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Leap Fat Cats Trouble Analysts

— An "All You Can Eat" business strategy might work if you don't try to swallow too much debt in expanding rapidly.

And when the losses soar, it's wise to slice top-management pay quickly, particularly when layoffs hit and stockholders realize they will have a bare plate.

These are some of the lessons of San Diego's once high-flying Leap Wireless, which filed for Chapter 11 bankruptcy April 13 but had never made money and had been teetering on the brink since August of last year.

In the giddy year of 2000, Leap's stock peaked out at $110.50 per share. Management was paid well. Chief executive officer Harvey P. White was fat and sassy, owning almost 700,000 shares.

In 2001, because of its innovative, all-you-can-talk, unlimited local wireless service within a market area, Leap's growth was the envy of the industry. Losses steepened sharply, but Wall Street didn't consider management remuneration out of line.

By mid-2002, everything began coming asunder. Leap was hit by a weak economy, competitive pricing pressures, and fraud perpetrated by 5 percent of its customers. Layoffs began. The company lost an expensive arbitration decision and paid the bill by doling out stock without shareholder consent -- one of several factors that got its stock delisted from NASDAQ and put the company in default on most of its huge pile of debt.

The company belatedly responded by slicing pay and benefits for White and president Susan G. Swenson, although three other top executives continued to do well, and some argue that White and Swenson may still be dining a bit too sumptuously.

Leap says it can get its financial house in order and continue operating with a successful business plan, but there is plenty of skepticism in the telecommunications industry and on Wall Street. With the company in default on a staggering $2.2 billion of debt, the stock is now selling below a dime a share.

The company was spun off from Qualcomm in a stock distribution in 1998. White had been a co-founder of Qualcomm. Originally, Leap concentrated on foreign markets, but then its Cricket operation came up with the "talk all you want" format, in which customers can make unlimited wireless calls in a service area for a low, flat rate. Compared with the wireless industry, Leap enjoyed great success weaning people completely off standard phone lines to 100 percent wireless.

But as it expanded to 40 markets and 1.5 million customers, the company piled up the huge debt, some of it of the junk variety -- now effectively yielding around 16 percent -- but most of it owed ailing vendors such as Lucent.

Last year, Leap got hit particularly hard, even for an industry that was in a widespread downspiral. By early September of last year, there were suggestions that Leap might go belly-up, but management -- which can certainly be faulted for some of its decisions -- kept a game face and still has one, despite last month's bankruptcy.

Early last year, the company said it would concentrate on its 40 existing markets and not continue its expansion kick into new territories. That made some wonder if the company might be overextended.

Then, in the first quarter, it was hit with fraud, such as customers buying service with stolen credit cards and dealers raking in money by inventing phony accounts. Some said that Leap's no-contract, no-credit service made it more vulnerable to monkey business. It tackled the fraud problem, but the effort contributed to a slowdown in growth.

In early 2002, Leap went into binding arbitration with MCG PCS, Inc., over the price that Leap had paid MCG for wireless licenses in Buffalo and Syracuse. In late August, the bad news hit: Leap had to pay $40 million or issue 21 million shares to MCG. It took the latter course, but because it didn't get shareholder permission, it faced NASDAQ delisting. In turn, it went into default on its arrangements with vendors such as Lucent. In a chain reaction, its credit ratings fell and securities analysts made gloomy assessments -- some even suggesting that bankruptcy lay ahead, an idea that would have been unthinkable only a few months earlier.

The payout of 21 million shares lifted the number of outstanding shares to 59 million, immediately diluting the value of the shares of existing shareholders. Before September arrived, the stock was plunging toward 40 cents. It kept going south.

Later, NASDAQ officially delisted the shares, citing Leap's refusal to seek shareholder approval in passing out the arbitration-related shares, as well as its inability to meet net tangible asset, stockholder equity, and minimum stock-price requirements.

Then there were civil suits, claiming that Leap wasn't just a victim of fraud; it was perpetrating fraud itself by grossly inflating the value of its wireless business. The company says it has valid defenses for those suits.

Then there is the matter of executive pay. In 2001, the company lost a whopping $483.3 million. Nonetheless, according to a recent SEC filing, White enjoyed a $750,000 salary, a $1.1 million bonus, and $930,000 in other compensation, consisting of such things as matching 401(k) contributions and executive benefit payments. Swenson had a salary of $520,000, a bonus of $486,000, and $112,000 in other compensation.

But in September of 2002, after the arbitration debacle, White voluntarily cut his salary from $787,500 to $487,500, and Swenson whacked hers from $546,000 to $375,000. An insurance policy on White was suspended, wiping away most of his "other compensation." Of course, stock options were underwater, and insiders -- who had not, to their credit, dumped their shares to any significant degree -- had taken a licking in the market.

In February of this year, the board voted to keep most of the executive officers' salaries intact in case of bankruptcy, so that business could continue in the belly-up phase.

Executive-compensation expert Graef Crystal, a former San Diegan now living in Las Vegas, thinks White took sufficient penance with his cuts, even though the 2002 loss ballooned to $665 million.

However, the salaries of the general counsel, chief financial officer, and top-human resources executive have continued to rise each year to a high of $280,000 a year, with the others close behind.

Bud Leedom, an equity analyst in San Diego for Wells Fargo Securities, thinks the executive pay remains on the high side, particularly since the company's post-bankruptcy filings warn that shareholders are all but certain to be wiped out. "The days of these types of salaries for companies of this nature are long gone," says Leedom.

He and some other analysts think that Leap's low-cost, talk-all-you-want strategy is overdue for an overhaul, particularly since bigger competitors are doing similar things. For example, right after Leap suffered the MCG indignity, AT&T Wireless announced a plan permitting customers to make unlimited domestic calls anytime they wanted for a flat rate.

Critics "are wrong," says Jim Seines, Leap's director of investor relations. He says that Leap's cash-flow loss has been receding. The company will operate while restructuring its finances in bankruptcy. "We believe we have sufficient cash to operate the business, and we're not seeking outside sources of financing."

But of three analysts who still follow the stock, two have a strong sell and the third has a sell recommendation. That's no Leap of faith.

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— An "All You Can Eat" business strategy might work if you don't try to swallow too much debt in expanding rapidly.

And when the losses soar, it's wise to slice top-management pay quickly, particularly when layoffs hit and stockholders realize they will have a bare plate.

These are some of the lessons of San Diego's once high-flying Leap Wireless, which filed for Chapter 11 bankruptcy April 13 but had never made money and had been teetering on the brink since August of last year.

In the giddy year of 2000, Leap's stock peaked out at $110.50 per share. Management was paid well. Chief executive officer Harvey P. White was fat and sassy, owning almost 700,000 shares.

In 2001, because of its innovative, all-you-can-talk, unlimited local wireless service within a market area, Leap's growth was the envy of the industry. Losses steepened sharply, but Wall Street didn't consider management remuneration out of line.

By mid-2002, everything began coming asunder. Leap was hit by a weak economy, competitive pricing pressures, and fraud perpetrated by 5 percent of its customers. Layoffs began. The company lost an expensive arbitration decision and paid the bill by doling out stock without shareholder consent -- one of several factors that got its stock delisted from NASDAQ and put the company in default on most of its huge pile of debt.

The company belatedly responded by slicing pay and benefits for White and president Susan G. Swenson, although three other top executives continued to do well, and some argue that White and Swenson may still be dining a bit too sumptuously.

Leap says it can get its financial house in order and continue operating with a successful business plan, but there is plenty of skepticism in the telecommunications industry and on Wall Street. With the company in default on a staggering $2.2 billion of debt, the stock is now selling below a dime a share.

The company was spun off from Qualcomm in a stock distribution in 1998. White had been a co-founder of Qualcomm. Originally, Leap concentrated on foreign markets, but then its Cricket operation came up with the "talk all you want" format, in which customers can make unlimited wireless calls in a service area for a low, flat rate. Compared with the wireless industry, Leap enjoyed great success weaning people completely off standard phone lines to 100 percent wireless.

But as it expanded to 40 markets and 1.5 million customers, the company piled up the huge debt, some of it of the junk variety -- now effectively yielding around 16 percent -- but most of it owed ailing vendors such as Lucent.

Last year, Leap got hit particularly hard, even for an industry that was in a widespread downspiral. By early September of last year, there were suggestions that Leap might go belly-up, but management -- which can certainly be faulted for some of its decisions -- kept a game face and still has one, despite last month's bankruptcy.

Early last year, the company said it would concentrate on its 40 existing markets and not continue its expansion kick into new territories. That made some wonder if the company might be overextended.

Then, in the first quarter, it was hit with fraud, such as customers buying service with stolen credit cards and dealers raking in money by inventing phony accounts. Some said that Leap's no-contract, no-credit service made it more vulnerable to monkey business. It tackled the fraud problem, but the effort contributed to a slowdown in growth.

In early 2002, Leap went into binding arbitration with MCG PCS, Inc., over the price that Leap had paid MCG for wireless licenses in Buffalo and Syracuse. In late August, the bad news hit: Leap had to pay $40 million or issue 21 million shares to MCG. It took the latter course, but because it didn't get shareholder permission, it faced NASDAQ delisting. In turn, it went into default on its arrangements with vendors such as Lucent. In a chain reaction, its credit ratings fell and securities analysts made gloomy assessments -- some even suggesting that bankruptcy lay ahead, an idea that would have been unthinkable only a few months earlier.

The payout of 21 million shares lifted the number of outstanding shares to 59 million, immediately diluting the value of the shares of existing shareholders. Before September arrived, the stock was plunging toward 40 cents. It kept going south.

Later, NASDAQ officially delisted the shares, citing Leap's refusal to seek shareholder approval in passing out the arbitration-related shares, as well as its inability to meet net tangible asset, stockholder equity, and minimum stock-price requirements.

Then there were civil suits, claiming that Leap wasn't just a victim of fraud; it was perpetrating fraud itself by grossly inflating the value of its wireless business. The company says it has valid defenses for those suits.

Then there is the matter of executive pay. In 2001, the company lost a whopping $483.3 million. Nonetheless, according to a recent SEC filing, White enjoyed a $750,000 salary, a $1.1 million bonus, and $930,000 in other compensation, consisting of such things as matching 401(k) contributions and executive benefit payments. Swenson had a salary of $520,000, a bonus of $486,000, and $112,000 in other compensation.

But in September of 2002, after the arbitration debacle, White voluntarily cut his salary from $787,500 to $487,500, and Swenson whacked hers from $546,000 to $375,000. An insurance policy on White was suspended, wiping away most of his "other compensation." Of course, stock options were underwater, and insiders -- who had not, to their credit, dumped their shares to any significant degree -- had taken a licking in the market.

In February of this year, the board voted to keep most of the executive officers' salaries intact in case of bankruptcy, so that business could continue in the belly-up phase.

Executive-compensation expert Graef Crystal, a former San Diegan now living in Las Vegas, thinks White took sufficient penance with his cuts, even though the 2002 loss ballooned to $665 million.

However, the salaries of the general counsel, chief financial officer, and top-human resources executive have continued to rise each year to a high of $280,000 a year, with the others close behind.

Bud Leedom, an equity analyst in San Diego for Wells Fargo Securities, thinks the executive pay remains on the high side, particularly since the company's post-bankruptcy filings warn that shareholders are all but certain to be wiped out. "The days of these types of salaries for companies of this nature are long gone," says Leedom.

He and some other analysts think that Leap's low-cost, talk-all-you-want strategy is overdue for an overhaul, particularly since bigger competitors are doing similar things. For example, right after Leap suffered the MCG indignity, AT&T Wireless announced a plan permitting customers to make unlimited domestic calls anytime they wanted for a flat rate.

Critics "are wrong," says Jim Seines, Leap's director of investor relations. He says that Leap's cash-flow loss has been receding. The company will operate while restructuring its finances in bankruptcy. "We believe we have sufficient cash to operate the business, and we're not seeking outside sources of financing."

But of three analysts who still follow the stock, two have a strong sell and the third has a sell recommendation. That's no Leap of faith.

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