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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-64459
PROSPECTUS
2,271,060 SHARES
LEAP WIRELESS INTERNATIONAL, INC.
COMMON STOCK
This Prospectus relates to the issuance by Leap Wireless International,
Inc. ("Leap" or the "Company") of up to 2,271,060 shares of Common Stock of the
Company, par value $.0001 per share, (the "Common Stock"), including certain
attached preferred stock purchase rights (the "Rights"), upon the possible
future conversion of the Trust Convertible Preferred Securities (the "Trust
Preferred Securities") of QUALCOMM Financial Trust I, a wholly-owned statutory
business trust of QUALCOMM Incorporated ("QUALCOMM").
The Company was formed as a wholly-owned subsidiary of QUALCOMM. On
September 23, 1998 (the "Distribution Date"), QUALCOMM distributed all of the
outstanding Common Stock of the Company to QUALCOMM's stockholders as a taxable
dividend (the "Distribution"). As a result of the Distribution, and pursuant to
a resolution of the QUALCOMM Board of Directors as permitted by the Indenture
relating to the Trust Preferred Securities, each holder of a Trust Preferred
Security is entitled to receive both QUALCOMM Common Stock and Leap Common Stock
at a rate of 0.6882 and 0.17205 shares, respectively, upon the future conversion
of such Trust Preferred Security. The Company agreed to issue Common Stock upon
the future conversion of the Trust Preferred Securities (the "Offering") in
consideration for the transfer of the Leap Business from QUALCOMM to the Company
in connection with the Distribution. The Company will receive no additional
consideration or forgiveness of debt upon conversion of the Trust Preferred
Securities and the issuance of Common Stock.
The last reported sale price of the Common Stock, which is quoted under the
symbol "LWIN" on the Nasdaq National Market, on October 9, 1998 was $3.00 per
share.
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 11.
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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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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OCTOBER 13, 1998
This prospectus includes trademarks of Leap Wireless International, Inc. as
well as trademarks of companies other than Leap.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Combined Financial Statements and Notes thereto, appearing
elsewhere in this Prospectus. The Common Stock offered hereby involves a high
degree of risk. See "Risk Factors."
This Prospectus contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and includes this statement for purposes of such safe harbor provisions.
Forward-looking statements, which are based upon certain assumptions and
describe future plans, strategies and expectations of the Company are generally
identifiable by use of the words "believes," "expects," "intends,"
"anticipates," "plans to," "estimates," "projects" or similar expressions. The
ability of the Company to predict results or the actual effect of future plans
or strategies is inherently uncertain. Important factors which may cause actual
results to differ materially from the forward-looking statements contained
herein or in other public statements by the Company are described in the section
entitled "Risk Factors."
THE COMPANY
Leap Wireless International, Inc. ("Leap" or the "Company") manages,
supports, operates and otherwise participates in Code Division Multiple Access
("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, 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 has been and is expected to 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
are 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.
Leap owns certain joint venture and equity interests (held directly by Leap
or indirectly by companies controlled by Leap) formerly held by QUALCOMM 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
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QUALCOMM's interest in TOU will be so transferred. See "Business -- Potential
Acquisition of Ukraine Operating Company."
The Company's wireless telecommunications systems are based on 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 Prospectus, "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 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, formerly Vice Chairman of the Board of QUALCOMM and the Company's
President, Chief Executive Officer and Chairman of the Board; Thomas J. Bernard,
who was a Senior Vice President of QUALCOMM, who is the Company's Executive Vice
President; and James E. Hoffmann, formerly 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
businesses and ventures transferred to the Company in the Distribution (the
"Leap Business") have 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.
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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.
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 Prospectus 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 are
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.
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- 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.
RELATIONSHIP BETWEEN QUALCOMM AND THE COMPANY
Following the Distribution, QUALCOMM and Leap will be operated as
independent publicly traded companies, with no common officers or directors.
QUALCOMM and Leap will, however, continue to have a relationship as a result of
the following agreements between QUALCOMM and Leap:
Separation and Distribution Agreement. Pursuant to the Separation and
Distribution Agreement, QUALCOMM agreed to transfer the Leap Business to Leap.
QUALCOMM also agreed to contribute to Leap the following: (i) $10 million in
cash; (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 was transferred to Leap in connection with the
separation of the companies (the "Separation"), and QUALCOMM retained 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
issued to QUALCOMM a warrant to purchase 5,500,000 shares of Leap Common Stock
(the "Warrant"), exercisable during the 10 years following the Distribution. In
addition, Leap assumed 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 Telesystems of Ukraine
("TOU") will be transferred to Leap. The Separation and Distribution Agreement
also provided that, subject to the terms and conditions thereof, QUALCOMM and
the Company will take all reasonable steps necessary to effect the Distribution.
Leap also agreed 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. In addition, the
Company agreed 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 has 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 granted 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 further agreed 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 provides, 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. The Company has entered into a secured credit facility
with QUALCOMM (the "Credit Facility"). The Credit Facility consists 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
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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. 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") sets 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 agreed 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 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
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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"), governs 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 agreed to pay
QUALCOMM the hourly rate of the QUALCOMM employees performing such services,
plus associated general and administrative overhead (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 assumed and agreed 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 agreed to grant options to purchase shares of Leap
Common Stock to certain holders of options to purchase shares of QUALCOMM Common
Stock.
Tax Agreement. The Tax Agreement generally requires 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
agreed to issue the shares of Leap Common Stock offered hereby to holders of
QUALCOMM's Trust 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."
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company(1)...................... 2,271,060 shares
Use of proceeds............................................. The Company agreed to issue
Common Stock upon the future
conversion of the Trust
Preferred Securities in
consideration for the transfer
of the Leap Business from
QUALCOMM to the Company in
connection with the
Distribution. The Company will
receive no additional
consideration or forgiveness of
debt upon conversion of the
Trust Preferred Securities and
the issuance of Common Stock
offered hereby.
Nasdaq National Market symbol............................... LWIN
</TABLE>
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(1) Issuable upon the future conversion of the Trust Preferred Securities.
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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 Prospectus. 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 ENDED YEARS ENDED NINE MONTHS PRO FORMA
SEPTEMBER 1, 1995 MAY 31, AUGUST 31, ENDED YEAR ENDED
(INCEPTION) TO ------------------ --------------- 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................ 17,648 17,648 17,648 17,648
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
Stockholders' equity.......... 54,880 45,988 (111) 260,492
</TABLE>
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(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
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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 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 17,647,684 shares of common
stock of the Company issued upon the Distribution. 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.
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RISK FACTORS
This Prospectus 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 Prospectus.
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.
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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 has 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
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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
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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 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.
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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 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
Leap owns 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 has retained 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.
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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 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
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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.
INVESTMENT COMPANY ACT
A significant portion of the Company's assets 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, on September 21, 1998 the Company filed a request 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
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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 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
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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 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
An aggregate of 17,647,684 shares of Leap Common Stock were issued in the
Distribution. The holders of such shares are subject to potential substantial
dilution due to the significant number of shares of Leap Common Stock that are
reserved for issuance. 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
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<PAGE> 20
upon exercise of the Warrants to be issued to QUALCOMM; 3,157,260 shares for
issuance to its employees, officers, directors and consultants pursuant to
Leap's equity incentive plans; 5,542,740 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 the Trust Preferred Securities. The
Company agreed to issue Common Stock upon the future conversion of the Trust
Preferred Securities in consideration for the transfer of the Leap Business from
QUALCOMM to the Company in connection with the Distribution. The Company will
receive no additional consideration or forgiveness of debt upon conversion of
the Trust Preferred Securities and the issuance of Common Stock. Upon conversion
of the Trust Preferred Securities, QUALCOMM will receive benefit in the form of
forgiveness of debt. Though the Company does not expect all 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 48.3% 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.
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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 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 involved the distribution of an aggregate of 17,647,684
shares of Leap Common Stock to the stockholders of QUALCOMM. A substantial
portion of such shares are 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
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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.
RELATIONSHIP BETWEEN QUALCOMM
AND THE COMPANY AFTER THE DISTRIBUTION
For purposes of facilitating an orderly transfer 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,
have entered 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 Prospectus
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
Immediately prior to the Distribution, QUALCOMM and the Company entered
into the Separation and Distribution Agreement which sets 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 transferred the Leap Business to Leap.
QUALCOMM also contributed 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 transferred. No intellectual
property was transferred to Leap in connection with the Separation, and QUALCOMM
retained 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
issued to QUALCOMM the Warrant. In addition, Leap assumed 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
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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 also (i) includes releases of
claims of each party to the other, except as expressly set forth in the
Separation and Distribution Agreement, (ii) provides for the allocation of
certain contingent liabilities and (iii) provides the parties with certain
indemnification rights against each other.
Leap also agreed 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 also agreed 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 has 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 granted 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 further agreed 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 also agreed, 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
Immediately prior to the Distribution, the Company entered into a secured
Credit Facility with QUALCOMM. The Credit Facility consists 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.
Amounts borrowed under the Credit Facility will be due and payable
approximately eight years following the Distribution Date. The Credit Facility
requires 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 bear interest at a variable rate
equal to LIBOR plus 5.25% per annum. Interest is 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.
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The Credit Facility requires the Company to, among other things, achieve
and maintain a total debt to total capitalization financial ratio. The Credit
Facility also contains 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 agreed 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 was in compliance with the financial covenant at the time of
the Distribution. 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 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") sets 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 agreed 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.
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
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<PAGE> 25
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 entered into an Interim Services Agreement
immediately prior to the Distribution (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 agreed 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") governs
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 Prospectus. 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 prior to the
Distribution, the Company will have in effect its own employee benefit plans,
which generally will be the same as QUALCOMM's plans as in effect at that time.
In addition, Leap has granted options to purchase shares of Leap Common Stock to
certain holders of options to purchase shares of QUALCOMM Common Stock.
TAX AGREEMENT
The Tax Agreement generally requires 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
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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 further provides 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 agreed to issue the Leap
Common Stock offered hereby to holders of the Trust Preferred Securities
("Holders"), to which this Prospectus relates, 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. Leap is also obligated to file and keep
effective, subject to certain exceptions, this registration statement covering
the shares of Leap Common Stock issuable upon conversion of the Trust Preferred
Securities. Upon conversion of such Trust Preferred Securities, QUALCOMM will
receive benefit in the form of forgiveness of debt, but Leap will receive no
such benefit or other consideration.
QUALCOMM TRUST CONVERTIBLE PREFERRED SECURITIES
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 Trust 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 Trust 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 Trust 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 Trust
Preferred Securities if the Trust fails to make them. Distributions on the Trust
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 September 11, 1998
for possible conversion of the Trust Preferred Securities at the option of the
holders.
Prior to the Distribution, the Trust Preferred Securities were convertible
only into QUALCOMM Common Stock, at the rate of 0.6882 shares of QUALCOMM Common
Stock for each Trust Preferred Security (equivalent to a conversion price of
$72.6563 per share of common stock). As of September 11, 1998, there were
outstanding approximately 13.2 million Trust Preferred Securities, convertible
into 9,084,240 shares of QUALCOMM Common Stock. As a result of and subsequent to
the Distribution, and pursuant to a resolution of the Board of Directors of
QUALCOMM, each Trust Preferred Security is 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 Trust Preferred Security. The Company agreed to issue
Common Stock upon the future conversion of the Trust Preferred Securities in
consideration for the transfer of the Leap Business from QUALCOMM to the Company
in connection with the Distribution. The Company will receive no additional
consideration or forgiveness of debt upon conversion of the Trust Preferred
Securities and the issuance of Common Stock. Upon conversion of such Trust
Preferred Securities, QUALCOMM will receive benefit in the form of forgiveness
of debt.
26
<PAGE> 27
USE OF PROCEEDS
The shares of Leap Common Stock offered hereby will be issued to Holders
upon the possible future conversion of the Trust Preferred Securities held by
such Holders. The Company agreed to issue Common Stock upon the future
conversion of the Trust Preferred Securities in consideration for the transfer
of the Leap Business from QUALCOMM to the Company in connection with the
Distribution. The Company will receive no additional consideration or
forgiveness of debt upon conversion of the Trust Preferred Securities and the
issuance of Common Stock. Upon the conversion of the Trust Preferred Securities,
QUALCOMM may receive benefit in the form of forgiveness of debt. See
"Relationship with QUALCOMM after the Distribution -- Conversion Agreement."
PLAN OF DISTRIBUTION
The shares of Leap Common Stock offered hereunder will be issued from time
to time by the Company to Holders upon exercise of such Holders' conversion
rights. For a description of the conversion rights of Holders. See "QUALCOMM
Trust Convertible Preferred Securities." Pursuant to the Conversion Agreement,
QUALCOMM has agreed to pay all expenses of the Company, including professional
fees, incurred in connection with the registration of the Common Stock being
registered hereby and the additional expenses that will be incurred from time to
time to maintain such registration statement. The Company is expected to incur
certain administrative expenses in connection with the issuance of Common Stock
upon the conversion of the Trust Preferred Securities.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market System under the
symbol "LWIN." The high and low reported sale prices per share for the Common
Stock from the commencement of trading on September 24, 1998 until October 9,
1998 were $9 and $2 11/16, respectively. The number of stockholders of record as
of October 9, 1998 was approximately 2,150. On October 9, 1998, the last
reported sale price of the Common Stock as reported by the Nasdaq National
Market System was $3 per share.
DIVIDEND POLICY
To date, the Company has neither declared nor paid any cash dividends on
shares of its Common Stock. The Company is prohibited by the terms of the Credit
Agreement from declaring or paying cash dividends upon any of its capital stock.
See "Relationship with QUALCOMM after the Distribution -- Credit Facility." The
Company currently intends to retain its earnings for future growth and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
27
<PAGE> 28
CAPITALIZATION
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 Prospectus. 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.
<TABLE>
<CAPTION>
AS OF MAY 31, 1998
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<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 has provided 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 is payable eight years after
September 23, 1998. The loan bears interest at a variable rate equal to
LIBOR plus 5.25% per annum. Interest accrues quarterly with cash interest
payments beginning September 2001. Approximately $22.8 million is
anticipated to be outstanding as of October 5, 1998 related to the financing
of the 2% origination fee of $5.3 million and a loan by the Company to an
affiliated entity made subsequent to the Distribution.
(2) The number of shares of Leap Common Stock outstanding as of the Distribution
Date was 17,647,684. Such shares reflect the 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.
28
<PAGE> 29
DILUTION
As of May 31, 1998, the pro forma net tangible book value of the Company's
Common Stock was $260.5 million or $14.76 per share of Common Stock. Pro forma
net tangible book value per share represents the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding as of September 23, 1998. Dilution per share represents the
difference between the pro forma net tangible book value per share prior to the
Offering and the pro forma net tangible book value per share after the Offering.
Upon conversion of the Trust Preferred Securities, QUALCOMM will receive benefit
in the form of forgiveness of debt, but Leap will receive no such benefit or
additional consideration. After giving effect to the issuance by the Company of
2,271,060 shares offered hereby, the Company's pro forma net tangible book value
as of May 31, 1998 would have been $260.5 million or $13.08 per share of Common
Stock. This represents an immediate decrease in such pro forma net tangible book
value of $1.68 per share to existing stockholders. Holders of Trust Preferred
Securities will receive 0.17205 shares of the Company's Common Stock upon
conversion thereof, the value of which will depend upon the market price of the
Company's Common Stock as of the date of conversion. At an assumed conversion
price per share of $6.87, the average of the high and low sales prices of the
Company's Common Stock on September 24, 1998, the Holders would suffer no
dilution based on such assumed conversion price relative to the estimated $13.08
pro forma net tangible book value per share after the Offering. The following
table indicates the relation between such assumed conversion price and pro forma
net tangible book value:
<TABLE>
<S> <C>
Assumed conversion price per share..................... $ 6.87
Pro forma net tangible book value per share as of May
31, 1998 prior to Offering.......................... $14.76
Decrease in pro forma net tangible book value per
share attributable to new investors................. $(1.68)
------
Pro forma net tangible book value per share after
Offering.............................................. $13.08
</TABLE>
SUBSTANTIAL FUTURE DILUTION FROM LEAP SHARE RESERVES
The foregoing computations assume no exercise of stock options or warrants
as of September 23, 1998. The holders of Leap Common Stock will be subject to
potential substantial dilution as of September 23, 1998 due to the significant
number of shares of Common Stock of the Company that are reserved for issuance
following September 23, 1998. Collectively, in addition to the 2,271,060 shares
of Common Stock reserved for issuance upon the conversion of the Trust Preferred
Securities, there are 14,200,000 shares of Common Stock of the Company reserved
for issuance after September 23, 1998 consisting of the following: 5,500,000
shares reserved for issuance upon exercise of the Warrant issued to QUALCOMM;
3,157,260 shares reserved for issuance to the Company's employees, officers,
directors and consultants pursuant to Leap's equity incentive plans; and
5,542,740 shares reserved for issuance upon exercise of options to purchase
Common Stock of the Company which are held by QUALCOMM employees, officers,
directors and consultants as a result of option grants to such persons in
connection with the Distribution at a weighted average exercise price of $3.71.
To the extent that any shares are issued upon exercise of options, warrants or
rights that are presently outstanding or granted in the future, or reserved for
future issuance under the Company's stock plans, there will be further dilution
to new investors.
29
<PAGE> 30
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
Prospectus, 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 Prospectus 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 Separation and Distribution Agreement (except
for the potential transfer of TOU following the Distribution) and the agreements
to be entered into pursuant to the Separation and Distribution Agreement
including the completion of all the asset transfers and contract assignments
contemplated thereby.
30
<PAGE> 31
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31, 1998
--------------------------------------
PRO FORMA
ADJUSTMENTS
LEAP RELATED
HISTORICAL TO LEAP PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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).................... 17,648 17,648
======== ========
</TABLE>
- ---------------
(1) The Company has 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
17,647,684 shares of common stock of the Company issued upon the
Distribution based on QUALCOMM Common Stock outstanding as of September 11,
1998. Such shares reflect the 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 include:
(a) options to purchase 5,542,740 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; (c) 2,271,060 shares of Leap Common
Stock reserved for issuance by Leap in the event of conversion of the Trust
Preferred Securities; (d) options to purchase 60,000 shares of Leap Common
Stock issued to certain of the Company's directors; and (e) options to
purchase 765,000 shares of Leap Common Stock issued to the Company's
employees.
31
<PAGE> 32
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
--------------------------------------
PRO FORMA
ADJUSTMENTS
LEAP RELATED TO
HISTORICAL LEAP PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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)..................... 17,648 17,648
======= =======
</TABLE>
- ---------------
(1) The Company has 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 has been contributed to Orrengrove or QUALCOMMTel Isle of Man, 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 17,647,684 shares of Common Stock of the Company issued upon the
Distribution based on QUALCOMM Common Stock outstanding as of September 11,
1998. Such shares reflect the 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 include:
(a) options to purchase 5,542,740 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; (c) 2,271,060 shares of Leap Common
Stock reserved for issuance by Leap in the event of conversion of the Trust
Preferred Securities; (d) options to purchase 60,000 shares of Leap Common
Stock issued to certain of the Company's directors; and (e) options to
purchase 765,000 shares of Leap Common Stock issued to the Company's
employees.
32
<PAGE> 33
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MAY 31, 1998
---------------------------------------
PRO FORMA
ADJUSTMENTS
LEAP RELATED TO PRO
HISTORICAL LEAP(1) FORMA
---------- ----------- --------
(IN THOUSANDS)
<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 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 were transferred by QUALCOMM to Leap prior to the Distribution
Date.
(5) Reflects loans issued to investees and loans payable to banks incurred
subsequent to May 31, 1998, but prior to the Distribution, in connection
with the partial funding of certain of the loans receivable. Leap
33
<PAGE> 34
has total non-cancelable debt commitments of $135 million; $61.2 million
was 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.
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, approximately $30.8 million in principal was
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 outstanding as of the Distribution Date for Chase and
Metrosvyaz were $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
transferred a 70% interest in QUALCOMMTel Isle of Man, which holds 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, approximately
$11.6 million was 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 provided 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 is payable eight years following the Distribution Date. The loan
bears interest at a variable rate of LIBOR plus 5.25%. Interest accrues
quarterly with cash interest payments beginning September 2001.
Approximately $5.3 million was 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.
34
<PAGE> 35
(11) Reflects the distribution of 17,647,684 Leap shares to QUALCOMM
stockholders at $0.0001 per share par value based on QUALCOMM Common Stock
outstanding as of September 11, 1998. Such shares reflect the 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 the Trust Preferred
Securities upon conversion of such securities into shares of QUALCOMM
Common Stock and Leap Common Stock.
35
<PAGE> 36
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 Prospectus. 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 Prospectus. 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 Prospectus.
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, NINE MONTHS ENDED YEARS ENDED
1995 (INCEPTION) MAY 31, 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............................. 17,648 17,648
======== =======
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>
36
<PAGE> 37
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 for the Company, 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
37
<PAGE> 38
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
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from the entities' temporary investment of their capital funds prior to being
expended for network build-out, 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 were 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 received $10 million in cash from
QUALCOMM in connection with the Separation and entered 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.
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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 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 entered into a $265.0
million secured Credit Facility pursuant to which it will have access to funds
from QUALCOMM. The Credit Facility consists 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
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contains 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.
Pursuant to the Credit Agreement, Leap has agreed 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 was in compliance with the financial covenant at the
Distribution. In addition, the Credit Facility permits uses of funds only for
specified purposes consistent with approved business plans, restricts the nature
and breadth of the Company's investments and imposes 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
court ordered protection from 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
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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 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
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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 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,
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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.
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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 has been and is expected to 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
are 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.
Leap owns certain joint venture and equity interests (held directly by Leap
or indirectly by companies controlled by Leap) formerly held by QUALCOMM 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.
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 Prospectus,
"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
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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, formerly Vice Chairman of the Board of QUALCOMM and the Company's
President, Chief Executive Officer and Chairman of the Board; Thomas J. Bernard,
formerly Senior Vice President of QUALCOMM, who is the Company's Executive Vice
President; and James E. Hoffmann, formerly 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
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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 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/
EXPECTED
EQUITY REAL GDP LICENSED EQUITY TOTAL EQUITY COMMERCIAL
INVESTMENT LOCATION INTEREST PER 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 33%(2) $ 2,947 99.0 48.5(2) N/A N/A Dec 98
Chase Telecommunications,
Inc..................... Tennessee, 6.4% 27,175(3) 6.3 0.4 N/A N/A Sep 98
U.S.A.
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) 5.9 5.9 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 thirty-three percent (33%) 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 Telecomunicaciones, S.A. de C.V. is expected to be
diluted to no less than a 25% equity interest through new capital raising
committed prior to the date of this Prospectus, 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 Man 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. The Company has 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 has committed
approximately $265 million to the Company by way of the Credit Facility. Leap
and QUALCOMM also have entered 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, each of which is described below.
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.
In late September 1998, the Company provided a $17.5 million loan (the
"Pegaso Loan") to Pegaso S.A. de C.V., a Mexican company 96%-owned by Alejandro
Burillo Azcarraga, a member of the Company's Board of Directors. The Pegaso Loan
bears interest at the rate of 13% per annum and is repayable in installments of
$7.5 million on or before October 31, 1998 and $10 million on or before December
31, 1998. The purpose of the Pegaso Loan is to facilitate investment by Pegaso
S.A. de C.V. in PEGASO, the joint venture in which the Company has an interest,
and to ensure that all capital contributions required for the acquisition of the
Mexican licenses on September 30, 1998 were made by the respective investors.
The Pegaso Loan is guaranteed by Mr. Burillo and is secured by a pledge of all
of the shares of Pegaso S.A. de C.V. and Mr. Burillo's interest in an unrelated
joint venture with QUALCOMM to operate a satellite tracking, management and
two-way communications systems for the trucking industry in Mexico.
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Leap Rights and Interests. Leap, through a wholly-owned subsidiary,
currently owns a 33% interest in PEGASO and has invested $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.
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
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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 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.
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Strategic Partners. The 50% of Metrosvyaz and the 50% of Orrengrove not
owned by the respective QUALCOMMTel organizations are owned by Teletal Limited,
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 Teletal Limited. 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
Teletal Limited. In each of Metrosvyaz and Orrengrove, the parent company has a
right to elect four of nine Directors with Teletal Limited also having a right
to elect four Directors. The ninth director will be jointly elected by the
respective QUALCOMMTel entity and Teletal Limited. In addition, each of the
QUALCOMMTel entities 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) have invested 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 Teletal
Limited 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
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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.
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.
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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 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 has
launched service in Chattanooga and is the first PCS provider in the Chattanooga
area. Chase has also begun design of its Nashville, Knoxville and Memphis
networks and, if suitable additional financing can be obtained, 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
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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.
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, if it is successful in completing
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 ten 800MHz
licenses covering approximately 5.9 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 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.
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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.
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. Leap has entered into a contract to acquire F
Block licenses to operate wireless telecommunications systems in four BTAs in
North Carolina, and the Company is currently exploring opportunities to acquire
other spectrum for this venture. The Company 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
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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). 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
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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 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 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
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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
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
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<PAGE> 63
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.
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
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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.
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.
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EMPLOYEES
The Company has approximately 50 full time employees, excluding employees
of the Leap Operating Companies. It also has 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 directors and
executive officers of the Company:
<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, served as Vice Chairman
of the Board of QUALCOMM from June 1998 to September 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 served as Vice President, Legal Counsel of QUALCOMM from
June 1998 to September 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 served as Senior Vice President, Public Affairs of QUALCOMM
from March 1997 to September 1998. 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
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<PAGE> 67
Gensia Pharmaceuticals from 1986 to 1996. Mr. Pegg holds a B.A. degree from
California State University at Los Angeles.
Leonard C. Stephens served as Vice President, Human Resources Operations
for QUALCOMM from December 1995 to September 1998. 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 to 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 provides 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. Messrs. Hoffmann and Targoff are Class I directors,
Messrs. Bernard and Burillo are Class II directors, and Messrs. White and
Williams are 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."
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<PAGE> 68
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established an Audit Committee
and a Compensation Committee.
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."
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. The base annual salary for the individuals
listed below as officers of Leap is 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.
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<PAGE> 69
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------------------------- LONG-TERM
OTHER COMPENSATION
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.................. 1998 $480,373 (3) $ 0 75,000 $91,822
Chairman of the Board, 1997 $395,713 $250,000 $ 0 0 $37,011
Chief Executive Officer and 1996 $354,963 $100,000 $ 0 85,000 $34,437
President
Thomas J. Bernard................ 1998 $287,509 (3) $ 0 0 $34,545
Executive Vice President and 1997 $245,142 $ 65,000 $ 0 0 $ 6,086
Director 1996 $186,976 $ 40,000 $ 0 60,000 $ 0
James E. Hoffmann................ 1998 $178,930 (3) $ 0 4,000 $13,899
Senior Vice President, General 1997 $149,283 $ 50,000 $ 0 3,000 $10,048
Counsel, Secretary and Director 1996 $131,646 $ 20,000 $ 0 4,000 $ 9,418
Leonard C. Stephens.............. 1998 $176,930 (3) $104,947 6,000 $ 2,258
Senior Vice President, Human 1997 $146,828 $ 45,000 $ 42,268 3,000 $ 1,816
Resources 1996 $112,711 $ 25,000 $ 43,644 15,000 $ 0
Daniel O. Pegg................... 1998 $209,868 (3) $ 0 0 $41,475
Senior Vice President, Public 1997 $111,174(4) $ 55,000 $ 0 50,000 $ 3,463
Affairs 1996 $ 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 and in the 1998 fiscal year reimbursed Mr. Stephens in the
amount of $50,705 for the income taxes arising from the relocation payment
in such year.
(3) Bonus for the 1998 fiscal year has not yet been determined.
(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:
<TABLE>
<CAPTION>
QUALCOMM TOTAL
MATCHING EXECUTIVE EXECUTIVE FINANCIAL OTHER
401(K) BENEFITS RETIREMENT PLANNING COMPEN-
NAME YEAR CONTRIBUTIONS PAYMENTS CONTRIBUTIONS(1) SERVICES SATION
---- ---- ------------- --------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Harvey P. White............ 1998 $ 2,313 $2,520 $48,919 $38,070 $91,822
1997 $ 2,145 $2,520 $32,346 $ 0 $37,011
1996 $ 2,191 $2,520 $29,726 $ 0 $34,437
Thomas J. Bernard.......... 1998 $ 2,659 $4,270 $26,532 $ 1,084 $34,545
1997 $ 1,816 $4,270 $ 0 $ 0 $ 6,086
1996 $ 0 $ 0 $ 0 $ 0 $ 0
James E. Hoffmann.......... 1998 $ 2,659 $ 0 $ 8,916 $ 2,324 $13,899
1997 $ 2,145 $ 0 $ 7,903 $ 0 $10,048
1996 $ 2,191 $ 0 $ 7,227 $ 0 $ 9,418
Leonard C. Stephens........ 1998 $ 2,258 $ 0 $ 0 $ 0 $ 2,258
1997 $ 1,816 $ 0 $ 0 $ 0 $ 1,816
1996 $ 0 $ 0 $ 0 $ 0 $ 0
Daniel O. Pegg............. 1998 $14,048 $4,475 $ 9,174 $14,048 $41,745
1997 $ 0 $ 0 $ 3,463 $ 0 $ 3,463
1996 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
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- ---------------
(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 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 1998:
QUALCOMM OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS STOCK PRICE APPRECIATION FOR
OPTIONS GRANTED TO OPTION 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......... 4,000 0.07% $64.18 12/04/07 $ 161,393.93 $ 408,971.71
Leonard C. Stephens....... 6,000 0.10% $64.18 12/04/07 $ 242,090.90 $ 613,457.57
Harvey P. White........... 75,000 1.23% $62.35 11/13/07 $2,939,850.37 $7,449,571.43
</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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Leap was not an independent public company as of the end of its 1998 fiscal
year and, accordingly, the following table sets forth for each Named Executive
Officer the specified information with respect to grants of options to purchase
Leap Common Stock ("Leap Options") as of September 27, 1998, the end of
QUALCOMM's 1998 fiscal year.
LEAP OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS STOCK PRICE APPRECIATION FOR
OPTIONS GRANTED TO OPTION TERM(1)
GRANTED EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME (#) FISCAL YEAR PRICE DATE 5% 10%
---- ---------- ------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey P. White............ 36,000(2) 19.50% $2.59 07/05/03 $108,136.36 $158,294.34
15,000(3) 8.12% 2.42 01/26/05 54,249.78 85,326.07
21,250(4) 11.31% 4.06 07/11/06 51,439.97 111,656.26
18,750(5) 10.16% 5.59 11/13/07 24,926.15 93,670.26
Thomas J. Bernard.......... 7,500(6) 4.06% 3.56 01/04/06 20,699.04 39,811.15
7,500(7) 4.06% 4.06 07/11/06 18,155.28 39,407.74
James E. Hoffmann.......... 4,000(8) 2.17% 2.08 06/10/03 13,980.50 19,446.41
1,250(9) 0.68% 2.43 10/06/04 4,396.19 6,805.88
1,000(10) 0.34% 3.44 12/07/05 2,856.26 5,363.55
750(11) 0.41% 3.49 12/12/06 2,344.12 4,654.92
1,000(12) 0.34% 5.75 12/04/07 1,168.85 4,893.95
Daniel O. Pegg............. 12,500(13) 6.77% 5.28 03/08/07 17,627.44 57,894.94
Leonard C. Stephens........ 3,750(14) 2.03% 3.44 12/07/05 10,710.98 20,113.32
750(15) 0.41% 3.49 12/12/06 2,344.12 4,654.92
1,500(16) 0.81% 5.75 12/04/07 1,793.27 7,340.93
</TABLE>
- ---------------
(1) Calculated on the assumption that the market value of the underlying stock
increases at the stated values, compounded annually. Options granted under
the Company's 1998 Stock Option Plan generally have a maximum term of ten
years, however, Leap Options granted in connection with the Distribution in
respect of outstanding QUALCOMM Options have a remaining term equal to the
corresponding QUALCOMM Option.
(2) Options became fully-exercisable on 9/23/98.
(3) Options vest as follows: 6,000 shares on date of grant; 3,000 shares on
1/27/99; and 6,000 shares on 1/27/00.
(4) Options vest as follows: 8,500 shares on date of grant and 4,250 shares per
year thereafter beginning on 7/12/99.
(5) Options vest as follows: 3,750 shares per year beginning on 11/14/98.
(6) Options vest as follows: 1,500 shares on date of grant; 1,500 shares on
1/5/99; 1,500 shares on 1/5/00; and 3,000 shares on 1/5/01.
(7) Options vest as follows: 3,000 shares on date of grant and 1,500 shares per
year thereafter beginning on 7/12/99.
(8) Options became fully-exercisable on 9/23/98.
(9) Options vest as follows: 500 shares on date of grant; 250 shares on
10/7/98; and 500 shares on 10/7/99.
(10) Options vest as follows: 200 shares on date of grant; 200 shares on each of
12/8/98 and 12/8/99; and 400 shares on 12/8/00.
(11) Options vest as follows: 150 shares on date of grant and 150 shares per
year thereafter beginning on 12/13/98.
(12) Options vest as follows: 200 shares per year beginning on 12/5/98.
(13) Options vest as follows: 2,500 shares on date of grant and 2,500 shares per
year thereafter beginning on 3/7/99.
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<PAGE> 72
(14) Options vest as follows: 750 shares on date of grant; 750 shares on each of
12/8/98 and 12/8/99; and 1,500 shares on 12/8/00.
(15) Options vest as follows: 150 shares on date of grant and 150 shares per
year thereafter beginning on 12/13/98.
(16) Options vest as follows: 300 shares per year beginning on 12/5/98.
The following table shows for each Named Executive Officer the specified
information with respect to exercises of QUALCOMM Options during fiscal 1998 and
the value of unexercised options at the end of fiscal 1998.
QUALCOMM 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................ 6,000 $132,540 202,000 162,000 $3,950,860 $1,154,850
Thomas J. Bernard.............. 0 $ 0 18,000 42,000 $ 136,500 $ 374,700
James E. Hoffmann.............. 0 $ 0 19,400 12,600 $ 509,560 $ 141,310
Daniel O. Pegg................. 0 $ 0 10,000 40,000 $ 0 $ 0
Leonard C. Stephens............ 0 $ 0 3,600 20,400 $ 45,276 $ 181,104
</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 $51.00 on the last trading
day of the fiscal year as reported on the Nasdaq National Market.
Leap was not an independent public company as of the end of its 1998 fiscal
year and, accordingly, the following table sets forth for each Named Executive
Officer the specified information with respect to Leap Options as of September
27, 1998, the end of QUALCOMM's 1998 fiscal year.
LEAP AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END OPTIONS AT FY-END
SHARES VALUE (#) ($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey P. White................... 0 $0 50,500 40,500 $249,105 $135,518
Thomas J. Bernard................. 0 $0 4,500 10,500 $ 17,355 $ 41,745
James E. Hoffmann................. 0 $0 4,850 3,150 $ 26,841 $ 11,994
Daniel O. Pegg.................... 0 $0 2,500 10,000 $ 6,175 $ 24,700
Leonard C. Stephens............... 0 $0 900 5,100 $ 3,872 $ 18,486
</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 $7.75 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
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<PAGE> 73
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 5,542,740 shares
were granted to holders of outstanding QUALCOMM Options immediately prior to the
Distribution (the "Distribution Options") and 2,457,260 shares will be available
for future grants.
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.
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
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<PAGE> 74
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.
In connection with the Distribution, the Company made 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 are immediately exercisable; Mr. Bernard, 15,000 options, of
which 4,500 options are immediately exercisable; Mr. Hoffmann, 8,000 options, of
which 4,850 options are immediately exercisable; Mr. Pegg, 12,500 options, of
which 2,500 options are immediately exercisable; and Mr. Stephens, 6,000
options, of which 900 are 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 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
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<PAGE> 75
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.
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").
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<PAGE> 76
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.
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
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<PAGE> 77
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.
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
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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 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.
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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.
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.
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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 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.
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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.
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 received 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
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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 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
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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
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.
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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. QUALCOMM has a significant
relationship with the Company as a result of the agreements entered into by
QUALCOMM and the Company in connection with the Distribution, and due to
QUALCOMM's 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."
In late September 1998, the Company provided a $17.5 million loan (the
"Pegaso Loan") to Pegaso S.A. de C.V., a Mexican company 96%-owned by Alejandro
Burillo Azcarraga, a member of the Company's Board of Directors. The Pegaso Loan
bears interest at the rate of 13% per annum and is repayable in installments of
$7.5 million on or before October 31, 1998 and $10 million on or before December
31, 1998. The purpose of the Pegaso Loan is to facilitate investment by Pegaso
S.A. de C.V. in PEGASO, the joint venture in which the Company has an interest,
and to ensure that all capital contributions required for the acquisition of the
Mexican licenses on September 30, 1998 were made by the respective investors.
The Pegaso Loan is guaranteed by Mr. Burillo and is secured by a pledge of all
of the shares of Pegaso S.A. de C.V. and Mr. Burillo's interest in an unrelated
joint venture with QUALCOMM to operate a satellite tracking, management and
two-way communications systems for the trucking industry in Mexico.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of Leap Common
Stock as of October 9, 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)................................ 319,263 1.8%
Thomas J. Bernard(5)(6)(7).............................. 7,994 *
James E. Hoffmann(5)(6)................................. 10,198 *
Daniel O. Pegg(5)(6)(8)................................. 8,110 *
Leonard C. Stephens(5)(6)............................... 1,967 *
Alejandro Burillo Azcarraga............................. 0 *
Michael B. Targoff...................................... 0 *
Jeffrey P. Williams..................................... 0 *
All Officers and Directors as a group (9 persons)....... 347,532 2.0%
</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 and has a business address care of Leap Wireless
International, Inc., 10307 Pacific Center Court, San Diego, California
92121. Applicable percentages are based on 17,647,684 shares of Leap Common
Stock outstanding, adjusted as required by rules promulgated by the
Commission.
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(2) 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,
fully exercisable immediately, which expires 10 years following the
Distribution. QUALCOMM Incorporated's business address is 6455 Lusk Blvd.,
San Diego, California 92121.
(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 October 9, 1998 as follows: Mr. Bernard, 7,250 shares (including 2,750
shares subject to options held by Mr. Bernard's wife); Mr. Hoffmann, 5,500
shares; Mr. Pegg, 2,500; Mr. Stephens, 1,950; and Mr. White, 54,250 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 October 9, 1998 in the
following amounts: Mr. Bernard, 29,000 shares (including 11,000 shares
subject to options held by Mr. Bernard's wife); Mr. Hoffmann, 22,000 shares;
Mr. Pegg, 10,000; Mr. Stephens, 7,800; and Mr. White, 217,000 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,
25 shares held in a custodial account for the benefit of Mr. Pegg's spouse
and 500 shares held by Mr. Pegg's minor son.
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.
COMMON STOCK
As of October 9, 1998, the Company had 17,648,386 shares of Common Stock
outstanding. The holders of Leap Common Stock are entitled to one vote for each
share on all matters voted on by stockholders, and the holders of such shares
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 is 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
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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 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
In connection with the Distribution, the Company issued a Warrant to
purchase 5,500,000 shares of Leap Common Stock (the "Warrant") to QUALCOMM at an
exercise price of $6.10625 per share. The Warrant is exercisable during the ten
(10) years following the Distribution. Upon exercise in full of the Warrant,
QUALCOMM would hold approximately 18% of the outstanding Leap Common Stock,
assuming exercise of all outstanding options and convertible securities.
LEAP COMMON STOCK RESERVED FOR ISSUANCE
QUALCOMM holds the Warrant, which is immediately exercisable and entitles
QUALCOMM to purchase 5,500,000 shares of Leap Common Stock at a purchase price
of $6.10625 per share of Leap Common Stock. In addition, based on the number of
QUALCOMM Options outstanding on September 11, 1998, options to purchase a total
of approximately 5,542,740 shares of Leap Common Stock were granted in
connection with the Distribution to QUALCOMM option holders. In addition to the
Leap Options granted to QUALCOMM option holders who continued as employees of
Leap after the Distribution, Leap intends to grant stock options to purchase
Leap Common Stock 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 2,957,260 shares of Common Stock 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 Preferred Securities convertible into QUALCOMM Common Stock
are convertible into an aggregate 2,271,060 shares of Leap Common Stock. As a
result, collectively, 16,471,060 shares of Leap Common Stock were 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
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connection with the Distribution, each outstanding share of Leap Common Stock
was 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 also issued 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 is 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
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 S-1, of
which this Prospectus 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
87
<PAGE> 88
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 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.
88
<PAGE> 89
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 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 Bylaws, 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.
89
<PAGE> 90
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 Bylaws 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
Bylaws.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. As of October
9, 1998, the Company had outstanding 17,648,386 shares of Common Stock. Of these
shares, 17,559,800 shares will generally be freely tradable without restriction
or further registration under the Securities Act and 88,586 shares will
generally be freely tradeable without further registration under the Securities
Act, subject to the volume and other restrictions under Rule 144. In addition,
as of September 23, 1998, holders of vested options to purchase approximately
1,488,149 shares of Common Stock will be able to sell without restriction
pursuant to a Form S-8 registration statement filed with respect to such shares.
Future sales of shares by existing stockholders could have an adverse effect on
the market price of the Common Stock or otherwise impair the Company's ability
to raise additional capital. See "Description of Capital Stock."
The Company has filed registration statements under the Securities Act
covering shares of Common Stock reserved for issuance under the Company's stock
option plans. Such registration statements cover approximately 8,700,000 shares.
Shares registered under such registration statements will, subject to Rule 144
volume limitations applicable to Affiliates, be available for sale in the open
market.
90
<PAGE> 91
EXPERTS
The combined financial statements as of August 31, 1997 and 1996 and for
each of the two years in the period ended August 31, 1997 and for the period
from September 1, 1995 (inception) to August 31, 1997 of Leap Wireless
International, Inc. and the combined consolidated financial statements as of
December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997 and for the period from June 25, 1990 (inception) to December
31, 1997 of the Transworld Companies included in this Registration Statement
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements as of December 31, 1997 and for the period from
March 3, 1997 (inception) to December 31, 1997 of Chilesat Telefonia Personal
S.A. included in this Registration Statement have been so included in reliance
on the report of Price Waterhouse, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Leap Common Stock
will be passed upon for the Company by Latham & Watkins, San Diego, California.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement," which term shall include any amendments or
supplements thereto) under the Securities with respect to the shares offered
hereby. This Prospectus 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.
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.
91
<PAGE> 92
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> 93
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MAY 31, 1998
--------------
(IN THOUSANDS)
<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> 94
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE PERIOD FROM
MAY 31, SEPTEMBER 1, 1995
------------------- (INCEPTION)
1998 1997 TO MAY 31, 1998
-------- ------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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> 95
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE PERIOD FROM
MAY 31, SEPTEMBER 1, 1995
-------------------- (INCEPTION)
1998 1997 TO MAY 31, 1998
-------- -------- -------------------
(IN THOUSANDS)
<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> 96
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
PARENT'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
---------- ----------- ----------- --------
(IN THOUSANDS)
<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> 97
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> 98
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 17,647,684 shares of common stock of the Company issued upon
the Distribution based on QUALCOMM shares outstanding as of September 11, 1998.
Such shares reflect the 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 5,542,740 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> 99
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> 100
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> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Leap Wireless International, Inc.
In our opinion, 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 provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
June 29, 1998
F-10
<PAGE> 102
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------
1997 1996
------- -----
(IN THOUSANDS)
<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> 103
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD
AUGUST 31, FROM SEPTEMBER 1, 1995
---------------- (INCEPTION)
1997 1996 TO AUGUST 31, 1997
------- ----- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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> 104
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD
AUGUST 31, FROM SEPTEMBER 1, 1995
----------------- (INCEPTION)
1997 1996 TO AUGUST 31, 1997
-------- ----- ----------------------
(IN THOUSANDS)
<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> 105
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
PARENT'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
---------- ----------- ------------ -------
(IN THOUSANDS)
<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> 106
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 Company's costs and expenses to
QUALCOMM's costs and expenses. Management believes these allocations
F-15
<PAGE> 107
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-16
<PAGE> 108
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-17
<PAGE> 109
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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. The functional currency of the Company's foreign investees
that operate in highly inflationary economies is the U.S. dollar. The monetary
assets and liabilities of these foreign investees are translated into U.S.
dollars at the exchange rate in effect at the balance sheet date. Revenues,
expenses, gains and losses are translated at the average exchange rate for the
period, and non-monetary assets and liabilities are translated at historical
rates. Resulting remeasurement gains or losses of these foreign investees are
recognized in the combined results of operations. 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 17,647,684 shares of Common
Stock of the Company issued upon the Distribution based on QUALCOMM shares
outstanding as of September 11, 1998. Such shares reflect the issuance upon the
Distribution of one of the Company's shares of common stock for every four
shares of QUALCOMM common stock outstanding.
F-18
<PAGE> 110
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Replacement stock options and awards for 5,542,740 shares, the conversion of
QUALCOMM's Trust Convertible Preferred Securities which are expected to be
convertible into shares of 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> 111
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> 112
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> 113
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> 114
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 Teletal
Limited, 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 Teletal Limited 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> 115
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT ACCOUNTANTS
(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 Teletal Limited. 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.
In September of 1998, of the Company provided a $17.5 million loan (the
"Pegaso Loan") to Pegaso S.A. de C.V., a Mexican company 96%-owned by Alejandro
Burillo Azcarraga, a member of the Company's Board of Directors. The Pegaso Loan
bears interest at the rate of 13% per annum and is repayable in installments of
$7.5 million on or before October 31, 1998 and $10 million on or before December
31, 1998. The purpose of the Pegaso Loan is to facilitate investment by Pegaso
S.A. de C.V. in PEGASO, the joint venture in which the Company has an interest,
and to ensure that all capital contributions required for the acquisition of the
Mexican licenses on September 30, 1998 were made by the respective investors.
The Pegaso Loan is guaranteed by Mr. Burillo and is secured by a pledge of all
of the shares of Pegaso S.A. de C.V. and Mr. Burillo's interest in an unrelated
joint venture with QUALCOMM to operate a satellite tracking, management and
two-way communications systems for the trucking industry in Mexico.
F-24
<PAGE> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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$338,000 as advertising expense.
G) INCOME TAXES
Income taxes have been recorded in accordance with Statement of Financial
Accounting Standards No. 109 (FAS 109). Income taxes payable for the current
year are recorded in current liabilities, if applicable. Future taxes arising
from differences between the amounts shown for assets and liabilities in the
balance sheet and the tax basis of those assets and liabilities at the balance
sheet date have been recorded as deferred income taxes. Deferred income tax
assets are reduced by a valuation allowance if, based on the weight of available
F-31
<PAGE> 123
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
H) LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
I) CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents, including securities
purchased under resale agreements. Securities purchased under agreements to
resell include investments in instruments issued by the Central Bank of Chile
acquired under resale agreements, and are stated at cost plus accrued interest.
Cash and cash equivalents at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
(US$ 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> 124
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
======
</TABLE>
Estimated useful lives of assets are:
<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$1,508,000 of interest as part of the cost of construction
of the mobile PCS telephone system.
F-33
<PAGE> 125
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 6 -- ACCRUED LIABILITIES AND WITHHOLDINGS
Accrued liabilities and withholdings at December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
(US$ 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 543 -- 543
on 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> 126
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
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.
F-35
<PAGE> 127
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
xvi) Incur capital expenditures greater than US$116 million until the
Company has more than 50,000 subscribers, at which time the threshold
increases.
The Company is in compliance with these covenants.
NOTE 8 -- OTHER LONG-TERM LIABILITIES
This balance is mainly comprised of deferred customs duties.
Under Chilean law, the payment of customs duties levied on machinery and
equipment can be deferred over a period of up to seven years. The balance at
December 31, 1997 represents amounts owing at maturity including accrued
interest. The scheduled repayments are as follows:
<TABLE>
<CAPTION>
(US$ 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.
F-36
<PAGE> 128
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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.
F-37
<PAGE> 129
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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.
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.
F-38
<PAGE> 130
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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> 131
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> 132
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1998 1997 1996
------------ -------- -------
(UNAUDITED)
(IN THOUSANDS)
<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> 133
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
<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)
(IN THOUSANDS)
<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> 134
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<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)
(IN THOUSANDS)
<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> 135
TRANSWORLD COMPANIES
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 25, 1990 (INCEPTION) TO JUNE 30,1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
PARENT'S DEVELOPMENT STOCKHOLDERS'
INVESTMENT STAGE EQUITY
---------- ----------- -------------
(IN THOUSANDS)
<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> 136
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 Teletal Limited. 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> 137
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> 138
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> 139
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> 140
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> 141
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.
F-50
<PAGE> 142
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> 143
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> 144
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NO DEALERSHIP, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY TO ANY PERSON IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 11
Relationship Between QUALCOMM and the
Company after the Distribution...... 22
QUALCOMM Trust Convertible Preferred
Securities.......................... 26
Use of Proceeds....................... 27
Plan of Distribution.................. 27
Price Range of Common Stock........... 27
Dividend Policy....................... 27
Capitalization........................ 28
Dilution.............................. 29
Pro Forma Financial Statements........ 30
Selected Historical Combined Financial
Data................................ 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 45
Management............................ 66
Equity Incentive Plans................ 72
Certain Relationships and Related
Transactions........................ 84
Security Ownership of Certain
Beneficial Owners................... 84
Description of Company Capital
Stock............................... 85
Description of Rights Agreement....... 87
Liability and Indemnification of
Directors and Officers.............. 89
Shares Eligible for Future Sale....... 90
Experts............................... 91
Legal Matters......................... 91
Additional Information................ 91
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
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2,271,060 SHARES
LEAP WIRELESS
INTERNATIONAL, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
OCTOBER 13, 1998
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