1/14/00 - Management's Discussions: 10-Q, LEAP WIRELESS INTERNATIONAL INC 1 of 2
(Edgar Online via COMTEX)
Company Name: LEAP WIRELESS INTERNATIONAL INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed consolidated financial statements and notes thereto
included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Registration Statement on Form
S-3 (File No. 333-93073).
As used in this report, the terms we, our or us refer to Leap Wireless International, Inc. and its subsidiaries unless the context
suggests otherwise.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's future results could differ materially from those discussed here. Factors that could cause or
contribute to such differences, including factors relating to joint ventures and other entities in which the Company has interests,
include: the ability to successfully deploy wireless networks; the ability to raise sufficient funds to finance such deployment; the ability
to control costs relating to constructing, expanding, and operating the networks; the ability to attract new subscribers and the rate of
growth of the subscriber base; the usage and revenue generated from subscribers; the level of airtime and equipment prices; the rate of
churn of subscribers; the range of services offered; the ability to effectively manage growth and the intense competition in the wireless
communications industry, as well as conditions governing the use of network licenses set by various government and regulatory
authorities; developments in current or future litigation; and the other risks detailed in the Company's Registration Statement on Form
S-3 (File No. 333-93073) under the heading "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.
OVERVIEW
Leap is a wireless communications carrier with a unique approach to providing digital wireless service that is designed to appeal to the
mass market. We intend to transform wireless into a mass consumer product by deploying customer-oriented, low-cost, simple
wireless services. We generally seek to address a much broader population segment than incumbent wireless operators have
addressed to date. In the United States, we are employing a unique business strategy to extend the benefits of mobility to the mass
market by offering wireless service under the brand name Cricket that is as simple as, and priced at rates competitive with, traditional
landline service. Cricket service was introduced in Chattanooga, Tennessee in March 1999 by Chase Telecommunications, Inc., a
company that we have agreed to acquire, under a management agreement that requires the management of Chase
Telecommunications to control the business until our proposed acquisition is completed. The expansion of the Cricket service to
Nashville, Tennessee is currently underway with an expected launch in January 2000. To expand the Cricket service, we currently have
acquired or agreed to acquire wireless licenses covering approximately 29 million potential customers.
Internationally, we currently are involved in developing and operating nationwide digital wireless systems in Mexico and Chile. We plan
to focus our efforts in markets primarily in the Americas where we believe the combination of unfulfilled demand and our attractive
wireless service offerings will fuel rapid growth. In Mexico, we were a founding shareholder and have invested $100 million in Pegaso, a
joint venture with Grupo Pegaso and Grupo Televisa, the largest media company in the Spanish-speaking world. We currently own
28.6% of Pegaso, which is deploying the first 100% digital wireless communications network in Mexico. Pegaso holds wireless
licenses in the 1900 MHz band to provide nationwide service covering all of Mexico, with approximately 99 million potential customers.
Pegaso recently announced that it has signed a non-binding memorandum of understanding with Sprint PCS under which Sprint PCS
would invest up to $250 million by purchasing shares from Pegaso and shareholders other than Leap. If the contemplated transaction is
consummated, Sprint PCS will acquire a 30.5% interest in Pegaso and our percentage interest in Pegaso will decrease to 20.5%.
In Chile, in April 1999, we acquired the 50% of our wireless venture that we did not already own, and in November 1999, re-launched the
venture's service under a new brand name and corporate identity, SMARTCOM PCS. We acquired the remaining 50% interest for $28
million in cash and a $22 million interest-free note due in May 2002. Smartcom holds a nationwide wireless license in the 1900 MHz
band and operates a nationwide digital wireless system in Chile. Smartcom's network is the only CDMA-based network in the country,
and it covers approximately 12 million potential customers representing 80% of Chile's total population.
We are in the early stages of development. Start-up wireless communications companies typically require substantial capital
expenditures for the construction of their networks and license acquisition costs. In addition, these
companies typically incur significant marketing and other expenses as they begin commercial operations. Accordingly, as we continue
to build-out our networks, expand our operations, and amortize our capitalized costs, our net operating losses and our proportionate
share of the losses in our unconsolidated wireless operating companies is expected to grow.
PENDING ACQUISITIONS
Chase Telecommunications. In December 1998, we agreed to acquire substantially all the assets of Chase Telecommunications
Holdings, including wireless licenses, subject to FCC approval and other conditions. The purchase price includes approximately $6.3
million in cash, the assumption of principal amounts of liabilities that totaled approximately $109.8 million at November 30, 1999, a
warrant to purchase 1% of the common stock of our subsidiary Cricket Communications Holdings at an exercise price of $1.0 million,
and contingent earn-out payments of up to $41.0 million based on Chase Telecommunications's earnings during the fifth full year
following the closing of the acquisition. The liabilities to be assumed include approximately $78.8 million in principal amounts owed to
the FCC associated with the wireless licenses that bear interest at the rate of 7.0% per annum and must be repaid in quarterly
installments of principal and interest through September 2006. An acquisition agreement has been signed, but the transaction has not
yet been completed and is subject to FCC approval and other conditions.
Following the closing of the acquisition, amounts owed by Chase Telecommunications to Qualcomm under an equipment financing
agreement become due and payable within five days and will be repaid from borrowings under Cricket Communications's credit facility
with Lucent. As of November 30, 1999, Chase Telecommunications owed approximately $31.0 million to Qualcomm under the
equipment financing agreement.
Our subsidiary, Cricket Communications, has entered into a credit facility with Chase Telecommunications under which Cricket
Communications agreed, at its discretion, to provide working capital loans to Chase Telecommunications. The maximum principal
amount of working capital loans that may be drawn under the facility is $50 million. Borrowings under the facility bear interest at the
prime rate plus 4.5%. The borrowings are collateralized by substantially all of the assets of Chase Telecommunications and are
subordinated in right of payment to amounts Chase Telecommunications owes to Qualcomm under its equipment financing agreement.
As of November 30, 1999, Chase Telecommunications's borrowings under its working capital facility with Cricket Communications
totaled $43.4 million, including $4.5 million of accrued and capitalized interest.
Until our pending acquisition of Chase Telecommunications is completed, Cricket Communications plans to purchase the equipment
and services required by Chase Telecommunications under its existing equipment purchase and financing agreements and then resell
the equipment and services to Chase Telecommunications on substantially similar terms, including financing. If we fail to close the
acquisition of Chase Telecommunications by September 20, 2000, we will be required to pay in full up to $60 million of debt plus
accrued interest incurred from the purchase and sale of equipment and services to Chase Telecommunications under Cricket
Communications's credit agreement with Lucent Technologies.
Other Wireless Licenses. In September 1998, we agreed to acquire three wireless licenses covering markets in North Carolina from
AirGate for a purchase price of approximately $13.3 million in cash and the assumption of principal amounts of approximately $11.7
million in debt obligations to the FCC. Amounts owed to the FCC bear interest at the rate of 6.25% per annum and must be repaid in
quarterly installments of principal and interest through April 2007. A reduction in the outstanding balance of the FCC debt by AirGate
before the closing will increase Leap's cash payment to AirGate. An acquisition agreement has been signed, but the transaction has
not yet been completed and is subject to closing conditions.
In September 1999, we agreed to acquire a wireless license covering the Dayton, Ohio market from PCS Devco for a purchase price of
approximately $2.4 million in cash and the assumption of principal amounts of approximately $1.1 million in debt obligations to the
FCC. Amounts owed to the FCC bear interest at the rate of 6.25% per annum and must be repaid in quarterly installments of principal
and interest through June 2007. In addition, Leap has agreed to transfer to PCS Devco a wireless license that covers 135,000 potential
customers. Until closing, Leap is required to make PCS Devco's payments under its FCC debt, with any payments made by Leap
reducing the cash payment to PCS Devco. An acquisition agreement has been signed, but the transaction has not yet been completed
and is subject to FCC approval and other conditions. Our agreement with PCS Devco expires in March 2000 if the transaction is not
consummated by such date.
In December 1999, we entered into a non-binding memorandum of understanding to acquire all of the outstanding stock of three
corporations which own wireless licensees covering markets in Albany, Columbus and Macon, Georgia for an aggregate purchase price
of 170,374 shares of our common stock. The memorandum of understanding provides
that these corporations will have no indebtedness or other liabilities at the closing. The memorandum of understanding provides that we
will file and have declared effective a resale shelf registration statement with the SEC covering the shares of our common stock issued
to the seller as soon as reasonably practicable after the closing of the transaction, subject to certain "lock-up" restrictions on resale. A
binding acquisition agreement has not yet been agreed to by the parties. If a definitive agreement is reached, the transaction will be
subject to FCC approval and other conditions.
In January 2000, we agreed to acquire two wireless licenses covering the Pittsburgh, Pennsylvania and Denver, Colorado markets from
Radiofone PCS, L.L.C. The purchase price for the Pittsburgh license is $18.4 million in cash and the purchase price for the Denver
license is 232,754 shares of our common stock and $3.4 million in cash less the amount of debt owed by Radiofone to the FCC
associated with the Denver license which will be assumed by Leap at the closing. As of November 30, 1999, the outstanding principal
amount owed to the FCC associated with the Denver license was approximately $1.5 million. The amounts owed to the FCC must be
repaid in quarterly installments of principal and interest through April 2007. As a condition to closing the purchase of the Denver
license, we must file and have declared effective a resale shelf registration statement with the SEC covering the shares of our common
stock to be issued to the seller, subject to certain "lock-up" restrictions on resale. The transaction is subject to FCC approval and other
conditions.
PRESENTATION
Management's Discussion and Analysis of Financial Condition and Results of Operations reviews the financial condition of the
businesses that Qualcomm transferred to us in September 1998 as if we were a separate entity for all periods discussed. We adopted
the equity method of accounting for our investment in Chase Telecommunications Holdings, Inc. in the third quarter of fiscal 1999.
Before that, we accounted for our investment in Chase Telecommunications Holdings under the cost method. Accordingly, all prior
periods presented in the accompanying financial statements have been adjusted retroactively in accordance with generally accepted
accounting principles.
In April 1999, we increased our ownership interest in Smartcom from 50% to 100%. As a result of the reporting lag we have adopted for
our foreign operating companies, we began fully consolidating Smartcom's results of operations in June 1999, the beginning of the
fourth quarter of fiscal 1999. Before that, we accounted for our investment in Smartcom under the equity method of accounting. We
account for our interest in Pegaso under the equity method of accounting. As of November 30, 1999, we owned 28.6% of Pegaso.
The directors of the Transworld Companies, partially owned subsidiaries of a company in which we have an indirect interest, recently
voted to liquidate the companies. The decision followed the Transworld Companies' loss of leased satellite transmission capacity and
the companies' failure to develop an acceptable business plan that did not utilize satellite transmission. As a result of these
developments, we wrote down our indirect investment in the Transworld Companies in the fourth quarter of fiscal 1999. In addition, we
have ceased funding loans to Metrosvyaz and, as a result, have written-off our remaining investment in Metrosvyaz.
The term "operating company" refers to Cricket Communications, Chase Telecommunications, Pegaso, Smartcom, the Transworld
Companies, Orrengrove, Metrosvyaz and OzPhone.
RESULTS OF OPERATIONS
The results of operations discussed below include period to period comparisons that may not reflect the character of our future results
of operations because of the following events that took place during our most recent fiscal year:
- the divestiture and liquidation of the Transworld Companies and the sale of our interest in OzPhone;
- the initial launch of the Cricket service in the U.S.;
- our agreements to acquire the wireless licenses and other assets of Chase Telecommunications Holdings and the wireless licenses
of AirGate and PCS Devco; and
- the consolidation of Smartcom with Leap after our purchase of the remaining 50% interest in Smartcom that we did not already own.
THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
We incurred a net loss of $46.3 million during the three month period ended November 30, 1999 compared to a net loss of $21.0 million
in the corresponding period of the prior fiscal year. The increase resulted primarily from start-up costs associated with our operating
companies. Net losses for our consolidated and unconsolidated wireless operating companies relate primarily to the expenditures
incurred in launching network services, including marketing and other expenses, and the amortization of capitalized network costs.
Smartcom, accounted for under the equity method until the fourth quarter of fiscal 1999, launched nationwide service in September
1998. Pegaso launched operations in Tijuana, Guadalajara and Monterrey in February through September 1999 and in Mexico City in
December 1999. Chase Telecommunications launched its traditional mobile service in the U.S. in September 1998 and re-launched
service utilizing Leap's Cricket wireless concept in March 1999.
As a direct result of the consolidation of Smartcom, we recorded $5.4 million of operating revenues, $7.4 million of cost of operating
revenues, $7.4 million of additional selling, general and administrative expenses, $5.0 million of additional depreciation and
amortization, $2.9 million of additional net interest expense, and $2.8 million of foreign currency transaction losses during the fiscal
quarter ended November 30, 1999. Smartcom's net loss of $20.7 million recognized during the three month period ended November 30,
1999, before intercompany eliminations, compares to $3.4 million that we recognized under the equity method for our 50% interest in
the corresponding period of the prior fiscal year. During the first quarter of fiscal 1999, we did not report any operating revenues because
all of our operating companies were accounted for under the equity method of accounting. Our operating companies did not generate
material revenues in the first quarter of fiscal 1999.
We incurred $13.5 million of selling, general and administrative expenses during the three month period ended November 30, 1999
compared to $4.2 million in the corresponding period of the prior fiscal year. The increase includes $7.4 million from the consolidation of
Smartcom. Excluding Smartcom, selling, general and administrative expenses remained relatively flat, despite increased staffing and
business development activities related to our domestic subsidiary, Cricket Communications.
We incurred an operating loss of $20.6 million during the three month period ended November 30, 1999 compared to an operating loss
of $4.4 million in the corresponding period of the prior fiscal year. The $16.2 million increase primarily reflects the consolidation of
Smartcom. We expect that the results of operations for the quarter ended November 30, 1999 may not reflect the character of our future
results of operations and believe operating revenues and expenses will increase in the future. We expect substantial growth in
subscribers, operating revenues and operating expenses as a result of our pending acquisition and consolidation of Chase
Telecommunications, the planned development and launch of Cricket service in multiple U.S. markets, and an increase in Smartcom's
marketing efforts. We also expect substantial growth in Pegaso's subscribers, operating revenues and operating expenses; however,
because Pegaso is accounted for under the equity method, its operating revenues and expenses are not fully consolidated.
Equity in net loss of unconsolidated wireless operating companies was $16.2 million during the three month period ended November 30,
1999 compared to $16.0 million in the corresponding period of the prior fiscal year. During the first fiscal quarter, our equity share in the
net loss of our unconsolidated wireless operating companies related to Pegaso, which launched service in Tijuana, Guadalajara and
Monterrey in February through September 1999, and Chase Telecommunications, which re-launched service utilizing Leap's Cricket
wireless concept in March 1999. During the corresponding quarter of fiscal 1999, our equity share in the net loss of our unconsolidated
wireless operating companies related primarily to Smartcom (prior to Leap's acquisition of the remaining 50 percent interest), Chase
Telecommunications (for which Leap adopted the equity method of accounting in the third quarter of fiscal 1999 and retroactively
adjusted prior periods) and our Russian investments which have been subsequently written-down, liquidated or are in the process of
liquidation.
Interest expense was $7.2 million during the three month period ended November 30, 1999 compared to $1.1 million in the
corresponding period of the prior fiscal year. Interest expense related primarily to borrowings under our credit agreement with
Qualcomm, and Smartcom's interest expense related primarily to the financing of its wireless communications network. We expect
interest expense to increase substantially in the future due to expected borrowings used to fund the construction of wireless networks
in various markets across the United States.
Foreign currency transaction losses of $2.8 million during the three month period ended November 30, 1999 reflected unrealized foreign
exchange losses recognized by Smartcom on U.S. dollar denominated loans as a result of changes in the exchange rate between the
U.S. dollar and the Chilean peso.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Over the next twelve months, we have budgeted a total of approximately $633.6 million for the following capital requirements:
- approximately $500 million for capital expenditures for the build-out of our first 17 Cricket networks in our initial phase of development
and to fund operating losses expected to be incurred by Cricket Communications;
- approximately $75 million for capital expenditures for the build-out of Smartcom's networks in Chile and operating losses expected to
be incurred by Smartcom;
- approximately $41.6 million to complete our pending acquisitions, including the acquisitions of Chase Telecommunications and
wireless licenses from AirGate, PCS Devco and Radiofone and wireless licenses to be acquired under a non-binding memorandum of
understanding entered into in December 1999; and
- approximately $17 million for general corporate overhead and other expenses.
Our actual expenditures may vary significantly depending upon the progress of the build-out of our networks and other factors, including
unforeseen delays, cost overruns, unanticipated expenses, regulatory expenses, engineering design changes and other technological
risks.
As of November 30, 1999, we had a total of approximately $835.9 million in unused capital resources in place for our future cash needs
as follows:
- approximately $40.2 million in consolidated cash on hand (including $28.6 million held by Leap);
- approximately $114.7 million in available commitments under the credit facility with Qualcomm; and
- approximately $681.0 million in commitments under vendor financing arrangements with Lucent Technologies and Qualcomm, with
availability subject to the total amounts of equipment purchased.
Consequently, we believe that if we do not make any additional license acquisitions or any investments in new ventures, we have
adequate capital resources in place to fund our operations for the next twelve months.
On December 20, 1999, we filed a registration statement on Form S-3 with the Securities and Exchange Commission to register the
offer and sale of an additional 3,000,000 shares of common stock in an underwritten public offering. We cannot assure you that this
proposed common stock offering will be completed on a timely basis, or at all.
In addition, we intend to raise additional capital in the near future by means of a high-yield debt offering, and we are also exploring other
debt and equity financing alternatives. However, we may not be able to raise additional capital in fiscal 2000 on terms which are
acceptable to us, or at all. If we do not obtain sufficient financing, we believe we can reduce our capital needs sufficiently to meet our
liquidity requirements through fiscal 2000, by slowing or reducing the scope of our planned deployments in the U.S. and by reducing or
deferring additional license acquisitions.
We expect that we will require $875 million over the next several years to substantially complete the build-out of our planned wireless
networks in the U.S. and Chile, not including the acquisition of additional licenses and the build-out of markets related to additional
licenses. These capital requirements include license acquisition costs, capital expenditures for network construction, operating cash
flow losses and other working capital costs, debt service and closing fees and expenses. As is typical for start-up telecommunications
networks, we expect our networks to incur operating expenses significantly in excess of revenues in their early years of operations. We
intend to finance the construction and operation of Cricket networks primarily through borrowings under our credit agreement with
Qualcomm and the proceeds of equipment financing agreements.
We intend to finance the planned upgrade and expansion and the operation of Smartcom's network in fiscal 2000 through borrowings
under our credit agreement with Qualcomm and the proceeds of equipment financing agreements that we expect to negotiate in
connection with planned equipment purchases by Smartcom. Smartcom recently entered into a new equipment purchase agreement
with Ericsson. In addition, Smartcom has engaged an investment banker to assist it in selling equity and is exploring other capital
raising alternatives. Smartcom may not conclude a sale of equity
or other financing transaction or obtain additional vendor funding. If Smartcom does not obtain additional financing in fiscal 2000, we
expect to delay or reduce the scope of Smartcom's planned expansion.
We have no direct obligation to fund the operations of Pegaso, our venture in Mexico, and expect Pegaso to be funded independently.
Although Pegaso has raised or obtained commitments for debt and equity capital in excess of $1.0 billion, Pegaso will need to obtain
substantial additional capital to complete the build-out, launch and operation of its planned networks. As a result, Pegaso is seeking
additional debt and equity financing, including additional vendor financing.
CREDIT FACILITIES AND OTHER FINANCING ARRANGEMENTS
|
