Leap Wireless International, Inc.

10307 Pacific Center Court
San Diego, California 92121
U.S.A.
Telephone: (858) 882-6000
Fax: (858) 882-6010
Web site: http://www.leapwireless.com

Public Company
Incorporated: 1998
Employees: 1,400
Sales: $751.3 million (2003)
Stock Exchanges: Over the Counter (OTC)
Ticker Symbol: LEAP
NAIC: 425110 Business to Business Electronic Markets

Leap Wireless International, Inc. is a QUALCOMM Incorporated spinoff that started off quickly, fizzled with the meltdown of the telecom industry, filed for Chapter 11 bankruptcy protection, and is struggling to find its place in an industry that appears to have rendered its business model obsolete. The San Diego company, whose stock trades on an over-the-counter basis, markets Cricket, which originated as a flat-rate wireless telephone service for local calls only (no roaming) with no long-term commitment, essentially sold as an alternative to traditional landline service. Relying on an all-digital CDMA (code division multiple access) network, Cricket is offered in 39 markets in 20 states. The idea of no-frills, flatrate wireless service was appealing at first, and many people turned to it because they did little traveling and did not require roaming capabilities. With major wireless companies now offering cheaper plans, Cricket has begun adding new services, such as the addition of long-distance calling capabilities, unlimited text messaging, voicemail, caller ID, call waiting, three-way calling, and family plans. As a result, there is now little distinction between Cricket and other wireless providers, aside from price, making the company highly dependent on its cost-effective CDMA system.

Parent Company a Pioneer in the Late 20th-Century Mobile Telecom Industry

Leap Wireless started out as a collection of wireless assets owned by QUALCOMM, which was founded in 1985 by seven men. One of them was Harvey White, who would become Leap's CEO. QUALCOMM was interested in applying mobile satellite communications technology, initially for military purposes, but soon turned its attention to the transportation industry. In 1988 QUALCOMM introduced a satellite-based data messaging service used to manage trucking fleets. The company then looked to the fledgling cellular telephone business, convinced that its analog transmission technology would one day give way to digital signals. It was in the hope of creating a new wireless digital standard that QUALCOMM began work on CDMA technology, which the company successfully demonstrated in 1990. In the meantime, however, the Cellular Telecommunications Industries Association had adopted time division multiple access (TDMA) as the new digital cell phone standard. The CDMA approach made more efficient use of the cellular frequencies, resulting in higher voice quality over greater distances, fewer antennas to provide coverage, and the ability to carry twice as many calls as a TDMA system—and ten times as many as analog. Despite the obvious advantages of CDMA over TDMA, it took years of persistent effort from QUALCOMM to gain industry acceptance. Finally in 1993 CDMA was adopted as the cellular standard by the U.S. Telecommunications Industry Association and the company began to pick up business rapidly.

While QUALCOMM continued to lobby for global acceptance of CDMA, it made acquisitions and launched a number of joint ventures around the world in an effort to drum up demand for the technology, so that by the late 1990s the company was doing business in such diverse countries as Australia, Chile, Mexico, and Russia. This grab bag of assets consisted mostly of licenses, which QUALCOMM believed were valuable; to investors, however, they were a distraction and potentially harmful to earnings because they would require a great deal of capital to unlock their potential. Thus QUALCOMM decided to package these assets into a new company called Leap International, Inc., which was incorporated in June 1998. It was then spun off in September 1998 to shareholders, who received one share of Leap for every four shares of QUALCOMM they owned. Heading the new venture was Harvey White, who had championed the idea of spinning off Leap.

Leap began deploying CDMA networks overseas and in the United States. Early in 1999 the company's Mexican subsidiary launched that country's first all digital wireless network, but it was domestic subsidiary Cricket Communications that quickly attracted most of the attention. Cricket offered what it called "comfortable wireless," a wireless telephone plan that provided unlimited local calls for $29.95 a month. The idea was considered a bold move for several reasons: the price was cheap enough to persuade some landline customers to give up their traditional telephones; most cell phone customers only used their cell phones to make local calls; and the flat rate made billing simple for customers, who did not have to worry about going over their allotted minutes, and the provider, which did not have to devote resources to keeping track of customer activity. The service was first rolled out in March 1999 in Chattanooga, Tennessee. Earlier in the year, Leap picked up the wireless license to Chattanooga by acquiring Chase Telecommunications Holdings, Inc. The company also added licenses to the Nashville, Memphis, and Knoxville metropolitan areas and contiguous territory in six adjacent states.

Early Success in 1999

Leap enjoyed early success with Cricket. During the first three months it was able to capture 2.8 percent of the Chattanooga cell phone market and plans were made to expand into Nashville. The company also added 36 markets by making the winning $18.7 million bid in a federal government re-auction of licenses. Moreover, a Mexican venture was off to a strong start, and in Chile Leap acquired a 100 percent interest in a joint venture, Chilesat PCS, which had shown steady growth since its wireless network was launched in September 1998. A joint venture in Russia also launched wireless services in the early months of 1999, but by the end of the year Leap pulled out of the arrangement after its operating partner defaulted on loan agreements. Leap also sold an Australian subsidiary in 1999 when it was offered a good price for the business. The promise of Leap was such that seasoned telecommunications executives quit their jobs to join the start-up, including 22-year industry veteran Sue Swenson, the president and CEO of Cellular One.

As Leap marked its first anniversary in September 1999, management could point to a number of achievements. Not only had the company launched wireless networks in Mexico, Chile, Russia, and the United States, it had also acquired a number of licenses in the United States. These markets included Albuquerque, New Mexico; Charlotte, North Carolina; Dayton, Ohio; Little Rock, Arkansas; Salt Lake City, Utah; Spokane, Washington; Tucson, Arizona; Tulsa, Oklahoma; and Wichita, Kansas. Altogether, these communities contained 24 million potential subscribers. If Chattanooga was used as a measuring stick, the company's prospects appeared bright. By the end of the fiscal year, Cricket had captured 4 percent of that city's market.

In late 1999 Leap filed to make an initial public offering (IPO) of stock and investor interest was so great that the offering was increased from three million to four million shares. During the months leading up to the IPO, Leap continued to add licenses in markets such as Denver; Pittsburgh; Charlotte and Greensboro, North Carolina; Macon, Columbus, and Albany, Georgia; and Dayton, Ohio. The company then raised the funds it needed to launch service in these markets with a highly successful securities sale in February 2000. The sale of stock and private placement of ten-year notes resulted in $1.24 billion for the young company. The company's stock was priced at $88 and after it began trading on the NASDAQ, investors continued to bid up the price, which reached a high-water mark of $111 a share a few weeks later.

Cricket began servicing the Nashville market in 2000 and continued to buy licenses in additional markets, including Phoenix, Arizona; Reno, Nevada; Roswell, New Mexico; Buffalo and Syracuse, New York; Omaha and Lincoln, Nebraska; Birmingham, Alabama; Daytona, Florida; Honolulu, Hawaii; Jackson, Mississippi; Eugene, Oregon; Lakeland-Winterhaven, Florida; Greeley, Colorado; and Visalia, California. Cricket soon began servicing several of these communities, so that by the end of the year Cricket was offered in ten markets and the customer base reached 190,000. Increasingly Leap focused on Cricket and severed its ties to overseas ventures. In May 2000, Leap received an attractive cash buyout offer from its Chilean partner and management decided it was in the interests of shareholders to accept. Leap's lone remaining foreign investment was in Mexico.

In January 2001 Leap participated in a federal spectrum auction and won wireless operating licenses for 22 markets at a cost of $350 million. The new communities included Columbus, Ohio; Providence, Rhode Island; Houston and San Antonio, Texas; New London, Connecticut; Jacksonville and Melbourne, Florida; Columbus and Indianapolis, Indiana; Lexington and Louisville, Kentucky; Worcester, Massachusetts; Asheville, North Carolina; Las Cruces, New Mexico; Albany and Poughkeepsie, New York; Scranton, Pennsylvania; and Austin, Brownsville, Bryan, El Paso and McAllen, Texas. With the addition of these licenses, Cricket now had the potential of reaching more than 70 million customers in 36 states. As Cricket continued its rollout during the course of 2001, it began to service 39 markets in 20 states and cracked the one million mark in number of customers.

Company Perspectives:

Leap Wireless International, Inc. is a leading provider of innovative and value-driven wireless communications services.

Setbacks Mounting in 2002

Yet Leap had essentially reached its high-water mark, as early enthusiasm now began to give way to cold reality. Some of the company's winning license bids in 2001 were challenged by NextWave Communications, which took the matter all the way to the U.S. Supreme Court. Moreover, Leap had taken on $1.9 billion in debt, mostly to equipment makers Nortel Networks, Lucent Technologies, and Ericsson, but it was a long way from becoming a profitable business. Investors were beginning to lose faith, as they did with all of the telecom sector, so that by early 2002, Leap shares dipped below $8. In February 2002 Cricket began serving Buffalo, New York, its 40th market, but by early May, Leap announced a reorganization effort that would put a halt to further expansion in favor of focusing on improving operations in existing markets. A poor quarterly report and an analyst downgrade combined to drive down the price of Leap stock to $2.60, and matters worsened when the company announced that it needed an infusion of $225 million in cash by the end of the year. Bad news continued to snowball in 2002. Leap had to reveal that about 5 percent of its subscribers, or 69,000 customers, obtained Cricket service through fraudulent means: through stolen credit cards, or by signing up with false information to get a free month of service. The company implemented more stringent anti-fraud measures, but its reputation in the investor community was already damaged.

In August Leap received an unfavorable arbitration decision regarding the purchase of licenses covering Buffalo and Syracuse, and was ordered to pay an additional $41 million in cash or issue 21.5 million additional shares of stock to the seller, MCG PCS Inc. It was money that Leap simply did not have, and Wall Street reacted harshly. The price of Leap stock dipped well below $1, to 65 cents a share. White continued to express faith in Cricket's flat-rate, no-frills model, but conditions had changed since the heady days of September 1998. Competing wireless carriers cut prices, added minutes, and sweetened their prepaid offerings, making the Cricket plan less distinctive. Leap responded by offering a $39.99 option that included unlimited local service, 500 minutes of long-distance calls, along with voice mail, call waiting, caller ID, and three-way calling. To many observers, this new approach cut against the message that Cricket was different from other wireless carriers. Some simply concluded that the original concept was fundamentally flawed. Cricket was supposed to be so different from the competition that it would not need to spend as much to add customers. In truth, Leap's marketing costs continued to rise as did customer turnover, known as "churn" in the industry. As one analyst told the San Diego Union-Tribune, "If their product is so great, why is churn so high?"

In September 2002, Leap announced that it was in violation of its credit facility agreements and also faced delisting by the NASDAQ. The company sold its Mexican interests and cut its workforce, while key executives began to depart as well. In December 2002 Leap shares, now trading below 25 cents, were delisted by the NASDAQ, and relegated to over-the-counter status. By the time the company filed for Chapter 11 bankruptcy protection in April 2003, Leap stock was worth less than a dime. The company had debt of nearly $2.5 billion and listed assets of $2.2 billion.

Leap's bankruptcy reorganization was contentious, as MCG in particular maintained that Leap was undervaluing its assets and that its plan unfairly enriched some creditors at the expense of other creditors and shareholders. Finally, in October 2003, the court accepted the plan, which called for the debt of Leap and its subsidiaries to be replaced by a $350 million secured note, which would be held by the investors who had purchased the debt of Leap's equipment suppliers: Lucent, Nortel, and Ericcson. The company now changed the top ranks of leadership, as White retired and Swenson resigned to "pursue other interests." Taking over as CEO was William M. Freeman, a 30-year veteran in telecommunications who came to Leap from Verizon Communications. He expressed optimism that there was still a place for the Cricket service in the current wireless climate, even as critics were eager to pronounce the patient all but dead. Nevertheless, the company, free of its crushing debt load, reissued stock, reorganized its board, and began offering a variety of products to attract customers, including unlimited text messaging for $4.99 a month and prepaid plans. It also began on a trial basis data services such as ring tone, wallpapers, games, weather reports, and an English-Spanish dictionary. In addition, in a complete departure from its origins, Leap considered offering roaming to customers. The company's future remained very much in doubt. Unable to compete with major carriers in large markets, Leap's best hope appeared to reside in small cities.