Thursday June 13, 7:00 am Eastern Time
Press Release
SOURCE: Leap Wireless International, Inc.
Leap Reports Significant Progress in Mitigating Fraud
~ Leap Addresses Investor Inquiries Regarding Vendor Loan Covenants ~
SAN DIEGO, June 13 /PRNewswire-FirstCall/ -- Leap Wireless International, Inc. (Nasdaq: LWIN - News) today reported significant progress in mitigating the effects of fraud on its business. The Company has seen a significant reduction in fraudulent activity after taking aggressive steps to implement processes, systems and controls designed to detect fraud and screen out customers and dealers who engage in fraudulent activity. Also, in response to investor questions regarding the Company's ability to meet its minimum EBITDA covenants, Leap stated that given its progress in mitigating fraud and its expectations that the business will continue to perform consistent with plan, the Company anticipates it will meet all of its minimum EBITDA covenants added to its vendor facilities earlier this year.
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"After developing and testing a series of new policies and procedures, we completed their implementation in April and have since seen a significant positive operational and financial impact from the work we have done to combat fraud," said Harvey P. White, Leap's chairman and CEO. "While we are reporting today on our current progress in containing fraud, our efforts and focus on this issue have been and will be ongoing. We continue to carefully scrutinize our existing customer and dealer base in an effort to identify and eliminate fraudulent activity."
Leap has taken the following actions to combat fraud by customers and
dealers:
-- To contain credit card fraud, in which a person pays for service with
the credit card of another, Leap has implemented improved credit card
validation systems and processes at both the point of sale and at
Cricket's customer care centers. This has reduced the percentage of
credit card transaction charge backs by nearly 80 percent since
January, and Leap believes that the Company's results are now
consistent with industry standards. This type of fraud decreases
reported service revenue and average revenue per user (ARPU) because
revenue associated with charge backs is reversed out in the month the
charge back is received.
-- To prevent subscription fraud, in which a person who already owns a
Cricket phone activates service with false information and thereby
obtains an additional month of service free, the Company has
implemented new customer validation systems and processes at the point
of activation. Leap believes these actions have prevented the
activation of or otherwise cleared from its system more than
20,000 customers in the second quarter who were potentially involved
in fraud. In addition, the Company believes that virtually all of the
customers involved in fraud at the end of the first quarter have been
removed from its system or turned into paying customers, because
nonpaying customers are automatically removed from its system after
30 days. This type of fraud decreases reported service revenue and
ARPU due to the free month of service provided to these customers.
-- To rein in distribution fraud, in which a third-party dealer or
distributor reports a handset as sold and activates the service in a
fictitious person's name, Leap has reviewed dealer performance and
eliminated approximately 15 percent of the indirect sales locations
that were under-performing or suspected of potentially fraudulent
activity. As a result, Leap currently markets its Cricket service
through over 5,100 indirect points of sale in addition to its direct
retail locations. The Company has also instituted more timely and
targeted dealer performance and inventory monitoring systems that
provide the Company with near-real time reporting. Leap will continue
to utilize these systems to identify and mitigate potential fraudulent
activity. This type of fraud increases the amount of equipment
subsidy reported and cost per gross addition (CPGA) because, like all
wireless carriers, the Company sells its handsets at a loss and gives
market development funds and volume incentives to its indirect
dealers.
With the exception of some normal delays in the reporting of credit card misuse, which the Company does not believe is material, Leap believes that the financial costs related to the fraudulent activity that occurred during the first quarter were included in the financial results reported for that quarter. As the Company stated in the last quarterly conference call and in its Quarterly Report on Form 10-Q for the first quarter of 2002, it expects to see a negative impact on the calculated revenue per user, acquisition cost and churn metrics during the second quarter of 2002, with improvement in these metrics expected later in the year as the new programs, systems and processes continue to mitigate the effects of fraud.
"We have instituted the necessary steps to reduce the effects of fraud while remaining focused on the growth and cost performance of our business," said Susan G. Swenson, Leap's president and chief operating officer. "We have ceased doing business with a number of indirect dealers and we have been working with law enforcement as appropriate throughout this process to prosecute those who steal from our company. Based on results today, we are encouraged that we have the right systems and processes in place to mitigate the fraud issue."
In addition, White commented on the requirements of the Total Debt to Total Capitalization covenant contained within its vendor financing agreements as measured on January 1, 2004.
"As we previously reported, to meet this particular covenant we either will need to refinance the indebtedness, obtain a waiver of the covenant from our lenders, or raise $225 million in additional capital to pay down indebtedness," White said. "However, if we continue to execute on our business plans as we anticipate, our operations will generate sufficient cash flow for the operation of our 40 market plan and to make required principal and interest payments to the lenders. We are optimistic that the vendors will work with us as they have done in the past, and we will be able to refinance our vendor facilities or simply amend this particular covenant if our b
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