defendants. The derivative
complaints seek a judicial determination that the claims may be
asserted derivatively on behalf of Leap, and unspecified
damages, equitable
and/or
injunctive relief, imposition of a constructive trust,
disgorgement, and attorneys fees and costs. Leap and the
individual defendants filed motions to dismiss the amended
federal complaint, and on September 29, 2009, the district
court granted Leaps motion to dismiss the derivative
complaint for failure to plead that a presuit demand on
Leaps board was excused. The parties have agreed in
principle to settle the derivative suits subject to
documentation and court approval. The settlement is contemplated
to be a non-monetary settlement based upon our agreement to make
various corporate and operational changes, and to fund, through
its insurance carriers, an award of attorneys fees to
plaintiffs counsel. The parties are in the process of
documenting their agreement and preparing a motion for
preliminary court approval and a settlement fairness hearing.
Leap and certain current and former officers and directors, and
Leaps independent registered public accounting firm,
PricewaterhouseCoopers LLP, also were named as defendants in a
consolidated securities class action lawsuit filed in the United
States District Court for the Southern District of California
which consolidated several securities class action lawsuits
initially filed between September 2007 and January 2008.
Plaintiffs allege that the defendants violated
Section 10(b) of the Exchange Act and
Rule 10b-5,
and Section 20(a) of the Exchange Act. The consolidated
complaint alleges that the defendants made false and misleading
statements about Leaps internal controls, business and
financial results, and customer count metrics. The claims are
based primarily on the November 9, 2007 announcement that
we were restating certain of our financial statements and
statements made in our August 7, 2007 second quarter 2007
earnings release. The lawsuit seeks, among other relief, a
determination that the alleged claims may be asserted on a
class-wide
basis and unspecified damages and attorneys fees and
costs. On January 9, 2009, the federal court granted
defendants motions to dismiss the complaint for failure to
state a claim. On February 23, 2009, defendants were served
with an amended complaint which did not name
PricewaterhouseCoopers LLP or any of Leaps outside
directors. Leap and the remaining individual defendants moved to
dismiss the amended complaint.
The parties reached an agreement in principle to settle the
class action. The settlement is contingent upon court approval
and provides for, among other things, dismissal of the lawsuits
with prejudice, releases in favor of the defendants, and payment
to the class of $13.75 million, including the award of
attorneys fees to class plaintiffs counsel. On
February 18, 2010, the lead plaintiff filed a motion
seeking preliminary approval by the court of the settlement and
approval of a form of notice to potential settlement class
members, which was granted on March 24, 2010. The district
court set a settlement fairness hearing for October 4,
2010. Following preliminary approval, the entire settlement
amount was paid into an escrow account by our insurance carriers
pursuant to the terms of the settlement agreement.
Department
of Justice Inquiry
On January 7, 2009, we received a letter from the Civil
Division of the United States Department of Justice, or the DOJ.
In its letter, the DOJ alleges that between approximately 2002
and 2006, we failed to comply with certain federal postal
regulations that required us to update customer mailing
addresses in exchange for receiving certain bulk mailing rate
discounts. As a result, the DOJ has asserted that we violated
the False Claims Act, or FCA, and are therefore liable for
damages. On November 18, 2009, the DOJ presented us with a
calculation that single damages in this matter were
$2.7 million for the period from June 2003 through June
2006, which amount may be trebled under the FCA. The FCA also
provides for statutory penalties, which the DOJ has previously
asserted could total up to $11,000 per mailing. The DOJ had also
previously asserted as an alternative theory of liability that
we are liable on a basis of unjust enrichment for estimated
single damages.
Other
Litigation, Claims and Disputes
In addition to the matters described above, we are often
involved in certain other claims, including disputes alleging
intellectual property infringement, which arise in the ordinary
course of business or are otherwise immaterial and which seek
monetary damages and other relief. Based upon information
currently available to us,
54
none of these other claims is expected to have a material
adverse effect on our business, financial condition or results
of operations.
There have been no material changes to the Risk Factors
described under Part I Item 1A. Risk
Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2009 filed with the SEC on
March 1, 2010, other than:
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changes to the risk factor below entitled We Have Made
Significant Investment, and May Continue to Invest, in Joint
Ventures That We Do Not Control, which has been updated to
reflect developments with our Denali joint venture;
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changes to the risk factor below entitled We May Be Unable
to Obtain the Roaming Services We Need From Other Carriers to
Remain Competitive, which has been updated to reflect
additional risks related to our ability to provide roaming
services; and
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changes to the risk factor below entitled If We Are Unable
to Manage Our Planned Growth, Our Operations Could Be Adversely
Impacted, which has been updated to reflect additional
risks related to partnerships we may enter into or businesses we
may acquire.
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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 $65.4 million for the three
months ended March 31, 2010, and net losses of
$238.0 million, $143.4 million and $76.4 million
for the years ended December 31, 2009, December 31,
2008 and December 31, 2007, respectively. We may not
generate profits in the future on a consistent basis or at all.
Our strategic objectives depend on our ability to successfully
and cost-effectively operate our existing and newly launched
markets, on our ability to respond appropriately to changes in
the competitive and economic environment, and on customer
acceptance of our Cricket product offerings. We have experienced
increased expenses in connection with our launch of significant
new business expansion efforts, including activities to broaden
our product portfolio and to enhance our network coverage and
capacity. If we fail to attract additional customers for our
Cricket products and services and fail to achieve consistent
profitability in the future, 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 continue to increase our customer base over
time, providing us with increased economies of scale. Our
ability to continue to grow our customer base and achieve the
customer penetration levels we currently believe are possible in
our markets is subject to a number of risks, including, among
other things, increased competition from existing or new
competitors, higher than anticipated churn, our inability to
increase our network capacity to meet increasing customer
demand, unfavorable economic conditions (which may have a
disproportionate negative impact on portions of our customer
base), changes in the demographics of our markets, adverse
changes in the legislative and regulatory environment and other
factors that may limit our ability to grow our customer base. If
we are unable to attract and retain a growing customer base, our
current business plans and financial outlook may be harmed.
We Face
Increasing Competition Which Could Have a Material Adverse
Effect on Demand for 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,
voice-over-internet-protocol
service providers, traditional landline service providers and
cable companies. Some of
55
these competitors are able to offer bundled service offerings
which package wireless service offerings with additional service
offerings, such as landline phone service, cable or satellite
television, media and internet, that we are not be able to
duplicate at competitive prices.
Some of these competitors have greater name and brand
recognition, larger spectrum holdings, larger footprints, access
to greater amounts of capital, greater technical, sales,
marketing and distribution resources and established
relationships with a larger base of current and potential
customers. These advantages may allow our competitors to provide
service offerings with more extensive features or options than
those we currently provide, offer the latest and most popular
devices through exclusive vendor arrangements, market to broader
customer segments, offer service over larger geographic areas,
or purchase equipment, supplies, devices and services at lower
prices than we can. As device selection and pricing become
increasingly important to customers, our inability to offer
customers the latest and most popular devices as a result of
exclusive dealings between device manufacturers and our larger
competitors could put us at a significant competitive
disadvantage and make it more difficult for us to attract and
retain customers. 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,
advantages that our competitors may 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.
The competitive pressures of the wireless telecommunications
industry and the attractive growth prospects in the prepaid
segment have continued to increase and have caused a number of
our competitors to offer competitively-priced unlimited prepaid
and postpaid service offerings or increasingly large bundles of
minutes of use at increasingly lower prices, which are competing
with the predictable and unlimited Cricket Wireless service
plans. For example, AT&T, Sprint Nextel,
T-Mobile and
Verizon Wireless each offer unlimited service offerings. Sprint
Nextel also offers a competitively-priced unlimited service
offering under its Boost Unlimited and Virgin Mobile brands,
which are similar to our Cricket Wireless service.
T-Mobile
also offers an unlimited plan that is competitively priced with
our Cricket Wireless service. In addition, a number of MVNOs
offer or have recently introduced competitively-priced service
offerings. For example, Tracfone Wireless has introduced a
wireless offering under its Straight Talk brand
using Verizons wireless network. Moreover, some
competitors offer prepaid wireless plans that are being
advertised heavily to the same demographic segments we target.
These various service offerings described above have presented,
and are expected to continue to present, strong competition in
markets in which our offerings overlap.
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 wireless
licenses, which may increase the number of our competitors. The
FCC has also in recent years allowed satellite operators to use
portions of their spectrum for ancillary terrestrial use, and
also permitted the offering of broadband services over power
lines. In addition, the auction and licensing of new spectrum
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. We have recently revised a number of
our Cricket Wireless service plans to provide additional
features previously only available in our higher-priced plans
and have eliminated certain fees charged when changing service
plans. These changes, which were made in response to the
competitive and economic environment, have resulted in lower
average monthly revenue per customer. In addition, a number of
our competitors have introduced all-inclusive rate
plans which are priced to include applicable regulatory fees and
taxes. In the event that we were to transition the pricing of
our rate plans to generally include regulatory fees and taxes,
this change could further impact our revenues. The evolving
competitive landscape has negatively impacted our financial and
operating results, and we expect that it may result in more
competitive pricing, slower growth, higher costs and increased
customer turnover, as well as the possibility of requiring us to
further modify our service
56
plans, increase our device subsidies or increase our dealer
compensation in response to competition. Any of these results or
actions could have a material adverse effect on our business,
financial condition and operating results.
General
Economic Conditions May Adversely Affect Our Business, Financial
Performance or Ability to Obtain Debt or Equity Financing on
Reasonable Terms or at All.
Our business and financial performance are sensitive to changes
in general economic conditions, including changes in interest
rates, consumer credit conditions, consumer debt levels,
consumer confidence, rates of inflation (or concerns about
deflation), unemployment rates, energy costs and other
macro-economic factors. Market and economic conditions have been
unprecedented and challenging in recent years. Continued
concerns about the systemic impact of a long-term downturn, high
unemployment, high energy costs, the availability and cost of
credit and unstable housing and mortgage markets have
contributed to increased market volatility and diminished
expectations for the economy. Concern about the stability of the
financial markets and the strength of counterparties has led
many lenders and institutional investors to reduce or cease to
provide credit to businesses and consumers, and illiquid credit
markets have adversely affected the cost and availability of
credit. These factors have led to a decrease in spending by
businesses and consumers alike.
Continued market turbulence and weak economic conditions may
materially adversely affect our business and financial
performance in a number of ways. Because we do not require
customers to sign fixed-term contracts or pass a credit check,
our service is available to a broad customer base. As a result,
during general economic downturns, we may have greater
difficulty in gaining new customers within this base for our
services and existing customers may be more likely to terminate
service due to an inability to pay. For example, high
unemployment levels have recently impacted our customer base,
especially the lower-income segment of our customer base, by
decreasing their discretionary income which has resulted in
higher levels of churn. Continued recessionary conditions and
tight credit conditions may also adversely impact our vendors
and dealers, some of which have filed for or may be considering
bankruptcy, or may experience cash flow or liquidity problems,
any of which could adversely impact our ability to distribute,
market or sell our products and services. For example, in 2009,
Nortel Networks, which has provided a significant amount of our
network infrastructure, sold substantially all of its network
infrastructure business to Ericsson. Sustained difficult, or
worsening, general economic conditions could have a material
adverse effect on our business, financial condition and results
of operations.
In addition, general economic conditions have significantly
affected the ability of many companies to raise additional
funding in the capital markets. U.S. credit markets have
experienced significant dislocations and liquidity disruptions
which have caused the spreads on prospective debt financings to
widen considerably. These circumstances materially impacted
liquidity in the debt markets, making financing terms for
borrowers less attractive and resulting in the unavailability of
some forms of debt financing. Uncertainty in the credit markets
could negatively impact our ability to access additional debt
financing or to refinance existing indebtedness in the future on
favorable terms or at all. These general economic conditions,
combined with intensified competition in the wireless
telecommunications industry and other factors, have also
adversely affected the trading prices of equity securities of
many U.S. companies, including Leap, which could
significantly limit our ability to raise additional capital
through the issuance of common stock, preferred stock or other
equity securities. 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
business, financial condition and results of operations.
If We
Experience Low Rates of Customer Acquisition or High Rates of
Customer Turnover, Our Ability to Become Profitable Will
Decrease.
Our rates of customer acquisition and turnover are affected by a
number of competitive factors in addition to the macro-economic
factors described above, including the size of our calling
areas, network performance and reliability issues, our device
and service offerings (including the ability of customers to
cost-effectively roam onto other wireless networks), customer
perceptions of our services, customer care quality and wireless
number portability. 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. Managing these factors
and customers expectations is essential in attracting and
retaining customers.
57
Although we have implemented programs to attract new customers
and address customer turnover, we cannot assure you that these
programs or our strategies to address customer acquisition and
turnover will be successful. In addition, we and Denali
Operations launched a significant number of new Cricket markets
in 2008 and 2009. In newly launched markets, we expect to
initially experience a greater degree of customer turnover due
to the number of customers new to Cricket service, although we
generally expect that churn will gradually improve as the
average tenure of customers in such markets increases. 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 May Continue to Invest, in
Joint Ventures That We Do Not Control.
We own a 94.6% 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. We also own an 82.5% non-controlling
interest in Denali, an entity which acquired a wireless license
covering the upper mid-west portion of the U.S in
Auction #66 through a wholly owned subsidiary. 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 that 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 the joint venture, and may be terminated for
convenience by the controlling member. 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 these joint ventures or any
other joint venture in which we may invest 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. For example, we are
currently discussing with Denali Spectrum Manager, LLC, or DSM,
differences between us regarding the performance and financial
condition of the joint venture. The parties have entered into
agreements to waive certain obligations of Denali License during
2010 and 2011 to pay a share of our corporate and regional
overhead costs under the management services agreement between
the parties and certain royalty fees for use of our trademarks.
Differences between the parties, however, have continued.
Although we continue to engage in discussions with DSM in hopes
of resolving these differences, we may not be successful in
doing so. If we are not successful in resolving these matters,
we may seek to purchase all or a portion of DSMs interest
in the joint venture, which could represent a significant cash
outflow. Alternatively, as the controlling member of Denali, DSM
could seek to terminate the management services agreement
and/or
trademark license between Denali and Cricket and obtain
management services from a third party, or it could take other
actions that we believe could negatively impact Denalis
business. DSM could also attempt to sell or dispose of all or a
portion of Denalis wireless license or other assets,
although we would have the right under agreements with Denali to
consent to any such sale or disposal. Any transition to another
party of the services we currently provide to Denali, any sale
or disposal of all or a portion of Denalis wireless
license or other assets, or any other material operational or
financial disruption to the joint venture could significantly
disrupt its business, negatively impact its financial and
operational performance and result in significant expenses for
our business. As a result, any of these actions could have a
material adverse effect on our financial condition and results
of operations.
If any of the members of our joint ventures files for bankruptcy
or otherwise fails to perform its obligations or does not manage
the joint venture effectively, or if the joint venture files for
bankruptcy, we may lose our equity investment in, and any
present or future opportunity to acquire the assets (including
wireless licenses) of, such entity (although a substantial
portion of our investment in Denali consists of secured debt).
The FCC has implemented rule changes aimed at addressing alleged
abuses of its designated entity program. While we do not believe
that these recent rule changes materially affect our joint
ventures with LCW Wireless and
58
Denali, the scope and applicability of these rule changes to
these designated entity structures remain in flux, and the
changes remain subject to administrative and judicial review. On
March 26, 2009, the United States Court of Appeals for the
District of Columbia Circuit rejected one of the pending
judicial challenges to the designated entity rules. Another
appeal of these rules remains pending in the United States Court
of Appeals for the Third Circuit and seeks to overturn the
results of the AWS and 700 MHz auctions. In addition, third
parties and the federal government have challenged certain
designated entity structures alleging violations of federal law
and seeking monetary damages. We cannot predict the degree to
which rule changes, federal court litigation surrounding
designated entity structures, increased regulatory scrutiny or
third party or government lawsuits will affect our current or
future business ventures, including our arrangements with
respect to LCW Wireless and Denali, or our or Denalis
current license holdings or our participation in future FCC
spectrum auctions.
We May Be
Unable to Obtain the Roaming Services We Need From Other
Carriers to Remain Competitive.
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 offer. The networks we
operate do not, by themselves, provide national coverage and we
must pay fees to other carriers who provide roaming services to
us. We currently rely on roaming agreements with several
carriers for the majority of our roaming services. Our 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 has adopted a report and order and a further order on
reconsideration clarifying that commercial mobile radio service
providers are required to provide automatic roaming for voice
and SMS text messaging services on just, reasonable and
non-discriminatory terms. The FCC orders, however, do not
address roaming for data services, which are the subject of a
further pending proceeding. The orders also do not provide or
mandate any specific mechanism for determining the
reasonableness of roaming rates for voice or SMS text messaging
services and require that roaming complaints be resolved on a
case-by-case basis, based on a non-exclusive list of factors
that can be taken into account in determining the reasonableness
of particular conduct or rates.
In light of the current FCC orders, 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, and we may be unable to secure
reasonable 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 in turn could materially adversely affect our
business, financial condition and results of operations.
We
Restated Certain of Our Prior Consolidated Financial Statements,
Which 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 December 31, 2006, filed
with the SEC on December 26, 2007, we 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 restated our
condensed consolidated financial statements as of and for the
quarterly periods ended June 30, 2007 and
59
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 and
recognition of certain service revenues and operating expenses,
(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 became 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 addition, two shareholder
derivative actions are currently pending, and we are party to a
consolidated securities class action lawsuit. As described in
Part II Item 1. Legal
Proceedings of this report, the parties have reached an
agreement in principle to settle the derivative suits and have
received preliminary court approval to settle the class action.
If these matters do not settle on terms we consider reasonable,
we could be required to pay substantial damages or settlement
costs, which could materially adversely affect our business,
financial condition and results of operations.
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, each year 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.
In our quarterly and annual reports (as amended) for the periods
ended from December 31, 2006 through September 30,
2008, we reported a material weakness in our internal control
over financial reporting which 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. As described in
Part II Item 9A. Controls and
Procedures of our Annual Report on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
February 27, 2009, we took a number of actions to remediate
this material weakness, which included reviewing and designing
enhancements to certain of our systems and processes relating to
revenue recognition and user acceptance testing and hiring and
promoting additional accounting personnel with the appropriate
skills, training and experience in these areas. Based upon the
remediation actions described in Part II
Item 9A. Controls and Procedures of our Annual Report
on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
February 27, 2009, management concluded that the material
weakness described above was remediated as of December 31,
2008.
In addition, 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, 2006. 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 took appropriate actions to remediate the
control deficiencies we 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 Leap common
stock could decline significantly, we may be unable to obtain
additional financing to operate and expand our business, and our
business and financial condition could be harmed.
Our
Primary Business Strategy May Not Succeed in the Long
Term.
A major element of our business strategy is to offer consumers
unlimited wireless services for a flat rate without requiring
them to enter into a fixed-term contract or pass a credit check.
In 2010, we substantially expanded the coverage of the unlimited
services available to our customers, and our Cricket Wireless
and most Cricket PAYGo service plans now provide unlimited voice
services across a national footprint covering 277 million
POPs.
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We also offer customers purchasing Cricket Wireless and most
Cricket PAYGo service plans optional roaming services in most
areas of the country where we do not provide unlimited voice
service. This strategy may not prove to be successful in the
long term. From time to time, we also evaluate our product and
service offerings and the demands of our target customers and
may modify, change, adjust or discontinue our product and
service offerings or offer new products and services on a
permanent, trial or promotional basis. We cannot assure you that
these product or service offerings will be successful or prove
to be profitable.
We Expect
to Incur Higher Operating Expenses in Recently Launched Markets,
and We Could Incur Substantial Costs if We Were to Elect to
Build Out Additional New Markets.
During 2009, we and Denali Operations launched new markets in
Chicago, Philadelphia, Washington, D.C., Baltimore and Lake
Charles covering approximately 24.2 million additional
POPs. Our strategic objectives depend on our ability to
successfully and cost-effectively operate these recently
launched markets as well as our more mature markets and on
customer acceptance of our Cricket product offerings. We
generally expect to incur higher operating expenses as our
existing business grows and during the first year after we
launch service in new markets. If we fail to achieve consistent
profitability in these markets, that failure could have a
material adverse effect on our business, financial condition and
results of operations.
In addition, we have identified new markets covering
approximately 16 million additional POPs that we could
elect to launch with Cricket service in the future using our
wireless licenses, although we have not established a timeline
for any such build-out or launch. Large-scale construction
projects for the build-out of any new markets would require
significant capital expenditures and could suffer cost overruns.
Significant capital expenditures and increased operating
expenses, including in connection with the build-out and launch
of new markets, decrease OIBDA and free cash flow for the
periods in which we incur such costs. The build-out and
operation of any new markets could also 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,
difficulties or delays in clearing U.S. government
and/or
incumbent commercial licensees from spectrum we intend to
utilize, our relationships with our joint venture partners, and
the timely performance by third parties of their contractual
obligations to construct portions of the networks. In addition,
to the extent that we or Denali Operations are operating on AWS
spectrum and a federal government agency believes that our
planned or ongoing operations interfere with its current uses,
we may be required to immediately cease using the spectrum in
that particular market for a period of time until the
interference is resolved. Any temporary or extended shutdown of
one of our or Denali Operations wireless networks in a
launched market could materially and adversely affect our
competitive position and results of operations.
Any failure to complete the build-out of any new markets that we
elect to launch with Cricket service in the future on budget or
on time could delay the implementation of our clustering and
expansion strategies.
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. During 2009, we
and Denali Operations launched new markets in Chicago,
Philadelphia, Washington, D.C., Baltimore and Lake Charles
covering approximately 24.2 million additional POPs. The
management of our growth requires, among other things, continued
development of our financial and management controls and
management information systems, stringent control of costs,
diligent management of our network infrastructure and its
growth, increased spending associated with marketing activities
and acquisition of new customers, the ability to attract and
retain qualified management personnel and the training of new
personnel. Furthermore, the implementation of new or expanded
systems or platforms to accommodate our growth, and 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 effectively manage launched markets,
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.
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In addition, our rapid growth and the recent launch of new
markets requires continued management and control of our device
inventories. From time to time, we have experienced inventory
shortages, most notably with certain of our strongest-selling
devices, including shortages we experienced during the second
quarter of 2009. While we intend to implement a new inventory
management system in 2010 and have undertaken other efforts to
address inventory forecasting, there can be no assurance that we
will not experience inventory shortages in the future. Any
failure to effectively manage and control our device inventories
could adversely affect our ability to gain new customers and
have a material adverse effect on our business, financial
condition and results of operations.
In addition to growing to our business through the operation of
our existing and new markets, we may also expand our business by
entering into partnerships with others or acquiring other
wireless communications companies or complementary businesses.
For example, we recently entered into an asset purchase and
contribution agreement with various entities doing business as
Pocket Communications pursuant to which the parties agreed to
contribute substantially all of their wireless spectrum and
operating assets in South Texas to a joint venture that we will
control. The closing of the transaction is subject to customary
closing conditions, including the consent of the FCC. Entering
into partnerships or acquiring other companies or businesses may
create numerous possible risks and uncertainties, including
unanticipated costs, expenses and liabilities, possible
difficulties associated with the integration of the
parties various operations and the potential diversion of
managements time and attention from our existing
operations. Our failure to effectively manage and integrate new
partnerships that we may enter into or companies or businesses
that we could acquire 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 March 31, 2010, our total outstanding
indebtedness was $2,742 million, including
$1,100 million of senior secured notes due 2016 and
$1,650 million in unsecured senior indebtedness, which
comprised $1,100 million of senior notes due 2014,
$250 million of convertible senior notes due 2014 and
$300 million of senior notes due 2015.
Our significant indebtedness could have material consequences.
For example, it could:
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make it more difficult for us to service all of our debt
obligations;
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increase our vulnerability to general adverse economic and
industry conditions;
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impair our ability to obtain additional financing in the future
for working capital needs, capital expenditures, network
build-out and other activities, including acquisitions and
general corporate purposes;
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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;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; and
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place us at a disadvantage compared to our competitors that have
less indebtedness.
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Any of these risks could impact our ability to fund our
operations or limit our ability to expand our business, which
could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, any
significant capital expenditures or increased operating expenses
associated with the launch of new product offerings or operating
markets will decrease OIBDA and free cash flow for the periods
in which we incur such costs, increasing the risk that we may
not be able to service our indebtedness.
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Despite
Current Indebtedness Levels, We Are Permitted to Incur
Additional Indebtedness. This Could Further Increase the Risks
Associated With Our Leverage.
The terms of the indentures governing Crickets secured and
unsecured senior notes permit us, subject to specified
limitations, to incur additional indebtedness, including secured
indebtedness. The indenture governing Leaps convertible
senior notes does not limit our ability to incur debt.
We may incur additional indebtedness in the future, as market
conditions permit, to enhance our liquidity and to provide us
with additional flexibility to pursue business expansion
efforts, which could consist of debt financing from the public
and/or
private capital markets. To provide flexibility with respect to
any future capital raising alternatives, we have filed a
universal shelf registration statement with the SEC to register
various debt, equity and other securities, including debt
securities, common stock, preferred stock, depository shares,
rights and warrants. The securities under this registration
statement may be offered from time to time, separately or
together, directly by us or through underwriters, at amounts,
prices, interest rates and other terms to be determined at the
time of any offering.
If new indebtedness is added to our current levels of
indebtedness, the related risks that we now face could intensify.
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 financing will be available to us, in
an amount sufficient to enable us to repay or service our
indebtedness or to fund our other liquidity needs or at all. If
the cash flow from our operating activities is insufficient for
these purposes, we may take actions, such as delaying or
reducing capital expenditures, 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 or Our
Joint Ventures May Be Unable to Refinance Our
Indebtedness.
We or our joint ventures may need to refinance all or a portion
of our indebtedness before maturity, including indebtedness
under the indentures governing our secured and unsecured senior
notes and convertible senior notes. Our $1,100 million of
9.375% unsecured senior notes and our $250 million of
unsecured convertible senior notes are due in 2014, our
$300 million of 10.0% unsecured senior notes is due in 2015
and our $1,100 million of 7.75% senior secured notes
is due in 2016. Outstanding borrowings under LCW
Operations term loans must be repaid in quarterly
installments (which commenced in June 2008), with an aggregate
final payment of $10.1 million due in March 2011. There can
be no assurance that we or our joint ventures will be able to
obtain sufficient funds to enable us to repay or refinance any
of our indebtedness on commercially reasonable terms or at all.
Covenants
in Our Indentures and Other Credit Agreements or Indentures That
We May Enter Into in the Future May Limit Our Ability to Operate
Our Business.
The indentures governing Crickets secured and unsecured
senior notes contain covenants that restrict the ability of
Leap, Cricket and the subsidiary guarantor to make distributions
or other payments to our investors or creditors until we satisfy
certain financial tests or other criteria. In addition, these
indentures include covenants restricting, among other things,
the ability of Leap, Cricket and their restricted subsidiaries
to:
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incur additional indebtedness;
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create liens or other encumbrances;
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place limitations on distributions from restricted subsidiaries;
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pay dividends, make investments, prepay subordinated
indebtedness or make other restricted payments;
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issue or sell capital stock of restricted subsidiaries;
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issue guarantees;
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sell or otherwise dispose of all or substantially all of our
assets;
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enter into transactions with affiliates; and
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make acquisitions or merge or consolidate with another entity.
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The restrictions in the indentures governing Crickets
secured and unsecured senior notes 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.
Under the indentures governing our secured and unsecured senior
notes and convertible senior notes, if certain change of
control events occur, each holder of notes may require us
to repurchase all of such holders notes at a purchase
price equal to 101% of the principal amount of secured or
unsecured senior notes, or 100% of the principal amount of
convertible senior notes, plus accrued and unpaid interest.
If we default under any of the indentures governing our secured
or unsecured senior notes or convertible senior notes 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 the indenture governing Crickets unsecured
senior notes due 2014. We cannot assure you that we will be able
to obtain a waiver should a default occur in the future. Any
acceleration of amounts due would have a material adverse effect
on our liquidity and financial condition, and we cannot assure
you that we would have sufficient funds to repay all of the
outstanding amounts under the indentures governing our secured
and unsecured senior notes and convertible senior notes.
Our
Ability to Use Net Operating Loss Carryforwards to Reduce Future
Tax Payments Could be Negatively Impacted if There is an
Ownership Change as Defined Under Section 382
of the Internal Revenue Code.
We have substantial federal and state NOLs for income tax
purposes. Under the Internal Revenue Code, subject to certain
requirements, we may carry forward our federal NOLs
for up to a
20-year
period to offset future taxable income and reduce our income tax
liability. For state income tax purposes, the NOL carryforward
period ranges from five to 20 years. At March 31,
2010, we estimated that we had federal NOL carryforwards of
approximately $1.6 billion (which begin to expire in 2022),
and state NOL carryforwards of approximately $1.7 billion
($21.9 million of which will expire at the end of 2010).
While these NOL carryforwards have a potential value of
approximately $610.0 million in cash tax savings, there is
no assurance we will be able to realize such tax savings.
If we were to experience an ownership change, as
defined in Section 382 of the Internal Revenue Code and
similar state provisions, at a time when our market
capitalization was below a certain level, our ability to utilize
these NOLs to offset future taxable income could be
significantly limited. In general terms, a change in ownership
can occur whenever there is a shift in the ownership of a
company by more than 50 percentage points by one or more
5% stockholders within a three-year period.
The determination of whether an ownership change has occurred is
complex and requires significant judgment. If an ownership
change for purposes of Section 382 were to occur, it could
significantly limit the amount of NOL carryforwards that we
could utilize on an annual basis, thus accelerating cash tax
payments we would have to make and possibly causing these NOLs
to expire before we could fully utilize them. As a result, any
restriction on our ability to utilize these NOL carryforwards
could have a material impact on our future cash flows.
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A
Significant Portion of Our Assets Consists of Goodwill, Wireless
Licenses and Other Intangible Assets.
As of March 31, 2010, 45.2% of our assets consisted of
goodwill, wireless licenses and other intangible assets. 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 readily
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.
The
Wireless Industry is Experiencing Rapid Technological Change,
Which May Require Us to Significantly Increase Capital
Investment, and We May Lose Customers If We Fail to Keep Up With
These Changes.
The wireless communications industry continues to experience
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. Our continued success will depend, in part, on our
ability to anticipate or adapt to technological changes and to
offer, on a timely basis, services that meet customer demands.
In the future, competitors may seek to provide competing
wireless telecommunications service through the use of
developing 4G technologies, such as WiMax and LTE. We are
currently conducting technical trials of LTE technology. We
cannot predict, however, which of many possible future
technologies, products or services will be important to maintain
our competitive position or what expenditures we will be
required to make in order to develop and provide these
technologies, products and services. 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. In addition, we may
be required to acquire additional spectrum to deploy these new
technologies, which we cannot guarantee would be available to us
at a reasonable cost, on a timely basis or at all. There are
also risks that current or future versions of the wireless
technologies and evolutionary path that we have selected or may
select may not be demanded by customers or provide the
advantages that we expect. 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 widespread demand for advanced data
services will develop at a price level that will allow us to
earn a reasonable return on our investment. In addition, there
are risks that other wireless carriers on whose networks our
customers currently roam may change their technology to other
technologies that are incompatible with ours. As a result, the
ability of our customers to roam on such carriers wireless
networks could be adversely affected. If these risks
materialize, our business, financial condition or results of
operations could be materially adversely affected. Further, we
may not be able to negotiate cost-effective data roaming
agreements on 4G or other data networks, and we are not able to
assure you that customer devices that operate on 4G or other
data networks will be available at costs that will make them
attractive to customers.
In addition, CDMA based infrastructure networks serve a
relatively small minority of wireless users worldwide and could
become less popular in the future, which could raise the cost to
us of network equipment and devices that use that technology
relative to the cost of devices and network equipment that
utilize other technologies, or could result in advanced wireless
devices becoming available to us later than devices available
for GSM-based carriers.
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.
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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. The loss of
key individuals in the future may have a material adverse impact
on our ability to effectively manage and operate our business.
In addition, we may have difficulty attracting and retaining key
personnel in future periods, particularly if we were to
experience poor operating or financial performance.
Risks
Associated With Wireless Devices Could Pose Product Liability,
Health and Safety Risks That Could Adversely Affect Our
Business.
We do not manufacture devices 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 devices to meet certain governmentally imposed
safety criteria. However, even if the devices 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 devices 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, anti-lock brakes, hearing aids and
other medical devices. The media has also reported incidents of
handset battery malfunction, including reports of batteries that
have overheated. Malfunctions have caused at least one major
handset manufacturer to recall certain batteries used in its
handsets, including batteries in a handset sold by Cricket and
other wireless providers.
Concerns over possible health and safety risks associated with
radio frequency emissions and defective products may discourage
the use of wireless handsets, which could decrease demand for
our services, or result in regulatory restrictions or increased
requirements on the location and operation of cell sites, which
could increase our operating expenses. Concerns over possible
safety risks could decrease the demand for our services. For
example, in 2008, a technical defect was discovered in one of
our manufacturers handsets which appeared to prevent a
portion of 911 calls from being heard by the operator. After
learning of the defect, we instructed our retail locations to
temporarily cease selling the handsets, notified our customers
of the matter and directed them to bring their handsets into our
retail locations to receive correcting software. If one or more
Cricket customers were harmed by a defective product provided to
us by a 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 devices while operating vehicles or equipment. 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 Products or
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, service providers or third-party retailers fail to
comply with their contracts, fail to meet our performance
expectations or refuse or are unable to supply or provide
services to us in the future, our business could be severely
disrupted. Generally, there are multiple sources for the types
of products and services we purchase or use. However, some
suppliers and contractors are the
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exclusive sources of specific products and services that we rely
upon for billing, customer care, sales, accounting and other
areas in our business. For example, in December 2008 we entered
into a long-term, exclusive services agreement with Convergys
Corporation for the implementation and ongoing management of a
new billing system. We also use a limited number of vendors to
provide payment processing services, and in a significant number
of our markets, the majority of these services may be provided
by a single vendor. In addition, a limited number of vendors
currently provide a majority of our voice and data
communications transport services. Because of the costs and time
lags that can be associated with transitioning from one supplier
or service provider to another, our business could be
substantially disrupted if we were required to replace the
products or services of one or more major suppliers or service
providers with products or services from another source,
especially if the replacement became necessary on short notice.
Any such disruption could have a material adverse effect on our
business, results of operations and financial condition.
System
Failures, Security Breaches, Business Disruptions and
Unauthorized Use or Interference with our Network or other
Systems 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 surges or outages, natural disasters, fires, human error,
terrorism, intentional wrongdoing or similar events.
Unanticipated problems at our facilities or with our technical
infrastructure, system or equipment failures, hardware or
software failures or defects, computer viruses or hacker attacks
could affect the quality of our services and cause network
service interruptions. Unauthorized access to or use of customer
or account information, including credit card or other personal
data, could result in harm to our customers and legal actions
against us, and could damage our reputation. In addition,
earthquakes, floods, hurricanes, fires and other unforeseen
natural disasters or events could materially disrupt our
business operations or the provision of Cricket service in one
or more markets. For example, during the third quarter of 2008,
our customer acquisitions, cost of service and revenues in
certain markets were adversely affected by Hurricane Ike and
related weather systems. Any costs we incur to restore, repair
or replace our network or technical infrastructure, and any
costs associated with detecting, monitoring or reducing the
incidence of unauthorized use, may be substantial and increase
our cost of providing service. Any failure in or interruption of
systems that we or third parties maintain to support ancillary
functions, such as billing, point of sale, inventory management,
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,
financial condition or results of operations.
We Are in
the Process of Upgrading a Number of Significant Business
Systems, including our Customer Billing System, and Any
Unanticipated Difficulties, Delays or Interruptions with the
Transition Could Negatively Impact Our Business.
We are in the process of upgrading a number of our significant,
internal business systems, including our customer billing
system. In December 2008, we entered into a long-term, exclusive
services agreement with Convergys for the implementation and
ongoing management of the new billing system. To help facilitate
the transition of customer billing from our previous vendor,
VeriSign, Inc., to Convergys, we acquired VeriSigns
billing system software and simultaneously entered into a
transition services agreement to enable Convergys to provide us
with billing services using the VeriSign software we acquired
until the conversion to the new system is complete. In addition
to the new billing system, we also intend to implement a new
inventory management system and new
point-of-sale
system.
We cannot assure you that we will not experience difficulties,
delays or interruptions while we implement and transition to
these new systems. At times during the transition of our billing
system, we will be limited in our ability to modify our current
product and service offerings or to offer new products and
services. In addition, the transition of these systems may not
progress according to our current schedule and could suffer cost
overruns. Significant unexpected difficulties in transitioning
our billing, inventory,
point-of-sale
or other systems could materially impact
67
our ability to timely and accurately record, process and report
information that is 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, financial condition or results of operations.
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
us with any competitive advantages.
In addition, 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 have asserted and may in the future assert
infringement claims against us or our suppliers 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
Part II Item 1. Legal
Proceedings Patent Litigation of this report
for a description of certain patent infringement lawsuits that
have been brought against us. Due in part to the growth and
expansion of our business operations, we have become subject to
increased amounts of litigation, including disputes alleging
patent infringement. If plaintiffs in any patent litigation
matters brought against us were to prevail, we could be required
to pay substantial damages or settlement costs, which could have
a material adverse effect on our business, financial condition
and results of operations.
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 help protect us against possible infringement claims.
However, depending on the nature and scope of a possible claim,
we may not be entitled to seek indemnification from the
manufacturer, vendor or supplier under the terms of the
agreement. In addition, to the extent that we may be entitled to
seek indemnification under the terms of an agreement, we cannot
guarantee that the financial condition of an indemnifying party
will be sufficient to protect us against all losses associated
with infringement claims or that we would be fully indemnified
against all possible losses associated with a possible claim. In
addition, 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, which could have the effect of slowing or limiting our
ability to introduce products and services 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 is valid or successful, it could materially adversely
affect our business, financial condition or results of
operations by diverting management attention, involving us in
costly and time-consuming litigation, requiring us to enter into
royalty or licensing agreements (which may not be available on
acceptable terms, or at all) or requiring us to redesign our
business operations or systems to avoid
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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.
Action by
Congress or Government Agencies May Increase Our Costs of
Providing Service or Require Us to Change Our
Services.
The FCC regulates the licensing, construction, modification,
operation, ownership, sale and interconnection of wireless
communications systems, as do some state and local regulatory
agencies. We cannot assure you that the FCC or any state or
local agencies having jurisdiction over our business will not
adopt regulations or take other enforcement or other actions
that would adversely affect our business, impose new costs or
require changes in current or planned operations. In 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.
We also cannot assure you that Congress will not amend the
Communications Act, from which the FCC obtains its authority, or
enact legislation in a manner that could be adverse to us. For
example, the FCC has 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. The scope and applicability of these rule changes to
these designated entity structures remain in flux, and the
changes remain subject to administrative and judicial review. In
March 2009, the United States Court of Appeals for the District
of Columbia Circuit rejected one of the pending judicial
challenges to the designated entity rules, and another appeal of
these rules remains pending in the United States Court of
Appeals for the Third Circuit that seeks to overturn the results
of the AWS and 700 MHz auctions. In addition, third parties
and the federal government have challenged certain designated
entity structures alleging violations of federal law and seeking
monetary damages. We cannot predict the degree to which rule
changes, judicial review of the designated entity rules,
increased regulatory scrutiny that may follow from these
proceedings or third party or government lawsuits will affect
our current or future business ventures, licenses acquired in
the challenged auctions, or our participation in future FCC
spectrum auctions.
The DMCA prohibits the circumvention of technological measures
employed to protect a copyrighted work, or access control.
However, under the DMCA, the Copyright Office of the Library of
Congress, or the Copyright Office, has the authority to exempt
for three years certain activities from copyright liability that
otherwise might be prohibited by that statute. In November 2006,
the Copyright Office granted an exemption to the DMCA to allow
circumvention of software locks and other firmware that prohibit
a wireless device from connecting to a wireless network when
such circumvention is accomplished for the sole purpose of
lawfully connecting the wireless device to another wireless
telephone network. This exemption was due to expire on
October 27, 2009 and has been temporarily extended. The
DMCA copyright exemption facilitates our current practice of
allowing customers to bring in unlocked, or
reflashed, phones that they already own and may have
used with another wireless carrier, and activate them on our
network. We and other carriers have asked the Copyright Office
to extend the current or substantially similar exemption for
another three-year period. However, we are unable to predict the
outcome of the Copyright Offices determination to continue
the exemption for this time period or the effect that a
Copyright Office decision not to extend the exemption might have
on our business. To the extent that the Copyright Office
determines not to extend this exemption for an extended period
of time and this prevents us from activating
reflashed devices on our network, this could have a
material adverse impact on our business, financial condition and
results of operations.
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
69
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, which would have a material adverse effect on our
business, financial condition and results of operations.
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 cannot assure you that we would be able
to obtain such a ruling or that any other actions we may take
would be successful.
We also are subject, or potentially subject, to numerous
additional rules and requirements, including universal service
obligations; number portability requirements; number pooling
rules; rules governing billing, subscriber privacy and customer
proprietary network information; 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. There also pending proceedings exploring the imposition
of various types of nondiscrimination, open access and broadband
management obligations on our devices and networks; the
prohibition of device exclusivity; the possible re-imposition of
bright-line spectrum aggregation requirements; further
regulation of special access used for wireless backhaul
services; and the effects of the siting of communications towers
on migratory birds, among others. Some of these requirements and
pending proceedings (of which the foregoing examples are not an
exhaustive list) pose technical and operational challenges to
which we, and the industry as a whole, have not yet developed
clear solutions. These requirements generally are 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.
Our operations are subject to various other laws and
regulations, including those regulations promulgated by the
Federal Trade Commission, the Federal Aviation Administration,
the Environmental Protection Agency, the Occupational Safety and
Health Administration, other federal agencies 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, legislation or 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 or Wireless Broadband Usage Exceeds Our Expectations, Our
Costs of Providing Service Could Increase, Which Could Have a
Material Adverse Effect on Our Operating Expenses.
Cricket Wireless customers generally use their handsets for
voice calls for an average of approximately 1,500 minutes per
month, and some markets experience substantially higher call
volumes. Our Cricket Wireless service plans bundle certain
features, long distance and unlimited service for a fixed
monthly fee to more effectively compete with other
telecommunications providers. We also offer Cricket Broadband,
our unlimited mobile broadband service, and Cricket PAYGo, a
pay-as-you-go unlimited prepaid wireless service.
If customers exceed expected usage for our voice or mobile
broadband services, 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
rates of usage of voice and mobile broadband services, and we
consistently assess and try to implement technological
improvements to increase the efficiency of our wireless
spectrum. We currently manage our network and users of our
Cricket Broadband service by limiting throughput speeds if their
usage adversely impacts our network or service levels or if
usage exceeds certain thresholds. However, if future wireless
use by Cricket customers exceeds the capacity of our network,
service quality may suffer. We may be forced to raise the price
of our voice or mobile broadband services to reduce volume,
further limit data quantities or speeds, otherwise limit the
number of new customers, acquire additional spectrum, or incur
substantial capital expenditures to improve network capacity or
quality.
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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 rate,
our customers average minutes of use per month is
substantially above U.S. averages. In addition, customer
usage of our Cricket Broadband service has been significant. We
intend to meet demand for our wireless services 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. For example, Denali Operations currently operates on
10 MHz of spectrum in its newly launched Chicago market. In
the future, we may be required to acquire additional spectrum in
this and other of our markets to satisfy increasing demand
(especially for data services) or to deploy new technologies,
such as WiMax or LTE. In addition, we also may 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. In addition, the FCC may
impose conditions on the use of new wireless broadband mobile
spectrum, such as heightened build-out requirements or open
access requirements, that may make it less attractive or
economical for us. If such additional spectrum is not available
to us when required on reasonable terms or at a reasonable cost,
our business, financial condition and results of operations
could be materially 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 Personal Communications Services, or
PCS, wireless licenses in 2006. The FCC will award 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. Historically, the
FCC has approved our license renewal applications. 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.
In addition, if we fail to timely file to renew any wireless
license, or fail to meet any regulatory requirements for
renewal, including construction and substantial service
requirements, we could be denied a license renewal. Many of our
wireless licenses are subject to interim or final construction
requirements and there is no guarantee that the FCC will find
our construction, or the construction of prior licensees,
sufficient to meet the build-out or renewal requirements. 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.
If any of our wireless licenses were to be revoked or not
renewed upon expiration, we would not be permitted to provide
services under that license, which could have a material adverse
effect on our business, results of operations and financial
condition.
Future
Declines in the Fair Value of Our Wireless Licenses Could Result
in Future Impairment Charges.
As of March 31, 2010, the carrying value of our wireless
licenses and those of Denali License Sub and LCW License was
approximately $1.9 billion. During the years ended
December 31, 2009, 2008 and 2007, we recorded impairment
charges of $0.6 million, $0.2 million and
$1.0 million, respectively.
The market values of wireless licenses have varied over the last
several years, and may vary significantly in the future.
Valuation swings could occur for a variety of reasons relating
to supply and demand, including:
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consolidation in the wireless industry allows or requires
carriers to sell significant portions of their wireless spectrum
holdings;
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a sudden large sale of spectrum by one or more wireless
providers occurs; or
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market prices decline as a result of the sale prices in FCC
auctions.
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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, during recent years, the FCC auctioned
additional spectrum in the 1700 MHz to 2100 MHz band
in Auction #66 and the 700 MHz band in
Auction #73, 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 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 or Financial Performance Could Result in an
Impairment of Our
Indefinite-Lived
Assets, Including Goodwill.
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 also
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. General
economic conditions in the U.S. have recently adversely
impacted the trading prices of securities of many
U.S. companies, including Leap, due to concerns regarding
recessionary economic conditions, tighter credit conditions, the
subprime lending and financial crisis, volatile energy costs, a
substantial slowdown in economic activity, decreased consumer
confidence and other factors. If our projected financial or
operating performance were to be adversely affected due to
significant adverse changes in legal factors or in our business
climate, adverse action or assessment by a regulator,
unanticipated competition, loss of key personnel or likely sale
or disposal of all or a significant portion of a reporting unit,
this could constitute a triggering event which would require us
to perform an interim goodwill impairment test prior to our next
annual impairment test in the third quarter of 2010. If the
first step of the interim impairment test were to indicate that
a potential impairment existed, we would be required to perform
the second step of the goodwill impairment test, which would
require us to determine the fair value of our net assets and
could require us to recognize a material non-cash impairment
charge that could reduce all or a portion of the carrying value
of our goodwill of $430.1 million. Any significant
reduction in the carrying value of our goodwill, wireless
licenses
and/or our
long-lived assets could have a material adverse effect on our
operating results.
We May
Incur Higher Than Anticipated Intercarrier Compensation
Costs.
When our customers use our service to call customers of local
exchange carriers, we are required under the current
intercarrier compensation scheme to pay the carrier that serves
the called party, and any intermediary or transit carrier, for
the use of their networks. 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 local
exchange carriers have claimed a right to unilaterally impose
what we believe to be unreasonably high charges on us. Some of
these carriers have threatened to pursue, have initiated, or may
in the future initiate, claims against us to recover these
charges, and the outcome of any such claims is uncertain. The
FCC is actively considering possible regulatory approaches to
address this situation but we cannot assure you that any FCC
action will be beneficial to us. The enactment of adverse FCC
rules, regulations or decisions or any FCC inaction could result
in carriers successfully collecting higher intercarrier fees
from us, which could materially adversely affect our business,
financial condition and operating results.
More broadly, the FCC is actively considering whether a unified
intercarrier compensation regime can or should be established
for all traffic exchanged between all carriers, including
commercial mobile radio services
72
carriers. There are also pending appeals of various substantive
and procedural aspects of the intercarrier compensation regime
in the courts, at the FCC and before state regulatory bodies.
New or modified intercarrier compensation rules, if adopted, may
increase the charges we are required to pay other carriers for
terminating calls or transiting calls over their networks,
increase the costs of, or make it more difficult to negotiate,
new agreements with carriers, decrease the amount of revenue we
receive for terminating calls from other carriers on our
network, or result in significant costs to us for past and
future termination charges. Any of these changes could have a
material adverse effect on our business, financial condition and
operating results.
We resell third party long distance services in connection with
our offering of unlimited international long distance service.
The charges for these services may be subject to change by the
terminating or interconnecting carrier, or by the regulatory
body having jurisdiction in the applicable foreign country. If
the charges are modified, the terminating or interconnecting
carrier may attempt to assess such charges retroactively on us
or our third party international long distance provider. If such
charges are substantial, or we cease providing service to the
foreign destination, prospective customers may elect not to use
our service and current customers may choose to terminate
service. Such events could limit our ability to grow our
customer base, which could have a material adverse effect on our
business, financial condition and operating results.
If We
Experience High Rates of Credit Card, Subscription or Dealer
Fraud, Our Ability to Generate Cash Flow Will
Decrease.
Our operating costs could increase substantially as a result of
fraud, including 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, 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 Leap 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 continue
to be, subject to wide fluctuations. Factors affecting the
trading price of Leap common stock may include, among other
things:
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variations in our operating results or those of our competitors;
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announcements of technological innovations, new services or
service enhancements, strategic alliances or significant
agreements by us or by our competitors;
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entry of new competitors into our markets, changes in product
and service offerings by us or our competitors, or changes in
the prices charged for product and service offerings by us or
our competitors;
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significant developments with respect to intellectual property,
securities or related litigation;
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announcements of and bidding in auctions for new spectrum;
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recruitment or departure of key personnel;
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changes in the estimates of our operating results or changes in
recommendations by any securities analysts that elect to follow
Leap common stock;
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any default under any of the indentures governing our secured or
unsecured senior notes or convertible senior notes because of a
covenant breach or otherwise;
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rumors or speculation in the marketplace regarding acquisitions
or consolidation in our industry, including regarding
transactions involving Leap; and
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market conditions in our industry and the economy as a whole.
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In addition, general economic conditions in the U.S. in
recent years adversely impacted the trading prices of securities
of many U.S. companies, including Leap, due to concerns
regarding recessionary economic conditions, tighter credit
conditions, the subprime lending and financial crisis, volatile
energy costs, a substantial slowdown in economic activity,
decreased consumer confidence and other factors. The trading
price of Leaps common stock has also been impacted by
increased competition in prepaid offerings by wireless
companies. The trading price of Leap common stock may continue
to be adversely affected if investors have concerns that our
business, financial condition or results of operations will be
negatively impacted by these negative general economic
conditions or increased competition.
We Could
Elect to Raise Additional Equity Capital Which Could Dilute
Existing Stockholders.
During the second quarter of 2009 we sold 7,000,000 shares
of Leap common stock in an underwritten public offering. We
could raise additional capital in the future, as market
conditions permit, to enhance our liquidity and to provide us
with additional flexibility to pursue business expansion
efforts. Any additional capital we could raise could be
significant and could consist of debt, convertible debt or
equity financing from the public
and/or
private capital markets. To provide flexibility with respect to
any future capital raising alternatives, we have filed a
universal shelf registration statement with the SEC to register
various debt, equity and other securities, including debt
securities, common stock, preferred stock, depository shares,
rights and warrants. The securities under this registration
statement may be offered from time to time, separately or
together, directly by us or through underwriters, at amounts,
prices, interest rates and other terms to be determined at the
time of any offering. To the extent that we were to elect to
raise equity capital, this financing may not be available in
sufficient amounts or on terms acceptable to us and could be
dilutive to existing stockholders. In addition, these sales
could reduce the trading price of Leap common stock and impede
our ability to raise future capital.
Your
Ownership Interest in Leap Will Be Diluted Upon Issuance of
Shares We Have Reserved for Future Issuances, and Future
Issuances or Sales of Such Shares May Adversely Affect the
Market Price of Leap Common Stock.
As of April 30, 2010, 78,216,420 shares of Leap common
stock were issued and outstanding, and 6,033,040 additional
shares of Leap common stock were reserved for issuance,
including 4,450,969 shares reserved for issuance upon the
exercise of outstanding stock options under our 2004 Stock
Option, Restricted Stock and Deferred Stock Unit Plan, as
amended, 711,114 shares of common stock available for
future issuance under our 2004 Stock Option, Restricted Stock
and Deferred Stock Unit Plan, 234,875 shares reserved for
issuance upon the exercise of outstanding stock options under
our 2009 Employment Inducement Equity Incentive Plan,
104,475 shares of common stock available for future
issuance under our 2009 Employment Inducement Equity Incentive
Plan, and 531,607 shares available for future issuance
under our Employee Stock Purchase Plan.
Leap has also reserved up to 4,761,000 shares of its common
stock for issuance upon conversion of its $250 million in
aggregate principal amount of convertible senior notes due 2014.
Holders may convert their notes into shares of Leap common stock
at any time on or prior to the third scheduled trading day prior
to the maturity date of the notes, July 15, 2014. If, at
the time of conversion, the applicable stock price of Leap
common stock is less than or equal to approximately $93.21 per
share, the notes will be convertible into 10.7290 shares of
Leap common stock per $1,000 principal amount of the notes
(referred to as the base conversion rate), subject
to adjustment upon the occurrence of certain events. If, at the
time of conversion, the applicable stock price of Leap common
stock exceeds approximately $93.21 per share, the conversion
rate will be determined pursuant to a formula based on the base
conversion rate and an incremental share factor of
8.3150 shares per $1,000 principal amount of the notes,
subject to adjustment. At an applicable stock price of
approximately $93.21 per share, the number of shares of common
stock issuable upon full conversion of the convertible senior
notes would be 2,682,250 shares. Upon the occurrence of a
make-whole fundamental change of Leap under the
indenture, under certain circumstances the maximum number of
shares of common stock issuable upon full conversion of the
convertible senior notes would be 4,761,000 shares.
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, under our employment inducement equity
incentive 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
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of Leaps stockholders causes 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 also could
impede our ability to raise future capital.
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 20.8% of Leap common stock
as of April 30, 2010. Moreover, our seven largest
stockholders and entities affiliated with them beneficially
owned in the aggregate approximately 62.6% of Leap common stock
as of April 30, 2010. 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 statements register for resale
15,537,869 shares of Leap common stock held by entities
affiliated with one of our directors, or approximately 19.9% of
Leaps outstanding common stock as of April 30, 2010.
In addition, in connection with our offering of
7,000,000 shares of Leap common stock in the second quarter
of 2009, we agreed to register for resale any additional shares
of common stock that these entities or their affiliates may
acquire in the future. 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, under Delaware Law, or in Our Indentures Might
Discourage, Delay or Prevent a Change in Control of Our Company
or Changes in Our Management and, Therefore, Depress the Trading
Price of Leap 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:
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require super-majority voting to amend some provisions in our
amended and restated certificate of incorporation and bylaws;
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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;
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prohibit stockholder action by written consent, and require that
all stockholder actions be taken at a meeting of our
stockholders;
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provide that the board of directors is expressly authorized to
make, alter or repeal our bylaws; and
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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.
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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, under the indentures governing our secured and
unsecured senior notes and convertible senior notes, if certain
change of control events occur, each holder of notes
may require us to repurchase all of such holders notes at
a purchase price equal to 101% of the principal amount of
secured or unsecured senior notes, or 100% of the principal
amount of convertible senior notes, plus accrued and unpaid
interest. See Part I Item 2.
75
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources of this report.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds.
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The following table contains information regarding shares of
Leap common stock that were returned to us during the three
months ended March 31, 2010 in satisfaction of tax
withholding obligations that arose in connection with the
vesting of certain restricted stock awards previously granted to
employees pursuant to our 2004 Stock Option, Restricted Stock
and Deferred Stock Unit Plan, as amended.
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Maximum Number (or
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Total Number of
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Approximate Dollar
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Total
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Shares Purchased
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Value) of Shares
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Number
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Average
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as Part of Publicly
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that May Yet Be
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of Shares
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Price Paid
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Announced Plans or
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Purchased Under
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Period
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Purchased
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Per Share
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Programs
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the Plans or Programs
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February 28, 2010
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4,054
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$
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14.27
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March 25, 2010
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5,018
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$
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16.40
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Total Three Months Ended March 31, 2010
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9,072
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Item 3.
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Defaults
Upon Senior Securities.
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None.
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Item 5.
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Other
Information.
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None
Index to Exhibits:
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Exhibit
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Number
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Description of Exhibit
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31.1*
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Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2*
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Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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32**
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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* |
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Filed herewith. |
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** |
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This certification is being furnished solely to accompany this
quarterly report pursuant to 18 U.S.C. § 1350, and is
not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of Leap Wireless
International, Inc., whether made before or after the date
hereof, regardless of any general incorporation language in such
filing. |