<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM 10
------------------------
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
LEAP WIRELESS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0811062
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
10307 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA
ATTENTION: HARVEY P. WHITE
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
WITH COPIES TO:
<TABLE>
<S> <C>
FREDERICK T. MUTO SCOTT N. WOLFE
THOMAS A. COLL DAVID A. HAHN
COOLEY GODWARD LLP LATHAM & WATKINS
4365 EXECUTIVE DRIVE 701 B STREET
SUITE 1100 SUITE 2100
SAN DIEGO, CA 92121-2128 SAN DIEGO, CA 92101-8193
(619) 550-6000 (619) 236-1234
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (877) 977-5327
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
(TITLE OF CLASS)
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
LEAP WIRELESS INTERNATIONAL, INC.
INFORMATION REQUIRED IN REGISTRATION STATEMENT:
CROSS-REFERENCE BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM
NUMBER CAPTION LOCATION IN INFORMATION STATEMENT
- -------- ------- ---------------------------------
<S> <C> <C>
Item 1. Business Information Statement Summary; Risk Factors;
Introduction; The Distribution; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Combined Financial
Statements.
Item 2. Financial Information Information Statement Summary; Risk Factors; Pro Forma
Capitalization; Pro Forma Combined Financial
Statements; Selected Historical Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Combined
Financial Statements.
Item 3. Properties Business.
Item 4. Security Ownership of Principal Stockholders; Management.
Certain Beneficial Owners
and Management
Item 5. Directors and Executive Management; Liability and Indemnification of Directors
Officers and Officers.
Item 6. Executive Compensation Management.
Item 7. Certain Relationships and Information Statement Summary; The Distribution;
Related Transactions Relationship Between QUALCOMM and the Company after
the Distribution; Certain Relationships and Related
Transactions.
Item 8. Legal Proceedings Business.
Item 9. Market Price of and Information Statement Summary; The Distribution;
Dividends on the Principal Stockholders; Management; Treatment of
Registrant's Common Equity QUALCOMM Stock Options in the Distribution;
and Related Stockholder Description of Company Capital Stock.
Matters
Item 10. Recent Sales of Description of Company Capital Stock.
Unregistered Securities
Item 11. Description of Registrant's Description of Company Capital Stock; Description of
Securities to Be Registered Rights Agreement.
Item 12. Indemnification of Liability and Indemnification of Directors and
Directors and Officers Officers.
Item 13. Financial Statements and Index to Financial Statements and the statements
Supplementary Data referenced therein.
Item 14. Changes in and Not Applicable.
Disagreements with
Accountants on Accounting
and Financial Disclosure
Item 15. Financial Statements and Index to Financial Statements; Exhibit Index.
Exhibits
</TABLE>
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 3 to registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Leap Wireless International, Inc.
September 14, 1998 By: /s/ HARVEY P. WHITE
----------------------------------
Name: Harvey P. White
Title: Chairman of the Board,
President and Chief Executive
Officer
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1* Form of Separation and Distribution Agreement between
QUALCOMM Incorporated ("QUALCOMM") and the Registrant.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
3.3* Certificate of Amendment of Certificate of Incorporation of
the Registrant.
3.4* Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Registrant.
3.5* Form of Amended and Restated Certificate of Incorporation of
the Registrant.
3.6* Form of Amended and Restated Bylaws of the Registrant.
4.1* Form of Common Stock Certificate.
4.2* Form of Warrant to be issued to QUALCOMM.
4.3* Form of Rights Agreement between the Registrant and Harris
Trust Company of California.
10.1* Form of Credit Agreement between QUALCOMM and the
Registrant.
10.2* Form of Tax Matters Agreement between QUALCOMM and the
Registrant.
10.3* Form of Interim Services Agreement between QUALCOMM and the
Registrant.
10.4* Form of Master Agreement Regarding Equipment Procurement
between QUALCOMM and the Registrant.
10.5* Form of Employee Benefits Agreement between QUALCOMM and the
Registrant.
10.6* Form of Conversion Agreement between QUALCOMM and the
Registrant.
10.7* Form of Registrant's 1998 Stock Option Plan (the "Option
Plan").
10.8* Form of non-qualified/incentive stock option under the
Option Plan.
10.9* Form of non-qualified stock option under the Option Plan to
be granted to QUALCOMM option holders in connection with the
Distribution.
10.10* Form of Registrant's 1998 Non-Employee Directors' Stock
Option Plan
(the "Directors' Plan").
10.11* Form of non-qualified stock option under the Directors'
Plan.
10.12* Form of Registrant's Employee Stock Purchase Plan.
10.13* Assignment and Assumption of Lease dated August 11, 1998
between QUALCOMM and Vaxa International, Inc.
10.14* Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers.
21.1* Subsidiaries of the Registrant.
27.1 Financial Data Schedule for the fiscal year ended August 31,
1997.
27.2 Financial Data Schedule for the fiscal year ended August 31,
1996.
27.3 Financial Data Schedule for the nine months ended May 31,
1997.
27.4 Financial Data Schedule for the nine months ended May 31,
1998.
99.1 Leap Wireless International, Inc. Information Statement
dated September 14, 1998.
</TABLE>
- ------------------------
* Previously filed.
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<ARTICLE> 5
<MULTIPLIER> 1,000
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
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<PERIOD-END> AUG-31-1997
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<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,267
<CURRENT-LIABILITIES> 279
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 45,988
<TOTAL-LIABILITY-AND-EQUITY> 46,267
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
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<LOSS-PROVISION> 0
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<INCOME-TAX> 0
<INCOME-CONTINUING> (1,154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,154)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 111
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (111)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (396)
<INCOME-TAX> 0
<INCOME-CONTINUING> (396)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (396)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,133)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,133)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,777
<CURRENT-LIABILITIES> 2,897
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 54,880
<TOTAL-LIABILITY-AND-EQUITY> 57,777
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,723)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,723)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
[QUALCOMM LOGO]
6455 LUSK BLVD.
SAN DIEGO, CALIFORNIA 92191
September 14, 1998
Dear Stockholder:
I am pleased to inform you that the Board of Directors of QUALCOMM
Incorporated ("QUALCOMM") has approved a distribution (the "Distribution") to
our stockholders of all of the outstanding shares of Common Stock of Leap
Wireless International, Inc. ("Leap"). The Distribution will be made on or about
September 23, 1998 (the "Distribution Date") to holders of record of Common
Stock of QUALCOMM (the "QUALCOMM Common Stock") on September 11, 1998 (the
"Record Date"). You will receive one (1) share of Common Stock of Leap (the
"Leap Common Stock"), including certain preferred stock purchase rights, for
every four (4) shares of QUALCOMM Common Stock you hold on such date.
As part of QUALCOMM's strategy of supporting the commercialization and sale
of its CDMA products and technology, QUALCOMM has from time to time entered into
strategic alliances and joint ventures with domestic and international emerging
terrestrial-based wireless telecommunications operating companies. Several of
these alliances have involved the investment by QUALCOMM of substantial equity
in the operating company, as well as a commitment by the operating company to
purchase certain CDMA equipment from QUALCOMM. In most of these operating
companies, QUALCOMM has also assumed a significant role in the operations and
management of the entity.
Upon completion of the Distribution, Leap will own certain of QUALCOMM's
joint venture and equity interests in a number of these operating companies and
will assume QUALCOMM's management role with respect to these entities. In
particular, QUALCOMM will transfer to Leap all of its joint venture and equity
interests in Pegaso Telecomunicaciones, S.A. de C.V. (Mexico), Metrosvyaz
Limited (Russia), Orrengrove Investments Limited (Russia), ChileSat Telefonia
Personal, S.A. (Chile), Chase Telecommunications, Inc. (U.S.), OzPhone Pty. Ltd.
(Australia) and certain other development-stage businesses. QUALCOMM and Leap
have also agreed that, if certain events occur within eighteen months after the
Distribution, certain assets and liabilities related to QUALCOMM's operating
company in Ukraine will be transferred to Leap. QUALCOMM will also transfer to
Leap $10 million cash and certain indebtedness of the operating companies owed
to QUALCOMM in the amount of approximately $113 million, approximately $30.8
million of which is indebtedness under certain convertible notes. QUALCOMM will
also make a substantial funding commitment to Leap in the form of a $265.0
million secured credit facility.
Leap intends to take an active management role in these operating
companies, consistent with applicable laws, contractual arrangements and other
requirements. Although QUALCOMM is expected to continue to provide equipment
vendor financing, Leap has agreed to assume certain of QUALCOMM's other
obligations to manage operations of and finance costs relating to ongoing
build-outs of the wireless telecommunications systems being deployed by such
operating companies. In addition, Leap intends to pursue opportunities to
provide, manage, support, operate and invest in additional terrestrial-based
wireless telecommunications systems in other targeted United States and
international markets offering high growth potential. QUALCOMM will continue to
be a supplier of CDMA equipment to these operating companies, and has retained
substantially all of its rights under its equipment supply agreements with such
entities. In addition, QUALCOMM will retain a warrant (the "Warrant") to
purchase 5,500,000 shares of Leap Common Stock, at a purchase price equal to the
average of the last sales price per share of the Leap Common Stock on the Nasdaq
National Market for each of the five (5) consecutive trading days beginning with
and including the Distribution Date. The Warrant is exercisable during the ten
(10) years following the Distribution. Based on the number of shares of Leap
Common Stock expected to be outstanding and reserved for issuance pursuant to
outstanding options and convertible securities as of the Distribution, upon
exercise in full of the Warrant QUALCOMM would hold approximately 18% of the
outstanding shares of Leap Common Stock, assuming exercise of all such
outstanding options and convertible securities.
<PAGE> 2
The Board of Directors has determined that it is in the best interests of
QUALCOMM and its stockholders to spin off its interests in the operating
companies described above. QUALCOMM believes that, although its strategy of
investing in emerging wireless telecommunications operating companies has
benefited QUALCOMM and the advancement of its CDMA technology and products
worldwide, spinning off these assets will eliminate potential conflicts with
QUALCOMM's CDMA equipment customers who compete against these companies. In
addition, QUALCOMM believes that (i) the value of the joint venture and equity
interests being spun off are not fully recognized in the current market price of
QUALCOMM's stock, (ii) the Distribution will enable QUALCOMM's and Leap's
respective management teams to better focus on enhancing each company's
competitive position in its respective businesses, thereby producing greater
stockholder value over the long-term, and (iii) the Distribution will better
enable Leap to attract, retain and motivate the employees necessary to achieve
its business objectives by allowing it to implement its own equity-based
incentive plans. Finally, without the spin off, according to applicable
accounting rules, QUALCOMM would be required to continue recognizing a share of
these companies' start-up operating losses, which are likely to be substantial,
and would be required to eliminate intercompany profits from equipment sales to
some of these companies.
The Distribution is expected to be taxable to the holders of QUALCOMM
Common Stock. See "Material Federal Income Tax Considerations." Harris Trust
Company of California is acting as distribution agent and will be responsible
for mailing stock certificates to Leap stockholders following the Distribution.
The enclosed Information Statement explains the Distribution in greater
detail and provides financial and other important information regarding Leap. We
urge you to read it carefully. Holders of QUALCOMM Common Stock as of the Record
Date are not required to take any action to participate in the Distribution. A
stockholder vote is not required in connection with this matter and,
accordingly, your proxy is not being sought.
We are enthusiastic about the Distribution and look forward to the future
success of QUALCOMM and Leap as separate publicly traded companies.
Sincerely,
/s/ IRWIN M. JACOBS
--------------------------------
Irwin M. Jacobs
Chairman of the Board and Chief
Executive Officer
<PAGE> 3
[LEAP WIRELESS LOGO]
September 14, 1998
Dear Stockholder:
I am very pleased that you will soon be a stockholder of Leap Wireless
International, Inc. ("Leap"). I want to take this opportunity to briefly touch
on some of our current business activities and on some of our plans for the
future. Leap today has interests in a number of existing and newly formed
digital wireless businesses around the world using CDMA -- the powerful, rapidly
expanding technology pioneered by QUALCOMM Incorporated ("QUALCOMM"). These
wireless telephone businesses are generally joint ventures with several
partners, with no single majority partner; however, Leap is generally one of the
largest partners. Leap intends to provide a significant portion of the
management and operational leadership of these entities. We see Leap becoming a
major provider of leadership, management and services to wireless telephone
companies worldwide.
Leap's businesses are largely overseas at this time with an emphasis on
Latin America and Eastern Europe. Although these and other international markets
are suffering economically, we believe these are two areas that hold good
promise for the future of wireless telephone and data systems. Generally, they
are ones where teledensity (i.e., the number of phones per one hundred people)
is still low, but growing, and where the underlying economies have the potential
to recover, expand and prosper over the next few years. We are also planning to
pursue opportunities in the Asia-Pacific region as is indicated by our recent
purchase of spectrum in Australia. We are also carefully studying the
possibilities to expand our activities domestically.
The early phases of new telephone system deployment are always capital
intensive, and this will clearly be the case for Leap. A significant part of our
effort and the effort of our joint ventures will be to obtain the capital to
meet the current build-out plans and support the growth of each venture and of
Leap itself. Current conditions may delay or hinder access to capital markets,
and therefore the speed at which we expand our ventures may be slowed. We will
be concentrating a great deal of our initial energy on bringing our current
ventures into positive cash flow and earnings. However, we will be keeping tabs
on opportunities elsewhere as they arise.
Together with our partners, we believe that the combination of the
potential of our current joint ventures, QUALCOMM's vendor commitments to our
ventures and our focus on CDMA (which is rapidly becoming a dominant technology
of choice throughout the world) gives us a strong base to commence operations.
We intend to build from this base and to explore other promising opportunities
as an operator of quality wireless systems.
I believe as an independent stand-alone company we can more effectively
focus on our objectives, support the capital needs of our company and thus bring
value to our stockholders and expand our business.
We look forward to your support, and we will be providing more information
on the current systems as they commence commercial service and on new ventures
as we undertake them.
Leap has applied for listing of its shares on the Nasdaq National Market
under the symbol "LWIN."
Leap's Board, management and employees are excited about our future as an
independent company and look forward to your participation in our success.
Sincerely,
/s/ HARVEY P. WHITE
--------------------------------------
Harvey P. White
Chairman of the Board, Chief Executive
Officer and President
<PAGE> 4
INFORMATION STATEMENT
LEAP WIRELESS INTERNATIONAL, INC.
COMMON STOCK
PAR VALUE $0.0001 PER SHARE
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by QUALCOMM Incorporated ("QUALCOMM") to
holders of record of QUALCOMM Common Stock, par value $0.0001 per share (the
"QUALCOMM Common Stock"), at the close of business on September 11, 1998 (the
"Record Date") of one (1) share of Common Stock, par value $0.0001 per share
(the "Leap Common Stock"), including certain attached preferred stock purchase
rights (the "Rights"), of Leap Wireless International, Inc. ("Leap" or the
"Company") for every four (4) shares of QUALCOMM Common Stock owned on the
Record Date. The Distribution will result in all of the outstanding shares of
Leap Common Stock being distributed to holders of QUALCOMM Common Stock on a pro
rata basis. The Distribution will be effective on September 23, 1998 (the
"Distribution Date"). In addition, QUALCOMM will retain a warrant (the
"Warrant") to purchase 5,500,000 shares of Leap Common Stock, at a price equal
to the average of the last sales price per share of Leap Common Stock on the
Nasdaq National Market for each of the five (5) consecutive trading days
beginning with and including the Distribution Date. The Warrant will be
exercisable during the ten (10) years following the Distribution. Based on the
number of shares of Leap Common Stock expected to be outstanding and reserved
for issuance pursuant to outstanding options and convertible securities as of
the Distribution, upon exercise in full of the Warrant, QUALCOMM would hold
approximately 18% of the outstanding shares of Leap Common Stock, assuming
exercise of all such outstanding options and convertible securities.
The Company is a newly formed company which, as a result of transactions
being entered into in connection with the Distribution, will own what were
formerly certain of QUALCOMM's joint venture and equity interests in
terrestrial-based wireless telecommunications operating companies in emerging
international markets and the United States. These joint venture and equity
interests will be held directly by Leap, or indirectly by companies controlled
by Leap. The Company intends to take an active management role in these
operating companies consistent with applicable laws, contractual arrangements
and other requirements.
No consideration will be paid by QUALCOMM's stockholders for the shares of
Leap Common Stock issued in connection with the Distribution. There is no
current public trading market for the shares of Leap Common Stock, although it
is expected that a trading market will develop between the Record Date and the
Distribution Date. The Company has applied for listing of the shares of Leap
Common Stock and the attached Rights on the Nasdaq National Market under the
symbol "LWIN."
The Distribution is expected to be taxable to the holders of QUALCOMM
Common Stock. See "Material Federal Income Tax Considerations." Harris Trust
Company of California (the "Distribution Agent") is acting as distribution agent
and will be responsible for mailing stock certificates to Leap stockholders
following the Distribution.
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER
THE MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS."
Stockholders of QUALCOMM with inquiries regarding the Distribution should
contact QUALCOMM Incorporated, Investor Relations, Attention: Julie Cunningham,
6455 Lusk Boulevard, San Diego, California 92121; telephone (619) 658-4813.
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE ARE
NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement is September 14, 1998.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INFORMATION STATEMENT SUMMARY............................... 1
RISK FACTORS................................................ 16
INTRODUCTION................................................ 27
THE DISTRIBUTION............................................ 27
OPINION OF FINANCIAL ADVISOR................................ 31
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.................. 35
RELATIONSHIP BETWEEN QUALCOMM AND THE COMPANY AFTER THE
DISTRIBUTION.............................................. 37
CAPITALIZATION.............................................. 42
PRO FORMA FINANCIAL STATEMENTS.............................. 43
SELECTED HISTORICAL COMBINED FINANCIAL DATA................. 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 49
BUSINESS.................................................... 57
MANAGEMENT.................................................. 77
EQUITY INCENTIVE PLANS...................................... 82
TREATMENT OF QUALCOMM STOCK OPTIONS IN THE DISTRIBUTION..... 92
TREATMENT OF QUALCOMM TRUST CONVERTIBLE PREFERRED SECURITIES
IN THE DISTRIBUTION....................................... 93
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............. 95
DESCRIPTION OF COMPANY CAPITAL STOCK........................ 96
DESCRIPTION OF RIGHTS AGREEMENT............................. 98
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS..... 101
LEGAL MATTERS............................................... 101
ADDITIONAL INFORMATION...................................... 102
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX 1 -- OPINION OF FINANCIAL ADVISOR..................... A-1
ANNEX 2 -- CONSENT OF FINANCIAL ADVISOR..................... A-4
</TABLE>
TRADEMARKS
This Information Statement includes trademarks and service marks of
QUALCOMM, Leap and other parties, all of which are the property of their
respective holders.
ii
<PAGE> 6
INFORMATION STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
by, the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, (i)
references in this Information Statement to QUALCOMM or the Company shall
include QUALCOMM's or the Company's respective subsidiaries, and (ii) references
in this Information Statement to the Company prior to the Distribution Date
shall refer to the Leap Business (defined below) as operated by QUALCOMM.
Except for the historical information contained herein, the discussion in
this Information Statement contains forward-looking statements that involve
risks and uncertainties. Leap's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled "Risk
Factors" and elsewhere in this Information Statement.
THE COMPANY
Leap Wireless International, Inc. ("Leap" or the "Company"), manages,
supports, operates and otherwise participates in CDMA-based wireless
telecommunications businesses and ventures located in emerging international
markets and the United States. Outside of the United States, the Company is
currently operating, managing, supporting or participating in the development of
CDMA-based wireless telecommunications systems in Mexico, Russia, Chile and
Australia. Most of these systems are in an early stage of development, and the
Company expects commercial launch of these systems at various times during 1998
and 1999. The Company is also pursuing opportunities to provide, manage,
support, operate and invest in additional wireless telecommunications systems in
other targeted United States and international markets offering high growth
potential.
Leap was formed in June 1998 by QUALCOMM Incorporated ("QUALCOMM"), a
leading provider of digital wireless communications equipment, technologies and
services. QUALCOMM continues to serve as a major supplier of CDMA subscriber and
infrastructure equipment for the Company's wireless telecommunications
businesses, and the Company expects that QUALCOMM will be a major CDMA
subscriber and infrastructure equipment supplier for future wireless
telecommunications businesses which the Company manages, operates and supports
or in which the Company otherwise participates.
Following the Distribution, QUALCOMM will continue to be a supplier of CDMA
equipment and is expected to provide significant vendor financing to Leap's
wireless telecommunications businesses and ventures. These ongoing relationships
could place QUALCOMM in a position in conflict with Leap with respect to Leap's
businesses and ventures. In addition, QUALCOMM and Leap will be parties to a
number of agreements, including but not limited to a Separation and Distribution
Agreement, a Credit Agreement and a Master Agreement Regarding Equipment
Procurement. Such agreements contain restrictions on Leap's ability to invest in
other joint ventures.
The Company's wireless telecommunications systems are based on Code
Division Multiple Access ("CDMA") technology, a proprietary integrated software
and hardware system invented by QUALCOMM and used for digitally transmitting
telecommunications signals in a wireless network. CDMA offers a number of
advantages over analog and other digital technologies, including increased call
capacity, higher quality voice and data transmission, fewer dropped calls,
enhanced privacy, lower power requirements and lower system costs. For purposes
of this Information Statement, "cdmaOne" shall mean those fixed or mobile
wireless telecommunications systems based on or derived from QUALCOMM's CDMA
technology which (i) have been adopted as an industry standard by the
Telecommunications Industry Association ("TIA") or other recognized
international standards bodies, and the adoption of such standard has been voted
in favor of by QUALCOMM ("QUALCOMM Approved Standards"), (ii) are compatible
with or employ the same physical layer as QUALCOMM Approved Standards ("QUALCOMM
Approved Systems"), or (iii) are compatible with the infrastructure and
subscriber equipment manufactured and sold by QUALCOMM. CdmaOne currently
includes, by way of example and not of limitation, the TIA's IS-95 digital
cellular standard and ANSI JSTD-008 digital PCS standard. If a terrestrial-based
wireless telecommunications
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<PAGE> 7
system is considered a cdmaOne system in one country, QUALCOMM and Leap agree
that it would be considered a cdmaOne system in any other country, irrespective
of whether or not such system has been adopted (or approved by QUALCOMM) as a
standard in such other country. CdmaOne systems have been widely adopted
throughout the world, having been commercially deployed or under development in
approximately 30 countries with over ten million commercial subscribers
worldwide, as of March 31, 1998.
The Company's senior management has many years experience in the wireless
telecommunications industry. A number of the Company's senior management members
have been members of QUALCOMM's senior management and joined the Company from
QUALCOMM in connection with the formation of the Company, including Harvey P.
White, currently Vice Chairman of the Board of QUALCOMM and the Company's
President, Chief Executive Officer and Chairman of the Board; Thomas J. Bernard,
who has served as Senior Vice President of QUALCOMM, who is the Company's
Executive Vice President; and James E. Hoffmann, currently Vice President, Legal
Counsel of QUALCOMM, who is the Company's Senior Vice President and General
Counsel. Leap believes its continuing relationship with QUALCOMM and the other
participants in its operating companies, the experience and expertise of its
management team, and the quality of CDMA and other products and services to be
offered by Leap's operating entities, among other factors, will position Leap to
become a significant provider of wireless telecommunications services worldwide.
The Company operates, manages, supports and participates in its wireless
telecommunications businesses primarily through joint ventures and strategic
alliances with third parties. The Company intends to provide substantial
management and operational support to its wireless telecommunications
businesses, consistent with applicable laws, contractual arrangements and other
requirements, in the areas of system design and planning, design and development
of marketing plans, distribution systems, billing systems and customer support
plans, system launch and roll-out execution and virtually all other operational
functions. The Company intends to provide these services using its own employees
as well as through consultants with substantial experience in the
telecommunications industry. The Company intends to continue to focus on
providing such management and operational support in its future wireless
telecommunications business opportunities.
The Company does not have any operating history as an independent company
and it and each of its wireless telecommunications businesses and ventures are
at an early stage of development. To date, the Company has generated no revenue
from such businesses and ventures, which are expected to incur substantial
losses for the foreseeable future and are subject to substantial risks. The Leap
Business has generated net losses since inception, and Leap will be required to
recognize a share of the start-up operating losses of such businesses and
ventures as a result of the Company's ownership interests therein. The Company's
ability to generate revenues will be dependent on a number of factors, including
the future operations and profitability of the Company's wireless
telecommunications businesses and ventures.
The Company expects to have significant future capital requirements
relating to funding commitments to its wireless telecommunications businesses
and ventures and other general working capital needs. The Company expects to
obtain much of its required near-term financing through borrowings under the
Credit Agreement provided by QUALCOMM. As a result of its capital requirements,
including borrowings under the Credit Agreement, the Company expects that it
will be highly leveraged within twelve months after the Distribution.
Leap's executive offices are located at 10307 Pacific Center Court, San
Diego, CA 92121. Its telephone number is (877) 977-5327.
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<PAGE> 8
RISK FACTORS
Ownership of the Leap Common Stock involves a high degree of investment
risk. The risk factors set forth below, more fully described in "Risk Factors,"
should be considered carefully with the other risks described in "Risk Factors"
and elsewhere in this Information Statement in evaluating the ownership of the
Leap Common Stock. See "Risk Factors."
- Leap is a newly formed company and does not have any operating history as
an independent company.
- The Company's ability to generate revenues will be dependent on a number
of factors, including the future operations and profitability of the
Company's wireless telecommunications businesses and ventures.
- The Company expects to have significant future capital requirements, and
there can be no assurance that such required funding will be available on
favorable terms or at all.
- The Company expects that it will be highly leveraged within twelve months
after the Distribution.
- The Company's joint ventures have generated net losses since inception,
and the Company will be required to recognize a share of the start-up
operating losses of its wireless telecommunications businesses and
ventures, which are likely to be substantial.
- The Company will be subject to a number of international risks as a
result of its international business operations. Certain of the countries
in which the Company's joint ventures are doing business, including
Russia and Mexico, are experiencing volatile financial and currency
markets.
- QUALCOMM's ongoing relationships with the Company's wireless
telecommunications businesses and ventures could place QUALCOMM in a
position in conflict with Leap. In addition, QUALCOMM and Leap will be
parties to a number of ongoing agreements which contain restrictions on
Leap's ability to invest in other joint ventures.
- There can be no assurance that the Company and its wireless
telecommunications businesses and ventures will be able to acquire and
maintain required telecommunications operating licenses.
- The Company and its wireless telecommunications businesses and ventures
will face significant construction and system performance risks.
- The Company will be a participant in a number of joint ventures and may
have limited ability to withdraw funds from or exercise management
control over such ventures.
- There can be no assurance that the Company's business activities will not
ultimately subject the Company to the registration requirements of the
Investment Company Act of 1940.
- The Company faces intense competition in the wireless telecommunications
industry.
- The Company will be dependent upon industry acceptance and adoption of
cdmaOne.
- The Company and its wireless telecommunications businesses and ventures
are subject to substantial governmental regulation both domestically and
abroad.
- The Company's success will be significantly dependent upon the
contributions of a number of its key personnel, including Harvey P.
White, Chairman of the Board, President and Chief Executive Officer,
Thomas J. Bernard, Executive Vice President, and James E. Hoffmann,
Senior Vice President and General Counsel.
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<PAGE> 9
THE DISTRIBUTION
DISTRIBUTING CORPORATION...... QUALCOMM.
DISTRIBUTED CORPORATION....... Leap is a newly formed company which, as of the
Distribution Date, will have transferred to it
certain of QUALCOMM's joint venture and equity
interests in terrestrial-based wireless
telecommunications operating companies located
in emerging international markets and the
United States, together with certain other
assets and related liabilities, including
significant funding obligations (the "Leap
Business"). In particular, upon completion of
the Distribution, Leap will own all of
QUALCOMM's joint venture and equity interests
(held directly by Leap or indirectly by
companies controlled by Leap) in Pegaso
Telecomunicaciones S.A. de C.V. (Mexico),
Metrosvyaz Limited (Russia), Orrengrove
Investments Limited (Russia), ChileSat
Telefonia Personal, S.A. (Chile), Chase
Telecommunications, Inc. (U.S.) and OzPhone
Pty. Ltd. (Australia) (collectively, the "Leap
Operating Companies"). In addition, Leap
intends to pursue opportunities to provide,
manage, support or invest in additional
terrestrial-based wireless telecommunications
systems in other targeted United States and
international markets offering high growth
potential. QUALCOMM and Leap have also agreed
that, if certain events occur within eighteen
months after the Distribution, certain assets
and liabilities related to Telesystems of
Ukraine ("TOU"), QUALCOMM's operating company
in Ukraine, will be transferred to Leap. There
can be no assurance that such events will occur
or that legal impediments to transfer will be
removed, or that QUALCOMM's interest in TOU
will be so transferred. See
"Business -- Potential Acquisition of Ukraine
Operating Company." QUALCOMM will also transfer
to Leap $10 million cash and certain
indebtedness of certain of the Leap Operating
Companies in the amount of approximately $113
million owed to QUALCOMM, approximately $30.8
million of which is indebtedness owed under
certain convertible notes. Also, QUALCOMM will
make a substantial funding commitment to Leap
in the form of a $265.0 million secured credit
facility. QUALCOMM's performance as an
equipment vendor is not a condition to payment
to Leap under the notes and other indebtedness
to be transferred. Leap intends to take an
active management role in the Leap Operating
Companies, consistent with applicable laws,
contractual arrangements and other
requirements. Leap will also assume QUALCOMM's
obligations to manage operations of and finance
certain costs relating to ongoing build-outs of
the wireless telecommunications systems being
deployed by such operating companies, including
approximately $73.8 million of anticipated
funding obligations to certain of the Leap
Operating Companies, other than equipment
financing obligations, including $4.2 million
which will be indebtedness of Chilesat
Telefonia Personal convertible into equity on
certain terms and conditions. Leap also intends
to pursue opportunities to provide, manage,
support, operate and invest in additional
terrestrial-based wireless telecommunications
systems in other targeted United States and
international markets offering high growth
potential.
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<PAGE> 10
BUSINESSES TO BE RETAINED BY
QUALCOMM.................... QUALCOMM will retain its other businesses,
consisting of all of its current business
activities other than the Leap Business (the
"Core Businesses"). Without limiting the
foregoing, QUALCOMM will continue to be a
supplier of CDMA equipment to the Leap
Operating Companies, and has retained
substantially all of its rights under its
equipment supply and vendor finance agreements
with the Leap Operating Companies.
PRIMARY PURPOSES OF THE
DISTRIBUTION.................. The primary purposes of the Distribution are to
(i) eliminate potential conflicts between
QUALCOMM and certain of its CDMA equipment
customers which may compete against the Leap
Operating Companies, (ii) enable the Leap
Business and the Core Businesses to each be
recognized and appropriately valued by the
financial community as a separate and distinct
business, (iii) enable QUALCOMM's and Leap's
respective management teams to better focus on
enhancing each company's competitive position
in its respective businesses, which may produce
greater stockholder value over the long-term,
(iv) better enable Leap to attract, retain and
motivate the employees necessary to achieve its
business objectives by allowing it to implement
its own equity-based incentive plans, (v)
eliminate the continuing recognition by
QUALCOMM of a share of the Leap Operating
Companies' start-up operating losses, and (vi)
remove the requirement that QUALCOMM eliminate
intercompany profits on its equipment sales to
certain of the Leap Operating Companies.
OPINION OF FINANCIAL
ADVISOR....................... Lehman Brothers Inc. ("Lehman Brothers") has
acted as financial advisor to QUALCOMM in
connection with the Distribution and was
engaged to render its opinion with respect to
(i) the fairness, from a financial point of
view, to the holders of Common Stock of
QUALCOMM, of the Distribution, and (ii) whether
the Distribution will materially impair the
ability of QUALCOMM after the Distribution and
Leap to fund in the future, from external
sources or through internally generated funds,
their respective currently anticipated
operating and capital requirements. The full
text of the opinion of Lehman Brothers, which
sets forth the assumptions made, matters
considered and limitations on the review
undertaken by Lehman Brothers, is attached as
Annex 1 to this Information Statement. See
"Opinion of Financial Advisor."
SHARES TO BE DISTRIBUTED;
LEAP SHARE RESERVE.......... Approximately 17,643,830 shares of Leap Common
Stock (the "Leap Shares"), based on the number
of shares of QUALCOMM's Common Stock
outstanding on August 20, 1998, shall be
distributed in the Distribution. The shares to
be distributed will constitute all of the
outstanding shares of Leap Common Stock on the
Distribution Date. In addition, Leap has
reserved 3,218,623 shares for issuance to its
employees, officers, directors and consultants
pursuant to Leap's equity incentive plans;
5,481,377 shares for issuance upon exercise of
options to purchase Leap Common Stock which
will be held as of the Distribution Date by
current and former QUALCOMM employees,
officers, directors and consultants as a result
of option grants to such
5
<PAGE> 11
persons in connection with the Distribution;
5,500,000 shares for issuance upon exercise of
the QUALCOMM warrant described below; and
2,271,060 shares for issuance upon conversion
of certain Trust Convertible Preferred
Securities convertible into QUALCOMM Common
Stock pursuant to certain adjustment provisions
contained in such securities.
QUALCOMM WARRANT.............. QUALCOMM will retain a warrant (the "Warrant")
to purchase 5,500,000 shares of Leap Common
Stock, at a price equal to the average price of
the last sales price per share of the Leap
Common Stock on the Nasdaq National Market for
each of the five (5) consecutive trading days
beginning with and including the Distribution
Date. The Warrant will be exercisable during
the ten (10) years following the Distribution.
Based on the number of shares of Leap Common
Stock expected to be outstanding and reserved
for issuance pursuant to outstanding options
and convertible securities as of the
Distribution, upon exercise in full of the
Warrant, QUALCOMM would hold approximately 18%
of the outstanding shares of Leap, assuming
exercise of all such outstanding options and
convertible securities. See "Security Ownership
of Certain Beneficial Owners."
DISTRIBUTION RATIO............ Each QUALCOMM stockholder (each, a "Holder")
will receive one (1) share of Leap Common
Stock, including the attached preferred stock
purchase right (individually, a "Right" and
collectively, the "Rights"), for every four (4)
shares of QUALCOMM Common Stock held on the
Record Date.
NO FRACTIONAL SHARES.......... No fractional shares of Leap Common Stock will
be distributed. Fractional Leap Shares will be
aggregated and sold as whole Leap Shares by
Leap's transfer agent and distribution agent
for the Distribution, Harris Trust Company of
California (the "Distribution Agent"), to
provide cash to Holders in lieu of such
fractional Leap Shares.
LISTING AND TRADING MARKET.... The Company has applied for listing of the
shares of Leap Common Stock and the attached
Rights on the Nasdaq National Market (the
"Nasdaq NMS") under the symbol "LWIN."
RECORD DATE................... Close of business on September 11, 1998.
DISTRIBUTION DATE............. September 23, 1998.
MANNER OF EFFECTING THE
DISTRIBUTION................ On the Distribution Date, all of the
outstanding shares of Leap Common Stock will be
delivered to the Distribution Agent. It is
expected that on or about the Distribution
Date, the Distribution Agent will begin to mail
stock certificates representing shares of Leap
Common Stock to holders of record of QUALCOMM
Common Stock as of the Record Date. See "The
Distribution -- Manner of Effecting the
Distribution."
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<PAGE> 12
MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS.............. It is expected that the Distribution will be a
taxable distribution to each Holder in an
amount equal to the fair market value on the
date of the distribution of the Leap Shares
plus the cash intended to represent the fair
market value of fractional Leap Shares
distributed to such Holder. Each Holder's
portion of the Distribution will be taxable as
ordinary income to the extent of such Holder's
pro rata share of the current and accumulated
earnings and profits ("E&P") of QUALCOMM,
measured as of the end of the fiscal year in
which the Distribution occurs (which is
expected to be the fiscal year ending September
27, 1998). If the Holder's share of the
Distribution exceeds such Holder's pro rata
share of E&P, the excess will be treated first
as a basis-reducing, tax-free return of capital
to the extent of the Holder's adjusted tax
basis in each QUALCOMM share, and then as a
capital gain (treated as short-term or
long-term depending on the duration the Holder
has held each of its QUALCOMM shares).
No later than January 31, 1999, QUALCOMM will
issue to each Holder an IRS Form 1099-DIV
reflecting the fair market value of the Leap
Shares distributed to such Holder and the
portion of such Distribution that is taxable as
ordinary income. The Holder's adjusted tax
basis for income tax purposes in the
distributed Leap Shares will be the fair market
value of shares on the date of the
Distribution. The Distribution and any
subsequent sale of Leap Shares may have other
federal income tax consequences to Holders. See
"Material Federal Income Tax Considerations."
BECAUSE EACH STOCKHOLDER'S SITUATION IS UNIQUE,
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE TAX CONSEQUENCES OF THE
DISTRIBUTION TO THEM.
DIVIDEND POLICY............... The payment and amount of cash dividends and/or
share repurchases, if any, on or with respect
to, the Leap Common Stock after the
Distribution will be subject to the discretion
of Leap's Board of Directors. However, so long
as the Credit Facility to be provided to the
Company by QUALCOMM in connection with the
Distribution is in effect, Leap will be
contractually prohibited from declaring or
paying any dividends on or with respect to, or
repurchasing, Leap Common Stock. The Company
has never paid or declared any cash dividends.
It is the present policy of the Company to
retain earnings to finance the growth and
development of the businesses and, therefore,
the Company does not anticipate paying cash
dividends on Leap Common Stock in the
foreseeable future. Leap's policy will be
determined and reviewed by its Board of
Directors at such future times as may be
appropriate, and payment of dividends, if any,
on Leap Common Stock will depend upon Leap's
ongoing financial position, capital
requirements, profitability, contractual
obligations, cash flow and such other factors
as Leap's Board of Directors deems relevant.
RELATIONSHIP WITH QUALCOMM
AFTER THE DISTRIBUTION........ Following the Distribution, QUALCOMM and Leap
will be operated as independent publicly traded
companies, with no common
7
<PAGE> 13
officers or directors. QUALCOMM and Leap will,
however, continue to have a relationship as a
result of the following agreements to be
entered into between QUALCOMM and Leap prior to
the Distribution Date:
Separation and Distribution Agreement. Pursuant
to the Separation and Distribution Agreement,
QUALCOMM will agree to transfer the Leap
Business to Leap. QUALCOMM will also agree to
contribute to Leap the following: (i) $10
million in cash; and (ii) certain indebtedness
of certain of the operating companies in the
amount of approximately $113 million owed to
QUALCOMM, approximately $30.8 million of which
is indebtedness under certain convertible
notes; (iii) QUALCOMM's rights under agreements
to the extent relating solely to the Leap
Business (such as registration rights and other
similar rights as a holder of equity interests
in the Leap Operating Companies); and (iv)
miscellaneous assets. No intellectual property
will be transferred to Leap in connection with
the separation of the companies (the
"Separation"), and QUALCOMM will retain all
rights not expressly transferred with respect
to any and all agreements with the Leap
Operating Companies.
In connection with such transfer of assets and
rights by QUALCOMM, Leap will issue the Leap
Shares and the Warrant to QUALCOMM. In
addition, Leap will agree to assume certain
liabilities of QUALCOMM, including without
limitation (i) significant funding obligations
with respect to the Leap Operating Companies
expected to total at the time of the
Distribution approximately $73.8 million,
including $4.2 million which will be
indebtedness of Chilesat Telefonia Personal
convertible into equity on certain terms and
conditions; (ii) QUALCOMM's obligations to
manage operations of the Leap Operating
Companies; and (iii) certain accrued
liabilities with respect to Leap's employees in
the amount of approximately $2 million.
Under the Separation and Distribution
Agreement, QUALCOMM and Leap have agreed that,
if certain events occur within eighteen months
after the Distribution, certain assets and
liabilities related to TOU will be transferred
to Leap. The Separation and Distribution
Agreement will also provide that, subject to
the terms and conditions thereof, QUALCOMM and
the Company will take all reasonable steps
necessary to effect the Distribution.
Leap will also agree in the Separation and
Distribution Agreement that, until January 1,
2004, it will deploy, subject to certain
specified limited exceptions, only wireless
terrestrial systems using cdmaOne. For purposes
of this Information Statement, "cdmaOne" shall
mean those fixed or mobile wireless
telecommunications systems based on or derived
from QUALCOMM's CDMA technology which (i) have
been adopted as an industry standard by the
Telecommunications Industry Association ("TIA")
or other recognized international standards
bodies, and the adoption of such standard has
been voted in favor of by QUALCOMM ("QUALCOMM
Approved Standards"), (ii) are compatible with
or employ the same physical layer as
8
<PAGE> 14
QUALCOMM Approved Standards ("QUALCOMM Approved
Systems"), or (iii) are compatible with the
infrastructure and subscriber equipment
manufactured and sold by QUALCOMM. CdmaOne
currently includes, by way of example and not
of limitation, the TIA's IS-95 digital cellular
standard and ANSI JSTD-008 digital PCS
standard. If a terrestrial-based wireless
telecommunications system is considered a
cdmaOne system in one country, QUALCOMM and
Leap agree that it would be considered a
cdmaOne system in any other country,
irrespective of whether or not such system has
been adopted (or approved by QUALCOMM) as a
standard in such other country.
In addition, the Company will agree that, until
January 1, 2004, it will, subject to certain
specified limited exceptions, invest only in
companies using cdmaOne systems, in connection
with terrestrial wireless activities. Pursuant
to the Separation and Distribution Agreement
and subject to certain exceptions, QUALCOMM
will have a non-exclusive, royalty-free license
to any patent rights developed by Leap or any
of Leap's affiliates. In addition, pursuant to
the Separation and Distribution Agreement, the
Company will grant to QUALCOMM a right of first
refusal for a period of three (3) years with
respect to proposed transfers by Leap of
interests in joint ventures and equity
interests included in the Leap Business at the
time of the Distribution, subject to
pre-existing rights of other investors. Leap
will further agree to take an active role in
the management of companies with which it has
joint venture or equity interests, consistent
with its own business needs and applicable
laws, contractual arrangements and other
requirements. Finally, the agreement will
provide, with certain limited exceptions, that
for a period of three (3) years following the
Distribution neither party will solicit or hire
employees of the other.
Credit Facility. Prior to the Distribution, the
Company will enter into a secured credit
facility with QUALCOMM (the "Credit Facility").
The Credit Facility will consist of two
sub-facilities. The first sub-facility (the
"Working Capital Facility") will enable Leap to
borrow up to $35.2 million from QUALCOMM,
subject to the terms thereof. The proceeds from
the Working Capital Facility may be used by
Leap solely to meet the normal working capital
and operating expenses of Leap, including
salaries and overhead, but excluding, among
other things, strategic capital investments in
wireless operators, substantial acquisitions of
capital equipment, and/or the acquisition of
telecommunications licenses. The other
sub-facility (the "Investment Capital
Facility") will enable Leap to borrow up to
$229.8 million from QUALCOMM, subject to the
terms thereof. The proceeds from the Investment
Capital Facility may be used by Leap solely to
make certain identified portfolio investments.
Amounts borrowed under the Credit Facility will
be due and payable approximately eight years
following the Distribution Date. QUALCOMM will
have a first priority security interest in,
subject to some exceptions, substantially all
of the assets of Leap for so long as any
amounts are outstanding under the Credit
Facility.
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<PAGE> 15
Amounts borrowed under the Credit Facility will
bear interest at a variable rate equal to LIBOR
plus 5.25% per annum. Interest shall be payable
quarterly beginning September 30, 2001; and
prior to such time, accrued interest shall be
added to the principal amount outstanding.
Master Agreement Regarding Equipment
Procurement. The Master Agreement Regarding
Equipment Procurement (the "Equipment
Agreement") will set forth certain obligations
of Leap and QUALCOMM with respect to the
purchase and sale of certain terrestrial-based
cdma One infrastructure and subscriber
equipment. Pursuant to the Equipment Agreement,
Leap will agree that: (i) Leap will purchase
from QUALCOMM not less than 50% of Leap's
direct requirements for infrastructure and
subscriber equipment during the five-year
period following the first such purchase; (ii)
with respect to each direct or indirect
investment by Leap which is made at any time
prior to the fourth anniversary of the
Distribution Date in a wireless
telecommunication operating entity operating in
the United States in which Leap has not
previously invested (a "U.S. Operator"), Leap
shall cause each such U.S. Operator, as a
condition of and prior to making such
investment, to enter into an equipment
requirements agreement with QUALCOMM which
shall require such U.S. Operator to purchase
from QUALCOMM not less than 50% of its
requirements for infrastructure and subscriber
equipment during a five year period commencing
on the date of such investment; and (iii) with
respect to each direct or indirect investment
by Leap in a U.S. Operator which is made after
the fourth anniversary of the Distribution
Date, Leap shall exercise its commercially
reasonable efforts to cause the U.S. Operator,
as a condition of making such investment, to
provide QUALCOMM with a reasonable opportunity
to bid on such U.S. Operator's requirements for
infrastructure and subscriber equipment, and
encourage such U.S. Operator to acquire such
equipment from QUALCOMM. Such obligations shall
be imposed upon Leap for such infrastructure
and subscriber equipment so long as QUALCOMM's
bid for such (i) infrastructure equipment and
related services, or (ii) subscriber equipment,
as applicable is not greater than 110% of the
lowest competing bid that Leap designates that
Leap is willing to accept, taking into account
all reasonably quantifiable and/or objective
factors associated with the sale and financing
of wireless telecommunications equipment and
related services, provided, however, that once
QUALCOMM has been awarded contracts for an
aggregate $250 million of infrastructure
equipment and related services, or subscriber
equipment, as applicable (calculated
separately), the 110% criterion shall be
lowered to 100% for subsequent purchases of
such equipment as the volume for such category
of purchases exceeds the $250 million
threshold.
Further, until the earlier to occur of (i) the
fourth anniversary of the Distribution Date and
(ii) the date on which Leap has received an
aggregate $60 million of debt or equity
financing (by parties other than QUALCOMM and
excluding the proceeds from the exercise of
Leap stock options), Leap shall cause each
wireless
10
<PAGE> 16
telecommunication operating entity operating
outside the United States in which Leap has not
previously invested (a "Non-U.S. Operator"), as
a condition of and prior to making such new
direct or indirect investment, to enter into an
equipment requirements agreement with QUALCOMM
which shall provide that the Non-U.S. Operator
shall purchase from QUALCOMM not less than 50%
of such Non-U.S. Operator's requirements for
infrastructure and subscriber equipment during
the five year period commencing on the date of
such investment. With respect to any Non-U.S.
Operators in which Leap makes a direct or
indirect investment following the
above-described applicable period, Leap shall
use commercially reasonable efforts to cause
such Non-U.S. Operator, as a condition of
making such investment, to provide QUALCOMM
with a reasonable opportunity to bid on such
Non-U.S. Operator's infrastructure and
subscriber equipment, and encourage such
Non-U.S. Operator to acquire such equipment
from QUALCOMM. The obligations of all such
Non-U.S. Operators shall be subject to QUALCOMM
providing competitive prices, taking into
account all reasonably quantifiable and/or
objective factors associated with the sale and
financing of wireless telecommunications
equipment and related services. Certain
additional terms limit the respective
obligations of the parties to perform under
specified circumstances. All such obligations
with respect to equipment purchases shall
expire on the date nine years following the
Distribution.
QUALCOMM's right to supply infrastructure and
subscriber equipment constitutes a right of
first refusal in favor of QUALCOMM. To the
extent Leap (or any subject U.S. Operator or
Non-U.S. Operator) attempts to procure
infrastructure equipment and subscriber
equipment on a "bundled" basis (that is, the
prospective buyer is seeking to enter into a
contract for the purchase of infrastructure
equipment and subscriber equipment from the
same vendor on a concurrent basis), then under
certain prescribed circumstances QUALCOMM shall
be entitled to respond separately to each
portion of the proposed "bundled" procurement.
To the extent Leap does not attempt to procure,
in any instance, such equipment on a
competitive basis from multiple prospective
vendors, but instead elects to negotiate
exclusively with QUALCOMM to supply such
equipment, then QUALCOMM agrees to offer and
sell such equipment to Leap on a "most favored
pricing" basis.
Interim Services Agreement. The Interim
Services Agreement (the "Interim Services
Agreement"), will govern the provision by
QUALCOMM to the Company, on an interim basis,
of certain services (which may include voice
telecommunications and data transmission,
accounting, financial management, tax, payroll,
stockholder and public relations, legal, human
resources administration, procurement, real
estate management and other administrative
functions), each as mutually agreed to and on
the terms set forth therein. The Company will
agree to pay QUALCOMM the hourly rate of the
QUALCOMM employees performing such services,
plus associated general and administrative
overhead
11
<PAGE> 17
(which shall be deemed to equal an additional
150% of the hourly rate of the employees) and
all out-of-pocket costs and expenses. These
interim services are not expected to extend
beyond one year following the Distribution
Date.
Employee Benefits Agreement. Pursuant to the
Employee Benefits Agreement, the Company will
assume and agree to pay, perform, fulfill and
discharge, in accordance with their respective
terms, all liabilities to, or relating to,
former employees of QUALCOMM or its affiliates
who will be employed by the Company. In
addition, Leap will be obligated to grant
(prior to the Distribution) options to purchase
shares of Leap Common Stock to certain holders
of options to purchase shares of QUALCOMM
Common Stock. See "Treatment of QUALCOMM
Employee Stock Options in the Distribution."
Tax Agreement. The Tax Agreement generally will
require QUALCOMM to pay, and indemnify Leap
against, all United States federal, state,
local and foreign taxes relating to the
businesses conducted by QUALCOMM or its
subsidiaries for any taxable period, other than
the following taxes which will be paid by Leap
and against which Leap will indemnify QUALCOMM:
(i) all United States federal, state, local and
foreign taxes relating to Leap and its U.S.
subsidiaries for periods after the
Distribution; (ii) all United States federal,
state, local and foreign taxes relating to
Leap's non-U.S. subsidiaries or any predecessor
or successor thereof for all periods before and
after the Distribution (other than with respect
to certain restructuring transactions incident
to the Distribution); and (iii) all United
States federal, state, local and foreign taxes
arising out of certain actions taken by, or in
respect of, Leap or any of its subsidiaries
that cause adverse tax consequences to
QUALCOMM, Leap or their respective subsidiaries
with respect to the Distribution or the
transactions related thereto; provided,
however, that under certain limited
circumstances Leap's indemnification obligation
described in this subparagraph (iii) may be
reduced.
Conversion Agreement. Pursuant to the
Conversion Agreement, the Company will agree to
issue shares of Leap Common Stock to holders of
QUALCOMM's Trust Convertible Preferred
Securities upon the conversion of such
securities and to, at all times, have reserved
and keep available, solely for issuance and
delivery upon such conversion, all Leap Common
Stock issuable from time to time upon such
conversion.
QUALCOMM's relationships as equipment vendor to
Leap and the Leap Operating Companies and as
lender under the Credit Facility will give
QUALCOMM significant influence over Leap and
will create certain conflicts with Leap. In
addition, QUALCOMM is not restricted from
competing with the Company or the Leap
Operating Companies or pursuing directly
wireless telecommunications businesses or
interests which would also be attractive to
Leap. See "Risk Factors -- Potential Conflicts
with QUALCOMM," and "Relationship Between
QUALCOMM and the Company After the
Distribution."
12
<PAGE> 18
REASONS FOR FURNISHING THIS
INFORMATION STATEMENT....... This Information Statement is being furnished
solely to provide information for Holders, each
of whom will receive Leap Shares in the
Distribution. It is not to be construed as an
inducement or encouragement to buy or sell any
securities of Leap or QUALCOMM. The information
contained herein is provided as of the date of
this Information Statement unless otherwise
indicated. Leap will not update the information
contained in this Information Statement except
in the normal course of its public disclosure
practices.
13
<PAGE> 19
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth summary historical combined statement of
operations data and combined balance sheet data and corresponding pro forma data
for the Company, a development stage company. The historical combined financial
data for the nine months ended May 31, 1998 and 1997 and years ended August 31,
1997 and 1996 and for the period from September 1, 1995 (inception) to May 31,
1998 are derived from the unaudited Condensed Combined Financial Statements and
the audited Combined Financial Statements of the Company, respectively, which
are included elsewhere in this Information Statement. The historical combined
financial data relate to the Leap Business as it was operated as part of
QUALCOMM, and such data do not reflect significant business activities since the
date of the periods indicated.
The pro forma financial data were derived from the "Pro Forma Financial
Statements" that give pro forma effect to the Distribution. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable. The pro forma statement of operations data
for the nine months ended May 31, 1998 and the year ended August 31, 1997 give
effect to the Distribution as if it had occurred as of September 1, 1996. The
pro forma balance sheet data give effect to the Distribution as if it had
occurred as of May 31, 1998. The pro forma financial data do not purport to
represent what the financial position or results of operations of the Company
would actually have been had the Distribution in fact occurred on the assumed
dates or to project the financial position or results of operations of the
Company for any future period or date. These tables should be read in
conjunction with "Pro Forma Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the unaudited
"Condensed Combined Financial Statements and the Combined Financial Statements"
included elsewhere herein.
SUMMARY COMBINED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE PERIOD FROM NINE MONTHS PRO FORMA
SEPTEMBER 1, 1995 NINE MONTHS ENDED YEARS ENDED ENDED YEAR ENDED
(INCEPTION) TO MAY 31, AUGUST 31, MAY 31, AUGUST 31,
MAY 31, ------------------- --------------- ----------------- ----------
1998 1998 1997 1997 1996 1998 1997
------------------- -------- -------- ------- ----- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Equity in net (losses) earnings of
wireless operating companies(1)... $ (1,328) $ (1,535) $ (139) $ 207 $ -- $ (3,042) $(1,247)
General and administrative
expenses.......................... (17,945) (16,188) (994) (1,361) (396) (16,188) (1,361)
-------- -------- -------- ------- ----- -------- -------
Loss before income taxes............ (19,273) (17,723) (1,133) (1,154) (396) (19,230) (2,608)
Income tax expense.................. -- -- -- -- -- -- --
-------- -------- -------- ------- ----- -------- -------
Net loss.................... $(19,273) $(17,723) $ (1,133) $(1,154) $(396) $(19,230) $(2,608)
======== ======== ======== ======= ===== ======== =======
Unaudited pro forma basic and
diluted net loss per common
share(2).......................... $ (1.00) $ (0.07) $ (1.09) $ (0.15)
======== ======= ======== =======
Shares used in computing unaudited
pro forma basic and diluted net
loss per common share............. 17,644 17,644 17,644 17,644
BALANCE SHEET DATA(1)(3):
Cash (at end of period)............. $ -- $ -- $ -- $ 10,000
Working capital (deficit)........... (2,897) (279) (111) 8,053
Total assets........................ 57,777 46,267 -- 279,389
Stockholder's equity................ 54,880 45,988 (111) 260,492
</TABLE>
- ---------------
(1) As of and for the periods ended May 31, 1998 and 1997 and August 31, 1997
and 1996, and for the period from September 1, 1995 (inception) to May 31,
1998, the Company's combined historical financial data reflect the Company's
equity activity from its investment in Chilesat Telefonia Personal, S.A. The
pro forma statement of operations data for the periods ended May 31, 1998
and August 31, 1997 reflect the Company's equity activity from its
investment in Chilesat Telefonia Personal, S.A. The pro forma balance sheet
data at May 31, 1998 reflects investments in ChileSat Telefonia Personal,
S.A. and Chase Telecommunications, Inc. and additional investments, to
14
<PAGE> 20
be contributed by QUALCOMM, in Pegaso Telecomunicaciones, S.A. de C.V.,
QUALCOMM Telecommunications Ltd., and OzPhone Pty. Ltd. The Company accounts
for its investment in Chase Telecommunications, Inc. using the cost basis
method of accounting.
(2) The Company had no common shares outstanding during the first nine months of
fiscal 1998 or during fiscal 1997. The pro forma net loss was calculated by
dividing the net loss for each period by the 17,643,830 expected shares of
common stock of the Company to be issued upon the Distribution based on
QUALCOMM common shares outstanding as of August 20, 1998. Such shares
reflect the expected issuance upon the Distribution of one of the Company's
shares of common stock for every four shares of QUALCOMM common stock
outstanding. See Note 1 of Combined Financial Statements.
(3) Pro forma balance sheet data give effect to (a) the net assets to be
contributed to the Company by QUALCOMM and (b) the distribution of Leap
common stock to QUALCOMM stockholders.
15
<PAGE> 21
RISK FACTORS
This Information Statement contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those projected in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this section, as well as those discussed elsewhere in this
Information Statement.
OPERATING HISTORY
The Company was formed as a stand-alone corporation in June 1998 for the
purpose of effecting the Distribution. The Company does not have any operating
history as an independent company and it and each of the Leap Operating
Companies are at an early stage of development. As such, the Company is subject
to the risks inherent in the establishment of a new business enterprise and its
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets and companies experiencing rapid
growth.
UNCERTAINTY OF FUTURE PROFITABILITY
To date, the Company has generated no revenue from its ownership interests
in or management roles with the Leap Operating Companies. The Company's ability
to generate revenues will be dependent on a number of factors, including the
future operations and profitability of the Leap Operating Companies. The Leap
Operating Companies are expected to incur substantial losses for the foreseeable
future and are subject to substantial risks. The Company will be required to
recognize a share of these companies' start-up operating losses as a result of
the Company's ownership interests in the Leap Operating Companies. The industry
in which the Leap Operating Companies operate is highly competitive and is
subject to a number of significant project, market, political, credit and
exchange risks, among others. The Company, QUALCOMM and others will be required
to provide substantial funding to these entities to finance completion of their
wireless operating systems. The build-out of the Leap Operating Companies'
wireless systems may take a number of years to complete. There can be no
assurance that any of the Leap Operating Companies or any other companies in
which the Company may acquire a joint venture or equity interest will be able to
obtain sufficient financing to build-out their systems, meet their payment
obligations to the Company or others, including the Federal Communications
Commission ("FCC") and other regulatory agencies, or become profitable. The
failure of these companies to build-out their systems, meet their payment
obligations or become profitable would adversely affect the value of the
Company's assets and its future profitability. Further, the above factors could
also adversely affect the value of the Leap Common Stock in the public market.
The time required for the Company to reach or sustain profitability is highly
uncertain, and there can be no assurance that the Company will be able to
achieve or maintain profitability. Moreover, if profitability is achieved, the
level of such profitability cannot be predicted and may vary significantly from
quarter to quarter.
ADDITIONAL CAPITAL NEEDS
The Company expects to have significant future capital requirements
relating (i) to funding commitments to the Leap Operating Companies and other
operating companies in which the Company may acquire joint venture or equity
interests and (ii) to general working capital needs and other cash requirements.
The magnitude of these capital requirements will depend on a number of factors,
including the specific capital needs of the Leap Operating Companies, additional
capital needed to acquire or maintain other joint venture or equity interests or
to pursue other telecommunications opportunities, competing technological and
market developments and changes in existing and future relationships. The
capital markets in the United States and worldwide are currently experiencing
severe volatility and uncertainty. There can be no assurance that such markets
will improve or that the Company will be able to access such markets or raise
additional capital on favorable terms or at all. Failure to satisfy such capital
requirements would have a material adverse effect on the Company's business,
results of operations, liquidity and financial position and could also adversely
affect the value of the Leap Common Stock in the public market. Prior to the
Distribution, the Company has funded its cash requirements through contributions
from QUALCOMM.
16
<PAGE> 22
SUBSTANTIAL LEVERAGE
The Company expects to obtain much of its required near term financing
through borrowings under the Credit Facility provided by QUALCOMM. The Company
expects, however, that it will use substantially all of its available cash as of
the Distribution Date and will need to draw down the entire $35.2 million
borrowing limit under the Working Capital Facility and the entire $229.8 million
borrowing limit under the Investment Capital Facility by the end of fiscal 1999.
The Credit Facility bears a variable interest rate, which exposes the Company to
interest rate risk. The Company will have no other available sources of working
capital or financing as of the Distribution Date for the period subsequent to
fiscal 1999. There can be no assurance that the Company will be able to obtain
such additional required financing on favorable terms or at all. The terms of
the Credit Facility, including the security interest in favor of QUALCOMM and
other restrictive covenants, may significantly limit or prevent the Company's
ability to obtain additional debt financing. If additional funds are raised
through equity financings, dilution to the Company's existing stockholders would
result. To the extent that such additional financing is raised by the sale or
other transfer of any of the Company's equity interests in the Leap Operating
Companies, the Companies' percentage ownership in the Leap Operating Companies
will be diluted or the Company may relinquish certain operating control over the
Leap Operating Companies. If adequate additional financing is not available, the
Company may be forced to default on its funding obligations to the Leap
Operating Companies, significantly modify its business plan and, in the case of
failure to obtain working capital financing, cease some or all of its
operations. Accordingly, the failure to obtain adequate additional financing
would have a material adverse effect on the Company's business, results of
operations, liquidity and financial position.
As a result of its capital requirements, including expected borrowings
under the Credit Facility, the Company expects that it will be highly leveraged
within twelve months after the Distribution. The degree to which the Company is
leveraged could have important consequences, including: (i) the Company's
ability to obtain additional financing in the future may be impaired; (ii) a
substantial portion of the Company's future cash flows from operations may be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available for operations; (iii) the Company may be hindered
in its ability to adjust rapidly to changing market conditions; (iv) the
Company's substantial degree of leverage may make it more vulnerable in the
event of a downturn in general economic conditions or in its business; and (v)
the Company's substantial degree of leverage could impair stockholders'
investment in the Company since the Company's debt holders would have priority
with respect to the Company's assets in the event of a liquidation. There can be
no assurance that the Company's future cash flows will be sufficient to meet the
Company's debt service requirements or that the Company will be able to
refinance any of its indebtedness at maturity.
The Leap Operating Companies have used or intend to use various sources of
financing for their respective funding. Although each of them has received
equity infusions, many are or will be highly leveraged. The ability of the Leap
Operating Companies to meet debt covenants will be dependent upon their future
performance, which will be subject to prevailing economic conditions and to
financial, business and other factors beyond their control. The ability of the
Leap Operating Companies to obtain future financings on acceptable terms will be
limited by their leverage and cash flows. In addition, the Leap Operating
Companies will be substantially funded through equipment financing arrangements
from vendors. See "-- Potential Conflicts with QUALCOMM." Such equipment
financings will be contingent upon meeting planned levels of performance, and
should any Leap Operating Company fail to meet such performance requirements,
the related equipment financing could be materially restricted or terminated.
PROJECTED LOSSES
The Company experienced net losses for the nine months ended May 31, 1998
and for the years ended August 31, 1997 and 1996 of approximately $17.7 million,
$1.2 million and $400,000, respectively. Following the Distribution, the Company
will be responsible for the additional costs associated with being an
independent public company, including costs related to corporate governance,
listed and registered securities and investor relations issues. Also, following
the Distribution, according to applicable accounting rules, the Company will be
required to recognize a share of the Leap Operating Companies' operating losses,
which are likely to be substantial. Further, the principal Leap Operating
Companies are in the early stages of developing
17
<PAGE> 23
and deploying their respective telecommunications systems, which require
significant expenditures, a substantial portion of which are incurred before
corresponding revenues are generated, and many of which will in turn be borne by
the Company. In addition, the degree to which the Company and its operating
companies are expected to be leveraged will lead to significant interest expense
and principal repayment obligations with respect to outstanding indebtedness.
The Company therefore expects to incur significant expenses in advance of
generating revenues, and as a result to incur substantial additional losses in
the foreseeable future. There can be no assurance that the Company or any of the
Leap Operating Companies will achieve or sustain profitability in the near term
or at all. Failure to achieve profitability could have an adverse effect on the
market value of the Leap Common Stock.
INTERNATIONAL RISKS
The Company is subject to numerous risks as a result of its international
activities. The Leap Operating Companies are dependent, in large part, on the
economies of the markets in which they have operations. Those markets and other
markets in which the Company may operate are in countries with economies in
various stages of development or structural reform, some of which are subject to
rapid fluctuations in currency exchange rates, consumer prices, employment
levels and gross domestic product. The Company and the Leap Operating Companies
are exposed to market risk from changes in foreign currency exchange rates and
interest rates, and are subject to other currency, economic and political risks,
which could impact their results of operations and financial condition.
Moreover, applicable agreements relating to the Company's interests in the Leap
Operating Companies are frequently governed by foreign law and are subject to
dispute resolution in the courts of, or through arbitration proceedings in, the
country or region in which each such Leap Operating Company is located or
another jurisdiction agreed upon by the parties. Agreements between Leap and/or
the Leap Operating Companies and other parties relating to the development,
construction or operation of wireless operating systems in international markets
may be abandoned or breached by such other parties or may be difficult to
enforce in such markets due to political and market instability, the limited
development of the judicial systems in such markets and other factors affecting
such markets. Further, public awareness of the risks associated with
international operations may increase the volatility of the market price of Leap
Common Stock. This potential volatility has been evidenced recently by stock
market fluctuations attributed to recent developments in Russia, Latin America,
Asia and other emerging markets. The risks and volatility associated with the
Company's markets may adversely impact the ability of the Company and the Leap
Operating Companies to raise capital.
The value of the Company's interest in a Leap Operating Company is
partially a function of the currency exchange rate between the U.S. dollar and
the applicable local currency. Exchange rates for currencies of the countries in
which the Company's Leap Operating Companies do business may fluctuate in
relation to the U.S. dollar, and such fluctuations may have a material adverse
effect on the Company's earnings or assets, or on the likelihood of repayment of
certain obligations to the Company.
A significant part of the Company's strategy involves its planned
activities in a number of developing nations. Various challenges and risks are
attendant to doing business in certain of these countries, including, among
other things, high real estate prices and a shortage of skilled
middle-management employees in addition to risks associated with international
business generally. The Company's activities in developing nations are
significant to the Company's business and the failure of the Company to
effectively implement its strategy in these and other developing nations could
have a material adverse effect on the Company's business, results of operations,
liquidity and financial position.
In addition to the general risks associated with the international
operations of the Leap Operating Companies, the Company will also be subject to
risks specific to the individual countries in which the Leap Operating Companies
are located, including political, regulatory and competitive risks. The
following is a summary of such country-specific risks:
Doing Business in Russia
The Russian economy recently has experienced severe volatility in both
financial and currency markets despite the monetary support and financing
provided by the IMF. The Russian Ruble has been allowed to devalue significantly
and generally lacks convertibility into other currencies. The Russian government
is
18
<PAGE> 24
experiencing extreme political volatility and has defaulted on certain of its
obligations to foreign investors and governments. News reports have indicated
that a number of Russian banks have become insolvent. The pace of political
reform has slowed and the recent dismissal of a significant number of government
leaders by the Russian President has contributed to continuing political
instability. Such political instability could lead to a return to a state
controlled economy, market inefficiencies and hyperinflation. Further, the IMF
has indicated that continued support would be conditioned on continued
implementation of political reform and the institution of a market based
economy, which cannot be assured. This economic and political instability could
have a material adverse effect on the value of the Company's businesses and
prospects in Russia, including but not limited to nationalization of
telecommunications operations. In addition, the regulatory framework and
authorities in Russia are relatively recent and, therefore, the enforcement and
interpretation of regulations, the assessment of compliance, and the degree of
flexibility of regulatory authorities are uncertain. Further, QUALCOMM's CDMA
equipment has not yet been approved in Russia for mobility applications. Any or
all of these factors could negatively impact the Company's prospects in Russia.
Moreover, the Company's Russian operating companies are currently subject to
increasing competition from other vendors of telecommunications equipment. There
can be no assurance that the Company's Russian operating companies will be able
to compete successfully or that new technologies and products that are more
commercially effective than the Company's or its operating companies' products
and services will not be developed.
Doing Business in Australia
The Leap Operating Company in Australia is dependent, in large part, on the
economy of that country. The recent economic crisis in Asia has had a negative
impact on the growth of the Australian economy which could, in turn, negatively
impact the Company's prospects in Australia. There can be no assurances that
Australia's economy will not continue to be negatively impacted by the Asian
economic crisis or that the Company's operations in Australia will not similarly
be affected. In addition, three of the Company's existing competitors in
Australia have nationwide operations and have substantially greater financial,
technical, marketing, sales and distribution resources than those of the
Company. The Company's Australian Operating Company has only regional coverage
and the Australian telecommunications market is expected to have new entrants.
There can also be no assurance that the Company will be able to obtain
additional required financing on favorable terms or at all from significant
investors to support its operations in Australia.
Doing Business in Chile
The Leap Operating Company in Chile is dependent, in large part, on the
economy of that country which historically has been closely tied to fluctuations
in the price of certain natural resources. The recent economic crisis in Asia
has had a negative impact on certain commodity prices which could, in turn,
negatively impact the Company's prospects in Chile. Although Chilean prices and
its currency generally have been stable, such stability has required continued
intervention by the Chilean government. In addition, although the Company's
Chilean operating company is the only vendor in Chile of CDMA technology, a
number of the Company's existing competitors in Chile currently have cellular
network systems based on alternative technology in place or have entered into
teaming arrangements in certain areas of the country. There can be no assurance
that the Company's Chilean operating company will be able to compete
successfully or that new technologies and products that are more commercially
effective than the Company's or its operating company's products and services
will not be developed.
Doing Business in Mexico
Mexico continues to experience a high rate of inflation, and the country's
currency and financial markets continue to be volatile. The impact on the
Mexican economy of the recent economic crisis in Asia and the economic slowdown
in the U.S. is as yet unclear and there can be no assurances that Mexico's
economy will not be negatively impacted by such economic factors or that the
Company's operations in Mexico will not similarly be affected. The economy of
Mexico historically has also been closely tied to fluctuations in the price of
oil and petroleum products and fluctuations in the prices of such products could
also negatively impact the Company's prospects as could continuing political
tensions in Mexico. Additionally, a number of large
19
<PAGE> 25
American and European companies and large international telecommunications
companies, including Motorola, Ericsson, Alcatel, Nortel and Lucent, are
actively engaged in manufacturing of telecommunications products and/or programs
to develop and commercialize telecommunications services in Mexico. Many of
these competitors have substantially greater financial, technical, marketing,
sales and distribution resources than those of the Company. There can be no
assurance that the Company or its Mexican operating company will be able to
compete effectively.
Doing Business in Ukraine
Under the Separation and Distribution Agreement, QUALCOMM and Leap have
agreed that, if certain events occur within eighteen months after the
Distribution, certain assets and liabilities related to TOU will be transferred
to Leap. There can be no assurance that such events will occur or that legal
impediments to transfer will be removed, or that QUALCOMM's interest in TOU will
ever be transferred to Leap.
In the event QUALCOMM's interest in TOU is transferred to the Company, it
will subject the Company to certain risks of doing business in Ukraine. The
Ukrainian economy recently experienced a deep recession and is expecting only
relatively low growth of 1-2% of GDP during 1998 and 1999. Ukraine also has a
very high debt service requirement and had per capita GDP of only $2,853.
Politically, Ukraine has been subject to a number of risks and the upcoming
parliamentary and presidential elections in 1999 could negatively impact the
Company's prospects in that country. In addition, although the Company's
Ukrainian operating company is currently the only known vendor in Ukraine of
CDMA technology, a number of the Company's existing competitors in Ukraine have
planned cellular network systems to compete with the Company's Ukrainian
operating company. The Ukrainian operating company also competes against the
landline carriers, including government-owned telephone companies. There can be
no assurance that the Company's Ukrainian operating company will be able to
compete successfully or that new technologies and products that are more
commercially effective than the Company's or its operating company's products
and services will not be developed.
POTENTIAL CONFLICTS WITH QUALCOMM
Upon completion of the Distribution, Leap will own QUALCOMM's former joint
venture and equity interests in the Leap Operating Companies. QUALCOMM, however,
will continue to be a supplier of CDMA equipment and is expected to provide
significant vendor financing to those companies. QUALCOMM will retain
substantially all of its rights under its equipment supply and vendor finance
agreements with such entities, and such entities will continue to rely on
QUALCOMM and its equipment and technology. The ability of the Leap Operating
Companies to construct and operate their wireless operating systems and their
business and future prospects may be substantially dependent upon QUALCOMM's
performance under QUALCOMM's agreements with the Leap Operating Companies.
Neither Leap nor any of the Leap Operating Companies will be able to exercise
any substantial control over QUALCOMM or its management or the performance by
QUALCOMM of such agreements. There can be no assurance that QUALCOMM will
perform services or other obligations under such agreements in a timely or
sufficient manner, or at all. Failure by QUALCOMM to fully perform under such
agreements could have a material adverse effect on Leap and/or the Leap
Operating Companies. In addition, QUALCOMM's relationship with and economic
interest in the Leap Operating Companies could place QUALCOMM in a position in
conflict with the Company's with respect to the Leap Operating Companies.
Following the Distribution, the Company and QUALCOMM will also be subject
to several agreements between them. For instance, the Company will initially be
dependent upon the Credit Facility with QUALCOMM to meet its needs for capital.
The Credit Facility contains a financial covenant and operating covenants,
including restrictions on the ability of the Company to incur indebtedness, to
merge, consolidate or transfer all or substantially all of its assets, to make
certain sales of assets, to create, incur or permit the existence of certain
liens and to pay dividends. In addition, the Credit Facility permits uses of
funds only for specified purposes, restricts the nature and breadth of the
Company's joint venture and equity interests and imposes other restrictions on
the Company's business. The Company and QUALCOMM have also entered into the
Equipment Agreement, pursuant to which the Company has made certain commitments
with respect
20
<PAGE> 26
to its own and its operating companies' purchase of certain CDMA products from
QUALCOMM. The relationships with QUALCOMM, including the Equipment Agreement and
the Credit Facility, may restrict the Company's ability to invest in other joint
ventures. These agreements will allow QUALCOMM to continue to exert significant
influence over the Company following the Distribution, and there can be no
assurance that the Company and QUALCOMM will not experience disputes or other
difficulties with respect to their performance under these agreements. The
deterioration of the Company's relationship with QUALCOMM could have an adverse
effect on the value of the Leap Common Stock through the public market. See
"Relationship Between QUALCOMM and the Company After the Distribution."
AVAILABILITY AND MAINTENANCE OF LICENSES
The ability of the Company and the Leap Operating Companies to retain and
exploit their existing telecommunications licenses, to renew licenses when they
expire, and to obtain new licenses in the future, is essential to the Company's
operations. The Company believes that the opportunity to acquire new
telecommunications licenses may exist only for a limited time and be subject to
intense competition. There can be no assurance that in the future existing
licenses will not be limited, revoked or otherwise adversely modified, or that
renewal of licenses will be granted on terms favorable to the Company or at all,
or that the Company or the Leap Operating Companies will be able to secure
additional desired licenses.
CONSTRUCTION AND SYSTEM PERFORMANCE RISKS
The Company and the Leap Operating Companies will typically require
substantial construction of new telecommunications networks and additions to
existing networks. Construction projects are subject to cost overruns and delays
not within the control of the operating company or its subcontractors, such as
those caused by acts of governmental entities, financing delays and catastrophic
occurrences. Accordingly, there can be no assurance that the Company and the
Leap Operating Companies will be able to complete current or future construction
projects for the amount budgeted or on a timely basis, which could jeopardize
subscriber contracts, franchises or licenses and could have a material adverse
effect on the Company and the Leap Operating Companies.
LONG TERM CONTRACTS
In addition, the Leap Operating Companies and Leap have several significant
contracts, including certain network infrastructure contracts with QUALCOMM,
that extend over a multi-year period. There can be no assurance that any or all
of these contracts can be completed on a timely basis, in accordance with the
customer's technical specifications or without significant cost overruns.
Certain of these multi-year contracts also contain demanding installation and
maintenance requirements, in addition to other performance criteria which, if
not satisfied, could subject the operating companies to substantial penalties,
lost profits, damages and operating and start-up losses. The Company expects
that multi-year contracts its operating companies may enter into in the future
may give rise to similar uncertainties.
JOINT VENTURES
The Company will be a participant in joint venture companies that hold
wireless telephone licenses or are seeking such licenses. Many of the partners
of the joint venture companies have relatively little experience in managing
wireless operating companies. The Company's ability to withdraw funds, including
dividends, from its participation in, and to exercise significant management
influence over, such joint ventures, is dependent in many cases on receiving the
consent of the other participants, over which the Company has no control.
Additionally, many of the partners in the joint ventures have invested
relatively small amounts of their own funds in such joint ventures. Any material
disagreement with respect to the operational strategy and system implementation
plans of these joint ventures between the Company and its joint venture partners
could have a material adverse effect on the Company. Additionally, the inability
of any of the Company's joint venture partners to meet its funding or other
obligations with respect to a Leap Operating Company could also have a material
adverse effect on the Company, and could force the Company to make additional
investments in such Leap Operating Companies.
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INVESTMENT COMPANY ACT
Following the Distribution, a significant portion of the Company's assets
will consist of equity and other interests in its operating companies.
Significant investments in entities that are not majority owned by the Company
could subject the Company to the registration requirements of the Investment
Company Act of 1940 (the "Investment Company Act"). The Investment Company Act
requires registration of, and imposes substantial restrictions on, certain
companies that engage, or propose to engage, primarily in the business of
investing, reinvesting, owning, holding, or trading in securities, or that fail
certain statistical tests concerning a company's asset composition and sources
of income. Primarily because the Company's operating companies will be engaged
in telecommunication business operations and because the Company intends to
actively participate in the management of its operating companies, consistent
with applicable laws, contractual arrangements and other requirements, the
Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding, or trading in securities. The Company
intends to monitor and adjust the nature of its interests in and involvement
with operating companies in order to avoid subjecting the Company to the
registration requirements of the Investment Company Act. In addition, in order
to clarify the Company's status under the Investment Company Act, the Company
intends to apply on or about the Distribution Date for an exemptive order from
the Securities and Exchange Commission finding and declaring the Company to be
primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities, either directly, through majority-owned
subsidiaries or through controlled companies conducting similar types of
businesses. There can be no assurance that the Company's business activities
will not ultimately subject the Company to the Investment Company Act, or that
the exemptive order will be issued. If the Company were required to register as
an investment company under the Investment Company Act, it would become subject
to regulations that would have a material adverse impact on its business.
COMPETITION
There is increasing competition in the wireless telecommunications industry
in the United States and throughout the world. There can be no assurance that
the Company or its operating companies will be able to compete successfully or
that new technologies and products that are more commercially effective than the
Company's or its operating companies' products and services will not be
developed. In addition, many of the Company's prospective competitors have
substantially greater financial, technical, marketing, sales and distribution
resources than those of the Company.
Although the implementation of advanced telecommunications services is in
its early stages in many developing countries, the Company believes competition
is intensifying as businesses and foreign governments realize the market
potential of telecommunications services. Many of the Company's operating
companies currently face competition from existing telecommunication providers.
A number of large American and European companies and large international
telecommunications companies are actively engaged in programs to develop and
commercialize telecommunications services in both developing and developed
countries. In many cases, the Company also competes against the landline
carriers, including government-owned telephone companies. In some cases, the
competition is from government-controlled or -supported entities that are, or
may in the future be, privatized or otherwise become more efficient and
competitive. In addition, the Leap Operating Companies throughout the world may
face competition with new technologies and services introduced in the future.
Although the Leap Operating Companies intend to employ relatively new
technologies, there will be a continuing competitive threat from even newer
technologies that may render the technologies employed by such companies
obsolete. The Company also expects that the price that the Leap Operating
Companies charge for their products and services in certain regions will decline
over the next few years as competition intensifies in their markets.
The U.S. wireless industry is characterized by intense competition between
personal communications service ("PCS"), cellular and other wireless service
providers. A limited number of the Company's prospective competitors are
operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless telecommunications networks that cover most of the United
States. In the United States, the Company will compete directly with other
wireless providers in each of its markets, a number of whom entered the PCS
market earlier than the Company. There can be no assurance that such
time-to-market
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advantage will not have a material adverse effect on the Company's ability to
successfully implement its strategy. Some competitors are also expected to
market other services, such as cable television access, landline telephone
service and Internet access with their wireless telecommunications service
offerings. Furthermore, certain competing licensees may partition and
disaggregate their competing licenses into smaller service areas, which could
provide new entrants with further opportunities to enter the Company's market.
The Company also believes that the two incumbent cellular providers in each of
the Company's planned United States markets, all of which have infrastructure in
place, a customer base and a brand name, and have been operational for five to
ten years or more, have upgraded or will upgrade their networks to provide
services in competition with the Company. The Company further expects to compete
with other telecommunications technologies such as paging, enhanced specialized
mobile radio and global satellite networks.
In addition, following the Distribution, QUALCOMM may choose to pursue new
CDMA-based wireless telecommunications businesses and ventures that would also
be attractive projects for the Company. QUALCOMM will have no obligation to
refer any such project to the Company and may in fact compete with the Company
for such projects. Also, QUALCOMM will not be restricted from pursuing wireless
telecommunications opportunities that may compete directly with the Company or
the Leap Operating Companies. Any such competition or potential competition
could result in conflict between the Company and QUALCOMM and adversely affect
other relationships between the companies. Moreover, there can be no assurance
that the Company would be able to compete effectively with QUALCOMM with respect
to these opportunities. Competitive pressures could also suppress the market
price of Leap Common Stock, which would adversely affect the Company's
stockholders.
In addition, the Company believes that companies holding equity interests
in multiple operating companies throughout the world will be increasingly
predominant in the wireless communications industry and expects to experience
increasing competition from entities with structures resembling that of Leap.
FOCUS ON CDMAONE
CDMA is a proprietary integrated software and hardware system invented by
QUALCOMM and used for digitally transmitting telecommunications signals in a
wireless network. The Company believes CDMA offers a number of advantages over
analog and other digital technologies, and plans to operate only cdmaOne
networks through the Leap Operating Companies and any future operating companies
in which the Company invests. CdmaOne is the original standard for fixed
wireless telecommunications systems based on or derived from QUALCOMM's CDMA
technology and successor standards that QUALCOMM has adopted.
The telecommunications industry is subject to rapid and significant changes
in technology that could lead to new products and services that compete with
those offered by the Leap Operating Companies or lower the cost of competing
products and services to the point where the Leap Operating Companies' products
and services could become non-competitive, thereby requiring them to reduce
their prices or amend their business plans. The effect of technological changes
on the Company's businesses cannot be predicted. In particular, there can be no
assurance that CDMA will continue to gain acceptance in the wireless
telecommunications industry, or that cdmaOne will continue to gain significant
market share as opposed to other CDMA-based systems. Also, there can be no
assurance that the Leap Operating Companies will not experience technical
difficulties in their commercial deployment. A failure by cdmaOne to gain market
acceptance, or the emergence of another competing technology superior to
cdmaOne, could have a material adverse effect on the Company's business, results
of operations, liquidity and financial position.
GOVERNMENT REGULATION
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in each of the countries outside the United States in which
Leap has operations are regulated by governmental authorities in each such
country. In some cases, the regulatory authorities also operate or control the
operations of the competitors of the operating companies. Changes in the current
regulatory environment of these markets or future judicial intervention, or
regulations affecting the pricing of the operating companies' services, could
have a material adverse effect on
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the Company. In addition, the regulatory framework and authorities in certain of
the countries where the Company operates are relatively recent and, therefore,
the enforcement and interpretation of regulations, the assessment of compliance,
and the degree of flexibility of regulatory authorities are uncertain. Further,
changes in the regulatory framework may limit the ability to add subscribers to
developing systems. An operating company's failure to comply with applicable
governmental regulations or operating requirements could result in the loss of
licenses, penalties and/or fines or otherwise could have a material adverse
effect on the Company. For a more detailed description of the regulatory
environment in the United States and each of the other countries in which Leap
operates, see the "Regulatory Environment" discussion for each of the Leap
Operating Companies under "Business."
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in the United States are regulated to varying degrees by
state regulatory agencies, the FCC, the United States Congress and the courts.
The Leap Operating Companies doing business in the United States, and Leap, will
be required to maintain compliance with all of the requirements for operating
wireless operations in the United States and the requirements for entering into
reseller agreements with United States operators. Such regulation is continually
evolving and there are a number of issues on which regulation has been or in the
future may be suggested. The Telecommunications Act of 1996 mandates significant
changes in existing regulations of the telecommunications industry to promote
competitive development of new service offerings to expand the availability of
telecommunications services and to streamline the regulation of the industry.
There can be no assurance that the FCC, Congress, the courts or state agencies
having jurisdiction over the business of any of the Company's United States
operating companies will not adopt or change regulations or take other actions
that would adversely affect the Company's financial condition or results of
operations. Many of the FCC's rules relating to the businesses of the Company's
United States operating companies have not been tested by the courts and are
subject to being changed by Congressional action. In addition, FCC licenses are
subject to renewal and revocation. There can be no assurance that the licenses
of the Company's United States operating companies will be renewed or not be
revoked.
DEPENDENCE ON KEY PERSONNEL
The Company believes its success will be significantly dependent on the
contributions of a number of its key personnel, including Harvey P. White,
Chairman of the Board, President and Chief Executive Officer, Thomas J. Bernard,
Executive Vice President, and James E. Hoffmann, Senior Vice President and
General Counsel. The loss of the services of Messrs. White, Bernard or Hoffmann,
or other of the Company's key personnel, could have a material adverse effect on
the Company. None of the Company's employees is bound by an employment or
non-competition agreement, and the Company does not maintain "key person" life
insurance on any employee.
SUBSTANTIAL FUTURE DILUTION FROM LEAP SHARE RESERVES
Based on the number of shares of QUALCOMM Common Stock outstanding on
August 20, 1998, an aggregate of 17,643,830 shares of Leap Common Stock will be
issued in the Distribution. Such shares will constitute all of the outstanding
shares of Leap Common Stock as of the Distribution Date. However, the holders of
such shares will be subject to potential substantial dilution due to the
significant number of shares of Leap Common Stock that will be reserved for
issuance following the Distribution. Collectively, there will be 16,471,060
shares of Leap Common Stock reserved for issuance following the Distribution
consisting of the following: 5,500,000 shares for issuance upon exercise of the
Warrants to be issued to QUALCOMM; 3,218,623 shares for issuance to its
employees, officers, directors and consultants pursuant to Leap's equity
incentive plans; 5,481,377 shares for issuance upon exercise of options to
purchase Leap Common Stock which will be held as of the Distribution Date by
QUALCOMM employees, officers, directors and consultants as a result of option
grants to such persons in connection with the Distribution; and 2,271,060 shares
for issuance upon conversion of certain Trust Convertible Preferred Securities
convertible into QUALCOMM Common Stock pursuant to certain adjustment provisions
contained in such securities. Upon conversion of such Trust Convertible
Preferred Securities, QUALCOMM will receive benefit in the form of forgiveness
of debt, but Leap will receive no such benefit or other consideration. Though
the Company does not expect all
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such shares to be issued, if all such shares were issued, the holders of shares
distributed in the Distribution would be substantially diluted and would hold
51.6% of the outstanding Leap Common Stock. See "Description of Company Capital
Stock."
NO PRIOR MARKET FOR LEAP COMMON STOCK; VOLATILITY
There has been no public market for the Leap Common Stock prior to the
Distribution. There can be no assurance that an active trading market will
develop or be sustained after the Distribution. The price at which shares are
initially transferred following the Distribution may not be indicative of the
market price for the Leap Common Stock thereafter. The market price for shares
of the Leap Common Stock may be volatile depending on a number of factors,
including business performance, industry dynamics, news announcements,
international factors, or changes in general market conditions, among others.
ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws"), including provisions classifying the Board of Directors,
prohibiting stockholder action by written consent and requiring advance notice
for nomination of directors and stockholder proposals, may inhibit changes of
control of the Company that are not approved by the Company's Board of
Directors. Such Certificate of Incorporation and Bylaw provisions could diminish
the opportunities for a stockholder to participate in certain tender offers,
including tender offers at prices above the then-current fair market value of
the Leap Common Stock, and may also inhibit fluctuations in the market price of
the Leap Common Stock that could result from takeover attempts. In addition, the
Company's Board of Directors, without further stockholder approval, may issue
preferred stock that could have the effect of delaying, deferring or preventing
a change in control of the Company. The issuance of preferred stock could also
adversely affect the voting power of the holders of Leap Common Stock, including
the loss of voting control to others. The Company has no present plans to issue
any preferred stock. The provisions of the Certificate of Incorporation and
Bylaws may have the effect of discouraging or preventing an acquisition of the
Company or a disposition of certain of the Company's businesses.
The preferred stock purchase rights (the "Rights") attached to each
outstanding share of Leap Common Stock may have some anti-takeover affects. The
Rights are designed to assure that all of the Company's stockholders receive
fair and equal treatment in the event of any proposed takeover of the Company
and to guard against partial tender offers, open market accumulations and other
abusive tactics to gain control of the Company without paying all stockholders a
control premium. The Rights will cause substantial dilution to a person or group
(other than QUALCOMM with respect to the acquisition of shares of the Company's
stock upon exercise of the Warrant) that acquires 15% or more of the Company's
stock on terms not approved by the Company's Board of Directors (an "Acquiring
Person"), excluding shares of the Company's stock acquired by QUALCOMM upon
exercise of the Warrant. The Rights should not interfere with any merger or
other business combination approved by the Board of Directors at any time prior
to the first date that a person or group has become an Acquiring Person.
PRODUCT LIABILITY
Testing, manufacturing, marketing and use of the Company's and the Leap
Operating Companies' products entail the risk of product liability. An inability
to maintain insurance at an acceptable cost or to otherwise protect against
potential product liability could prevent or inhibit the commercialization of
the Company's or any Leap Operating Company's products. In addition, a product
liability claim or recall could have a material adverse effect on the business,
results of operations, liquidity and financial position of the Company.
News reports have asserted that power levels associated with hand-held
wireless telephones may pose certain health risks. The Company is not aware of
any study that has concluded that there are any significant health risks from
using hand-held wireless telephones. If it were determined that electromagnetic
waves carried through the antennas of wireless telephones create a significant
health risk, there could be a material adverse effect on the Company's or the
Leap Operating Companies' ability to market and sell wireless telephone
products. In addition, there may also be certain safety risks associated with
the use of hand-held
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wireless phones while driving which also could have a material adverse effect on
the Company's or the Leap Operating Companies' ability to market and sell
wireless telephones.
SUBSTANTIAL STOCK SALES
The Distribution will involve the distribution of an aggregate of
approximately 17,643,830 shares of Leap Common Stock to the stockholders of
QUALCOMM. A substantial portion of such shares will be eligible for immediate
resale in the public market. The Company is unable to predict whether
substantial amounts of Leap Common Stock will be sold in the open market soon
after the Distribution. A higher volume of such sales may also occur if
stockholders of QUALCOMM Common Stock choose to sell shares of Leap Common Stock
in order to pay the additional tax liability created as a result of the
Distribution. Any sales of substantial amounts of Leap Common Stock in the
public market, or the perception that such sales might occur, could have a
material adverse effect on the market price of the Leap Common Stock.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software
programs have been written using two digits rather than four to represent a
specific year. Any computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
As the Company and the Leap Operating Companies have recently begun their
respective businesses, there exists uncertainty as to the impact the Year 2000
issue could have on the Company. The Company does not believe that the Year 2000
issue will significantly impact its administrative and accounting software,
which have been acquired recently or will be acquired. The Company generally
subjects its vendors to Year 2000 compliance requirements in connection with the
Company's acquisitions of software. Also, the Company believes that the Year
2000 issue will not significantly impair the ability of the Leap Operating
Companies' wireless communications networks to perform as intended. The Leap
Operating Companies are expected to have direct or indirect computerized
interfaces to third parties relating to the transmission of telecommunications
traffic over local, national and international telecommunications networks. The
Leap Operating Companies are vulnerable to the failure of such third parties to
adequately address their Year 2000 issues. Such failures, should they occur,
could cause significant disruption to the operations of the Leap Operating
Companies, including the ability to provide certain services and correctly bill
customers, resulting in the potential for revenue loss and increased costs. The
Company is not currently aware of any significant third party problems
concerning the computerized interfaces, but as the Leap Operating Companies have
only recently begun network build-out and commercial activities, they have not
yet completed their assessment of the risk associated with third party
interfaces and the Year 2000 issue. This overall assessment is expected to
continue through December 1998. At that time, the concurrently developed
remediation plan will begin, with an expected completion date of July 1, 1999.
The Company is in the process of developing a risk profile to evaluate all third
parties in regard to their capability to become compliant with Year 2000.
As of the date hereof, the Company has not incurred any material costs in
support of the Year 2000 issue. The Company estimates that it will spend
$500,000 in fiscal year 1999 to review and correct any non-information
technology systems as well as support material third party relationships. The
Company has not developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all
Year 2000 problems in its systems, the systems of the Leap Operating Companies
or third party systems with which the Company or the Leap Operating Companies
will have computerized interfaces in advance of their occurrence or that the
Company will be able to successfully remedy any problems. The expenses
associated with the Company's efforts to remedy any Year 2000 problems, the
expenses or liabilities to which the Company may become subject as a result of
such problems or the impact of Year 2000 problems on the ability of Leap
Operating Companies to do business with the Company could have a material
adverse effect on the Company's business, prospects, operating results and
financial condition.
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INTRODUCTION
On September 4, 1998, the Board of Directors of QUALCOMM declared a
dividend payable to holders of record of QUALCOMM Common Stock, at the close of
business on the Record Date of one (1) share of Leap Common Stock for every four
(4) shares of QUALCOMM Common Stock held on the Record Date. The Distribution
will be effected on September 23, 1998. A stock certificate will be mailed to
each QUALCOMM stockholder on or about the Distribution Date representing the
number of shares of Leap Common Stock received by such stockholder in the
Distribution. As a result of the Distribution, all of the outstanding shares of
Leap Common Stock will be distributed to QUALCOMM stockholders. See "Description
of Company Capital Stock."
The Company was formed for the purpose of effecting the Distribution. On or
prior to the Distribution Date, QUALCOMM will have transferred to the Company
the Leap Business.
If you have any questions relating to the Distribution, please contact the
Distribution Agent at 311 West Monroe Street, Chicago, IL 60606; (800) 554-3406.
For other information relating to QUALCOMM, please contact: QUALCOMM Investor
Relations Department, QUALCOMM Incorporated, 6455 Lusk Boulevard, San Diego,
California 92121, (619) 658-4813. For questions related specifically to Leap,
please contact: Leap Investor Relations Department, Attention: Daniel O. Pegg,
10307 Pacific Center Court, San Diego, California 92121, (877) 977-5327.
THE DISTRIBUTION
PRIMARY REASONS FOR THE DISTRIBUTION
The Board of Directors of QUALCOMM has determined that it is in the best
interest of QUALCOMM and its stockholders to undertake the Distribution, thereby
separating the Leap Business from QUALCOMM, for the reasons described herein.
QUALCOMM believes that its joint venture and equity interests in emerging
wireless telecommunications operating companies create potential conflicts with
QUALCOMM's CDMA equipment customers which compete against these companies. In
addition, the separation of the Leap Business from the Core Businesses is
intended to allow the two entities to be recognized and appropriately valued by
the financial community as distinct businesses with different investment risk
and return profiles. In this regard, investors may be better able to evaluate
the merits and future prospects of the businesses of QUALCOMM and the Company,
enhancing the likelihood that each will achieve appropriate market recognition
and valuation for its performance and potential. Current stockholders and
potential investors will be better able to direct their investments to their
specific areas of interest. The Distribution will also enable the Company, as
and when appropriate, to explore the possibility of engaging in strategic
acquisitions, joint ventures and other collaborative arrangements.
The Distribution will also permit management of each of the Company and
QUALCOMM to focus its attention on its respective businesses. In addition, the
Distribution will allow each of the Company and QUALCOMM to allocate its
financial resources to address its particular business needs and capitalize on
its business opportunities. With respect to the Company, the Distribution is
designed to establish Leap as a stand alone independent company that can adopt
strategies and pursue objectives appropriate to its specific businesses. As an
independent company, the Company's management should be better able to structure
and operate the Company in a manner more directly and appropriately tailored to
meet the business opportunities and challenges presented by the competitive core
environment in which the Company operates.
The Distribution is also designed to allow the Company and QUALCOMM to each
establish and tailor its own equity-based compensation plans so that there will
be a more direct alignment between the performance of each business and the
compensation of its management. Among other things, the implementation of a
separate Leap equity-based compensation plan is intended to strengthen and
enhance the Company's ability to achieve cost savings and enhance efficiencies.
Following the Distribution, the Company's management will receive equity-based
incentives which will be more closely aligned with the financial results of the
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Company, thereby linking each employee's financial success more directly to the
financial success of the Company. See "Management."
Moreover, without the spin-off, according to applicable accounting rules,
QUALCOMM would be required to continue recognizing a share of these companies'
start-up operating losses, which are likely to be substantial, and would be
required to eliminate intercompany profits from equipment sales to some of these
companies.
POTENTIAL DETRIMENTS ASSOCIATED WITH THE DISTRIBUTION
The Distribution may also impose a number of significant detriments,
disadvantages and risks on the Company and its stockholders. Although the
Distribution is intended to allow Leap and QUALCOMM to be recognized and
appropriately valued by the financial community as distinct businesses with
different investment risk and return profiles, Leap's stockholders will hold
investments in a less diversified business with less financial resources than
prior to the Distribution, which will cause Leap and its stockholders to be more
susceptible to operational and industry fluctuations and competitive pressures.
Leap will be required to recognize a share of the start-up operating losses of
the Leap Operating Companies, which are likely to be substantial. Although
following the Distribution management of each company will be better able to
focus attention on its respective business, Leap will not enjoy the same
management and operational synergies and economies of scale as it did as a part
of QUALCOMM. In addition, the Distribution could result in potential management
disruption as a result of key management and other personnel moving from
QUALCOMM to Leap in connection with the Distribution. Finally, the ongoing
agreements between QUALCOMM and Leap contain restrictions on Leap's ability to
invest in other joint ventures. See "Risk Factors."
APPROVAL OF THE DISTRIBUTION BY QUALCOMM BOARD OF DIRECTORS
The QUALCOMM Board of Directors has determined that the Distribution is in
the best interest of QUALCOMM and its stockholders. In reaching such
conclusions, the Board considered a number of factors, including the opinion
received from QUALCOMM's financial advisor and the matters discussed below.
In May 1998, management held various conversations with individual members
of QUALCOMM's Board of Directors and with QUALCOMM's financial and legal
advisors to discuss the possibility of a spin-off of certain of QUALCOMM's
interests in terrestrial-based wireless telecommunications operating companies.
During such conversations, management indicated that the proposed spin-off might
result in substantial benefits to QUALCOMM and its stockholders, including those
noted above. Although no formal Board action was taken, the members of the Board
with whom such discussions had been held were supportive of management
continuing to explore the possibility of the proposed spin-off. On May 21, 1998,
management and members of the Board participated in a telephonic conference
during which management reviewed, and the participants discussed, various
aspects of a possible spinoff, including risks and potential benefits. On May
27, 1998, QUALCOMM issued a press release announcing that it was considering a
proposed spin-off of the Company, subject to review and approval by QUALCOMM's
Board of Directors.
On June 29, 1998, QUALCOMM held a telephonic meeting of its Board of
Directors to discuss the proposed spin-off. The Board heard presentations from
various members of QUALCOMM's management regarding the possible structure and
timing of the proposed transaction, as well as management's analysis of the
potential impact of the transaction on QUALCOMM and its future earnings and
customer relations. At the meeting, management noted that for a number of
reasons, including to minimize taxes payable by QUALCOMM's stockholders as well
as losses to be recognized by QUALCOMM as a result of an allocation of the
start-up company operating losses of the Leap Operating Companies, it would be
important to complete the transaction, if approved by the Board of Directors, by
the end of the current fiscal year. Although the Board did not formally approve
the transaction at that time, in order to preserve the ability to complete the
transaction within the desired time frame, the Board, after consulting with
various professional advisors, authorized management to continue exploring the
possible spin-off and to move forward with the proposed transaction, again
subject to further review and approval by the QUALCOMM Board.
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On July 1, 1998, Leap filed with the Securities and Exchange Commission a
Registration Statement on Form 10 relating to the proposed Distribution, and
QUALCOMM issued a press release announcing the filing of the Registration
Statement on Form 10 and the proposed Distribution, subject to Board approval.
On July 20, 1998, QUALCOMM held a regularly scheduled meeting of its Board
of Directors at which the Board again discussed the proposed spin-off.
Management gave presentations to the Board on the status of the transaction and
the proposed structure as well as its further analysis regarding the impact of
the potential transaction on QUALCOMM and its future earnings, financial
position and customer relations. Among other things, management noted that
QUALCOMM's earnings for the quarter ended June 30, 1998 included $6 million of
equity losses of investees that were proposed to be spun-off as part of the
proposed Distribution. Although the Board again did not formally approve the
transaction, the Board authorized management to continue moving forward with the
proposed transaction, subject to further review and approval by the QUALCOMM
Board.
On September 4, 1998, QUALCOMM held a special meeting of its Board of
Directors for the purpose of formally considering and approving the proposed
Distribution. At the meeting, the Board heard additional presentations from
management regarding the proposed spin-off and its positive impact on QUALCOMM's
future earnings, financial position and customer relations. The Board also heard
a presentation from Lehman Brothers, financial advisor to QUALCOMM, during which
Lehman Brothers rendered its opinion regarding the fairness, from a financial
point of view, to the holders of QUALCOMM Common Stock, of the Distribution and
as to whether the Distribution would materially impair the ability of QUALCOMM
after the Distribution and Leap to fund in the future, from external sources or
through internally generated funds, their respective currently anticipated
operating and capital requirements (as currently projected in the financial
forecasts prepared by the management of QUALCOMM). See "Opinion of Financial
Advisor."
The QUALCOMM Board then unanimously approved the Distribution, except that
Mr. White, who is President, Chief Executive Officer and Chairman of the Board
of Directors of Leap and who will resign from the QUALCOMM Board on or before
the Distribution Date, abstained from voting. The QUALCOMM Board then set a
record date of September 11, 1998 and a Distribution Date of September 23, 1998
for the transaction. The QUALCOMM Board considered the following factors,
assisted by its legal and financial advisors, in reaching its decision:
- The conflicts arising between QUALCOMM and its CDMA equipment
customers as a result of QUALCOMM's continued operation of the Leap
Business.
- The extent to which the value of Leap may not be properly reflected
in QUALCOMM's stock price.
- The ability of Leap to better engage in strategic acquisitions,
joint ventures and other collaborative arrangements as a result of the
Distribution.
- The ability of management of each company to better focus on and
manage its respective business as a result of the Distribution.
- The ability of each company to establish and tailor its own
equity-based compensation plans to more directly align the performance of
each business and the compensation of its management.
- The positive impact on QUALCOMM's future earnings as a result of the
Distribution of not being required to recognize a share of the start-up
company losses of the Leap Operating Companies.
In the course of its deliberations, the QUALCOMM Board reviewed the
following additional factors relevant to the Distribution: (i) the capital
structure of Leap, (ii) QUALCOMM's ongoing potential equity ownership of Leap by
means of the Warrant, (iii) the financial analysis relating to Leap prepared by
management and Lehman Brothers, (iv) reports from management and legal advisors
on specific terms of the proposed Distribution, and (v) the proposed terms,
timing and structure of the proposed Distribution. Management noted that the
Distribution could have a materially favorable impact on QUALCOMM's future net
earnings, since following the spin-off, QUALCOMM will not be required to
recognize its share of the Leap Operating Companies' future start-up losses,
which are likely to be substantial. However,
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QUALCOMM generally does not have operational control over these entities and
estimates of the amounts of such future losses and the impact of the
Distribution on QUALCOMM's earnings are highly uncertain.
The QUALCOMM Board also considered the following potentially negative
factors in its deliberations concerning the Distribution: (i) the fact that
Leap's stockholders will hold investments in a less diversified business with
less financial resources than prior to the Distribution, which will cause Leap
and its stockholders to be more susceptible to operational and industry
fluctuations and competitive pressures; (ii) the substantial ongoing funding
requirement by QUALCOMM with respect to Leap pursuant to the Credit Facility;
(iii) the loss of management and operational synergies and economies of scale to
Leap as a result of being operated as a separate business; and (iv) the
potential management disruption as a result of structuring and negotiating the
transaction and key management and other personnel moving from QUALCOMM to Leap
in connection with the Distribution.
The foregoing discussion of information and factors considered by the
QUALCOMM Board is not intended to be exhaustive but is intended to include the
material factors considered. In view of the wide variety of factors considered,
the QUALCOMM Board did not find it practical to, and did not, quantify or
otherwise assign relative weight to the specific factors considered, and
individual directors may have given differing weights to different factors.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in a Separation and Distribution Agreement (the "Distribution Agreement") to be
entered into prior to the Distribution Date between QUALCOMM and the Company.
The Distribution will be made on the basis of one (1) share of Leap Common
Stock, including the attached Right, for every four (4) shares of QUALCOMM
Common Stock held on the Record Date. The actual total number of shares of Leap
Common Stock to be distributed will depend on the number of shares of QUALCOMM
Common Stock outstanding on the Record Date. Based upon the shares of QUALCOMM
Common Stock outstanding on August 20, 1998, approximately 17,643,830 shares of
Leap Common Stock will be distributed to QUALCOMM stockholders. The shares of
Leap Common Stock will be fully paid and nonassessable and the holders thereof
will not be entitled to preemptive rights. See "Description of Company Capital
Stock, "Treatment of QUALCOMM Employee Stock Options in the Distribution" and
"Treatment of QUALCOMM Trust Convertible Preferred Securities in the
Distribution."
On the Distribution Date, all of the outstanding shares of Leap Common
Stock will be delivered to the Distribution Agent. It is expected that on or
about the Distribution Date, the Distribution Agent will begin to mail stock
certificates representing shares of Leap Common Stock to holders of record of
QUALCOMM Common Stock as of the Record Date.
No fractional Leap shares will be distributed. The Distribution Agent will,
promptly after the Distribution Date, aggregate all such fractional share
interests in Leap Common Stock with those of other similarly situated
stockholders and sell such fractional share interests in Leap Common Stock at
then-prevailing prices. The Distribution Agent will distribute the cash proceeds
to stockholders entitled to such proceeds pro rata based upon their fractional
interests in Leap Common Stock. No interest will be paid on any cash distributed
in lieu of fractional shares.
No holder of QUALCOMM Common Stock will be required to pay any cash or
other consideration for the shares of Leap Common Stock received in the
Distribution or to surrender or exchange shares of QUALCOMM Common Stock in
order to receive shares of Leap Common Stock.
LISTING AND TRADING OF LEAP COMMON STOCK
There is currently no public market for Leap Common Stock. The Company has
applied for listing of the shares of Leap Common Stock, including the attached
Rights, on the Nasdaq NMS under the symbol "LWIN" and expects a "when-issued"
trading market to develop between the Record Date and the Distribution Date as
described below. The Company is expected to have initially approximately 2,350
holders of record, based on the number of stockholders of record of QUALCOMM on
August 20, 1998. The Company has never paid or declared any cash dividends. It
is the present policy of the Company to retain
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earnings to finance the growth and development of the businesses and, therefore,
the Company does not anticipate paying cash dividends on Leap Common Stock in
the foreseeable future. Moreover, so long as Leap's Credit Facility (as defined
below) with QUALCOMM is effective, Leap's Board of Directors will be
contractually prohibited from declaring or paying any dividends on or with
respect to, or repurchasing, Leap Common Stock.
A "when-issued" trading market is expected to develop between the Record
Date and the Distribution Date. The term "when-issued" means that shares can be
traded prior to the time certificates are actually available or issued. Prices
at which the shares of Leap Common Stock may trade on a "when-issued" basis or
after the Distribution cannot be predicted. See "Risk Factors -- No Prior Market
for Leap Common Stock."
The shares of Leap Common Stock distributed to QUALCOMM stockholders will
be freely transferable, except for shares received by persons who may be deemed
to be "affiliates" of the Company within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). See "Risk Factors -- Substantial Stock
Sales." Persons who may be deemed to be affiliates of the Company after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with the Company and may include the
directors and principal executive officers of the Company as well as any
principal stockholder of the Company. Persons who are affiliates of the Company
will be permitted to sell their shares of Leap Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as Rule 144
thereunder.
OPINION OF FINANCIAL ADVISOR
Lehman Brothers has acted as financial advisor to QUALCOMM in connection
with the Distribution and was engaged to render its opinion with respect to (i)
the fairness, from a financial point of view, to the holders of common stock of
QUALCOMM, of the Distribution, and (ii) whether the Distribution will materially
impair the ability of QUALCOMM after the Distribution ("New QUALCOMM") and Leap
to fund in the future, from external sources or through internally generated
funds, their respective currently anticipated operating and capital requirements
(as currently projected in the financial forecasts prepared by the management of
QUALCOMM).
On September 4, 1998, in connection with the evaluation of the Distribution
by the QUALCOMM Board of Directors, Lehman Brothers rendered its written opinion
that, as of the date of such opinion, and subject to certain assumptions,
factors and limitations set forth in such written opinion as described below,
the Distribution (i) is fair, from a financial point of view, to the holders of
common stock of QUALCOMM and (ii) will not materially impair the ability of New
QUALCOMM and Leap to fund in the future, from external sources or through
internally generated funds, their respective currently anticipated operating and
capital requirements (as currently projected in the financial forecasts prepared
by the management of QUALCOMM).
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS DATED SEPTEMBER 4,
1998 IS ATTACHED AS ANNEX 1 TO THIS INFORMATION STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE. ATTACHED AS ANNEX 2 TO THIS INFORMATION STATEMENT AND
INCORPORATED HEREIN BY REFERENCE IS A CONSENT OF LEHMAN BROTHERS RELATING TO
SUCH OPINION AND THIS DISCUSSION. STOCKHOLDERS MAY READ SUCH OPINION FOR A
DISCUSSION OF ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY LEHMAN BROTHERS IN RENDERING ITS OPINION. THE SUMMARY OF LEHMAN
BROTHERS' OPINION SET FORTH IN THIS INFORMATION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
No limitations were imposed by QUALCOMM on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion except as described below. In arriving at its opinion, Lehman
Brothers did not ascribe a specific range of value to QUALCOMM, New QUALCOMM and
Leap, but rather made its determination as to the fairness, from a financial
point of view, of the Distribution on the basis of a variety of financial and
comparative analyses. Lehman Brothers' opinion is
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for the use and benefit of the Board of Directors of QUALCOMM and was rendered
to the Board in connection with its consideration of the Distribution. Lehman
Brothers' opinion is not intended to be and does not constitute a recommendation
to any current or prospective stockholder of QUALCOMM, New QUALCOMM or Leap as
to any action or investment decision which may be taken by such stockholders
with respect to shares owned or to be received by them in the Distribution.
Lehman Brothers was not requested to opine as to, and its opinion does not in
any manner address, (i) QUALCOMM's underlying business decision to proceed with
or effect the Distribution or (ii) the ability of New QUALCOMM or Leap to access
the capital markets at any time following the Distribution.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (i) the
agreements to be entered into between New QUALCOMM and Leap (the "Agreements"),
(ii) the Registration Statement, the Information Statement and such other
publicly available information concerning QUALCOMM, New QUALCOMM, Leap and the
Distribution that Lehman Brothers believes to be relevant to its inquiry, (iii)
financial and operating information with respect to the business, operations and
prospects of QUALCOMM, New QUALCOMM and Leap furnished to Lehman Brothers by
QUALCOMM, (iv) information with respect to the business, operations and
prospects of the portfolio companies in which Leap has an equity interest (the
"Leap Operating Companies") and the potential liquidity of Leap's investments in
the Leap Operating Companies, (v) information with respect to the accounting and
business impact on QUALCOMM of a continuing ownership of the Leap Operating
Companies, (vi) a comparison of the historical financial results and present
financial conditions of QUALCOMM and, on a pro forma basis, New QUALCOMM and
Leap, with those of other publicly held companies that Lehman Brothers deemed
relevant, (vii) the trading history of QUALCOMM common stock (including, without
limitation, since the date of the public announcement of the Distribution) and a
comparison of such trading history with those of other publicly held companies
that Lehman Brothers deemed relevant, (viii) publicly available research reports
regarding QUALCOMM, including, without limitation, the comments of research
analysts with respect to the Distribution, (ix) the terms of selected recent
spin-off transactions that Lehman Brothers deemed relevant and the market
performance of securities involved in such transactions both before and after
the consummation of such transactions, (x) the proposed terms of the Credit
Facilities to be provided to Leap by New QUALCOMM, and (xi) the continuing
relationship between New QUALCOMM and Leap as set forth in the Agreements. In
addition, Lehman Brothers has had discussions with the management of QUALCOMM
and the proposed management of Leap concerning the business, operations, assets,
financial condition and prospects of QUALCOMM and, on a pro forma basis, New
QUALCOMM and Leap, and have undertaken such other studies, analyses and
investigations as Lehman Brothers deemed appropriate.
The opinion states that Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it in
arriving at its opinion without independent verification and further relied upon
the assurances of the management of QUALCOMM that they are not aware of any
facts that would make such information inaccurate or misleading. With respect to
the financial forecasts of New QUALCOMM and Leap, upon advice of QUALCOMM Lehman
Brothers has assumed that such forecasts have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of QUALCOMM as to the future financial performance of New QUALCOMM
and Leap and that New QUALCOMM and Leap will perform in accordance with such
forecasts. In arriving at its opinion, Lehman Brothers has not conducted a
physical inspection of the properties or facilities of QUALCOMM or Leap and has
not made or obtained any evaluations or appraisals of the assets or liabilities
of QUALCOMM or Leap. In addition, QUALCOMM's Board of Directors did not
authorize Lehman Brothers to solicit, and Lehman Brothers did not solicit, any
indications of interest from any third party with respect to a purchase of any
of the equity interests in the Leap Operating Companies. Lehman Brothers'
opinion is necessarily based upon market, economic and other considerations as
they exist on, and can be evaluated as of, the date of its opinion letter.
In its opinion, Lehman Brothers expressed no opinion as to the prices at
which shares of common stock of New QUALCOMM or Leap will actually trade
following the consummation of the Distribution. Lehman Brothers noted that the
process by which securities trading markets establish a market price for any
security is complex, involving the interaction of numerous factors, and market
prices will fluctuate with changes in, among other things, the financial
condition, business and prospects of the issuer and comparable companies
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and economic and financial market conditions. In addition, trading in shares of
Leap will likely be characterized by a period of redistribution among QUALCOMM's
shareholders who receive such shares in the Distribution (especially in light of
the taxable nature of the Distribution) which may temporarily depress the market
price of such shares during such period. Accordingly, the opinion should not be
viewed as providing any assurance that the combined market value of the shares
of common stock of New QUALCOMM and the shares of common stock of Leap to be
received by a stockholder in the Distribution will be in excess of the current
market value of the common stock of QUALCOMM owned by such stockholder at any
time prior to announcement or consummation of the Distribution.
In connection with its written opinion, Lehman Brothers performed a variety
of financial and comparative analyses as summarized below. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant method of financial and comparative analysis and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Furthermore, in arriving at its
opinion, Lehman Brothers did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgements as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portions of such analyses and factors without considering all
analyses and factors could create a misleading or incomplete view of the process
underlying its opinion. In its analysis, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of QUALCOMM.
Any estimates contained in these analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be more or
less favorable than as set forth therein. In addition, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which businesses actually may be sold.
Stock Trading History. Lehman Brothers considered various historical data
concerning the history of the trading prices for QUALCOMM common stock for the
period August 27, 1993 to August 27, 1998, including following the announcement
of the Distribution, and the relative stock price performance during this same
period of QUALCOMM and of selected companies engaged in businesses considered by
Lehman Brothers to be comparable to that of QUALCOMM. Specifically, Lehman
Brothers included in its review certain telecommunications equipment companies
including 3Com Corporation, ADC Telecommunications, Inc., Alcatel Alsthom,
Cabletron Systems, Inc., Cisco Systems, Inc., LM Ericsson Telefonaktiebologet,
Lucent Technologies Inc., Motorola, Inc., Nokia Oyj, and Northern Telecom
Limited (the "Comparable Companies"). During this period, the closing stock
price of QUALCOMM common stock ranged from $15.75 to $71.00 per share.
Lehman Brothers also considered various historical data concerning the
trading price for Bell Canada International Inc. ("BCI") common stock from
September 30, 1997 to August 28, 1998. During this period, the closing stock
price of BCI common stock ranged from $11.275 to $26.563 per share. Lehman
Brothers also considered various historical data concerning the history of the
trading price for Millicom International Cellular ("Millicom") from December 31,
1993 to August 28, 1998. During this period, the closing stock price of Millicom
common stock ranged from $20.00 to $53.875 per share. Lehman Brothers viewed BCI
and Millicom as the most relevant companies for purposes of analyzing the
Distribution.
Pro Forma Analysis. Lehman Brothers reviewed the pro forma financial impact
of the Distribution on QUALCOMM including the impact on pro forma net income of
the elimination of the necessity to consolidate the losses of the Leap Operating
Companies. Lehman Brothers noted that QUALCOMM would be obligated to consolidate
significant Leap Operating Company losses for 1999 and thereafter if it chose
not to complete the Distribution.
Comparable Company Analysis. Using publicly available information, Lehman
Brothers compared selected financial data of QUALCOMM and the Comparable
Companies. Lehman Brothers looked at these multiples as a means of estimating
the trading multiples in the future for New QUALCOMM. For both QUALCOMM and the
Comparable Companies, Lehman Brothers calculated the multiple of the current
stock price to (i) the latest twelve month earnings per share (the "LTM P/E
Multiple"); (ii) the estimated
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year ending September 30, 1998 earnings per share (the "1998 P/E Multiple"),
based on publicly available research reports and First Call mean EPS estimates;
and (iii) the estimated year ending September 30, 1999 earnings per share (the
"1999 P/E Multiple"), also based on data from publicly available research
reports and First Call mean EPS estimates. Lehman Brothers noted that as of
September 1, 1998, (i) the LTM P/E Multiple for QUALCOMM (based on a price of
$47.56) was 28.4x as compared to 34.2x for the median of the Comparable
Companies; (ii) the 1998 P/E Multiple for QUALCOMM (based on a price of $47.56)
was 29.0x as compared to 28.1x for the median of the Comparable Companies, and
(iii) the 1999 P/E Multiple for QUALCOMM (based on a price of $47.56) was 17.6x
as compared to 24.1x for the median of the Comparable Companies. In addition,
Lehman Brothers compared the year ending September 30, 1999 P/E to five year
growth rate multiple as of September 1, 1998 and noted that this multiple was
0.50x for QUALCOMM and 0.71x for the Comparable Companies.
However, because of the inherent differences between the businesses,
operations and prospects of QUALCOMM and the business, operations and prospects
of the Comparable Companies, Lehman Brothers believed that it was inappropriate
to, and therefore did not, rely solely on the quantitative results of the
comparable company analysis, and accordingly also made qualitative judgments
concerning differences between the financial and operating characteristics and
prospects of the Comparable Companies and QUALCOMM that would affect the public
trading values of each.
Book Value Analysis. Lehman Brothers noted that as of the time of Lehman
Brothers' opinion the book value of the investments being contributed to Leap is
expected to be approximately $270 million at the time of the Distribution.
Discounted Cash Flow Analysis. Using financial projections prepared by
QUALCOMM for each of the Leap Operating Companies, Lehman Brothers prepared a
discounted cash flow analysis for each of these businesses which provided a
range of value for each business. Leap's proportionate equity interest in each
property was used to determine the value to Leap of each of these businesses.
These values were then adjusted to reflect a combination of risks associated
with minority holdings, system and business rollout risk and country and
political risk. In addition, using publicly available information, Lehman
Brothers compared enterprise value per POP for wireless systems operators
grouped as (i) Europe, (ii) Asia, (iii) United States Cellular, (iv) United
States PCS, (v) North American (non-U.S.) Cellular, and (vi) North American
(non-U.S.) PCS. Lehman Brothers noted that the average enterprise value per POP
for (i) Europe was $396 per POP, (ii) Asia was $57 per POP, (iii) United States
Cellular was $155 per POP, (iv) United States PCS was $39 per POP, (v) North
American (non-U.S.) Cellular was $72 per POP, and (vi) North American (non-U.S.)
PCS was $27 per POP.
Comparable Spin-Off Transactions. Using publicly available information,
Lehman Brothers compared data for selected spin-off transactions (the "Selected
Spin-Off Transactions") and spin-offs in the technology industry (the "Selected
Technology Spin-Off Transactions"). The Spin-Off Transactions included LIN
Broadcasting Corporations's spin-off of LIN Television Corporation, Samsonite
Corporation's spin-off of Culligan Water Technologies, Inc., Kimberly-Clark
Corporation's spin-off of Schweitzer-Mauduit International, Inc., Dole Food
Company, Inc.'s spin-off of Castle & Cooke, Inc., Roadway Services, Inc.'s
spin-off of Roadway Express, Inc., Anheuser-Busch Companies, Inc.'s spin-off of
The Earthgrains Company, Melville Corporation's spin-off of Footstar, Inc.,
Corning Incorporated's spin-off of Quest Diagnostics Incorporated and Covance
Inc., Waban Inc.'s spin-off of BJ's Wholesale Club, Inc., Equifax Inc.'s
spin-off of ChoicePoint Inc., Lennar Corporation's spin-off of LNR Property
Corporation, Whitman Corporation's spin-off of Hussmann International, Inc. and
Midas, Inc., and Great Lakes Chemical Corporation's spin-off of Octel Corp. The
Selected Technology Spin-Off Transactions included Minnesota Mining and
Manufacturing Company's spin-off of Imation Corp., Commercial Intertech Corp.'s
spin-off of Cuno Incorporated, The Dun & Bradstreet Corporation's spin-off of
ACNielsen Corporation and Cognizant Corporation, AT&T Corp.'s spin-off of NCR
Corporation and Western Atlas Inc.'s spin-off of UNOVA, Inc. Lehman Brothers
reviewed (i) the spin-off value as a percent of the pre spin-off parent value
(the "Spin-Off Percent of Parent") and noted that the median Spin-Off Percent of
Parent for the Selected Spin-Off Transactions was 14.2% and the median Spin-Off
Percent of Parent for the Selected Technology Spin-Off Transactions was 21.6%.
Lehman Brothers also reviewed the market adjusted change in combined equity
market capitalization of each spun-off company and
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its former parent to the market cap of the parent before the spin-off (the
"Market Adjusted Change") over the periods from thirty days before the spin-off
distribution to (i) one day after the spin-off distribution, (ii) one month
after the spin-off distribution and (iii) one year after the spin-off
distribution. Lehman Brothers noted that (i) median Market Adjusted Change one
day after the spin-off distribution was 3.1% for the Selected Spin-Off
Transactions and 4.5% for the Selected Technology Spin-Off Transactions, (ii)
median Market Adjusted Change one month after the spin-off distribution was 1.0%
for the Selected Spin-Off Transactions and 1.9% for the Selected Technology
Spin-Off Transactions and (iii) median Market Adjusted Change one year after the
spin-off distribution was 11.7% for the Selected Spin-Off Transactions and 13.8%
for the Selected Technology Spin-Off Transactions.
Leap Liquidity Analysis. Lehman Brothers reviewed Leap's projected funded
investment balance at September 30, 1998 and its incremental investment
requirements for fiscal year 1999. Lehman Brothers noted that the $265 million
credit facility from QUALCOMM is sufficient for Leap to meet its currently
projected obligations as well as to provide working capital to Leap.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, spin-offs, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements, and
valuations for corporate and other purposes. QUALCOMM selected Lehman Brothers
to act as its financial advisor in connection with the Distribution based upon
its expertise in the foregoing areas and its familiarity with the Company's
industry.
QUALCOMM will pay Lehman Brothers a fee of $1 million for its services in
connection with the Distribution. The receipt of a portion of this fee is
contingent upon the consummation of the Distribution. Lehman Brothers also will
be reimbursed for its reasonable expenses incurred in rendering its services.
QUALCOMM has agreed to indemnify Lehman Brothers for certain liabilities that
may arise out of the rendering its opinion. Lehman Brothers also has performed
various investment banking services for QUALCOMM in the past and has received
customary fees for such services. In the ordinary course of its business, Lehman
Brothers actively trades in the securities of QUALCOMM for its own account and
for the accounts of its customers and, accordingly, may at any time hold long
and/or short positions in such securities or in the securities of New QUALCOMM
or Leap following the Distribution.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the opinion of Cooley Godward LLP with
respect to material federal income tax considerations under the Internal Revenue
Code of 1986, as amended (the "Code"), with respect to the Leap Shares and any
cash in lieu of fractional Leap Shares, distributed to Holders in the
Distribution. This discussion does not address the tax consequences of the
acquisition of Leap Shares by purchase, exercise of stock options or means other
than the distribution. Holders should be aware that this discussion does not
deal with all federal income tax considerations that may be relevant to
particular Holders in light of their particular circumstances, such as Holders
who are foreign persons, dealers in securities, banks, insurance companies,
Holders that hold their shares as a hedge or as part of a hedging, straddle,
conversion or other risk reduction transaction, Holders that acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions, Holders that are exempt from federal income tax and
Holders subject to the alternative minimum tax provisions of the Code. This
discussion is based upon the Code, Treasury Regulations (including temporary and
proposed Treasury Regulations) promulgated thereunder, rulings, official
pronouncements and judicial decisions all as in effect on the date hereof and
all of which are subject to change or different interpretations by the Internal
Revenue Service ("IRS") or the courts, any of which changes or interpretations
may have retroactive effect. Cooley Godward LLP has disclaimed any undertaking
to advise QUALCOMM or the Holders as to any change in the law that may affect
this discussion, including changes that may be made under currently pending
legislative proposals. In addition, no opinion has been expressed as to the tax
laws of any jurisdictions other than the United States of America. An opinion of
counsel does not bind the IRS, which could take a contrary position, but
represents only counsel's judgment as to the likely outcome if the issues
involved were properly presented to a court of competent
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jurisdiction. This discussion assumes that the Leap Shares will at all relevant
times constitute capital assets of each of the Holders. This discussion does not
address state, local, or foreign tax considerations. BECAUSE EACH HOLDER'S TAX
SITUATION IS UNIQUE, THE DISTRIBUTION MAY AFFECT EACH HOLDER DIFFERENTLY. FOR
THIS REASON, EACH HOLDER IS URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO
DETERMINE THE TAX CONSEQUENCES OF THE DISTRIBUTION TO HIM. Cooley Godward LLP
acted as United States federal income tax counsel to QUALCOMM, assisted in
preparing this Information Statement and consents to the use of its opinion in
this Information Statement.
Taxability of The Distribution To Holders of QUALCOMM Common Stock. The
fair market value of the Leap Shares, plus the cash intended to represent the
fair market value of a fractional Leap Share (together, the "Distribution
Amount"), distributed to a Holder of QUALCOMM Common Stock will constitute a
dividend taxable as ordinary income to the extent that QUALCOMM has current or
accumulated "earnings and profits" as of the end of the taxable year (expected
to be September 27, 1998) in which the Distribution occurs that are allocable to
the Distribution for federal income tax purposes ("E&P"). Assuming that there
will be a public market for the Leap Shares at the time of the Distribution, the
fair market value of a Leap Share to a Holder for this purpose is expected to be
the average of the high and low trading price on the date of the Distribution
or, if such date is not a trading day, on the first trading day following the
Distribution. However, if the Distribution Amount exceeds the Holder's allocable
share of QUALCOMM's E&P, the excess will generally be treated first as a
basis-reducing, tax-free return of capital to the extent of the Holder's
adjusted tax basis in the Holder's QUALCOMM Common Stock, and after this
adjusted tax basis is reduced to zero, as either short-term or long-term capital
gain income to the extent of the remaining Distribution Amount to be accounted
for. QUALCOMM's management has estimated that, based on the information
currently available, QUALCOMM's E&P may be less than the Distribution Amount. In
such an event, the basis-reducing, tax-free return of capital and capital gain
distribution rules described above would apply. Accordingly, each Holder would
need to determine its adjusted per share tax basis in each of its QUALCOMM
Common Stock shares to determine how the Distribution would be taxed. This
determination of E&P will be made by QUALCOMM's management as soon as
practicable after the close of QUALCOMM's taxable year in which the Distribution
occurs.
No later than January 31, 1999, QUALCOMM will issue to each Holder of
QUALCOMM Common Stock receiving Leap Shares in the Distribution an IRS Form
1099-DIV reflecting such Holder's portion of the Distribution Amount. The IRS
Form 1099-DIV will also indicate what portion of the Distribution is an ordinary
dividend, taxable as ordinary income, and a nondividend distribution, taxable as
a tax-free return of capital or capital gain income depending on each Holder's
own situation.
To the extent that the Distribution Amount constitutes ordinary dividend
income (the "Dividend Amount"), it will generally be subject to back-up
withholding with respect to Holders who, before the Distribution, have not
provided their correct taxpayer identification number to QUALCOMM on an IRS Form
W-9 or a substitute therefor. Although this discussion does not generally
address tax consequences of the Distribution to foreign Holders of QUALCOMM
Common Stock, such Holders should note that distribution of the Dividend Amount
will generally be subject to U.S. withholding tax at the rate of 30%. This
withholding tax rate may be reduced by income tax treaties to which the United
States is a party. Non-resident alien individuals, foreign corporations and
other foreign Holders are urged to consult their own tax advisors regarding the
availability of such reductions and the procedures for claiming them, including,
but not limited to, executing an IRS Form W-8 to identify themselves as foreign
Holders to which an exception to the general withholding tax rules would apply.
For United States resident corporate Holders of QUALCOMM Common Stock, the
Dividend Amount will be eligible for a "dividends-received" deduction, subject
to limitations and exclusions provided by the Code. However, for corporate
Holders of QUALCOMM Common Stock, the Dividend Amount will be subject to the
Code's extraordinary dividend rules, which could reduce a corporate Holder's
basis in its QUALCOMM Common Stock by the amount of the deduction, if the
Dividend Amount equals at least 10% of the Holder's adjusted basis in its
QUALCOMM Common Stock. Moreover, to the extent that the untaxed Dividend Amount
exceeds the corporate Holder's adjusted basis in its QUALCOMM Common Stock, gain
will be recognized by such corporate Holder.
36
<PAGE> 42
Sale Of Leap Shares. Upon the sale of Leap Shares, the Holders will have a
capital gain or loss equal to the difference between the sale price and the
Holder's adjusted tax basis in the Leap Shares sold. This gain or loss will be
short-term if the Leap Shares have a holding period of one year or less on the
sale date. For noncorporate Holders, short-term capital gain is currently
subject to federal income tax at a maximum rate of 39.6%. For noncorporate
Holders, capital gain income from assets like Leap Shares, that have a holding
period of more than a year on the sale date, is subject to a maximum federal
income tax rate of 20%. Note that the phase-out or elimination of certain
deductions and exemptions at higher income levels can have the effect of raising
the marginal tax rate at those levels for other income of the taxpayer. There is
presently no difference in federal income tax rates between ordinary income and
capital gains of corporations. Limitations may apply to prevent or defer a
Holder's deduction of capital loss realized on any subsequent sale of Leap
Shares.
A Holder's initial adjusted tax basis in Leap Shares received in the
Distribution will be the fair market value of those Leap Shares at the time of
the Distribution. The holding period for Leap Shares received in the
Distribution will begin with the date of the Distribution.
ALL STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL, AND FOREIGN AND APPLICABLE MINIMUM OR ALTERNATIVE
MINIMUM TAX LAWS.
RELATIONSHIP BETWEEN QUALCOMM
AND THE COMPANY AFTER THE DISTRIBUTION
For purposes of facilitating an orderly transfer on the Distribution Date
of the Leap Business to the Company and an orderly transition to the status of
two separate independent companies, QUALCOMM and the Company, and certain of
their executive officers, will enter into various agreements and relationships,
including those described in this section. The agreements summarized in this
section are included as exhibits to the Registration Statement of which this
Information Statement forms a part. For purposes of agreements described below,
the term "QUALCOMM" refers to QUALCOMM and its subsidiaries, to the extent
applicable.
QUALCOMM's relationships as equipment vendor to Leap and the Leap Operating
Companies and as lender under the Credit Facility will give QUALCOMM significant
influence over Leap and will create certain conflicts with Leap. In addition,
QUALCOMM is not restricted from competing with the Company or any of the Leap
Operating Companies or pursuing directly wireless telecommunications businesses
which would also be attractive to Leap.
SEPARATION AND DISTRIBUTION AGREEMENT
Prior to the Distribution Date, QUALCOMM and the Company will enter into
the Separation and Distribution Agreement which will set forth the agreements
between the Company and QUALCOMM with respect to the principal transactions
required to effect the separation of the companies (the "Separation") and the
Distribution, and certain other agreements governing the relationship between
the parties thereafter.
To effect the Separation, QUALCOMM will agree to transfer the Leap Business
to Leap. QUALCOMM will also agree to contribute to Leap the following: (i) $10
million in cash; (ii) certain other indebtedness of the operating companies in
the amount of approximately $113 million owed to QUALCOMM, approximately $30.8
million of which is indebtedness under certain convertible notes; (iii)
QUALCOMM's rights under certain agreements to the extent relating solely to the
Leap Business (such as registration rights and other similar rights as a holder
of equity interest in the Leap Operating Companies); and (iv) miscellaneous
assets. QUALCOMM's performance as an equipment vendor is not a condition to
payment to Leap under the notes and other indebtedness to be transferred. No
intellectual property will be transferred to Leap in connection with the
Separation, and QUALCOMM will retain all rights not expressly transferred with
respect to any and all agreements with the Leap Operating Companies.
37
<PAGE> 43
In connection with such transfer of assets and rights by QUALCOMM, Leap
will issue to QUALCOMM the Leap Shares and the Warrant. In addition, Leap will
agree to assume certain liabilities of QUALCOMM, including without limitation
(i) significant funding obligations with respect to the Leap Operating Companies
expected to total at the time of the Distribution approximately $73.8 million,
including $4.2 million which will be indebtedness of Chilesat Telefonia Personal
convertible into equity on certain terms and conditions; (ii) QUALCOMM's
obligations to manage operations of the Leap Operating Companies; and (iii)
certain accrued liabilities with respect to Leap's employees in the amount of
approximately $2 million.
The Separation and Distribution Agreement will provide that, subject to the
terms and conditions thereof, QUALCOMM and the Company will take all reasonable
steps necessary and appropriate to cause all conditions to the Distribution to
be satisfied, and to effect the Distribution on the Distribution Date. The
Separation and Distribution Agreement will also (i) include releases of claims
of each party to the other, except as expressly set forth in the Separation and
Distribution Agreement, (ii) provide for the allocation of certain contingent
liabilities and (iii) provide the parties with certain indemnification rights
against each other.
Leap will also agree in the Separation and Distribution Agreement that,
until January 1, 2004, it will, subject to certain specified limited exceptions,
deploy only systems using cdmaOne. CdmaOne is the original standard for fixed or
mobile wireless telecommunications systems based on or derived from QUALCOMM's
CDMA technology and successor standards that QUALCOMM has adopted. CdmaOne has
been adopted as an industry standard by the TIA and other recognized
international standards bodies. For purposes of the Separation and Distribution
Agreement, cdmaOne also includes other CDMA systems that are compatible with or
employ the same physical layer as the original cdmaOne and adopted by QUALCOMM,
or that are compatible with the infrastructure and subscriber equipment
manufactured and sold by QUALCOMM (e.g., the TIA/EIA/IS-95 digital cellular
standard and ANSI JSTD-008 digital PCS standard to be published).
The Company will also agree that, until January 1, 2004, it will, subject
to certain specified limited exceptions, invest only in companies using cdmaOne
systems, in connection with terrestrial wireless activities. Pursuant to the
Separation and Distribution Agreement, and subject to certain exceptions
QUALCOMM will have a non-exclusive, royalty-free license to any patent rights
developed by Leap or any of Leap's affiliates. In addition, pursuant to the
Separation and Distribution Agreement, the Company will grant to QUALCOMM a
right of first refusal for a period of three (3) years with respect to proposed
transfers by Leap of interests in joint venture and equity interests included in
the Leap Business at the time of the Distribution, subject to preexisting rights
of other investors. Leap will further agree to take an active role in the
management of companies with which it has joint venture or equity interests,
consistent with its own business needs and applicable laws, contractual
arrangements and other requirements. The parties will also agree, with certain
limited exceptions, that for a period of three (3) years following the
Distribution neither party will solicit or hire employees of the other.
Under the Separation and Distribution Agreement, QUALCOMM and Leap have
agreed that, if certain events occur within eighteen months after the
Distribution, certain assets and liabilities related to TOU will be transferred
to Leap. There can be no assurance that such events will occur or that legal
impediments to transfer will be removed, or that QUALCOMM's interest in TOU will
ever be transferred to Leap.
CREDIT FACILITY
Prior to the Distribution, the Company will enter into a secured Credit
Facility with QUALCOMM. The Credit Facility will consist of two sub-facilities.
The Working Capital Facility will enable Leap to borrow up to $35.2 million from
QUALCOMM, subject to the terms thereof. The proceeds from the Working Capital
Facility may be used by Leap solely to meet the normal working capital and
operating expenses of Leap, including salaries and overhead, but excluding,
among other things, strategic capital investments in wireless operators,
substantial acquisitions of capital equipment and/or the acquisition of
telecommunications licenses. The Investment Capital Facility will enable Leap to
borrow up to $229.8 million from QUALCOMM, subject to the terms thereof. The
proceeds from the Investment Capital Facility may be used by Leap solely to make
certain identified portfolio investments.
38
<PAGE> 44
Amounts borrowed under the Credit Facility will be due and payable
approximately eight years following the Distribution Date. The Credit Facility
provides for a 2% origination fee. QUALCOMM will have a first priority security
interest in, subject to certain exceptions, substantially all of the assets of
Leap for so long as any amounts are outstanding under the Credit Facility.
Amounts borrowed under the Credit Facility will bear interest at a variable rate
equal to LIBOR plus 5.25% per annum. Interest shall be payable quarterly
beginning September 30, 2001; and prior to such time, accrued interest shall be
added to the principal amount outstanding. After QUALCOMM assigns more than 10%
of the aggregate funding commitments to other lenders, a commitment fee is
payable in favor of the lenders on unused balances under the Credit Facility.
The Credit Facility will require the Company to, among other things,
achieve and maintain a total debt to total capitalization financial ratio. The
Credit Facility will also contain operating covenants, including restrictions on
the ability of the Company to incur indebtedness, merge, consolidate or transfer
all or substantially all of its assets, make certain sales of assets, create,
incur or permit the existence of certain liens or pay dividends. Pursuant to the
Credit Agreement, Leap will agree that it will not at any time permit the
quotient obtained by dividing total debt by total capitalization of Leap to
exceed the following level during the indicated period:
<TABLE>
<CAPTION>
PERIOD LEVEL
------ -----
<S> <C>
Distribution Date through fourth anniversary thereof........ 70%
After fourth anniversary of Distribution Date............... 50%
</TABLE>
The Company fully expects to be in compliance with the financial covenant at the
Distribution. In addition, the Credit Facility will permit uses of funds only
for specified purposes, restricts the nature and breadth of the Company's joint
venture and equity interests, and will impose other restrictions on the
operation of the Company's business. Upon certain sales of assets, certain
agreed percentages of the proceeds are required to prepay the Credit Facility.
MASTER AGREEMENT REGARDING EQUIPMENT PROCUREMENT
The Master Agreement Regarding Equipment Procurement (the "Equipment
Agreement") will set forth certain obligations of Leap and QUALCOMM with respect
to the purchase and sale of certain terrestrial-based cdmaOne infrastructure and
subscriber equipment. Pursuant to the Equipment Agreement, Leap will agree that:
(i) Leap will purchase from QUALCOMM not less than 50% of Leap's direct
requirements for infrastructure and subscriber equipment during the five-year
period following the first such purchase; (ii) with respect to each direct or
indirect investment by Leap which is made at any time prior to the fourth
anniversary of the Distribution Date in a wireless telecommunication operating
entity operating in the United States in which Leap has not previously invested
(a "U.S. Operator"), Leap shall cause each such U.S. Operator, as a condition of
and prior to making such investment, to enter into an equipment requirements
agreement with QUALCOMM which shall require such U.S. Operator to purchase from
QUALCOMM not less than 50% of its requirements for infrastructure and subscriber
equipment during a five year period commencing on the date of such investment;
and (iii) with respect to each direct or indirect investment by Leap in a U.S.
Operator which is made after the fourth anniversary of the Distribution Date,
Leap shall exercise its commercially reasonable efforts to cause the U.S.
Operator, as a condition of making such investment, to provide QUALCOMM with a
reasonable opportunity to bid on such U.S. Operator's requirements for
infrastructure and subscriber equipment, and encourage such U.S. Operator to
acquire such equipment from QUALCOMM. Such obligations shall be imposed upon
Leap for such infrastructure and subscriber equipment so long as QUALCOMM's bid
for such (i) infrastructure equipment and related services or (ii) subscriber
equipment, as applicable, is not greater than 110% of the lowest competing bid
that Leap designates that Leap is willing to accept, taking into account all
reasonably quantifiable and/or objective factors associated with the sale and
financing of wireless telecommunications equipment and related services;
provided, however, that once QUALCOMM has been awarded contracts for an
aggregate $250 million of infrastructure equipment and related services on the
one hand, or subscriber equipment, as applicable (calculated separately), the
110% criterion shall be lowered to 100% for subsequent purchases of such
equipment as the volume for such category of purchases exceeds the $250 million
threshold.
39
<PAGE> 45
Further, until the earlier to occur of (i) the fourth anniversary of the
Distribution Date and (ii) the date on which Leap has received an aggregate $60
million of debt or equity financing (by parties other than QUALCOMM and
excluding the proceeds from the exercise of Leap stock options), Leap shall
cause each wireless telecommunication operating entity operating outside the
United States in which Leap has not previously invested (a "Non-U.S. Operator")
in which Leap has made a direct or indirect investment, as a condition of and
prior to making such investment, to enter into an equipment requirements
agreement with QUALCOMM which shall provide that such Non-U.S. Operator shall
purchase from QUALCOMM not less than 50% of such Non-U.S. Operators'
requirements for infrastructure and subscriber equipment during the five year
period commencing on the date of such investment. With respect to any Non-U.S.
Operators in which Leap makes a direct or indirect investment following the
above-described applicable period, Leap shall use commercially reasonable
efforts to cause such Non-U.S. Operator, as a condition of making such
investment, to provide QUALCOMM with a reasonable opportunity to bid on such
U.S. Operator's infrastructure and subscriber equipment, and encourage such U.S.
Operator to acquire such equipment from QUALCOMM. The obligations of all such
Non-U.S. Operators shall be subject to QUALCOMM providing competitive prices,
taking into account all reasonably quantifiable and/or objective factors
associated with the sale and financing of wireless telecommunications equipment
and related services. Certain additional terms limit the respective obligations
of the parties to perform under specified circumstances. All such obligations
with respect to equipment purchases shall expire on the date nine years
following the Distribution.
QUALCOMM's right to supply infrastructure and subscriber equipment
constitutes a right of first refusal of QUALCOMM. To the extent Leap (or any
subject U.S. Operator or Non-U.S. Operator) attempts to procure infrastructure
equipment and subscriber equipment on a "bundled" basis (that is, the
prospective buyer is seeking to enter into a contract for the purchase of
infrastructure equipment and subscriber equipment from the same vendor on a
concurrent basis), then under certain prescribed circumstances QUALCOMM shall be
entitled to respond separately to each portion of the proposed "bundled"
procurement. To the extent Leap does not attempt to procure, in any instance,
such equipment on a competitive basis from multiple prospective vendors, but
instead elects to negotiate exclusively with QUALCOMM to supply such equipment,
then QUALCOMM agrees to offer and sell such equipment to Leap on a "most favored
pricing" basis.
INTERIM SERVICES AGREEMENT
The Company and QUALCOMM will enter into an Interim Services Agreement
prior to the Distribution Date (the "Interim Services Agreement"), governing the
provision by QUALCOMM to the Company, on an interim basis, of certain data
processing and telecommunications services (which may include voice
telecommunications and data transmission, accounting, financial management, tax,
payroll, stockholder, governmental and public relations, legal, human resources
administration, procurement, real estate management and other administrative
functions), each as mutually agreed to and on the terms set forth therein. The
Company will agree to pay QUALCOMM the hourly rate of the QUALCOMM employees
providing such services, plus associated general and administrative overhead
(which shall be deemed to equal an additional 150% of the hourly rate of the
employee) and all out-of-pocket costs and expenses. These interim services are
not expected to extend beyond one year following the Distribution Date.
EMPLOYEE BENEFITS AGREEMENT
The Employee Benefits Agreement (the "Employee Benefits Agreement") will
govern the employee benefit obligations of the Company, including both
compensation and benefits, with respect to employees assigned to the Company as
of the Distribution Date. Pursuant to the Employee Benefits Agreement, the
Company will assume and agree to pay, perform, fulfill and discharge, in
accordance with their respective terms, all liabilities to, or relating to,
former employees of QUALCOMM or its affiliates who will be employed by the
Company. With respect to stock plans, Leap will have in place its 1998 Stock
Option Plan, Employee Stock Purchase Plan and 1998 Non-Employee Directors' Stock
Option Plan, each of which are described in this Information Statement. Leap
will also adopt a 401(k) plan that will be substantially similar to QUALCOMM's,
to which certain assets will be transferred from QUALCOMM's. Otherwise,
effective immediately after the Distribution, the Company will have in effect
its own employee benefit plans, which
40
<PAGE> 46
generally will be the same as QUALCOMM's plans as in effect at that time. In
addition, Leap will be obligated to grant (prior to the Distribution) options to
purchase shares of Leap Common Stock to certain holders of options to purchase
shares of QUALCOMM Common Stock. See "Treatment of QUALCOMM Employee Stock
Options in the Distribution."
TAX AGREEMENT
The Tax Agreement generally will require QUALCOMM to pay, and indemnify
Leap against, all United States federal, state, local and foreign taxes relating
to the businesses conducted by QUALCOMM or its subsidiaries for any taxable
period, other than the following taxes which will be paid by Leap and against
which Leap will indemnify QUALCOMM: (i) all United States federal, state, local
and foreign taxes relating to Leap and its U.S. subsidiaries for periods after
the Distribution; (ii) all United States federal, state, local and foreign taxes
relating to Leap's non-U.S. subsidiaries or any predecessor or successor thereof
for all periods before and after the Distribution (other than with respect to
certain restructuring transactions incident to the Distribution); and (iii) all
United States federal, state, local and foreign taxes arising out of certain
actions taken by, or in respect of, Leap or any of its subsidiaries that cause
adverse tax consequences to QUALCOMM, Leap or their respective subsidiaries with
respect to the Distribution or the transactions related thereto; provided,
however, that under certain limited circumstances Leap's indemnification
obligation described in this subparagraph (iii) may be reduced.
The Tax Agreement will further provide for cooperation with respect to
certain tax matters, the exchange of information and retention of records that
may affect the tax liability of either party.
CONVERSION AGREEMENT
Pursuant to the Conversion Agreement, the Company will agree to issue
shares of Leap Common Stock to holders of QUALCOMM's Trust Convertible Preferred
Securities upon the conversion of such securities and to, at all times, have
reserved and keep available, solely for issuance and delivery upon such
conversion, all Leap Common Stock issuable form time to time upon such
conversion. Leap will also be obligated to file and keep effective, subject to
certain exceptions, a registration statement covering the shares of Leap Common
Stock issuable upon conversion of the Trust Convertible Preferred Securities.
41
<PAGE> 47
CAPITALIZATION
(IN THOUSANDS)
The following table sets forth, as of May 31, 1998, the Company's
historical capitalization and pro forma capitalization as if the Distribution
occurred as of that date. This data should be read in conjunction with the pro
forma balance sheet and the introduction to the pro forma financial statements
appearing elsewhere in this Information Statement. The pro forma information may
not reflect the capitalization of the Company in the future or as it would have
been had the Company been a separate, independent company on May 31, 1998.
Assumptions regarding the number of shares of Leap Common Stock may not reflect
the actual number of shares at the Distribution Date. See "Pro Forma Financial
Statements."
<TABLE>
<CAPTION>
AS OF MAY 31, 1998
-----------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Credit facility(1).......................................... $ -- $ 5,300
-------- --------
Stockholder's equity:
Parent's investment....................................... 76,048 --
Deficit accumulated during the development stage.......... (19,273) (19,273)
Common stock(2)........................................... -- 2
Additional paid-in-capital(3)............................. -- 281,658
Cumulative translation adjustment......................... (1,895) (1,895)
-------- --------
Total stockholder's equity................................ 54,880 260,492
-------- --------
Total capitalization...................................... $ 54,880 $265,792
======== ========
</TABLE>
(1) QUALCOMM will provide the Company with the Credit Facility. A $35.2 million
Working Capital Facility and a $229.8 million Investment Capital Facility
are available under the Credit Facility for working capital and investment
capital purposes, respectively. The facility will be payable eight years
following the Distribution Date. The loan will bear interest at a variable
rate equal to LIBOR plus 5.25% per annum. Interest will accrue quarterly
with cash interest payments beginning September 2001. Approximately $5.3
million is anticipated to be outstanding as of the Distribution Date related
to the financing of the 2% origination fee.
(2) Based on each holder of QUALCOMM Common Stock receiving a dividend of one
share of Leap Common Stock for every four shares of QUALCOMM Common Stock,
the numbers of shares of Leap Common Stock outstanding as of the
Distribution Date is anticipated to be 17,643,830 based on QUALCOMM common
stock outstanding as of August 20, 1998. Such shares reflect the expected
issuance upon the distribution of one of the Company's shares of common
stock for every four shares of QUALCOMM common stock outstanding. See Note 1
of Combined Financial Statements.
(3) Reflects the contribution of net assets by QUALCOMM to the Company,
including $147.6 million in investments in wireless operating companies and
$113 million in loans receivable.
42
<PAGE> 48
PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company was formed by QUALCOMM for the purpose of effecting the
Distribution and has no operating history as a separate, independent company.
The historical combined financial statements of the Company reflect periods
during which the Company did not operate as a separate, independent company, and
certain assumptions were made in preparing such financial statements. Therefore,
such historical combined financial statements may not reflect the results of
operations or financial position that would have been achieved had the Company
been a separate, independent company.
The following unaudited pro forma financial statements (the "Pro Forma
Financial Statements") are based on the historical combined financial statements
of the Company as of May 31, 1998 and for the nine months then ended and as of
August 31, 1997 and for the year then ended included elsewhere in this
Information Statement, adjusted to give effect to the Distribution. The Pro
Forma Statements of Operations for the nine months ended May 31, 1998 and the
year ended August 31, 1997 give effect to the Distribution as if it had occurred
as of September 1, 1996 and the Pro Forma Balance Sheet gives effect to the
Distribution as if it had occurred as of May 31, 1998. The Distribution and the
related adjustments are described in the accompanying notes. The Pro Forma
Financial Statements are based upon available information and certain
assumptions that management believes are reasonable. The Pro Forma Financial
Statements do not purport to represent what the Company's results of operations
or financial condition would actually have been had the Distribution in fact
occurred on such dates or to project the Company's results of operations or
financial condition for any future period or date. The Pro Forma Financial
Statements should be read in conjunction with the historical combined financial
statements of the Company included elsewhere in this Information Statement and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Pro Forma Financial Statements assume the completion of the
transactions contemplated by the Distribution Agreement (except for the
potential transfer of TOU following the Distribution) and the agreements to be
entered into pursuant to the Distribution Agreement including the completion of
all the asset transfers and contract assignments contemplated thereby.
Assumptions regarding the number of shares of Leap Common Stock may not reflect
the actual numbers at the Distribution Date.
43
<PAGE> 49
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31, 1998
--------------------------------------
PRO FORMA
ADJUSTMENTS
-----------
RELATED
LEAP TO
HISTORICAL LEAP PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Equity in net losses of wireless operating companies...... $ (1,535) $(1,507)(1) $ (3,042)
General and administrative expenses....................... (16,188) -- (16,188)
-------- ------- --------
Loss before income taxes.................................. (17,723) -- (19,230)
Income tax expense........................................ -- -- --
-------- ------- --------
Net loss.................................................. $(17,723) $(1,507) $(19,230)
======== ======= ========
Unaudited pro forma basic and diluted net loss per common
share(2)................................................ $ (1.00) $ (1.09)
======== ========
Shares used in computing unaudited pro forma basic and
diluted net loss per common share(2).................... 17,644 17,644
======== ========
</TABLE>
- ---------------
(1) At the time of the Distribution, the Company will have a 70% interest in
QUALCOMMTel Isle of Man, which holds a 50% non-controlling interest in
Orrengove Investments Ltd. Orrengrove acquired a 60% equity interest in the
Transworld Companies on August 4, 1998. Because Orrengrove financed its
investment in the Transworld Companies and no other capital will have been
contributed to Orrengove or QUALCOMMTel Isle of Man prior to the
Distribution, the Company's pro forma balance sheet reflects no basis
related to its equity interest in QUALCOMMTel Isle of Man. The pro forma
adjustment reflects the equity loss that would have been incurred by the
Company during the period presented in connection with its investment in the
Transworld Companies. The Company will record its share of equity losses to
the extent of its $51.8 million note receivable from Orrengove.
(2) The Company had no common shares outstanding during the first nine months of
fiscal 1998. The pro forma net loss per common share was calculated by
dividing the net loss for the first nine months of fiscal 1998 by the
17,643,830 expected shares of common stock of the Company to be issued upon
the Distribution based on QUALCOMM common shares outstanding as of August
20, 1998. Such shares reflect the expected issuance upon the Distribution of
one of the Company's shares of common stock for every four shares of
QUALCOMM common stock outstanding. See Note 1 of Combined Financial
Statements.
Potential common shares are excluded from the loss per share calculations
because the effect would be antidilutive. Potential common shares upon the
Distribution are expected to include: (a) options to purchase 5,481,377
shares of Leap Common Stock to be issued to QUALCOMM optionholders; (b)
warrants to purchase 5,500,000 shares of Leap Common Stock to be retained
by QUALCOMM; and (c) 2,271,060 shares of Leap Common Stock reserved for
issuance by Leap in the event of conversion of the QUALCOMM Financial Trust
Convertible Preferred Securities.
44
<PAGE> 50
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
-------------------------------------
PRO FORMA
ADJUSTMENTS
-----------
LEAP RELATED TO
HISTORICAL LEAP PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Equity in net earnings (losses) of wireless operating
companies................................................. $ 207 $(1,454)(1) $(1,247)
General and administrative expenses......................... (1,361) -- (1,361)
------- -------- -------
Loss before income taxes.................................... (1,154) (1,454) (2,608)
Income tax expense.......................................... -- -- --
------- -------- -------
Net loss.................................................... $(1,154) $(1,454) $(2,608)
======= ======== =======
Unaudited pro forma basic and
diluted net loss per common share(2)...................... $ (0.07) $ (0.15)
======= =======
Shares used in computing unaudited pro forma basic and
diluted net loss per common share(2)...................... 17,644 17,644
======= =======
</TABLE>
- ---------------
(1) At the time of the Distribution, the Company will have a 70% interest in
QUALCOMMTel Isle of Man, which holds a 50% non-controlling interest in
Orrengrove Investments Ltd. Orrengrove acquired a 60% equity interest in the
Transworld Companies on August 4, 1998. Because Orrengrove financed its
investment in the Transworld Companies and no other capital will have been
contributed to Orrengrove or QUALCOMMTel Isle of Man prior to the
Distribution, the Company's pro forma balance sheet reflects no basis
related to its equity interest in QUALCOMMTel Isle of Man. The pro forma
adjustment reflects the equity loss that would have been incurred by the
Company during the period presented in connection with its investment in the
Transworld Companies. The Company will record its share of equity losses to
the extent of its $51.8 million note receivable from Orrengrove.
(2) The Company had no common shares outstanding during fiscal 1997. The pro
forma net loss per common share was calculated by dividing the 1997 loss by
the 17,643,830 expected shares of common stock of the Company to be issued
upon the Distribution based on QUALCOMM common shares outstanding as of
August 20, 1998. Such shares reflect the expected issuance upon the
Distribution of one of the Company's shares of common stock for every four
shares of QUALCOMM common stock outstanding. See Note 1 of Combined
Financial Statements.
Potential common shares are excluded from the loss per share calculation
because the effect would be antidilutive. Potential common shares upon the
Distribution are expected to include: (a) options to purchase 5,481,377
shares of Leap Common Stock to be issued to QUALCOMM optionholders; (b)
warrants to purchase 5,500,000 shares of Leap Common Stock to be retained
by QUALCOMM; and (c) 2,271,060 shares of Leap Common Stock reserved for
issuance by Leap in the event of conversion of the QUALCOMM Financial Trust
Convertible Preferred Securities.
45
<PAGE> 51
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MAY 31, 1998
---------------------------------------
PRO FORMA
ADJUSTMENTS
LEAP RELATED TO PRO
HISTORICAL LEAP (1) FORMA
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ -- $ 10,000(2) $ 10,000
Other current assets................................... -- 50(3) 50
-------- -------- --------
Total current assets..................................... -- 10,050 10,050
Investments in wireless operating companies.............. 42,777 104,823(4) 147,600
Loans receivable......................................... 15,000 98,000(5) 113,000
Other assets............................................. -- 8,739(6) 8,739
-------- -------- --------
Total assets................................... $ 57,777 $221,612 $279,389
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............... $ 2,897 $ (2,897)(7) $ --
Other current liabilities.............................. -- 1,997(8) 1,997
-------- -------- --------
Total current liabilities................................ 2,897 (900) 1,997
Loans payable to banks................................... -- 11,600(5) 11,600
Long-term debt........................................... -- 5,300(9) 5,300
-------- -------- --------
Total liabilities.............................. 2,897 16,000 18,897
-------- -------- --------
COMMITMENTS(5)
STOCKHOLDERS' EQUITY:
Parent's investment...................................... 76,048 (76,048)(10) --
Common stock............................................. -- 2(11) 2
Additional paid-in-capital............................... -- 281,658(10) --
-- 21,400(12) --
-- (21,400)(12) 281,658
Deficit accumulated during the development stage......... (19,273) -- (19,273)
Cumulative translation adjustment........................ (1,895) -- (1,895)
-------- -------- --------
Total stockholders' equity..................... 54,880 205,612 260,492
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $ 57,777 $221,612 $279,389
======== ======== ========
</TABLE>
- ---------------
(1) Pro forma adjustments give effect to (a) the net assets to be contributed
to the Company by QUALCOMM and (b) the distribution of Leap common stock to
QUALCOMM stockholders.
(2) Reflects the transfer of $10 million in cash from QUALCOMM to Leap prior to
the Distribution Date.
(3) Reflects estimated prepaid insurance transferred by QUALCOMM prior to the
Distribution Date.
(4) Reflects additional investments expected to be made subsequent to May 31,
1998 and prior to the Distribution Date in the following companies: Pegaso
Telecomunicaciones, S.A. de C.V., QUALCOMMTel Cayman and OzPhone. Such
investments will be transferred by QUALCOMM to Leap prior to the
Distribution Date.
(5) Reflects loans to be issued to investees and loans payable to banks to be
incurred subsequent to May 31, 1998, but prior to the Distribution, in
connection with the partial funding of certain of the loans receivable.
Leap has total non-cancelable debt commitments of $135 million; $61.2
million will be funded by Leap prior to the Distribution, leaving $73.8
million in non-cancelable debt commitments payable within 15 months of the
Distribution. Leap plans to fund its non-cancelable debt commitments with
funds under the Credit Facility.
46
<PAGE> 52
Chilesat PCS Convertible Loans
A maximum principal amount of $35 million can be borrowed with accrued
interest and principal due and payable on or before January 31, 1999. If
Chilesat PCS fails to pay, at the Company's sole option, the loans and
accrued interest are convertible into shares of Chilesat PCS common stock.
The number of shares into which the loans are convertible is determined by
dividing the outstanding principal balance of the loans plus accrued
interest by the issue price of $5.00 per share of common stock. As of the
Distribution Date, $30.8 million in principal is expected to be
outstanding.
Chase and Metrosvyaz Working Capital Loans
The Company has provided working capital loans to Chase Telecommunications,
Inc. and Metrosvyaz Limited. The Chase facility is a $25 million working
capital loan with an 8-year term at an interest rate of prime plus 4 1/2%.
The Metrosvyaz facility is $75 million with a 5-year term at an interest
rate of 13%. Amounts expected to be outstanding as of the Distribution Date
for Chase and Metrosvyaz are $13 million and $17.4 million, respectively.
Orrengrove Investments, Ltd.
The Company has a $51.8 million promissory note from Orrengrove advanced in
connection with its $51.8 million investment in the Transworld Companies.
The note matures on September 20, 2003 and bears interest at 13%. QUALCOMM
will transfer a 70% interest in QUALCOMMTel Isle of Man, which will hold a
50% interest in Orrengrove, to the Company prior to the Distribution.
Because Orrengrove financed its investment in the Transworld Companies and
no other capital will have been contributed to Orrengrove or QUALCOMMTel
Isle of Man prior to the Distribution, the Company's pro forma balance
sheet reflects no basis related to its equity interest in QUALCOMMTel Isle
of Man.
Loans Payable to Banks
The maximum principal amount of the loan is $15.8 million with an interest
rate of 8.56%. The entire principal balance and accrued interest is due and
payable on February 15, 1999. As of the Distribution Date, $11.6 million is
expected to be outstanding.
(6) Reflects the contribution of intangible assets, leasehold improvements,
office furniture, computer equipment and security deposit by QUALCOMM to
Leap prior to the Distribution Date.
(7) Reflects the elimination of accounts payable and accrued liability balances
pursuant to QUALCOMM's contribution of capital upon the Distribution Date.
(8) Reflects the transfer of vacation and sick time accruals and accrued
bonuses from QUALCOMM to Leap prior to the Distribution Date.
(9) QUALCOMM will provide the Company with a senior secured multiple drawdown
Credit Facility. A $35.2 million Working Capital Facility and a $229.8
million Investment Capital Facility are available under the Credit Facility
for working capital and investment capital purposes, respectively. The
facility will be payable eight years following the Distribution Date. The
loan will bear interest at a variable rate of LIBOR plus 5.25%. Interest
will accrue quarterly with cash interest payments beginning September 2001.
Approximately $5.3 million is anticipated to be outstanding as of the
Distribution Date related to the financing of the 2% origination fee.
(10) Reflects the distribution of all outstanding shares of Leap common stock to
QUALCOMM stockholders.
(11) Reflects the distribution of 17,643,830 Leap shares to QUALCOMM
stockholders at $0.0001 per share par value based on QUALCOMM Shares
outstanding as of August 20, 1998. Such shares reflect the expected
issuance upon the Distribution of one of the Company's shares of Common
Stock for every four shares of QUALCOMM Common Stock outstanding. See Note
1 of Combined Financial Statements.
(12) Reflects the estimated fair value of $21.4 million of Leap's obligation to
issue shares of Leap Common Stock to holders of QUALCOMM's Trust
Convertible Preferred Securities upon conversion of such securities into
shares of QUALCOMM and Leap Common Stock.
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<PAGE> 53
SELECTED HISTORICAL COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected historical combined financial data of the Company
should be read in conjunction with the historical combined financial statements
and notes thereto included elsewhere in this Information Statement. The selected
combined historical financial data relates to the Leap Business as it was
operated by QUALCOMM. The following selected historical combined financial data
are derived from the historical combined financial statements of the Company.
The annual historical combined financial information has been adjusted for those
parts of the infrastructure business unit which are to remain under QUALCOMM
ownership and management after the Distribution. The selected historical
combined financial data that relate to the two year period ended August 31, 1997
have been derived from audited historical combined financial statements included
in this Information Statement. The selected historical combined financial data
that relate to the nine months ended May 31, 1998 and 1997 and for the period
from September 1, 1995 (inception) to May 31, 1998 have been derived from
unaudited historical combined financial statements included in this Information
Statement.
The historical combined financial data of the Company may not reflect the
results of operations or financial position that would have been achieved had
the Company been a separate, independent company for the years presented.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM SEPTEMBER 1,
1995 (INCEPTION) NINE MONTHS ENDED MAY 31, YEARS ENDED AUGUST 31,
TO MAY 31, --------------------------- ----------------------
1998 1998 1997 1997 1996
------------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Equity in net (losses) earnings of
wireless operating companies....... $ (1,328) $ (1,535) $ (139) $ 207 $ --
General and administrative
expenses........................... (17,945) (16,188) (994) (1,361) (396)
-------- ----------- ------- ----------- -----
Loss before income taxes............. (19,273) (17,723) (1,133) (1,154) (396)
Income tax expense................... -- -- -- -- --
-------- ----------- ------- ----------- -----
Net loss............................. $(19,273) $ (17,723) $(1,133) $ (1,154) $(396)
======== =========== ======= =========== =====
Unaudited pro forma basic and diluted
net loss per common share.......... $ (1.00) $ (0.07)
=========== ===========
Shares used in computing unaudited
pro forma basic and diluted net
loss per common share.............. 17,644 17,644
=========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital (deficit)............ $ (2,897) $ (279) $(111)
Total assets......................... 57,777 46,267 --
Stockholder's equity................. 54,880 45,988 (111)
</TABLE>
48
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 of each joint venture and other entities in which it has
interests, include, but are not specifically limited to: the ability to
successfully deploy their wireless networks, 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 types 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, as well as the other risks
detailed in this section and in the sections entitled "Risk Factors" and
"Results of Operations and Liquidity and Capital Resources."
OVERVIEW
Leap's strategy is to build an operating entity that provides management
and project expertise and selectively participates in and manages joint ventures
and other collaborative efforts to provide cdmaOne wireless telecommunications
services in telecommunications markets with significant growth potential. The
Company believes its experience, technical and commercial expertise, and access
to equipment and technology will benefit the Company and the entities in which
it has interests.
Domestic and international telecommunications markets are expanding rapidly
as countries seek to increase teledensity (number of telephone lines as a
percentage of the population) and competition among carriers. Often the fastest,
most economical and easiest way to meet these demands is through the
implementation and operation of wireless networks and systems. In many such
countries, telecommunications systems have been closely regulated by local
governments, and licenses to provide services have been largely unavailable.
Decreased government regulation, and active solicitation of new and better
services through auctions of licenses, have created opportunities for local and
foreign providers to capture market share. These changes create the need to
provide both the capital to build out these new (largely wireless) systems and
the expertise to oversee and manage their entry into these competitive markets.
Such opportunities have been recognized in many countries, including those where
Leap has operations.
The Company and its operating companies are in the early stages of
development and are subject to the risks inherent in the establishment of a new
business enterprise. The Company's results of operations must be considered in
light of the risks, expenses and difficulties encountered by companies at this
stage of development, particularly companies in new and rapidly evolving markets
and companies experiencing rapid growth. It is expected that the launch,
development and expansion of the Company's wireless services over the next
several years, as well as the pursuit of additional telecommunications
opportunities, will require significant capital. The Company's future growth and
results of operations will therefore depend upon its ability to raise sufficient
funds to meet its capital requirements.
The entities in which the Company has joint venture and equity interests
have not generated any revenues from operations, and the Company has no other
current sources of income. Costs associated with the construction and testing of
the wireless networks are being capitalized. Accordingly, the Company's
proportionate share of the net losses of such entities accounted for under the
equity method of accounting to date has been limited.
Upon commercial launch of operations, revenues of the operating companies
will be derived primarily from fees and usage charges. Other sources of revenue
may include equipment sales and activation fees. Wireless telecommunications
projects usually experience significant losses and negative cash flows in their
initial years of operation. Such projects require substantial capital
expenditures for the construction of their networks, license fees and license
acquisition costs, some of which are payable upon issuance of the license, and
significant marketing and other expenses needed to start the business. As such,
the Company expects its
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<PAGE> 55
proportionate share of the net loss of its investees to increase significantly
as they begin commercial operations.
The Company has experienced, and expects to continue to experience,
increased general and administrative expenses as a result of the Company's
overall expansion. Such costs will include the hiring of additional staff,
professional and consulting fees, costs related to project development and
corporate overhead costs. The Company expects to continue to add to its
managerial resources as it expands its involvement in wireless projects in
various parts of the world.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1998 COMPARED TO NINE MONTHS ENDED MAY 31, 1997
Equity in net losses of wireless operating companies for the first nine
months of fiscal 1998 was $1.5 million, which represents the Company's share of
the net losses of the wireless operating companies in which it holds an
ownership interest accounted for under the equity method of accounting. These
losses consisted of costs incurred prior to service launch during the network
build-out and testing phases such as salary and related benefits, overhead
expenses and professional and consulting fees. Through May 31, 1998, there was
no depreciation of network equipment and no amortization of licenses as service
had not been launched commercially. For the nine months ended May 31, 1997,
equity in net losses of wireless operating companies amounted to $139,000,
reflecting the fact that the wireless operating companies in which the Company
invested had only recently begun network planning and build-out activities.
General and administrative expenses were $16.2 million for the first nine
months of fiscal 1998, compared to $1.0 million for the first nine months of
fiscal 1997. General and administrative expenses for the first nine months of
fiscal 1998 consisted primarily of the following: corporate allocations of $5.1
million, consulting and marketing expenses of $4.1 million, project development
expenses of $3.7 million, bad debt expense of $1.7 million and compensation and
fringe benefits of $1.6 million. General and administrative expenses for the
first nine months of fiscal 1997 consisted primarily of the following: corporate
allocations of $400,000, compensation and fringe benefits of $300,000 and
project development expenses of $300,000. The dollar increase was due
principally to increases in business development activity relating to projects
to create wireless operating companies in Mexico and Russia and the $1.7 million
provision for bad debts against a receivable from a potential business acquiree.
Such development activity resulted in significantly higher professional and
consulting expenses and an increase in QUALCOMM corporate overhead allocated to
the Company. During November 1997, QUALCOMMTel entered into a letter of intent
to purchase a controlling interest in a Russian telephone company for
approximately $10 million, subject to adjustment and pending due diligence
procedures. In connection with the potential acquisition, during November and
December of 1997 QUALCOMMTel provided $1.7 million in interest-bearing loans
under an exclusivity clause to meet the interim working capital needs of the
potential acquiree. Such loans were to become part of the purchase price
consideration in the event the acquisition was completed. Otherwise, such loans
and accrued interest were repayable no later than 180 days after the date of
issuance. Subsequent negotiations failed to result in an acquisition agreement
and, due to substantial doubt on the ability of the potential acquiree to repay
such loans, the Company provided a $1.7 million bad debt allowance against the
receivable. The Company expects that general and administrative expenses will
continue to increase as a result of on-going development efforts on current and
new projects. Also, general and administrative expenses are expected to continue
to increase resulting from the hiring of Company personnel as a result of the
Company becoming a stand-alone entity.
No provision for income taxes was recognized for the nine months ended May
31, 1998 and 1997, as a result of the net losses incurred.
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
Equity in net earnings of wireless operating companies for fiscal 1997 was
$207,000, which represents the Company's share of the net income of wireless
operating companies in which it holds an ownership interest accounted for under
the equity method of accounting. The net earnings represent the excess of
interest income from the entities' temporary investment of their capital funds
prior to being expended for network build-out,
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<PAGE> 56
offset by costs incurred prior to service launch during the network build-out
and testing phases. Such costs included salary and related benefits, overhead
expenses and professional and consulting fees. Through August 31, 1997, there
was no depreciation of network equipment and no amortization of licenses as
service had not been launched commercially. Through August 31, 1996, the Company
did not have any operating company interests, and, accordingly, there was no
equity in earnings of investees during the year then ended.
General and administrative expenses were $1.4 million for fiscal 1997,
compared to $0.4 million for fiscal 1996. General and administrative expenses
for the year ended August 31, 1997 consisted primarily of the following:
corporate allocations of $600,000, compensation and fringe benefits of $400,000
and project development expenses of $400,000. General and administrative
expenses for the year ended August 31, 1996 consisted primarily of the
following: corporate allocations of $300,000 and compensation and fringe
benefits of $100,000. This increase was due principally to increases in business
development activity relating to projects to create a wireless operating company
in Chile. Such development activity resulted in higher professional and
consulting fees. Additionally, the Company incurred higher incremental labor and
travel expenses to develop the wireless operating companies.
No provision for income taxes was recognized for the years ended August 31,
1997 and 1996, as a result of the net losses incurred.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to have significant future capital requirements over
the next several years in relation to existing operations, development projects
and additional new projects. Prior to the Distribution, the Company's cash
requirements have been funded by QUALCOMM. The proceeds were primarily used to
fund the Company's joint venture and equity interests in wireless operating
companies, including the expenses incurred in seeking and evaluating new
business opportunities, and to fund corporate overhead expenses as allocated to
the Company by QUALCOMM.
As of May 31, 1998, the Company had no outstanding long-term indebtedness
and had no cash balances. To provide short-term liquidity over the twelve-month
period following the Distribution, the Company expects to receive $10 million in
cash from QUALCOMM in connection with the Separation and to enter into a credit
agreement with QUALCOMM for a secured Credit Facility in an aggregate amount of
$265.0 million. The Company expects to meet its short-term cash requirements for
existing operations and current development projects through fiscal 1999 from
available cash balances and borrowings under the Credit Facility. To the extent
that such cash resources are insufficient to fund the Company's activities on a
short-term basis, the Company may be required to raise additional funds which
may be derived through additional debt, equity financing or other sources. If
additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders could occur.
The Company continues to evaluate financing alternatives, including unsecured
bank facilities and other sources of short-term debt or equity financing. There
can be no assurances such additional short-term financing will be available or,
if available, that it will be on acceptable terms.
As a result, the Company expects that it will be highly leveraged within
twelve months after the Distribution. The degree to which the Company is
leveraged could have important consequences, including: (i) the Company's
ability to obtain additional financing in the future may be impaired, (ii) a
substantial portion of the Company's future cash flows from operations may be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available for operations, (iii) the Company may be hindered
in its ability to adjust rapidly to changing market conditions and (iv) the
Company's substantial degree of leverage may make it more vulnerable in the
event of a downturn in general economic conditions or in its business. There can
be no assurance that the Company's future cash flows will be sufficient to meet
the Company's debt service requirements or that the Company will be able to
refinance any of its indebtedness at maturity.
Operating Activities
In the first nine months of fiscal 1998, $11.9 million in cash was used in
operating activities, compared to $0.9 million used in operating activities in
the first nine months of fiscal 1997. The increase resulted from
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<PAGE> 57
higher expenses, predominantly higher professional and consulting fees
associated with project development expenses of new wireless companies in
Mexico, including expenses associated with participating in the Mexican auction
for PCS licenses, and in Russia. It is expected that cash used in operating
activities will continue to increase as the Company expands its project
development efforts on existing and new project opportunities. Also, the Company
has budgeted $81.3 million over fifteen months to pursue its strategy of
providing a fixed fee limited cdmaOne telephone service targeted at the United
States mass market.
In fiscal 1997, $1.2 million in cash was used in operating activities,
compared to $0.3 million used in operating activities in fiscal 1996. The
increase in cash used in operating activities in 1997 resulted from an increase
in general and administrative expenses.
Investing Activities
Cash used in investing activities was $16.7 million for the first nine
months of fiscal 1998 and $46.0 million for the corresponding period in fiscal
1997. The 1998 activity results from the Company providing $15 million in loans
to certain subsidiaries of Transworld Communications (U.S.A.), Inc. Also, the
Company funded a $1.7 million loan receivable related to a potential business
combination. Investment activity in the corresponding period for fiscal 1997
represented the Company's $42 million investment in preferred voting stock of
Chilesat PCS and the $4.0 million purchase of Series B Common Stock in Chase
Telecommunications, Inc. The Company is expected to have $73.8 million in
outstanding non-cancelable debt commitments to its investments in wireless
operating companies as of the date of the Distribution. Such commitments are
expected to be funded within fifteen months of the Distribution. The Company
expects that investments in wireless operating companies will increase
significantly in the near future.
Investments in wireless operating companies totaled $46.0 million in fiscal
1997. There were no investments in fiscal 1996. The fiscal 1997 investment
consisted of the purchase of $42 million of voting preferred shares representing
a 50% ownership interest in a corporate joint venture, Chilesat PCS and the
investment of $4 million in Chase Telecommunications Inc. in which the Company
holds less than a 7% ownership interest.
Financing Activities
Cash provided by financing activities during the first nine months of
fiscal 1998 and 1997 amounted to $28.6 million and $46.9 million, respectively,
consisting of QUALCOMM's funding of the operating and investing cash used by the
Company.
The Company's financing activities, which consisted solely of QUALCOMM's
investment, provided net cash of $47.2 million in fiscal 1997 compared to $0.3
million in fiscal 1996. The investment represents QUALCOMM's funding of the
operating and investing cash used by the Company.
QUALCOMM Credit Facility
In connection with the Distribution, the Company is expected to enter into
a $265.0 million secured Credit Facility pursuant to which it will have access
to funds from QUALCOMM. The Credit Facility will consist of two sub-facilities.
The first sub-facility (the "Working Capital Facility") will enable Leap to
borrow up to $35.2 million from QUALCOMM, subject to the terms thereof. The
proceeds from the Working Capital Facility may be used by Leap solely to meet
the normal working capital and operating expenses of Leap, including salaries
and overhead, but excluding, among other things, strategic capital investments
in wireless operators, substantial acquisitions of capital equipment, and/or the
acquisition of telecommunications licenses. The other sub-facility (the
"Investment Capital Facility") will enable Leap to borrow up to $229.8 million
from QUALCOMM, subject to the terms thereof. The proceeds from the Investment
Capital Facility may be used by Leap solely to make certain specified portfolio
investments. The Credit Facility will contain a financial covenant and operating
covenants, including restrictions on the ability of the Company to incur
indebtedness, merge, consolidate or transfer all or substantially all of its
assets, to make certain sales of assets, to create, incur or permit the
existence of certain liens and to pay dividends.
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Pursuant to the Credit Agreement, Leap will agree that it will not at any
time permit the quotient obtained by dividing total debt by total capitalization
of Leap to exceed the following level during the indicated period:
<TABLE>
<CAPTION>
PERIOD LEVEL
------ -----
<S> <C>
Distribution Date through fourth anniversary thereof........ 70%
After fourth anniversary of Distribution Date............... 50%
</TABLE>
The Company fully expects to be in compliance with the financial covenant at the
Distribution. In addition, the Credit Facility will permit uses of funds only
for specified purposes consistent with approved business plans, restrict the
nature and breadth of the Company's investments and impose other restrictions
peculiar to the Company's business. The restrictions imposed by QUALCOMM related
to the Credit Facility could have a material adverse effect on the Company.
The Company expects to have significant long-term future capital
requirements beyond fiscal 1999 relating (i) to funding commitments to the Leap
Operating Companies and other operating companies in which the Company may
acquire joint venture or equity interests and (ii) to general working capital
needs and other cash requirements. The magnitude of these long-term capital
requirements will depend on a number of factors, including the specific capital
needs of the Leap Operating Companies, additional capital needed to acquire or
maintain other joint venture or equity interests or to pursue other
telecommunications opportunities, competing technological and market
developments and changes in existing and future relationships. The Company
intends to address its long-term liquidity needs through access to private
and/or public equity and/or high yield debt markets; however, there can be no
assurance that the Company will be successful in its efforts to raise the
capital required to fund operations on a long-term basis. Failure to satisfy
such capital requirements would have a material adverse effect on the Company's
business, results of operations, liquidity and financial position.
Substantial Leverage of Operating Companies
Initially, the operating companies are typically financed by contributions
of the Company and its partners in the form of equity and shareholder loans.
After the initial stages of development, the Company seeks, where possible, to
secure stand-alone third party financing at the operating company level,
preferably on a non-recourse basis to the Company. Cash requirements of the
Company's operating companies which are not financed by third party financing
are financed by capital contributions and loans of the Company and the other
shareholders of such operating companies. There is no assurance that the
Company's partners will make their required equity contributions in the
operating companies or otherwise meet their financial obligations when due.
The Company's 50% joint venture partner in Chilesat PCS, Telex-Chile, has
been unable to make principal repayments on its outstanding loans and is under
standstill agreements with many of its significant lenders. Thus, the Company
may not be able to rely on Telex-Chile to provide additional capital to Chilesat
PCS when and if needed. The Company expects that Chilesat PCS will have
sufficient cash available to meet its cash needs for operations and network
expansion for the remainder of calendar 1998 via a $35 million short-term cash
facility provided by the Company and vendor financing. The Company believes that
Chilesat PCS intends to meet its cash needs through calendar 1999 via additional
loans and/or equity contributions by its partners and/or conversion of the
short-term debt owed to the Company into equity, additional vendor financing,
the sale of high yield debt to third parties and/or the sale of equity to third
party investors. Long-term cash needs are expected to be met by cash from
operations, vendor financing, borrowings from banks and sales of equity to
third-party investors. As such, it is not currently expected that the financial
difficulties of Telex-Chile should significantly adversely impact the ability of
Chilesat PCS to conduct ongoing operations and network expansion. However, there
can be no assurance that such financing will be obtained or that there will not
be a material adverse effect on ongoing operations and network expansion.
The operating companies have used or intend to use various sources for
their respective funding. Although each of them has relied on equity infusions,
many are or will be highly leveraged. The ability of the
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<PAGE> 59
operating companies to meet debt covenants will be dependent upon their future
performance, which will be subject to prevailing economic conditions and to
financial, business and other factors beyond their control. The ability of the
operating companies to obtain future financings on acceptable terms will be
limited by their leverage and cash flows. In addition, some of the operating
companies will be substantially funded through equipment financing arrangements
from vendors. Such equipment financings will be contingent upon meeting planned
levels of performance and should the operating companies fail to meet such
performance requirements, the related equipment financings could be materially
restricted or terminated.
Currency Fluctuation Risks
The Company reports its financial statements in U.S. dollars. The Company's
principal operating companies function in different currency jurisdictions and
all report in local currencies. Consequently, the Company's results of
operations as well as the value of its ownership interests in its operating
companies or start-up projects will be affected by fluctuations in currency
exchange rates between the dollar and the applicable local currency.
The Company's operating companies are exposed to risk from fluctuations in
foreign currency and interest rates, which could impact each company's
respective results of operations and financial condition. Because many of the
operating companies' contracts with equipment suppliers, including QUALCOMM,
will be denominated in dollars, a significant change in the value of the dollar
against the national currency of any operating company could result in the
increase of the relative cost of such contracts and could restrict such company
from fulfilling certain of its contractual obligations. As a result, any
devaluation in the local currency relative to the currencies in which such
liabilities are payable could have a material adverse effect on the Company. In
some developing countries, including Mexico and Russia, significant devaluations
relative to the U.S. dollar have occurred and may occur again in the future. In
such circumstances, the Company may experience economic loss with respect to its
ownership interests and fluctuations in its results of operations solely as a
result of exchange rate fluctuations.
The Company seeks to reduce its foreign exchange exposure arising from
transactions by matching, where possible, assets and liabilities. There can be
no assurance that the Company will be able to match its assets and liabilities
or otherwise reduce its foreign exchange exposure. In some cases, the operating
companies may borrow in U.S. dollars rather than in local currencies because
such U.S. dollar borrowings are the only funding source available to them at the
time. In such circumstances, the Company has decided, in conjunction with its
partners, to accept the inherent currency risk principally because of the
relatively high cost of buying or the inability to buy forward cover in
currencies of the countries in which the operating companies conduct business.
In general, the Company may elect to enter into hedging arrangements from
time to time in the future, although it is not currently party to any such
transaction and does not have a policy to systematically hedge against foreign
currency exchange rate risks.
Inflation and Deflation
Inflation has had and may continue to have adverse effects on the economies
and securities markets of certain emerging market countries and could have
adverse effects on the operating companies and start-up projects in those
countries, including their ability to obtain financing. Russia, Chile and
Mexico, for example, have periodically experienced relatively high rates of
inflation. The operating companies, where permitted, and subject to competitive
pressures, intend to increase their tariffs to account for the effects of
inflation. However, in those jurisdictions where tariff rates are regulated or
specified in the license, the operating companies may not be able to mitigate
the impact of inflation on their operations. The Company believes risks
associated with deflation have recently increased, particularly given recent
deflation in certain parts of Asia. Significant deflation could have a material
adverse effect on the Company's revenues, profit and overall performance.
While system equipment costs may increase over time as a result of
inflation, the Company expects that the cost of subscriber equipment will
decrease over time although there can be no assurance that this will be
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the case. General operating expenses such as salaries, employee benefits and
lease costs are, however, subject to normal inflationary or deflationary
pressures.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software
programs have been written using two digits rather than four to represent a
specific year. Any computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
As the Company and the Leap Operating Companies have recently begun their
respective businesses, there exists uncertainty as to the impact the Year 2000
issue could have on the Company. The Company does not believe that the Year 2000
issue will significantly impact its administrative and accounting software,
which have been acquired recently or will be acquired. The Company generally
subjects its vendors to Year 2000 compliance requirements in connection with the
Company's acquisitions of software. Also, the Company believes that the Year
2000 issue will not significantly impair the ability of the Leap Operating
Companies' wireless communications networks to perform as intended. The Leap
Operating Companies are expected to have direct or indirect computerized
interfaces to third parties relating to the transmission of telecommunications
traffic over local, national and international telecommunications networks. The
Leap Operating Companies are vulnerable to the failure of such third parties to
adequately address their Year 2000 issues. Such failures, should they occur,
could cause significant disruption to the operations of the Leap Operating
Companies, including the ability to provide certain services and correctly bill
customers, resulting in the potential for revenue loss and increased costs. The
Company is not currently aware of any significant third party problems
concerning the computerized interfaces, but as the Leap Operating Companies have
only recently begun network build-out and commercial activities, they have not
yet completed their assessment of the risk associated with third party
interfaces and the Year 2000 issue. This overall assessment is expected to
continue through December 1998. At that time, the concurrently developed
remediation plan will begin, with an expected completion date of July 1, 1999.
The Company is in the process of developing a risk profile to evaluate all third
parties in regard to their capability to become compliant with Year 2000.
As of the date hereof, the Company has not incurred any material costs in
support of the Year 2000 issue. The Company estimates that it will spend
$500,000 in fiscal year 1999 to review and correct any non-information
technology systems as well as support material third party relationships. The
Company has not developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all
Year 2000 problems in its systems, the systems of the Leap Operating Companies
or third party systems with which the Company or the Leap Operating Companies
will have computerized interfaces in advance of their occurrence or that the
Company will be able to successfully remedy any problems. The expenses
associated with the Company's efforts to remedy any Year 2000 problems, the
expenses or liabilities to which the Company may become subject as a result of
such problems or the impact of Year 2000 problems on the ability of Leap
Operating Companies to do business with the Company could have a material
adverse effect on the Company's business, prospects, operating results and
financial condition.
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects
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that the effect of adoption of FAS 130 may be primarily from foreign currency
translation adjustments and has not yet determined the manner in which
comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its financial statement disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
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BUSINESS
INTRODUCTION
Leap Wireless International, Inc. ("Leap" or the "Company") manages,
supports, operates and otherwise participates in CDMA-based wireless
telecommunications businesses and ventures in emerging international markets and
the United States. Outside of the United States, the Company is currently
operating, managing, supporting or participating in the development of cdmaOne
wireless telecommunications systems in Mexico, Russia, Chile and Australia. Most
of these systems are at an early stage of development, and the Company expects
commercial launch of these systems at various times during 1998 and 1999. The
Company is also pursuing opportunities to provide, manage, support, operate and
invest in additional wireless telecommunications systems in other targeted
United States and international markets offering high growth potential.
Leap was formed in June 1998 by QUALCOMM Incorporated ("QUALCOMM"), a
leading provider of digital wireless communications equipment, technologies and
services. QUALCOMM continues to serve as a major supplier of CDMA subscriber and
infrastructure equipment for the Company's wireless telecommunications
businesses, and the Company expects that QUALCOMM will be a major CDMA
subscriber and infrastructure equipment supplier for future wireless
telecommunications businesses which the Company manages, operates and supports
or in which the Company otherwise participates.
Following the Distribution, QUALCOMM will continue to be a supplier of CDMA
equipment and is expected to provide significant vendor financing to Leap's
wireless telecommunications businesses and ventures. These ongoing relationships
could place QUALCOMM in a position in conflict with Leap with respect to Leap's
businesses and ventures. In addition, QUALCOMM and Leap will be parties to a
number of agreements, including but not limited to a Separation and Distribution
Agreement, a Credit Agreement and a Master Agreement Regarding Equipment
Procurement. Such Agreements contain restrictions on Leap's ability to invest in
other joint ventures.
The Company's wireless telecommunications systems are based on Code
Division Multiple Access ("CDMA") technology, a proprietary integrated software
and hardware system invented by QUALCOMM and used for digitally transmitting
telecommunications signals in a wireless network. CDMA offers a number of
advantages over analog and other digital technologies, including increased call
capacity, higher quality voice and data transmission, fewer dropped calls,
enhanced privacy, lower power requirements and lower system costs. CDMA has been
widely adopted throughout the world, having been commercially deployed or under
development in approximately 30 countries with over ten million commercial
subscribers worldwide, as of March 31, 1998. For purposes of this Information
Statement, "cdmaOne" shall mean those fixed or mobile wireless
telecommunications systems based on or derived from QUALCOMM's CDMA technology
which (i) have been adopted as an industry standard by the Telecommunications
Industry Association ("TIA") or other recognized international standards bodies,
and the adoption of such standard has been voted in favor of by QUALCOMM
("QUALCOMM Approved Standards"), (ii) are compatible with or employ the same
physical layer as QUALCOMM Approved Standards ("QUALCOMM Approved Systems"), or
(iii) are compatible with the infrastructure and subscriber equipment
manufactured and sold by QUALCOMM. CdmaOne currently includes, by way of example
and not by limitation, the TIA's IS-95 digital cellular standard and ANSI
JSTD-008 digital PCS standard. If a terrestrial-based wireless
telecommunications system is considered a cdmaOne system in one country,
QUALCOMM and Leap agree that it would be considered a cdmaOne system in any
other country, irrespective of whether or not such system has been adopted (or
approved by QUALCOMM) as a standard in such other country.
The Company's senior management has many years experience in the wireless
telecommunications industry. A number of the Company's senior management members
have been members of QUALCOMM's senior management and joined the Company from
QUALCOMM in connection with the formation of the Company, including Harvey P.
White, currently Vice Chairman of the Board of QUALCOMM and the Company's
President, Chief Executive Officer and Chairman of the Board; Thomas J. Bernard,
currently Senior Vice President of QUALCOMM, who is the Company's Executive Vice
President; and James E.
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Hoffmann, currently Vice President, Legal Counsel of QUALCOMM, who is the
Company's Senior Vice President and General Counsel. Leap believes its
continuing relationship with QUALCOMM and the other participants in its
operating companies, the experience and expertise of its management team, and
the quality of CDMA and other products and services to be offered by Leap's
operating entities, among other factors, will position Leap to become a
significant provider of wireless telecommunications services worldwide.
The Company operates, manages, supports, operates and participates in its
wireless telecommunications businesses primarily through joint ventures and
strategic alliances with third parties. The Company intends to provide
substantial management and operational support to its wireless
telecommunications businesses, consistent with applicable laws, contractual
arrangements and other requirements, in the areas of system design and planning,
design and development of marketing plans, distribution systems, billing systems
and customer support plans, system launch and roll-out execution and virtually
all other operational functions. The Company intends to provide these services
using its own employees as well as through consultants with substantial
experience in the telecommunications industry. The Company intends to continue
to focus on providing such management and operational support in its future
wireless telecommunications business opportunities.
The Company does not have any operating history as an independent company
and it and each of its wireless telecommunications businesses and ventures are
at an early stage of development. To date, the Company has generated no revenue
from such businesses and ventures, which are expected to incur substantial
losses for the foreseeable future and are subject to substantial risks. Leap has
generated net losses since inception, and will be required to recognize a share
of the start-up operating losses of such businesses and ventures as a result of
the Company's ownership interests therein. The Company's ability to generate
revenues will be dependent on a number of factors, including the future
operations and profitability of the Company's wireless telecommunications
businesses and ventures.
The Company expects to have significant future capital requirements
relating to funding commitments to its wireless telecommunications businesses
and ventures and other general working capital needs. The Company expects to
obtain much of its required near-term financing through borrowings under the
Credit Facility Agreement provided by QUALCOMM. As a result of its capital
requirements, including borrowings under the Credit Facility Agreement, the
Company expects that it will be highly leveraged within twelve months after the
Distribution.
The Company believes that recent changes in the telecommunication industry
have resulted in a growing opportunity to manage, operate and invest in wireless
systems around the world. While older wireless systems had spurred the growth of
cellular networks, the invention of terrestrial wireless CDMA not only improved
cellular systems but also effectively supported fixed wireless with growth in
capacity, coupled with wireline voice quality and lower cost of equipment and
maintenance. So while wireless telecommunications has historically been viewed
primarily as a second phone for the affluent, the Company believes it will
increasingly be viewed as the logical and preferred system for use as a first
and only phone.
As new carriers and/or spectrum opportunities arose for the deployment of
CDMA systems, QUALCOMM was approached from time to time by wireless operators
and others to join new carriers in operating joint ventures in the United States
and abroad. As these ventures have been transferred to Leap, Leap believes that
it has a significant advantage in being already established in the business of
managing, supporting and/or investing in CDMA wireless networks that are being
built out or are in the planning stages of such build out. Leap anticipates that
there will be an increasingly large number of opportunities where new licensees
or expansions of existing licensees will seek help from Leap for operational
support, management and capital. Historically the participation in these
opportunities has been through joint ventures, usually including a local license
holder as well as equipment suppliers, deployment and/or management
organization(s), carriers and financial investors.
Leap intends to continue its strategy of entering into joint ventures to
access new markets and opportunities. Leap expects that it will selectively
focus on a limited number of high-growth opportunities, taking into account its
management and capital resources. Leap plans to focus its operations on areas
where the potential to provide value added services and thereby launch
successful wireless ventures is higher. Leap
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will strive to continue to expand its expertise through the experience gained on
its current and future ventures to become a sought after and more valuable
participant in future joint ventures.
Leap believes that it will not have the opportunity for majority ownership
in many of these operating joint ventures, due to a variety of reasons ranging
from government policy, to investment limitations prescribed by license holders
and/or the desire to bring many parties with diverse experience into a joint
venture. Leap does not believe that the actual ownership percentage of a
participant in such a joint venture is the sole determinant, or necessarily
indicative, of the level of services supplied or the degree of operational or
project management provided. Leap will, generally, plan to have a significant
initial ownership and to be active in the management of all the systems in which
it has an equity interest, consistent with applicable laws, contractual
arrangements and other requirements, even those where the ownership percentage
is relatively small. In addition, Leap's percentage ownership interest will be
reduced as part of the dilution necessary to expand or build out the systems.
From time to time, it may also sell ownership interests as part of a strategy of
returning value to Leap stockholders from the increase in value of the systems
in which it has participated. Such sales are expected to provide funds for
future participation in new projects thereby providing for growth in Leap. It is
anticipated that sales of partial interests in any operation should not affect
Leap's management or operational role with that entity.
Leap's wireless telecommunications operating companies hold licenses to
provide wireless telecommunications services to an aggregate of approximately
198 million potential subscribers as of June 29, 1998. In addition, Leap's
Russian wireless telecommunications operating entity is in the process of
attempting to secure joint ventures with holders of licenses throughout Russia
to provide wireless telecommunications services to up to an additional 128
million potential subscribers. Leap also intends to identify and develop new
opportunities in the United States through the acquisition of frequency
spectrum, or the entering into of reseller agreements for minutes of use,
principally in the PCS bands, and the establishment of new businesses to provide
competitive wireless services in the United States.
Leap expects its operations in Mexico, which recently obtained licenses to
provide nationwide services throughout Mexico, will provide high-quality,
cost-effective cdmaOne wireless telecommunications services to selected markets
within that country beginning in December 1998. In Russia, Leap's subsidiary
QUALCOMMTel is in a joint venture with Tiller International Limited, which joint
venture ("Metrosyvaz") is in the process of entering into other joint ventures
with local telecommunications operators to finance, build and operate wireless
systems in Russia. Leap's operations in Chile are through Chilesat Telefonia
Personal S.A. ("Chilesat PCS"), which holds one of three Chilean PCS licenses
and has a license enabling it to operate a wireless PCS network with a
nationwide footprint. As of August 30, 1998, Chilesat PCS had approximately
3,000 subscribers after two months of operation. In Australia, Leap's wholly
owned subsidiary owns a license to operate wireless telecommunications in eight
regions covering approximately 5.4 million potential customers ("POPs"). In
addition, QUALCOMM and Leap have agreed that, if certain events occur within
eighteen months after the Distribution, certain assets and liabilities related
to TOU will be transferred to Leap. There can be no assurance that such events
will occur or that legal impediments to transfer will be removed, or that
QUALCOMM's interest in TOU will ever be transferred to Leap. The Ukrainian
operating company, Telesystems of Ukraine, is scheduled to commence commercial
operation in Kiev in late 1998 and is anticipated to follow with national
coverage. See "Risk Factors -- International Risks -- Doing Business in
Ukraine."
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The following table summarizes Leap's current joint ventures and other
interests and provides certain information relating thereto:
<TABLE>
<CAPTION>
ACTUAL/
REAL EXPECTED
EQUITY GDP PER LICENSED EQUITY TOTAL EQUITY COMMERCIAL
INVESTMENT LOCATION INTEREST CAPITA POPS POPS SUBSCRIBERS SUBSCRIBERS LAUNCH
---------- ---------- -------- ------- -------- ------ ----------- ----------- ----------
(US$) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAS
Pegaso Telecomunicaciones,
S.A. de C.V.(1)............ Mexico 49%(2) $2,947 99.0 48.5(2) N/A N/A Dec 98
Chase Telecommunications,
Inc........................ Tennessee,
U.S.A. 6.4% 27,175(3) 6.3 0.4 N/A N/A Sep 98
Chilesat Telefonia Personal,
S.A.(4).................... Chile 50% 3,229 14.9 7.5 3,000 1,500 Aug 98
EASTERN EUROPE
QUALCOMMTel/Metrosvyaz/
Orrengrove................... Russia 70%(5) 2,128(3) 20.9(6) 3.7(6) N/A N/A Dec 97 (7)
OTHER MARKETS
Oz Phone..................... Australia 100% 20,062(3) 5.4 5.4 N/A N/A Mar 99
</TABLE>
- ---------------
(1) Leap's holdings are through a wholly owned subsidiary Qualcomm PCS Mexico,
Inc. which in turn owns forty-nine percent (49%) of Pegaso
Telecomunicaciones, S.A. de C.V. Pegaso Telecomunicaciones, S.A. de C.V.
owns three companies, one of which owns the license, one of which owns the
operating assets and operates the business and one of which employs the
personnel.
(2) Leap's interest in Pegaso is expected to be diluted to no less than a 25%
equity interest through new capital raising committed prior to the date of
this Information Statement, and this will reduce the equity POPs to 24.8
million.
(3) Real GDP (Gross Domestic Product adjusted for inflation) is stated for the
country as a whole, although existing licenses cover only a portion of the
country.
(4) Leap's holdings are through a wholly owned subsidiary Inversiones QUALCOMM
Chile S.A. which in turn owns fifty percent (50%) of Chilesat.
(5) Leap's holdings in Russia are through two distinct subsidiaries. Leap holds
a seventy percent (70%) owned subsidiary QUALCOMM Telecommunications Ltd.,
a Cayman Islands company, which in turn owns fifty percent (50%) of
Metrosvyaz Limited, which in turn will own fifty percent (50%)of the
operating joint ventures. In addition, Leap holds a 70% interest in
QUALCOMM Telecommunications Ltd., an Isle of Mann company, which in turn
owns a 50% interest in Orrengrove Investments Limited, which in turn owns a
60% interest in each of the Transworld companies.
(6) Licensed POPs (licenses covering a number of potential customers) and
Equity POPs (licensed POPs multiplied by equity percentage ownership) are
based on those regions for which a letter of intent has been signed as of
June 29, 1998.
(7) The first system in Rostov on Don became operational in December 1997
outside the joint venture. As a result of the formation of the joint
venture, the system is expected to be contributed to the joint venture.
INDUSTRY BACKGROUND
Telecommunications markets are expanding rapidly as countries seek to
increase teledensity and competition among carriers. Often the fastest, most
economical and easiest way to meet these demands is through the implementation
and operation of wireless networks and systems. The number of wireless licenses
and the amount of spectrum allocated to wireless networks are growing rapidly.
Awarding of multiple licenses for fixed and mobile wireless telecommunications
operations to multiple carriers to spur the growth of teledensity and
competition is occurring in many markets. Historically, many countries had just
one government-owned or government-supported wireless carrier, but many of these
nations now have multiple regional carriers. These changes create the need to
provide both the capital to build out these new (largely wireless) systems and
the expertise to oversee and manage their entry into these competitive markets.
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There exists significant demand for high-quality wireless
telecommunications systems in more developed international markets as well. In
many such countries, telecommunications systems have been closely regulated by
local governments, and licenses to provide services have been largely
unavailable. Decreased government regulation, and active solicitation of new and
better services through auctions of licenses, have created opportunities for
local and foreign providers to capture market share. Such opportunities have
been recognized in many countries, including those where Leap has operations.
CDMA. Wireless telecommunications service is currently available using
either analog or digital technology. Although more widely deployed than digital
technology, analog technology has certain significant limitations. Digital
wireless telecommunications systems overcome the capacity constraints of analog
systems by converting voice or data signals into a stream of digits that is
compressed before transmission, enabling a single radio channel to carry
multiple simultaneous signal transmissions. This increased capacity, along with
enhancements in digital protocols, allows digital-based transfer systems to
offer new and advanced services including greater call privacy, fraud
protection, higher voice quality, single number service, integrated voice and
paging and enhanced wireless data transmission services such as e-mail,
facsimile and wireless connections to computer networks.
The primary digital technologies available for wireless fixed and mobile
applications are CDMA and Time Division Multiple Access ("TDMA"). TDMA has been
deployed in three variations including Global System for Mobile Communications
("GSM"). A form of TDMA has been adopted as a standard for cellular and PCS in
the U.S. and GSM has been adopted as a standard for PCS in the U.S. and for
cellular and PCS in Europe, Asia and certain other markets. CdmaOne is the
original standard for mobile wireless telecommunications systems based on or
derived from QUALCOMM's CDMA technology and successor standards that QUALCOMM
has adopted. CdmaOne has been adopted as an industry standard by the TIA and
other recognized international standards bodies. In July 1993, the TIA adopted a
North American standard (TIA/EIA/IS-95) for cellular telecommunications based on
QUALCOMM's CDMA technology. In April 1995, QUALCOMM's CDMA technology was
approved as a standard for PCS, which is expected to be published as ANSI
standard J-STD-008. Wireless networks based on QUALCOMM's CDMA technology are
commercially deployed or are under development in over 30 countries around the
world.
From an economic standpoint, CDMA technology provides cost savings in
initial capital investment and over the life of the network because of its
capacity and coverage advantages. CDMA networks cost less to design and engineer
than other types of wireless systems, making them easier to reconfigure and
expand. CDMA provides 10 to 20 times the capacity of analog wireless
technologies, and more than three times the capacity of other digital
technologies, enabling service providers to support more subscribers and greater
volumes of wireless traffic within a given amount of radio frequency spectrum.
CDMA networks require fewer cell sites than other wireless technologies to cover
a given area. With fewer cell sites, service providers can reduce their initial
capital expenditures as well as their ongoing operational and maintenance costs.
In addition, CDMA is the only wireless technology that effectively supports both
fixed and mobile services from the same platform, supporting two sources of
revenue and providing a rapid, cost-effective means to respond to dynamic market
requirements. From a performance standpoint, consumers benefit from improved
voice and call quality, longer phone battery life, better coverage and fewer
dropped calls, and the security afforded by digital coding techniques.
CDMA is an open standard with many manufacturers who produce CDMA network
equipment, providing a wide choice in suppliers, competitive equipment pricing
and continued product developments. The developer and licenser of CDMA,
QUALCOMM, continues to maximize the performance of the technology across its
broad CDMA product lines, and is a leader in the advancement of the CDMA
standard and CDMA equipment. Ongoing enhancements have decreased costs and
increased performance of CDMA systems.
CdmaOne is evolving to support new features and services such as higher
speed data and exponentially more capacity. The community of CDMA manufacturers
has demonstrated widespread commitment to evolve this technology to the next
generation of systems. The Company believes that by deploying cdmaOne networks,
service providers are well positioned to migrate their networks from the current
to the next generation of networks. As a result, Leap is committed to managing
networks utilizing CDMA technology and
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has established a relationship with QUALCOMM that provides a framework for
obtaining and financing infrastructure and subscriber equipment.
Leap's Markets. The following information relates to certain of Leap's
existing international markets and reflects recent growth and the current
wireless penetration in the regions:
Latin America. Latin America has a population of nearly 450 million
people. Current wireless penetration in all Latin American markets is
approximately 2%, and industry reports estimate penetration will grow to 5%
by 2001. The total Latin America subscriber base is currently estimated to
be 6 million people, and is expected to grow to approximately 20 million by
2001. Mexico is one of the most important markets for wireless services in
Latin America with 96 million POPs and a significant urban population.
Chile has a population of 15 million people and current wireless
penetration of approximately 4%.
Asia-Pacific. It is estimated that there were approximately 41 million
wireless subscribers in the Asia-Pacific region, including Australia, at
the end of 1996, an increase of 97.4% over 1995. Future subscriber growth
is forecast to average 25% per year, bringing the total subscriber base to
approximately 127 million by 2001. Australia has a population of
approximately 18.7 million people. Australia has 51% teledensity and 23%
wireless penetration as of 1997. Subscriber growth for cellular phones in
Australia was approximately 90% during 1996 and it is expected to increase
an average of 12% per year through 1999.
Russia. Teledensity in Russia in 1997 was approximately 18%, with
wireless penetration of just 0.5%. The teledensity growth rate is expected
to be approximately 2.5% annually over the next four years.
United States. Recent increased demand for wireless telecommunications
in the United States has been driven by technological advancements and
increased competition. Wireless communication products and services have
evolved from basic tone-only paging services to mass-market cellular
services and since late 1996, digital PCS services. Each new generation of
wireless communication products and services has generally been
characterized by improved product quality, broader service offering and
enhanced features. As of December 31, 1997, wireless penetration in the
United States was estimated by industry sources to be 22% and is expected
to grow to 54.1% by 2006 for a compounded annual growth rate of 10%. As
reported by industry sources, the compound annual growth rate of wireless
subscribers exceeded 41% from 1990 through 1997. At the end of 1997, there
were 57.2 million wireless subscribers in the U.S., up from 5.0 million in
1990. Industry sources are projecting 163.1 million wireless subscribers in
2007, of which 55.8 million would be PCS subscribers, up from only 2.9
million subscribers at the end of 1997, for a compounded annual growth rate
of 34.4%. As subscriber numbers have grown, average revenues per subscriber
have fallen but the wireless industry has still experienced a corresponding
growth in total service revenues.
CORPORATE STRATEGY
Leap's strategy is to build an operating entity that provides management
and project expertise and selectively invests in and manages joint ventures and
other collaborative efforts to provide cdmaOne wireless telecommunications
services in telecommunications markets with significant growth potential. The
Company believes its experience, technical and commercial expertise, and access
to equipment and technology will benefit the Company and the entities in which
it invests. Elements of the Company's strategy include:
Focus on Growth Markets. The Company will continue to invest in entities
that serve or intend to serve the United States and international markets in
which Leap's contributions could most likely result in added value and
contributions to an enterprise that captures significant market share. Leap's
equity interests in Russia are examples of the Company's plan to invest in
developing countries and provide wireless service to markets without significant
wireline penetration. Joint ventures and equity interests in Australia, Chile
and Mexico are consistent with the Company's strategy of obtaining licenses in
markets where such licenses were previously unavailable or more limited in
number and scope. Leap's United States equity interest is in a company with an
opportunity to provide wireless services to help meet continued increases in
demand and facilitate a continuing transition from wireline to wireless
networks.
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Actively Participate in Operating Company Management. The Company intends
to exercise significant management influence and oversight over its joint
ventures and equity interests. Leap believes its experience, business
relationships and other factors enable it to add value to its joint ventures and
equity interests and increase its operating companies' performance and
likelihood of success. Wherever possible, Leap secures the right to appoint or
nominate management personnel. Leap also generally seeks representation on the
Boards of Directors of its operating companies. Moreover, Leap has entered into
contractual arrangements with its operating companies to provide financing
and/or services, and has played a significant role in the development of its
operating companies' business plans and objectives.
Leverage Management Experience and Expertise. The Company's management team
consists of individuals with substantial experience collectively in the wireless
communications industry, including experience with large, international
deployments of networks and services. Moreover, Harvey P. White, Thomas J.
Bernard and James E. Hoffmann have played a significant role in the rapid growth
of QUALCOMM, the development and standardization of QUALCOMM's CDMA technology
and the formation of the Leap joint ventures. Leap believes the experience and
expertise of its management team enables it to add significant value in its
relationships with operating companies.
Leverage Strategic Alliances. Leap has developed strong relationships with
telecommunications and other companies including those with which it has jointly
invested. In securing an investment partner, Leap seeks an entity that can
provide familiarity with local markets, or an ability to facilitate development
in a particular market, or other necessary features of a successful
network-building enterprise. The Company intends to cultivate its existing
relationship with its co-investors in various markets in order that each
investor can contribute to the success of a particular operating company, in the
areas of operations, management, technology and others. The Company also intends
to continue to search for strategic partners with whom it can invest in new
enterprises supported by a wide range of expertise and available resources. The
Company seeks to ensure that its strategic alliances enable it to better prepare
and equip its operating companies for successful development.
Leverage QUALCOMM Relationship. The Company's operating companies are
comprised principally of joint ventures in which QUALCOMM became a partner
during the past two years. Following the Distribution, the Company will have a
close relationship with QUALCOMM that it believes helps position the Company as
an attractive partner that can help an operating company succeed. Leap believes
that its relationship with QUALCOMM will provide it with competitive advantages
in identifying, qualifying for and participating in international
telecommunications joint ventures on terms and conditions that are mutually
beneficial to both companies. Leap also expects to have certain access to
technical expertise and experience of QUALCOMM and its employees and affiliated
entities, through its relationship under the Equipment Agreement and QUALCOMM's
ongoing relationship with the Leap Operating Companies under equipment and other
agreements. QUALCOMM will commit approximately $265 million to the Company by
way of the Credit Facility. Leap and QUALCOMM will also enter into the Equipment
Agreement pursuant to which QUALCOMM will have the right to provide its CDMA
equipment to certain of Leap's existing and future operating companies. QUALCOMM
also has existing contracts to supply and finance equipment, and other
contractual relationships, with Leap's initial operating companies. The Company
intends to leverage its relationship with QUALCOMM to take advantage of the
success of QUALCOMM and its CDMA technology, by continuing its business
activities with QUALCOMM and facilitating relationships between QUALCOMM and its
operating companies.
Build Industry-Leading Networks. The Company's wireless networks are and
will be designed utilizing QUALCOMM's CDMA technology. The Company intends its
operating companies to build high-quality, industry-leading networks that
provide state of the art services and sophistication. The Company believes
QUALCOMM's CDMA technology allows the operating companies to offer
cost-effective, high quality telecommunications services, integrate advanced
feature functionality and provide advanced services that make such companies'
offerings attractive to end-users. The Company believes this gives it an
advantage over competitors utilizing competing technologies in terms of cost to
deploy and operate networks, spectral efficiencies, improved service offerings
to customers and enhanced voice quality, privacy, fraud protection and fewer
dropped calls.
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LEAP OPERATING COMPANIES
Leap's operating companies consist of joint ventures and other entities
around the world. The joint ventures are described below in order of their size
and the perceived opportunity for Leap to carry out its strategies.
PEGASO TELECOMUNICACIONES, S.A. DE C.V. AND PEGASO COMUNICACIONES Y
SISTEMAS, S.A. DE C.V., MEXICO
General. The Company holds an interest in Pegaso Telecomunicaciones, S.A.
de C.V. ("PEGASO"), a joint venture formed for the purpose of obtaining
telecommunications licenses and constructing a wireless telecommunications
network in the United Mexican States ("Mexico"). In May of 1998, Pegaso
Comunicaciones y Sistemas, S.A. de C.V., a wholly-owned subsidiary of PEGASO,
acquired nationwide PCS licenses in the 1.9GHz frequency bands in Mexico at a
price of US$2.88 (based on an exchange rate of 9.2 Mexican pesos to one U.S.
dollar, the exchange rate in effect on August 19, 1998) per POP. There is a
legal challenge in Mexico to the constitutionality of the government's transfer
of the frequency licenses. Neither the Company nor any Leap Operating Company is
a party to the litigation, and the Company believes that the challenge will not
have a material adverse effect on Leap and the Leap Operating Companies taken as
a whole. The Company has an agreement to provide operating services to PEGASO.
The current plan is to commence construction in Mexico City, Monterrey,
Guadalajara and Tijuana as the first phase. It is expected that PEGASO's network
in these cities will be in initial commercial service by mid-1999 and will be
followed shortly thereafter by construction in up to 61 additional cities. There
can be no assurance that PEGASO will be able to complete such construction
projects for the amount budgeted or on a timely basis. The opportunity to assist
in the license acquisition, financing, design, construction and operation of a
new wireless cdmaOne system in an area previously underserved makes Leap's
Mexico operation a blueprint for future Leap joint venture opportunities. In
bidding for its licenses, PEGASO agreed to provide coverage, within a period of
three years, beginning from the granting of the license, to most counties or
political delegations in which at least 20% of the total population of the
subject licensed region resides. PEGASO further committed that most counties or
political delegations with at least 50% of the total population of the
applicable licensed region would be covered within five years.
Market Opportunity. The Mexican government recently auctioned four
additional licenses in each region of Mexico to allow additional competition in
the mobile wireless market. Leap and its partners recognized the opportunity to
become involved with a CDMA nationwide network given the expansion of the
Mexican economy and the currently low penetration levels of telecommunications
services in the country. Mexico's population of approximately 99 million people
is approximately 70% urban with approximately 50% living in the three largest
cities. Mexico's real GDP per capita in 1997 was $2,947 with a teledensity of
approximately 9.4%. The cellular penetration was only 1.6% at the end in 1997.
Strategic Partners. In addition to the Company's interest, Pegaso
Comunicaciones y Servicios, S.A. de C.V. ("Pegaso S.A. de C.V.") and Corporativo
del Valle de Mexico, S.A. de C.V., an affiliate of Grupo Televisa S.A.
("Televisa") (collectively the "Consortium") have interests in PEGASO. Televisa
is the largest media company in the Spanish-speaking world and is a major
participant in the international entertainment business. Leap management
believes the Consortium's strong financing resources, as well as its political
access in Mexico, provide PEGASO critical skills and relationships for assisting
the network build-out and in marketing and distributing PEGASO's wireless
services.
Leap Rights and Interests. Leap, through a wholly-owned subsidiary,
currently owns a 49% interest in PEGASO and has committed to invest $100 million
of the $400 million of capital committed by all members of the joint venture and
ultimately will have a 25% equity interest in such joint venture. Once all
committed capital has been contributed to this venture, Leap, Pegaso S.A. de
C.V. and Televisa will hold approximately 27%, 29% and 20% of the voting shares,
respectively. Under the joint venture agreement with PEGASO, Leap has a
contractual right to elect two of nine directors for so long as Leap owns 15% or
more of the equity. Such agreement also establishes significant supermajority
rights that are expected to give Leap significant control over the actions of
PEGASO. Leap is under contract with PEGASO to provide operator services to
PEGASO and expects to subcontract many of those services to GTE. GTE is one of
the world's largest publicly traded international telecommunications operators
with investments and operations in the United States and many other parts of the
world.
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Capital Requirements and Projected Investments. The license acquisition and
build out of the national operating system and the initial working capital will
require a financing of approximately $1 billion to $1.4 billion. To date, the
members of the joint venture, including Leap, have obtained commitments for
equity capital of approximately $400 million, including Leap's $100 million
equity investment. In addition, the members of the joint venture are working
with investment bankers to complete an approximately $200 million high yield
debt financing and a $200 million bank financing, although there can be no
assurance this financing will be obtained. There are preliminary commitments
from vendors, including QUALCOMM, to provide between $250 million and $500
million in vendor financing. In addition, PEGASO is negotiating a long-term
contract with GTE with respect to the initial startup and operations of PEGASO
and to make a material equity investment.
Regulatory Environment. After the passage of the Ley Federal de
Telecomunicaciones (Federal Telecom Law), which came into effect on June 8, 1995
(the "1995 Law"), Mexican PCS/WLL auctions started on November 17, 1997. The
Comision Federal de Telecomunicaciones ("COFETEL") offered four licenses in the
1.9GHz band (PCS) and four licenses in the 3.4GHz band (WLL). PEGASO
successfully purchased nationwide PCS licenses in the auctions, each with a term
of 20 years. The Secretaria de Comunicaciones y Transportes ("SCT") is the
government ministry responsible for regulating the telecommunications sector and
licensing new competitors, while COFETEL is the independent authority
specifically charged with promoting and supervising the deregulation of Mexico's
telecom sector. Modeled after the U.S. Federal Communications Commission,
COFETEL was created by the 1995 Law. The 1995 Law provides the underlying basis
for telecom competition in Mexico. The 1995 Law is designed to provide a
pro-competitive regulatory environment in the Mexican wireless services market.
It is also intended to outlaw cross subsidization of concessionary and
competitive services and provides that concession and permit holders for public
wireless service may not receive subsidies or preferential treatment from other
telecommunications concessions.
Mexico's existing cellular market has a regulated duopoly. Telmex, the
government telecommunications operator, is required by the 1995 Law to
interconnect competing cellular operators to the landline public switch
telephone network. Interconnect agreements are supervised and approved by the
SCT. While cellular tariffs are no longer regulated by the SCT, rates must still
be registered with the SCT. Mexico currently restricts foreign voting ownership
of telecommunications networks and services to 49%.
Competition. Mexico's current cellular market is divided into nine regions
with a regulated duopoly in each of the regions. There are currently seven
cellular telephone operators in Mexico: Telcel, Iusacell, Norcel, Portatel, Baja
Cellular Mexican, Movitel and Cedetel. As a result of the recent auctions, the
following wireless operators, in addition to the Company, have entered the
Mexican PCS market: SPC; Midicell; Grupo Hermes; Dipsa; and Iusacell.
Furthermore, the local access market has been liberalized and new providers of
local service are in the process of being licensed.
Currently, the largest cellular operator, Telcel, a subsidiary of Telmex,
is the Band A national cellular operator and covers all nine regions with a
subscriber base of approximately 1.1 million subscribers. In the auctions,
Telemex, through its subsidiary Dipsa, has acquired an additional nationwide
10MHz PCS license. Iusacell is the second largest cellular operator in Mexico,
covering four regions, including Mexico City and Guadalajara. However, even
after acquiring two 10MHz PCS licenses at the auctions, Iusacell does not have
licenses in regions II, III and V (VIII for cellular license) such that it would
have a nationwide footprint. SPC purchased a nationwide 30MHz PCS license.
Midicell and Grupo Hermes have both purchased PCS licenses, but do not hold such
licenses in all nine regions. The other existing cellular operators, primarily
those bordering the U.S., are run by operators significantly owned by Motorola.
QUALCOMM TELECOMMUNICATIONS LTD., RUSSIA
The Company holds a 70% interest in two companies which both have the name
QUALCOMM Telecommunications Ltd. The first of such companies is a company
organized under the laws of Cayman Islands ("QUALCOMMTel Cayman") and is a joint
venture partner in Metrosvyaz Ltd. ("Metrosvyaz"). Metrosvyaz was formed to
develop joint ventures with local Russian telecommunications operators (the
"Joint Ventures") for the formation, development, financing and operation of a
wireless local loop (fixed) telephone
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services in the Russian Federation. Many local operators are currently licensed
to operate wireless systems in Russia. Partnerships are being used to facilitate
the implementation of such operations. Metrosvyaz expects to partner with local
operators to offer the regional telephone companies and other licensed
telecommunications operators a local solution, including financing, for the
delivery of wireless telecommunications systems in their regions. Metrosvyaz
hopes to obtain approximately ten million new wireless local loop lines through
the Metrosvyaz Joint Ventures during the five years following the Distribution.
There can be no assurance that Metrosvyaz will successfully obtain such wireless
local loop lines. Nine such Joint Ventures have been formed or are in the
process of being formed as of August 20, 1998. Metrosvyaz expects to own 50% of
each such Joint Venture. Two of QUALCOMM's original customers that had begun
CDMA wireless local loop services with equipment provided by QUALCOMM prior to
the organization of the Joint Venture are expected to transfer their current
operations to a Joint Venture. The Joint Ventures are expected to provide local
telephony services to subscribers on the basis of a commercial agency agreement
with the relevant local licensed company. Long distance and international
traffic are expected to be carried by Tass Loutch Telecom, a company organized
under the laws of the Russian Federation and the holder of one of two licenses
for international and long distance telephone services in Russia. Tass Loutch
Telecom currently has agreements in place to transmit long distance traffic.
Tass Telecom has agreed to represent Metrosvyaz as its agent in connection with
establishing the Joint Ventures and is being paid a commission based upon
subscriber lines sold to the Joint Venture.
In addition, Leap will hold an interest in QUALCOMM Telecommunications
Ltd., an Isle of Man company ("QUALCOMMTEL Isle of Man"), which in turn owns an
interest in Orrengrove Investments Ltd. ("Orrengrove"). Orrengrove currently
holds a 60% interest in three related companies (the "Transworld Companies") one
of which is the 50% owner of Tass Loutch Telecom. One of the Transworld
Companies, through a subsidiary, intends to implement a long distance network in
Russia consisting of earth stations deployed in various regions of Russia. The
long distance network has been designed to work in conjunction with satellite
services being provided by another Transworld Company to Tass Loutch Telecom.
This network is intended to be used by Tass Loutch Telecom to offer long
distance and international telephone services in Russia to local operators.
The Company contemplates that the Transworld Companies and the Joint
Ventures will enter into cooperative arrangements following the Distribution,
pursuant to which Tass Loutch Telecom will carry long distance and international
traffic generated by the Joint Venture's wireless local loop operations.
Market Opportunity. The Company believes that the Russian Federation market
represents a significant CDMA service market opportunity. Russia currently has a
population of approximately 149 million people with a teledensity of only 18%.
Recently, the Russian telecommunications authorities announced that they intend
to add 30 million additional subscriber lines of fixed service over the next
ten-year period. To that end, more than 50 CDMA licenses have been granted to
existing Russian PTT's and some private carriers. Russia's current population is
approximately 73% urban. Russia's rural GDP per capita in 1997 was $2,128. The
cellular penetration was only 0.5% at the end of 1997 with very little wireless
local route service.
Strategic Partners. The 50% of Metrosvyaz and the 50% of Orrengrove not
owned by the respective QUALCOMMTel organizations are owned by Tass Telecom, a
holding company affiliated with Itar Tass, the official news agency of the
Russian Federation. The 30% of each of the QUALCOMMTel entities not owned by the
Company are held by Tiller International Ltd. ("Tiller"), a private investment
company, with telecommunications interests in Russia and significant contacts
with Russian telecommunications regulators and regional operators.
Company Rights and Interests. The Company holds a 70% interest in each of
the QUALCOMMTEL entities. QUALCOMMTel Cayman owns a 50% interest in Metrosvyaz,
organized in 1997, a joint venture with Tass Telecom. The Company holds a 70%
interest in QUALCOMMTel Isle of Man, which in turn owns a 50% interest in
Orrengrove. Orrengrove was organized in 1998 and also is a joint venture with
Tass Telecom. In each of Metrosvyaz and Orrengrove, the parent company has a
right to elect four of nine Directors with Tass Telecom also having a right to
elect four Directors. The ninth director will be jointly elected by the
respective QUALCOMMTel entity and Tass Telecom. In addition, each of the
QUALCOMMTel entities
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has agreed to cause one of the Directors to be elected by it to be a
representative of Tiller. Leap has a right to elect four of seven Directors of
each of the QUALCOMMTel entities and Tiller has the right to elect the remaining
three Directors.
The Company intends to play a significant role in the operation of
Metrosvyaz as the implementation and rollout of the Joint Venture companies are
initiated. The Company intends to provide oversight and direct support for the
services in areas including marketing, distribution, customer care, billing and
service initiation. The expertise of Leap's management will be applied (through
Metrosvyaz) to assist the Joint Venture operators in managing successful system
launches. Leap also intends to play a significant role in the implementation and
rollout of the operations of the Transworld Companies, including construction,
marketing, distribution, customer care, billing and service implementation.
Capital Requirements and Project Investments. The Company and Tiller (by
way of a loan from the Company) are expected to invest an aggregate of $3
million in QUALCOMMTel Cayman, which in turn is expected to invest $3 million in
Metrosvyaz. QUALCOMMTel Cayman, the Company and QUALCOMM have agreed to be
responsible for providing or procuring financing for Metrosvyaz, on and subject
to terms to be agreed and without the need for any direct guarantee from Tass
Telecom or Tiller, up to an aggregate amount of $500 million to be invested in
stages, the first of which is a loan agreement for the provision of $175 million
from QUALCOMM. Metrosvyaz has agreed to purchase from QUALCOMM all of its CDMA
equipment necessary to implement the Joint Ventures. Leap expects to loan
Metrosvyaz approximately $55 million prior to December 1999. Metrosvyaz will
require approximately $8 billion of capital over a ten-year period in order to
provide the ten million lines targeted by Metrosvyaz management.
Leap has invested $51.8 million in Orrengrove in the form of a promissory
note. Approximately $44 million of this sum is expected to provide the initial
funding required for the buildout of two additional earth stations. The
Transworld Companies will require additional loans or equity to complete the
buildout of the nationwide long distance service.
There can be no assurance that either Metrosvyaz or the Transworld
Companies will be able to obtain the additional financing required.
Regulatory Environment. The Russian Ministry of Communications is
responsible for regulation and oversight of the telecommunications sector.
Improving and maintaining the installed infrastructure are principal objectives
of the Ministry of Communications in Russia. Deregulation and privatization of
the telecommunications industry is occurring throughout the country. One
company, Svyazinvest, a partially state-owned company with foreign investors,
controls the majority of the voting interest in Russia's 89 regional PTT's. CDMA
is currently only being used for wireless local loop in Russia. The Company
believes that CDMA will, in the future, be made certified for mobility in the
Russian Federation.
Competition. Most of the targeted operators with whom Metrosvyaz expects to
enter into joint ventures agreements are established, government-owned,
telecommunications companies in the various regions of Russia. The competition
with the Joint Venture in most of the regions will be primarily with wireline
services operated by the local partner of the Joint Venture. In some larger
cities, however, including Moscow and St. Petersburg, there is meaningful
competition from private cellular operators. In the long distance area, the
principal competition will be from Rostelecom, the established long distance and
international carrier.
CHILESAT TELEFONIA PERSONAL, S.A., CHILE
General. Chilesat Telefonia Personal, S.A. ("Chilesat PCS") is a joint
venture company in which Leap holds a 50% interest. In 1997, Chilesat PCS
acquired a nationwide license to offer PCS services in Chile. Chilesat PCS'
partners promptly began the design and development of a nationwide cdmaOne
system provided and financed by QUALCOMM. Currently, a system covering most of
Chile is ready for operation. The balance of the national network is expected to
be completed not later than November 1998. Chilesat PCS began limited commercial
operation in July 1998 and has approximately 3,000 subscribers as of August 30,
1998. Chilesat expects to have approximately 20,000 subscribers through a
controlled initial startup phase by the end of 1998 although there can be no
assurance these goals will be met.
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Market Opportunity. Chile is considered by many to be a technology leader
in Latin America. It has a stable economy and a regulatory environment that is
friendly to foreign investors. Chile has a population of approximately 15
million people. In excess of 70% of the population is concentrated in the center
of the country in the Santiago and Valparaiso regions. Current teledensity is
approximately 15.5%. The real GDP per capita is $4,360. Currently there are
approximately 600,000 PCS and cellular subscribers and approximately 2,800
wireless local loop subscribers in Chile, reflecting a wireless penetration of
approximately 4%.
Strategic Partner. A 50% interest in Chilesat PCS is owned by Telex Chile
and its operating affiliate Chilesat S.A. Chilesat S.A. is the third largest
international long distance operator in Chile. Certain of Chilesat PCS's site
leases are leased or subleased from Telex Chile. Telex Chile is currently
operating under a stand-still agreement with many of its significant lenders
because Telex Chile is unable to make principal reductions in its outstanding
loans as required under its credit facility with such lenders. Thus, there can
be no assurance that Chilesat PCS will be able to rely on Telex Chile or its
affiliates to make additional capital contributions to Chilesat PCS when and if
needed, or maintain site leases. See "Risk Factors -- General Risks -- Joint
Ventures."
Leap Rights and Interests. Leap holds 50% of the stock of Chilesat PCS
through an equity class that has a liquidation preference over the shares held
by Telex Chile and its affiliates. Each of the major partners is entitled to
elect two of the five directors of Chilesat PCS and Leap is entitled to nominate
the chief financial officer. Leap expects to offer Chilesat PCS management
expertise on deployment, marketing, back office and customer care issues. If the
short term loans described below are not repaid on or before January 31, 1999,
Leap will have the right to convert such loan into equity in Chilesat PCS and
thereby increase its voting shares to approximately 65%. In addition, a
Subscription and Shareholders Agreement provides a substantial list of items
which require a super majority vote, further extending Leap's right to be
involved in the management of the Chilesat PCS.
Capital Requirements and Projected Investments. To complete the nationwide
system and successfully launch service, Leap estimates that Chilesat PCS will
require a total financing of approximately $202 million, including the in-kind
contributions made by Telex Chile described below. Chilesat PCS was initially
capitalized with a $42 million cash contribution from QUALCOMM, a contribution
of the PCS license (valued by the parties at $28 million) and an 11.5 year right
to use a nationwide backbone network from Telex Chile (valued by the parties at
$14 million). A vendor forbearance to finance a full build-out of the system,
including reasonable expansion following the initial rollout, was provided by
QUALCOMM with a cap of $59.5 million. In addition, QUALCOMM has committed to
provide three year handset financing of up to $25 million. Due to delays in
startup and cost overruns, Chilesat PCS has an additional requirement for
working capital through the end of 1998 of approximately $35 million. QUALCOMM
and its affiliates have committed to provide these loans on a short term basis
and Leap expects that additional capital contributions from the shareholders
will be required to take out this loan facility and to facilitate additional
commercial loans to complete the negative cash flow associated with the startup
operation. These short-term loans will be transferred to Leap.
The approximately $35 million of loans from QUALCOMM will be convertible
into common equity that would provide control of Chilesat PCS to Leap following
the conversion. This conversion is available to Leap only if the loans are not
repaid on or before January 31, 1999. It is currently contemplated that there
will be an additional $35 million capital call in approximately December of 1998
which may be used to repay the convertible loan or to provide for additional
operating expenses. If Telex Chile makes at least a $17.5 million cash capital
contribution before January 31, 1999 pursuant to such capital call, Leap has
committed to convert $17.5 million of the short-term loans to equity as its
match to the Telex Chile contribution.
Regulatory Environment. The Subsecretaria Telecomunicaciones regulates the
basic telecommunications network in Chile. In April 1997, Subsecretaria
Telecomunicaciones awarded the three licenses for 1900MHz mobile operations in
Chile. In addition, there are three major cellular operators currently licensed
by the government. The regulatory environment in Chile is considered to be
stable, reliable and neutral to foreign investment. It is believed that the
regulatory environment will not present impediments to an effective
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marketing plan, pricing or operations in Chile. Licenses and interconnections
have been received and are in place.
Competition. There are currently three major operators of cellular
services, including CTC/StarTel, Bell South and Entel Cellular. Bell South and
Entel Cellular have set up reciprocal roaming agreements because Bell South
operates in central Chile, whereas Entel operates in the balance of the regions.
Through this arrangement, each is able to provide nationwide coverage. Combined
they are expected to have approximately 220,000 subscribers in 1997. CTC/StarTel
had approximately 200,000 subscribers in 1997. In addition, two additional PCS
licenses were awarded to affiliates of Entel. Entel launched its commercial PCS
service using GSM technology in March of 1998 and currently has approximately
210 base stations deployed throughout Chile.
CHASE TELECOMMUNICATIONS, UNITED STATES
General. Chase Telecommunications, Inc., a Delaware corporation ("Chase"),
was the winning bidder for eleven wideband personal communications service C
Block licenses and now holds 15MHz (as a result of voluntarily disaggregating
half of its C Block spectrum) of spectrum covering approximately 6.3 million
POPs in the Tennessee region with coverage of about 98% of Tennessee. Major
markets include Nashville, Memphis, Knoxville and Chattanooga. Chase was the
sixth largest winner in the PCS C Block auction. Unlike the other Leap
opportunities, Chase involves an investment by Leap of a relatively small amount
of equity capital at this time and does not entail any significant involvement
by Leap in the management of Chase. Limited involvement is required in this
instance by the FCC regulations relating to ownership and control of C block PCS
license holders.
Chase has begun designing and building the cdmaOne wireless
telecommunication network that will serve its licensed areas. It has completed
its system design and base station site selection process on a majority of its
Chattanooga base station sites and has commenced network construction. Chase is
expected to complete its Chattanooga build-out in time to launch service in the
fourth quarter of 1998, which is expected to make Chase the first PCS provider
in the Chattanooga area. Chase has also begun design of its Nashville, Knoxville
and Memphis networks and expects to launch services in these metropolitan areas
in the first half of 1999. Chase acquired its PCS licenses through the FCC C
Block spectrum auctions in 1996 and has benefited from both favorable government
financing terms on the auction price and a 50% reduction in the aggregate
principal amount due as a result of the subsequent C Block restructuring in
which Chase elected to disaggregate 15MHz of its 30MHz of spectrum in each of
its markets.
Market Opportunity. Chase presented Leap an opportunity to break into the
competitive United States markets with a relatively small investment. Chase's
Nashville, Memphis, Knoxville and Chattanooga markets account for approximately
4.6 million of Chase's approximately 6.3 million POPs. The state of Tennessee is
situated in the heart of the growing Southeast with a diverse economic base
including manufacturing, services, retail and wholesale trade, transportation,
finance and agriculture. Tennessee has experienced strong population and
economic growth over the period from 1991 to 1996. In addition, Tennessee's
median household income grew at the second highest rate in the United States
between 1992 and 1994 and at 129% of the national average from 1991 to 1996.
Tennessee continues to attract people and businesses due to its low state excise
and franchise taxes and lack of both personal income tax on earned income and
property tax. Tennessee's job growth was 125% of the U.S. average from 1991 to
1996 and continues to present strong growth for small and mid-sized business.
Strategic Partners. Chase was founded by Tony Chase, formerly the chairman
and CEO of Faith Broadcasting Corporation which operates radio communications
licenses in several major markets in Texas. In addition, Chase has established
strong strategic relationships with QUALCOMM, as an equipment supplier.
Leap Rights and Interests. Leap holds a 6.4% interest in Chase. Leap does
not have a right to board representation or to otherwise participate in
management to any material degree. Leap does expect that the expertise Leap has
in CDMA deployments and network operations will be utilized by Chase.
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Capital Requirements and Projected Investments. The business plan for
building out and launching the entire region requires Chase to raise in excess
of $250 million. Chase has twice attempted and failed to raise high yield debt
in the public market. The current strategy involves a plan to deploy an initial
system in Chattanooga to demonstrate the viability of the Chase business plan
before again seeking to enter the high yield debt market. The current plan
involves QUALCOMM providing to Chase an additional $22 million in vendor
financing and Leap providing $25 million in working capital financing, which is
expected to be sufficient to allow Chase to complete the build-out and startup
of the Chattanooga system. As a result of these interim financings, Leap will
hold warrants to acquire up to approximately 5.6% of the Chase equity. After the
Chattanooga build-out is complete, it is expected that Chase will again need to
seek high-yield debt in the public market and, upon successful completion of
such an offering; the Company expects QUALCOMM will expand its vendor financing
to $130 million; and Leap has committed, subject to certain exceptions, to
convert the working capital loan into $25 million of senior unsecured notes in
Chase.
Regulatory Environment. In maintaining its PCS licenses, Chase is required
to comply with numerous FCC requirements, including qualifying as "small
business" to receive the bidding credits towards the purchase of its PCS
licenses and entitling Chase to the government financing of these licenses. If
Chase seeks to assign or transfer control of its licenses to an entity not
satisfying the small business requirements or that qualifies for lower bidding
credits, unjust enrichment penalties apply.
Competition. Chase faces and expects to face competition in these markets
from current and potential market entrants including, among others, Sprint
Spectrum, Power Telecom, AT&T, Bell South and Alltel. To the extent that PCS
licensees have not begun operating their PCS services in Chase's licensed
territories, the Company believes that such competitors currently are or will
soon begin designing, constructing or operating the respective networks in such
territories. Additionally, the FCC rules allow licensees to partition or
disaggregate their spectrum. If other licensees create such partitioned or
disaggregated licenses, this could increase the number of competitors and the
types of competition in Chase's market.
OZPHONE PTY. LTD., AUSTRALIA
General. Leap holds a 100% equity interest in OzPhone Pty. Ltd.
("OzPhone"), an Australian corporation formed to participate in Australia's
personal communication services auctions. OzPhone has been awarded eight 800MHz
licenses covering approximately 5.4 million POPs to provide digital mobile and
wireless local loop services in major metropolitan and rural areas throughout
Australia. The regions covered are Brisbane, Perth, Cairns and certain regions
of the gold coast, Tasmania and regional west regions. Planning is underway to
launch regional wireless service in these areas. OzPhone has registered for and
may participate in an auction for additional licenses currently scheduled to
begin in mid-September, 1998.
OzPhone expects to build regional wireless telephony networks using CMDA
technology and will offer advanced wireless services to improve service quality
and increase choices for customers. The Company believes CDMA technology and
spectral efficiency will be suitable for large city operations and the wide
coverage afforded by CDMA base stations will allow OzPhone's networks to be
extended to rural areas to provide roaming capabilities as well as services to
those areas. OzPhone has a commitment from QUALCOMM to provide wireless
telecommunications subscriber and infrastructure equipment with 100% financing.
Market Opportunity. Leap believes that there is promising growth potential
in telecommunications services in Australia and believes that it can achieve a
market niche through an appropriate regionalized wireless marketing strategy.
Australia is a highly developed country with a stable economic and regulatory
environment and an advanced telecommunications infrastructure. Australia's
population of approximately 19 million people is largely centered on its west
and east coasts. Australia's real GDP per capita in 1997 was $20,062 with a
teledensity of approximately 49.7%. The cellular penetration was only 29% at the
end in 1997.
Strategic Partners. Leap intends to seek one or more local partners to
participate in the development of the opportunity it has recognized in
Australia. Those partners have not yet been identified but they are expected to
be selected based on their local wireless experience and/or other local
contacts.
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Capital Requirements and Projected Investments. OzPhone has a projected
capital requirement of approximately $150 million to completely build-out the
region. It is anticipated that this will be done over a five year period. Final
capital raising plans have not yet been completed. As of September 1, 1998, Leap
has invested $6 million to acquire the licenses and expects to invest an
additional $13.3 million in equity to begin limited operations before March
1999.
Regulatory Environment. A deregulation process began in Australia in the
late 1980's and has been monitored by the Australian Telecommunications
Commission. A new Telecommunications Act was introduced to the Australian
Parliament in December, 1996 which has encouraged competition and modernization
of Australia's telephone networks. In 1995, the "Hilmer Reforms" came into
effect and are designed to provide a generalized pro-competition policy spanning
all industries including telecommunications.
Competition. The wireless telecommunications industry in Australia is
currently controlled by three companies, with Telstra accounting for
approximately 60% of total subscribers, Optus accounting for approximately 33%
of total subscribers, and Vodaphone accounting for the remaining 7% of total
subscribers. Approximately one-third of all mobile phone users are now
individual subscribers with small and medium business users comprising
approximately an additional 40% of subscribers. The largest competitor, Telstra,
was partially privatized in 1997 and has been losing market share to Optus
Communications, which entered the fixed and mobile markets in early 1990
effectively ending Telstra's monopoly. Optus' success is due in large part to a
heavy promotional strategy. Vodaphone's entry into the telecommunications market
has further eroded Telstra's market share. The addition of competitors has
caused a sharp decline in the revenues per user though this trend has tended to
stabilize over time. Recent auctions will add three additional competitors to
the market, including Hutchinson and AAPT in addition to OzPhone. The new
entrants will attempt to win market share through innovative marketing and
distribution strategies and the use of advances in use capacity, especially with
CDMA technology. OzPhone will face some difficulties in competing with AAPT and
the existing wireless carriers due to lack of brand name recognition and an
existing operating history in Australia.
UNITED STATES WIRELESS OPPORTUNITIES
General. Leap's strategy for wireless telecommunication opportunities in
the United States is based on providing a fixed fee limited mobility cdmaOne
telephone service targeted at the mass consumer market. By providing a fixed
fee, limited mobility service offering, the Company's strategy is different from
the existing model used by most current wireless operators in the United States.
The Company is in the process of developing marketing plans to implement its
strategy, both in the U.S. market and in other foreign markets where the
opportunity could present itself. The Company is currently exploring
opportunities to acquire spectrum for this venture and has formed two
subsidiaries to pursue these opportunities.
In order to pursue wireless telecommunication opportunities in the United
States and implement its strategy, the Company or one or more entities in which
the Company will hold an equity interest, intends to acquire spectrum and
operate in the U.S. broadband PCS frequency blocks or enter into reseller
agreements with PCS operators for minutes of use. To the extent that the Company
is qualified to hold the subject spectrum, it is anticipated that Leap will
acquire such spectrum either directly or through a subsidiary in which Leap
initially holds at least a 75% equity interest, with the remaining equity
interest being held by other investors. To the extent that the Company is not
able to directly or indirectly acquire spectrum, it is anticipated that Leap
will enter into reseller agreements with operators, with Leap making, as
required, equity investments in such operators in accordance with applicable
law. To the extent that available spectrum is in the C and F Blocks, the
Company's equity participation will have to be through companies designed to
satisfy the FCC "Designated Entity" requirements. Leap expects that it or one of
the newly formed subsidiaries of Leap, and those affiliates which are
attributable to it under the FCC rules relating to Designated Entities, will
qualify as a Designated Entity, although there can be no assurance that it will.
If the subsidiary does not so qualify, complying with the "Designated Entity"
requirements would limit Leap's ownership in such C and F Block license holding
companies to 25% of the equity of such license holder.
PCS differs from traditional cellular in three basic ways: frequency,
bandwidth and geographic service areas. PCS networks operate in a higher
frequency band (1850-1990 MHz) than cellular (800-900 MHz).
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PCS licenses also comprise 30 MHz bandwidth (A, B and C-Blocks) or 10 MHz
bandwidth (D, E and F-Blocks), versus 25 MHz bandwidth for cellular networks. As
a result of the utilization of improved digital technology from inception, PCS
will have more capacity for new wireless services such as data and video
transmission than traditional analog systems.
Market Opportunity. Wireless telephony penetration is currently
approximately 22% of the potential U.S. market. A market convergence has begun
to occur between the development of wireless and wireline services as wireless
costs rapidly drop below traditional wireline costs for comparable services.
This has resulted in the introduction of new wireless services that have
penetrated new markets. In the U.S. market, incumbent wireline operators are
preparing to offer long distance services to their customers, while at the same
time the traditional long distance carriers are trying to effect entry into the
local loop arena. Wireless carriers have made efforts to offer more
competitively priced services, but have focused on high mobility customers that
generate higher revenues.
Without the economies of scale that volume affords, current wireless
marketing models suffer with the loss of any portion of the traditional business
market segment. Wireless companies operating on such models are likely to
continue to compete for the same customer base and for increasingly diminishing
economic returns. In contrast, the Company's strategy is to provide a
high-quality fixed fee limited mobility cdmaOne wireless telephone service
targeted at the mass consumer market.
Strategic Partners. The Company expects to implement its United States
wireless opportunities through a strategic consortium of companies and
investors.
Capital Requirements and Projected Investments. Because the scope of this
opportunity has not yet been developed and is subject to market research and
trials, Leap has not yet developed a detailed capital budget or investment
strategy. However, Leap has budgeted approximately $81 million to pursue this
strategy in the U.S. wireless market. The Company will look for opportunities to
acquire spectrum in the U.S. PCS frequency Blocks A, B, D and E. In addition,
the Company will look for opportunities to participate in PCS service provision
by establishing and entering into reseller agreements with qualifying
"Designated Entities" that can hold C and F Block frequency. Furthermore, the
Company may enter into reseller agreements with other holders of spectrum on
favorable terms and conditions. Leap anticipates that it will structure its
reseller relationships and relationships with any Designated Entities in a
fashion to maximize the potential benefit to Leap shareholders as a whole while
complying with applicable FCC requirements.
Regulatory Environment. In this effort, Leap will operate in the complex
United States FCC regulatory scheme. The Company will be required to maintain
compliance with all of the requirements for operating wireless operations in the
United States and the requirements for entering into reseller agreements with
United States operators, including the requirements applicable to Designated
Entities to the extent the subject spectrum is in the C and F Blocks. PCS
licenses are granted for a ten year period at the end of which the licensee must
apply for renewal. Licenses may be revoked by the FCC at any time for cause
including failure to comply with the terms of the licenses or failure to qualify
for such licenses, malfeasance or other misconduct. Construction regulations and
moratoria are in effect in some markets which can create certain risks and costs
associated with the construction of a network. The licensing, construction,
operation, sale and interconnection agreements of wireless telecommunications
systems are regulated to varying degrees by the FCC and State regulatory
agencies. Such regulation is continually evolving and there are a number of
issues on which regulation has been or in the future may be suggested. The
Telecommunications Act of 1996 mandates significant changes in existing
regulations of the telecommunications industry to promote competitive
development of new service offerings to expand the availability of
telecommunication services and to streamline the regulation of the industry.
Competition. The U.S. wireless industry is characterized by intense
competition between PCS, cellular and other wireless service providers. There
can be no assurance that the Company will be able to compete successfully or
that new technologies and products that are more commercially effective than the
Company's technologies and products will not be developed. In addition, many of
the Company's prospective competitors have substantially greater financial,
technical, marketing, sales and distribution resources than those of the
Company. Some competitors are expected to market other services, such as cable
television access, landline telephone service and Internet access with their
wireless telecommunications service offerings. A limited
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number of the Company's prospective competitors are operating, or planning to
operate, through joint ventures and affiliation arrangements, wireless
telecommunications networks that cover most of the United States.
The Company will compete directly with other PCS providers in each of its
markets, including principal competitors such as PrimeCo, Sprint and AT&T. The
FCC issued PCS licenses to the A and B Block license winners in June 1995.
Accordingly, the holders of the A and B Block PCS licenses in the Company's
markets have entered the PCS market earlier than the Company. There can be no
assurance that such time-to-market advantage will not have a material adverse
effect on the Company's ability to successfully implement its strategy in the
United States. Also providing competition in a market in which the Company
operates may be holders of three other PCS frequency blocks of spectrum.
Furthermore, PCS licensees may also partition and disaggregate their PCS
licenses into smaller service areas, which could provide new entrants with
further opportunities to enter the PCS market. The Company also expects that the
two incumbent cellular providers in each of the Company's planned United States
markets, all of which have infrastructure in place, a customer base and a brand
name, and have been operational for five to ten years or more, have upgraded or
will upgrade their networks to provide services in competition with the Company.
The Company further expects to compete with other telecommunications
technologies such as paging, enhanced specialized mobile radio and global
satellite networks.
Network and Development Plan. The business plan, if successful in trials,
will be developed for nationwide sales and service in the U.S.
TELESYSTEMS OF UKRAINE
Under the Separation and Distribution Agreement, QUALCOMM and Leap have
agreed that, if certain events occur within eighteen months after the
Distribution, certain assets and liabilities related to QUALCOMM's operating
company in Ukraine, Telesystems of Ukraine ("TOU"), will be transferred to Leap.
There can be no assurance that such events will occur or that legal impediments
to transfer will be removed, or that QUALCOMM's interest in TOU will ever be
transferred to Leap. Set forth below is a description of the interest in TOU
Leap may acquire, and of TOU itself.
General. In the event QUALCOMM transfers TOU to Leap, Leap will hold up to
a 49% participation interest in TOU. In April of 1997, TOU obtained a license to
construct, own, operate and maintain a CDMA wireless local loop
telecommunication systems throughout most of Ukraine. In March of 1998, TOU
obtained a national and international long distance license for the nine major
regions of Ukraine covering most of the 51 million POPs in that country.
TOU currently is in the process of deploying a wireless local loop
telecommunication systems in the Ukrainian capital city of Kiev. It is currently
estimated that TOU will commercially launch the system in Kiev in late 1998.
After successful commercial launch of the system in Kiev, TOU plans to deploy
systems in the balance of the country based on a schedule and funding plan to be
completed based on the success of the Kiev system. TOU intends to offer
subscribers wireless local loop services as well as mobile services within each
region of Ukraine. TOU is the first communications operator to provide CDMA in
Ukraine. In addition to providing wireless local loop and mobility service, TOU
is permitted under the terms of its national and international access license to
provide national and international long distance services.
Market Opportunity. Ukraine is the second largest of the former Soviet
countries and represents an attractive market for wireless telecommunication
services. The Ukrainian telecommunications market remains significantly
under-served by existing wireline and wireless operators. To improve the
telephone services in Ukraine, the Ukrainian government has established a
telecommunications program with a goal of increasing teledensity from 14.97% in
1993 to 30% by 2000. Ukraine's population of approximately 51 million people is
approximately 68% urban. The real GDP per capita in 1997 was $2,853 and is
declining. The wireless penetration was only 0.13% at the end in 1997.
Strategic Partners. In the event QUALCOMM transfers TOU to Leap, the
Company's partners will include Rhuta-Farm, a Ukrainian limited company
("Rhuta-Farm"), which holds a 41.1% participation interest in TOU. Rhuta-Farm is
engaged in the manufacture, import and distribution of pharmaceuticals
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throughout Ukraine. The majority owner of Rhuta-Farm is Victor Zholinski, who
has extensive knowledge of the Ukrainian telecommunications market and Ukrainian
political environment. In addition to Rhuta-Farm, Ukrtelecom, the national
wireline provider in Ukraine, holds a 9.9% participation interest in TOU. Since
this venture was formed, the number of additional competitors has increased in
Kiev (TOU will be the 5th). Furthermore, the overall relationship with
Rhuta-Farm has become strained. QUALCOMM and Rhuta-Farm currently have material
disagreements on speed and method of system deployment, the terms of acceptable
project financing and the day-to-day control of the operation of TOU. These
disagreements have delayed funding of the system and have resulted in delays in
commercial operation of the system. See "Risk Factors -- General Risks -- Joint
Ventures."
Leap Rights and Interests. In the event QUALCOMM transfers TOU to Leap,
Leap will have up to 49% of the voting rights of TOU, though by contract Leap
would also have the right to elect the majority of TOU's board of directors.
Leap would also have the right to appoint many of the operating officers of the
company. Leap would play a significant role in the operation of TOU, offering
oversight and direct support for services in areas including system design,
planning, installation, marketing, distribution, customer care, billing and
service initiation. In the event QUALCOMM transfers TOU to Leap, Leap expects to
apply its expertise to assure that TOU manages a successful system launch
resulting in forecasted subscriber growth and revenue.
Capital Requirements and Projected Investments. TOU will require
approximately $51 million to complete license acquisition and the build-out and
initial operation of the system in Kiev of which approximately $35 million is
expected to be provided by Leap and/or QUALCOMM. The partners in TOU contributed
approximately $150,000 in equity to the venture. In addition, as of June 29,
1998, QUALCOMM has invested approximately $16 million pursuant to an Agreement
on Joint Investment Activity which, under Ukrainian law, is equity with features
similar to a redeemable preferred stock, which equity interest if transferred to
Leap would provide Leap a favorable preferred return on the invested capital and
a return of capital before any of the partners receive a return on their
investments. QUALCOMM expects to provide equipment to TOU and to provide up to
$70 million of equipment financing for a full country build-out and may provide
additional working capital on terms to be negotiated. Funding for build out
beyond Kiev is not yet committed.
Regulatory Environment. The Ukrainian Parliament adopted CDMA as a
nationwide wireless standard on June 28, 1996. In April 1997, the Ukrainian
Ministry of Communications ("MOC") issued TOU a nationwide license to operate a
CDMA wireless local loop telecommunication system in the 800 MHz band. The MOC
is responsible for the regulation and oversight of the telecommunication sector,
including wireline and wireless local loop operations. The MOC supervises and
audits the performance of each licensee's legal and contractual obligations. The
MOC also has general authority to issue regulations for telecommunications
operators, subject to such regulations being in accordance with applicable law.
The Ukrainian law requires that licensees operating telecommunications systems
issue a minimum of 51% of their equity (on a fully diluted basis) to Ukrainian
corporations or individuals. However, to attract foreign investment, the
Ukrainian Foreign Investment Laws allow foreign investments in
telecommunications companies pursuant to joint investment agreements. Under this
format, a Ukrainian partner can allocate up to 100% of profits in a
telecommunication venture to a foreign partner until the foreign partner has
been repaid its investment. Leap would proceed under this authority. The
nationwide CDMA license granted to TOU allows TOU to construct, own, operate and
maintain a wireless local loop and mobile telecommunications system throughout
Ukraine. To obtain the license, TOU was required to make a one time payment of
$8.1 million ($0.16 per POP). The term of the license is 15 years and is
renewable.
The MOC has also issued a national and international access license
allowing TOU to own, operate and maintain a national and international access
license. The term of the national and international license is 15 years and is
renewable.
Competition. Ukrtelecom is the national wireline provider. UMC is a
wireless telecommunication provider that owns and maintains wireless systems in
NMT technology and a GSM network in Kiev. Kiev Star is a mobile
telecommunications operator providing GSM services. Golden Telecom is a mobile
operator providing GSM services. DCC is a cellular telecommunication company
providing digital amps services.
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COMPETITION
There is increasing competition in the wireless telecommunications industry
in the United States and throughout the world. There can be no assurance that
the Company will be able to compete successfully or that new technologies and
products that are more commercially effective than the Company's technologies
and products will not be developed. In addition, many of the Company's
prospective competitors have substantially greater financial, technical,
marketing, sales and distribution resources than those of the Company.
Although the implementation of advanced telecommunications services is in
its early stages in many developing countries, the Company believes competition
is intensifying as businesses and foreign governments realize the market
potential of telecommunications services. Many of the Company's operating
companies currently face competition from existing telecommunication providers.
A number of large American and European companies and large international
telecommunications companies are actively engaged in programs to develop and
commercialize telecommunications services in both developing and developed
countries. In many cases, the Company also competes against the landline
carriers, including government-owned telephone companies. In some cases, the
competition is from government-controlled or -supported entities that are, or
may in the future be, privatized or otherwise become more efficient and
competitive. In addition, the Company's operating companies throughout the world
may face competition with new technologies and services introduced in the
future. Although the Company's operating companies intend to employ relatively
new technologies, there will be a continuing competitive threat from even newer
technologies that may render the technologies employed by such companies
obsolete. See "Risk Factors -- Rapid Technological Change." The Company also
expects that the price that its operating companies charge for their products
and services in certain regions will decline over the next few years as
competition intensifies in their markets. See "-- Leap Operating Companies."
The U.S. wireless industry is characterized by intense competition between
PCS, cellular and other wireless service providers. A limited number of the
Company's prospective competitors are operating, or planning to operate, through
joint ventures and affiliation arrangements, wireless telecommunications
networks that cover most of the United States. In the United States, the Company
will compete directly with other wireless providers in each of its markets, a
number of whom entered the PCS market earlier than the Company. There can be no
assurance that such time-to-market advantage will not have a material adverse
effect on the Company's ability to successfully implement its strategy. Some
competitors are also expected to market other services, such as cable television
access, landline telephone service and Internet access with their wireless
telecommunications service offerings. Furthermore, certain competing licensees
may partition and disaggregate their competing licenses into smaller service
areas, which could provide new entrants with further opportunities to enter the
Company's market. The Company also believes that the two incumbent cellular
providers in each of the Company's planned United States markets, all of which
have infrastructure in place, a customer base and a brand name, and have been
operational for five to ten years or more, have upgraded or will upgrade their
networks to provide services in competition with the Company. The Company
further expects to compete with other telecommunications technologies such as
paging, enhanced specialized mobile radio and global satellite networks. See
"-- United States Wireless Opportunities."
In addition, following the Distribution QUALCOMM may choose to pursue new
CDMA-based wireless telecommunications businesses and ventures that would also
be attractive projects for the Company. QUALCOMM will have no obligation to
refer any such project to the Company and may in fact compete with the Company
for such projects. Also, QUALCOMM will not be restricted from pursuing wireless
telecommunications opportunities that may compete directly with the Company or
the Leap Operating Companies. Any such competition or potential competition
could result in conflict between the Company and QUALCOMM and adversely affect
other relationships between the companies. Moreover, there can be no assurance
that the Company would be able to compete effectively with QUALCOMM with respect
to these opportunities.
In addition, the Company believes that companies holding equity interests
in multiple operating companies throughout the world will be increasingly
predominant in the wireless communications industry and expects to experience
increasing competition from entities with structures resembling that of Leap.
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GOVERNMENT REGULATION
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in each of the countries outside the United States in which
Leap has operations are regulated by governmental authorities in each such
country. In some cases, the regulatory authorities also operate or control the
operations of the competitors of the operating companies. Changes in the current
regulatory environment of these markets or future judicial intervention, or
regulations affecting the pricing of the operating companies' services, could
have a material adverse effect on the Company. In addition, the regulatory
framework and authorities in certain of the countries where the Company operates
are relatively recent and, therefore, the enforcement and interpretation of
regulations, the assessment of compliance, and the degree of flexibility of
regulatory authorities are uncertain. Further, changes in the regulatory
framework may limit the ability to add subscribers to developing systems. An
operating company's failure to comply with applicable governmental regulations
or operating requirements could result in the loss of licenses, penalties and/or
fines or otherwise could have a material adverse effect on the Company. For a
more detailed description of the regulatory environment in the United States and
each of the other countries in which Leap operates, see the "Regulatory
Environment" discussion for each of the Leap Operating Companies under
"Business."
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in the United States are regulated to varying degrees by
state regulatory agencies, the FCC, the United States Congress and the courts.
The Leap Operating Companies doing business in the United States, and Leap, will
be required to maintain compliance with all of the requirements for operating
wireless operations in the United States and the requirements for entering into
reseller agreements with United States operators. Such regulation is continually
evolving and there are a number of issues on which regulation has been or in the
future may be suggested. The Telecommunications Act of 1996 mandates significant
changes in existing regulations of the telecommunications industry to promote
competitive development of new service offerings to expand the availability of
telecommunications services and to streamline the regulation of the industry.
There can be no assurance that the FCC, Congress, the courts or state agencies
having jurisdiction over the business of any of the Company's United States
operating companies will not adopt or change regulations or take other actions
that would adversely affect the Company's financial condition or results of
operations. Many of the FCC's rules relating to the businesses of the Company's
United States operating companies have not been tested by the courts and are
subject to being changed by Congressional action. In addition, FCC licenses are
subject to renewal and revocation. There can be no assurance that the licenses
of the Company's United States operating companies will be renewed or not be
revoked.
EMPLOYEES
Upon completion of this Distribution, the Company is expected to have
approximately 50 full time employees, excluding employees of the Leap Operating
Companies. It will also have consultants under contract to work on specific
projects.
FACILITIES
The Company has leased approximately 50,000 square feet of office space in
San Diego, California, U.S.A.
LEGAL PROCEEDINGS
Neither the Company nor any of the Leap Operating Companies is a party to
any litigation that the Company believes would, individually or in the
aggregate, have a material adverse effect on Leap and the Leap Operating
Companies, taken as a whole, and Leap is not aware that any such litigation is
threatened. There is a legal challenge in Mexico to the constitutionality of the
government's transfer of the frequency licenses. Neither the Company nor any
Leap Operating Company is a party to the litigation, and the Company believes
that the challenge will not have a material adverse effect on Leap and the Leap
Operating Companies taken as a whole. See "Business -- Leap Operating
Companies -- Pegaso Telecomunicaciones, S.A. de C.V. and Pegaso Comunicaciones y
Sistemas, S.A. de C.V., Mexico."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the individuals who
will serve as directors and executive officers of the Company as of the
Distribution:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harvey P. White.............................. 64 Chairman, Chief Executive Officer, President
and Director
Thomas J. Bernard............................ 66 Executive Vice President and Director
James E. Hoffmann............................ 48 Senior Vice President, General Counsel,
Secretary and Director
Daniel O. Pegg............................... 52 Senior Vice President, Public Affairs
Leonard C. Stephens.......................... 41 Senior Vice President, Human Resources
Tom Willardson............................... 47 Senior Vice President, Finance and Treasurer
Alejandro Burillo Azcarraga.................. 46 Director
Michael B. Targoff........................... 54 Director
Jeffrey P. Williams.......................... 47 Director
</TABLE>
Certain additional information concerning the directors and executive
officers is set forth below:
Harvey P. White, one of the founders of QUALCOMM, has served as Vice
Chairman of the Board since June 1998. From May 1992 until June 1998 he served
as President of QUALCOMM and from February 1994 to August 1995 as Chief
Operating Officer of QUALCOMM. Prior to May 1992 he was Executive Vice President
and Chief Operating Officer and has also been a Director of QUALCOMM since it
began operations in July 1985. From March 1978 to June 1985, Mr. White was an
officer of LINKABIT (M/A-COM LINKABIT after August 1980), where he was
successively Chief Financial Officer, Vice President, Senior Vice President and
Executive Vice President. Mr. White became Chief Operating Officer of LINKABIT
in July 1979 and a Director of LINKABIT in December 1979. He holds a B.A. degree
in Economics from Marshall University.
Thomas J. Bernard served as a Senior Vice President of QUALCOMM from April
1996 through June 1998. From April 1996 until June 1998, he was also General
Manager of the Infrastructure Product Division of QUALCOMM. He retired in April
1994, but returned to QUALCOMM in August 1995 as Executive Consultant and became
Senior Vice President, Marketing, in December 1995. Mr. Bernard first joined
QUALCOMM in September 1986. He served as Vice President and General Manager for
the OmniTRACS division and in September 1992 was promoted to Senior Vice
President. From March 1982 to September 1986, Mr. Bernard held various positions
at M/A-COM LINKABIT. Prior to joining QUALCOMM in September 1986, Mr. Bernard
was Executive Vice President and General Manager, M/A-COM Telecommunications
Division, Western Operations. Mr. Bernard served on the Board of Directors of
Sigma Circuits, Inc., a circuit board manufacturing company, from April 1995 to
July 1998.
James E. Hoffmann has served as Vice President, Legal Counsel of QUALCOMM
since June 1998. From February 1995 until June 1998, he served as Vice President
of QUALCOMM and Division Counsel for the Infrastructure Products Division,
having joined QUALCOMM as Senior Legal Counsel in June 1993. Prior to joining
QUALCOMM, Mr. Hoffmann was a partner in the law firm of Gray, Cary, Ames & Frye,
where he practiced transactional corporate law. He holds a B.S. degree from the
United States Naval Academy, an M.B.A. degree from Golden Gate University and a
J.D. degree from University of California, Hastings College of the Law.
Daniel O. Pegg has served as Senior Vice President, Public Affairs of
QUALCOMM since March 1997. Prior to joining QUALCOMM, Mr. Pegg was President and
Chief Executive Officer of the San Diego Economic Development Corporation for 14
years. Mr. Pegg served on the Board of Directors of Gensia Pharmaceuticals from
1986 to 1996. Mr. Pegg holds a B.A. degree from California State University at
Los Angeles.
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Leonard C. Stephens has served as Vice President, Human Resources
Operations for QUALCOMM since December 1995. Prior to joining QUALCOMM, Mr.
Stephens was employed by Pfizer Inc., where he served in a number of human
resources positions over a 14 year career. He holds a B.A. degree in Political
Science from Howard University.
Tom Willardson joined QUALCOMM in July 1998 and will serve as Senior Vice
President, Finance and Treasurer of the Company. From July 1995 to July 1998,
Mr. Willardson was Vice President and Associate Managing Director of Bechtel
Enterprises, Inc., a wholly-owned investment and development subsidiary of
Bechtel Group, Inc. From January 1986 to July 1995, Mr. Willardson served as a
principal at The Fremont Group, an investment company. Mr. Willardson was
re-elected in June 1998 to serve as a Director of Cost Plus, Inc. where he has
served as a Director since March 1991. He holds an M.B.A. degree from the
University of Southern California and a B.S. degree from Brigham Young
University.
Alejandro Burillo Azcarraga has more than 30 years experience working for,
and holds 14% of the controlling interest in, Grupo Televisa ("Televisa"). Mr.
Burillo presently serves as Vice-Chairman of the Board of Directors and
President of International Affairs of Televisa, positions to which he was
appointed in 1997. Previously and since 1991, Mr. Burillo served as
Vice-Chairman of the Board and Chief Operating Officer of Televisa. Mr. Burillo
also holds a controlling interest in Grupo Pegaso, a private investment group
with interests in various industries including cable television, communications,
retail electronics, real estate, sports and entertainment. Mr. Burillo also
serves as a Board Member of Grupo Desc, an NYSE-listed company and one of
Mexico's main industrial groups.
Michael B. Targoff was President & Chief Operating Officer of Loral Space &
Communications Limited from its formation in January 1996 through January 1998.
Prior to that, Mr. Targoff was Senior Vice President of Loral Corporation. From
1991, Mr. Targoff was a Director and a principal Loral executive responsible for
Loral's satellite manufacturing joint venture with Alcatel, Aerospatiale, Alenia
and Daimler Benz Aerospace. Mr. Targoff was also the President and is a Director
of Globalstar Telecommunications Limited, the company that is the public owner
of Globalstar, Loral's global mobile satellite system. Mr. Targoff is also a
Director of Satelites Mexicanos, S.A. de D.V., as well as of Foremost
Corporation of America. Prior to joining Loral Corporation in 1981, Mr. Targoff
was a Partner in the New York law firm of Willkie Farr and Gallagher. Mr.
Targoff attended Brown University where he received a B.A. degree in 1966. From
Columbia University School of Law, he earned a J.D. degree in 1969 and was a
Hamilton Fisk Scholar and Editor of the Columbia Journal of Law and Social
Problems.
Jeffrey P. Williams has been a Managing Partner at Greenhill and
Associates, an investment banking firm, since 1998. From September 1996 to
January 1998, Mr. Williams was Executive Vice President, Strategic Development
and Global Markets for McGraw-Hill Companies, and from 1984 through 1996 he was
an investment banker with Morgan Stanley and Company in their Telecommunications
and Media Group. Mr. Williams has a Bachelor of Architecture from the University
of Cincinnati and an M.B.A. degree with distinction from Harvard University
Graduate School of Business Administration.
CLASSIFIED BOARD OF DIRECTORS
The Company's Certificate of Incorporation will provide for a classified
Board of Directors consisting of three classes as nearly equal in number as
possible with the directors in each class serving staggered three-year terms.
The terms of the Class I, Class II and Class III directors will expire initially
in 1999, 2000 and 2001, respectively. Initially, Messrs. Hoffmann and Targoff
will be Class I directors, Messrs. Bernard and Burillo will be Class II
directors, and Messrs. White and Williams will be Class III directors. At each
annual meeting of the stockholders of the Company, the successors to the class
of directors whose term expires will be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
their election. See "Description of Company Capital Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established an Audit Committee
and a Compensation Committee.
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The Audit Committee will, among other things, recommend independent
certified public accountants; review the scope of the audit examination,
including fees and staffing; review the independence of the auditors; review and
approve non-audit services provided by the auditors; review findings and
recommendations of auditors and management's response; review the internal audit
and control function; and review compliance with the Company's ethical business
practices policy. The members of the Audit Committee are Messrs. Targoff and
Williams.
The Compensation Committee will review management compensation programs,
approve compensation changes for senior executive officers, review compensation
changes for senior management, and administer management stock plans. The
members of the Compensation Committee are Messrs. Burillo, Targoff and Williams.
COMPENSATION OF DIRECTORS
When traveling from out-of-town, the members of the Board of Directors are
eligible for reimbursement for their travel expenses incurred in connection with
attendance at Board meetings and meetings of committees of the Board of
Directors. Employee directors will not receive any compensation for their
participation in Board or Board committee meetings. The Directors' Plan will
provide for initial option grants to persons upon first joining the Board and
annual option grants to non-employee directors who continue to serve on the
Board. See "-- Equity Incentive Plans."
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COMPENSATION OF EXECUTIVE OFFICERS
All of the information set forth in the following tables reflects
compensation earned during the QUALCOMM fiscal years indicated based upon
services rendered to QUALCOMM by the Company's Chief Executive Officer and the
four other most highly paid executive officers of the Company (collectively, the
"Named Executive Officers"). The services rendered by such individuals to
QUALCOMM were, in some instances, in capacities not equivalent to those
positions in which they will serve for the Company or its subsidiaries.
Therefore, these tables do not reflect the compensation that will be paid to the
executive officers of the Company. As currently contemplated, the base annual
salary for the individuals listed below as officers of Leap immediately
following the Distribution will be as follows, subject to future adjustment in
the discretion of the Board of Directors of the Company: Mr. White, $500,011;
Mr. Bernard, $270,004; Mr. Hoffmann, $185,016; Mr. Stephens, $170,019; and Mr.
Pegg, $210,017. Neither Leap nor its Board of Directors has determined the
amount, if any, of compensation in addition to base salary that may be paid to
such officers following the Distribution.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
--------------------------------- ------------
OTHER
ANNUAL SECURITIES ALL OTHER
COMPEN- UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION(2) OPTIONS SATION(5)
--------------------------- ---- -------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Harvey P. White........................ 1997 $395,713 $250,000 $ 0 0 $37,011
Chairman of the Board, 1996 $354,963 $100,000 $ 0 85,000 $34,437
Chief Executive Officer and President 1995 $297,462 $150,000 $ 0 60,000 $ 4,654
Thomas J. Bernard...................... 1997 $245,142 $ 65,000 $ 0 0 $ 6,086
Executive Vice President and Director 1996 $186,976 $ 40,000 $ 0 60,000 $ 0
1995 $ 7,200(3) $ 0 $ 0 0 $ 0
James E. Hoffmann...................... 1997 $149,283 $ 50,000 $ 0 3,000 $ 2,145
Senior Vice President, General 1996 $131,646 $ 20,000 $ 0 4,000 $ 2,191
Counsel, Secretary and Director 1995 $117,454 $ 15,000 $ 0 5,000 $ 2,134
Leonard C. Stephens.................... 1997 $146,828 $ 45,000 $ 42,268 3,000 $ 1,816
Senior Vice President, Human 1996 $112,711 $ 25,000 $ 43,644 15,000 $ 0
Resources 1995 $ 0 $ 0 $ 0 0 $ 0
Daniel O. Pegg......................... 1997 $111,174(4) $ 55,000 $ 0 50,000 $ 0
Senior Vice President, Public Affairs 1996 $ 0 $ 0 $ 0 0 $ 0
1995 $ 0 $ 0 $ 0 0 $ 0
</TABLE>
- ---------------
(1) As permitted by rules established by the Commission, no amounts are shown
with respect to certain "perquisites" where such amounts do not exceed the
lesser of either $50,000 or 10% of the total of annual salary and bonus.
(2) In December 1995, Leonard C. Stephens joined QUALCOMM as Vice President of
Human Resources. The Company made payments related to his relocation as
shown above.
(3) Mr. Bernard served as a consultant to QUALCOMM in 1995, and the reported
salary constitutes consulting fees.
(4) Mr. Pegg joined QUALCOMM in March 1997. If he had been employed by QUALCOMM
during the entire 1997 fiscal year at the same annual base salary rate, his
salary for fiscal 1997 would have been $212,000.
(5) Includes QUALCOMM matching 401(k) contributions, executive benefits payments
and executive retirement stock matching as follows:
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<PAGE> 86
<TABLE>
<CAPTION>
QUALCOMM EXECUTIVE TOTAL
MATCHING EXECUTIVE RETIREMENT OTHER
401(K) BENEFITS CONTRIBUTIONS COMPEN-
NAME YEAR CONTRIBUTIONS PAYMENTS (1) SATION
---- ---- ------------- --------- ------------- -------
<S> <C> <C> <C> <C> <C>
Harvey P. White...................... 1997 $2,145 $2,520 $32,346 $37,011
1996 $2,191 $2,520 $29,726 $34,437
1995 $2,134 $2,520 $ 0 $ 4,654
Thomas J. Bernard.................... 1997 $1,816 $4,270 $ 0 $ 6,086
1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
James E. Hoffmann.................... 1997 $2,145 $ 0 $ 0 $ 2,145
1996 $2,191 $ 0 $ 0 $ 2,191
1995 $2,134 $ 0 $ 0 $ 2,134
Leonard C. Stephens.................. 1997 $1,816 $ 0 $ 0 $ 1,816
1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
Daniel O. Pegg....................... 1997 $ 0 $ 0 $ 0 $ 0
1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
</TABLE>
- ---------------
(1) QUALCOMM has a voluntary retirement plan that allows eligible executives to
defer up to 100% of their income on a pre-tax basis. The participants
receive 50% company stock match on a maximum deferral of 15% of income
payable only upon eligible retirement. Participants become fully vested in
the stock benefit at age 65 and may become partially vested earlier upon
reaching age 62 1/2 and completing ten years of employment with QUALCOMM.
The employee contributions and the stock benefit are unsecured and subject
to the general creditors of QUALCOMM. At September 28, 1997, 1,008 shares
were vested on behalf of Harvey P. White.
As part of the Distribution, the Company has assumed QUALCOMM's obligation
to pay premiums under an existing split dollar life insurance policy for the
benefit of Harvey P. White and his wife. The initial annual premiums are
approximately $590,000, and the policy's death benefit is initially $9,800,000.
Upon the death of the second to die of Mr. White and his wife, the Company will
receive out of the policy's proceeds a full reimbursement of any premiums paid
under the policy.
The following table shows for the Named Executive Officers the specified
information with respect to grants of options to purchase QUALCOMM Common Stock
("QUALCOMM Options") during fiscal 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR OPTION
OPTIONS GRANTED TO TERM(2)
GRANTED EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME (#)(1) FISCAL YEAR PRICE DATE 5% 10%
---- ---------- ------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James E. Hoffmann......... 3,000 0.07% $39.81 12/12/06 $ 75,082.88 $ 190,259.78
Leonard C. Stephens....... 3,000 0.07% $39.81 12/12/06 $ 75,082.88 $ 190,259.78
Daniel O. Pegg............ 50,000 1.18% $60.25 03/06/07 $1,893,889.17 $4,799,109.10
</TABLE>
- ---------------
(1) Such options vest according to the following schedule: 20% vest on each of
the first, second, third, fourth and fifth anniversaries of the date of
grant.
(2) Calculated on the assumption that the market value of the underlying stock
increases at the stated values, compounded annually. Options granted under
QUALCOMM's Option Plan generally have a maximum term of ten years. The total
appreciation of the options over their ten year terms at 5% and 10% is 63%
and 159%, respectively.
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<PAGE> 87
The following table shows for each Named Executive Officer the specified
information with respect to exercises of QUALCOMM Options during fiscal 1997 and
the value of unexercised options at the end of fiscal 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END OPTIONS AT FY-END
SHARES VALUE (#) ($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey P. White............... 0 $0 119,000 176,000 $2,892,030 $3,618,120
Thomas J. Bernard............. 0 $0 6,000 54,000 $ 58,500 $ 699,000
James E. Hoffmann............. 0 $0 9,000 19,000 $ 286,860 $ 488,270
Daniel O. Pegg................ 0 $0 0 50,000 $ 0 $ 0
Leonard C. Stephens........... 0 $0 0 18,000 $ 0 $ 301,950
</TABLE>
- ---------------
(1) Represents the closing price per share of the underlying shares on the last
day of the fiscal year less the option exercise price multiplied by the
number of shares. The closing value per share was $56.06 on the last trading
day of the fiscal year as reported on the Nasdaq National Market.
EQUITY INCENTIVE PLANS
1998 STOCK OPTION PLAN
In September 1998, the Board of Directors adopted, and QUALCOMM, as sole
stockholder of the Company, approved, the Company's 1998 Stock Option Plan (the
"Option Plan"), which provides for the grant of various types of equity-based
compensation to selected officers, directors and employees of and consultants to
the Company and its affiliates. The Option Plan is designed to promote the
success of the Company's business by more closely aligning the interests of
management and the Company's stockholders through the provision of equity-based
incentives to those individuals who are or will be responsible for such success.
The total number of shares of Common Stock that may be issued or awarded
under the Option Plan may not exceed 8,000,000, subject to adjustment as
described below, of which options to purchase approximately 5,481,377 shares
will be granted to holders of outstanding QUALCOMM Options immediately prior to
the Distribution (the "Distribution Options") and 2,518,623 shares would be
available for future grants. The total number of shares of Common Stock reserved
under the Option Plan and the total number of shares issuable under Distribution
Options shall be reduced by the number of shares of Common Stock issued pursuant
to the exercise of QUALCOMM Options between the Record Date and the Distribution
Date as provided in the Employee Benefits Agreement. See "Treatment of QUALCOMM
Employee Stock Options in the Distribution."
The essential features of the Option Plan are outlined below.
General
The Option Plan provides for the grant of both incentive and non-qualified
stock options. Incentive stock options granted under the Option Plan are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). Non-qualified
stock options granted under the Option Plan are not intended to qualify as
incentive stock options under the Code. See "Federal Income Tax Information" for
a discussion of the tax treatment of incentive and non-qualified stock options.
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<PAGE> 88
Purpose
The Option Plan was adopted to provide a means by which selected officers,
directors and employees of and consultants to the Company and its affiliates
could be given an opportunity to purchase stock in the Company, to assist in
retaining the services of employees holding key positions, to secure and retain
the services of persons capable of filling such positions and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
Administration
The Option Plan is administered by the Board of Directors. The Board has
the power to construe and interpret the Option Plan and, subject to the
provisions of the Option Plan, to determine the persons to whom and the dates on
which options will be granted, the number of shares to be subject to each
option, the time or times during the term of each option within which all or a
portion of such option may be exercised, the exercise price, the type of
consideration to be paid upon exercise of an option and other terms of the
option. The Board of Directors is authorized to delegate administration of the
Option Plan to a committee composed of not fewer than two members of the Board.
The Board has also delegated administration of the Option Plan to the
Compensation Committee of the Board. As used herein with respect to the Option
Plan, the "Board" refers to the Compensation Committee as well as to the Board
of Directors itself.
Stock Subject to the Plan
If options granted under the Option Plan expire or otherwise terminate
without being exercised, the Common Stock not purchased pursuant to such options
again becomes available for issuance under the Option Plan.
Eligibility
Incentive stock options may be granted only to selected employees
(including corporate officers) of the Company and its affiliates. Non-qualified
stock options may be granted to selected employees (including corporate
officers), directors and consultants.
No incentive stock options may be granted under the Option Plan to any
person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the option exercise price is at least 110%
of the fair market value of the stock subject to the option on the date of
grant, and the term of the option does not exceed 5 years from the date of
grant. The aggregate fair market value, determined at the time of grant, of the
shares of Common Stock with respect to which incentive stock options granted
under the Option Plan are exercisable for the first time by an optionee during
any calendar year (under all such plans of the Company and its affiliates) may
not exceed $100,000.
Prior to the Distribution, the Company will make grants of options under
the Option Plan to the Named Executive Officers in respect of their outstanding
QUALCOMM Options, as follows: Mr. White, 91,000 options, of which 50,500 options
will be immediately exercisable; Mr. Bernard, 15,000 options, of which 4,500
options will be immediately exercisable; Mr. Hoffmann, 8,000 options, of which
4,850 options will be immediately exercisable; Mr. Pegg, 12,500 options, of
which 2,500 options will be immediately exercisable; and Mr. Stephens, 6,000
options, of which 900 will be immediately exercisable. Each of these individuals
will be eligible to receive grants of additional options under the Option Plan
in the future, at the discretion of the Compensation Committee.
Terms of Options
The following is a description of the permissible terms of options under
the Option Plan. Individual option grants may be more restrictive as to any or
all of the permissible terms described below.
Exercise Price; Payment. The exercise price of incentive stock options
under the Option Plan may not be less than the fair market value of the Common
Stock subject to the option on the date of the option grant, and
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<PAGE> 89
in some cases (see "Eligibility" above), may not be less than 110% of such fair
market value. The exercise price of non-qualified stock options may not be less
than 85% of the fair market value of the stock subject to the option on the date
of the option grant. The exercise price of options granted under the Option Plan
must be paid either: (i) in cash at the time the option is exercised; or (ii) at
the discretion of the Board, (a) by delivery of other Common Stock of the
Company, (b) pursuant to a deferred payment arrangement or (c) in any other form
of legal consideration acceptable to the Board.
Option Repricing. In the event of a decline in the value of the Company's
Common Stock, the Board has the authority to offer employees the opportunity to
replace outstanding higher priced options, whether incentive or non-qualified,
with new lower priced options.
Option Exercise. Options granted under the Option Plan may become
exercisable in cumulative increments ("vest") as determined by the Board.
Options granted under the Option Plan generally are subject to vesting over a
5-year period, with a specified percentage of each option vesting on various
annual anniversary dates of the option's date of grant, provided that the
optionee has continuously provided services to the Company or an affiliate of
the Company from such date of grant until the applicable vesting date. The Board
has the power to accelerate the time during which an option may be exercised. In
addition, options granted under the Option Plan may permit exercise prior to
vesting, but in such event the optionee may be required to enter into an early
exercise stock purchase agreement that allows the Company to repurchase shares
not yet vested at their exercise price should the optionee leave the employ or
cease to be a consultant of the Company before vesting.
Term. The maximum term of options under the Option Plan is ten years,
except that in certain cases (see "Eligibility") the maximum term is five years.
The Option Plan provides for earlier termination of an option due to the
optionee's cessation of service. Options under the Option Plan generally
terminate thirty (30) days after the optionee ceases to provide services to the
Company or any affiliate of the Company. However, in the event the optionee's
continuous service terminates due to the optionee's permanent and total
disability as defined in Section 22(e)(3) of the Code, then the option may
continue under its original terms if so provided in the option agreement. If the
optionee's continuous service terminates due to the death of the optionee or due
to the optionee's permanent and total disability and such termination due to
disability is followed by the death of the optionee, then the vesting of all
unvested shares may be accelerated as of the date of death of the optionee if so
provided in the option agreement. The Board has discretion to suspend and/or
extend the vesting and/or term of options granted to persons on leaves of
absence. Individual options by their terms may provide for exercise within a
longer period of time following termination of employment or the consulting
relationship.
Restrictions on Transfer. Incentive stock options granted under the Option
Plan may not be transferred except by will or by the laws of descent and
distribution, and may be exercised during the lifetime of the person to whom the
option is granted only by such person. The Option Plan provides that
non-qualified stock options shall be transferable by the optionee only upon such
terms and conditions as set forth in the option agreement as the Board shall
determine in its discretion. In addition, shares subject to repurchase by the
Company under an early exercise stock purchase agreement may be subject to
restrictions on transfer which the Board deems appropriate.
Effect of Certain Corporate Events
If any change is made in the stock subject to the Option Plan or subject to
any option granted under the Option Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration of the Company), the Option Plan and options
outstanding thereunder will be appropriately adjusted as to the type(s) and the
maximum number of securities subject to such plan, the maximum number of
securities which may be granted to an employee in a particular calendar year and
the type(s), number of securities and price per share of stock subject to such
outstanding options.
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<PAGE> 90
In the event of a merger or consolidation in which the Company is not the
surviving corporation or a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding prior to
the merger are converted into other property (each a "Change in Control"), then
to the extent permitted by law, any surviving corporation will be required to
either assume options outstanding under the Option Plan or substitute similar
options for those outstanding under such plan, or such outstanding options will
continue in full force and effect. In the event that any surviving corporation
refuses to assume or continue options outstanding under the Option Plan, or to
substitute similar options, then with respect to options other than Distribution
Options held by persons then performing services as employees, directors or
consultants for the Company or any affiliate of the Company, the time during
which such options may be exercised will be accelerated and the options
terminated if not exercised prior to such event, and with respect to
Distribution Options the effect shall be as provided in the applicable option
agreement. In the event of a dissolution or liquidation of the Company, any
options outstanding under the Option Plan will terminate if not exercised prior
to such event.
In addition, the Option Plan provides that options held by any person who
is terminated for any reason other than cause within twenty-four (24) months
following a Change in Control will accelerate and immediately become fully
vested and exercisable, except if such contemplated Change in Control would
occur prior to the second anniversary of the adoption of the Option Plan by the
Board and such potential acceleration would by itself prohibit the Company from
entering into a "pooling of interests" accounting transaction.
Duration, Amendment and Termination
The Board may suspend or terminate the Option Plan at any time. Unless
sooner terminated, the Option Plan will terminate in September 2008.
The Board may also amend the Option Plan at any time or from time to time.
However, no amendment will be effective unless approved by the stockholders of
the Company within twelve (12) months before or after its adoption by the Board
if the amendment would: (i) increase the number of shares reserved for options
under the Option Plan; (ii) modify the requirements as to eligibility for
participation (to the extent such modification requires stockholder approval in
order for the Option Plan to satisfy Section 422 of the Code); or (iii) modify
the Option Plan in any other way if such modification requires stockholder
approval in order for the Option Plan to satisfy the requirements of Section 422
of the Code or to comply with the requirements of Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
Federal Income Tax Information
Incentive Stock Options. Incentive stock options under the Option Plan are
intended to be eligible for the favorable federal income tax treatment accorded
"incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee or
the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be capital gain or loss. Generally, if the optionee disposes of the
stock before the expiration of either of these holding periods (a "disqualifying
disposition"), at the time of disposition, the optionee will realize taxable
ordinary income equal to the lesser of (a) the excess of the stock's fair market
value on the date of exercise over the exercise price, or (b) the optionee's
actual gain, if any, on the purchase and sale. The optionee's additional gain,
or any loss, upon the disqualifying disposition will be a capital gain or loss,
which will be long-term or short-term depending on how long the optionee holds
the stock. Capital gains are generally subject to lower tax rates than ordinary
income. Slightly different rules may apply to optionees who are subject to
Section 16 of the Exchange Act or who acquire stock subject to certain
repurchase options.
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<PAGE> 91
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, Code Section 162(m) and the satisfaction of a
tax reporting obligation) to a corresponding business expense deduction in the
tax year in which the disqualifying disposition occurs.
Non-Qualified Stock Options. Non-qualified stock options granted under the
Option Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or the Company by reason of
the grant of a non-qualified stock option. Upon exercise of a non-qualified
stock option, the optionee will recognize taxable ordinary income equal to the
excess of the stock's fair market value on the date of exercise over the option
exercise price. Generally, with respect to employees, the Company is required to
withhold taxes in an amount based on the ordinary income recognized. Subject to
the requirement of reasonableness, Code Section 162(m) and the satisfaction of a
tax-reporting obligation, the Company generally will be entitled to a business
expense deduction equal to the taxable ordinary income realized by the optionee.
Upon disposition of the stock, the optionee will recognize a capital gain or
loss equal to the difference between the selling price and the sum of the amount
paid for such stock plus any amount recognized as ordinary income upon exercise
of the option. Such gain or loss will be: (i) long-term if the stock was held
for more than twelve (12) months or (ii) short-term if the stock was held twelve
(12) months or less. Slightly different rules may apply to optionees who acquire
stock subject to certain repurchase options or who are subject to Section 16(b)
of the Exchange Act.
Potential Limitation on Company Deductions. Code Section 162(m) denies a
deduction to any publicly held corporation for compensation paid to certain
employees in a taxable year to the extent that compensation exceeds $1,000,000
for a covered employee. It is possible that compensation attributable to stock
options, when combined with all other types of compensation received by a
covered employee from the Company, may cause this limitation to be exceeded in
any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with applicable Treasury regulations issued under Section 162(m),
compensation attributable to stock options will qualify as performance-based
compensation, provided that: either (a)(i) the option plan contains a
per-employee limitation on the number of shares for which options may be granted
during a specified period, (ii) the per-employee limitation is approved by the
stockholders, (iii) the option is granted by a compensation committee comprised
solely of "outside directors" (as defined in Section 162(m)) and (iv) the
exercise price of the option is no less than the fair market value of the stock
on the date of grant; or (b) the option is granted by a compensation committee
comprised solely of "outside directors" and is granted (or exercisable) only
upon the achievement (as certified in writing by the Compensation Committee) of
an objective performance goal established by the compensation committee while
the outcome is substantially uncertain and approved by the stockholders.
Other Tax Consequences. The foregoing discussion is intended to be a
general summary only of the federal income tax aspects of options granted under
the Option Plan; tax consequences may vary depending on the particular
circumstances at hand. In addition, administrative and judicial interpretations
of the application of the federal income tax laws are subject to change.
Furthermore, no information is given with respect to state or local taxes that
may be applicable. Participants in the Option Plan who are residents of or are
employed in a country other than the United States may be subject to taxation in
accordance with the tax laws of that particular country in addition to or in
lieu of United States federal income taxes.
EMPLOYEE STOCK PURCHASE PLAN
In September 1998, the Board of Directors adopted, and QUALCOMM, as sole
stockholder of the Company, approved, the Company's Employee Stock Purchase Plan
(the "Purchase Plan") covering an aggregate of 200,000 shares of the Company's
Common Stock.
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<PAGE> 92
The essential features of the Purchase Plan, as amended, are outlined
below.
Purpose
The purpose of the Purchase Plan is to provide a means by which employees
of the Company (and any parent or subsidiary of the Company designated by the
Board of Directors to participate in the Purchase Plan (an "Affiliate")) may be
given an opportunity to purchase Common Stock of the Company through payroll
deductions, to assist the Company in retaining the services of its employees, to
secure and retain the services of new employees and to provide incentives for
such persons to exert maximum efforts for the success of the Company.
The rights to purchase Common Stock granted under the Purchase Plan are
intended to qualify as options issued under an "employee stock purchase plan" as
that term is defined in Section 423(b) of the Code.
Administration
The Purchase Plan is administered by the Board of Directors, which has the
final power to construe and interpret the Purchase Plan and the rights granted
under it. The Board has the power, subject to the provisions of the Purchase
Plan, to determine when and how rights to purchase Common Stock of the Company
will be granted, the provisions of each offering of such rights (which need not
be identical), and whether any parent or subsidiary of the Company shall be
eligible to participate in such plan. The Board of Directors has delegated
administration of the Purchase Plan to the Compensation Committee of the Board.
As used herein with respect to the Purchase Plan, the "Board" refers to the
Compensation Committee as well as to the Board of Directors itself. The Board
may at any time revest in the Board the administration of the Purchase Plan.
Stock Subject to the Purchase Plan
If rights granted under the Purchase Plan expire, lapse or otherwise
terminate without being exercised, the Common Stock not purchased under such
rights again becomes available for issuance under such plan.
Offerings
The Purchase Plan is implemented by offerings of rights to all eligible
employees from time to time by the Board. The Board has discretion to determine
the length of offerings under the Purchase Plan.
Eligibility
Any person who has been in the employ of the Company for at least ninety
days and is customarily employed at least twenty hours per week and five months
per calendar year by the Company (or by any Affiliate), on the first day of an
offering period, is generally eligible to participate in that offering under the
Purchase Plan. The Board may provide that officers of the Company who are
"highly compensated" as defined in the Code are not eligible to be granted
rights under an offering.
Notwithstanding the foregoing, no employee is eligible for the grant of any
rights under the Purchase Plan if, immediately after such grant, the employee
would own, directly or indirectly, stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or a
parent or subsidiary of the Company (including any stock which such employee may
purchase under all outstanding rights and options), nor will any employee be
granted rights that would permit him to buy more than $25,000 worth of stock
(determined based on the fair market value of the shares at the time such rights
are granted) under all employee stock purchase plans of the Company in any
calendar year.
Participation in the Purchase Plan
Eligible employees become participants in the Purchase Plan by delivering
to the Company, prior to the date selected by the Board as the offering date for
the offering, an agreement authorizing payroll deductions of
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up to the maximum percentage specified by the Board of such employees' base
compensation during the purchase period.
Purchase Price
The purchase price per share at which shares are sold in an offering under
the Purchase Plan cannot be less than the lower of (i) 85% of the fair market
value of a share of Common Stock on the date of commencement of the offering or
(ii) 85% of the fair market value of a share of Common Stock on the date of
purchase.
Payroll Deductions
The purchase price of the shares is accumulated by payroll deductions over
the offering period. A participant may increase or reduce his or her payroll
deductions during the course of an offering only to the extent permitted under
the terms of the offering. Generally, a participant may not increase payroll
deductions after the beginning of any purchase period, but may decrease his or
her participation percentage at any time but on no more than one occasion during
the course of the offering. Notwithstanding the foregoing, a participant may
reduce his or her participation percentage to zero or withdraw from an offering
at any time during the course of the offering. All payroll deductions made for a
participant are credited to his or her account under the Purchase Plan and
deposited with the general funds of the Company.
Purchase of Stock
By executing an agreement to participate in the Purchase Plan, an eligible
employee is entitled to purchase shares under the Purchase Plan. In connection
with offerings made under the Purchase Plan, the Board specifies a maximum
number of shares any employee may be granted the right to purchase. If the
aggregate number of shares to be purchased upon exercise of rights granted in
the offering would exceed the maximum aggregate number of shares available for
issuance under the Purchase Plan, the Board would make a pro rata allocation of
shares available in a uniform and equitable manner. Unless the employee's
participation is discontinued, his or her right to purchase shares is exercised
automatically at each exercise date designated by the Board at the applicable
price. See "Withdrawal" below.
Withdrawal
While each participant in the Purchase Plan is required to sign an
agreement authorizing payroll deductions, the participant may withdraw from a
given offering by terminating his or her payroll deductions and by delivering a
notice of withdrawal from the Purchase Plan to the Company. Such withdrawal may
be elected at any time prior to the end of the applicable offering except as
provided by the Board or the Committee in the offering.
Upon any withdrawal from an offering by the employee, the Company will
distribute to the employee his or her accumulated payroll deductions without
interest, and such employee's interest in the offering will be automatically
terminated. The employee is not entitled to again participate in such offering.
An employee's withdrawal from an offering will not have any effect upon such
employee's eligibility to participate in subsequent offerings under the Purchase
Plan.
Termination of Employment
Rights granted pursuant to any offering under the Purchase Plan terminate
immediately upon cessation of an employee's employment for any reason, and the
Company will distribute to such employee all of his or her accumulated payroll
deductions, without interest.
Restrictions on Transfer
Rights granted under the Purchase Plan are not transferable and may be
exercised only by the person to whom such rights are granted.
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Effect of Certain Corporate Events
If any change is made in the stock subject to the Purchase Plan, or any
rights granted under the Purchase Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Purchase Plan and
outstanding rights will be appropriately adjusted in the class and maximum
number of shares subject to the Purchase Plan and the class, number of shares
and price per share of stock subject to outstanding rights.
In the event of a dissolution or liquidation of the Company, a merger or
consolidation in which the Company is not the surviving corporation, a reverse
merger in which the Company is the surviving corporation but the shares of the
Company's Common Stock are converted into other property or any other capital
reorganization in which more than fifty percent (50%) of the shares of the
Company entitled to vote are exchanged, then, as determined by the Board in its
sole discretion (i) any surviving corporation may assume outstanding rights or
substitute similar rights for those under the Purchase Plan, (ii) such rights
may continue in full force and effect or (iii) participants' accumulated payroll
deductions may be used to purchase Common Stock immediately prior to the
transaction described above and the participants' rights under the ongoing
offering terminated.
Duration, Amendment and Termination
The Board may suspend or terminate the Purchase Plan at any time. Unless
sooner terminated, the Purchase Plan will terminate in September 2008.
The Board may also amend the Purchase Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of the Company within twelve (12) months before or after its
adoption by the Board if the amendment would: (i) increase the number of shares
reserved for issuance under the Purchase Plan; (ii) modify the requirements as
to eligibility for participation in the Purchase Plan (to the extent such
modification requires stockholder approval in order for the Plan to obtain
employee stock purchase plan treatment under Section 423 of the Code or to
comply with the requirements of Rule 16b-3); or (iii) modify the Purchase Plan
in any other way if such modification requires stockholder approval in order for
the Purchase Plan to obtain employee stock purchase plan treatment under Section
423 of the Code or to comply with the requirements of Rule 16b-3.
Rights granted before amendment or termination of the Purchase Plan will
not be altered or impaired by any amendment or termination of such plan without
consent of the person to whom such rights were granted.
Federal Income Tax Information
Rights granted under the Purchase Plan are intended to qualify for
favorable federal income tax treatment associated with rights granted under an
employee stock purchase plan which qualifies under provisions of Section 423 of
the Code.
A participant will be taxed on amounts withheld for the purchase of shares
as if such amounts were actually received. Generally, other than this, no income
will be taxable to a participant until disposition of the shares acquired, and
the method of taxation will depend upon the holding period of the purchased
shares.
If the stock is disposed of more than two years after the beginning of the
offering period and more than one year after the purchase date of the stock,
then the lesser of (i) the excess of the fair market value of the stock at the
time of such disposition over the purchase price of the stock or (ii) the excess
of the fair market value of the stock as of the beginning of the offering period
over the purchase price (determined as of the beginning of the offering period),
will be treated as ordinary income. Any further gain, or any loss, will be taxed
as a long-term capital gain or loss if it was held for more than twelve (12)
months.
If the stock is disposed of before the expiration of either of the holding
periods described above, then the excess of the fair market value of the stock
on the purchase date over the purchase price will be treated as ordinary income
at the time of such disposition. The balance of any gain or loss will be treated
as capital gain
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or loss. Such gain or loss will be: (i) long-term if the stock was held for more
than twelve (12) months or (ii) short-term if the stock was not held more than
twelve (12) months. Even if the stock is later disposed of for less than its
fair market value on the purchase date, the same amount of ordinary income is
attributed to the participant, and a capital loss is recognized equal to the
difference between the sales price and the fair market value of the stock on
such purchase date.
There are no federal income tax consequences to the Company by reason of
the grant or exercise of rights under the Purchase Plan. The Company is entitled
to a deduction to the extent amounts are taxable as ordinary income to a
participant by reason of a disposition before the expiration of the holding
periods described above (subject to the requirement of reasonableness, the
provisions of Section 162(m) of the Code, and, perhaps, in the future, the
satisfaction of a withholding or tax reporting obligation).
Other Tax Consequences. The foregoing discussion is intended to be a
general summary only of the federal income tax aspects of rights granted under
the Purchase Plan; tax consequences may vary depending on the particular
circumstances at hand. In addition, administrative and judicial interpretations
of the application of the federal income tax laws are subject to change.
Furthermore, no information is given with respect to state or local taxes that
may be applicable. Participants in the Purchase Plan who are residents of or are
employed in a country other than the United States may be subject to taxation in
accordance with the tax laws of that particular country in addition to or in
lieu of United States federal income taxes.
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1998, the Board of Directors adopted, and QUALCOMM, as sole
stockholder of the Company, approved, the Company's 1998 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The total number of shares of Common Stock that may be issued or
awarded under the Directors' Plan may not exceed 500,000, subject to adjustment
as described below.
The essential features of the Directors' Plan are outlined below.
General
The Directors' Plan provides for the grant of non-qualified stock options
to "Non-Employee Directors" (defined below in "Eligibility") of the Company.
Such options granted under the Directors' Plan are intended not to qualify as
incentive stock options under the Code. See "Federal Income Tax Information" for
a discussion of the tax treatment of non-qualified stock options.
Purpose
The Directors' Plan was adopted to provide a means by which Non-Employee
Directors will be given an opportunity to purchase stock of the Company and to
assist in retaining the services of such persons as members of the Board of
Directors of the Company.
Administration
The Directors' Plan is administered by the Board of Directors. The Board
has the power to construe and interpret the Directors' Plan. The Board of
Directors has delegated administration of the Directors' Plan to the
Compensation Committee of the Board.
Stock Subject to the Directors' Plan
If options granted under the Directors' Plan expire or otherwise terminate
without being exercised, the Common Stock not purchased pursuant to such options
again becomes available for issuance under the Directors' Plan.
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Eligibility
Stock options will be granted under the Directors' Plan only to directors
of the Company who are not otherwise employees of the Company or any affiliate
of the Company ("Non-Employee Directors").
Non-Discretionary Grants
The Directors' Plan provides for (i) a one-time, non-discretionary grant to
each Non-Employee Director of an option to purchase 20,000 shares of the
Company's Common Stock, effective upon the Distribution Date or the subsequent
election of such person for the first time to serve as a Non-Employee Director
of the Company (an "Initial Option") and (ii) an annual grant to be issued at
the time of each annual meeting, to each Non-Employee Director who continues to
serve as such, of an option to purchase 10,000 shares of the Company's Common
Stock (an "Annual Option"). Upon the Distribution Date, Messrs. Burillo, Targoff
and Williams each will receive a grant of an option to purchase 20,000 shares of
the Company's Common Stock under the Directors' Plan.
Terms of Options
Exercise Price; Payment. The exercise price of options granted under the
Directors' Plan is equal to the fair market value of the Common Stock subject to
the option on the date of the grant. The exercise price of options granted under
the Directors' Plan must be paid either: (i) in cash at the time the option is
exercised, (ii) by delivery of other Common Stock of the Company, (iii)
according to a deferred payment or other arrangement or (iv) in any other form
of legal consideration acceptable to the Board and provided in the applicable
option agreement.
Option Exercise. Initial Options and Annual Options for Non-Employee
Directors will vest over 5 years according to the following schedule: so long as
the optionee continues to serve as a Non-Employee Director or employee of or
consultant to the Company, 20% of the shares subject to the option will vest on
each of the first, second, third, fourth and fifth anniversaries of the date of
grant.
Term. The term of all options under the Directors' Plan is ten years;
provided; however, such options terminate 30 days after the optionee ceases to
be a Non-Employee Director, employee or consultant. In the event that an
optionee ceases to be a Non-Employee Director, employee or consultant due to the
optionee's (i) retirement at age seventy (70) or older after nine (9) years of
service on the Board or (ii) due to permanent and total disability as defined in
Section 22(e)(3) of the Code, the option will terminate only upon expiration of
the option term. In the event that an optionee ceases to be a Non-Employee
Director, employee or consultant due to the optionee's death or due to the
optionee's termination due to permanent and total disability when such
termination due to disability is followed by death, the vesting of all unvested
shares will be accelerated to such date and the option may be exercised in full
at any time within one year of such termination.
Restrictions on Transfer
The Directors' Plan provides that options shall be transferable by the
optionee only upon such terms and conditions as set forth in the option
agreement as the Board shall determine in its discretion. In addition, shares
subject to repurchase by the Company under an early exercise stock purchase
agreement may be subject to restrictions on transfer which the Board deems
appropriate.
Effect of Certain Corporate Events
If any change is made in the stock subject to the Directors' Plan or
subject to any option granted under the Directors' Plan (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration of the
Company), the Directors' Plan and options outstanding thereunder will be
appropriately adjusted
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as to the type(s) and the maximum number of securities subject to such plan and
the type(s), number of securities and price per share of stock subject to such
outstanding options.
In the event of: (1) a dissolution or liquidation of the Company, (2) the
sale of all or substantially all of the Company's assets, (3) a merger,
consolidation or reorganization of the Company with or into another corporation
or other legal person, other than a merger, consolidation or reorganization in
which more than fifty percent (50%) of the combined voting power of the
then-outstanding securities of the surviving entity (or if more than one entity
survives the transaction, the controlling entity) immediately after such a
transaction are held in the aggregate by holders of voting securities of the
Company immediately prior to such transaction, (4) the acquisition by any person
of beneficial ownership of securities representing fifty percent (50%) or more
of the combined voting power of the then-outstanding securities of the Company,
or (5) individuals who at the beginning of any consecutive two-year period
constitute the directors of the Company ceasing for any reason to constitute at
least a majority thereof (collectively, a "Change in Control"), then: (i) any
surviving or acquiring corporation shall assume options outstanding under the
Plan or shall substitute similar options or (ii) in the event any surviving or
acquiring corporation refuses to assume such options or to substitute similar
options for those outstanding under the Plan, then (A) with respect to options
held by persons then performing services as directors, employees or consultants,
the vesting of such options and the time during which such options may be
exercised shall be accelerated prior to such event and the options terminated if
not exercised after such acceleration and at or prior to such event, and (B)
with respect to any other options outstanding under the Directors' Plan, such
options shall be terminated if not exercised prior to such event.
Duration, Amendment and Termination
The Board may suspend or terminate the Directors' Plan at any time. Unless
sooner terminated, the Directors' Plan will terminate in September 2008.
The Board may also amend the Directors' Plan at any time or from time to
time. However, except with respect to certain amendments relating to adjustments
upon changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder approval is necessary for
the Directors' Plan to satisfy the requirements of Rule 16b-3, any requirements
of Section 144 of the Delaware General Corporation Law, or any Nasdaq National
Market or securities exchange listing requirements.
Federal Income Tax Information
Non-Qualified Stock Options. Options granted under the Directors' Plan are
intended to be treated as non-qualified stock options and are not intended to be
eligible for the favorable federal income tax treatment accorded "incentive
stock options" under the Code. Non-qualified stock options granted under the
Directors' Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or the Company by reason of
the grant of a non-qualified stock option. Upon exercise of a non-qualified
stock option, the optionee will recognize taxable ordinary income equal to the
excess of the stock's fair market value on the date of exercise over the option
exercise price. Subject to the requirement of reasonableness, Code Section
162(m) and the satisfaction of a tax reporting obligation, the Company generally
will be entitled to a business expense deduction equal to the taxable ordinary
income realized by the optionee. Upon disposition of the stock, the optionee
will recognize a capital gain or loss equal to the difference between the
selling price and the sum of the amount paid for such stock plus any amount
recognized as ordinary income upon exercise of the option. Such gain or loss
will be: (i) long-term if the stock was held for more than twelve (12) months or
(ii) short-term if the stock was not held for twelve (12) months. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
Other Tax Consequences. The foregoing discussion is intended to be a
general summary only of the federal income tax aspects of options granted under
the Directors' Plan; tax consequences may vary depending on the particular
circumstances at hand. In addition, administrative and judicial interpretations
of the application of the federal income tax laws are subject to change.
Furthermore, no information is given with respect to state or local taxes that
may be applicable. Participants in the Directors' Plan who are residents of a
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country other than the United States may be subject to taxation in accordance
with the tax laws of that particular country in addition to or in lieu of United
States federal income taxes.
TREATMENT OF QUALCOMM
STOCK OPTIONS IN THE DISTRIBUTION
As of August 20, 1998, there were outstanding options (the "QUALCOMM
Options") to purchase (i) 21,639,008 shares of QUALCOMM Common Stock under the
QUALCOMM Incorporated 1991 Stock Option Plan (the "QUALCOMM Option Plan") and
(ii) 665,500 shares of QUALCOMM Common Stock under the QUALCOMM Incorporated
1998 Non-employee Directors Stock Option Plan (the "QUALCOMM Director Plan").
Pursuant to the terms of the Employee Benefits Agreement, immediately prior to
the Distribution, Leap will grant, under the 1998 Plan, options to purchase Leap
Common Stock ("Leap Options") to each holder of an outstanding QUALCOMM Option
who is a current or former employee, consultant or director of QUALCOMM, as
determined by QUALCOMM (including, as appropriate, employees, consultants and
directors of Leap). The exercise price and number of shares subject to QUALCOMM
Options to purchase 379,000 shares of QUALCOMM Common Stock (based on options
outstanding as of August 20, 1998) held by persons other than such current or
former employees, consultants or directors of QUALCOMM ("Redenominated Options")
will be adjusted in a manner designed to preserve the economic value of such
options, but no Leap Options will be granted with respect to such QUALCOMM
options.
The Leap Options will be exercisable for Leap Common Stock on the basis of
one share of Leap Common Stock for every four shares of QUALCOMM Common Stock
subject to the outstanding QUALCOMM Options. No Leap Options to purchase
fractional shares of Leap Common Stock will be granted, but will instead be
rounded down to the nearest whole share. Based on the number of QUALCOMM Options
outstanding on August 20, 1998, it is anticipated that Leap Options to purchase
a total of approximately 5,481,377 shares of Leap Common Stock will be granted
in connection with the Distribution to QUALCOMM option holders.
In connection with the grant of such Leap Options, the exercise price of
the corresponding QUALCOMM Options will be adjusted pursuant to Section
1.162-27(e)(2)(iii)(C) of the federal income tax regulations and the exercise
price of the Leap Options will be determined in a manner designed to preserve
the economic value of the QUALCOMM Options existing immediately prior to the
Distribution. The economic value will be preserved by allocating the current
exercise price of each QUALCOMM Option between the adjusted QUALCOMM Option and
the Leap Option (as adjusted for the distribution ratio) based on the relative
fair market values of the underlying QUALCOMM Common Stock and Leap Common Stock
immediately after the Distribution so as to preserve the "spread" value of the
existing QUALCOMM Option. For this purpose, the portion of the current exercise
price attributable to Leap Common Stock will be based on one-fourth of the
closing "when issued" sales price per share of Leap Common Stock on the
Distribution Date. The portion of the current exercise price attributable to
QUALCOMM Common Stock will be based on the closing sales price per share of
QUALCOMM Common Stock on the Nasdaq National Market, less one-fourth of the
closing "when issued" sales price per share of Leap Common Stock, on the
Distribution Date. As a result, except with respect to Redenominated Options,
following the Distribution each holder of an outstanding QUALCOMM Option prior
to the Distribution will have the opportunity after the Distribution to obtain
Leap Common Stock and the same number of shares of QUALCOMM Common Stock at the
same aggregate exercise price (as adjusted for the distribution ratio) as if
such individual had exercised the QUALCOMM Options in full (as if such options
were fully vested) prior to the Distribution Date.
The vesting schedules and term of outstanding QUALCOMM Options will not be
affected by the Distribution, and the Leap Options will be subject to the same
vesting schedule and term. Vesting and termination of such options will,
however, be dependent upon an employee's continued employment with QUALCOMM or
Leap, as applicable (under the terms of the companies' respective plans),
following the Distribution.
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TREATMENT OF QUALCOMM TRUST CONVERTIBLE PREFERRED
SECURITIES IN THE DISTRIBUTION
In February 1997, QUALCOMM Financial Trust I (the "Trust"), a QUALCOMM
wholly-owned subsidiary trust created under the laws of the State of Delaware,
completed a private placement of $660 million of 5 3/4% Trust Convertible
Preferred Securities (the "QUALCOMM Trust Convertible Preferred Securities").
The sole assets of the Trust are QUALCOMM Incorporated 5 3/4% Convertible
Subordinated Debentures ("Convertible Subordinated Debentures") due February 24,
2012. Holders of the QUALCOMM Trust Convertible Preferred Securities are
entitled to periodic payments from the Trust. The payments by QUALCOMM to the
Trust pursuant to the payment terms of the Convertible Subordinated Debentures
are designed to permit the Trust to fulfill its payment obligations with respect
to the QUALCOMM Trust Convertible Preferred Securities. Pursuant to the terms of
a guaranty, under certain circumstances QUALCOMM may be obligated to make
certain payments to the holders of the QUALCOMM Trust Convertible Preferred
Securities if the Trust fails to make them.
The QUALCOMM Trust Convertible Preferred Securities are convertible into
QUALCOMM Common Stock at the rate of 0.6882 shares of QUALCOMM Common Stock for
each QUALCOMM Trust Convertible Preferred Security (equivalent to a conversion
price of $72.6563 per share of common stock). Distributions on the QUALCOMM
Trust Convertible Preferred Securities are payable until subject to mandatory
redemption on February 24, 2012, at a redemption price of $50 per preferred
security. QUALCOMM has reserved 9,084,240 shares of QUALCOMM Common Stock as of
August 20, 1998 for possible conversion of the QUALCOMM Trust Convertible
Preferred Securities at the option of the holders.
As of August 20, 1998, there were outstanding approximately 13.2 million
QUALCOMM Trust Convertible Preferred Securities, convertible into 9,084,240
shares of QUALCOMM Common Stock as described above. As a result of and
subsequent to the Distribution, each QUALCOMM Trust Convertible Preferred
Security will be convertible, subject and pursuant to the terms of the
Convertible Subordinated Debentures, into both QUALCOMM Common Stock and Leap
Common Stock at the rate of 0.6882 and 0.17205 shares respectively for each
QUALCOMM Trust Convertible Preferred Security. Upon conversion of such Trust
Convertible Preferred Securities, QUALCOMM will receive benefit in the form of
forgiveness of debt, but Leap will receive no such benefit or other
considerations.
Pursuant to the terms of the Conversion Agreement, Leap will be obligated
to file and keep effective, subject to certain exceptions, a registration
statement covering the shares of Leap Common Stock issuable upon conversion of
the Trust Convertible Preferred Securities.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The businesses to be conducted by the Company have in the past engaged in
transactions with QUALCOMM and its businesses. Following the Distribution,
QUALCOMM will continue to have a significant relationship with the Company as a
result of the agreements being entered into by QUALCOMM and the Company in
connection with the Distribution, and due to its warrant to purchase 5,500,000
shares of the Company. QUALCOMM's relationships as equipment vendor to Leap and
the Leap Operating Companies and as lender under the Credit Facility will give
QUALCOMM significant influence over Leap and will create certain conflicts with
Leap. In addition, QUALCOMM is not restricted from competing with the Company or
the Leap Operating Companies or pursuing directly wireless telecommunications
businesses or interests which would also be attractive to Leap. See "Risk
Factors -- Potential Conflicts with QUALCOMM," and "Relationship Between
QUALCOMM and the Company After the Distribution."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Immediately prior to the Distribution, all of the outstanding Company
shares will be held by QUALCOMM. The following table sets forth the projected
beneficial ownership of Leap Common Stock immediately following the
Distribution, based on beneficial ownership with respect to shares of QUALCOMM
as of August 20, 1998, by (i) all those known by the Company to be beneficial
owners of more than 5% of its Common Stock; (ii) each director of the Company;
(iii) each Named Executive Officer of the Company; and (iv) all directors and
officers of the Company as a group.
<TABLE>
<CAPTION>
COMPANY SHARES PROJECTED TO BE
BENEFICIALLY OWNED(1)
-------------------------------
NUMBER OF PERCENT OF
DIRECTORS, OFFICERS AND 5% SHAREHOLDERS SHARES(2) TOTAL
--------------------------------------- ----------- ------------
<S> <C> <C>
QUALCOMM Incorporated(3).................................... 5,500,000 23.8
Harvey P. White(4)(5)(6).................................... 140,516 *
Thomas J. Bernard(5)(6)(7).................................. 7,345 *
James E. Hoffmann(5)(6)..................................... 5,298 *
Daniel O. Pegg(5)(6)(8)..................................... 2,610 *
Leonard C. Stephens(5)(6)................................... 900 *
Alejandro Burillo Azcarraga................................. 0 *
Michael B. Targoff.......................................... 0 *
Jeffrey P. Williams......................................... 0 *
All Officers and Directors as a group (9 persons)........... 156,669 *
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders of QUALCOMM and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "Commission"). Unless otherwise
indicated in the footnotes to this table and subject to marital property
laws where applicable, each of the stockholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 17,643,830 shares of
Leap Common Stock outstanding based on the number of shares of QUALCOMM
Common Stock outstanding on August 20, 1998, adjusted as required by rules
promulgated by the Commission.
(2) Except as otherwise noted, reflects, in each case, the number of shares of
QUALCOMM Common Stock beneficially owned as of August 20, 1998, divided by
four (4). In addition to shares held in the individual's sole name, this
column includes shares held by the spouse and other members of the named
person's immediate household who share that household with the named person,
and shares held in family trusts.
(3) Consists entirely of a warrant to purchase shares of Leap Common Stock
exercisable immediately following the Distribution, which expires 10 years
following the Distribution.
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(4) Includes 2,500 shares held in a foundation of which Mr. White disclaims
beneficial ownership. Also includes 72,816 shares held in family trusts,
7,500 held in a Family Limited Partnership, 250 shares held in a charitable
remainder trust, and 6,950 shares held in trusts for the benefit of
relatives.
(5) Includes shares issuable upon exercise of options exercisable within 60 days
of August 20, 1998 as follows: Mr. Bernard, 6,600 shares (including 2,100
shares subject to options held by Mr. Bernard's wife); Mr. Hoffmann, 5,100
shares; Mr. Pegg, 2,500; Mr. Stephens, 900; and Mr. White, 50,500 shares.
(6) Does not include shares issuable upon exercise of QUALCOMM stock options.
The officers as of the Distribution will hold options to purchase shares of
QUALCOMM exercisable within 60 days following August 20, 1998 in the
following amounts: Mr. Bernard, 26,400 shares (including 8,400 shares
subject to options held by Mr. Bernard's wife); Mr. Hoffmann, 20,400 shares;
Mr. Pegg, 10,000; Mr. Stephens, 3,600; and Mr. White, 202,000 shares.
(7) Includes 60 shares held by Mr. Bernard's spouse.
(8) Includes 25 shares held in a custodial account for the benefit of Mr. Pegg
and 25 shares held in a custodial account for the benefit of Mr. Pegg's
spouse.
DESCRIPTION OF COMPANY CAPITAL STOCK
Under the Certificate of Incorporation, the total number of shares of all
classes of stock that the Company has authority to issue is 85 million,
consisting of 10 million shares of preferred stock, par value $0.0001 per share
("Preferred Stock") and 75 million shares of Leap Common Stock. Based on the
number of shares of QUALCOMM Common Stock outstanding at August 20, 1998
approximately 17,643,830 shares of Leap Common Stock will be issued to
stockholders of QUALCOMM.
COMMON STOCK
The holders of Leap Common Stock will be entitled to one vote for each
share on all matters voted on by stockholders, and the holders of such shares
will possess all voting power, except as otherwise required by law or provided
in any resolution adopted by the Board of Directors of the Company with respect
to any series of Preferred Stock. It is currently expected that the first annual
meeting of stockholders of the Company will be held in January 1999. Subject to
any preferential or other rights of any outstanding series of Company preferred
stock that may be designated by the Board of Directors of the Company, the
holders of Leap Common Stock will be entitled to such dividends as may be
declared from time to time by the Board of Directors of the Company from funds
available therefor, and upon liquidation will be entitled to receive pro rata
all assets of the Company available for distribution to such holders. See "Risk
Factors -- Dividend Policy."
PREFERRED STOCK
The Board of Directors of the Company will be authorized to provide for the
issuance of shares of Preferred Stock, in one or more series, and to determine,
with respect to any series, the terms and rights of such series, including the
following: (i) the designation of such series; (ii) the rate and time of, and
conditions and preferences with respect to, dividends, and whether such
dividends are cumulative; (iii) the voting rights, if any, of shares of such
series; (iv) the price, timing and conditions regarding the redemption of shares
of such series and whether a sinking fund should be established for such series;
(v) the rights and preferences of shares of such series in the event of
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company; and (vi) the right, if any, to convert or exchange shares of
such series into or for stock or securities of any other series or class.
The Company believes that the availability of the Preferred Stock will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs which might
arise. Having such authorized shares available for issuance will allow the
Company to issue shares of Preferred Stock without the expense and delay of a
special stockholders' meeting. The authorized shares of Preferred Stock, as well
as shares of Leap Common Stock, will be available for issuance without
96
<PAGE> 102
further action by the Company's stockholders, unless action is required by
applicable law or the rules of any stock exchange on which the Company's
securities may be listed or unless the Company is restricted by the Preferred
Stock.
On September 9, 1998, the Board of Directors adopted a Stockholder Rights
Plan. See "Description of Rights Agreement." In connection with the Rights Plan,
the Board of Directors of the Company declared a dividend of one Right for each
outstanding share of Common Stock of the Company. Each Right will entitle the
registered holder thereof, after the Rights become exercisable and until
September 10, 2008 (or the earlier redemption, exchange or termination of the
Rights), to purchase from the Company one one-thousandth (1/1000) of a share of
Series A Junior Participating Preferred Stock, par value $.0001 per share (the
"Series A Preferred Shares"), at a price of $90.00 per one one-thousandth
(1/1000) of a Series A Preferred Share, subject to certain anti-dilution
adjustments. Each Series A Preferred Share purchasable upon exercise of the
Rights will be entitled, when, as and if declared, to a minimum preferential
quarterly dividend payment of $10.00 per share but will be entitled to an
aggregate dividend of 1,000 times the dividend, if any, declared per share of
Common Stock. In the event of liquidation, dissolution or winding up of the
Company, the holders of the Series A Preferred Shares will be entitled to a
preferential liquidation payment of $1,000 per share plus any accrued but unpaid
dividends but will be entitled to an aggregate payment of 1,000 times the
payment made per share of Common Stock. Each Series A Preferred Share will have
1,000 votes and will vote together with the shares of Common Stock. Finally, in
the event of any merger, consolidation or other transaction in which outstanding
shares of Leap Common Stock are exchanged, each Series A Preferred Share will be
entitled to receive 1,000 times the amount received per share of Common Stock.
Series A Preferred Shares will not be redeemable. The Company has reserved for
issuance 75,000 Series A Preferred Shares issuable upon exercise of the Rights.
WARRANTS
Following the Distribution, there will be an outstanding warrant (the
"Warrant"), held by QUALCOMM, to purchase 5,500,000 shares of Leap Common Stock
at an exercise price equal to the average price of the last sales price per
share of the Leap Common Stock on the Nasdaq National Market for each of the
five (5) consecutive trading days beginning on and including the Distribution
Date. The Warrant is exercisable during the ten (10) years following the
Distribution. Based upon the number of shares expected to be outstanding and
reserved for issuance pursuant to outstanding options and convertible securities
as of the Distribution, upon exercise in full of the Warrant, QUALCOMM would
hold approximately 18% of the outstanding Leap Common Stock, assuming exercise
of all such outstanding options and convertible securities.
LEAP COMMON STOCK RESERVED FOR ISSUANCE
QUALCOMM will retain the Warrant following the Distribution, which will be
immediately exercisable and will entitle QUALCOMM to purchase 5,500,000 shares
of Leap Common Stock at a purchase price equal to the average of the last sales
price per share of Leap Common Stock on the Nasdaq National Market for each of
the five (5) consecutive trading days beginning with and including the
Distribution Date. In addition, based on the number of QUALCOMM Options
outstanding on August 20, 1998, it is anticipated that Leap Options to purchase
a total of approximately 5,481,377 shares of Leap Common Stock will be granted
in connection with the Distribution to QUALCOMM option holders. In addition to
the Leap Options to be granted to QUALCOMM option holders who will continue as
employees of Leap after the Distribution, Leap intends to grant stock options to
purchase Leap Common Stock following the Distribution to employees, officers,
directors and consultants of Leap as part of its ongoing equity incentive
program. Leap has reserved an aggregate 8,700,000 shares for issuance to its
employees, officers, directors and consultants under its 1998 Stock Option Plan,
Employee Stock Purchase Plan and 1998 Directors' Stock Option Plan, which will
permit the grant of options to purchase an additional approximately 3,218,623
shares following the grant of options to QUALCOMM option holders in connection
with the Distribution. Finally, due to and subsequent to the Distribution, the
outstanding Trust Convertible Preferred Securities convertible into QUALCOMM
Common Stock will additionally be convertible into an aggregate 2,271,060 shares
of Leap Common Stock. As a result,
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<PAGE> 103
collectively, there will be 16,471,060 shares of Leap Common Stock reserved for
issuance following the Distribution.
RECENT SALES OF UNREGISTERED SECURITIES
In June 1998, Leap sold 1,000 shares of Common Stock to QUALCOMM for $.10
in a transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof. In connection with the Distribution
contemplated by this Information Statement, each outstanding share of Leap
Common Stock will be converted and split into the number of shares of Leap
Common Stock necessary to provide QUALCOMM with all shares to be transferred in
the Distribution. In connection with the Distribution, Leap will also issue a
warrant to purchase 5,500,000 shares of Common Stock to QUALCOMM in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
NO PREEMPTIVE RIGHTS
No holder of any stock of the Company of any class authorized at the
Distribution Date will then have any preemptive right to subscribe to any
securities of the Company of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Leap Common Stock will be Harris
Trust Company of California.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"), an anti-takeover law. In general, the
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation also requires that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing. In addition, special meetings of
stockholders of the Company may be called only by a majority of the authorized
number of directors, the Chairman of the Board or the President of the Company.
The Certificate of Incorporation also provides for a classified Board of
Directors consisting of three classes of directors. In addition, the Certificate
of Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. The Company's Bylaws require
advance notice by a stockholder of a proposal or director nomination which such
stockholder desires to present at the annual meeting of stockholders. The
Company's Certificate of Incorporation and Bylaws also require that the holders
of at least 66 2/3% of the voting stock of the Company must approve any
amendment to either the Certificate of Incorporation or Bylaws affecting certain
provisions. These provisions may have the effect of deterring hostile takeovers
or delaying changes in control or management of the Company.
DESCRIPTION OF RIGHTS AGREEMENT
On September 9, 1998, the Board of Directors of the Company adopted a
Stockholder Rights Plan. The following description of the Stockholder Rights
Plan is intended as a summary only and is qualified in its entirety by reference
to the Rights Agreement dated as of September 14, 1998 between the Company and
98
<PAGE> 104
Harris Trust Company of California (the "Rights Agreement"), a form of which is
filed as an exhibit to the Company's Registration Statement on Form 10, of which
this Information Statement forms a part.
In connection with the Rights Plan, the Board of Directors of the Company
declared a dividend of one preferred share purchase right (the "Rights") for
each outstanding share of Common Stock of the Company outstanding at the close
of business on September 11, 1998. Each Right will entitle the registered holder
thereof, after the Rights become exercisable and until September 10, 2008 (or
the earlier redemption, exchange or termination of the Rights), to purchase from
the Company one one-thousandth (1/1000) of a share of Series A Junior
Participating Preferred Stock, par value $.0001 per share (the "Series A
Preferred Shares"), at a price of $90.00 per one one-thousandth (1/1000) of a
Series A Preferred Share, subject to certain anti-dilution adjustments (the
"Purchase Price"). Until the earlier to occur of (i) ten (10) days following a
public announcement that a person or group of affiliated or associated persons
(other than an Existing Holder (as defined below)) has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding Leap
Common Stock (an "Acquiring Person") or (ii) ten (10) business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement or announcement of an intention to make a
tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the outstanding Leap
Common Stock (the earlier of (i) and (ii) being called the "Rights Distribution
Date"), the Rights will be evidenced, with respect to any of the Common Stock
certificates outstanding as of the Record Date, by such Common Stock
certificate. "Existing Holder" means QUALCOMM Incorporated, together with its
affiliates and associates (but excluding individual officers, directors and
employees of QUALCOMM Incorporated) unless and until such Existing Holder has
acquired beneficial ownership of one or more additional shares of Common Stock.
The Rights will be transferred with and only with the Common Stock until the
Rights Distribution Date or earlier redemption or expiration of the Rights. As
soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the outstanding Leap Common Stock as of the close of
business on the Rights Distribution Date and such separate Right Certificates
alone will evidence the Rights. The Rights will at no time have any voting
rights.
Each Series A Preferred Share purchasable upon exercise of the Rights will
be entitled, when, as and if declared, to a minimum preferential quarterly
dividend payment of $10.00 per share but will be entitled to an aggregate
dividend of 1,000 times the dividend, if any, declared per share of Common
Stock. In the event of liquidation, dissolution or winding up of the Company,
the holders of the Series A Preferred Shares will be entitled to a preferential
liquidation payment of $1,000 per share plus any accrued but unpaid dividends
but will be entitled to an aggregate payment of 1,000 times the payment made per
share of Common Stock. Each Series A Preferred Share will have 1,000 votes and
will vote together with the shares of Common Stock. Finally, in the event of any
merger, consolidation or other transaction in which outstanding shares of Leap
Common Stock are exchanged, each Series A Preferred Share will be entitled to
receive 1,000 times the amount received per share of Common Stock. Series A
Preferred Shares will not be redeemable. These Rights are protected by customary
anti-dilution provisions. Because of the nature of the Series A Preferred
Share's dividend, liquidation and voting rights, the value of one one-thousandth
of a Series A Preferred Share purchasable upon exercise of each Right should
approximate the value of one share of Common Stock.
In the event that a person or group becomes an Acquiring Person or if the
Company were the surviving corporation in a merger with an Acquiring Person or
any affiliate or associate of an Acquiring Person and the outstanding shares of
Leap Common Stock were not changed or exchanged, each holder of a Right, other
than Rights that are or were acquired or beneficially owned by the Acquiring
Person (which Rights will thereafter be void), will thereafter have the right to
receive upon exercise that number of shares of Common Stock having a market
value of two times the then current Purchase Price of one Right. In the event
that, after a person or group has become an Acquiring Person, the Company were
acquired in a merger or other business combination transaction or more than 50%
of its assets or earning power were sold, proper provision shall be made so that
each holder of a Right shall thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price of the Right, that number of
shares of common stock of the acquiring company
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<PAGE> 105
which at the time of such transaction would have a market value of two times the
then current Purchase Price of one Right.
At any time after a person or group becomes an Acquiring Person and prior
to the earlier of one of the events described in the last sentence in the
previous paragraph or the acquisition by such Acquiring Person of 50% or more of
the then outstanding shares of Leap Common Stock, the Board of Directors may
cause the Company to exchange the Rights (other than Rights owned by an
Acquiring Person which have become void), in whole or in part, for shares of
Common Stock at an exchange rate equal to that number of shares of Common Stock
having an aggregate value equal to the difference between the value of the
shares of Common Stock issuable upon exercise of a Right and the Purchase Price
therefor (with such values being based on the current per share market price, as
determined under the Rights Agreement) per Right (subject to adjustment).
The Rights may be redeemed in whole, but not in part, at a price of $.01
per Right (the "Redemption Price") by the Board of Directors at any time prior
to the time that an Acquiring Person has become such. The redemption of the
Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The Rights will expire on September 10, 2008 (unless earlier redeemed,
exchanged or terminated). Harris Trust Company of California is the Rights
Agent.
The Purchase Price payable, and the number of one one-thousandths of a
Series A Preferred Share or other securities or property issuable, upon exercise
of the Rights are subject to adjustment from time to time to prevent dilution
(i) in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Shares, (ii) upon the grant to
holders of the Series A Preferred Shares of certain rights or warrants to
subscribe for or purchase Series A Preferred Shares or convertible securities at
less than the current market price of the Series A Preferred Shares or (iii)
upon the distribution to holders of the Series A Preferred Shares of evidences
of indebtedness, cash, securities or assets (excluding regular periodic cash
dividends at a rate not in excess of 125% of the rate of the last regular
periodic cash dividend theretofore paid or, in case regular periodic cash
dividends have not theretofore been paid, at a rate not in excess of 50% of the
average net income per share of the Company for the four quarters ended
immediately prior to the payment of such dividend, or dividends payable in
Series A Preferred Shares (which dividends will be subject to the adjustment
described in clause (i) above)) or of subscription rights or warrants (other
than those referred to above).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company beyond those as an existing stockholder,
including, without limitation, the right to vote or to receive dividends.
Any of the provisions of the Rights Agreement may be amended by the Board
of Directors of the Company for so long as the Rights are then redeemable, and
after the Rights are no longer redeemable, the Company may amend or supplement
the Rights Agreement in any manner that does not adversely affect the interests
of the holder of the Rights.
One Right was distributed to stockholders of the Company for each share of
Leap Common Stock owned of record by them on September 11, 1998. As long as the
Rights are attached to the shares of Common Stock, the Company will issue one
Right with each new share of Common Stock (including, without limitation, the
shares of Leap Common Stock that will be distributed in the Distribution) so
that all such shares will have attached Rights. The Company has agreed that,
from and after the Rights Distribution Date, the Company will reserve 75,000
Series A Preferred Shares initially for issuance upon exercise of the Rights.
The Rights may have some anti-takeover affects. The rights are designed to
assure that all of the Company's stockholders receive fair and equal treatment
in the event of any proposed takeover of the Company and to guard against
partial tender offers, open market accumulations and other abusive tactics to
gain control of the Company without paying all stockholders a control premium.
The Rights will cause
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<PAGE> 106
substantial dilution to a person or group (other than an Existing Holder) that
acquires 15% or more of the Company's stock on terms not approved by the
Company's Board of Directors. The Rights should not interfere with any merger or
other business combination approved by the Board of Directors at any time prior
to the first date that a person or group has become an Acquiring Person.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Officers and directors of the Company are covered by certain provisions of
the DGCL, the Certificate of Incorporation, the By-laws, individual
indemnification agreements with the Company and insurance policies which serve
to limit, and, in certain instances, to indemnify them against, certain
liabilities which they may incur in such capacities. None of such provisions
would have retroactive effect for periods prior to the Distribution Date, and
the Company is not aware of any claim or proceeding in the last three years, or
any threatened claim, which would have been or would be covered by these
provisions. These various provisions are described below.
Elimination of Liability in Certain Circumstances. In June 1986, Delaware
enacted legislation which authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. This duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations now authorized by such
legislation, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting negligence or gross negligence in
the exercise of their duty of care. Although the statute does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by such legislation. Specifically, the
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as director, except for liability: (i) for
any breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for unlawful payments of
dividends or unlawful share repurchases or redemptions as provided in Section
174 of the DGCL; or (iv) for any transaction from which the director derived an
improper personal benefit.
Indemnification and Insurance. As a Delaware corporation, the Company has
the power, under specified circumstances generally requiring the director or
officer to act in good faith and in a manner he reasonably believes to be in or
not opposed to the Company's best interests, to indemnify its directors and
officers in connection with actions, suits or proceedings brought against them
by a third party or in the name of the Company, by reason of the fact that they
were or are such directors or officers, against expenses, judgments, fines and
amounts paid in settlement in connection with any such action, suit or
proceeding. The By-laws generally provide for mandatory indemnification of the
Company's directors and officers to the full extent provided by Delaware
corporate law. In addition, the Company intends to enter into indemnification
agreements with its directors and officers which generally provide for mandatory
indemnification under circumstances for which indemnification would otherwise be
discretionary under Delaware law.
The Company intends to purchase and maintain insurance on behalf of any
person who is or was a director or officer of the Company, or is or was a
director or officer of the Company serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Company would have the power or
obligation to indemnify him against such liability under the provisions of the
By-laws.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Leap Shares in
the Distribution will be passed upon for QUALCOMM by Cooley Godward LLP, San
Diego, California and for the Company by Latham & Watkins, San Diego,
California.
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<PAGE> 107
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
10 (the "Registration Statement," which term shall include any amendments or
supplements thereto) under the Exchange Act with respect to the shares of Leap
Common Stock being received by QUALCOMM stockholders in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. With respect to each contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by the Company
with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site
that contains reports, proxy statements, registration statements and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov. Copies of all or any part of the Registration Statement
and reports, proxy statements and the other information filed electronically by
the Company may be obtained from the Commission at its principal offices in
Washington D.C. after payment of amounts prescribed by the Commission.
Following the Distribution, the Company intends to furnish to its
stockholders annual reports containing consolidated financial statements
prepared in accordance with generally accepted accounting principles and audited
by an independent public accounting firm accompanied by an opinion expressed by
such independent public accounting firm.
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<PAGE> 108
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE
COMPANY)
Condensed Combined Financial Statements (unaudited):
Condensed Combined Balance Sheet at May 31, 1998
(unaudited)............................................ F-2
Condensed Combined Statements of Operations for the nine
months ended
May 31, 1998 and 1997 and for the period from September
1, 1995 (inception) to May 31, 1998 (unaudited)........ F-3
Condensed Combined Statements of Cash Flows for the nine
months ended
May 31, 1998 and 1997 and for the period from September
1, 1995 (inception) to May 31, 1998 (unaudited)........ F-4
Condensed Combined Statements of Stockholder's Equity for
the nine months ended May 31, 1998 and the period from
September 1, 1995 (inception) to May 31, 1998
(unaudited)............................................ F-5
Notes to Condensed Combined Financial Statements
(unaudited)............................................ F-6
Combined Financial Statements:
Report of Price Waterhouse LLP, Independent Accountants... F-10
Combined Balance Sheets at August 31, 1997 and 1996....... F-11
Combined Statements of Operations for the fiscal years
ended August 31, 1997 and 1996 and for the period from
September 1, 1995 (inception) to August 31, 1997....... F-12
Combined Statements of Cash Flows for the fiscal years
ended August 31, 1997 and 1996 and for the period from
September 1, 1995 (inception) to August 31, 1997....... F-13
Combined Statements of Stockholder's Equity for each of
the fiscal years in the period from September 1, 1995
(inception) to August 31, 1997......................... F-14
Notes to Combined Financial Statements.................... F-15
CHILESAT TELEFONIA PERSONAL S.A. (A COMPANY IN THE
DEVELOPMENT STAGE)
Financial Statements:
Report of Price Waterhouse, Independent Accountants....... F-25
Balance Sheet at December 31, 1997........................ F-26
Statement of Income for the period from inception (March
3, 1997) to December 31, 1997.......................... F-27
Statement of Cash Flows for the period from inception
(March 3, 1997) to December 31, 1997................... F-28
Statement of Shareholders' Equity for the period from
inception (March 3, 1997) to December 31, 1997......... F-29
Notes to Financial Statements............................. F-30
TRANSWORLD COMPANIES (ENTITIES IN THE DEVELOPMENT STAGE)
Combined Consolidated Financial Statements:
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-40
Combined Consolidated Balance Sheets at December 31, 1997
and 1996 and at June 30, 1998 (unaudited).............. F-41
Combined Consolidated Statements of Operations for the
years ended December 31, 1997 and 1996 and for the
period from June 25, 1990 (inception) to December 31,
1997 and for the six months ended June 30, 1998 and
1997 and for the period from June 25, 1990 (inception)
to June 30, 1998 (unaudited)........................... F-42
Combined Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 and for the period
from June 25, 1990 (inception) to June 30, 1998
(unaudited) and for the years ended December 31, 1997
and 1996 and for the period from June 25, 1990
(inception) to December 31, 1997....................... F-43
Combined Consolidated Statements of Stockholder's Equity
for the period from June 25, 1990 (inception) to
December 31, 1998 and for the period from June 25, 1990
to June 30, 1998 (unaudited)........................... F-44
Notes to Combined Consolidated Financial Statements....... F-45
</TABLE>
F-1
<PAGE> 109
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MAY 31, 1998
------------
<S> <C>
Current assets.............................................. $ --
Loans receivable............................................ 15,000
Investments in wireless operating companies................. 42,777
--------
Total assets................................................ $ 57,777
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities.................... $ 2,897
--------
Commitments (Note 4)
Stockholder's equity:
Parent's investment....................................... 76,048
Deficit accumulated during the development stage.......... (19,273)
Cumulative translation adjustment......................... (1,895)
--------
Total stockholder's equity............................. 54,880
--------
Total liabilities and stockholder's equity.................. $ 57,777
========
</TABLE>
See accompanying notes.
F-2
<PAGE> 110
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE PERIOD FROM
MAY 31, SEPTEMBER 1, 1995
------------------- (INCEPTION)
1998 1997 TO MAY 31, 1998
-------- ------- --------------------
<S> <C> <C> <C>
Equity in net losses of wireless operating
companies........................................... $ (1,535) $ (139) $ (1,328)
General and administrative expenses................... (16,188) (994) (17,945)
-------- ------- --------
Loss before income taxes.............................. (17,723) (1,133) (19,273)
Income tax expense.................................... -- -- --
-------- ------- --------
Net loss.............................................. $(17,723) $(1,133) $(19,273)
======== ======= ========
Unaudited proforma basic and diluted net loss per
common share (Note 1)............................... $ (1.00)
========
</TABLE>
See accompanying notes.
F-3
<PAGE> 111
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
NINE MONTHS ENDED MAY 31, FROM SEPTEMBER 1, 1995
-------------------------- (INCEPTION)
1998 1997 TO MAY 31, 1998
---------- ---------- ----------------------
<S> <C> <C> <C>
Operating activities:
Net loss...................................... $(17,723) $ (1,133) $(19,273)
Equity in net losses of wireless operating
companies.................................. 1,535 139 1,328
Provision for bad debt........................ 1,700 -- 1,700
Change in accounts payable and accrued
liabilities................................... 2,618 98 2,897
-------- -------- --------
Net cash used in operating activities........... (11,870) (896) (13,348)
-------- -------- --------
Investing activities:
Investments in wireless operating companies... -- (46,000) (46,000)
Issuance of loans receivable.................. (16,700) -- (16,700)
-------- -------- --------
Net cash used in investing activities........... (16,700) (46,000) (62,700)
-------- -------- --------
Financing activities:
Parent's investment........................... 28,570 46,896 76,048
-------- -------- --------
Net cash provided by financing activities....... 28,570 46,896 76,048
-------- -------- --------
Net change in cash and cash equivalents......... -- -- --
Cash and cash equivalents at beginning of
period........................................ -- -- --
-------- -------- --------
Cash and cash equivalents at end of period...... $ -- $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 112
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
PARENT'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
---------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at September 1, 1995 (Inception)........ $ -- $ -- $ -- $ --
Transfers from QUALCOMM......................... 285 -- -- 285
Net loss........................................ -- (396) -- (396)
------- -------- ------- -------
Balance at August 31, 1996...................... 285 (396) -- (111)
Transfers from QUALCOMM......................... 47,193 -- -- 47,193
Net loss........................................ (1,154) -- (1,154)
Cumulative translation adjustment............... -- -- 60 60
------- -------- ------- -------
Balance at August 31, 1997...................... 47,478 (1,550) 60 45,988
Transfers from QUALCOMM......................... 28,570 -- -- 28,570
Net loss........................................ -- (17,723) -- (17,723)
Cumulative translation adjustment............... -- -- (1,955) (1,955)
------- -------- ------- -------
Balance at May 31, 1998......................... $76,048 $(19,273) $(1,895) $54,880
======= ======== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 113
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
On June 24, 1998, QUALCOMM Incorporated ("QUALCOMM") created a separate
wholly-owned company, Leap Wireless International, Inc. (the "Company" or
"Leap"), a Delaware corporation. The Company intends to enter into a Separation
and Distribution Agreement with QUALCOMM pursuant to which certain of QUALCOMM's
joint venture and equity interests in domestic and international terrestrial-
based wireless telecommunications operating companies will be transferred to the
Company, followed by a spin-off of the subsidiary to the stockholders of
QUALCOMM (the "Distribution"). QUALCOMM intends to complete the Distribution
before September 23, 1998. The Company's business strategy is to operate,
manage, support and otherwise participate in Code Division Multiple Access
("CDMA") based wireless telecommunications businesses and ventures in emerging
international markets and the United States. Initially, the Company expects that
its principal markets for its intended activity will be in Latin America,
Eastern Europe, Asia-Pacific and the United States. QUALCOMM is a Delaware
corporation that develops, manufactures, markets, licenses and operates advanced
communications systems and products based on digital wireless technology,
including mobile and fixed satellite communications systems and products and
digital wireless telephone systems and products using QUALCOMM's proprietary
CDMA technology. QUALCOMM has entered into, and will retain upon the
Distribution, equipment sales and services and vendor financing agreements with
the wireless telecommunications operating companies to be transferred to the
Company.
Following the Distribution, QUALCOMM and the Company will be operated as
independent companies. QUALCOMM and the Company will, however, continue to have
a relationship as a result of the various agreements being entered into between
QUALCOMM and the Company in connection with the Distribution.
Basis Of Presentation
The accompanying interim condensed financial statements have been prepared
by the Company, without audit, in accordance with the instructions to Form 10-Q
and, therefore, do not necessarily include all information and footnotes
necessary for a fair presentation of its financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles.
In the opinion of management, the unaudited financial information for the
interim periods presented reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation. These condensed
financial statements and notes thereto should be read in conjunction with the
financial statements and notes hereto included in the Company's combined
financial statements for the fiscal year ended August 31, 1997. Operating
results for interim periods are not necessarily indicative of operating results
for an entire fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The combined financial statements reflect the financial position, results
of operations, cash flows and changes in stockholder's equity of the business
that will be transferred to the Company from QUALCOMM as if the Company were a
separate entity for all periods presented and as if the historical joint venture
and equity interests in wireless operating companies were owned by the Company.
However, for the periods
F-6
<PAGE> 114
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
covered by the financial statements, such joint venture and equity interests
were directly or indirectly owned by QUALCOMM. The financial statements have
been presented as if the Company were a development stage company with an
inception date of September 1, 1995. As of May 31, 1998, neither the Company nor
its investees had generated any revenues from their planned principal
operations. The financial statements have been prepared using the historical
basis in the assets and liabilities and historical results of operations related
to the Company's business. The Company had no cash balances as of May 31, 1998
as no specific cash accounts had been designated by QUALCOMM for the Company.
When Company liabilities are paid or investments are made, it is assumed that
the cash used by the Company was funded by a stockholder cash contribution.
Changes in stockholder's equity represent QUALCOMM's contribution after giving
effect to the net operating cash used by the Company and amounts necessary to
finance the acquisition of ownership interests in wireless operating companies.
The Company had no employees or QUALCOMM employees wholly dedicated to its
business during the fiscal periods presented. QUALCOMM departmental labor and
other direct costs have been allocated to the Company based on estimates of
incremental efforts expended and incremental costs incurred related to the
Company's business. General corporate overhead related to QUALCOMM's corporate
headquarters and common support divisions have been allocated to the Company
generally based on the proportion of the Company's costs and expenses to
QUALCOMM's costs and expenses. Management believes these allocations reasonably
approximate costs incurred by QUALCOMM on behalf of the Company's operations.
However, the costs as allocated to the Company are not necessarily indicative of
the costs that would have been incurred if the Company had performed these
functions as a stand-alone entity. Subsequent to the separation of the Company
from QUALCOMM, the Company will have its own staff perform necessary functions
using its own resources or purchased services and will be responsible for the
costs and expenses associated with the management of a public corporation.
The financial information included herein may not necessarily reflect the
results of operations, financial position, cash flows and changes in
stockholder's equity of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
Unaudited Pro Forma Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share"
which the Company has adopted to compute unaudited pro forma net loss per common
share ("EPS") amount for the nine months ended May 31, 1998.
The Company had no shares of common stock outstanding during the nine
months ended May 31, 1998. The unaudited pro forma net loss per common share was
calculated by dividing the net loss for the first nine months of fiscal 1998 of
$17,723,000 by the 17,643,830 expected shares of common stock of the Company to
be issued upon the Distribution based on QUALCOMM shares outstanding as of
August 20, 1998. Such shares reflect the expected issuance upon the Distribution
of one of the Company's shares of common stock for every four shares of QUALCOMM
common stock outstanding. Replacement stock options and awards for 5,481,377
shares, the conversion of QUALCOMM's Trust Convertible Preferred Securities
which are convertible into shares of QUALCOMM and 2,271,060 shares of Company
common stock and the exercise of a warrant to be issued to QUALCOMM for
approximately 5,500,000 shares of Company common stock have not been considered
in calculating the pro forma net loss per common share because their effect
would be anti-dilutive. As a result, the Company's unaudited pro forma basic and
diluted net loss per common share are the same.
F-7
<PAGE> 115
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
may be primarily from foreign currency translation adjustments and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its financial statement disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
NOTE 2. INVESTMENTS IN WIRELESS OPERATING COMPANIES
The Company's investments in wireless operating companies consist of the
following (in thousands):
<TABLE>
<CAPTION>
MAY 31, 1998
------------
<S> <C>
Investment at equity........................................ $38,777
Investment at cost.......................................... 4,000
-------
$42,777
=======
</TABLE>
The Company has joint venture and equity interests in companies that hold
cellular telephone licenses or are seeking such licenses. Its participation in
each company differs from market to market and the Company does not have
majority interests in such companies. The Company's ability to withdraw funds,
including dividends, from its participation in such investments is dependent in
many cases on receiving the consent of the other participants, over which the
Company has no control.
The Company is a 70% common owner in QUALCOMM Telecommunications, Ltd.
("QUALCOMMTel"), a Cayman Islands Corporation. In November 1997, QUALCOMMTel
entered into a letter of intent to purchase a controlling interest in a Russian
telephone company for approximately $10 million, subject to adjustment and
pending due diligence procedures. In connection with the potential acquisition,
during November and December of 1997 QUALCOMMTel provided $1.7 million in
interest-bearing loans under an exclusivity clause to meet the interim working
capital needs of the potential acquiree.
F-8
<PAGE> 116
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Such loans were to become part of the purchase price consideration in the event
the acquisition was completed. Otherwise, such loans and accrued interest were
repayable no later than 180 days after the date of issuance. Subsequent
negotiations failed to result in an acquisition agreement and, due to
substantial doubt on the ability of the potential acquiree to repay such loans,
the Company provided a $1.7 million bad debt allowance against the receivable.
As the minority interest holder has not contributed any capital to QUALCOMMTel,
the Company has not allocated any loss resulting from the bad debt allowance to
the minority interest. As of May 31, 1998, QUALCOMMTel has no other assets and
no liabilities.
In May 1998, the Company provided $15 million in loans to certain
subsidiaries of Transworld Communications (U.S.A.), Inc. ("TWC"). In August
1998, the Company purchased 60% of the respective common stock of the TWC
subsidiaries for a purchase price of $51.8 million, consisting of $36.8 million
in cash and forgiveness of the $15 million in outstanding loans. The acquired
subsidiaries of TWC are development stage companies and together are developing
and will operate a satellite-based communications system for long-distance
voice, video and data services in the Russian Federation.
Condensed financial information for the wireless operating company
accounted for under the equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31, 1998
------------
<S> <C>
Condensed Balance Sheet Information:
Current assets............................................ $17,020
Non-current assets........................................ 92,212
Current liabilities....................................... 12,731
Non-current liabilities................................... 58,981
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, 1998 MAY 31, 1997
------------ ------------
<S> <C> <C>
Condensed Statement of Operations Information:
Operating expenses............................... $(2,671) $ (279)
Net losses....................................... (3,069) (278)
</TABLE>
As of May 31, 1998, the wireless operating companies had not yet commenced
commercial revenue and cash flow generating operations.
NOTE 3. INCOME TAXES
The Company has not recorded provisions for federal and state income taxes
for the nine months ended May 31, 1998 and 1997 due to net operating losses
during those periods.
NOTE 4. COMMITMENTS
As of May 31, 1998, the Company had an outstanding commitment to provide
$100 million in equity contributions to Pegaso Telecomunicaciones, S.A. de C.V.,
a development stage joint venture in which the Company held 49% of the
outstanding common shares as of May 31, 1998.
Due to the nature of the Company's business, the Company expects to
continue to enter into new joint venture and equity interests in which the
Company provides significant equity contributions and debt. Also, the Company
may provide further equity or debt, as necessary, to support the future
build-out and operational needs of the wireless operating companies in which the
Company has already invested as of May 31, 1998.
F-9
<PAGE> 117
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Leap Wireless International, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying combined balance sheets and the related combined statements of
operations, of cash flows and of changes in stockholder's equity present fairly,
in all material respects, the financial position of Leap Wireless International,
Inc. (a development stage company) at August 31, 1997 and 1996, and the results
of its operations and its cash flows for the years then ended and for the period
from September 1, 1995 (inception) through August 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
June 29, 1998
F-10
<PAGE> 118
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------
1997 1996
------- -----
<S> <C> <C>
Current assets.............................................. $ -- $ --
Investments in wireless operating companies................. 46,267 --
------- -----
Total assets................................................ $46,267 $ --
======= =====
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities.................... $ 279 $ 111
------- -----
Commitments (Note 5)
Stockholder's equity:
Parent's investment....................................... 47,478 285
Deficit accumulated during the development stage.......... (1,550) (396)
Cumulative translation adjustment......................... 60 --
------- -----
Total stockholder's equity............................. 45,988 (111)
------- -----
Total liabilities and stockholder's equity.................. $46,267 $ --
======= =====
</TABLE>
See accompanying notes.
F-11
<PAGE> 119
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED AUGUST 31, FROM SEPTEMBER 1, 1995
---------------------- (INCEPTION)
1997 1996 TO AUGUST 31, 1997
--------- ------- ----------------------
<S> <C> <C> <C>
Equity in net earnings of wireless operating
companies........................................ $ 207 $ -- $ 207
General and administrative expenses................ (1,361) (396) (1,757)
------- ----- -------
Loss before income taxes........................... (1,154) (396) (1,550)
Income tax expense................................. -- -- --
------- ----- -------
Net loss........................................... $(1,154) $(396) $(1,550)
======= ===== =======
Unaudited pro forma basic and diluted net loss per
common share (Note 1)............................ $ (0.07)
=======
</TABLE>
See accompanying notes.
F-12
<PAGE> 120
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED AUGUST 31, FROM SEPTEMBER 1, 1995
----------------------- (INCEPTION)
1997 1996 TO AUGUST 31, 1997
---------- ------- ----------------------
<S> <C> <C> <C>
Operating activities:
Net loss........................................ $ (1,154) $(396) $ (1,550)
Equity in net earnings of wireless operating
companies.................................... (207) -- (207)
Change in accounts payable and accrued
liabilities.................................. 168 111 279
-------- ----- --------
Net cash used in operating activities............. (1,193) (285) (1,478)
-------- ----- --------
Investing activities:
Investments in wireless operating companies..... (46,000) -- (46,000)
-------- ----- --------
Net cash used in investing activities............. (46,000) -- (46,000)
-------- ----- --------
Financing activities:
Parent's investment............................. 47,193 285 47,478
-------- ----- --------
Net cash provided by financing activities......... 47,193 285 47,478
-------- ----- --------
Net change in cash and cash equivalents........... -- -- --
Cash and cash equivalents at beginning of
period.......................................... -- -- --
-------- ----- --------
Cash and cash equivalents at end of period........ $ -- $ -- $ --
======== ===== ========
</TABLE>
See accompanying notes.
F-13
<PAGE> 121
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
PARENT'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
---------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at September 1, 1995 (inception)....... $ -- $ -- $-- $ --
Transfers from QUALCOMM........................ 285 -- -- 285
Net loss....................................... -- (396) -- (396)
------- ------- --- -------
Balance at August 31, 1996..................... 285 (396) -- (111)
Transfers from QUALCOMM........................ 47,193 -- -- 47,193
Net loss....................................... -- (1,154) -- (1,154)
Cumulative translation adjustment.............. -- -- 60 60
------- ------- --- -------
Balance at August 31, 1997..................... $47,478 $(1,550) $60 $45,988
======= ======= === =======
</TABLE>
See accompanying notes.
F-14
<PAGE> 122
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
On June 24, 1998, QUALCOMM Incorporated ("QUALCOMM") created a separate
wholly-owned company, Leap Wireless International, Inc. (the "Company" or
"Leap"), a Delaware corporation. It is the Company's intent to enter into a
Separation and Distribution Agreement with QUALCOMM pursuant to which certain of
QUALCOMM's joint ventures and equity interests in domestic and international
terrestrial-based wireless telecommunications operating companies will be
transferred to the Company, followed by a spin-off of the Company to the
stockholders of QUALCOMM (the "Distribution"). QUALCOMM intends to complete the
Distribution before September 23, 1998. The Company's business strategy is to
operate, manage, support and otherwise participate in Code Division Multiple
Access ("CDMA") based wireless telecommunications businesses and ventures in
emerging international markets and the United States. Initially, the Company
expects that its principal markets for its intended activity will be in Latin
America, Eastern Europe, Asia-Pacific and the United States. QUALCOMM is a
Delaware corporation that develops, manufactures, markets, licenses and operates
advanced communications systems and products based on digital wireless
technology, including mobile and fixed satellite communications systems and
products and digital wireless telephone systems and products using QUALCOMM's
proprietary CDMA technology. QUALCOMM has entered into, and will retain upon the
Distribution, equipment sales and services and vendor financing agreements with
the wireless telecommunications operating companies to be transferred to the
Company.
Following the Distribution, QUALCOMM and the Company will be operated as
independent companies. QUALCOMM and the Company will, however, continue to have
a relationship as a result of the various agreements being entered into between
QUALCOMM and the Company in connection with the Distribution.
Basis of Presentation
The combined financial statements reflect the financial position, results
of operations, cash flows and changes in stockholder's equity of the business
that will be transferred to the Company from QUALCOMM as if the Company were a
separate entity for all periods presented, as if the historical investments as
of August 31, 1997 and significant agreements entered into subsequent to August
31, 1997 in wireless operating companies were owned or entered into by the
Company. However, for the periods covered by the financial statements, such
investments were directly or indirectly legally owned by QUALCOMM. The financial
statements have been presented as if the Company were a development stage
company with an inception date of September 1, 1995. The Company did not engage
in any significant activity prior to fiscal 1996 and, as of August 31, 1997,
neither the Company nor its investees had generated any revenues from their
planned principal operations. The financial statements have been prepared using
the historical basis in the assets and liabilities and historical results of
operations related to the Company's business. The Company had no cash balances
as of August 31, 1997 and 1996 as no specific cash accounts had been designated
by QUALCOMM for the Company. When Company liabilities are paid or investments
are made, it is assumed that the cash used by the Company was funded by a
stockholder cash contribution. Changes in stockholder's equity represent
QUALCOMM's contribution after giving effect to the net operating cash used by
the Company and amounts necessary to finance the acquisition of ownership
interests in wireless operating companies.
The Company had no employees or QUALCOMM employees wholly dedicated to its
business during the fiscal periods presented. QUALCOMM departmental labor and
other direct costs have been allocated to the Company based on estimates of
incremental efforts expended and incremental costs incurred related to the
Company's business. General corporate overhead related to QUALCOMM's corporate
headquarters and common support divisions have been allocated to the Company
generally based on the proportion of the
F-15
<PAGE> 123
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Company's costs and expenses to QUALCOMM's costs and expenses. Management
believes these allocations reasonably approximate costs incurred by QUALCOMM on
behalf of the Company's operations. However, the costs as allocated to the
Company are not necessarily indicative of the costs that would have been
incurred if the Company had performed these functions as a stand-alone entity.
Subsequent to the separation of the Company from QUALCOMM, the Company will have
its own staff perform necessary functions using its own resources or purchased
services and will be responsible for the costs and expenses associated with the
management of a public corporation.
The financial information included herein may not necessarily reflect the
financial position, results of operations, cash flows and changes in
stockholder's equity of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
Additional Capital Needs; Substantial Leverage
The Company does not have any operating history as an independent public
company and is at an early stage of development. As such, the Company is subject
to the risks inherent in the establishment of a new business enterprise and its
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets and companies experiencing rapid
growth. To date, the Company has generated no revenue from its ownership
interests in or management roles with the wireless operating companies. The
Company's ability to generate revenues will be dependent on a number of factors,
including the future operations and profitability of the operating companies.
The operating companies are expected to incur substantial losses for the
foreseeable future and are subject to substantial risks. The Company will be
required to recognize a share of these companies' start-up operating losses as a
result of the Company's ownership interests in these companies. The industry in
which the operating companies operate is highly competitive and is subject to a
number of significant project, market, political, credit and exchange risks,
among others. The Company may be required to provide substantial funding to
these entities to finance completion of their wireless operating systems. The
build-out of the operating companies' wireless systems may take a number of
years to complete. There can be no assurance that any of the existing operating
companies or any other companies in which the Company may acquire a joint
venture or equity interest will be able to obtain sufficient financing to
build-out their systems, meet their payment obligations to the Company or
others, including the Federal Communications Commission ("FCC") and other
regulatory agencies, or become profitable. The failure of these companies to
build-out their systems, meet their payment obligations or become profitable
would adversely affect the value of the Company's assets and its future
profitability. The time required for the Company to reach or sustain
profitability is highly uncertain, and there can be no assurance that the
Company will be able to achieve or maintain profitability. Moreover, if
profitability is achieved, the level of such profitability cannot be predicted
and may vary significantly from quarter to quarter.
The Company expects to have significant future capital requirements
relating to funding of its existing wireless operating companies and operating
companies in which the Company may acquire joint venture or equity interests and
to general working capital needs and other cash requirements. The magnitude of
these capital requirements will depend on a number of factors, including the
specific capital needs of the operating companies, additional capital needed to
acquire or maintain other joint venture or equity interests, competing
technological and market developments and changes in existing and future
relationships.
The Company expects to obtain much of its required near term financing
through borrowings under a credit facility provided by QUALCOMM (the "Credit
Facility"). The Company expects, however, that it will reach its borrowing limit
under the Credit Facility by the end of fiscal 1999. The Company will have no
other available sources of working capital as of the date of the Distribution.
In addition, because the Company
F-16
<PAGE> 124
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
expects to be subject to restrictive covenants and other obligations under the
Credit Facility, there can be no assurance that the Company will have continued
access to these borrowings when required.
There can be no assurance that the Company will be able to obtain such
additional required financing on favorable terms or at all. The terms of the
Credit Facility will likely include security interests in favor of QUALCOMM and
other restrictive covenants, and may significantly limit or prevent the Company
from obtaining additional debt financing. If additional funds are raised through
equity financings, dilution to the Company's existing stockholders would result.
To the extent that such additional financing is raised by the sale or other
transfer of any of the Company's equity interests in the wireless operating
companies, the Company will be diluted or relinquish ownership of such
interests. If adequate additional financing is not available, the Company may be
forced to default on any then existing funding obligations to the operating
companies, significantly modify its business plan and, in the case of failure to
obtain working capital financing, cease operations. Accordingly, the failure to
obtain adequate additional financing would have a material adverse effect on the
Company's business, results of operations, liquidity and financial position.
As a result of its capital requirements, including expected borrowings
under the Credit Facility, the Company expects that it will be highly leveraged
after the Distribution. The degree to which the Company is leveraged could have
important consequences, including: (i) the Company's ability to obtain
additional financing in the future may be impaired; (ii) a substantial portion
of the Company's future cash flows from operations may be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available for operations; (iii) the Company may be hindered in its ability
to adjust rapidly to changing market conditions; and (iv) the Company's
substantial degree of leverage may make it more vulnerable in the event of a
downturn in general economic conditions or in its business. There can be no
assurance that the Company's future cash flows will be sufficient to meet the
Company's debt service requirements or that the Company will be able to
refinance any of its indebtedness at maturity.
The Company experienced net losses for the years ended August 31, 1997 and
1996 of approximately $1.2 million and $396,000, respectively. Following the
Distribution, the Company will be responsible for the additional costs
associated with being an independent public company, including costs related to
corporate governance, listed and registered securities and investor relations
issues. Further, as the existing operating companies are in the early stages of
developing and deploying their respective telecommunications systems, which
require significant expenditures, a substantial portion of which are incurred
before corresponding revenues are generated. In addition, the degree to which
the Company and its operating companies are expected to be leveraged will lead
to significant interest expense and principal repayment obligations with respect
to outstanding indebtedness. The Company therefore expects to incur significant
expenses in advance of generating revenues, and as a result, to incur
substantial additional losses in the foreseeable future. There can be no
assurance that the Company or any of the operating companies will achieve or
sustain profitability in the near term or at all.
Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in Wireless Operating Companies
Investments in corporate entities with less than 20% voting interest are
generally accounted for under the cost method. The Company uses the equity
method to account for investments in corporate entities in which it
F-17
<PAGE> 125
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
has voting interest of 20% to 50% or in which it otherwise exercises significant
influence and for ownership interests in partnerships. Under the equity method,
the investment is originally recorded at cost and adjusted to recognize the
Company's share of net earnings or losses of the investee, limited to the extent
of the Company's investment in, advances to and financial guarantees for the
investee. Such earnings or losses of the Company's investees are adjusted to
reflect the amortization of any differences between the carrying value of the
investment and the Company's equity in the net assets of the investee.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
total amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition are less than its carrying amount.
Foreign Currency
Results of operations for international investments are translated using
average exchange rates during the period, while assets and liabilities are
translated using end-of-period rates. The resulting exchange gains or losses are
accumulated in the "cumulative translation adjustment" account, a component of
stockholder's equity. For operations in countries treated as highly
inflationary, financial statement amounts are translated at historical exchange
rates, with all other assets and liabilities translated at year-end exchange
rates. The effects of translating the financial position and results of
operations of local currency operations have not been significant to the
Company's financial statements. Gains and losses resulting from the Company's
foreign currency transactions have not been significant in relation to its
operations.
Income Taxes
Historically, the Company's operations have been included in the
consolidated income tax returns filed by QUALCOMM. Income tax expense in the
Company's financial statements has been calculated on a separate tax return
basis.
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset and/or liability is computed
for both the expected future impact of differences between the financial
statement and tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carry forwards. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be "more likely than not" realized in future tax returns. Tax
rate changes are reflected in income in the period such changes are enacted.
Unaudited Pro Forma Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share"
which the Company has adopted to compute the unaudited pro forma net loss per
common share ("EPS") amount for fiscal 1997.
The Company had no shares of common stock outstanding during fiscal 1997
and 1996. The unaudited pro forma net loss per common share was calculated by
dividing the 1997 net loss of $1,154,000 by the 17,643,830 expected shares of
Common Stock of the Company to be issued upon the Distribution based on QUALCOMM
shares outstanding as of August 20, 1998. Such shares reflect the expected
issuance upon the Distribution of one of the Company's shares of common stock
for every four shares of QUALCOMM common stock outstanding. Replacement stock
options and awards for 5,481,377 shares, the conversion of QUALCOMM's Trust
Convertible Preferred Securities which are expected to be convertible into
shares of
F-18
<PAGE> 126
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
QUALCOMM and 2,271,060 shares of the Company common stock and the exercise of a
warrant to be issued to QUALCOMM for approximately 5,500,000 shares of common
stock have not been considered in calculating the unaudited pro forma net loss
per common share because their effect would be anti-dilutive. As a result, the
Company's unaudited pro forma basic and diluted net loss per common share are
the same.
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
may be primarily from foreign currency translation adjustments and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its financial statement disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
NOTE 2. INVESTMENTS IN WIRELESS OPERATING COMPANIES
The Company's investments in wireless operating companies consist of the
following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Investment at equity..................................... $42,267 $ --
Investment at cost....................................... 4,000 --
------- -------
$46,267 $ --
======= =======
</TABLE>
The Company has joint venture and equity interests in companies that hold
cellular telephone licenses or are seeking such licenses. Its participation in
each company differs and the Company does not have majority interests in such
companies. The Company's ability to withdraw funds, including dividends, from
its participation in such investments is dependent in many cases on receiving
the consent of the other participants, over which the Company has no control.
F-19
<PAGE> 127
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Condensed financial information for the wireless operating company during
the period under which the Company accounted for the investment under the equity
method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, 1997
---------------
<S> <C>
Condensed Balance Sheet Information:
Current assets............................................ $37,565
Non-current assets........................................ 15,058
Current liabilities....................................... 665
Non-current liabilities................................... 7,461
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997
---------------
<S> <C>
Condensed Statement of Operations Information:
Operating expenses........................................ $ (274)
Net income................................................ 414
</TABLE>
As of August 31, 1997, the wireless operating companies had not commenced
commercial revenue generating operations. Any income derived resulted
principally from earnings on investments and cash. The Company had no equity
method investments as of August 31, 1996.
Chilesat Telefonia Personal S.A.
In February 1997, the Company entered into a subscription and shareholders
agreement to purchase $42 million of voting preferred shares representing a 50%
ownership interest in a privately held corporate joint venture, Chilesat
Telefonia Personal S.A. ("Chilesat PCS"), a development stage enterprise. The
Company holds its shares in Chilesat PCS via a wholly-owned subsidiary of
QUALCOMM, Inversiones QUALCOMM Chile S.A. ("Inversiones QUALCOMM"), which held
no other assets and had no liabilities as of August 31, 1997. The remaining 50%
ownership interest represented by voting common shares is owned by Telex-Chile
S.A. and its subsidiary Chilesat S.A. (together "Telex-Chile"). Pursuant to the
agreement, in March 1997, the Company placed the $42 million purchase price in
an escrow account pending the grant of a license to operate wireless services in
Chile by the Subsecretaria de Telecommunications de Chile to Chilesat PCS. Upon
the award of the license, the escrowed amount of $42 million was released to
Chilesat PCS in June 1997. The preferred shares are entitled to a liquidation
preference in an amount equal to the original purchase price per share during a
six year period (the "Preference Period") beginning with April 1997. Pursuant to
the Subscription and Shareholders Agreement, Telex-Chile has a right to call
either 50% or 100% of the Company's shares, at the option of Telex-Chile, for
the purposes of placement of such shares with (i) a reputable international
operator or (ii) an investor not in competition with QUALCOMM as an equipment
vendor. The call price increases significantly on a quarterly basis and expires
in March of 1999. The Company may provide debt funding to Chilesat PCS as
necessary to support future wireless network build-out and operational needs.
The Company accounts for its investment under the equity method of
accounting. As of August 31, 1997, Chilesat PCS had not completed its initial
network build-out, and operational activity was not significant. The Company
recorded $207,000 in equity income resulting from this investment during fiscal
1997. Upon the commencement of commercial operations of the Chilesat PCS
network, the Company's recognition of its share of the operating results of
Chilesat PCS will be adjusted to include the amortization of the excess of the
basis of the Company's investment in Chilesat PCS over the Company's equity in
the net assets of Chilesat PCS. This basis difference is related to the fair
value of non-cash assets contributed to Chilesat PCS by Telex-Chile, which
consist of a wireless telecommunications license and a contract to use part of
Telex-Chile's existing telecommunications network. For purposes of computing
amortization expense, the Company's pro
F-20
<PAGE> 128
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
rata share of the fair values of the license and the contract, $14 million and
$7 million, respectively, will be amortized over the remainder of their useful
lives.
Under its licensing agreement with the Chilean government, Chilesat PCS is
obligated to meet certain network build-out milestones by December 1998 and has
provided a $59 million letter of credit to support the payment of government
fines if the build-out milestones are not met. The Company has guaranteed
reimbursement to the issuing bank of the Company's proportional share, based on
its ownership interest, of any government fines paid under the letter of credit.
Additionally, the Company has pledged its shares in Chilesat PCS to the issuing
bank as collateral for the letter of credit facility.
During fiscal 1997, QUALCOMM entered into agreements with Chilesat PCS to
supply approximately $94 million of Personal Communications Services ("PCS")
infrastructure and subscriber equipment and services. QUALCOMM also agreed to
provide approximately $60 million in vendor financing to Chilesat PCS for the
purchase of infrastructure equipment and services. The vendor financing
agreement restricts the ability of Chilesat PCS to declare or pay dividends. As
of August 31, 1997, QUALCOMM had outstanding long-term financed receivable
balances of approximately $8.6 million resulting from initial contract milestone
payments due to QUALCOMM under its agreements with Chilesat PCS.
Chase Telecommunications, Inc.
In December 1996, the Company purchased $4 million of Chase
Telecommunications, Inc. ("Chase") Class B Common Stock, representing less than
7% of the outstanding capital stock of Chase. The Company is accounting for its
investment under the cost method of accounting. It is not practicable to
estimate the fair value of the investment as Chase is a closely held domestic
corporation and is not publicly traded.
Chase is a development stage company that will require significant
financing to complete its Personal Communications Services ("PCS") network
build-out and to meet its payment obligations relating to the purchase of PCS
licenses covering the Tennessee region from the FCC. Chase's failure to obtain
sufficient financing or to meet its obligations to the FCC could adversely
affect the value of the Company's investment in Chase. There can be no assurance
that Chase will be successful in obtaining sufficient financing for its network
build-out or in meeting its payment obligations to the FCC.
NOTE 3. EMPLOYEE BENEFIT PLANS
Prior to August 31, 1997, the Company did not have any employees dedicated
solely to its affairs. QUALCOMM employees who expended efforts on behalf of the
Company participated in QUALCOMM employee benefit plans. The Company expects to
enter into employee benefit plans prior to the date of the Distribution
including an equity incentive plan which will provide for the grant of various
types of equity-based compensation to employees of the Company, including
incentive stock option plans, non-qualified stock option plans and other stock
based awards and a non-employee directors' stock option plan to provide for the
grant of options to purchase shares of the Company's Common Stock to
non-employee directors of the Company.
NOTE 4. INCOME TAXES
The Company has not recorded provisions for federal and state income taxes
for fiscal 1997 and 1996 due to net operating losses ("NOL") during those years.
F-21
<PAGE> 129
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation from the statutory U.S. federal income
tax rate to the Company's effective rate of income tax expense for the years
ended August 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
U.S. federal statutory tax rate............................. (34)% (34)%
State taxes, net of U.S. federal income..................... (5)% (5)%
--- ---
Tax benefit................................................. (39)% (39)%
Increase in valuation allowance............................. 39% 39%
--- ---
Effective tax rate.......................................... --% --%
=== ===
</TABLE>
At August 31, 1997 and 1996, the Company had total deferred tax assets of
approximately $0.6 million and $0.2 million, respectively, which consisted of
NOL carryforwards. Realization of the future tax benefits of the NOL
carryforwards is dependent on many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward period. Due
to the uncertainty surrounding the ultimate realization of such deferred tax
assets, the Company has provided a valuation allowance for the entire balance.
At August 31, 1997, the Company had NOL carryforwards available to offset
future income for federal income tax reporting purposes of approximately $1.6
million, which expire in years 2011 and 2012. State NOL carryforwards of
approximately $0.8 million at August 31, 1997 expire in years 2011 and 2012. As
a result of the distribution of the Company to the stockholders of QUALCOMM, the
Company will be subject to an annual limitation on the utilization of federal
and state NOL carryforwards generated from the date the businesses are
transferred to the Company from QUALCOMM to the date of Distribution. NOL's
generated prior to the date on which the businesses are transferred to the
Company, will remain with QUALCOMM.
NOTE 5. COMMITMENTS
The Company did not have any firm commitments to provide equity or debt to
its wireless operating company joint venture and equity interests as of August
31, 1997. However, due to the nature of the Company's business, the Company
expects to continue to enter into new joint venture and equity interests in
which the Company provides significant equity contributions and debt. Also, the
Company may provide further equity or debt, as necessary, to support the future
build-out and operational needs of the wireless operating companies in which the
Company has already invested as of August 31, 1997.
NOTE 6. SUBSEQUENT EVENTS
Subsequent to August 31, 1997, the Company became, or will become upon the
Distribution, a party to the following significant agreements concerning
wireless operating companies:
PEGASO
In April 1998, the Company, through a wholly owned subsidiary, QUALCOMM PCS
Mexico, Inc. entered into a joint venture agreement pursuant to which it
obtained a 49% ownership interest in a newly formed development stage entity,
Pegaso Telecomunicaciones, S.A. de C.V. ("PEGASO"), a Mexico corporation. In May
of 1998, PEGASO obtained the right to acquire PCS licenses together providing
nationwide coverage in Mexico. Pursuant to the joint venture agreement, the
Company will be required to provide equity contributions necessary for its
proportionate share of license payments and other financial requirements as a
result of the business plan. The Company expects that it will invest $100
million in the joint venture before October 1, 1998. The Company expects that
PEGASO will begin commercial service of wireless services in March 1999.
F-22
<PAGE> 130
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
QUALCOMMTel
During October 1997, the Company became a 70% common owner in a start-up
joint venture, QUALCOMM Telecommunications Ltd. ("QUALCOMMTel"), a Cayman
Islands corporation. Upon its formation, QUALCOMMTel had no significant assets
or liabilities. The minority 30% interest is held by Tiller International
Limited ("Tiller"), a private investment company. In the event that QUALCOMMTel
makes a call on its stockholders to provide equity contributions, at the request
of Tiller, the Company is required to fund 100% of Tiller's share of the equity
contributions. Such loans will be collateralized by Tiller's shares in
QUALCOMMTel and carry an interest rate of LIBOR plus 3% with principal and
interest to be repayable from 80% of future net earnings of QUALCOMMTel.
QUALCOMMTel is intended to be an intermediate holding company to facilitate the
Company's business prospects in the Russian Federation.
In February 1998, QUALCOMMTel entered into an agreement with Tass Telecom,
a Russian company, providing for their participation, subject to terms and
conditions, in the development of wireless communications networks in the
Russian Federation. Pursuant to the agreement and subject to terms and
conditions, QUALCOMMTel and TASS Telecomm will become 50/50 joint venture
partners in Metrosvyaz Limited ("Metrosvyaz"), a Cyprus corporation, intended to
invest in joint ventures with local Russian telecommunications operations for
the formation, development, financing and operations of CDMA based wireless
networks.
Additionally, QUALCOMMTel will commit, subject to terms and conditions, up
to $500 million in joint venture funding which may be in the form of debt or
equity, to Metrosvyaz to support its business plan. QUALCOMMTel may transfer a
significant portion of the $500 million in funding obligations to QUALCOMM
relating to vendor financing elements of the business plan. However, no
decisions relating to the relative funding by QUALCOMM and QUALCOMMTel have been
finalized (see Note 7).
OzPhone
In June 1998, the Company, via its wholly owned subsidiary OzPhone Pty
Limited ("OzPhone"), an Australian company, acquired wireless communication
licenses to provide digital mobile and wireless local loop services in
Australia. OzPhone was formed in April 1998 to participate in auctions for the
licenses. The total cost of the licenses was approximately $6.2 million.
Chilesat PCS
During June 1998, the Company and Inversiones QUALCOMM entered into
agreements with Chilesat PCS to provide or guarantee approximately $35 million
in short-term loans, convertible into common equity if not repaid on or before
January 31, 1999. If converted, the Company and Inversiones QUALCOMM would hold
voting shares of approximately 65% of Chilesat PCS. This conversion is available
to the Company and Inversiones QUALCOMM only if the loans are not repaid on or
before January 31, 1999. Chilesat PCS currently contemplates that it will issue
a $35 million capital call in approximately December of 1998 which may be used
to repay the convertible loan or to provide for additional operating expenses.
If Telex-Chile makes at least a $17.5 million cash contribution before January
31, 1999 pursuant to such capital call, the Company and Inversiones QUALCOMM
have committed to convert $17.5 million of the short-term loans to equity. As
part of the agreement, Telex-Chile agreed to eliminate call rights it had with
respect to the Company's existing 50% voting preferred shares in Chilesat PCS.
Telex-Chile has been unable to make principal repayments on its outstanding
loans and is under standstill agreements with many of its significant lenders.
However, Telex-Chile has informed the Company that it has the intention to, and
will have the ability to, fund its $17.5 million portion of the capital call
prior to January 31, 1999.
F-23
<PAGE> 131
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS (UNAUDITED)
In August 1998, the Company, via its equity investee Orrengrove Investments
Limited, purchased common stock from each of the subsidiaries (the "Related
Subsidiaries") of Transword Communications (U.S.A.), Inc. ("TWC") for an
aggregate purchase price of $51.8 million. Upon the acquisition, the Company
became a 60% common shareholder in each of the Related Subsidiaries. The
consideration was paid via a $36.8 million cash payment and the forgiveness of
$15 million in short term loans previously granted to the Related Subsidiaries
by the Company in May of 1998. The Related Subsidiaries together are
telecommunications companies in the development stage formed in part to help
create a modern telecommunications infrastructure for the Russian Federation and
the countries of the former East Bloc. The Related Subsidiaries have developed
and are completing the installation of a satellite-based communications system
for long-distance voice, video and data services using its exclusive rights to
Russian Loutch II satellite capacity. At the time of the acquisition, the
Related Subsidiaries comprised substantially all of the business, assets and
liabilities of TWC on a consolidated basis. After the acquisition, TWC remains a
40% common shareholder in each of the Related Subsidiaries. The Company will
account for the acquisition under the purchase method of accounting.
In August 1998, QUALCOMMTel became a 50% owner and partner in Metrosvyaz, a
newly-formed joint venture with TASS Telecomm. As of the formation, Metrosvyaz
had no assets or liabilities and no historical operating activity. Concurrent
with the formation of Metrosvyaz, QUALCOMM entered into a $175 million eight
year multiple drawdown loan facility under which Metrosvyaz would be able to
borrow funds, subject to certain terms and conditions, to support its business
plan, including equipment purchases, and working capital needs. The $175 million
facility is related to a $500 million financing commitment entered into by
QUALCOMMTel in February 1998 (See Note 6). Upon the Distribution, QUALCOMMTel
will assume $75 million of the $175 million financing obligation from QUALCOMM.
Furthermore, of the original $500 million commitment, the Company expects that
$150 million of financing will be provided by QUALCOMMTel, with the remaining
$350 million in financing to be provided by QUALCOMM as vendor financing.
The $175 million facility carries a 13% interest rate and borrowings are
generally repayable approximately 4 years from the date of the draw subject to a
final repayment in August 2006 of any outstanding draws then outstanding.
Borrowings under the facility are collateralized by substantially all the
assets of Metrosvyaz. Upon the assumption of $75 million of the facility by
QUALCOMMTel, it is expected that QUALCOMMTel will re-negotiate certain terms
with Metrosvyaz allowing for more favorable financing terms.
In June of 1998, the Company agreed to provide a $25 million working
capital facility to Chase. Borrowings under the facility are subject to interest
at prime plus 4 1/2% and are to be repaid by June of 2006. Borrowings are
collateralized by substantially all of the assets of Chase. The Company has
committed, subject to certain exceptions, to convert the facility into $25
million of redeemable preferred stock in Chase. The Company received warrants,
in connection with this financing, to acquire up to approximately 5.6% of Chase
equity.
F-24
<PAGE> 132
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Chilesat Telefonia Personal S.A.
(a company in the development stage)
In our opinion, the accompanying balance sheet and the related statements of
income, of cash flows and of changes in shareholders' equity present fairly, in
all material respects, the financial position of Chilesat Telefonia Personal
S.A. (a company in the development stage) at December 31, 1997, and the results
of its operations and cash flows for the period from inception (March 3, 1997)
to December 31, 1997, in conformity with generally accepted accounting
principles of the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards of
the United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Santiago, Chile,
February 27, 1998
F-25
<PAGE> 133
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents................................. 24,875
Accounts receivable from related companies................ 10
Other accounts receivable................................. 133
Recoverable taxes......................................... 6,228
Other current assets...................................... 695
------
Total current assets.............................. 31,941
------
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 40,093
OTHER ASSETS................................................ 4
------
Total assets...................................... 72,038
======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... 380
Accounts payable to related companies..................... 247
Accrued liabilities and withholdings...................... 960
------
Total current liabilities......................... 1,587
------
LONG-TERM LIABILITIES
Note payable to related company........................... 24,198
Other long-term liabilities............................... 4,579
------
Total long-term liabilities....................... 28,777
------
COMMITMENTS AND CONTINGENCIES............................... --
SHAREHOLDERS' EQUITY
Preferred stock (8,400,000 shares authorized, issued and
outstanding, with no par value)........................ 42,000
Common stock (8,400,000 shares authorized, issued and
outstanding, with no par value)........................ 1,964
Surplus accumulated during the development stage.......... 55
Cumulative translation adjustment......................... (2,345)
------
Total shareholders' equity........................ 41,674
------
Total liabilities and shareholders' equity........ 72,038
======
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-26
<PAGE> 134
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (MARCH 3, 1997) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
OPERATING RESULTS
General and administrative expenses....................... (663)
------
Operating loss.................................... (663)
NON-OPERATING RESULTS
Interest income........................................... 2,022
Currency exchange losses.................................. (1,280)
Other expenses, net....................................... (24)
------
Net income and surplus accumulated during the
development stage................................. 55
======
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-27
<PAGE> 135
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 3, 1997) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
CASH FLOW USED IN OPERATING ACTIVITIES
Net income................................................ 55
Adjustments to reconcile to net cash used in operating
activities:
Depreciation........................................... 4
Changes in working capital:
Accounts receivable from related companies................ (10)
Other accounts receivable................................. (133)
Recoverable taxes......................................... (6,171)
Other current assets...................................... (695)
Accounts payable.......................................... 380
Accounts payable to related companies..................... (32)
Accrued liabilities and withholdings...................... 957
-------
Cash flow used in operating activities...................... (5,645)
-------
CASH FLOW USED IN INVESTING ACTIVITIES
Acquisition of property, plant and equipment.............. (38,038)
Other..................................................... (4)
-------
Cash flow used in investing activities...................... (38,042)
-------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable to related companies........................ 24,198
Capital increase.......................................... 42,000
Other long-term liabilities............................... 4,579
-------
Cash flow provided by financing activities.................. 70,777
-------
Net increase in cash........................................ 27,090
Effect of exchange rate changes on cash..................... (2,215)
-------
Increase in cash............................................ 24,875
Cash and cash equivalents at the beginning of the period.... --
-------
Cash and cash equivalents at the end of the period.......... 24,875
=======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... 923
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
As indicated in Note 1, Chilesat S.A. contributed non-cash assets and
liabilities to the joint venture on March 3, 1997. The net assets contributed at
that date are summarized as follows:
<TABLE>
<S> <C>
Current assets.............................................. 57
Property, plant and equipment............................... 2,189
Current liabilities......................................... (282)
-----
Net assets contributed...................................... 1,964
=====
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-28
<PAGE> 136
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MARCH 3, 1997) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
SURPLUS
ACCUMULATED
DURING THE CUMULATIVE
NUMBER PREFERRED COMMON DEVELOPMENT TRANSLATION
OF SHARES STOCK STOCK STAGE ADJUSTMENT TOTAL
---------- -------------- -------------- -------------- -------------- --------------
(US$ IN 000'S) (US$ IN 000'S) (US$ IN 000'S) (US$ IN 000'S) (US$ IN 000'S)
<S> <C> <C> <C> <C> <C> <C>
Capital increase at
inception on March 3,
1997...................... 16,800,000 42,000 1,964 -- -- 43,964
Share subscriptions
receivable................ -- (42,000) -- -- -- (42,000)
Payment of share
subscriptions
receivable................ -- 42,000 -- -- -- 42,000
Cumulative translation
adjustment................ -- -- -- -- (2,345) (2,345)
Net income for the period... -- -- -- 55 -- 55
---------- ------- ----- -- ------ -------
Balance at December 31,
1997...................... 16,800,000 42,000 1,964 55 (2,345) 41,674
========== ======= ===== == ====== =======
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-29
<PAGE> 137
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- THE COMPANY
Chilesat Telefonia Personal S.A. (the "Company") is a joint venture created
on March 3, 1997 by Telex-Chile S.A. and its subsidiary Chilesat S.A. (together
"Chilesat") and Inversiones Qualcomm Chile S.A. ("Qualcomm") for the purpose of
building and operating a mobile PCS telephone system (personal communication
system) in Chile.
Pursuant to the terms of the Subscription and Shareholders' Agreement
("Shareholders' Agreement"), Chilesat and Qualcomm hold all of the outstanding
common and preferred shares of the Company, respectively. Each partner has a 50%
ownership in the joint venture. Each partner has the right to elect two
representatives to the Board of Directors and a fifth independent director is
elected by a vote of at least 75% of the shareholders. Approval of 4/5 of the
directors is required for a number of significant operating and management
decisions. The common directors are entitled to nominate the general manager,
and the preferred directors are entitled to nominate the CFO. However, approval
of the nominations requires approval by 4/5 of the directors.
Because Chilesat's contributions to the joint venture were non-cash assets
and liabilities whose fair values were not readily determinable, the non-cash
assets and liabilities contributed were recorded at their predecessor basis of
zero.
As one of the non-cash assets contributed, Chilesat S.A. provided a
contract entitling the Company to the right to use a part of Chilesat's network
for a period of 11.5 years and the right to receive signal distribution services
for the same period. The contract is for the Company's sole and exclusive use of
signal transmissions. Chilesat is responsible for meeting the Company's
transmission requirements as well as the supervision, control, maintenance and
repair of the network. Chilesat also contributed the already existing entity
Chilesat Telefonia Personal S.A., among whose assets was the PCS license to
operate in Chile.
The Company is the holder of one of three national licenses to provide PCS
services in Chile. These services must be ready for operations under the
conditions of the license by June 23, 1998 in the case of the geographical area
covered by Chile's 4th and 10th regions and by December 23, 1998 for the
remainder of the country. The Company is currently in the development stage and
is constructing its mobile PCS telephone system infrastructure. The Company has
entered into a System Equipment Purchase Agreement with Qualcomm Incorporated
whereby Qualcomm Incorporated will provide manufacturing, engineering,
equipping, integrating, installing, testing and technical assistance for the
mobile PCS telephone system.
Under the terms of the Shareholders' Agreement, the Company will purchase
from Qualcomm Incorporated all network hardware and software manufactured by
Qualcomm Incorporated and at least 50% of all mobile and fixed handsets
purchased by the Company until the later of five years following the formation
of the joint venture or the date on which Qualcomm Incorporated ceases to hold
preferred shares representing more than 24% of the capital stock of the Company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) GENERAL
Chilesat Telefonia Personal S.A. is a development stage company as defined
in accordance with Statement of Financial Accounting Standards No. 7 due to the
fact that planned principal operations have not commenced. As indicated in Note
1, the company is currently engaged in the construction of its mobile PCS
telephone system infrastructure. Testing of the installations between Chile's
4th and 10th regions with friendly users is expected to commence in July, 1998
with full commercial operations planned for September, 1998. Completion of the
infrastructure necessary to cover the remainder of Chile is planned for
September, 1998.
F-30
<PAGE> 138
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("U.S. GAAP"). The
preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
b) PERIOD OF FINANCIAL STATEMENTS
The financial statements for the Company are presented for the period from
the date of formation of the joint venture on March 3, 1997 through December 31,
1997.
c) TRANSLATION OF THE CHILEAN PESO FINANCIAL STATEMENTS
The financial statements give effect to the translation of the Chilean peso
financial statements of the Company (not submitted herewith) to United States
dollars. All asset and liability accounts have been translated (after
eliminating the effects of accounting for inflation in Chile) at the Observed
Exchange Rates determined by the Central Bank of Chile at December 31, 1997 of
Ch$ 439.18 per US$ 1. Capital stock has been translated at historic Observed
Exchange Rates. Income and expense accounts have been translated at average
monthly Observed Exchange Rates. The net effects of translation are recorded in
the cumulative translation adjustment account as a component of the Company's
equity.
d) MONETARY ASSETS AND LIABILITIES IN OTHER CURRENCIES
Monetary assets and liabilities denominated in foreign currency have been
translated at year-end exchange rates. The effects of such translation have been
recorded as exchange gains or losses in the statement of income. Certain assets
and liabilities are denominated in UFs (Unidades de Fomento). The UF is a
Chilean inflation-indexed, peso-denominated monetary unit which is set daily in
advance based on changes in the Consumer Price Index. The adjustment to the
closing value of UF-denominated assets and liabilities have also been recorded
as part of Currency exchange losses in the statement of income.
e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at acquisition cost plus
capitalized interest and direct costs incurred during the construction phase of
the mobile PCS telephone system. Depreciation is applied using the straight-line
method over the estimated useful lives of the assets once the assets are placed
in service. As of December 31, 1997, no depreciation charge has been made with
respect to the infrastructure as the mobile PCS telephone system was not yet
operational.
f) ADVERTISING
It is the Company's policy to record the cost of advertising as it is
incurred. For the period from inception (March 3, 1997) through to December 31,
1997, the Company recorded US$338,000 as advertising expense.
g) INCOME TAXES
Income taxes have been recorded in accordance with Statement of Financial
Accounting Standards No. 109 (FAS 109). Income taxes payable for the current
year are recorded in current liabilities, if applicable. Future taxes arising
from differences between the amounts shown for assets and liabilities in the
balance sheet and the tax basis of those assets and liabilities at the balance
sheet date have been recorded as deferred income taxes. Deferred income tax
assets are reduced by a valuation allowance if, based on the weight of available
F-31
<PAGE> 139
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
h) LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
i) CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents, including securities
purchased under resale agreements. Securities purchased under agreements to
resell include investments in instruments issued by the Central Bank of Chile
acquired under resale agreements, and are stated at cost plus accrued interest.
Cash and cash equivalents at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
(US$ IN 000'S)
---------------
<S> <C>
Cash and bank deposits................................. 899
Time deposits.......................................... 10,195
Securities purchased under agreements to resell (Note
3)................................................... 13,736
Other.................................................. 45
----------
24,875
</TABLE>
j) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 (FAS 130), Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. FAS 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. "Comprehensive income" is
defined in this statement as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period
(including net income) except those resulting from investments by owners and
distributions to owners. The adoption of this new standard will result in the
presentation of components of other comprehensive income which, in the case of
the Company for the period from inception (March 3, 1997) to December 31, 1997,
will only include the cumulative translation adjustment for the period.
Statement of Financial Accounting Standards No. 131 (FAS 131), Disclosures
About Segments of an Enterprise and Related Information, is effective for fiscal
years beginning after December 15, 1997. This standard establishes guidance
related to segment disclosure utilizing the "management approach", whereby
external segment reporting is aligned with segment reporting for internal
management purposes. The previous standard followed a "products and services"
model. This standard is not expected to have an effect on the disclosures of the
Company as it only operates a single operating segment.
F-32
<PAGE> 140
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 3 -- SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell at December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT
FINANCIAL INSTITUTION UNDERLYING FINANCIAL INSTRUMENT (US$ IN 000'S) MATURITY DATE
--------------------- ------------------------------- --------------- -------------
<S> <C> <C> <C>
Banco de A. Edwards Central Bank of Chile Debentures 6,417 February 10, 1998
Banco de A. Edwards Central Bank of Chile Debentures 6,491 February 12, 1998
Banco de A. Edwards Central Bank of Chile Debentures 828 February 19, 1998
-------
Total 13,736
=======
</TABLE>
At December 31, 1997, the underlying financial instruments were in the
custody of the counter party to the agreements. Central Bank of Chile Debentures
are generally considered to be low-risk securities and are generally not subject
to significant market volatility.
NOTE 4 -- RECOVERABLE TAXES
Recoverable taxes at December 31, 1997 relate to value added taxes (VAT) of
US$ 6,228,000 incurred primarily on the importation of property, plant and
equipment required for the Company's mobile PCS telephone system. VAT relating
to the importation of capital goods may be recovered by the Company in
accordance with Chilean law (Note 11 c).
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
(US$ IN 000'S)
---------------
<S> <C>
Land........................................................ 140
Buildings and infrastructure................................ 39,771
Machinery and equipment..................................... 88
Other....................................................... 98
Less: Accumulated depreciation.............................. (4)
------
Total net......................................... 40,093
======
Estimated useful lives of assets are:
</TABLE>
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Machinery and equipment..................................... 10
Other....................................................... 5 - 10
</TABLE>
For the period from inception (March 3, 1997) to December 31, 1997 the
Company capitalized US$ 1,508,000 of interest as part of the cost of
construction of the mobile PCS telephone system.
F-33
<PAGE> 141
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 6 -- ACCRUED LIABILITIES AND WITHHOLDINGS
Accrued liabilities and withholdings at December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
Amounts payable for construction in progress................ 597
Advertising and marketing expenses.......................... 278
Employee vacations.......................................... 33
Other....................................................... 52
---
Total............................................. 960
===
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS
a) RELATED PARTY TRANSACTIONS AND BALANCES
<TABLE>
<CAPTION>
AMOUNT OF BALANCES BALANCES
COMPANY RELATIONSHIP TRANSACTION TRANSACTIONS RECEIVABLE PAYABLE
------- ------------ ----------- ------------ ---------- --------
(US$ IN 000'S)
<S> <C> <C> <C> <C> <C>
Chilesat Servicios Affiliate Reimbursement of 47 10 --
Empresariales S.A. costs incurred on
their behalf
Chilesat S.A Shareholder Reimbursement of 589 -- 196
costs incurred in
connection with
construction
Rent 30 -- --
Qualcomm Incorporated Affiliate Purchase of 23,655 -- 23,655
equipment
Accrued interest on 543 -- 543
note payable
Telex-Chile S.A Shareholder Reimbursement of 49 -- --
costs incurred in
connection with
construction
Telsys S.A Affiliate Computer services 39 -- 39
</TABLE>
b) NOTE PAYABLE TO RELATED COMPANY
As a means of financing the Company's purchase of infrastructure equipment
from Qualcomm Incorporated, it entered into a Deferred Payment Agreement whereby
Qualcomm Incorporated defers payment for the equipment subject to the terms and
conditions set forth in the Agreement. The assets of the Company secure the
obligation. The shares of the Company have also been pledged by Telex-Chile in
guaranty. Qualcomm Incorporated and Bank of America's liens on the Company's
assets and shares are pari passu interests.
Under the terms of the agreement, Qualcomm Incorporated will make loans for
the equipment, software and services it provides to the Company up to a maximum
of US$ 59.5 million. Loans may bear interest based upon a LIBOR or Base Rate or
the Eurodollar. The obligation to repay these loans and interest is evidenced by
promissory notes. Interest accrues on the principal but remains unpaid, with
accrued interest added monthly to the outstanding principal amount of the
applicable loan until the first principal payment, at which time interest is
payable on the same dates as the principal payments.
F-34
<PAGE> 142
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The note payable at December 31, 1997 is comprised of LIBOR loans and bears
interest at LIBOR + 3% (8% per annum at December 31, 1997). The scheduled
principal repayments, including accrued interest, are as follows:
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
1999................................................... 3,025
2000................................................... 6,050
2001................................................... 6,049
2002................................................... 6,049
2003................................................... 3,025
------
Total........................................ 24,198
======
</TABLE>
The terms of the financing arrangement with Qualcomm Incorporated include
certain positive and negative covenants, the most significant of which are as
follows:
The Company shall not
<TABLE>
<C> <S>
i) Incur any additional encumbrances or liens.
ii) Create any indebtedness other than indebtedness incurred for
the purposes of partial or full repayment of the notes
payable.
iii) Incur operating lease obligations greater than one year and
exceeding US$ 1 million for any twelve month period.
iv) Consolidate or merge with another entity.
v) Guarantee any indebtedness.
vi) Acquire stock or the assets of any other person.
vii) Advance funds.
viii) Become liable for a capital lease obligation exceeding US$ 1
million.
ix) Enter into transactions with affiliates, except arm's length
transactions in the ordinary course of business.
x) Invest in other than investment grade instruments.
xi) Declare or pay cash dividends or make distributions in
excess of 30% of excess cash flows during the third and
fourth annual periods of operations of the Company,
increasing to 50% after period 4.
xii) Maintain funded debt to total capitalization greater than
0.65, 0.71 and 0.75 in annual periods 1, 2 and 3 and
thereafter, respectively.
xiii) Permit Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") to be less than US$ 1.
xiv) Permit funded debt to EBITDA to exceed 23.91, 4.74, 3.32 and
2.4 in annual periods 2, 3, 4 and 5, respectively.
xv) Permit EBITDA to interest expense to be less than 0.47,
2.38, 3.00 and 3.00 in annual periods 2, 3, 4 and 5,
respectively.
xvi) Incur capital expenditures greater than US$ 116 million
until the Company has more than 50,000 subscribers, at which
time the threshold increases.
</TABLE>
The Company is in compliance with these covenants.
F-35
<PAGE> 143
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 8 -- OTHER LONG-TERM LIABILITIES
This balance is mainly comprised of deferred customs duties.
Under Chilean law, the payment of customs duties levied on machinery and
equipment can be deferred over a period of up to seven years. The balance at
December 31, 1997 represents amounts owing at maturity including accrued
interest. The scheduled repayments are as follows:
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
1999................................................... --
2000................................................... 1,294
2001................................................... --
2002................................................... 1,505
2003 and thereafter.................................... 1,709
------
Total........................................ 4,508
Other.................................................. 71
------
Total other long-term liabilities............ 4,579
======
</TABLE>
NOTE 9 -- INCOME TAXES
The Company has not made a provision for current income taxes payable as it
incurred tax losses for the period from inception (March 3, 1997) to December
31, 1997.
At December 31, 1997, income tax loss carryforwards of approximately
US$5,233,000 were available to apply against income tax liabilities in future
years. Under Chilean law, such income tax loss carryforwards never expire.
Deferred income taxes at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
Assets:
Tax loss carryforwards................................. 785
Allowance for income tax loss carryforwards............ (655)
------
Deferred income tax assets............................. 130
------
Liabilities:
Capitalized interest................................... (130)
------
Deferred income tax liabilities........................ (130)
------
Net deferred income taxes.............................. --
======
</TABLE>
Because the Company is in the development stage and has no history of
generating taxable income against which tax loss carryforwards would be applied,
an allowance was recorded at December 31, 1997 with respect to those tax loss
carryforwards which, based on the weight of available evidence, are not likely
be realized.
NOTE 10 -- SHAREHOLDERS' EQUITY
a) AUTHORIZED CAPITAL
Authorized capital stock of the Company is comprised of 8,400,000 Series A
preferred shares and 8,400,000 Series B ordinary shares. Qualcomm holds all the
outstanding preferred shares whereas Chilesat
F-36
<PAGE> 144
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
holds all the ordinary shares. The preference with respect to the preferred
shares consists of the right to be paid before any other series of shares in the
event of liquidation of the Company up to the amount of the stated value of the
preferred shares. The preference has a duration of 6 years as from April 10,
1997, after which all shareholders shall have equal rights with respect to the
liquidation of the Company.
b) DIVIDENDS
Chilean law permits the payment of dividends only in Chilean pesos and
these are limited to the retained earnings balances in the Company's statutory
financial statements at each calendar year end. As the Company has an
accumulated deficit at December 31, 1997 in its statutory financial statements,
it is prohibited from declaring and paying dividends until such time that it
generates sufficient retained earnings.
c) CAPITAL INCREASE
Pursuant to the terms of the shareholders' agreement, Qualcomm agreed to
subscribe for 8,400,000 Series A preferred shares in exchange for its cash
contribution of US$42 million and Chilesat agreed to subscribe for 8,400,000
Series B ordinary shares for its contribution of a contract for the right to use
a part of Chilesat's network and signal distribution services and certain net
assets. Qualcomm contributed the funds into an escrow account on March 3, 1997
and a receivable balance for share subscriptions was recorded. With the
exception of US$1,500,000 of funds made available to the Company, the funds were
not to be distributed to it until official publication of the awarding of the
PCS license. The awarding of the PCS license was published and the Company
received the funds in June, 1997, at which time the share subscription
receivable was settled.
d) PUT AND CALL OPTIONS
As part of the Shareholders' Agreement between Qualcomm and Chilesat,
Chilesat acquired an option to purchase, for the purpose of placement with (i) a
reputable international operator or (ii) an investor not in competition with
Qualcomm as vendor and system integrator, either 50% or 100% of the preferred
shares held by Qualcomm at the option of Chilesat. The option is exercisable
until the earlier of (i) 21 months following the award of the PCS license to the
Company or (ii) 3 months following the release of the Company's surety
obligations with Subtel. At the same time, Qualcomm acquired an option to sell
its preferred shares to Chilesat in the event that the Company is no longer
using Qualcomm technology in its mobile PCS telephone system.
NOTE 11 -- FAIR VALUE
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at December 31, 1997, when the estimate
of such value is practicable:
- Cash and cash equivalents, recoverable taxes and accrued liabilities and
withholdings have been stated at carrying value which is equivalent to
fair value.
- The fair values of the note payable to related company and other
long-term liabilities were based on interest rates currently available to
the Company for debt with similar terms and remaining maturities. The
carrying value of the note payable to related company approximates fair
value because the terms of the loan agreement require that the stated
rate of interest be periodically adjusted to the market rate.
F-37
<PAGE> 145
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The estimated fair value of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------
CARRYING
AMOUNTS FAIR VALUE
-------------- --------------
(US$ IN 000'S) (US$ IN 000'S)
-------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. 24,875 24,875
Recoverable taxes...................................... 6,228 6,228
------ ------
Total assets................................... 31,103 31,103
====== ======
Liabilities:
Accrued liabilities and withholdings................... 960 960
Note payable to related company........................ 24,198 24,198
Other long-term liabilities............................ 4,579 3,117
------ ------
Total liabilities.............................. 29,737 28,275
====== ======
</TABLE>
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
a) OPERATING LEASES
At December 31, 1997, the Company had entered into operating leases
relating to the rental of sites for towers and antennas required for the
operation of its mobile PCS telephone system. The following is a schedule by
year of future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year at December
31, 1997:
<TABLE>
<CAPTION>
(US$ IN 000'S)
--------------
<S> <C>
Year ending December 31,
1998................................................... 943
1999................................................... 905
2000................................................... 905
2001................................................... 905
2002................................................... 997
</TABLE>
Rental expense for the period from inception (March 3, 1997) to December
31, 1997 was US$91,000.
b) SECURITY FOR DEBT AND OTHER OBLIGATIONS
The Company was required to provide a standby letter of credit facility in
the amount of US$58 million in favor of the Subsecretariat of Telecommunications
of Chile ("Subtel") to assure the fulfillment of the requirement that the
Company's PCS services be operational by June 23, 1998 in the case of the
geographical area covered by Chile's 4th to 10th regions and by December 23,
1998 for the remainder of the country. If the Company meets this condition by
these dates, the standby letter of credit will no longer be required by Subtel.
The Company solicited the Bank of America National Trust to issue a standby
letter of credit in favor of local financial institutions which, in turn, issued
a standby letter of credit in favor of Subtel.
The Company has pledged it PCS license as security against the notes
payable to Qualcomm Incorporated and the standby letter of credit from the Bank
of America National Trust.
Telex-Chile S.A. and Chilesat S.A. have pledged 83,920 and 8,316,080 Series
B common shares of the Company, respectively, as security for 50% of the notes
payable to Qualcomm Incorporated and the standby
F-38
<PAGE> 146
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
letter of credit from the Bank of America National Trust. Inversiones Qualcomm
Chile S.A. has also pledged 8,400,000 Series A preferred shares of the Company
as security for the standby letter of credit from the Bank of America National
Trust.
NOTE 13 -- SUBSEQUENT EVENTS
a) NOTES PAYABLE TO RELATED COMPANIES
During the period from January 1, 1998 through February 27, 1998, the
Company borrowed an additional US$11,932,000 under its financing agreement with
Qualcomm Incorporated relating to additional equipment purchases for its mobile
PCS telephone system.
b) TELEX-CHILE S.A.
Telex-Chile S.A., a shareholder of the Company and the parent company of
Chilesat S.A., also a shareholder of the Company, had a working capital
deficiency of approximately US$ 74 million at December 31, 1997. Telex-Chile
S.A. is presently negotiating to restructure or refinance its debt obligations.
Telex-Chile has been unable to find a strategic partner to make capital
contributions to provide working and investment capital to the company. The
management of Telex-Chile S.A. believes that the company will be successful in
its attempt to restructure or refinance its debt obligations and in its search
to incorporate a strategic partner. It is at least reasonably possible, however,
that the outcome of these negotiations may not be favorable to Telex-Chile S.A.
As mentioned in Note 10, Telex-Chile S.A. has granted a pledge on Series B
shares in Chilesat Telefonia Personal S.A. to guarantee the Company's notes
payable to Qualcomm and the standby letter of credit from Bank of America
National Trust. Telex-Chile S.A. is also guarantor of such obligations. Chilesat
S.A. has also entered into a contract to provide use of its fiber optic network
and to provide signal distributions services to the Company for 11.5 years (Note
1). The potential impact of the matter mentioned in the preceding paragraph on
the financial condition or results of operations of the Company cannot be
estimated at this time.
c) VALUE ADDED TAXES
On January 6, 1998, the Company recovered US$5,551,000 of VAT from the
Chilean Government relating to the importation of equipment for its mobile PCS
telephone system.
F-39
<PAGE> 147
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of QUALCOMM Incorporated and Leap Wireless International, Inc.
In our opinion, the accompanying combined consolidated balance sheets and the
related combined consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of the Transworld Companies (companies in the development stage) at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended and for the period from June 25, 1990 (inception)
through December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Companies'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Diego, California
August 28, 1998
F-40
<PAGE> 148
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1998 1997 1996
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 11,425 $ 49 $ 2,443
Note receivable, net..................................... 4,250
Note receivable from a related party, net................ 394 394 93
Other current assets..................................... 660 11 278
-------- -------- -------
Total current assets............................. 12,479 454 7,064
-------- -------- -------
Property and equipment, net................................ 5,915 5,691 5,992
Investment in joint venture................................ 51 21 20
Other assets............................................... 506 7 7
-------- -------- -------
Total assets............................................... $ 18,951 $ 6,173 $13,083
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................. $ 2,397 $ 700 $ 604
Current portion of notes payable to related parties...... 15,000 120 120
-------- -------- -------
Total current liabilities........................ 17,397 820 724
-------- -------- -------
Note payable to a related party, net of current portion.... 60
Commitments and contingencies (Note 9)
Stockholders' equity:
Parent's investment...................................... 21,127 21,127 21,127
Deficit accumulated during the development stage......... (19,573) (15,774) (8,828)
-------- -------- -------
Total stockholders' equity................................. 1,554 5,353 12,299
-------- -------- -------
Total liabilities and stockholders' equity................. $ 18,951 $ 6,173 $13,083
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-41
<PAGE> 149
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM JUNE 25, 1990
YEAR ENDED (INCEPTION) TO
SIX MONTHS ENDED --------------------------- ---------------------------
------------------------------- DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
JUNE 30, 1998 JUNE 30, 1997 1997 1996 1998 1997
-------------- -------------- ------------ ------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue................ $ -- $ -- $ -- $ -- $ 361 $ 361
General and
administrative
expenses............. 3,816 2,742 5,448 4,396 18,551 14,735
------ ------ ------ ------ ------- -------
Operating loss......... 3,816 2,742 5,448 4,396 18,190 14,374
Interest (income)
net.................. (17) (134) (315) (114) (513) (496)
Write-down of note
receivable........... 1,510 1,510 1,510
Loss on investment in
joint venture........ 150 301 82 384 384
Currency exchange
gains................ 2 2 2
------ ------ ------ ------ ------- -------
Net loss..... $3,799 $2,758 $6,946 $4,364 $19,573 $15,774
====== ====== ====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-42
<PAGE> 150
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM JUNE 25, 1990
SIX MONTHS ENDED YEAR ENDED (INCEPTION) TO
-------------------- --------------------------- -------------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1997 1997 1996 1998 1997
-------- -------- ------------ ------------ -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from development activities:
Net loss................................. $(3,799) $(2,758) $ (6,946) $ (4,364) $(19,573) $ (15,774)
Adjustments to reconcile net loss to net
cash used in development activities:
Depreciation and amortization.......... 761 726 1,285 328 2,451 1,690
Company's share in losses of equity
investee............................. 151 302 83 384 384
Accrued interest and expenses
contributed as capital............... -- 41 41 41
Write-down of note receivable.......... 1,510 1,510 1,510
Allowance on note receivable from
related party........................ 200 306 506 306
Changes in assets and liabilities:
(Increase) decrease in other
assets............................ (1,148) 180 267 (73) (1,166) (18)
Increase in note receivable from
related party..................... (200) (372) (607) (93) (900) (700)
Increase (decrease) in accounts
payable and accrued liabilities... 1,697 (131) 96 235 2,397 700
Increase (decrease) in notes payable
to related parties................ (120) (60) (60) 180 120
------- ------- ----------- ----------- -------- ------------
Net cash used in development activities.... (2,609) (2,264) (3,847) (3,663) (14,350) (11,741)
======= ======= =========== =========== ======== ============
Cash flow from investing activities:
Purchases of property and equipment...... (985) (929) (984) (670) (8,052) (7,067)
Payments on note receivable.............. 1,888 2,740 750 --
Investment in common stock............... (1,510) (1,510)
Investment in joint venture.............. (30) (151) (303) (103) (435) (405)
------- ------- ----------- ----------- -------- ------------
Net cash (used in) provided by investing
activities............................... (1,015) 808 1,453 (23) (9,997) (8,982)
======= ======= =========== =========== ======== ============
Cash flows from financing activities:
Net payable to related party............. 15,000 15,000
Parent investments....................... -- -- 4,685 20,772 20,772
------- ------- ----------- ----------- -------- ------------
Net cash provided by financing
activities............................... 15,000 -- -- 4,685 35,772 20,772
======= ======= =========== =========== ======== ============
Net increase (decrease) in cash and cash
equivalents.............................. 11,376 (1,456) (2,394) 999 11,425 49
Cash and cash equivalents, beginning of
period................................... 49 2,443 2,443 1,444 -- --
------- ------- ----------- ----------- -------- ------------
Cash and cash equivalents, end of period... $11,425 $ 987 $ 49 $ 2,443 $ 11,425 $ 49
======= ======= =========== =========== ======== ============
Non-cash investing and financing
activities:
Contribution of equipment................ $ $ $ $ 314 $ 314 $ 314
======= ======= =========== =========== ======== ============
Cash payment for interest................ $ 834 $ $ 20,175 $ $ 95,156 $ 36,897
======= ======= =========== =========== ======== ============
Conversion of investment in common stock
to a note receivable................... $ $ $ $ 5,000 $ 5,000 $ 5,000
======= ======= =========== =========== ======== ============
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-43
<PAGE> 151
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 25, 1990 (INCEPTION) TO JUNE 30,1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
PARENT'S DEVELOPMENT STOCKHOLDERS'
INVESTMENT STAGE EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
Balance at June 25, 1990 (inception)........................ $ -- $ -- $ --
Transfers from Transworld Communications (U.S.A.), Inc.... 550 550
Net loss.................................................. (457) (457)
------- -------- -------
Balance at December 31, 1990................................ 550 (457) 93
Transfers from Transworld Communications (U.S.A.), Inc.... 50 50
Net loss.................................................. (111) (111)
------- -------- -------
Balance at December 31, 1991................................ 600 (568) 32
Net loss.................................................. (178) (178)
------- -------- -------
Balance at December 31, 1992................................ 600 (746) (146)
Transfers to Transworld Communications (U.S.A.), Inc...... (23) (23)
Net loss.................................................. (399) (399)
------- -------- -------
Balance at December 31, 1993................................ 577 (1,145) (568)
Transfers from Transworld Communications (U.S.A.), Inc.... 3,573 3,573
Net loss.................................................. (1,095) (1,095)
------- -------- -------
Balance at December 31, 1994................................ 4,150 (2,240) 1,910
Transfers from Transworld Communications (U.S.A.), Inc.... 11,937 11,937
Net loss.................................................. (2,224) (2,224)
------- -------- -------
Balance at December 31, 1995................................ 16,087 (4,464) 11,623
Transfers from Transworld Communications (U.S.A.), Inc.... 5,040 5,040
Net loss.................................................. (4,364) (4,364)
------- -------- -------
Balance at December 31, 1996................................ 21,127 (8,828) 12,299
Net loss.................................................. (6,946) (6,946)
------- -------- -------
Balance at December 31, 1997................................ 21,127 (15,774) 5,353
Net loss (unaudited)...................................... (3,799) (3,799)
------- -------- -------
Balance at June 30, 1998 (unaudited)........................ $21,127 $(19,573) $ 1,554
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-44
<PAGE> 152
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANIES
The Company is made up of Transworld Telecommunications, Inc., Transworld
Communications Services, Inc. and Transworld Communications (Bermuda), Ltd.
(collectively the "Transworld Companies" or "Company"), formerly the
wholly-owned subsidiaries of Transworld Communications (U.S.A.), Inc. On August
4, 1998, QUALCOMM, via its wholly owned subsidiary Orrengrove Investments
Limited, purchased common stock from Transworld Telecommunications, Inc.,
Transworld Communications Services, Inc. and Transworld Communications
(Bermuda), Ltd. for an aggregate purchase price of $51.8 million. Upon the
acquisition, QUALCOMM became a 60% common shareholder in the Company. The
consideration included a $36.8 million cash payment and the forgiveness of $15
million in short-term loans previously granted by QUALCOMM on May 21, 1998 to
Transworld Communications, (U.S.A.), Inc. After the acquisition, Transworld
Communications (U.S.A.), Inc. remains a 40% common shareholder in the Company.
Transworld Telecommunications, Inc. was incorporated on May 1, 1998 and received
primarily all of the assets and liabilities of Transworld Communications
(U.S.A.), Inc. except for $5 million in cash and certain trademarks in
connection with QUALCOMM's investment on August 4, 1998. Transworld
Communications Services, Inc. was incorporated on January 18, 1996 and
Transworld Communications (Bermuda), Ltd. was incorporated on July 15, 1996.
Orrengrove Investments Ltd. ("Orrengrove") is a wholly owned subsidiary of
QUALCOMM Telecommunications Ltd., an Isle of Man company ("QUALCOMMTel Isle of
Man"), which is a wholly owned subsidiary of QUALCOMM. QUALCOMM has committed to
transfer 50% of QUALCOMMTel Isle of Man's ownership interest in Orrengrove prior
to September 23, 1998 to Tass Telecom. QUALCOMM has also committed to transfer
30% of its ownership interest in QUALCOMMTel Isle of Man prior to September 23,
1998 to Tiller International Limited. Consequently, prior to September 23, 1998,
it is expected that QUALCOMM will hold a 70% interest in QUALCOMMTel Isle of
Man, and QUALCOMMTel Isle of Man will hold a 50% interest in Orrengrove.
Finally, it is expected that QUALCOMM will thereafter transfer its remaining 70%
interest in QUALCOMMTel Isle of Man to Leap Wireless International, Inc. prior
to the consummation of QUALCOMM's anticipated spin-off.
Transworld Companies were created to build and operate a modern
telecommunications infrastructure for the Commonwealth of Independent States
(CIS), formerly known as the Soviet Union. The Company's business is developing
rapidly, with operations in CIS emerging economies, which by nature have an
uncertain economic, political and regulatory environment. The general risks of
conducting business in the CIS and other developing countries include the
possibility for rapid changes in government policies and regulations, economic
conditions, the tax regime and foreign currency regulations.
2. DEVELOPMENT STAGE ACTIVITIES AND DEPENDENCY ON ADDITIONAL FINANCING
The Company is a development stage enterprise which has incurred
substantial operating losses and negative cash flows from network development
and operations since inception. To date, the Company has focused primarily on
the development of its product line, the development and construction of its
networks, the hiring of management and other key personnel, the raising of
capital, the acquisition of equipment, the implementation of its sales and
marketing strategy and the development of operating systems. The development of
the Company's business and the deployment of its services and systems will
require significant additional capital expenditures, a substantial portion of
which will need to be incurred before the realization of significant revenues.
Together with associated start-up operating expenses, these capital expenditures
will result in substantial negative cash flow until an adequate
revenue-generating customer base is established. In order to implement its
business plan, significant capital will be required to fund capital
expenditures, working capital, debt service and operating losses. The Company's
principal capital expenditure requirements involve
F-45
<PAGE> 153
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the purchase, installation and construction of network operations centers, other
network infrastructure and customer located equipment, development and
construction of the network.
The Company expects that its future capital requirements will require it to
obtain additional financing, which may include the sale or issuance of equity
and debt securities either through one or more offerings or to one or more
strategic investors. There can be no assurance that the Company will be
successful in raising additional capital in sufficient amounts to fund its
strategic objectives, or that such funds, if available, will be available on
terms that the Company will consider acceptable. Failure to raise sufficient
funds may require the Company to modify, delay or abandon some of its planned
future expansion or expenditures, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
As discussed in Notes 1 and 11, QUALCOMM, via its wholly owned subsidiary
Orrengrove Investments Limited, acquired a 60% interest in the Company on August
4, 1998, which resulted in the receipt of approximately $51.8 million in net
proceeds. It is the opinion of Company management that such net proceeds will be
adequate to support the Company's operations through December 31, 1998. However,
based upon the factors discussed above, there can be no assurance that the
Company will achieve profitability or positive cash flow in the future or that
sufficient financing will be available to complete the Company's planned network
development efforts.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined consolidated financial statements reflect the financial
position, results of operations, cash flows and changes in stockholders' equity
of the business of Transworld Companies and that which was transferred to
Transworld Telecommunications, Inc. on August 4, 1998, as discussed in Note 1.
The financial statements have been presented for all periods since the inception
of Transworld Communications (U.S.A.), Inc. in June 1990. All of the revenues
and expenses of Transworld Communications Services, Inc. have been included in
the presentation of the combined consolidated financial statements since 100% of
business operations were conducted through the consolidated activities of
Transworld Communications Services, Inc. and its wholly-owned subsidiary, the
activities of Transworld Communications (Bermuda), Ltd. and the assets,
liabilities, rights and obligations contributed to Transworld
Telecommunications, Inc.
Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment in Joint Venture
The Company has an equity investment in a joint venture. The Company uses
the equity method to account for investments in corporate entities in which it
has voting interest of 20% to 50% or in which it otherwise exercises significant
influence and for ownership interests in partnerships. Under the equity method,
the investment is originally recorded at cost and adjusted to recognize the
Company's share of net earnings or losses of the investee, limited to the extent
of the Company's investment in, advances to and financial guarantees for the
investee. The Company maintained a 50% voting interest at June 30, 1998
(unaudited) and December 31, 1997 and 1996.
F-46
<PAGE> 154
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the lesser of the estimated useful lives, ranging from
five to eight years for telecommunications equipment and five to seven years for
furniture, fixtures and equipment and other property. Construction in process
reflects amounts incurred for the configuration and build-out of
telecommunications equipment not yet placed in service.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
Start-up Activities
The Company expenses all costs related to start-up activities as incurred.
Revenue recognition
In 1993 and 1994, the Company permitted third parties the right to transmit
data across the Company's network. Revenue totaling approximately $361,000 was
recognized during the years ended December 31, 1994 and 1993 when earned.
Income Taxes
Historically, the Company's operations have been included in the
consolidated income tax returns filed by Transworld Communications (U.S.A.),
Inc. Income tax expense in the Company's financial statements has been
calculated on a separate tax return basis.
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset and/or liability is computed
for both the expected future impact of differences between the financial
statements and tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be "more
likely than not" realized in future tax returns. Tax rate changes are reflected
in income in the period such changes are enacted.
Foreign Currency
The functional currency of the Company's foreign operations is United
States dollars. The Company maintains most of the cash balances in dollar
denominated bank accounts and has no significant foreign currency monetary
assets and liabilities at December 31, 1997 and 1996. Gains and losses resulting
from the Company's foreign currency transactions are included in the combined
consolidated statement of operations.
The Company does not currently hedge against foreign currency fluctuations
although the Company may take such steps in the future. Under current practices,
the Company's results of operations could be adversely affected by fluctuations
in exchange rates.
F-47
<PAGE> 155
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
At December 31, 1997 and 1996, the carrying amounts of the Company's cash
and cash equivalents and accounts payable approximate fair value due to the
short-term maturities of these balances. Additionally, the carrying amounts of
the note receivable and note receivable from a related party approximates fair
value since the current effective interest rate reflects the market rate for
debt with similar terms and remaining maturities.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 (FAS 130), Reporting
Comprehensive Income, was adopted by the Company in the first quarter of fiscal
1998 and has been applied to all prior periods presented for comparative
purposes. FAS 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. "Comprehensive income" is
defined in this statement as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period
(including net income) except those resulting from investments by owners and
distributions to owners. The adoption of this new standard did not impact the
Company's financial statements because there were no differences between net
income and comprehensive income.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 131 (FAS 131), Disclosures
About Segments of an Enterprise and Related Information, is effective for fiscal
years beginning after December 15, 1997. This standard establishes guidance
related to segment disclosure utilizing the "management approach", whereby
external segment reporting is aligned with segment reporting for internal
management purposes. The previous standard followed a "products and services"
model. This standard is not expected to have a significant effect on the
disclosures of the financial statements of the Company.
4. NOTES RECEIVABLE
In 1995, the Company invested $5 million to purchase 504,032 shares of
non-marketable International Business Communication System, Inc. ("IBCS") common
stock (5% of IBCS' outstanding common stock) with the intention of forming a
strategic alliance to provide telecommunications services in CIS.
In 1996, the Company and IBCS entered into an agreement whereby IBCS
repurchased the shares of common stock owned by the Company. IBCS agreed to pay
the Company $5.5 million in the form of a $4.75 million promissory note and
$750,000 cash at closing. The promissory note was secured by substantially all
of the assets of ZAO Rustel, a Russian telecommunications company, and an
affiliate of IBCS. The promissory note accrued interest at 10% and was payable
at the earlier of March 31, 1997, or 10 days after an offering, as defined.
In August 1997, the Company extended the maturity date of the note through
December 31, 1997. As a part of this agreement, IBCS prepaid $1 million, of
which $852,582 represented principal.
In 1997, the Company extended the due date of the promissory note twice and
collected $2.74 million plus accrued interest. At December 31, 1997, management
determined that the balance due was uncollectible and recorded a write-down of
$1.5 million including accrued interest of $70,000.
F-48
<PAGE> 156
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Telecommunications equipment............................... $5,274 $5,274
Construction-in-progress................................... 1,479 660
Furniture, fixtures and equipment.......................... 627 462
------ ------
7,380 6,396
Less accumulated depreciation and amortization............. 1,689 404
------ ------
$5,691 $5,992
====== ======
</TABLE>
The Company's telecommunications equipment and construction-in-progress are
primarily maintained in a foreign country.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Trade accounts payable...................................... $541 $570
Payroll and related taxes................................... 83 34
Other....................................................... 76 --
---- ----
$700 $604
==== ====
</TABLE>
7. RELATED PARTY TRANSACTIONS
Note Receivable from a Related Party
Since 1996, the Company has advanced certain amounts to another investor in
TASS Loutch Telecom ("TLT") for the investor's share of TLT's expenses in
exchange for a note receivable. The Company has advanced approximately $900,000,
$700,000 and $93,000 to a related party at June 30, 1998 (unaudited) and
December 31, 1997 and 1996, respectively. Amounts outstanding include accrued
interest at prime plus two percent [10.5% at June 30, 1998 (unaudited) and
December 31, 1997 and 1996] compounded quarterly. Principal and interest is due
December 31, 1998.
The Company is negotiating with the related party regarding approximately
$500,000 and $300,000 of unreconciled differences in the note receivable at June
30, 1998 (unaudited) and December 31, 1997. As a result, the Company has
established reserves for these amounts at June 30, 1998 (unaudited) and December
31, 1997.
Notes Payable to Related Parties
In May 1998, QUALCOMM advanced the Company $15 million in exchange for a
note payable bearing interest at prime plus 2% [10.5% at June 30, 1998
(unaudited)] payable in full on the first anniversary of the note. The note was
subsequently converted to equity as part of the QUALCOMM acquisition of 60% of
the Company. The note, which was guaranteed by shares of Transworld
Communications (U.S.A.), Inc., accrued interest at 12.5% and was paid in full at
August 4, 1998, and the interest was forgiven.
F-49
<PAGE> 157
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1996, the Company agreed to pay $420,000 to a former stockholder of
Transworld Communications (U.S.A.), Inc. in exchange for certain services
performed. Under the terms of the agreement, the Company made a $240,000 cash
payment in November 1996 and agreed to pay the remaining $180,000 in three equal
installments through May 1998.
Consulting Agreement with a Related Party
The Company will be required to pay a consulting fee to a related party of
up to $2.5 million based on 5% of the net proceeds from any future debt or
equity financings ("Offering"). The consulting fee will only be payable if the
Company completes such Offering. At December 31, 1997, the Company had not yet
completed any such Offering, and management did not deem the completion of an
Offering to be probable. The Company, accordingly, did not accrue the $2.5
million fee at December 31, 1997. The $15 million advanced to the Company by
QUALCOMM on May 19, 1998 in exchange for a note payable obligated the Company to
pay $750,000 to the related party under this agreement, and such amount was
reflected as a liability in the June 30, 1998 balance sheet.
8. INCOME TAXES
The Company has not recorded provisions for federal and state income taxes
for the six months ended June 30, 1998 (unaudited) and the years ended December
31, 1997, and 1996 due to net operating losses ("NOL") during those years.
The following is a reconciliation from the statutory U.S. federal income
tax rate to the Company's effective rate of income tax expense for the periods
ended:
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED DECEMBER 31,
JUNE 30, ------------
1998 1997 1996
----------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
U.S. federal statutory tax rate............................ (34)% (34)% (34)%
State taxes, net of U.S. federal income.................... (5)% (4)% (4)%
--- --- ---
Tax benefit................................................ (39)% (38)% (38)%
Increase in valuation allowance............................ 39% 38% 38%
--- --- ---
Effective tax rate......................................... --% --% --%
=== === ===
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------
1998 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax asset:
U.S. net operating losses..................... $ 4,600 $ 3,800 $ 2,020
Foreign net operating losses.................. 125 80 15
------- ------- -------
4,725 3,880 2,035
Less valuation allowance...................... (4,725) (3,880) (2,035)
======= ======= =======
Net deferred tax asset........................ $ -- $ -- $ --
======= ======= =======
</TABLE>
The Company has provided a deferred tax asset valuation allowance for its
net deferred tax assets as it is considered more likely than not that such
amounts will not be realized.
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<PAGE> 158
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, the Company had U.S. net operating loss carryforwards
of approximately $10 million for income tax reporting purposes that expire in
years 2005 through 2013 and foreign net operating loss carryforwards of
approximately $250,000 that expire in years 2001 through 2002.
As a result of the sale of stock of the Transworld Companies, the Company
may be subject to an annual limitation on the utilization of federal and state
NOL carryforwards generated from the date the businesses are transferred.
9. COMMITMENTS AND CONTINGENCIES
Transponder Agreements
The Company has obtained, through a number of agreements, the rights to
utilize certain Russian Loutch I and Loutch II satellite capacity. The
agreements give the Company rights to the capacity on satellites under the
Loutch I and Loutch II programs for up to 20 years.
In December 1993, the Company entered into an agreement with a third party
for the sole and exclusive use of two transponders on each of the first two
Loutch II satellites. The third party was responsible for modifying the
transponders on the first satellite for commercial use. At June 30, 1998
(unaudited) and December 31, 1997, under this agreement the Company had paid
approximately $5.3 million of the $7 million commitment. The commitment is
expected to be satisfied during 1999.
In December 1993, the Company entered into an agreement to provide
commercial capacity on satellites in the Loutch I program (the Loutch I
Agreement). In exchange, the Company has agreed to pay $45,000 per month per
satellite for which services are to be provided. The term of the agreement is 20
years commencing from the date of the agreement and can be canceled by the
licensor in the event of continued default by the Company. The Company has the
right to terminate this agreement once each year. At June 30, 1998 (unaudited)
and December 31, 1997, the Company had not yet begun to use the satellites and
as such, no payment obligation existed.
Financing Assistance Agreement
In June 1997, the Company entered into an agreement with a consulting
company pursuant to which the consulting company agreed to provide certain
services related to raising funds for the Company. As compensation for the
agreed upon services, the consulting company is entitled under the agreement to
receive a fee of five percent of the gross amount or value of any investments in
and/or loans to the Company by a third party. The agreement also provides that,
in the event that an investor invests equity in the Company, the consulting
company is to receive a warrant to purchase the Company's common stock at a
certain exercise price as described in the agreement. At December 31, 1997, the
Company had not yet completed any such transactions. At June 30, 1998, the
Company accrued $750,000 under this agreement because QUALCOMM had on May 19,
1998 advanced $15 million to the Company in exchange for a note payable, which
may have obligated the Company to pay $750,000 under this agreement. The Company
disputes the amount.
Construction-in-Progress
In August 1996, the Company entered into an agreement to purchase certain
telecommunications equipment for $1 million. At June 30, 1998 (unaudited) and
December 31, 1997, remaining costs to be incurred for this project approximated
$100,000 and $300,000, respectively.
In September 1997, the Company entered into an agreement to have six earth
stations built over an indefinite period. The agreement establishes a price
guarantee for two years at approximately $1 million per earth station. In
conjunction with this purchase order, the Company paid approximately $600,000 as
a down
F-51
<PAGE> 159
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payment. The Company expects the construction of these earth stations to be
completed in the first quarter of 1999. At June 30, 1998 (unaudited) and
December 31, 1997, the Company had ordered four earth stations under this
agreement.
Lease Commitments
The Company leases certain office space in the United States and
internationally in Bermuda and Russia under non-cancelable operating lease
agreements. Rent expense for the years ended December 31, 1997 and 1996 and from
June 25, 1990 (inception) to December 31, 1997 was approximately $435,000,
$81,000 and $695,000, respectively. Future minimum lease payments under all
non-cancelable operating lease arrangements as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998..................................................... $ 321,000
1999..................................................... 322,000
2000..................................................... 324,000
2001..................................................... 260,000
2002..................................................... 1,000
----------
$1,228,000
==========
</TABLE>
Legal Matters
The Company is a party to various legal actions and administrative
proceedings arising in the normal course of business. In the opinion of
Company's management, disposition of these matters is not expected to have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
10. STOCKHOLDERS' EQUITY
During the periods presented, Transworld Communications (U.S.A.), Inc.
issued common stock to various parties in exchange for contributions of cash and
other assets. These contributions have been reflected as investments by
Transworld Communications (U.S.A.), Inc. in the combined consolidated statements
of the Transworld Companies. The other assets contributed have been reflected as
investments based upon the fair value of the assets received.
11. SUBSEQUENT EVENTS
On August 4, 1998, QUALCOMM, via its wholly owned subsidiary Orrengrove
Investments Limited, purchased common stock from Transworld Telecommunications,
Inc., Transworld Communications Services, Inc. and Transworld Communications
(Bermuda), Ltd. for an aggregate purchase price of $51.8 million. Upon the
acquisition, QUALCOMM became a 60 percent common shareholder in the Company. The
consideration was paid via a $36.8 million cash payment and the forgiveness of
$15 million in short-term loans previously granted by QUALCOMM on May 20, 1998
and the related unpaid accrued interest. After the acquisition, Transworld
Communications (U.S.A.), Inc. remains a 40 percent common shareholder in the
Company.
F-52
<PAGE> 160
ANNEX 1
LEHMAN BROTHERS
September 4, 1998
Board of Directors
QUALCOMM Incorporated
6455 Lusk Boulevard
San Diego, CA 92121
Dear Members of the Board:
We understand that QUALCOMM Incorporated ("QUALCOMM" or the "Company") has
announced its plans to distribute to the holders of common stock of the Company
100% of the outstanding shares of common stock of Leap Wireless International,
Inc. ("Leap"), so that holders of shares of common stock of QUALCOMM will
receive one share of Leap for every four shares of QUALCOMM owned by them (the
"Distribution"). Leap is currently a wholly owned subsidiary of QUALCOMM,
created in connection with the Distribution. We further understand that QUALCOMM
will enter into a $35 million working capital facility and a $230 million
investment capital facility (together, the "Credit Facilities") with Leap and,
prior to the Distribution, will contribute $10 million in cash to Leap. In
addition, QUALCOMM will retain a warrant on the common stock of Leap
representing approximately 18% of Leap's common stock on a fully diluted basis
(the "Warrant"). QUALCOMM after the Distribution is hereinafter referred to as
"New QUALCOMM." Further information about the Distribution is included in the
Registration Statement of the Company on Form 10, as filed with the Securities
and Exchange Commission (the "Commission") on July 1, 1998 and amended to the
date hereof (the "Registration Statement"), and in the Information Statement
contained in the Registration Statement to be mailed to QUALCOMM shareholders in
connection with the Distribution (the "Information Statement"). In addition,
certain aspects of the relationship between New QUALCOMM and Leap following the
Distribution, including the Credit Facilities and the Warrant and agreements
relating to the provision of interim services to Leap and the purchase
requirements of Leap from New QUALCOMM, are set forth in a series of
intercompany agreements (the "Agreements") included as exhibits to the
Registration Statement.
In connection with the Distribution, we have been requested by QUALCOMM to
render our opinion with respect to (i) the fairness, from a financial point of
view, to the holders of common stock of QUALCOMM, of the Distribution, and (ii)
whether the Distribution will materially impair the ability of New QUALCOMM and
Leap to fund in the future, from external sources or through internally
generated funds, their respective currently anticipated operating and capital
requirements (as currently projected in the financial forecasts prepared by the
management of QUALCOMM). We have not been requested to opine as to, and our
opinion does not in any manner address, (i) QUALCOMM's underlying business
decision to proceed with or effect the Distribution or (ii) the ability of New
QUALCOMM or Leap to access the capital markets at any time following the
Distribution.
In arriving at our opinion, we reviewed and analyzed: (i) the Agreements,
(ii) the Registration Statement, the Information Statement and such other
publicly available information concerning QUALCOMM, New QUALCOMM, Leap and the
Distribution that we believe to be relevant to our inquiry, (iii) financial and
operating information with respect to the business, operations and prospects of
QUALCOMM, New QUALCOMM and Leap furnished to us by QUALCOMM, (iv) information
with respect to the business, operations and prospects of the portfolio
companies in which Leap has an equity interest (the "Leap Operating Companies")
and the potential liquidity of Leap's investments in the Leap Operating
Companies, (v) information with respect to the accounting and business impact on
QUALCOMM of continuing ownership of the Leap Operating Companies, (vi) a
comparison of the historical financial results and present financial conditions
of QUALCOMM and, on a pro forma basis, New QUALCOMM and Leap, with those of
other publicly held companies that we deemed relevant, (vii) the trading history
of QUALCOMM common stock (including, without limitation, since the date of the
public announcement of
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<PAGE> 161
the Distribution) and a comparison of such trading history with those of other
publicly held companies that we deemed relevant, (viii) publicly available
research reports regarding QUALCOMM, including, without limitation, the comments
of research analysts with respect to the Distribution, (ix) the terms of
selected recent spin-off transactions that we deemed relevant and the market
performance of securities involved in such transactions both before and after
the consummation of such transactions, (x) the proposed terms of the Credit
Facilities to be provided to Leap by New QUALCOMM, and (xi) the continuing
relationship between New QUALCOMM and Leap as set forth in the Agreements. In
addition, we have had discussions with the management of QUALCOMM and the
proposed management of Leap concerning the business, operations, assets,
financial condition and prospects of QUALCOMM and, on a pro forma basis, New
QUALCOMM and Leap, and have undertaken such other studies, analyses and
investigations as we deemed appropriate.
We have assumed and relied upon the accuracy and completeness of the
financial and other information used by us in arriving at our opinion without
independent verification and have further relied upon the assurances of the
management of QUALCOMM that they are not aware of any facts that would make such
information inaccurate or misleading. With respect to the financial forecasts of
New QUALCOMM and Leap, upon advice of QUALCOMM we have assumed that such
forecasts have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of QUALCOMM as to the future
financial performance of New QUALCOMM and Leap and that New QUALCOMM and Leap
will perform in accordance with such forecasts. In arriving at our opinion, we
have not conducted a physical inspection of the properties or facilities of
QUALCOMM or Leap and have not made nor obtained any evaluations or appraisals of
the assets or liabilities of QUALCOMM or Leap. In addition, you have not
authorized us to solicit, and we have not solicited, any indications of interest
from any third party with respect to a purchase of any of the equity interests
in the Leap Operating Companies. Our opinion is necessarily based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
In addition, we express no opinion as to the prices at which shares of
common stock of New QUALCOMM or Leap actually will trade following the
consummation of the Distribution. The process by which securities trading
markets establish a market price for any security is complex, involving the
interaction of numerous factors, and market prices will fluctuate with changes
in, among other things, the financial condition, business and prospects of the
issuer and comparable companies and economic and financial market conditions. In
addition, trading in shares of Leap will likely be characterized by a period of
redistribution among QUALCOMM's shareholders who receive such shares in the
Distribution (especially in light of the taxable nature of the Distribution)
which may temporarily depress the market price of such shares during such
period. Accordingly, this opinion should not be viewed as providing any
assurance that the combined market value of the shares of common stock of New
QUALCOMM and the shares of common stock of Leap to be received by a stockholder
of QUALCOMM in the Distribution will be in excess of the current market value of
the common stock of QUALCOMM owned by such stockholder at any time prior to
announcement or consummation of the Distribution.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that the Distribution (i) is fair, from a financial point of view,
to the holders of common stock of QUALCOMM and (ii) will not materially impair
the ability of New QUALCOMM and Leap to fund in the future, from external
sources or through internally generated funds, their respective currently
anticipated operating and capital requirements as currently projected in the
financial forecasts prepared by the management of QUALCOMM.
We have acted as financial advisor to QUALCOMM in connection with the
Distribution and will receive a fee for our services which is contingent upon
the consummation of the Distribution. In addition, QUALCOMM has agreed to
indemnify us for certain liabilities that may arise out of the rendering of this
opinion. We also have performed various investment banking services for QUALCOMM
in the past and have received customary fees for such services. In the ordinary
course of our business, we actively trade in the securities of QUALCOMM for our
own account and for the accounts of our customers and, accordingly, may at any
time hold long and/or short positions in such securities or in the securities of
New QUALCOMM or Leap following the Distribution.
A-2
<PAGE> 162
This opinion is for the use and benefit of the Board of Directors of
QUALCOMM. This opinion is not intended to be and does not constitute a
recommendation to any current or prospective stockholders of QUALCOMM, New
QUALCOMM or Leap as to any action or investment decisions which may be taken by
such stockholders with respect to shares owned or to be received by them.
Very truly yours,
LEHMAN BROTHERS INC.
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<PAGE> 163
ANNEX 2
LEHMAN BROTHERS
September 4, 1998
CONSENT OF LEHMAN BROTHERS INC.
We hereby consent to the use of our opinion letter dated September 4, 1998
to the Board of Directors of QUALCOMM Incorporated ("QUALCOMM") included as
Annex 1 to the Registration Statement relating to the Distribution of Leap
Wireless International, Inc. by QUALCOMM, and to the references therein to such
opinion under the captions "Summary -- Opinion of Financial Advisor" and
"Opinion of Financial Advisor."
In giving such consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we thereby admit that we are experts with respect
to any part of such Registration Statement within the meaning of the term
"experts" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
LEHMAN BROTHERS INC.
A-4
