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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0811062
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(858) 882-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE
(TITLE OF CLASS)
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 2001, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was approximately $901,992,839,
based on the closing price of Leap's Common Stock on the Nasdaq National Market
on March 1, 2001, of $31.38 per share.
As of March 1, 2001, 30,040,580 shares of registrant's Common Stock $.0001
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required to be furnished pursuant to Part III of this Form 10-K
will be set forth in, and is incorporated by reference to, the Registrant's
definitive Proxy Statement for the annual meeting of stockholders to be held
April 19, 2001, which definitive Proxy Statement will be filed by the Registrant
not later than 120 days after the close of the fiscal year ended December 31,
2000.
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LEAP WIRELESS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 27
Item 6. Selected Financial Data..................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 43
Item 8. Financial Statements and Supplementary Data................. 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 88
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 88
Item 11. Executive Compensation...................................... 88
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 88
Item 13. Certain Relationships and Related Transactions.............. 88
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 88
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PART I
FORWARD-LOOKING STATEMENTS; CAUTIONARY STATEMENT
Except for the historical information contained herein, this document
contains forward-looking statements reflecting management's current forecast of
certain aspects of Leap's future. Some forward-looking statements can be
identified by forward-looking words such as "believe," "may," "could," "will,"
"estimate," "continue," "anticipate," "intend," "seek," "plan," "expect,"
"should," "would" and similar expressions in this report. It is based on current
information, which Leap has assessed but which by its nature is dynamic and
subject to rapid and even abrupt changes. Our actual results could differ
materially from those stated or implied by such forward looking statements due
to risks and uncertainties associated with our business. Factors that could
cause actual results to differ include but are not limited to: changes in the
economic conditions of the various markets our subsidiaries serve which could
adversely affect the market for wireless services; our ability to access capital
markets; a failure to meet the operational, financial or other covenants
contained in our credit facilities; our ability to rollout networks in
accordance with our plans, including receiving equipment and backhaul and
interconnection facilities on schedule from third parties; failure of network
systems to perform according to expectations; the effect of competition; the
acceptance of our product offering by our target customers; our ability to
retain customers; our ability to maintain our cost, market penetration and
pricing structure in the face of competition; uncertainties relating to
negotiating and executing definitive agreements and the ability to close pending
transactions described in this report; technological challenges in developing
wireless data services and customer acceptance of such services if developed;
rulings by courts or the FCC adversely affecting our rights to own and/or
operate certain wireless licenses; and other factors detailed in the section
entitled "Risk Factors" included elsewhere in this document and in our other SEC
filings. The forward-looking statements should be considered in the context of
these risk factors. Investors and prospective investors are cautioned not to
place undue reliance on such forward-looking statements. We disclaim any
obligation to update the forward-looking statements contained herein to reflect
future events or developments.
ITEM 1. BUSINESS
The words "Leap," "we," "our," "ours" and "us" refer to Leap Wireless
International, Inc. and, unless the context otherwise requires, its consolidated
subsidiaries. Unless otherwise specified, information relating to population and
potential customers is based on 1998 population estimates provided by Easy
Analytic Software Incorporated.
OVERVIEW
Leap is a wireless communications carrier that is providing innovative,
affordable, simple wireless services designed to accelerate the transformation
of wireless service into a mass consumer product. We generally seek to address a
much broader population segment than traditional wireless providers have
addressed to date. In the U.S., we are offering wireless service under the brand
name "Cricket(TM)." Our innovative Cricket strategy is designed to extend the
benefits of mobility to the mass market by offering wireless service that is as
simple to understand and use as, and priced competitively with, traditional
landline service. In each of our markets, we are deploying 100% digital, Code
Division Multiple Access, or CDMA, networks that we believe provide higher
capacity and more efficient deployment of capital than competing technologies.
This, when combined with our efforts to streamline operation and distribution
systems, allows us to be a low-cost provider of wireless services in each of our
markets.
Cricket service allows customers to make and receive virtually unlimited
calls within a local calling area for a low, flat monthly rate compared with
traditional wireless services. Cricket customers pay in advance each month's
service from a simple, straightforward bill. We offer Cricket service without a
contract, and because service is paid in advance, we currently require no credit
check. The simplicity of the Cricket service allows us to sustain lower
operating costs per customer compared to traditional wireless providers. Our
networks are designed and built to provide coverage in the local calling area
where our target customers live, work and play. As a result, we believe that our
network operating costs are less than those of traditional wireless providers.
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At the end of 2000, we had launched Cricket service in markets covering a
total population of approximately 8 million and had more than 190,000 Cricket
customers across the U.S. To date we have acquired or have rights to acquire
wireless licenses covering approximately 73.1 million potential customers in 36
states, and we plan to continue launching new Cricket markets throughout 2001
and beyond. We currently plan to expand our wireless service offerings to
include data services designed to appeal to a broad segment of the population.
We believe that wireless data services, like our innovative Cricket service,
need to be simple, easy to use and affordable.
In Mexico, we were a founding shareholder and have invested $100 million in
Pegaso Telecomunicaciones, S.A. de C.V., a company that is providing a wireless
service in Mexico that is more traditional than our Cricket service. Pegaso
holds wireless licenses covering all of Mexico, representing approximately 99
million potential customers. At the end of 2000, Pegaso had approximately
536,000 customers. We currently own 20.1% of Pegaso.
BUSINESS STRATEGY
Our business strategy is to bring innovative wireless communications
products and services to markets with strong growth potential. Key elements of
this strategy include:
- Enhancing the Mass Market Appeal of Wireless Service. We are working to
remove the price and complexity barriers that we believe have prevented
many potential customers from using wireless service. We believe that
large segments of the population do not use wireless service because they
view wireless service as an expensive luxury item, believe they cannot
control the cost of service, or find existing service plans too
confusing. Our service plans are designed to offer appealing value in
simple formats that customers can understand and budget for.
- Offering an Appealing Value Proposition. We strive to provide service
offerings that combine high quality and advanced features with simplicity
and attractive pricing to create a "high value/reasonable price"
proposition and broaden the market for wireless services. In the U.S., we
offer the Cricket service plan at a flat rate, paid in advance each
month, that is competitive with traditional landline service.
- Controlling and Minimizing Costs. To become one of the lowest-cost
providers in the wireless industry, we are designing high-quality
networks to minimize our capital costs and streamlining marketing,
distribution and back-office procedures.
- Leveraging CDMA Technology. We are deploying state-of-the-art CDMA
networks that are designed to provide higher capacity at a lower capital
cost which can be easily upgraded to support enhanced capacity. We
believe this enables us to operate superior networks that support rapid
customer growth and high usage. In addition, we believe our CDMA networks
will provide a better platform to expand into data and other wireless
services based on advances in second and third generation digital
technology in the future.
- Expanding Our Cricket Service Through Acquisitions of Domestic Licenses
and Buildout of Additional Networks. We intend to expand the Cricket
service to selected metropolitan areas in the U.S. through the
acquisition of additional wireless licenses and the buildout of networks
for our newly-acquired wireless licenses.
- Expanding Our Service Offerings to Include Wireless Data Services. We
currently plan to expand our service offerings to include wireless data
services designed to appeal to a broad segment of the population and
further transform the nature of wireless communications for our
customers. We believe that wireless data services, like our innovative
Cricket service, need to be simple, easy to use and affordable for all
consumers.
- Investing Selectively in Foreign Ventures. While we expect our emphasis
for the next few years to be on our U.S.-based operations, if presented
with attractive opportunities, we may invest in international
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markets where we believe the combination of unfulfilled demand and our
attractive wireless service offerings can fuel rapid growth.
U.S. BUSINESSES
CRICKET
General. In the U.S., our business strategy is different from existing
models used by typical cellular or PCS wireless providers. Most of these
providers offer consumers a complex array of rate plans that include additional
charges for minutes above a set maximum, as well as fees for roaming, that may
result in monthly service charges that are higher than expected. Approximately
60% of the U.S. population currently does not subscribe to wireless service, and
we believe that many of these potential customers perceive wireless service as
too expensive and complicated. The Cricket service is based on our vision that
the mass market wants wireless service to be predictable, affordable and as
simple to understand and use as traditional landline telephone service, but with
the benefits of mobility.
We have designed the Cricket service to appeal to consumers who make the
majority of their calls from within the local areas in which they live, work and
play. The Cricket service allows customers to make and receive virtually
unlimited calls within a local calling area for an affordable, flat monthly rate
that is competitive with landline service. Cricket customers pay for each
month's service in advance from a simple, straightforward bill. We offer Cricket
service without a contract and because Cricket service is paid in advance, we
currently require no credit check. In addition to local calling, directory
assistance calls and long distance minutes can be purchased in advance and
direct dialed without the use of a special code or card.
We expect Cricket's simple pricing to attract customers who have been
apprehensive about the more complicated and unpredictable pricing plans offered
by traditional wireless providers. The simplicity of the Cricket service also
allows us to reduce costs by eliminating costly features of wireless services,
such as expansive geographic coverage and roaming, that our target customers are
likely to use infrequently. We are therefore able to offer our customers a high
quality mobile service at an affordable price.
Strategy. We believe that the Cricket service offering will help transform
wireless phone service from a luxury product into a mass consumer product. The
Cricket strategy is to provide digital wireless service to the mass market with
a simple, easy to understand approach. As a part of the Cricket strategy, we
intend to:
- attract new customers more quickly than traditional wireless providers
that offer complex pricing plans with peak/off-peak rates, roaming
charges and expensive "extra" minutes;
- maintain lower customer acquisition costs by offering one simple service
plan with a limited choice of handsets, and by distributing our product
through company stores and multiple third-party retail stores where the
mass market shops;
- sustain lower operating costs per customer compared to traditional
wireless providers through reduced network operation costs, streamlined
billing procedures, lower customer care expenses, lower credit
investigation costs and reduced bad debt; and
- deploy our capital more efficiently by building our networks to cover
only the urban and suburban areas of our markets where most of our
potential customers live, work and play, while avoiding rural areas and
corridors between distant markets.
Market Opportunity. Wireless penetration was approximately 38% in the U.S.
at the end of December 2000. Traditional wireless companies have generally
focused their U.S. marketing on highly mobile customers, including business
users, who are likely to generate the highest revenues. Their customers are
typically offered multiple service plans with prices based on the customer's
minutes of use during the billing period. Leap believes that the numerous plans
offered by wireless companies have tended to confuse many potential customers.
Market research indicates that many people are interested in a wireless product
but are concerned about the cost, complexity and unpredictability of traditional
wireless pricing plans.
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Sales and Distribution. We differentiate the Cricket service concept and
expect to increase our market share through promoting a simplified buying
process and focusing marketing efforts on potential customers in the communities
covered by our local wireless networks. The Cricket approach is to rapidly
penetrate our target markets while minimizing our sales and marketing expenses,
primarily by keeping the customer's purchase decision simple, thus minimizing
the need for sales agents and associated residuals.
The Cricket service and wireless handsets are sold through three main
channels:
- Cricket retail stores in high-traffic locations and Cricket kiosks
located in major shopping malls;
- the local stores of national retail chains; and
- independent third-party dealers who are well positioned through their
principal lines of business to reach our target potential customers, such
as furniture and appliance retailers and rental companies, convenience
stores and other local service businesses.
The Cricket service plan is designed so that a potential customer can make
a purchase decision with little or no sales assistance. Customers can read about
the Cricket service on the retail package for our wireless handsets and learn
virtually all they need to know about the service without consulting a
complicated plan summary or a specialized sales person. We simplify the
customer's decision process by limiting the number of Cricket handset models
available. We believe the sales costs for the Cricket service are lower than
traditional wireless providers because of this streamlined sales approach.
We currently offer handsets at two price points, priced with the first
month's Cricket service included. One is presented as an economically-priced
handset at approximately $100, and the other is positioned as a premium handset
at approximately $130. We expect to continue to charge customers a partially
subsidized price for handsets to ensure that they have made an investment in the
equipment related to our wireless service and provide a moderate economic
incentive to maintain the Cricket service rather than switching to the services
of a competitor. We do not require customers to sign a service contract, unlike
traditional wireless providers that require long-term commitments.
We combine mass marketing strategies and tactics to build awareness of the
Cricket service concept and brand name within the communities we service.
Because the Cricket service is offered in distinct "island" markets, we
advertise in local publications, on local radio stations and in local spot
television commercials. In addition to local advertising efforts, we maintain an
informational Web site for the Cricket service. Although we currently do not
sell our products or services directly over the Internet, some third-party
Internet retailers do sell the Cricket service over the Internet.
Network and Operations. The Cricket service is based on providing customers
with near-landline levels of usage at prices that are competitive with
traditional landline services and substantially lower than most of our wireless
competitors for similar usage. We believe our success depends on designing and
operating our networks to provide high, concentrated capacity with good
in-building coverage rather than the broad, geographically dispersed coverage
provided by traditional wireless carriers. Our current and planned Cricket
networks are in local population centers of self-contained communities where we
believe roaming is not an important component of service for our target
customers. Unlike traditional wireless providers who build comprehensive
networks to permit full-roaming by their customers, we believe that we can
deploy our capital more efficiently by tailoring our networks only to our target
population centers and omitting underutilized roaming sites between those
population centers.
We also seek to maintain lower operating costs through simplified billing.
Our simple, straight-forward bills show the monthly flat rate without any
per-call itemization. This simple format is expected to result in fewer billing
inquiries to our customer service center. Fewer calls to our customer service
center should, in turn, result in reduced customer service expenses compared to
more traditional wireless providers. In addition, because Cricket customers pay
in advance for each month's service, we minimize our costs of credit checks, bad
debt expenses and customer fraud. We also maintain low operating costs by
outsourcing our customer service center to third-party call centers. By
centralizing customer service in a few locations, we are able to
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streamline our customer care operations and gain economies of scale while
maximizing customer service availability.
Under a license from Leap, Chase Telecommunications, a company that we
acquired in March 2000, introduced the Cricket service in Chattanooga, Tennessee
in March 1999. At March 1, 2001, we had launched service in areas under 16 FCC
licenses with a total population of approximately 14.6 million, and our networks
covered approximately 9 million potential customers within those areas.
The appeal of our service in any given market is not dependent on the
Cricket service having ubiquitous coverage in the rest of the country or region
surrounding the market. Because our business model is scalable, we can launch
our networks on a market-by-market basis.
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The following table shows the wireless licenses for approximately 73.1
million potential customers that we have acquired or have rights to acquire.
1998 BTA
MARKET POPULATION(1) MHZ
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Anchorage, AK.......................... 442,324 30
Birmingham, AL(2)...................... 1,293,407 15
Florence, AL........................... 183,960 15
Tuscaloosa, AL(2)...................... 250,193 15
Blytheville, AR........................ 72,228 30
Fayetteville, AR....................... 287,594 30
Fort Smith, AR......................... 312,750 30
Hot Springs, AR........................ 132,519 15
Jonesboro, AR(2)....................... 174,746 15
Little Rock, AR(3)..................... 928,467 30
Pine Bluff, AR(3)...................... 150,421 30
Russellville, AR....................... 93,530 15
Nogales, AZ............................ 38,020 30
Phoenix, AZ............................ 3,089,889 10
Tucson, AZ............................. 790,975 15
Merced, CA............................. 211,145 15
Modesto, CA............................ 477,212 15
Redding, CA............................ 276,425 15
Visalia, CA(2)......................... 471,766 15
Denver/Boulder, CO..................... 2,471,889 10
Ft. Collins, CO(2)(3).................. 229,386 10
Greeley, CO(2)(3)...................... 157,890 10
Pueblo, CO............................. 299,154 30
New London, CT(5)...................... 358,218 10
Jacksonville, FL(5).................... 1,294,388 10
Lakeland, FL(2)........................ 450,761 10
Melbourne, FL(5)....................... 462,782 10
Albany, GA............................. 343,557 15
Columbus, GA........................... 357,914 30
Macon, GA.............................. 640,286 30
Boise, ID.............................. 534,196 30
Idaho Falls, ID........................ 212,301 30
Lewiston, ID........................... 123,479 30
Twin Falls, ID......................... 158,946 30
Peoria, IL(2).......................... 465,930 15
Columbus, IN(5)........................ 154,408 10
Evansville, IN(2)...................... 520,207 10
Ft Wayne, IN(2)........................ 689,252 10
Indianapolis, IN(5).................... 1,466,377 10
Coffeyville, KS........................ 61,901 15
Pittsburg, KS(2)....................... 90,471 30
Wichita, KS............................ 633,382 30
Lexington, KY(5)....................... 894,237 10
Louisville, KY(5)...................... 1,445,879 10
Middlesboro, KY........................ 120,774 15
Worcester, MA(5)....................... 725,747 10
Adrian, MI(2).......................... 98,691 15
Battle Creek, MI(2).................... 238,991 15
Escanaba, MI(2)........................ 48,203 10
Flint, MI(2)........................... 513,718 10
Grand Rapids, MI(2).................... 1,027,192 15
Houghton, MI(2)........................ 47,209 10
Iron Mountain, MI(2)................... 45,925 10
Ironwood, MI(2)........................ 32,432 20
Jackson, MI(2)......................... 203,672 15
Kalamazoo, MI(2)....................... 370,308 10
Lansing, MI(2)......................... 513,212 10
Marinette, WI-Menominee, MI(2)......... 67,950 10
Marquette, MI(2)....................... 69,425 10
Mount Pleasant, MI(2).................. 127,533 10
Muskegon, MI(2)........................ 220,532 15
Saginaw-Bay City, MI(2)................ 634,805 10
Sault Ste. Marie, MI(2)................ 56,243 20
Traverse City, MI(2)................... 234,122 10
Bemidji, MN(2)......................... 64,109 10
1998 BTA
MARKET POPULATION(1) MHZ
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Brainerd, MN(2)........................ 92,763 10
Duluth, MN(2).......................... 410,525 10
La Crosse, WI-Winona, MN(2)............ 311,841 10
Jackson, MS(2)......................... 653,863 10
Vicksburg, MS(2)....................... 60,797 10
Bozeman, MT............................ 78,996 30
Asheville, NC(5)....................... 571,334 10
Charlotte/Salisbury, NC................ 1,915,210 10
Greensboro/Winston-Salem, NC........... 1,371,782 10
Hickory, NC............................ 322,521 10
Fargo, ND.............................. 310,802 30
Grand Forks, ND........................ 212,006 15
Lincoln, NE(2)......................... 333,096 15
Omaha, NE.............................. 970,593 10
Albuquerque, NM........................ 800,201 15
Gallup, NM............................. 140,668 15
Las Cruces, NM(5)...................... 243,077 10
Roswell, NM............................ 80,005 15
Santa Fe, NM........................... 205,922 15
Reno, NV............................... 548,661 10
Albany, NY(5).......................... 1,048,614 10
Buffalo, NY(2)......................... 1,224,119 10
Poughkeepsie, NY(5).................... 431,444 10
Syracuse, NY(2)........................ 791,282 15
Utica, NY(2)........................... 294,296 10
Columbus, OH(5)........................ 1,623,401 10
Dayton/Springfield, OH................. 1,222,446 10
Sandusky, OH(2)........................ 140,841 15
Toledo, OH(2).......................... 785,760 15
Tulsa, OK.............................. 913,095 15
Eugene, OR(2)(3)....................... 313,316 10
Salem/Corvallis, OR.................... 512,535 30
Pittsburgh/Butler/Uniontown/Washington/
Latrobe, PA........................... 2,503,395 10
Scranton, PA(5)........................ 669,647 10
Providence, RI(5)...................... 1,508,224 10
Chattanooga, TN........................ 548,320 15
Clarksville, TN........................ 258,087 15
Cookeville, TN......................... 131,891 15
Dyersburg, TN.......................... 118,191 15
Jackson, TN............................ 275,578 15
Kingsport/Johnson/Bristol, TN.......... 690,437 15
Knoxville, TN.......................... 1,073,640 15
Memphis, TN............................ 1,499,222 15
Nashville/Murfreesboro, TN............. 1,662,927 15
Austin, TX(5).......................... 1,165,522 10
Brownsville, TX(5)..................... 348,225 10
Bryan, TX(5)........................... 164,465 10
El Paso, TX(5)......................... 771,774 10
Houston, TX(5)......................... 4,723,410 10
McAllen, TX(5)......................... 578,420 10
San Antonio, TX(5)..................... 1,784,992 10
Provo, UT.............................. 341,401 30
Salt Lake City/Ogden, UT............... 1,527,987 30
Kenewick/Pasco/Richland, WA............ 183,433 15
Spokane, WA............................ 725,591 15
Yakima, WA............................. 253,207 15
Appleton-Oshkosh, WI(2)................ 440,042 10
Eau Claire, WI(2)...................... 191,374 10
Stevens Point-Marshfield-Wisconsin
Rapids, WI(2)......................... 213,930 20
Casper, WY............................. 142,951 30
---------- --
TOTAL........................... 73,087,650(4)
==========
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(1) Demographic data related to 1998 population and population growth estimates
provided by Easy Analytic Software Incorporated.
(2) Represents licenses that Leap has rights to acquire under signed acquisition
agreements. These acquisitions remain subject to FCC approval and other
closing conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent or Pending Acquisitions" at
Item 7 below.
(3) Leap has agreed to transfer 10 MHz of licenses in Pine Bluff and Little
Rock, Arkansas to American Wireless in exchange for 10 MHz licenses in Fort
Collins and Greely, Colorado and Eugene, Oregon. An acquisition agreement
has been signed, but the transaction has not been completed. The transaction
is subject to FCC approval and other closing conditions.
(4) Leap has agreed to divest two wireless licenses covering 233,716 potential
customers in Grand Island and North Platte, Nebraska, which, accordingly,
are not included in the table above.
(5) Represents licenses for which Leap was the high bidder in the FCC's recent
reauction of C-Block and F-Block PCS spectrum that closed in January 2001.
These transfers remain subject to FCC approval.
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Cricket Communications has entered into infrastructure equipment purchase
agreements with Lucent Technologies, Inc., Nortel Networks, Inc. and Ericsson
Wireless Communications, Inc. to lead the overall buildout of our initial phase
of Cricket networks. Under the terms of the agreements, Cricket Communications
expects to contract most site acquisition activities and other services
associated with site development to third parties, including but not limited to
these vendors. To the extent the vendors are contracted to perform such
services, we expect that they will subcontract many of these services to a
number of different suppliers.
Leap's Rights and Interests. Our wholly-owned subsidiary, Cricket
Communications Holdings, Inc., owns Cricket Communications, Inc., which is the
operating company that is implementing the Cricket strategy.
On June 15, 2000, through a subsidiary merger, we acquired the 5.11% of
Cricket Communications Holdings that we did not already own. These shares were
owned by individuals and entities, including directors and employees of Leap and
Cricket Communications Holdings. Under the terms of the merger, each issued and
outstanding share of Cricket Communications Holdings common stock not held by
Leap was converted into the right to receive 0.315 of a fully paid and
nonassessable share of Leap common stock. As a result, an aggregate of 1,048,635
shares of Leap common stock were issued. We also assumed Chase
Telecommunications Holdings' warrant to purchase 1% of the common stock of
Cricket Communications Holdings, which was converted into a warrant to acquire
202,566 shares of our common stock, at an aggregate exercise price of $1.0
million. The aggregate fair value of the shares issued and warrant assumed in
excess of the carrying value of the minority interest was allocated to goodwill.
In addition, we assumed all unexpired and unexercised Cricket Communications
Holdings stock options outstanding at the time of the merger, whether vested or
unvested, which upon conversion amounted to options to purchase 407,784 shares
of Leap common stock.
Capital Requirements and Projected Investments. We will require substantial
capital to develop and operate wireless networks in the numerous markets in
which we plan to operate the Cricket service. The amount of financing that we
will require for these efforts will vary depending on the number of these
networks that are developed, including any markets covered by our future license
acquisitions, and the speed at which we construct and launch these networks. For
a more detailed description of our capital requirements and liquidity, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
Regulatory Environment. For a description of the extensive regulation
governing our domestic business, see "--Government Regulation," "Risk
Factors -- The FCC's Decision That We Are Qualified To Hold C-Block and F-Block
Licenses Is Subject To Review and Appeal," "Risk Factors -- We May Not Satisfy
the Buildout Deadlines and Geographic Coverage Requirements Applicable to Our
Licenses, Which May Result in the Revocation of Some of Our Licenses or the
Imposition of Fines and/or Other Sanctions," and "Risk Factors -- Adverse
Regulatory Changes Could Impair Our Ability To Maintain Existing Licenses and
Obtain New Licenses."
WIRELESS DATA SERVICES
We currently anticipate beginning launch of our first wireless data service
in selected markets during the first half of 2001. We are seeking to take the
same type of innovative approach to data as Cricket took with voice. Our vision
of wireless data services is that they should be simple, customer focused and
driven by customer needs rather than technology. We expect our first wireless
data service to provide customers with innovative, community- and location-based
information delivered with full mobility where our customers live, work and
play. We seek to personalize the content of these services for the individual
consumer. We took our first step toward offering wireless data services when we
acquired myAladdin.com, a proprietary, personalized, location-based technology.
Our goal will be to control both the content and the delivery of our wireless
data services. We expect to finance the development and operation costs of these
wireless data services largely through vendor financing, as well as from a
portion of the net proceeds from our February 2000 units and equity offerings,
our sale of Smartcom and other financing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity." We
expect, however, that we will also need to raise additional capital to fund
additional data launches and services.
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INTERNATIONAL INVESTMENTS
PEGASO
General. We were a founding shareholder and currently own 20.1% of Pegaso,
a joint venture formed to construct and operate the first 100% digital wireless
communications network in Mexico. In October 1998, a wholly-owned subsidiary of
Pegaso acquired nine regional PCS licenses and a public telecommunications
network license constituting nationwide coverage of Mexico's population of
approximately 99 million people, generally in the 1900 MHz band, for
approximately $234 million (based on exchange rates in effect on the dates the
license payments were made).
Pegaso launched commercial service in Tijuana in February 1999 and extended
its coverage area with launches in Mexico's three largest cities, Mexico City,
Guadalajara and Monterrey, in December, September and August 1999, respectively.
During the fourth quarter of 2000, Pegaso also moved forward with its plans to
build out its network with service launches in Chapala, Ensenada, Nuevo Laredo,
Reynosa and Toluca. As of December 31, 2000, Pegaso had approximately 536,000
customers. Pegaso is continuing its network expansion and plans to build
networks in additional metropolitan areas throughout Mexico as well as some
interconnecting highway corridors.
Pegaso offers roaming across the U.S-Mexico border as a result of its
agreement with Sprint PCS. The agreement permits Pegaso's post-paid customers to
use Sprint PCS's nationwide wireless network in the U.S. and allows Sprint PCS
customers to roam on Pegaso's network in Mexico. Pegaso believes this feature
will be attractive to the highly-mobile customers in Mexico's border cities.
We have entered into a management and operations agreement with Pegaso to
provide operator services and, in turn, have subcontracted those services to GTE
Data Services Mexico, a subsidiary of GTE. These arrangements are expected to
end in July 2001.
Strategic and Financial Partners. In addition to Leap, Pegaso
Comunicaciones y Servicios, S.A. de C.V. and Sprint Mexico Inc. have interests
in Pegaso. Pegaso Comunicaciones y Servicios is 99%-owned by Alejandro Burillo
Azcarraga, a member of our board of directors. Citicorp, the Latin America
Infrastructure Fund and Nissho Iwai have also invested in Pegaso.
On April 26, 2000, Sprint Corporation, through a subsidiary, invested $200
million in Pegaso by purchasing shares from Pegaso and shareholders other than
Leap. As a result of this transaction, our percentage interest in Pegaso was
reduced from 28.6% to 22.4%. Several other existing investors contributed an
additional $50 million of financing in August 2000, reducing our percentage
interest to 20.1%.
Leap's Rights and Interests. We currently own a 20.1% interest in Pegaso
and have invested $100 million of the $546 million of capital that has been
contributed by the owners of the venture. Pegaso is currently seeking additional
debt and equity financing. See "-- Capital Requirements and Projected
Investments" below. As noted above, we also provide operator services to Pegaso
under a management and operations agreement.
In December 1999, in connection with our guarantee of a portion of Pegaso's
obligations under its working capital facility, Leap has received an option to
subscribe for and purchase limited voting series "N" treasury shares of Pegaso.
The number of shares that may be purchased by Leap under the option will be
calculated as a proportion of the number of options granted to the lenders to
provide a total internal rate of return of 20% to the lenders on the average
outstanding balance of the bridge loan, subject to a maximum of 418,518 shares
of series "N" treasury shares issuable to Leap. The options have an exercise
price of $0.01 per share and expire 10 years from the date of issuance. The
options are exercisable at any time after the date on which all amounts under
the loan agreement are paid in full.
Capital Requirements and Projected Investments. Pegaso has already raised
or obtained commitments for substantial amounts of capital. To date, the members
of the joint venture have contributed $546 million of equity. In addition,
Qualcomm and another equipment vendor have agreed to provide approximately $580
million of secured equipment financing to the venture, a portion of which has
already been advanced. In May 1999, a Pegaso subsidiary also entered into a
working capital facility with several banks with credit
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support from Qualcomm. We guaranteed 33% of Pegaso's obligations under the
initial commitment from the lenders of $100 million. At December 31, 2000, the
maximum amount of the loan had been increased to approximately $300.0 million
although the amount of our guarantee was not increased. To complete the
buildout, launch and operation of its planned networks, however, Pegaso will
need to obtain substantial additional capital. As a result, Pegaso is seeking
additional debt and equity financing, including additional vendor financing.
Leap may contribute capital to Pegaso in the future. If Leap does not contribute
additional capital to Pegaso, Leap's ownership interest in Pegaso may be diluted
due to additional capital contributions of other investors.
Regulatory Environment. The Mexican Secretariat of Communications and
Transportation, or SCT, and Federal Telecommunications Commission, or COFETEL,
an independent regulatory body within the SCT, regulate the provision and
operation of telecommunications services in Mexico. The principal law governing
the provision of telecommunications services in Mexico is the 1995 Federal
Telecommunications Law and regulations promulgated thereunder; however, other
federal laws and regulations apply.
The SCT may grant licenses only to Mexican individuals and to Mexican
corporations in which non-Mexicans hold no more than 49% of the voting shares.
Cellular and PCS licensees may be more than 49% foreign-owned through a
structure involving limited- or non-voting interests with the prior approval of
the Mexican Foreign Investment Commission. Licenses may be sold or otherwise
transferred only with the prior authorization of the SCT. In addition, any
transfer of the shares of the holder of a license in excess of 10% of the total
equity outstanding requires the prior approval of the SCT and may require
notification to the Federal Competition Commission. A license may be terminated
upon expiration or dissolution of the holder of the license. The SCT may revoke
a license prior to its expiration under certain circumstances, including failure
to comply with the obligations and conditions specified in the license. The
Mexican government may also expropriate or temporarily seize assets related to a
license, but is obligated to compensate at market value the owner of such
assets.
Pegaso is interconnected nationwide with other Mexican wireless and
landline operators. Though interconnection arrangements are negotiated
privately, Telmex is required by law to interconnect with wireless operators,
and COFETEL will intervene where private parties reach an impasse. Wireless
rates are not regulated in Mexico but the rates must be registered with the SCT.
SMARTCOM
On June 2, 2000, we completed the sale of our Chilean operating subsidiary,
Smartcom, S.A., to Endesa, S.A., a Spanish utility company. Under the terms of
our agreement with Endesa, Endesa purchased all of the outstanding capital stock
of Smartcom from our subsidiary, Inversiones Leap Wireless Chile, S.A., and its
designated shareholder nominee (who held one share of the Series A preferred
stock of Smartcom in order to comply with Chilean law which requires two
shareholders for each Chilean sociedad anonima) in exchange for gross
consideration of approximately $381.5 million. The purchase price consisted of:
- approximately $156.8 million in cash;
- repayment of Smartcom indebtedness to us and Inversiones of approximately
$17.5 million and $35.8 million, respectively;
- release of cash collateral posted by us in the U.S. to collateralize our
reimbursement obligation with respect to a standby letter of credit
issued in favor of ABN AMRO Bank (Chile) to secure Smartcom indebtedness
of approximately $28.2 million; and
- three promissory notes issued by Endesa to Inversiones in the aggregate
amount of $143.2 million. One of the promissory notes is subject to a one
year right of set-off to secure the indemnification obligations of Leap
and Inversiones under the share purchase agreement between the parties.
Another of the promissory notes is subject to adjustment based upon an
audit of the closing balance sheet of Smartcom to be completed following
the closing of the agreement. The final audit is not yet completed, and
we are in discussions with Endesa concerning a potential adjustment,
which we do not expect to be
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material. In February 2001, we sold the third note which had an original
principal amount of $58.2 million to a third party for $60.7 million
including accrued interest.
Each of the two remaining promissory notes matures on June 2, 2001 and
bears interest at a rate equal to the 3-month LIBOR, compounded semi-annually.
In addition, the sale of the Smartcom shares resulted in the removal of
approximately $191.4 million of Smartcom liabilities from our consolidated
balance sheet.
Smartcom acquired a nationwide license in 1997 in the 1900 MHz band to
offer PCS services in Chile. Smartcom's nationwide system began operation in
September 1998. In April 1999, we increased our ownership of Smartcom from 50%
to 100% when our Chilean subsidiary purchased 50% of Smartcom from Telex-Chile,
a Chilean telecommunications company, and one of its affiliates for $28 million
in cash and a $22 million interest-free note payable in three years. Following
the acquisition, we recruited a new management team, upgraded the network
capabilities and, in November 1999, relaunched service under a new brand name,
SMARTCOM PCS. As a result of the favorable terms offered by Endesa for purchase
of the Smartcom shares, which represented a substantial return on our original
investment, we concluded that we could realize greater stockholder return
through the sale than we could through continued investment in Smartcom.
COMPETITION
The wireless telecommunications industry generally is very competitive and
competition is increasing. Unlike many wireless providers, we also intend to
compete directly with landline service providers in the telecommunications
industry. Many competitors have substantially greater resources than we have,
and we may not be able to compete successfully. Some competitors have launched
rate plans substantially similar to the Cricket service plan in markets in which
we have launched or expect to launch service. These competitive plans could
adversely affect our ability to maintain our pricing, market penetration and
customer retention.
In the U.S., we will compete directly with other wireless providers and
traditional landline carriers in each of our markets, many of which have greater
resources than we do and entered the market before us. A few of our competitors
operate wireless telecommunications networks covering most of the U.S.
Competitors' earlier entry and broader presence in the U.S. telecommunications
market may have a negative effect on our ability to successfully implement our
strategy. Furthermore, the FCC is actively pursuing policies designed to
increase the number of wireless competitors in each of our markets. For example,
the FCC will soon auction licenses that will authorize the entry of two
additional wireless providers in each market. In addition, other wireless
providers in the U.S. could attempt to implement our domestic strategy of
providing unlimited local service at a low, flat monthly rate if our strategy
proves successful. The landline services with which we will compete are already
used by some of our potential customers, and we may not be successful in our
efforts to persuade potential customers to adopt our wireless service in
addition to, or in replacement of, their current landline service.
Although the deployment of advanced telecommunications services is in its
early stages in many developing countries, we believe competition is increasing
as businesses and foreign governments realize the market potential of
telecommunications services. In Mexico, a number of international
telecommunications companies, including Verizon, AT&T, MCI, Motorola, Nextel and
SBC, as well as local competitors such as Telmex and other Mexican
telecommunications companies, continue to actively engage in developing
telecommunications services. Pegaso also competes against landline carriers,
including government-owned telephone companies. We also expect the prices that
Pegaso may charge for its products and services in some regions will decline
over the next few years as competition increases in its markets. Our competitors
in Mexico have greater financial resources and more established operations than
Pegaso. Pegaso is at an early stage of development and may not be able to
compete successfully.
We compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio
and domestic and global mobile satellite service. These technologies may have
advantages over the technology we use and may ultimately be more attractive to
customers. We may compete in the future with companies who offer new
technologies and market other services, including cable television access,
landline telephone service and Internet access, that we do not
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currently intend to market. Some of our competitors offer these other services
together with their wireless communications service, which may make their
services more attractive to customers. In addition, we expect that, over time,
providers of wireless communications services will compete more directly with
providers of traditional landline telephone services. In addition, energy
companies, utility companies and cable operators may expand their services to
offer communications services.
GOVERNMENT REGULATION
The spectrum licensing, construction, operation, sale and interconnection
arrangements of wireless communications networks are regulated to varying
degrees by state regulatory agencies, the FCC, Congress, the courts and other
governmental bodies. Proceedings before these bodies, such as the FCC and state
regulatory authorities, could have a significant impact on the competitive
market structure among wireless providers and on the relationships between
wireless providers and other carriers. These mandates may impose significant
financial obligations on us and other wireless providers. We are unable to
predict the scope, pace or financial impact of legal or policy changes that
could be adopted in these proceedings.
Licensing of PCS Systems. A broadband PCS system operates under a protected
geographic service area license granted by the FCC for a particular market on
one of six frequency blocks allocated for broadband PCS. Broadband PCS systems
generally are used for two-way voice applications. Narrowband PCS systems, in
contrast, are for non-voice applications such as paging and data service and are
separately licensed. The FCC has segmented the U.S. PCS markets into 51 large
regions called major trading areas, which are comprised of 493 smaller regions
called basic trading areas. The FCC awards two broadband PCS licenses for each
major trading area and four licenses for each basic trading area. Thus,
generally, six licensees will be authorized to compete in each area. The two
major trading area licenses authorize the use of 30 MHz of spectrum. One of the
basic trading area licenses is for 30 MHz of spectrum, and the other three are
for 10 MHz each. The FCC permits licensees to split their licenses and assign a
portion, on either a geographic or frequency basis or both, to a third party. In
recent years, the FCC has also further split licenses in connection with
re-auctions of PCS spectrum. Two cellular licenses are also available in each
market. Cellular markets are defined as either metropolitan statistical or rural
service areas.
The FCC's spectrum allocation for PCS includes two licenses, the 30 MHz
C-Block license and a 10 MHz F-Block license, that are designated as
"Entrepreneur's Blocks." The FCC requires holders of these licenses to meet
certain threshold financial size qualifications. In addition, the FCC has
determined that designated entities who qualify as small businesses or very
small businesses, as defined by a complex set of FCC rules, receive additional
benefits, such as bidding credits in C-Block or F-Block spectrum auctions or
reauctions, and in some cases, an installment loan from the federal government
for a significant portion of the dollar amount of the winning bids in the FCC's
initial auctions of C-Block and F-Block licenses. The FCC's rules also allow for
publicly traded corporations with widely dispersed voting power, as defined by
the FCC, to hold C-Block and F-Block licenses and to qualify as small or very
small businesses. In July 1999, the FCC issued an opinion and order that found
that we were entitled to acquire C-Block and F-Block licenses as a publicly
traded corporation with widely dispersed voting power and a very small business
under FCC rules. In July 2000, the FCC affirmed its July 1999 order.
Under the FCC's current rules specifying spectrum aggregation limits
affecting broadband PCS and cellular licensees, no entity may hold attributable
interests, generally 20% or more of the equity of, or an officer or director
position with, the licensee, in licenses for more than 45 MHz of PCS, cellular
and certain specialized mobile radio services where there is significant
overlap, except in rural areas. In rural areas, up to 55 MHz of spectrum may be
held. Passive investors may hold up to a 40% interest. Significant overlap will
occur when at least 10% of the population of the PCS licensed service area is
within the cellular and/or specialized mobile radio service area(s). The FCC has
initiated a proceeding to review whether the spectrum aggregation limits should
be retained. If the limits are removed, large carriers will be given additional
flexibility to acquire additional spectrum in our markets or in markets that we
may seek to enter. We cannot predict whether the limits will be removed or if
they are removed, what the effect would be on our business, financial condition
or results of operations.
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All PCS licenses have a 10-year term, at the end of which they must be
renewed. The FCC will award a renewal expectancy to a PCS licensee that has:
- provided substantial service during its past license term; and
- has substantially complied with applicable FCC rules and policies and the
Communications Act.
All PCS licensees must satisfy buildout deadlines and geographic coverage
requirements within five and ten years after the license grant date. For 30 MHz
C-Block licenses, this initial requirement is met when adequate service is
offered to at least one-third of the population of the licensed service area.
For 15 MHz and 10 MHz C-Block licenses and 10 MHz F-Block licenses, the initial
requirement is met when adequate service is provided to at least one-quarter of
the population in the licensed service area. Because we obtained many of our
wireless licenses from third parties subject to existing buildout requirements,
some of our licenses have buildout deadlines in 2001 and several other licenses
have buildout deadlines in the first half of 2002. We are unable to predict
whether the required coverage will be achieved. Failure to comply with these
buildout requirements could cause the revocation of some of our licenses or the
imposition of fines and/or other sanctions.
For a period of up to five years after the grant of a PCS license, subject
to extension, a licensee will be required to share spectrum with existing
licensees that operate certain fixed microwave systems within its license area.
In an effort to balance the competing interests of existing microwave users and
newly authorized PCS licensees, the FCC has adopted a transition plan to
relocate such microwave operators to other spectrum blocks and a cost sharing
plan so that if the relocation of an incumbent benefits more than one PCS
licensee, those licensees will share the cost of the relocation. To secure a
sufficient amount of unencumbered spectrum to operate our PCS systems
efficiently and with adequate population coverage, we may need to relocate one
or more of these incumbent fixed microwave licensees.
This transition plan currently allows most microwave users to operate in
the PCS spectrum for a two-year voluntary negotiation period and an additional
one-year mandatory negotiation period. Parties unable to reach agreement within
these time periods may refer the matter to the FCC for resolution, but the
incumbent microwave user is permitted to continue its operations until final FCC
resolution of the matter. The transition and cost sharing plans expire on April
4, 2005, at which time remaining microwave incumbents in the PCS spectrum will
be responsible for the costs of relocating to alternate spectrum locations.
PCS services are subject to certain FAA regulations governing the location,
lighting and construction of transmitter towers and antennas and may be subject
to regulation under Federal environmental laws and the FCC's environmental
regulations. State or local zoning and land use regulations also apply to our
activities. We expect to use common carrier point to point microwave facilities
to connect the transmitter, receiver, and signaling equipment for each PCS or
cellular cell, the cell sites, and to link them to the main switching office.
The FCC licenses these facilities separately and they are subject to regulation
as to technical parameters and service.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service, which includes PCS. The FCC generally does not
regulate commercial mobile radio service or private mobile radio service rates.
Recent Modifications of C-Block and F-Block Eligibility Rules and Recent
Reauction of PCS Licenses. The FCC recently held a reauction of 422 C-Block and
F-Block licenses that closed on January 26, 2001. In connection with that
reauction, the FCC made a number of changes to its wireless and PCS licensing
rules, and to the size of the licenses being sold. Specifically, the FCC
subdivided the C-Block licenses slated for reauction into three 10 MHz licenses.
For this reauction, the FCC also subdivided the BTA service areas to which
Entrepreneur's Block eligibility restrictions would continue to apply into two
tiers according to population. In so-called "Tier 1" BTAs, service areas with a
population equal to or greater than 2.5 million, the FCC removed all eligibility
restrictions on two of the newly-created 10 MHz C-Block licenses, and sold them
in open bidding to any entity that could afford to purchase them, no matter how
large. In these Tier 1 BTAs, one 10 MHz C-Block license remained subject to a
closed bidding process, such that only entities meeting Entrepreneur's Block
eligibility requirements were permitted to bid. In Tier 2 BTAs, service areas
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with a population less than 2.5 million, two of the 10 MHz C-Block licenses
remained subject to C-Block and F-Block eligibility rules and thus were reserved
for closed bidding by designated entities, while one 10 MHz C-Block license per
BTA was sold at open bidding. Several 15 MHz C-Block licenses and a number of
F-Block licenses slated for reauction also were sold at open bidding, such that
previous C-Block and F-Block eligibility requirements no longer applied.
The FCC's recent reauction represented a compromise that made some
additional spectrum available to large carriers, but also continued to preserve
C-Block and F-Block spectrum for designated entities. The FCC's C-Block and
F-Block rules, the recent reauction, and FCC actions taken in connection with
previous C-Block auctions and reauctions, remain subject to pending FCC and
judicial proceedings. These proceedings, and continuing changes to the C-Block
and F-Block rules, could have a material adverse effect on our business and
financial condition, including our ability to continue acquiring C-Block and
F-Block licenses. In addition, in the reauction, Leap was the high bidder on 22
licenses covering 22.4 million potential customers. These licenses have not yet
been granted to us, and we cannot predict what effect any challenges before the
FCC or in court to the reauction generally, or the grant of these licenses to us
specifically, will have on us. NextWave Telecommunications, Inc. is a party to
litigation challenging the validity of the auction. Other parties have indicated
publicly that they intend to challenge the validity of the auction and grants
thereunder, as well.
Transfer and Assignment of PCS Licenses. The Communications Act and FCC
rules require the FCC's prior approval of the assignment or transfer of control
of a license for a PCS or cellular system. Non-controlling interests in an
entity that holds an FCC license generally may be bought or sold without FCC
approval, subject to the FCC's spectrum aggregation limits.
C-Block and F-Block licenses historically have been subject to certain
additional transfer and assignment restrictions, including a prohibition on the
assignment or transfer of such licenses for a period of five years following the
initial license grant date to any entity that fails to satisfy C-Block and
F-Block financial qualification requirements. These rules were revised by the
FCC in August 2000. Under the revised rules, a C-Block or F-Block license may be
transferred to non-designated entities once the licensee has met its five-year
coverage requirement. Such transfers will remain subject to certain costs and
reimbursements to the government of any bidding credits or outstanding principal
and interest payments owed to the FCC.
Foreign Ownership. Under existing law, no more than 20% of an FCC
licensee's 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 our ownership structure, up to 25% of that
entity's capital stock may be owned or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. Foreign ownership above the 25% holding company level may be
allowed should the FCC find such higher levels not inconsistent with the public
interest. The FCC has ruled that higher levels of foreign ownership, even up to
100%, are presumptively consistent with the public interest with respect to
investors from certain nations. If our foreign ownership were to exceed the
permitted level, the FCC could revoke our wireless licenses, although we could
seek a declaratory ruling from the FCC allowing the foreign ownership or take
other actions to reduce our foreign ownership percentage in order to avoid the
loss of our licenses. We have no knowledge of any present foreign ownership in
violation of these restrictions.
Other Recent Industry Developments. The FCC has a number of other complex
requirements and proceedings that affect the operation of our business. For
example, FCC rules currently require wireless carriers to make available
emergency 911 services, including enhanced emergency 911 services that provide
the caller's telephone number, and a requirement that emergency 911 services be
made available to users with speech or hearing disabilities. We also are subject
or potentially subject to interconnection, reciprocal compensation and universal
service obligations; number portability obligations; rules governing billing and
subscriber privacy; rules governing wireless resale and roaming obligations;
rules that require wireless service providers to configure their networks to
facilitate electronic surveillance by law enforcement officials; and rules
requiring us to offer equipment and services that are accessible to and usable
by persons with disabilities. These requirements are all the subject of pending
FCC or judicial proceedings, and we are unable to predict how they may affect
our business, financial condition or results of operations.
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State Regulation and Local Approvals. Congress has given the FCC the
authority to preempt states from regulating rates or entry into commercial
mobile radio service, including PCS. The FCC, to date, has denied all state
petitions to regulate the rates charged by commercial mobile radio service
providers. State and local governments are permitted to manage public rights of
way and can require fair and reasonable compensation from telecommunications
providers, on a competitively neutral and nondiscriminatory basis for the use of
such rights of way by telecommunications carriers, including PCS providers, so
long as the compensation required is publicly disclosed by the government. The
siting of base stations also remains subject to state and local jurisdiction,
although proceedings are pending at the FCC to determine the scope of that
authority. States may also impose competitively neutral requirements that are
necessary for universal service, to protect the public safety and welfare, to
ensure continued service quality and to safeguard the rights of consumers. While
a state may not impose requirements that effectively function as barriers to
entry or create a competitive disadvantage, the scope of state authority to
maintain existing or to adopt new such requirements is unclear. State
commissions have become increasingly aggressive in their efforts to conserve
numbering resources.
Privacy. In anticipation of our planned wireless data services, we have
developed and intend to comply with a policy designed to protect the privacy of
our customers and their personal information.
FINANCIAL INFORMATION CONCERNING SEGMENTS AND GEOGRAPHICAL INFORMATION
Financial information concerning Leap's operating segments and the
geographic areas in which it operates is set forth in Note 13 to the
Consolidated Financial Statements set forth in Item 8 of this report.
EMPLOYEES
On February 1, 2001, Leap employed approximately 860 full time employees,
including the approximately 652 employees of its subsidiary, Cricket
Communications.
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RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY
We have operated as an independent company since September 1998 and we
acquired and/or launched all of our existing Cricket markets beginning in
January 2000. Because we are at an early stage of development, we face risks
generally associated with establishing a new business enterprise. When
considering our prospects, investors must consider the risks, expenses and
difficulties encountered by companies in their early stages of development.
These risks include possible disruptions and inefficiencies associated with
rapid growth and workplace expansion, the difficulties associated with raising
money to finance new enterprises and the difficulties of establishing a
significant presence in highly competitive markets.
THE CRICKET BUSINESS STRATEGY IS UNPROVEN
Our business strategy in the U.S., marketed under the brand name Cricket,
is to offer consumers a service plan that allows them to make and receive
virtually unlimited local calls for an affordable, flat monthly rate. This
strategy, which has been introduced in a limited number of markets, is a new
approach to marketing wireless services and may not prove to be successful. Our
marketing efforts may not draw the volume of customers necessary to sustain our
business plan, our capital and operating costs may exceed planned levels, and we
may be unable to compete effectively with landline and other wireless service
providers in our markets. In addition, potential customers may perceive the
Cricket service to be less appealing than other wireless plans, which offer more
features and options, including the ability to roam outside of the home service
area. If our business strategy proves to be successful, other wireless providers
are likely to adopt similar pricing plans and marketing approaches. Should our
competitors choose to adopt a strategy similar to the Cricket strategy, some of
them may be able to price their services more aggressively or attract more
customers because of their stronger market presence and geographic reach and
their larger financial resources.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
Leap experienced net losses of approximately $269.3 million (excluding the
gain on the sale of Smartcom, net of related taxes and foreign currency impact)
in the year ended December 31, 2000, $75.8 million in the transition period from
September 1, 1999 to December 31, 1999, $164.6 million in the year ended August
31, 1999, $46.7 million in the year ended August 31, 1998 and $5.2 million in
the year ended August 31, 1997. Losses are likely to be significant for the next
several years as we launch service in new markets and seek to increase our
customer bases in new and existing markets. We may not generate profits in the
short term or at all. If we fail to achieve profitability, that failure could
have a negative effect on the market value of our common stock.
IF WE EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, OUR COSTS COULD INCREASE
Many providers in the U.S. personal communications services, or PCS,
industry have experienced a high rate of customer turnover as compared to
cellular industry averages. The rate of customer turnover may be the result of
several factors, including limited network coverage, reliability issues such as
blocked or dropped calls, handset problems, inability to roam onto cellular
networks, affordability, customer care concerns and other competitive factors.
Our strategy to address customer turnover may not be successful, or the rate of
customer turnover may be unacceptable. In some markets, our competitors have
chosen to provide a service plan with pricing similar to the Cricket service,
and these competitive factors could also cause increased customer turnover. A
high rate of customer turnover could reduce revenues and increase marketing
costs in order to attract the minimum number of replacement customers required
to sustain our business plan, which, in turn, could have a material adverse
effect on our business and financial condition.
WE FACE SIGNIFICANT COMPETITION
The wireless telecommunications industry generally is very competitive and
competition is increasing. Unlike many wireless providers, we also intend to
compete directly with landline service providers in the
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telecommunications industry. Many competitors have substantially greater
resources than we have, and we may not be able to compete successfully. Some
competitors have announced rate plans substantially similar to the Cricket
service plan in markets in which we have launched or expect to launch service.
These competitive plans could adversely affect our ability to maintain our
pricing, market penetration and customer retention.
In the U.S., we will compete directly with other wireless providers and
traditional landline carriers in each of our markets, many of which have greater
resources than we do and entered the market before us. A few of our competitors
operate wireless telecommunications networks covering most of the U.S.
Competitors' earlier entry and broader presence in the U.S. telecommunications
market may have a negative effect on our ability to successfully implement our
strategy. Furthermore, the FCC is actively pursuing policies designed to
increase the number of wireless competitors in each of our markets. For example,
the FCC will soon auction licenses that will authorize the entry of two
additional wireless providers in each market. In addition, other wireless
providers in the U.S. could attempt to implement our domestic strategy of
providing unlimited local service at a low, flat monthly rate if our strategy
proves successful. The landline services with which we will compete are already
used by some of our potential customers, and we may not be successful in our
efforts to persuade potential customers to adopt our wireless service in
addition to, or in replacement of, their current landline service.
Although the deployment of advanced telecommunications services is in its
early stages in many developing countries, we believe competition is increasing
as businesses, and foreign governments realize the market potential of
telecommunications services. In Mexico, a number of international
telecommunications companies, including Verizon, AT&T, MCI, Motorola, Nextel and
SBC, as well as local competitors such as Telmex and other Mexican
telecommunications companies, continue to actively engage in developing
telecommunications services. Pegaso also competes against landline carriers,
including government-owned telephone companies. We also expect the prices that
Pegaso may charge for its products and services in some regions will decline
over the next few years as competition increases in its markets. Our competitors
in Mexico have greater financial resources and more established operations than
Pegaso. Pegaso is at an early stage of development and may not be able to
compete successfully.
We compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio
and domestic and global mobile satellite service. These technologies may have
advantages over the technology we use and may ultimately be more attractive to
customers. We may compete in the future with companies who offer new
technologies and market other services, including cable television access,
landline telephone service and Internet access, that we do not currently intend
to market. Some of our competitors offer these other services together with
their wireless communications service, which may make their services more
attractive to customers. In addition, we expect that, over time, providers of
wireless communications services will compete more directly with providers of
traditional landline telephone services. In addition, energy companies, utility
companies and cable operators may expand their services to offer communications
services.
LEAP MAY FAIL TO RAISE REQUIRED CAPITAL
We require significant additional capital to build out and operate planned
networks and for general working capital needs. We also require additional
capital to invest in any new wireless opportunities, including capital for
license acquisition costs, network buildout of newly-acquired licenses and the
planned development and rollout of our wireless data services. Capital markets
have recently been volatile and uncertain. These markets may not improve, and we
may not be able to access these markets to raise additional capital. If we fail
to obtain required new financing, that failure would have a material adverse
effect on our business and our financial condition. For example, if we are
unable to access capital markets, we may have to restrict our activities or sell
our interests in licenses, or in one or more of our subsidiaries or other
ventures earlier than planned or at a "distressed sale" price.
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YOUR OWNERSHIP INTEREST IN LEAP WILL BE DILUTED UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE
On February 22, 2001, 30,032,912 shares of our common stock were
outstanding, and 19,828,396 additional shares of our common stock were reserved
for issuance. The issuance of these additional shares will reduce your
percentage ownership in Leap.
The following shares were reserved for issuance as of February 22, 2001:
- 3,375,000 shares reserved for issuance upon exercise of a warrant issued
to Qualcomm in connection with the spin-off of Leap, which is exercisable
in whole or in part at any time between now and September 2008;
- 7,458,749 shares reserved for issuance upon the exercise of options or
awards granted or available for grant to employees, officers, directors
and consultants under Leap's equity incentive plans;
- 2,972,938 shares reserved for issuance upon exercise of options to
purchase Leap common stock granted to holders of Qualcomm options in
connection with the distribution of Leap's common stock to the
stockholders of Qualcomm;
- 2,203,691 shares reserved for issuance upon consummation of our pending
acquisitions of wireless licenses in Utica, New York, Visalia,
California, Birmingham and Tuscaloosa, Alabama, Jonesboro, Arkansas, and
Jackson, Mississippi, and up to 785,598 shares (subject to certain
adjustments based upon changes in the market value of wireless licenses)
reserved for issuance in connection with our pending acquisition of
wireless licenses in Buffalo and Syracuse, New York, all of which
acquisitions are subject to FCC approval and other conditions;
- 202,566 shares of common stock reserved for issuance upon exercise of a
warrant held by Chase Telecommunications Holdings, Inc.; and
- 2,829,854 shares of common stock reserved for issuance upon exercise of
the warrants issued in connection with our February 2000 units offering.
We have also committed to issue $9 million of our common stock in a license
acquisition transaction, with the exact number of shares to be set at the
closing of the license acquisition. Under certain circumstances, the number of
shares to be issued in connection with our acquisitions of wireless licenses is
subject to change based on the value of wireless licenses and the market price
of our common stock at the time of the closing of the acquisition.
In January 2001, the Board approved, subject to stockholder approval, an
amendment to Leap's Employee Stock Purchase Plan which would increase the number
of shares reserved for issuance under the plan from 200,000 to 500,000. In
addition, the Board approved, subject to stockholder approval, a new executive
officer deferred bonus stock plan under which 275,000 shares of common stock
would be reserved for issuance. Both of these matters will be voted on by the
stockholders at the annual meeting in April 2001.
In December 2000, we entered into a common stock purchase agreement with
Acqua Wellington North American Equities Fund, Ltd. under which we may, at our
discretion, sell registered common stock from time to time over the succeeding
28 month period. Under the agreement, we may require Acqua Wellington to
purchase between $10 and $25 million of common stock, depending on the market
price of our common stock, during one or more 18 trading day periods. In
addition, we may grant to Acqua Wellington an option to purchase up to an equal
amount of common stock during the same 18 trading day period. Acqua Wellington
purchases the common stock at a discount to its then current market price,
ranging from 4.0% to 5.5%, depending on our market capitalization at the time we
require Acqua Wellington to purchase our common stock. A special provision in
the agreement (as amended) allowed the first sale of common stock under the
agreement to be up to $55 million. On January 23, 2001, we completed the first
sale of our common stock under the agreement, issuing 1,564,336 shares to Acqua
Wellington in exchange for $55.0 million in cash.
Dilution of the outstanding number of shares of our common stock could
adversely affect prevailing market prices for our common stock and our ability
to raise capital through an offering of equity securities.
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We have agreed to file registration statements to register for resale up to
2,989,289 shares reserved for issuance upon consummation of our pending
acquisitions of wireless licenses, plus an additional $9 million of shares of
our common stock in connection with a license acquisition, with the exact number
of shares to be set at the closing of the license acquisition. Under certain
circumstances, the number of shares for which registration rights have been
granted is subject to change based on the value of wireless licenses and the
market price of our common stock at the time of the closing of the transactions
pursuant to which the shares to be registered are issued.
HIGH LEVELS OF DEBT COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION
We have obtained and expect to continue to obtain much of our required
capital through debt financing. A substantial portion of the debt financing,
including all of our vendor financing, bears or is likely to bear interest at a
variable rate, exposing us to interest rate risk.
Our high leverage could have important consequences, including the
following:
- our ability to obtain additional financing may be impaired;
- a substantial portion of our future cash flows from operations must be
dedicated to the servicing of our debt, thus reducing the funds available
for operations and investments;
- our leverage may reduce our ability to adjust rapidly to changing market
conditions and may make us more vulnerable to future downturns in the
general economy; and
- high levels of debt may reduce the value of stockholders' investments in
Leap because debt holders have priority regarding our assets in the event
of a bankruptcy or liquidation.
We may not have sufficient future cash flows to meet our debt payments, and may
not be able to refinance any of our debt at maturity.
In addition, our vendors have a right and may choose to sell outstanding
debt under our vendor financing agreements to third parties at a discount. Such
sales could affect the prices at which our outstanding notes trade and could
adversely affect the market's perception of Leap's creditworthiness.
OUR DEBT INSTRUMENTS CONTAIN PROVISIONS AND REQUIREMENTS THAT COULD LIMIT OUR
ABILITY TO PURSUE BORROWING OPPORTUNITIES
The restrictions contained in the indenture governing the notes issued in
our February 2000 units offering, and the restrictions contained in our vendor
facilities, may limit our ability to implement our business plan, finance future
operations, respond to changing business and economic conditions, secure
additional financing, if needed, and engage in opportunistic transactions, such
as the acquisition of wireless licenses. Such senior debt, among other things,
restricts our ability and the ability of our subsidiaries and our future
subsidiaries to do the following:
- incur additional indebtedness;
- create liens;
- make certain payments, including payments of dividends and distributions
in respect of capital stock;
- consolidate, merge and sell assets;
- engage in certain transactions with affiliates; and
- fundamentally change our business.
In addition, such senior debt requires us to maintain certain ratios,
including:
- leverage ratios;
- interest coverage ratios; and
- fixed charges ratios;
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and to satisfy certain tests, including tests relating to:
- maximum annual capital expenditures;
- minimum covered population in order to incur additional indebtedness;
- minimum number of subscribers to our services in order to incur
additional indebtedness; and
- minimum quarterly revenues and, commencing in 2004, minimum annual
revenues.
We may not satisfy the financial ratios, tests and other covenants under
our senior debt due to events that are beyond our control. If we fail to satisfy
any of the financial ratios, tests, or other covenants, we could be in default
under our senior debt or may be limited in our ability to access additional
funds under our senior debt, which could result in our being unable to make
payments on our outstanding notes. In addition, if we fail to meet performance
requirements, our equipment financing may be restricted or cancelled. Because
Leap's new Cricket markets were launched later in the fourth quarter of 2000
than anticipated and because of reduced equipment sales revenues as a result of
holiday promotions, Cricket revenue was below the minimum required level
contained in the financial covenants in the vendor loan facilities. Leap has
received waivers of its failure to meet this revenue target from all of the
required lenders. We expect to make up this revenue shortfall and to be in
compliance with the revenue covenant by the end of the first quarter of 2001.
There can be no assurance that additional delays in market launches and/or other
adverse results in our business will not result in a failure to meet our
financial or operating covenants in the future. Any defaults that result in a
suspension of further borrowings under the vendor facilities or acceleration of
our obligations to repay the outstanding balances under the vendor facilities
would have a material adverse effect on our business and our financial
condition.
WE MAY EXPERIENCE DIFFICULTIES IN CONSTRUCTING AND OPERATING OUR
TELECOMMUNICATIONS NETWORKS
We will need to construct new telecommunications networks and expand
existing networks. We will depend heavily on suppliers and contractors to
successfully complete these complex construction projects. We may experience
quality deficiencies, cost overruns and delays on these construction projects,
including deficiencies, overruns and delays not within our control or the
control of our contractors. We also will depend on third parties not under our
control or the control of our contractors to provide backhaul and
interconnection facilities on a timely basis. In addition, the construction of
new telecommunications networks requires the receipt of permits and approvals
from numerous governmental bodies including municipalities and zoning boards.
There are pressures to limit growth and tower and other construction in many of
our markets. Failure to receive these approvals in a timely fashion can delay
system rollouts and can raise the costs of completing construction projects.
Pegaso's launch of commercial service in Mexico City was delayed several months
due to delays in obtaining the required permits from local authorities for cell
site construction and some planned 2000 launches were delayed. Some of our
planned Cricket launches were delayed and launched with fewer cell sites than
desirable and therefore reduced coverage, as well.
We may not complete construction projects within budget or on a timely
basis. A failure to satisfactorily complete construction projects could
jeopardize wireless licenses and customer contracts. As a result, a failure of
this type could have a material adverse effect on our business and financial
condition.
Even if we complete construction in a timely and cost effective manner, we
will also face challenges in managing and operating our telecommunications
systems. These challenges include operating and maintaining the
telecommunications operating equipment and managing the sales, advertising,
customer support, billing and collection functions of the business. Our failure
in any of these areas could undermine customer satisfaction, increase customer
turnover, reduce revenues and otherwise have a material adverse effect on our
business and financial condition.
WE HAVE ENCOUNTERED RELIABILITY PROBLEMS DURING THE INITIAL DEPLOYMENT OF OUR
NETWORKS
As is typical with newly-constructed and rapidly expanding wireless
networks, we have experienced reliability problems with respect to network
infrastructure equipment, reliability of third party suppliers and
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capacity limitations of our networks. If our networks ultimately fail to perform
as expected, that failure could have a material adverse effect on our business
and financial condition.
CALL VOLUME UNDER CRICKET FLAT PRICE PLANS COULD EXCEED THE CAPACITY OF OUR
WIRELESS NETWORKS
Our Cricket strategy in the U.S. is to offer consumers a service plan that
allows them to make virtually unlimited local calls for a low, flat monthly
rate. Our business plans for this strategy assume that Cricket customers will
use their wireless phones for substantially more minutes per month than
customers who purchase service from other providers under more traditional
plans. Our current plans assume, and our experience has shown, that our Cricket
customers use their phones approximately 1,000 minutes per month. We design our
U.S. networks to accommodate this expected high call volume. Although we believe
CDMA-based networks will be well suited to support high call volumes, if
wireless use by Cricket customers exceeds the capacity of our future networks,
service quality may suffer, and we may be forced to raise the price of Cricket
service to reduce volume or otherwise limit the number of new customers, or
incur substantial capital expenditures to expand network capacity. If our
planned networks cannot handle the call volumes they experience, our competitive
position and business prospects in the U.S. could be materially adversely
affected.
THE FCC'S DECISION THAT WE ARE QUALIFIED TO HOLD C-BLOCK AND F-BLOCK LICENSES IS
SUBJECT TO REVIEW AND APPEAL
Our business plan depends on our acquisition and operation of C-Block and
F-Block licenses in the U.S. We may acquire and operate C-Block and F-Block
licenses only if we qualify as a "designated entity" under FCC rules.
In July 1999, the FCC issued an opinion and order that found that we were
entitled to acquire C-Block and F-Block licenses. The order approved our
acquisition of the 36 C-Block licenses for which we were the highest bidder in
the FCC's 1999 spectrum re-auction, and the transfer of three F-Block licenses
which cover portions of North Carolina from AirGate Wireless, L.L.C. to one of
our subsidiaries, in each case subject to the fulfillment of certain conditions.
In October 1999, the FCC issued to us the 36 re-auctioned licenses. In addition,
in March 2000, the FCC approved the transfer to us of 11 C-Block licenses from
Chase Telecommunications and one F-Block license from PCS Devco. Subsequently,
the FCC has approved the transfer to us of various other C-Block and F-Block
licenses.
The FCC's grants of our C-Block and F-Block licenses are subject to certain
conditions. Each of the conditions imposed by the FCC in the opinion and order
has been satisfied. We have a continuing obligation, during the designated
entity holding period for our C-Block and F-Block licenses, to limit our debt to
Qualcomm to 50% or less of our outstanding debt and to ensure that persons who
are or were previously officers or directors of Qualcomm do not comprise a
majority of our board of directors or a majority of our officers. If we fail to
continue to meet any of the conditions imposed by the FCC or otherwise fail to
maintain our qualification to own C-Block and F-Block licenses, that failure
could have a material adverse effect on our business and financial condition.
Various parties previously challenged our qualification to hold C-Block and
F-Block licenses, which challenges were rejected in the FCC's July 1999 order.
One of these parties, a wireless operating company, requested that the FCC
review its order, as well as the order consenting to the transfer of licenses to
us from Chase Telecommunications and PCS Devco. That wireless operating company
also has opposed all of our subsequent assignment or transfer applications at
the FCC. In July 2000, the FCC affirmed its July 1999 order as well as the order
consenting to the transfer of licenses to us from Chase Telecommunications and
PCS Devco, and the wireless operating company subsequently appealed the FCC's
decision with the Court of Appeal for the D.C. Circuit, which appeal is
currently pending. Further judicial review of the FCC's orders granting us
licenses is possible. In addition, licenses awarded to us at auction may be
subject to the outcome of pending judicial proceedings by parties challenging
the auction process or the FCC's decision or authority to auction or reauction
certain C-Block and F-Block licenses. We may also be affected by other pending
or future FCC, legislative or judicial proceedings that generally affect the
rules governing C-Block and F-Block
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licensees or other designated entities. For example, recent FCC rules changes
have made it easier for large companies to acquire C-Block and F-Block licenses
at auction and in the aftermarket.
In a recent reauction of C-Block and F-Block PCS spectrum that closed on
January 26, 2001, we were named the high bidder on 22 licenses covering 22.4
million potential customers. These licenses have not yet been granted to us, and
we cannot predict what effect any challenges before the FCC or in court to the
reauction generally, or the grant of these licenses to us specifically, will
have on us. NextWave Telecommunications, Inc. is a party to litigation
challenging the validity of the auction. Other parties have indicated publicly
that they intend to challenge the validity of the auction and grants thereunder,
as well.
We may not prevail in connection with any such challenges, appeals or
proceedings. If the FCC or a court determines that we are not qualified to hold
C-Block or F-Block licenses, it could take the position that some or all of our
licenses should be divested, cancelled or reauctioned, or that we should pay
certain financial penalties.
WE MAY NOT SATISFY THE BUILDOUT DEADLINES AND GEOGRAPHIC COVERAGE REQUIREMENTS
APPLICABLE TO OUR LICENSES, WHICH MAY RESULT IN THE REVOCATION OF SOME OF OUR
LICENSES OR THE IMPOSITION OF FINES AND/OR OTHER SANCTIONS
Each of our licenses is subject to an FCC mandate that we construct PCS
networks that provide adequate service to specified percentages of the
population in the areas covered by that license, or make a showing of
substantial service in that area, within five and ten years after the license
grant date. For 30 MHz C-Block licenses, this initial requirement is met when
adequate service is offered to at least one-third of the population of the
licensed service area. For 15 MHz and 10 MHz C-Block licenses and 10 MHz F-Block
licenses, the initial requirement is met when adequate service is provided to at
least one-quarter of the population in the licensed service area. Because we
obtained many of our wireless licenses from third parties subject to existing
buildout requirements, some of our licenses have buildout deadlines in 2001 and
several other licenses have buildout deadlines in the first half of 2002. We are
unable to predict whether the required coverage will be achieved. Failure to
comply with these buildout requirements could cause the revocation of some of
our licenses or the imposition of fines and/or other sanctions.
ADVERSE REGULATORY CHANGES COULD IMPAIR OUR ABILITY TO MAINTAIN EXISTING
LICENSES AND OBTAIN NEW LICENSES
We must maintain our existing telecommunications licenses and those we
acquire in the future to continue offering wireless telecommunications services.
Changes in regulations or failure to comply with the terms of a license or
failure to have the license renewed could result in a loss of the license,
penalties and fines. For example, we could lose a license if we fail to
construct or operate a wireless network as required by the license. If we lose a
license, that loss could have a material adverse effect on our business and
financial condition.
State regulatory agencies, the FCC, the U.S. Congress, the courts and other
governmental bodies regulate the operation of wireless telecommunications
systems and the use of licenses in the U.S. The FCC, Congress, the courts or
other federal, state or local bodies having jurisdiction over our operating
companies may take actions that could have a material adverse effect on our
business and financial condition.
The FCC recently held a reauction of 422 C-Block and F-Block licenses that
closed in January 2001. In connection with that reauction, the FCC made a number
of changes to its wireless and PCS licensing rules, and to the size of the
licenses being sold. Specifically, the FCC subdivided the C-Block licenses
slated for reauction into three 10 MHz licenses. For this reauction, the FCC
also subdivided the BTA service areas to which Entrepreneur's Block eligibility
restrictions would continue to apply into two tiers according to population. In
so-called "Tier 1" BTAs, service areas with a population equal to or greater
than 2.5 million, the FCC removed all eligibility restrictions on two of the
newly-created 10 MHz C-Block licenses, and sold them in open bidding to any
entity that could afford to purchase them, no matter how large. In these Tier 1
BTAs, one 10 MHz C-Block license remained subject to a closed bidding process,
such that only entities meeting Entrepreneur's Block eligibility requirements
were permitted to bid. In Tier 2 BTAs, service areas
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with a population less than 2.5 million, two of the 10 MHz C-Block licenses
remained subject to C-Block and F-Block eligibility rules and thus were reserved
for closed bidding by designated entities, while one 10 MHz C-Block license per
BTA was sold at open bidding. Several 15 MHz C-Block licenses and a number of
F-Block licenses slated for reauction also were sold at open bidding, such that
previous C-Block and F-Block eligibility requirements no longer applied.
The FCC's recent reauction represented a compromise that made some
additional spectrum available to large carriers, but also continued to preserve
C-Block and F-Block spectrum for designated entities. The FCC's C-Block and
F-Block rules, the recent reauction, and FCC actions taken in connection with
previous C-Block auctions and reauctions, remain subject to pending FCC and
judicial proceedings. These proceedings, and continuing changes to the C-Block
and F-Block rules, could have a material adverse effect on our business and
financial condition, including our ability to continue acquiring C-Block and
F-Block licenses. In addition, in the reauction, we were named the high bidder
on 22 licenses covering 22.4 million potential customers. These licenses have
not yet been granted to us, and we cannot predict what effects any challenges
before the FCC or in court to the reauction generally, or the grant of these
licenses to us specifically, will have on us. NextWave Telecommunications, Inc.
is a party to litigation challenging the validity of the auction. Other parties
have indicated publicly that they intend to challenge the validity of the
auction and grants thereunder, as well.
Foreign governmental authorities regulate the operation of wireless
telecommunications systems and the use of licenses in the foreign countries in
which we operate. In some cases, the regulatory authorities also operate our
competitors. Changes in the current regulatory environment of these markets
could have a negative effect on us. In addition, the regulatory frameworks in
some of these countries are relatively new, and the interpretation of
regulations is uncertain.
We believe that the process of acquiring new telecommunications licenses
will be highly competitive. If we are not able to obtain new licenses, or cannot
otherwise participate in companies that obtain new licenses, our ability to
expand our operations would be limited.
RISKS ASSOCIATED WITH PEGASO COULD ADVERSELY AFFECT OUR BUSINESS
We face many risks from our international activities. Pegaso in Mexico
largely depends on the Mexican economy. The Mexican market is subject to rapid
fluctuations in currency exchange rates, consumer prices, inflation, employment
levels and gross domestic product.
Mexico's currency and financial markets continue to experience volatility.
The impact on the Mexican economy of the economic crisis that began in Asia and
then spread to Eastern Europe and Brazil has affected the ability of Mexican
companies to access the capital markets. The ability of Mexican companies to
access the capital markets may not improve and may deteriorate further in the
future. The economy of Mexico historically is affected by fluctuations in the
price of oil and petroleum products. Fluctuations in the prices of these
products and continuing political tensions in Mexico could negatively impact our
prospects in Mexico.
In addition, foreign laws and courts govern many of the agreements of
Pegaso. Other parties may breach or may make it difficult to enforce these
agreements.
Pegaso requires substantial additional capital to continue its planned
growth and operations. Leap may contribute capital to Pegaso in the future. If
Leap does not contribute additional capital to Pegaso, Leap's ownership interest
in Pegaso may be diluted due to additional capital contributions of other
investors.
If presented with attractive opportunities, Leap may invest in additional
international markets in the future. Any such international investment would
create risks associated with the applicable foreign country's economic
condition, including but not limited to currency exchange rates, inflation,
employment levels and gross domestic product.
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OUR RESULTS OF OPERATIONS MAY BE HARMED BY FOREIGN CURRENCY FLUCTUATIONS
We are exposed to risk from fluctuations in foreign currency rates, which
could impact our results of operations and financial condition. Although we
report our financial statements in U.S. dollars, Pegaso reports its results in
Mexican pesos. Consequently, fluctuations in currency exchange rates between the
U.S. dollar and the Mexican peso will affect our results of operations as well
as the value of our ownership interest in Pegaso. We do not currently hedge
against foreign currency exchange rate risks.
Pegaso generates revenues that are paid in Mexican pesos. However, many of
Pegaso's major contracts, including financing agreements and contracts with
equipment suppliers, are denominated in U.S. dollars. As a result, a significant
change in the value of the U.S. dollar against the Mexican peso could
significantly increase Pegaso's expenses and could have a material adverse
effect on our business and financial condition. For example, Pegaso may be
unable to satisfy its obligations under equipment supply agreements denominated
in U.S. dollars in the event of currency devaluations. In some developing
countries, including Mexico, significant currency devaluations relative to the
U.S. dollar have occurred and may occur again in the future. In such
circumstances, Leap and Pegaso may experience economic loss with respect to the
collectability of payments from their business partners and customers and the
recoverability of their investments.
If we invest in other foreign ventures in the future, we will face similar
risks relating to the applicable foreign currency of the foreign venture as well
as other country-specific risks.
THE TECHNOLOGIES THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR ABILITY
TO COMPETE EFFECTIVELY
We have employed digital wireless communications technology based on CDMA
technology. We are required under an agreement entered into with Qualcomm in
connection with our spin-off to use only cdmaOne systems in international
operations through January 2004. Other digital technologies may ultimately prove
to have greater capacity or features and be of higher quality than CDMA. If
another technology becomes the preferred industry standard in any of the
countries in which we operate, we may be at a competitive disadvantage, and
competitive pressures may require us to change our digital technology at
substantial cost. We may not be able to respond to those pressures or implement
new technology on a timely basis, or at an acceptable cost. If CDMA technology
becomes obsolete at some time in the future, and we are unable to effect a
cost-effective migration path, it could materially and adversely affect our
business and financial condition.
IF WIRELESS HANDSETS POSE HEALTH AND SAFETY RISKS, WE MAY BE SUBJECT TO NEW
REGULATIONS, AND DEMAND FOR OUR SERVICES MAY DECREASE
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health concerns, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may have the effect
of discouraging the use of wireless handsets, which would decrease demand for
our services. In recent years, the FCC and foreign regulatory agencies have
updated the guidelines and methods they use for evaluating radio frequency
emissions from radio equipment, including wireless handsets. In addition,
interest groups have requested that the FCC investigate claims that wireless
technologies pose health concerns and cause interference with airbags, hearing
aids and other medical devices. There also are some safety risks associated with
the use of wireless handsets while driving. Concerns over these safety risks and
the effect of any legislation that may be adopted in response to these risks
could limit our ability to market and sell our wireless service.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS
We believe our success depends on the contributions of a number of our key
personnel. These key personnel include but are not limited to Harvey P. White,
Chairman of the Board and Chief Executive Officer, and Susan G. Swenson,
President and Chief Operating Officer. If we lose the services of key personnel,
that loss could materially harm our business. We do not maintain "key person"
life insurance on any employee.
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OUR STOCK PRICE IS VOLATILE
The stock market in general, and the stock prices of telecommunications
companies and other technology-based companies in particular, have experienced
significant volatility that often has been unrelated to the operating
performance of any specific public companies. The market price of Leap common
stock has fluctuated widely in the past quarter and calendar year and is likely
to continue to fluctuate in the future. Factors that may have a significant
impact on the market price of Leap common stock include:
- future announcements concerning Leap or its competitors, including the
announcement of joint development efforts;
- changes in the prospects of our business partners or equipment suppliers;
- delays in the construction of planned Cricket networks and in general
implementation of our business plan;
- failure to achieve planned levels of subscriber growth and other
operating targets;
- deficiencies in our networks;
- results of technological innovations;
- government regulation, including the FCC's review of our acquisition of
wireless licenses;
- changes in recommendations of securities analysts and rumors that may be
circulated about Leap or its competitors;
- the impact of an economic slowdown on existing and future customers; and
- public perception of risks associated with our international operations.
Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Shortfalls in our revenues,
earnings or subscriber growth or delays in network buildout in any given period
relative to the levels and schedule expected by securities analysts could
immediately, significantly and adversely affect the trading price of Leap common
stock. In the past, following periods of volatility in the market price of a
company's securities, class action litigation has often been instituted against
the subject company. Litigation of this type could result in substantial costs
and a diversion of our management's attention and resources which could, in
turn, have a material adverse effect on our business and financial condition.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. The terms of the indenture governing the notes issued in our
February 2000 units offering restrict our ability to declare or pay dividends.
We intend to retain future earnings to fund our growth. Accordingly, you will
not receive a return on your investment in our common stock through the payment
of dividends in the foreseeable future and may not realize a return on your
investment even if you sell your shares. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
A DETERMINATION THAT LEAP IS AN INVESTMENT COMPANY COULD ADVERSELY AFFECT OUR
BUSINESS
Our ownership interest in Pegaso was 20.1% as of February 28, 2001, and we
expect that future investments in ventures will include ownership interests of
less than 50% and that our interests will vary over time as the ventures raise
additional capital. As a result, we could be subject to the registration
requirements of the Investment Company Act of 1940. The Investment Company Act
of 1940 requires registration of companies that engage primarily in the business
of investing in stock. Because we intend to actively participate in the business
operations of our subsidiaries and other ventures, we do not believe that we are
primarily engaged in the business of investing in stock. We intend to monitor
and adjust our interests in our ventures to the extent practical to avoid being
subject to the Investment Company Act of 1940. If we must register as an
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investment company under the Investment Company Act of 1940, compliance with
these regulations will negatively impact our business.
WE HAVE IMPLEMENTED OR ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD
PREVENT OR DELAY AN ACQUISITION OF LEAP THAT IS BENEFICIAL TO OUR STOCKHOLDERS
Our charter and bylaws could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. Our charter and
bylaw provisions could diminish the opportunities for a stockholder to
participate in tender offers. The charter and bylaws may also restrain
volatility in the market price of our common stock resulting from takeover
attempts. In addition, our board of directors may issue preferred stock that
could have the effect of delaying or preventing a change in control of Leap. The
issuance of preferred stock could also negatively affect the voting power of
holders of our common stock. The provisions of the charter and bylaws may have
the effect of discouraging or preventing an acquisition of Leap or a sale of our
businesses. In addition, Section 203 of the Delaware General Corporation Law
imposes restrictions on mergers and other business combinations between us and
any holder of 15% or more of our common stock.
We have adopted a rights plan that could discourage, delay or prevent an
acquisition of Leap at a premium price. The rights plan provides for preferred
stock purchase rights attached to each share of our common stock which will
cause substantial dilution to a person or group acquiring 15% or more of our
stock if the acquisition is not approved by our board of directors.
The transfer restrictions imposed on the U.S. wireless licenses we own also
adversely affect the ability of third parties to acquire us. Our licenses may
only be transferred with prior approval by the FCC. In addition, we are
prohibited from voluntarily assigning or transferring control of our C-Block and
F-Block licenses for five years after grant date except to assignees or
transferees that satisfy the financial criteria established by the FCC for
designated entities, unless we have met the first network buildout deadline
applicable to such license. Accordingly, the number of potential transferees of
our licenses is limited, and any acquisition, merger or other business
combination involving us would be subject to regulatory approval.
In addition, the documents governing our indebtedness contain limitations
on our ability to enter into a change of control transaction. Under these
documents, the occurrence of a change of control transaction, in some cases
after notice and grace periods, would constitute an event of default permitting
acceleration of the indebtedness.
ITEM 2. PROPERTIES
We currently lease two office buildings in San Diego, California for our
headquarters, totaling 61,102 square feet, which we use for sales, marketing,
product development and administrative purposes. The lease on 10,575 square feet
of such space, which we sublease from Qualcomm, is subject to termination upon
90 days' notice by either party. We expect that the amount of space we sublease
from Qualcomm will increase to approximately 25,000 square feet in the near
future. We are also currently considering additional expansion in San Diego, and
may lease up to an additional aggregate of approximately 20,000 square feet over
the next 18 months.
As of February 1, 2001, Leap had leased regional headquarters in
Bridgeville, Pennsylvania; Tulsa, Oklahoma; Albuquerque, New Mexico; and
Nashville, Tennessee, which range from approximately 17,000 square feet to
approximately 18,750 square feet in each market. Leap has 10 additional office
leases in its individual markets which range from 2,460 square feet to 9,208
square feet. We also lease 25 retail stores in our markets ranging in size from
824 square feet to 3,767 square feet and lease four kiosks for retail sales. In
addition, we currently lease approximately 730 cell site locations and 16 switch
and warehouse facilities which range in size from approximately 5,000 square
feet to approximately 23,000 square feet. We do not own any real property.
As we continue to buildout Cricket markets in 2001 and beyond, we expect
that we will need to lease substantial additional office facilities, retail
stores, cell sites and switch and warehouse facilities.
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ITEM 3. LEGAL PROCEEDINGS
In July 1999, the FCC issued an opinion and order that found that Leap was
qualified to acquire C-Block and F-Block licenses. The order also approved
Leap's acquisition of the 36 C-Block licenses for which Leap was the high bidder
in the FCC's 1999 spectrum reauction, and approved the transfer to Leap of three
F-Block licenses covering portions of North Carolina, in each case subject to
the fulfillment of some conditions. Various parties previously challenged Leap's
qualification to hold C-Block and F-Block licenses, which challenges were
rejected in the FCC's July