<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10
------------------------
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
QUALCOMM SPINCO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0811062
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6455 LUSK BOULEVARD
SAN DIEGO, CALIFORNIA
ATTENTION: HARVEY P. WHITE
PRESIDENT AND CHIEF EXECUTIVE OFFICER 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
WITH COPIES TO:
<TABLE>
<S> <C>
FREDERICK T. MUTO SCOTT N. WOLFE
THOMAS A. COLL DAVID A. HAHN
COOLEY GODWARD LLP LATHAM & WATKINS
4365 EXECUTIVE DRIVE 701 B STREET
SUITE 1100 SUITE 2100
SAN DIEGO, CA 92121-2128 SAN DIEGO, CA 92101-8193
(619) 550-6000 (619) 236-1234
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 587-1121
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PER SHARE
(TITLE OF CLASS)
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<PAGE> 2
QUALCOMM SPINCO, INC.
INFORMATION REQUIRED IN REGISTRATION STATEMENT:
CROSS-REFERENCE BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM
NUMBER CAPTION LOCATION IN INFORMATION STATEMENT
- - -------- ------- ---------------------------------
<S> <C> <C>
Item 1. Business Information Statement Summary; Risk Factors;
Introduction; The Distribution; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Combined Financial
Statements.
Item 2. Financial Information Information Statement Summary; Risk Factors; Pro Forma
Capitalization; Pro Forma Combined Financial
Statements; Selected Historical Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Combined
Financial Statements.
Item 3. Properties Business.
Item 4. Security Ownership of Principal Stockholders; Management.
Certain Beneficial Owners
and Management
Item 5. Directors and Executive Management; Liability and Indemnification of Directors
Officers and Officers.
Item 6. Executive Compensation Management.
Item 7. Certain Relationships and Information Statement Summary; The Distribution;
Related Transactions Relationship Between QUALCOMM and the Company after
the Distribution; Certain Relationships and Related
Transactions.
Item 8. Legal Proceedings Business.
Item 9. Market Price of and Information Statement Summary; The Distribution;
Dividends on the Principal Stockholders; Management; Treatment of
Registrant's Common Equity QUALCOMM Employee Stock Options in the Distribution;
and Related Stockholder Description of Company Capital Stock.
Matters
Item 10. Recent Sales of Description of Company Capital Stock.
Unregistered Securities
Item 11. Description of Registrant's Description of Company Capital Stock.
Securities to Be Registered
Item 12. Indemnification of Liability and Indemnification of Directors and
Directors and Officers Officers.
Item 13. Financial Statements and Index to Financial Statements and the statements
Supplementary Data referenced therein.
Item 14. Changes in and Not Applicable.
Disagreements with
Accountants on Accounting
and Financial Disclosure
Item 15. Financial Statements and Index to Financial Statements; Exhibit Index.
Exhibits
</TABLE>
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
QUALCOMM SpinCo, Inc.
June 30, 1998 By: /s/ HARVEY P. WHITE
------------------------------------
Name: Harvey P. White
Title: President and Chief Executive
Officer
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1* Form of Separation and Distribution Agreement between
QUALCOMM Incorporated ("QUALCOMM") and the Registrant.
3.1* Form of Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* Form of Amended and Restated Bylaws of the Registrant.
4.1* Form of Common Stock Certificate.
10.1* Form of Credit Facility Agreement between QUALCOMM and the
Registrant.
10.2* Form of Tax Agreement between QUALCOMM and the Registrant.
10.3* Form of Interim Services Agreement between QUALCOMM and the
Registrant.
10.4* Form of SpinCo 1998 Equity Incentive Plan.
10.5* Form of 1998 Non-Employee Directors' Stock Option Plan.
10.6* Form of Master Agreement Regarding Equipment Procurement
between QUALCOMM and the Registrant.
10.7* Form of Employee Benefits Agreement between QUALCOMM and the
Registrant.
10.8* Form of Warrant to be issued to QUALCOMM.
21.1* Subsidiaries of the Registrant.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
99.1 QUALCOMM SpinCo, Inc. Information Statement dated
, 1998.
</TABLE>
- - ---------------
* To be filed by amendment.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,884
<CURRENT-LIABILITIES> 282
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 54,602
<TOTAL-LIABILITY-AND-EQUITY> 54,884
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (1,211)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,211)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,211)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,211)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 111
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (111)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (396)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (396)
<INCOME-TAX> 0
<INCOME-CONTINUING> (396)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (396)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (546)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (546)
<INCOME-TAX> 0
<INCOME-CONTINUING> (546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (546)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,831
<CURRENT-LIABILITIES> 1,967
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 48,864
<TOTAL-LIABILITY-AND-EQUITY> 50,831
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (10,939)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,939)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,939)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
QUALCOMM LETTERHEAD
, 1998
Dear Stockholder:
I am pleased to inform you that the Board of Directors of QUALCOMM
Incorporated ("QUALCOMM") has approved a distribution (the "Distribution") to
our stockholders of all of the outstanding shares of Common Stock of QUALCOMM
SpinCo, Inc. ("SpinCo"). The Distribution will be made on or about September 15,
1998 (the "Distribution Date") to holders of record of Common Stock of QUALCOMM
(the "QUALCOMM Common Stock") on August , 1998 (the "Record Date"). You
will receive one (1) share of Common Stock of SpinCo (the "SpinCo Common Stock")
for every four (4) shares of QUALCOMM Common Stock you hold on such date.
As part of QUALCOMM's strategy of supporting the commercialization and sale
of its CDMA products and technology, QUALCOMM has from time to time entered into
strategic alliances and joint ventures with domestic and international emerging
terrestrial-based wireless telecommunications operating companies. Several of
these alliances have involved the investment by QUALCOMM of substantial equity
in the operating company, as well as a commitment by the operating company to
purchase certain CDMA equipment from QUALCOMM. In most of these operating
companies, QUALCOMM has also assumed a significant role in the operations and
management of the entity.
Upon completion of the Distribution, SpinCo will own certain of QUALCOMM's
joint venture and equity interests in a number of these operating companies and
will assume QUALCOMM's management role with respect to these entities. In
particular, QUALCOMM will transfer to SpinCo all of its joint venture and equity
interests in Pegaso Comunicaciones (Mexico), Metrosvyaz (Russia), Telesystems of
Ukraine (Ukraine), ChileSat Telefonia Personal, S.A. (Chile), Chase
Telecommunications, Inc. (U.S.), OzPhone Pty. Ltd. (Australia) and certain other
development-stage businesses. QUALCOMM will also transfer to SpinCo $10 million
cash, certain notes convertible into equity interests in certain of these
operating companies and certain other indebtedness of such companies owed to
QUALCOMM. QUALCOMM will also make a substantial funding commitment to SpinCo in
the form of a $250 million secured credit facility.
SpinCo intends to take an active management role in these operating
companies, consistent with applicable laws, contractual arrangements and other
requirements. Although QUALCOMM is expected to continue to provide equipment
vendor financing, SpinCo has agreed to assume certain of QUALCOMM's other
obligations to manage operations of and finance costs relating to ongoing
build-outs of the wireless telecommunications systems being deployed by such
operating companies. In addition, SpinCo intends to pursue opportunities to
provide, manage, support, operate and invest in additional terrestrial-based
wireless telecommunications systems in other targeted United States and
international markets offering high growth potential. QUALCOMM will continue to
be a supplier of CDMA equipment to these operating companies, and has retained
substantially all of its rights under its equipment supply agreements with such
entities. In addition, QUALCOMM will retain a warrant (the "Warrant") to
purchase 5,500,000 shares of SpinCo Common Stock, at a purchase price equal to
the average of the last sales price per share of the SpinCo Common Stock on the
Nasdaq National Market for each of the five (5) consecutive trading days
beginning with and including the Distribution Date. The Warrant is exercisable
at any time during the ten (10) years following the Distribution. Based on the
number of shares of SpinCo Common Stock expected to be outstanding and reserved
for issuance pursuant to outstanding options and convertible securities as of
the Distribution, upon exercise in full of the Warrant QUALCOMM would hold
approximately 18% of the outstanding shares of SpinCo Common Stock, assuming
exercise of all such outstanding options and convertible securities.
The Board of Directors has determined that it is in the best interests of
QUALCOMM and its stockholders to spin off its interests in the operating
companies described above. QUALCOMM believes that, although its strategy of
investing in emerging wireless telecommunications operating companies has
benefited
<PAGE> 2
QUALCOMM and the advancement of its CDMA technology and products worldwide,
spinning off these assets will eliminate potential conflicts with QUALCOMM's
CDMA equipment customers who compete against these companies. In addition,
QUALCOMM believes that (i) the value of the joint venture and equity interests
being spun off are not fully recognized in the current market price of
QUALCOMM's stock, (ii) the Distribution will enable QUALCOMM's and SpinCo's
respective management teams to better focus on enhancing each company's
competitive position in its respective businesses, thereby producing greater
stockholder value over the long-term, and (iii) the Distribution will better
enable SpinCo to attract, retain and motivate the employees necessary to achieve
its business objectives by allowing it to implement its own equity-based
incentive plans. Finally, without the spin off, according to applicable
accounting rules, QUALCOMM would be required to continue recognizing a share of
these companies' start-up operating losses, which are likely to be substantial,
and would be required to eliminate intercompany profits from equipment sales to
some of these companies.
The Distribution is expected to be taxable to the holders of QUALCOMM
Common Stock. See "Certain Federal Income Tax Considerations." Shares of SpinCo
Common Stock will be held in "book-entry" form, although stock certificates will
be available upon request. Harris Trust Company of California is acting as
distribution agent and will be responsible for making book-entry credits to
holders' accounts and for mailing stock certificates to SpinCo stockholders upon
request.
The enclosed Information Statement explains the Distribution in greater
detail and provides financial and other important information regarding SpinCo.
We urge you to read it carefully. Holders of QUALCOMM Common Stock as of the
Record Date are not required to take any action to participate in the
Distribution. A stockholder vote is not required in connection with this matter
and, accordingly, your proxy is not being sought.
We are enthusiastic about the Distribution and look forward to the future
success of QUALCOMM and SpinCo as separate publicly traded companies.
Sincerely,
Irwin M. Jacobs
Chairman of the Board and Chief
Executive Officer
<PAGE> 3
QUALCOMM SPINCO, INC. LETTERHEAD
, 1998
Dear Stockholder:
I am very pleased that you will soon be a stockholder of QUALCOMM SpinCo,
Inc. ("SpinCo"). I want to take this opportunity to briefly touch on some of our
current business activities and on some of our plans for the future. SpinCo
today has interests in a number of existing and newly formed digital wireless
businesses around the world using CDMA -- the powerful, rapidly expanding
technology pioneered by QUALCOMM Incorporated ("QUALCOMM"). These wireless
telephone businesses are generally joint ventures with several partners, with no
single majority partner; however, SpinCo is generally one of the largest
partners. SpinCo intends to provide a significant portion of the management and
operational leadership of these entities. We see SpinCo becoming a major
provider of leadership, management and services to wireless telephone companies
worldwide.
SpinCo's businesses are largely overseas at this time with an emphasis on
Latin America and Eastern Europe. These are two areas that we believe hold good
promise for the future of wireless telephone and data systems. They are ones
where teledensity (i.e., the number of phones per one hundred people) is still
low, but growing, and where the underlying economies have the potential to
expand and prosper over the next few years. We are also planning to pursue
opportunities in the Asia-Pacific region as is indicated by our recent purchase
of spectrum in Australia. We are also carefully studying the possibilities to
expand our activities domestically.
The early phases of new telephone system deployment are always capital
intensive, and this will clearly be the case for SpinCo. A significant part of
our effort and the effort of our joint ventures will be in obtaining the capital
to meet the current build-out plans and support the growth of each venture and
of SpinCo itself. We will also be concentrating a great deal of our initial
energy on bringing our current ventures into positive cash flow and earnings.
However, we will be keeping tabs on opportunities elsewhere as they arise.
Together with our partners, we believe that the combination of the
potential of our current joint ventures, QUALCOMM's vendor commitments to our
ventures and our focus on CDMA (which is rapidly becoming a dominant technology
of choice throughout the world) gives us a strong base to commence operations.
We intend to build from this base and to explore other promising opportunities
as an operator of quality wireless systems.
I believe as an independent stand-alone company we can more effectively
focus on our objectives, support the capital needs of our company and thus bring
value to our stockholders and expand our business.
We look forward to your support, and we will be providing more information
on the current systems as they commence commercial service and on new ventures
as we undertake them.
SpinCo has applied for listing of its shares on the Nasdaq National Market
under the symbol " ."
SpinCo's Board, management and employees are excited about our future as an
independent company and look forward to your participation in our success.
Sincerely,
Harvey P. White
Chairman, Chief Executive Officer and
President
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENTS.
SUBJECT TO COMPLETION, DATED JUNE 30, 1998
INFORMATION STATEMENT
QUALCOMM SPINCO, INC.
COMMON STOCK
PAR VALUE $0.0001 PER SHARE
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by QUALCOMM Incorporated ("QUALCOMM") to
holders of record of QUALCOMM Common Stock, par value $0.0001 per share (the
"QUALCOMM Common Stock"), at the close of business on August , 1998 (the
"Record Date") of one (1) share of Common Stock, par value $0.0001 per share
(the "SpinCo Common Stock"), of QUALCOMM SpinCo, Inc. ("SpinCo" or the
"Company") for every four (4) shares of QUALCOMM Common Stock owned on the
Record Date. The Distribution will result in all of the outstanding shares of
SpinCo Common Stock being distributed to holders of QUALCOMM Common Stock on a
pro rata basis. The Distribution will be effective on September 15, 1998 (the
"Distribution Date"). In addition, QUALCOMM will retain a warrant (the
"Warrant") to purchase 5,500,000 shares of SpinCo Common Stock, at a price equal
to the average of the last sales price per share of SpinCo Common Stock on the
Nasdaq National Market for each of the five (5) consecutive trading days
beginning with and including the Distribution Date. The Warrant will be
exercisable at any time during the ten (10) years following the Distribution.
Based on the number of shares of SpinCo Common Stock expected to be outstanding
and reserved for issuance pursuant to outstanding options and convertible
securities as of the Distribution, upon exercise in full of the Warrant,
QUALCOMM would hold approximately 18% of the outstanding shares of SpinCo Common
Stock, assuming exercise of all such outstanding options and convertible
securities. SpinCo intends to change its corporate name prior to the Record
Date.
The Company is a newly formed company which, as a result of transactions
being entered into in connection with the Distribution, will own what were
formerly certain of QUALCOMM's joint venture and equity interests in
terrestrial-based wireless telecommunications operating companies in emerging
international markets and the United States. These joint venture and equity
interests will be held directly by SpinCo, or indirectly by companies controlled
by SpinCo. The Company intends to take an active management role in these
operating companies consistent with applicable laws, contractual arrangements
and other requirements.
No consideration will be paid by QUALCOMM's stockholders for the shares of
SpinCo Common Stock issued in connection with the Distribution. There is no
current public trading market for the shares of SpinCo Common Stock, although it
is expected that a trading market will develop on or about the Record Date. The
Company has applied for listing of the shares of SpinCo Common Stock on the
Nasdaq National Market under the symbol " ."
The Distribution is expected to be taxable to the holders of QUALCOMM
Common Stock. See "Certain Federal Income Tax Considerations." Shares of SpinCo
Common Stock will be held in "book-entry" form, although stock certificates will
be available upon request. Harris Trust Company of California (the "Distribution
Agent") is acting as distribution agent and will be responsible for making
book-entry credits to holders' accounts and for mailing stock certificates to
SpinCo stockholders upon request.
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER
THE MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS."
Stockholders of QUALCOMM with inquiries regarding the Distribution should
contact QUALCOMM Incorporated, Investor Relations, Attention: Julie Cunningham,
6455 Lusk Boulevard, San Diego, California 92121; telephone (619) 658-4224.
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE ARE
NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement is , 1998.
<PAGE> 5
TABLE OF CONTENTS
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<CAPTION>
PAGE
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<S> <C>
FORWARD LOOKING STATEMENTS.................................. 1
INFORMATION STATEMENT SUMMARY............................... 2
RISK FACTORS................................................ 14
INTRODUCTION................................................ 23
THE DISTRIBUTION............................................ 23
OPINION OF FINANCIAL ADVISOR................................ 25
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................... 27
RELATIONSHIP BETWEEN QUALCOMM AND THE COMPANY AFTER THE
DISTRIBUTION.............................................. 29
CAPITALIZATION.............................................. 33
PRO FORMA FINANCIAL STATEMENTS.............................. 34
SELECTED HISTORICAL COMBINED FINANCIAL DATA................. 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 39
BUSINESS.................................................... 45
MANAGEMENT.................................................. 64
TREATMENT OF QUALCOMM EMPLOYEE STOCK OPTIONS IN THE
DISTRIBUTION.............................................. 69
TREATMENT OF QUALCOMM TRUST CONVERTIBLE PREFERRED SECURITIES
IN THE DISTRIBUTION....................................... 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............. 71
DESCRIPTION OF COMPANY CAPITAL STOCK........................ 72
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS..... 74
LEGAL MATTERS............................................... 75
ADDITIONAL INFORMATION...................................... 75
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEX 1 -- OPINION OF FINANCIAL ADVISOR..................... A-1
</TABLE>
ii
<PAGE> 6
FORWARD-LOOKING STATEMENTS
This Information Statement 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 QUALCOMM and the Company,
respectively, are generally identifiable by use of the words "believe,"
"expect," "intend," "anticipate," "plan to," "estimate," "project" or similar
expressions. The ability of QUALCOMM and the Company, respectively, 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 QUALCOMM or the Company are described in the section entitled
"Risk Factors."
TRADEMARKS
This Information Statement includes trademarks and service marks of
QUALCOMM, SpinCo and other parties, all of which are the property of their
respective holders.
1
<PAGE> 7
INFORMATION STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
by, the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, (i)
references in this Information Statement to QUALCOMM or the Company shall
include QUALCOMM's or the Company's respective subsidiaries, and (ii) references
in this Information Statement to the Company prior to the Distribution Date
shall refer to the SpinCo Business (defined below) as operated by QUALCOMM.
THE COMPANY
QUALCOMM SpinCo, Inc. ("SpinCo" or the "Company"), manages, supports,
operates and otherwise participates in CDMA-based wireless telecommunications
businesses and ventures located in emerging international markets and the United
States. Outside of the United States, the Company is currently operating,
managing, supporting or participating in the development of CDMA-based wireless
telecommunications systems in Mexico, Russia, Ukraine, 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. SpinCo
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 invests.
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. 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. The current form of cdmaOne has been adopted as an industry
standard by the Telecommunications Industry Association ("TIA") and other
recognized international standards bodies. CdmaOne systems have been widely
adopted throughout the world, having been commercially deployed or under
development in approximately 30 countries with over ten million commercial
subscribers worldwide, as of March 31, 1998.
The Company's senior management has many years experience in the wireless
telecommunications industry. A number of the Company's senior management members
have been members of QUALCOMM's senior management and joined the Company from
QUALCOMM in connection with the formation of the Company, including Harvey P.
White, currently Vice Chairman of the Board of QUALCOMM and the Company's
President, Chief Executive Officer and Chairman of the Board; Thomas J. Bernard,
who has served as Senior Vice President of QUALCOMM, who is the Company's
Executive Vice President; and James E. Hoffmann, currently Vice President, Legal
Counsel of QUALCOMM, who is the Company's Senior Vice President and General
Counsel. SpinCo 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 SpinCo's operating entities, among other factors, will position
SpinCo 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
2
<PAGE> 8
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.
SpinCo's executive offices are located at 6455 Lusk Boulevard, San Diego,
CA 92121. Its telephone number is (619) 587-1121. SpinCo intends to change its
corporate name prior to the Record Date.
THE DISTRIBUTION
DISTRIBUTING CORPORATION...... QUALCOMM.
DISTRIBUTED CORPORATION....... SpinCo is a newly formed company which, as of
the Distribution Date, will have transferred to
it certain of QUALCOMM's joint venture and
equity interests in terrestrial-based wireless
telecommunications operating companies located
in emerging international markets and the
United States, together with certain other
assets and related liabilities, including
significant funding obligations (the "SpinCo
Business"). In particular, upon completion of
the Distribution, SpinCo will own all of
QUALCOMM's joint venture and equity interests
(held directly by SpinCo or indirectly by
companies controlled by SpinCo) in Pegaso S.A.
de C.U. (Mexico), Metrosvyaz (Russia),
Telesystems of Ukraine (Ukraine), ChileSat
Telefonia Personal, S.A. (Chile), Chase
Telecommunications, Inc. (U.S.) and OzPhone
Pty. Ltd. (Australia) (collectively, the
"SpinCo Operating Companies"). In addition,
SpinCo 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 will
also transfer to SpinCo $10 million cash,
certain notes convertible into equity interests
in certain of these operating companies and
certain other indebtedness of such companies
owed to QUALCOMM, and will make a substantial
funding commitment to SpinCo in the form of a
$250 million secured credit facility.
QUALCOMM's performance as an equipment vendor
is not a condition to payment to SpinCo under
the notes and other indebtedness to be
transferred. SpinCo intends to take an active
management role in the SpinCo Operating
Companies, consistent with applicable laws,
contractual arrangements and other
requirements, and to assume QUALCOMM's
obligations to manage operations of and finance
certain costs relating to ongoing build-outs of
the wireless telecommunications systems being
deployed by such operating companies other than
equipment financing obligations. SpinCo also
intends to pursue opportunities to provide,
manage, support, operate and invest in
additional terrestrial-based wireless
telecommunications systems in other targeted
United States and international markets
offering high growth potential.
BUSINESSES TO BE RETAINED BY
QUALCOMM.................... QUALCOMM will retain its other businesses,
consisting of all of its current business
activities other than the SpinCo Business (the
3
<PAGE> 9
"Core Businesses"). Without limiting the
foregoing, QUALCOMM will continue to be a
supplier of CDMA equipment to the SpinCo
Operating Companies, and has retained
substantially all of its rights under its
equipment supply and vendor finance agreements
with the SpinCo Operating Companies.
PRIMARY PURPOSES OF THE
DISTRIBUTION.................. The primary purposes of the Distribution are to
(i) eliminate potential conflicts between
QUALCOMM and certain of its CDMA equipment
customers which may compete against the SpinCo
Operating Companies, (ii) enable the SpinCo
Business and the Core Businesses to each be
recognized and appropriately valued by the
financial community as a separate and distinct
business, (iii) enable QUALCOMM's and SpinCo's
respective management teams to better focus on
enhancing each company's competitive position
in its respective businesses, which may produce
greater stockholder value over the long-term,
(iv) better enable SpinCo to attract, retain
and motivate the employees necessary to achieve
its business objectives by allowing it to
implement its own equity-based incentive plans,
(v) eliminate the continuing recognition by
QUALCOMM of a share of the SpinCo Operating
Companies' start-up operating losses, and (vi)
remove the requirement that QUALCOMM eliminate
intercompany profits on its equipment sales to
certain of the SpinCo Operating Companies.
OPINION OF FINANCIAL
ADVISOR....................... Lehman Brothers Inc. ("Lehman Brothers") has
acted as financial advisor to QUALCOMM in
connection with the Distribution and was
engaged to render its opinion with respect to
(i) the fairness, from a financial point of
view of the Distribution, to the holders of
QUALCOMM Common Stock and (ii) whether the
Distribution will materially impair the ability
of QUALCOMM after the Distribution and SpinCo
to fund in the future, from external sources or
through internally generated funds, their
respective currently anticipated operating and
capital requirements. The full text of the
opinion of Lehman Brothers, which sets forth
the assumptions made, matters considered and
limitations on the review undertaken by Lehman
Brothers, is attached as Annex 1 to this
Information Statement. See "Opinion of
Financial Advisor."
SHARES TO BE DISTRIBUTED; SPINCO SHARE
RESERVE....................... Approximately 17,338,858 shares of SpinCo
Common Stock (the "SpinCo Shares"), based on
the number of shares of QUALCOMM's Common Stock
outstanding on June 18, 1998, shall be
distributed in the Distribution. The shares to
be distributed will constitute all of the
outstanding shares of SpinCo Common Stock on
the Distribution Date. In addition, SpinCo has
reserved 2,151,631 shares for issuance to its
employees, officers, directors and consultants
pursuant to SpinCo's equity incentive plans;
5,348,369 shares for issuance upon exercise of
options and warrants to purchase SpinCo Common
Stock which will be held as of the Distribution
Date by QUALCOMM employees, officers,
directors, consultants and others as a result
of certain adjustment and such warrants
provisions contained in QUALCOMM's equity
incentive
4
<PAGE> 10
plans; and 2,271,060 shares for issuance upon
conversion of certain Trust Convertible
Preferred Securities convertible into QUALCOMM
Common Stock pursuant to certain adjustment
provisions contained in such securities.
QUALCOMM WARRANT.............. QUALCOMM will retain a warrant (the "Warrant")
to purchase 5,500,000 shares of SpinCo Common
Stock, at a price equal to the average price of
the last sales price per share of the SpinCo
Common Stock on the Nasdaq National Market for
each of the five (5) consecutive trading days
beginning with and including the Distribution
Date. The Warrant will be exercisable at any
time during the ten (10) years following the
Distribution. Based on the number of shares of
SpinCo Common Stock expected to be outstanding
and reserved for issuance pursuant to
outstanding options and convertible securities
as of the Distribution, upon exercise in full
of the Warrant, QUALCOMM would hold
approximately 18% of the outstanding shares of
SpinCo, assuming exercise of all such
outstanding options and convertible securities.
See "Security Ownership of Certain Beneficial
Owners."
DISTRIBUTION RATIO............ Each QUALCOMM stockholder (each, a "Holder")
will receive one (1) share of SpinCo Common
Stock for every four (4) shares of QUALCOMM
Common Stock held on the Record Date.
NO FRACTIONAL SHARES.......... No fractional shares of SpinCo Common Stock
will be distributed. Fractional SpinCo Shares
will be aggregated and sold as whole SpinCo
Shares by SpinCo's transfer agent and
distribution agent for the Distribution, Harris
Trust Company of California (the "Distribution
Agent"), to provide cash to Holders in lieu of
such fractional SpinCo Shares.
LISTING AND TRADING MARKET.... The Company has applied for listing of the
shares of SpinCo Common Stock on the Nasdaq
National Market (the "Nasdaq NMS") under the
symbol " ."
RECORD DATE................... Close of business on August , 1998.
DISTRIBUTION DATE............. September 15, 1998.
MANNER OF EFFECTING THE
DISTRIBUTION................ The Company currently intends to use a direct
registration system to implement the
distribution of SpinCo Shares. On the
Distribution Date, a certificate representing
all issued and outstanding SpinCo Shares will
be delivered to the Distribution Agent (as
defined herein). An account statement will be
mailed to each QUALCOMM stockholder as soon as
practicable thereafter stating the number of
SpinCo Shares received by such stockholder in
the Distribution.
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS.............. It is expected that the Distribution will be a
taxable distribution to each Holder in an
amount equal to the fair market value on the
date of the distribution of the SpinCo Shares
plus the cash intended to represent the fair
market value of fractional SpinCo Shares
distributed to such Holder. Each Holder's
portion of the Distribution will be taxable as
ordinary income to the extent of such Holder's
pro rata share of the current and accumulated
5
<PAGE> 11
earnings and profits ("E&P") of QUALCOMM,
measured as of the end of the fiscal year in
which the Distribution occurs (which is
expected to be the fiscal year ending September
27, 1998). If the Holder's share of the
Distribution exceeds such Holder's pro rata
share of E&P, the excess will be treated first
as a basis-reducing, tax-free return of capital
to the extent of the Holder's adjusted tax
basis in each QUALCOMM share, and then as a
capital gain (treated as short-term, mid-term
or long-term depending on the duration the
Holder has held each of its QUALCOMM shares).
The amount of E&P per share of QUALCOMM Common
Stock is not expected to exceed $4.00.
No later than January 31, 1999, QUALCOMM will
issue to each Holder an IRS Form 1099-DIV
reflecting the fair market value of the SpinCo
Shares distributed to such Holder and the
portion of such Distribution that is taxable as
ordinary income. The Holder's adjusted tax
basis for income tax purposes in the
distributed SpinCo Shares will be the fair
market value of shares on the date of the
Distribution. The Distribution and any
subsequent sale of SpinCo Shares may have other
federal income tax consequences to Holders. See
"Certain Federal Income Tax Considerations."
BECAUSE EACH STOCKHOLDER'S SITUATION IS UNIQUE,
HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE TAX CONSEQUENCES OF THE
DISTRIBUTION TO THEM.
DIVIDEND POLICY............... The payment and amount of cash dividends and/or
share repurchases, if any, on or with respect
to, the SpinCo Common Stock after the
Distribution will be subject to the discretion
of SpinCo's Board of Directors. However, so
long as SpinCo's Credit Facility (as defined
below) with QUALCOMM is in effect, SpinCo will
be contractually prohibited from declaring or
paying any dividends on or with respect to, or
repurchasing, SpinCo Common Stock. The Company
has never paid or declared any cash dividends.
It is the present policy of the Company to
retain earnings to finance the growth and
development of the businesses and, therefore,
the Company does not anticipate paying cash
dividends on SpinCo Common Stock in the
foreseeable future. SpinCo's policy will be
determined and reviewed by its Board of
Directors at such future times as may be
appropriate, and payment of dividends, if any,
on SpinCo Common Stock will depend upon
SpinCo's ongoing financial position, capital
requirements, profitability, contractual
obligations, cash flow and such other factors
as SpinCo's Board of Directors deems relevant.
RELATIONSHIP WITH QUALCOMM
AFTER THE DISTRIBUTION........ Following the Distribution, QUALCOMM and SpinCo
will be operated as independent publicly traded
companies, with no common officers or
directors. QUALCOMM and SpinCo will, however,
continue to have a relationship as a result of
the following agreements to be entered into
between QUALCOMM and SpinCo prior to the
Distribution Date:
Separation and Distribution Agreement. Pursuant
to the Separation and Distribution Agreement,
QUALCOMM will agree to
6
<PAGE> 12
transfer the SpinCo Business to SpinCo.
QUALCOMM will also agree to contribute to
SpinCo the following: (i) $10 million in cash;
(ii) approximately $35 million in notes
convertible into equity interests in one of the
operating companies included in the SpinCo
Business (in connection with which QUALCOMM is
not required to perform or otherwise satisfy
any obligation as a condition to payment or
conversion) and certain other indebtedness of
such companies to QUALCOMM; (iii) QUALCOMM's
rights under agreements to the extent relating
solely to the SpinCo Business (such as
registration rights and other similar rights as
a holder of equity interests in the SpinCo
Operating Companies); and (iv) miscellaneous
assets. No intellectual property will be
transferred to SpinCo in connection with the
separation of the companies (the "Separation"),
and QUALCOMM will retain substantially all
rights not expressly transferred with respect
to any and all agreements with the SpinCo
Operating Companies.
In connection with such transfer of assets and
rights by QUALCOMM, SpinCo will issue the
SpinCo Shares and the Warrant to QUALCOMM. In
addition, SpinCo will agree to assume certain
liabilities of QUALCOMM, including without
limitation (i) significant funding obligations
with respect to the SpinCo Operating Companies;
(ii) QUALCOMM's obligations to manage
operations of and finance certain costs
relating to ongoing systems and build-outs by
the SpinCo Operating Companies other than
equipment financing obligations; and (iii)
certain obligations with respect to SpinCo's
employees.
The Separation and Distribution Agreement will
also provide that, subject to the terms and
conditions thereof, QUALCOMM and the Company
will take all reasonable steps necessary to
effect the Distribution.
SpinCo will also agree in the Separation and
Distribution Agreement that, until January 1,
2004, it will deploy only wireless terrestrial
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. The
current form of 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
technologies that are compatible with or employ
the same physical layer as the original cdmaOne
and adopted by QUALCOMM, or that are compatible
with the infrastructure and subscriber
equipment manufactured and sold by QUALCOMM
(e.g., the TIA/EIA/IS-95 digital cellular
standard and ANSI JSTD-008 digital PCS standard
to be published).
The Company will agree to invest only in
companies using cdmaOne systems, in connection
with terrestrial wireless activities. Pursuant
to the Separation and Distribution Agreement
and subject to certain exceptions, QUALCOMM
will have a non-exclusive, royalty-free license
to any intellectual property rights developed
through SpinCo's use of CDMA technology. In
addi-
7
<PAGE> 13
tion, pursuant to the Separation and
Distribution Agreement, the Company will grant
to QUALCOMM a right of first refusal for a
period of three (3) years with respect to
proposed transfers by SpinCo of interests in
joint ventures and equity interests included in
the SpinCo Business at the time of the
Distribution, subject to pre-existing rights of
other investors. SpinCo will further agree to
take an active role in the management of
companies with which it has joint venture or
equity interests, subject to applicable laws,
contractual arrangements and other
requirements. Finally, the agreement will
provide, with certain limited exceptions, that
for a period of three (3) years following the
Distribution neither party will solicit or hire
employees of the other.
Credit Facility. Prior to the Distribution, the
Company will enter into a credit facility with
QUALCOMM, secured by substantially all of
SpinCo's assets (the "Credit Facility"). The
Credit Facility will consist of two
sub-facilities. The first sub-facility (the
"Working Capital Facility") will enable SpinCo
to borrow up to $25 million from QUALCOMM,
subject to the terms thereof. The proceeds from
the Working Capital Facility may be used by
SpinCo solely to meet the normal working
capital and operating expenses of SpinCo,
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 SpinCo to borrow up to
$225 million from QUALCOMM, subject to the
terms thereof. The proceeds from the Investment
Capital Facility may be used by SpinCo solely
to meet certain equity and debt funding
obligations of SpinCo.
Amounts borrowed under the Credit Facility will
be due and payable eight years following the
Distribution Date. QUALCOMM will have a first
priority security interest in substantially all
of the assets of SpinCo 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
2003; and prior to such time, accrued interest
shall be added to the principal amount
outstanding.
Master Agreement Regarding Equipment
Procurement. The Master Agreement Regarding
Equipment Procurement (the "Equipment
Agreement") will set forth certain obligations
of SpinCo and QUALCOMM with respect to the
purchase and sale of certain terrestrial-based
CDMA infrastructure and subscriber equipment.
Pursuant to the Equipment Agreement, SpinCo
will agree that: (i) SpinCo will purchase from
QUALCOMM not less 50% of SpinCo'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 SpinCo
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
8
<PAGE> 14
SpinCo has not previously invested (a "U.S.
Operator"), SpinCo shall cause each such U.S.
Operator to enter into an equipment purchase
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 SpinCo in a
U.S. Operator which is made after the fourth
anniversary of the Distribution Date, SpinCo
shall exercise its commercially reasonable
efforts to cause the U.S. Operator to enter
into an equipment purchase 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. Such obligations shall be
imposed upon SpinCo for such infrastructure and
subscriber equipment so long as QUALCOMM's bid
for such equipment is not greater than 110% of
the lowest competing bid, and QUALCOMM provides
competitive features and financing and other
terms and conditions; provided, however, that
once QUALCOMM has been awarded contracts for an
aggregate $250 million of infrastructure or
subscriber equipment (calculated separately),
the 110% criterion shall be lowered to 100% for
subsequent purchases of such equipment as the
volume for such category of equipment 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 SpinCo has received an
aggregate $60 million of debt or equity
financing (by parties other than QUALCOMM),
SpinCo shall cause each wireless
telecommunication operating entity operating
outside the United States in which SpinCo has
not previously invested (a "Non-U.S. Operator")
in which SpinCo has made a direct or indirect
investment to enter into an equipment purchase
agreement with QUALCOMM which shall provide
that 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 SpinCo makes a direct or
indirect investment following the applicable
period, SpinCo shall use commercially
reasonable efforts to cause such Non-U.S.
Operator to purchase infrastructure and
subscriber equipment from QUALCOMM. The
obligations of all such Non-U.S. Operators
shall be subject to QUALCOMM providing
competitive prices, features and financing, and
other terms and conditions. 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.
Interim Services Agreement. The Interim
Services Agreement (the "Interim Services
Agreement"), will govern the provision by each
to the other, on an interim basis, of certain
data processing and telecommunications services
(including voice telecommunications and data
transmission) and certain corporate support
services
9
<PAGE> 15
(including accounting, financial management,
tax, payroll, stockholder and public relations,
legal, human resources administration,
procurement, real estate management and other
administrative functions), each as specified
and on the terms set forth therein. Specified
charges for such services will generally be
intended to allow the providing company to
recover the fully allocated costs of providing
the services, plus all out-of-pocket costs and
expenses, but without any profit. These interim
services are not expected to extend beyond one
year following the Distribution Date.
Employee Benefits Agreement. Pursuant to the
Employee Benefits Agreement, the Company will
assume and agree to pay, perform, fulfill and
discharge, in accordance with their respective
terms, all Liabilities (as defined therein) to,
or relating to, former employees of QUALCOMM or
its affiliates who will be employed by the
Company.
Tax Agreement. The Tax Agreement generally will
require QUALCOMM to pay, and indemnify SpinCo
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
SpinCo and against which SpinCo will indemnify
QUALCOMM: (i) all United States federal, state,
local and foreign taxes relating to SpinCo and
its U.S. subsidiaries for periods after the
Distribution; (ii) all United States federal,
state, local and foreign taxes relating to
SpinCo'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, SpinCo or any of its subsidiaries that
cause adverse tax consequences to QUALCOMM,
SpinCo or their respective subsidiaries with
respect to the Distribution or the transactions
related thereto; provided, however, that under
certain limited circumstances SpinCo's
indemnification obligation described in this
subparagraph (iii) may be reduced.
Consulting Agreements. Prior to the
Distribution Date, the executive officers and
certain other employees of SpinCo who have been
QUALCOMM employees may enter into consulting
arrangements related to their respective areas
of expertise with QUALCOMM for a term of
generally one to two years in order to
facilitate the completion of ongoing projects
and to provide QUALCOMM with the benefit of
their expertise for the term of the
arrangement. The Company does not expect that
such consulting arrangements will interfere
with the ability of such officers and other
employees to perform all their responsibilities
to SpinCo.
QUALCOMM's relationships as equipment vendor to
SpinCo and the SpinCo Operating Companies and
as lender under the Credit Facility will give
QUALCOMM significant influence over SpinCo and
will create certain conflicts with SpinCo. In
addition, QUALCOMM is not restricted from
competing with the Company or the SpinCo
Operating Companies or pursuing directly
wireless
10
<PAGE> 16
telecommunications businesses or interests
which would also be attractive to SpinCo. See
"Risk Factors -- Potential Conflicts with
QUALCOMM," and "Relationship Between QUALCOMM
and the Company After the Distribution."
REASONS FOR FURNISHING THIS
INFORMATION STATEMENT....... This Information Statement is being furnished
solely to provide information for Holders, each
of whom will receive SpinCo Shares in the
Distribution. It is not to be construed as an
inducement or encouragement to buy or sell any
securities of SpinCo or QUALCOMM. The
information contained herein is provided as of
the date of this Information Statement unless
otherwise indicated. SpinCo will not update the
information contained in this Information
Statement except in the normal course of its
public disclosure practices.
RISK FACTORS
Stockholders should carefully consider the matters discussed under the
section entitled "Risk Factors" beginning on page 14 of this Information
Statement.
11
<PAGE> 17
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 six months ended February 28, 1998 and 1997 and years ended August
31, 1997 and 1996 and for the period from September 1, 1995 (inception) to
February 28, 1998 are derived from the unaudited Condensed Combined Financial
Statements and the audited Combined Financial Statements of the Company,
respectively, which are included elsewhere in this Information Statement. The
historical combined financial data relate to the SpinCo Business as it was
operated as part of QUALCOMM, and such data do not reflect significant business
activities since the date of the periods they 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 six months ended February 28, 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 February 28, 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 PRO FORMA FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM PRO FORMA PRO FORMA
SEPTEMBER 1, 1995 SIX MONTHS ENDED YEARS ENDED SIX MONTHS ENDED YEAR ENDED
(INCEPTION) TO FEBRUARY 28, AUGUST 31, FEBRUARY 28, AUGUST 31,
FEBRUARY 28, ------------------- ------------------ ----------------- ----------
1998 1998 1997 1997 1996 1998 1997
------------------- ---------- ------ ---------- ----- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Equity in net (loss) earnings of
wireless operating
companies(1)................... $ (630) $ (797) $ -- $ 167 $ -- $ (797) $ 167
General and administrative
expenses....................... (11,916) (10,142) (546) (1,378) (396) (15,773)(2) (6,647)(2)
-------- ---------- ------ ---------- ----- ---------- ----------
Loss before income taxes......... (12,546) (10,939) (546) (1,211) (396) (16,570) (6,480)
Income tax expense............... -- -- -- -- -- -- --
-------- ---------- ------ ---------- ----- ---------- ----------
Net loss................. $(12,546) $ (10,939) $ (546) $ (1,211) $(396) $ (16,570) $ (6,480)
======== ========== ====== ========== ===== ========== ==========
Unaudited pro forma basic and
diluted net loss per common
share(3)....................... $ (0.63) $ (0.07) $ (0.96) $ (0.37)
========== ========== ========== ==========
Shares used in computing
unaudited pro forma basic and
diluted net loss per common
share.......................... 17,338,858 17,338,858 17,338,858 17,338,858
BALANCE SHEET DATA(1)(4):
Cash (at end of period).......... $ -- $ -- $ -- $ 10,000
Working capital.................. (1,967) (282) (111) 7,487
Total assets..................... 50,831 54,884 -- 269,747
Stockholder's equity............. 48,864 54,602 (111) 249,784
</TABLE>
- - ---------------
(1) As of and for the periods ended February 28, 1998 and 1997 and August 31,
1997 and 1996, and for the period from September 1, 1995 (inception) to
February 28, 1998, the Company's combined historical financial data reflect
the Company's investments in Chilesat PCS, Telesystems of Ukraine, and Chase
Telecommunications. The pro forma statement of operations data for the
periods ended February 28, 1998 and August 31, 1997 reflect the Company's
investments in Chilesat PCS, Telesystems of Ukraine, and Chase
Telecommunications. The pro forma balance sheet
12
<PAGE> 18
data at February 28, 1998 reflects additional investments, to be contributed
by QUALCOMM, in PEGASO, QUALCOMMTel, and OzPhone.
(2) The pro forma adjustment to general and administrative expenses includes
additional expenses which would have been incurred by the Company, if it
were a separate stand alone entity, including incremental executive
compensation and fringe benefits, public relations, insurance, accounting
fees, public company, recruiting and other administrative expenses. The
adjustment reflects assumed staffing levels that are consistent with the
investment activity for the period.
(3) The Company had no common shares outstanding during the first six 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 17,338,588 expected shares of
common stock of the Company to be issued upon the Distribution based on
QUALCOMM common shares outstanding as of June 18, 1998. Such shares reflect
the expected issuance upon the Distribution of one of the Company's shares
of common stock for every four shares of QUALCOMM common stock outstanding.
See Note 1 of Combined Financial Statements.
(4) Pro forma balance sheet data gives effect to (a) the net assets to be
contributed to the Company by QUALCOMM and (b) the distribution of SpinCo
common stock to SpinCo stockholders.
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RISK FACTORS
This Information Statement contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those projected in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this section, as well as those discussed elsewhere in this
Information Statement.
OPERATING HISTORY; UNCERTAINTY OF FUTURE PROFITABILITY
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 prior to June 1998 as an independent company and it and each of the
SpinCo 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. To date, the Company has generated no revenue from
its ownership interests in or management roles with the SpinCo 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
SpinCo Operating Companies. The SpinCo 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 SpinCo Operating Companies. The industry in which the SpinCo 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 SpinCo Operating Companies' wireless systems may take a number
of years to complete. There can be no assurance that any of the SpinCo 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.
ADDITIONAL CAPITAL NEEDS; SUBSTANTIAL LEVERAGE
The Company expects to have significant future capital requirements
relating (i) to funding commitments to the SpinCo 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 SpinCo 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. Prior to the Distribution, the Company has funded its cash
requirements through contributions from QUALCOMM.
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 $25 million
borrowing limit under the Working Capital Facility and the entire $225 million
borrowing limit under the Investment Capital Facility by the end of fiscal 1999.
The Company will have no other available sources of working capital or financing
as of the Distribution Date for the period subsequent to fiscal 1999. There can
be no assurance that the Company will be able to obtain such additional required
financing on favorable terms or at all. The terms of the Credit Facility,
including the security interest in favor of QUALCOMM and other restrictive
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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 SpinCo Operating Companies, the
Companies' percentage ownership in the SpinCo Operating Companies will be
diluted or the Company may relinquish certain operating control over the SpinCo
Operating Companies. If adequate additional financing is not available, the
Company may be forced to default on its funding obligations to the SpinCo
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
after the Distribution. The degree to which the Company is leveraged could have
important consequences, including: (i) 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 SpinCo 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
SpinCo 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 SpinCo Operating Companies to obtain future financings on acceptable terms
will be limited by their leverage and cash flows. In addition, the SpinCo
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 SpinCo 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 six months ended February 28,
1998 and for the years ended August 31, 1997 and 1996 of approximately $10.9
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 SpinCo Operating Companies' operating
losses, which are likely to be substantial. Further, the principal SpinCo
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, 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 SpinCo Operating Companies
will achieve or sustain profitability in the near term or at all.
POTENTIAL CONFLICTS WITH QUALCOMM
Upon completion of the Distribution, SpinCo will own QUALCOMM's former
joint venture and equity interests in the SpinCo Operating Companies. QUALCOMM,
however, will continue to be a supplier of
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CDMA equipment and is expected to provide significant vendor financing to those
companies. QUALCOMM will retain substantially all of its rights under its
equipment supply and vendor finance agreements with such entities, and such
entities will continue to rely on QUALCOMM and its equipment and technology.
QUALCOMM's influence over and economic interest in the SpinCo Operating
Companies could place QUALCOMM in a position in conflict with the Company's with
respect to the SpinCo Operating Companies.
Following the Distribution, the Company and QUALCOMM will also be subject
to several agreements between them. For instance, the Company will initially be
dependent upon the Credit Facility with QUALCOMM to meet its needs for capital.
The Credit Facility contains financial 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, requires the Company's affiliates to use
QUALCOMM's cdmaOne or other approved derivative technologies, 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 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. See "Relationship Between Qualcomm and the Company After
the Distribution."
AVAILABILITY AND MAINTENANCE OF LICENSES
The ability of the Company and the SpinCo 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 SpinCo Operating Companies will be able to secure
additional desired licenses.
CONSTRUCTION AND SYSTEM PERFORMANCE RISKS; LONG TERM CONTRACTS
The Company and the SpinCo 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
SpinCo 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 SpinCo Operating Companies. In
addition, the SpinCo Operating Companies and SpinCo 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.
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JOINT VENTURES
The Company will be a participant in joint venture companies that hold
wireless telephone licenses or are seeking such licenses. Many of the Partners
of the joint venture companies have relatively little experience in managing
wireless operating companies. The Company's ability to withdraw funds, including
dividends, from its participation in, and to exercise significant management
influence over, such joint ventures, is dependent in many cases on receiving the
consent of the other participants, over which the Company has no control.
Additionally, many of the Purchases 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 SpinCo Operating Company could also have a
material adverse effect on the Company, and could force the Company to make
additional investments in such SpinCo Operating Companies.
INVESTMENT COMPANY ACT
Following the Distribution, a significant portion of the Company's assets
will consist of equity and other interests in its operating companies.
Significant investments in entities that are not majority owned by the Company
could subject the Company to the registration requirements of the Investment
Company Act of 1940 (the "Investment Company Act"). The Investment Company Act
requires registration of, and imposes substantial restrictions on, certain
companies that engage, or propose to engage, primarily in the business of
investing, reinvesting, owning, holding, or trading in securities, or that fail
certain statistical tests concerning a company's asset composition and sources
of income. Primarily because the Company's operating companies will be engaged
in telecommunication business operations and because the Company intends to
actively participate in the management of its operating companies, consistent
with applicable laws, contractual arrangements and other requirements, the
Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding, or trading in securities. The Company
intends to monitor and adjust the nature of its interests in and involvement
with operating companies in order to avoid subjecting the Company to the
registration requirements of the Investment Company Act. In addition, in order
to clarify the Company's status under the Investment Company Act, the Company
intends to apply 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.
INTERNATIONAL RISKS
The Company is subject to numerous risks as a result of its international
activities. The SpinCo Operating Companies are dependent, in large part, on the
economies of the markets in which they have operations. Those markets are in
countries with economies in various stages of development or structure reform,
some of which are subject to rapid fluctuations in consumer prices, employment
levels and gross domestic product. The Company and the SpinCo Operating
Companies are exposed to market risk from changes in foreign currency exchange
rates and interest rates, and are subject to other currency and economic risks,
which could impact their results of operations and financial condition.
Moreover, applicable agreements relating to the Company's interests in the
SpinCo 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 SpinCo Operating
Company is located or another jurisdiction agreed upon by the parties.
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The value of the Company's interest in a SpinCo Operating Company is
partially a function of the currency exchange rate between the U.S. dollars and
the applicable local currency. Exchange rates for currencies of the countries in
which the Company's 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 when translating foreign currency into U.S.
dollars.
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. For example, the Company faces challenges and risks with
respect to its business activities in Russia and Ukraine, given recent political
changes, the instability of the countries' respective economies and the early
stage of the respective telecommunications industries. Doing business in other
developing nations poses similar risks. 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.
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 SpinCo Operating Companies throughout the world
may face competition with new technologies and services introduced in the
future. Although the SpinCo Operating Companies intend to employ relatively new
technologies, there will be a continuing competitive threat from even newer
technologies that may render the technologies employed by such companies
obsolete. The Company also expects that the price that the SpinCo 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
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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 SpinCo 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 SpinCo.
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 SpinCo 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 SpinCo Operating Companies or lower the cost of competing
products and services to the point where the SpinCo 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 SpinCo Operating Companies will not experience technical
difficulties in their commercial deployment. A failure by cdmaOne to gain market
acceptance, or the emergence of another competing technology superior to
cdmaOne, could have a material adverse effect on the Company's business, results
of operations, liquidity and financial position.
GOVERNMENT REGULATION
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in each of the countries outside the United States in which
SpinCo 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
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States and each of the other countries in which SpinCo operates, see the
"Regulatory Environment" discussion for each of the SpinCo 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 SpinCo Operating Companies doing business in the United States, and SpinCo,
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 SPINCO SHARE RESERVES
Based on the number of shares of QUALCOMM Common Stock outstanding on June
18, 1998, an aggregate of 17,338,858 shares of SpinCo Common Stock will be
issued in the Distribution. Such shares will constitute all of the outstanding
shares of SpinCo Common Stock as of the Distribution Date. However, the holders
of such shares will be subject to potential substantial dilution due to the
significant number of shares of SpinCo Common Stock that will be reserved for
issuance following the Distribution. Collectively, there will be 15,271,060
shares of SpinCo Common Stock reserved for issuance following the Distribution
consisting of the following: 5,500,000 shares for issuance upon exercise of the
Warrants to be issued to QUALCOMM; 2,151,631 shares for issuance to its
employees, officers, directors and consultants pursuant to SpinCo's equity
incentive plans; 5,348 shares for issuance upon exercise of options and warrants
to purchase SpinCo Common Stock which will be held as of the Distribution Date
by QUALCOMM employees, officers, directors, consultants and others as a result
of certain adjustment provisions contained in QUALCOMM's equity incentive plans
and warrants, and other options and warrants; and 2,271,060 shares for issuance
upon conversion of certain Trust Convertible Preferred Securities convertible
into QUALCOMM Common Stock pursuant to certain adjustment provisions contained
in such securities. (Upon conversion of such Trust Convertible Preferred
Securities, QUALCOMM will receive benefit in the form of forgiveness of debt,
but SpinCo will receive no such benefit or other consideration.) 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 53.2% of the outstanding SpinCo Common
Stock. See "Description of Company Capital Stock."
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NO PRIOR MARKET FOR SPINCO COMMON STOCK; VOLATILITY
There has been no public market for the SpinCo 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 SpinCo Common Stock thereafter. The market price for shares
of the SpinCo 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 Certificate of Incorporation (the
"Certificate of Incorporation") and Bylaws (the "Bylaws"), including provisions
classifying the Board of Directors, prohibiting stockholder action by written
consent, governing business transactions with certain stockholders 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 SpinCo Common Stock, and may also inhibit fluctuations in the
market price of the SpinCo 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 SpinCo 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.
PRODUCT LIABILITY
Testing, manufacturing, marketing and use of the Company's and the SpinCo
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 SpinCo 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
SpinCo 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 SpinCo Operating Companies'
ability to market and sell wireless telephones.
SUBSTANTIAL STOCK SALES
The Distribution will involve the distribution of an aggregate of
approximately 17,338,858 shares of SpinCo Common Stock to the stockholders of
QUALCOMM. A substantial portion of such shares will be eligible for immediate
resale in the public market. The Company is unable to predict whether
substantial amounts of SpinCo 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 SpinCo Common
Stock in order to pay the additional tax liability created as a result of the
Distribution. Any sales of substantial amounts of SpinCo 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 SpinCo Common Stock.
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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 SpinCo Operating Companies have recently begun their
respective businesses, the Company does not believe that the Year 2000 issue
will significantly impact their 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 SpinCo Operating
Companies' wireless communications networks to perform as intended.
However, there can be no assurance that the Company will be able to
identify all Year 2000 problems in its systems or the systems of the SpinCo
Operating Companies 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 SpinCo Operating Companies to do
business with the Company could have a material adverse effect on the Company's
business, prospects, operating results and financial condition.
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INTRODUCTION
On , 1998, the Board of Directors of QUALCOMM declared a
dividend payable to holders of record of QUALCOMM Common Stock at the close of
business on the Record Date of one (1) share of SpinCo Common Stock for every
four (4) shares of QUALCOMM Common Stock held on the Record Date. The
Distribution will be effective on September 15, 1998. An account statement will
be mailed to each QUALCOMM stockholder as soon as practicable thereafter stating
the number of shares of SpinCo Common Stock received by such stockholder in the
Distribution. As a result of the Distribution, all of the outstanding shares of
SpinCo Common Stock will be distributed to QUALCOMM stockholders. See
"Description of Company Capital Stock."
The Company was formed for the purpose of effecting the Distribution. On or
prior to the Distribution Date, QUALCOMM will have transferred to the Company
the SpinCo Business.
If you have any questions relating to the Distribution, please contact the
Distribution Agent at 311 West Monroe Street, Chicago, IL 60606; (800) 554-3406.
For other information relating to QUALCOMM, please contact: QUALCOMM Investor
Relations Department, QUALCOMM Incorporated, 6455 Lusk Boulevard, San Diego,
California 92121, (619) 658-4224. For questions related specifically to SpinCo,
please contact: SpinCo Investor Relations Department, Attention: Daniel O. Pegg,
6455 Lusk Boulevard, San Diego, California 92121-2779, (619) 651-2577.
THE DISTRIBUTION
PRIMARY REASONS FOR THE DISTRIBUTION
The Board of Directors of QUALCOMM has determined that it is in the best
interest of QUALCOMM and its stockholders to undertake the Distribution, thereby
separating the SpinCo Business from QUALCOMM, for the reasons described herein.
QUALCOMM believes that its joint venture and equity interests in emerging
wireless telecommunications operating companies create potential conflicts with
QUALCOMM's CDMA equipment customers which compete against these companies. In
addition, the separation of the SpinCo Business from the Core Businesses is
intended to allow the two entities to be recognized and appropriately valued by
the financial community as distinct businesses with different investment risk
and return profiles. In this regard, investors may be better able to evaluate
the merits and future prospects of the businesses of QUALCOMM and the Company,
enhancing the likelihood that each will achieve appropriate market recognition
and valuation for its performance and potential. Current stockholders and
potential investors will be better able to direct their investments to their
specific areas of interest. The Distribution will also enable the Company, as
and when appropriate, to explore the possibility of engaging in strategic
acquisitions, joint ventures and other collaborative arrangements.
The Distribution will also permit management of each of the Company and
QUALCOMM to focus its attention on its respective businesses. In addition, the
Distribution will allow each of the Company and QUALCOMM to allocate its
financial resources to address its particular business needs and capitalize on
its business opportunities. With respect to the Company, the Distribution is
designed to establish SpinCo as a stand alone independent company that can adopt
strategies and pursue objectives appropriate to its specific businesses. As an
independent company, the Company's management should be better able to structure
and operate the Company in a manner more directly and appropriately tailored to
meet the business opportunities and challenges presented by the competitive core
environment in which the Company operates.
The Distribution is also designed to allow the Company and QUALCOMM to each
establish and tailor its own equity-based compensation plans so that there will
be a more direct alignment between the performance of each business and the
compensation of its management. Among other things, the implementation of a
separate SpinCo equity-based compensation plan is intended to strengthen and
enhance the Company's ability to achieve cost savings and enhance efficiencies.
Following the Distribution, the Company's management will receive equity-based
incentives which will be more closely aligned with the financial results
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of the Company, thereby linking each employee's financial success more directly
to the financial success of the Company. See "Management."
Moreover, without the spin off, according to applicable accounting rules,
QUALCOMM would be required to continue recognizing a share of these companies'
start-up operating losses, which are likely to be substantial, and would be
required to eliminate intercompany profits from equipment sales to some of these
companies.
The QUALCOMM Board of Directors has determined that the Distribution is in
the best interest of QUALCOMM and its stockholders, for the reasons stated
above. In reaching such conclusions, the Board considered a number of factors,
including the opinion received from QUALCOMM's financial advisor and other
factors.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in a Separation and Distribution Agreement (the "Distribution Agreement") to be
entered into prior to the Distribution Date between QUALCOMM and the Company.
The Distribution will be made on the basis of one (1) share of SpinCo
Common Stock for every four (4) shares of QUALCOMM Common Stock held on the
Record Date. The actual total number of shares of SpinCo Common Stock to be
distributed will depend on the number of shares of QUALCOMM Common Stock
outstanding on the Record Date. Based upon the shares of QUALCOMM Common Stock
outstanding on June 18, 1998, approximately 17,338,858 shares of SpinCo Common
Stock will be distributed to QUALCOMM stockholders. The shares of SpinCo Common
Stock will be fully paid and nonassessable and the holders thereof will not be
entitled to preemptive rights. See "Description of Company Capital Stock,
"Treatment of QUALCOMM Employee Stock Options in the Distribution" and
"Treatment of QUALCOMM Trust Convertible Preferred Securities in the
Distribution."
Since the Company will use a direct registration system to implement the
Distribution, the Distribution Agent will credit the shares of SpinCo Common
Stock distributed on the Distribution Date, excluding fractional interests, to
book-entry accounts established for all Company stockholders and will mail an
account statement to each stockholder stating the number of shares of SpinCo
Common Stock received by such stockholder in the Distribution. Following the
Distribution, stockholders may request the transfer of their interests to a
brokerage or other account or may request delivery of physical stock
certificates for their shares of SpinCo Common Stock.
No fractional SpinCo shares will be distributed. The Distribution Agent
will, promptly after the Distribution Date, aggregate all such fractional share
interests in SpinCo Common Stock with those of other similarly situated
stockholders and sell such fractional share interests in SpinCo Common Stock at
then-prevailing prices. The Distribution Agent will distribute the cash proceeds
to stockholders entitled to such proceeds pro rata based upon their fractional
interests in SpinCo Common Stock. No interest will be paid on any cash
distributed in lieu of fractional shares. If a stockholder requests physical
certificates for shares of SpinCo Common Stock, such stockholder will receive
physical certificates for all whole shares of SpinCo Common Stock.
No holder of QUALCOMM Common Stock will be required to pay any cash or
other consideration for the shares of SpinCo Common Stock received in the
Distribution or to surrender or exchange shares of QUALCOMM Common Stock in
order to receive shares of SpinCo Common Stock.
LISTING AND TRADING OF SPINCO COMMON STOCK
There is currently no public market for SpinCo Common Stock. The Company
has applied for listing of the shares of SpinCo Common Stock on the Nasdaq NMS
under the symbol " ." The Company is expected to have initially
approximately 2,500 holders of record, based on the number of stockholders of
record of QUALCOMM on June 18, 1998. The Company has never paid or declared any
cash dividends. It is the present policy of the Company to retain earnings to
finance the growth and development of the businesses
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and, therefore, the Company does not anticipate paying cash dividends on SpinCo
Common Stock in the foreseeable future. Moreover, so long as SpinCo's Credit
Facility (as defined below) with QUALCOMM is effective, SpinCo's Board of
Directors will be contractually prohibited from declaring or paying any
dividends on or with respect to, or repurchasing, SpinCo Common Stock.
A "when-issued" trading market is expected to develop shortly before the
Distribution. The term "when-issued" means that shares can be traded prior to
the time certificates are actually available or issued. Prices at which the
shares of SpinCo Common Stock may trade on a "when-issued" basis or after the
Distribution cannot be predicted. See "Risk Factors -- No Prior Market for
SpinCo Common Stock; Volatility."
The shares of SpinCo Common Stock distributed to QUALCOMM stockholders will
be freely transferable, except for shares received by persons who may be deemed
to be "affiliates" of the Company within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). See "Risk Factors -- Substantial Stock
Sales." Persons who may be deemed to be affiliates of the Company after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with the Company and may include the
directors and principal executive officers of the Company as well as any
principal stockholder of the Company. Persons who are affiliates of the Company
will be permitted to sell their shares of SpinCo Common Stock only pursuant to
an effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as Rule 144
thereunder.
OPINION OF FINANCIAL ADVISOR
Lehman Brothers Inc. ("Lehman Brothers") has acted as financial advisor to
QUALCOMM in connection with the Distribution and was engaged to render its
opinion with respect to (i) the fairness, from a financial point of view, to the
holders of common stock of QUALCOMM, of the Distribution, and (ii) whether the
Distribution will materially impair the ability of QUALCOMM after the
Distribution ("New QUALCOMM") and SpinCo to fund in the future, from external
sources or through internally generated funds, their respective currently
anticipated operating and capital requirements (as currently projected in the
financial forecasts prepared by the management of QUALCOMM). Lehman Brothers was
not requested to opine as to, and its opinion does not in any manner address,
(i) QUALCOMM underlying business decision to proceed with or effect the
Distribution or (ii) the ability of New QUALCOMM or SpinCo to access the capital
markets at any time following the Distribution.
THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS DATED [
, 1998] IS ATTACHED AS ANNEX 1 TO THIS INFORMATION STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS MAY READ SUCH OPINION FOR A
DISCUSSION OF ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY LEHMAN BROTHERS IN RENDERING ITS OPINION. THE SUMMARY OF LEHMAN
BROTHERS' OPINION SET FORTH IN THIS INFORMATION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
No limitations were imposed by QUALCOMM on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion except as described below. In arriving at its opinion, Lehman
Brothers did not ascribe a specific range of value to QUALCOMM, New QUALCOMM and
SpinCo, but rather made its determination as to the fairness, from a financial
point of view, of the Distribution on the basis of a variety of financial and
comparative analyses. Lehman Brothers' opinion is for the use and benefit of the
Board of Directors of QUALCOMM and was rendered to the Board in connection with
its consideration of the Distribution. Lehman Brothers' opinion is not intended
to be and does not constitute a recommendation to any current or prospective
stockholder of QUALCOMM, New QUALCOMM or SpinCo as to any action or investment
decision which may be taken by such stockholders with respect to shares owned or
to be received by them. Lehman Brothers was not requested to opine as to, and
its opinion does not in any manner address, (i) QUALCOMM's underlying business
decision to proceed with or effect the Distribution or (ii) the ability of New
QUALCOMM or SpinCo to access the capital markets at any time following the
Distribution.
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<PAGE> 31
On , 1998, in connection with the evaluation of the
Distribution by the QUALCOMM Board of Directors, Lehman Brothers rendered its
written opinion that, as of the date of such opinion, and subject to certain
assumptions, factors and limitations set forth in such written opinion as
described below, the Distribution (i) is fair, from a financial point of view,
to the holders of common stock of QUALCOMM and (ii) will not materially impair
the ability of New QUALCOMM and SpinCo to fund in the future, from external
sources or through internally generated funds, their respective currently
anticipated operating and capital requirements (as currently projected in the
financial forecasts prepared by the management of QUALCOMM).
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (i) the
Agreements, (ii) the Form 10, the Information Statement and such other publicly
available information concerning QUALCOMM, New QUALCOMM and SpinCo which Lehman
Brothers believed to be relevant to its inquiry, (iii) financial and operating
information with respect to the business, operations and prospects of QUALCOMM,
New QUALCOMM and SpinCo furnished to Lehman Brothers by QUALCOMM, (iv) a
comparison of the historical financial results and present financial conditions
of QUALCOMM and, on a pro forma basis, New QUALCOMM and SpinCo, with those of
other publicly held companies that Lehman Brothers deemed relevant, (v) the
trading history of QUALCOMM common stock and a comparison of such trading
history with those of other publicly held companies that Lehman Brothers deemed
relevant, (vi) publicly available research reports regarding QUALCOMM, (vii) the
terms of selected recent spin-off transactions that Lehman Brothers deemed
relevant and the market performance of securities involved in such transactions
both before and after the consummation of such transactions, (viii) the terms of
certain recent public stock offerings and merger transactions that Lehman
Brothers deemed relevant, and (ix) the proposed terms of the credit facility to
be provided to SpinCo by New QUALCOMM. In addition, Lehman Brothers had
discussions with the management of QUALCOMM and the proposed management of
SpinCo concerning the business, operations, assets, financial condition and
prospects of QUALCOMM and, on a pro forma basis, New QUALCOMM and SpinCo, and
undertook such other studies, analyses and investigations as Lehman Brothers
deemed appropriate.
The opinion states that Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it in
arriving at its opinion without independent verification and further relied upon
the assurances of the management of QUALCOMM that they are not aware of any
facts that would make such information inaccurate or misleading. With respect to
the financial forecasts of New QUALCOMM and SpinCo, upon advice of QUALCOMM we
have assumed that such forecasts have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of QUALCOMM as to the future financial performance of New QUALCOMM
and SpinCo and that New QUALCOMM and SpinCo will perform in accordance with such
forecasts. In arriving at its opinion, Lehman Brothers has not conducted a
physical inspection of the properties or facilities of QUALCOMM or SpinCo and
has not made or obtained any evaluations or appraisals of the assets or
liabilities of QUALCOMM or SpinCo. [In addition, QUALCOMM's Board of Directors
did not authorize Lehman Brothers to solicit, and Lehman Brothers did not
solicit, any indications of interest from any third party with respect to a
purchase of the businesses or assets of SpinCo]. Lehman Brothers' opinion is
necessarily based upon market, economic and other considerations as they exist
on, and can be evaluated as of, the date of its opinion letter.
In its opinion, Lehman Brothers expressed no opinion as to the prices at
which shares of common stock of New QUALCOMM or SpinCo will actually trade
following the consummation of the Distribution. In addition, Lehman Brothers
noted that the opinion should not be viewed as providing any assurance that the
combined market value of the shares of common stock of New QUALCOMM and the
shares of common stock of SpinCo to be received by a stockholder in the
Distribution will be in excess of the current market value of the common stock
of QUALCOMM owned by such stockholder at any time prior to announcement or
consummation of the Distribution.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, spin-offs, negotiated underwritings, competitive bids, secondary
distributions of
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listed and unlisted securities, private placements, and valuations for corporate
and other purposes. QUALCOMM selected Lehman Brothers to act as its financial
advisor in connection with the Distribution based upon its expertise in the
foregoing areas and its familiarity with the Company's industry.
QUALCOMM will pay Lehman Brothers a fee of $1 million for its services in
connection with the Distribution. The receipt of a portion of this fee is
contingent upon the consummation of the Distribution. Lehman Brothers also will
be reimbursed for its reasonable expenses incurred in rendering its services.
QUALCOMM has agreed to indemnify Lehman Brothers for certain liabilities that
may arise out of the rendering its opinion. Lehman Brothers also has performed
various investment banking services for QUALCOMM in the past and has received
customary fees for such services. In the ordinary course of its business, Lehman
Brothers actively trades in the securities of QUALCOMM for its own account and
for the accounts of its customers and, accordingly, may at any time hold long
and/or short positions in such securities or in the securities of New QUALCOMM
or SpinCo following the Distribution.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the opinion of Cooley Godward LLP with
respect to certain material federal income tax considerations under the Internal
Revenue Code of 1986, as amended (the "Code"), with respect to the SpinCo Shares
and any cash in lieu of fractional SpinCo Shares, distributed to Holders in the
Distribution. THIS DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES OF THE
ACQUISITION OF SPINCO SHARES BY PURCHASE, EXERCISE OF STOCK OPTIONS OR MEANS
OTHER THAN THE DISTRIBUTION. In addition, this discussion is intended only to
provide general information regarding Holders that are subject to United States
federal income tax; it may not address all relevant federal income tax
consequences to each Holder or to special categories of Holders, e.g., foreign
persons, dealers in securities, banks, insurance companies, Holders that hold
their shares as a hedge or as part of a hedging, straddle, conversion or other
risk reduction transaction, Holders that acquired their shares in connection
with stock option or stock purchase plans or in other compensatory transactions,
Holders that are exempt from federal income tax and Holders subject to the
alternative minimum tax provisions of the Code. This discussion is based upon
the Code, Treasury Regulations (including temporary and proposed Treasury
Regulations) promulgated thereunder, rulings, official pronouncements and
judicial decisions all as in effect on the date hereof and all of which are
subject to change or different interpretations by the Internal Revenue Service
("IRS") or the courts, any of which changes or interpretations may have
retroactive effect. Cooley Godward LLP has disclaimed any undertaking to advise
QUALCOMM or the Holders as to any change in the law that may affect this
discussion, including changes that may be made under currently pending
legislative proposals. In addition, no opinion has been expressed as to the tax
laws of any jurisdictions other than the United States of America. An opinion of
counsel does not bind the IRS, which could take a contrary position, but
represents only counsel's judgment as to the likely outcome if the issues
involved were properly presented to a court of competent jurisdiction. This
discussion assumes that the SpinCo Shares will at all relevant times constitute
capital assets of each of the Holders. This discussion does not address state,
local, or foreign tax considerations. BECAUSE EACH HOLDER'S TAX SITUATION IS
UNIQUE, THE DISTRIBUTION MAY AFFECT EACH HOLDER DIFFERENTLY. FOR THIS REASON,
EACH HOLDER IS URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO DETERMINE THE TAX
CONSEQUENCES OF THE DISTRIBUTION TO HIM. Cooley Godward LLP acted as United
States federal income tax counsel to QUALCOMM and assisted in preparing this
Information Statement.
Taxability of The Distribution To Holders of QUALCOMM Common Stock. The
fair market value of the SpinCo Shares, plus the cash intended to represent the
fair market value of a fractional SpinCo Share (together, the "Distribution
Amount"), distributed to a Holder of QUALCOMM Common Stock will constitute a
dividend taxable as ordinary income to the extent that QUALCOMM has current or
accumulated "earnings and profits" as of the end of the taxable year (expected
to be September 27, 1998) in which the Distribution occurs that are allocable to
the Distribution for federal income tax purposes ("E&P"). Assuming that there
will be a public market for the SpinCo Shares at the time of the Distribution,
the fair market value of a SpinCo Share to a Holder for this purpose is expected
to be the average of the high and low trading price on the date of the
Distribution or, if such date is not a trading day, on the first trading day
following the
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Distribution. However, if the Distribution Amount exceeds the Holder's allocable
share of QUALCOMM's E&P, the excess will generally be treated first as a
basis-reducing, tax-free return of capital to the extent of the such an event,
the basis-reducing, tax-free return of capital and capital gain distribution
rules described above would apply. Accordingly, each Holder would need to
determine its adjusted per share tax basis in each of its QUALCOMM Common Stock
shares to determine how the Distribution would be taxed. This determination of
E&P will be made by QUALCOMM's management as soon as practicable after the close
of QUALCOMM's taxable year in which the Distribution occurs. The amount of E&P
per share of QUALCOMM Common Stock is not expected to exceed $4.00.
No later than January 31, 1999, QUALCOMM will issue to each Holder of
QUALCOMM Common Stock receiving SpinCo Shares in the Distribution an IRS Form
1099-DIV reflecting such Holder's portion of the Distribution Amount. The IRS
Form 1099-DIV will also indicate what portion of the Distribution is an ordinary
dividend, taxable as ordinary income, and a nondividend distribution, taxable as
a tax-free return of capital or capital gain income depending on each Holder's
own situation.
To the extent that the Distribution Amount constitutes ordinary dividend
income (the "Dividend Amount"), it will generally be subject to back-up
withholding with respect to Holders who, before the Distribution, have not
provided their correct taxpayer identification number to QUALCOMM on an IRS Form
W-9 or a substitute therefor. Although this discussion does not generally
address tax consequences of the Distribution to foreign Holders of QUALCOMM
Common Stock, such Holders should note that distribution of the Dividend Amount
will generally be subject to U.S. withholding tax at the rate of 30%. This
withholding tax rate may be reduced by income tax treaties to which the United
States is a party. Non-resident alien individuals, foreign corporations and
other foreign Holders are urged to consult their own tax advisors regarding the
availability of such reductions and the procedures for claiming them, including,
but not limited to, executing an IRS Form W-8 to identify themselves as foreign
Holders to which an exception to the general withholding tax rules would apply.
For United States resident corporate Holders of QUALCOMM Common Stock, the
Dividend Amount will be eligible for a "dividends-received" deduction, subject
to limitations and exclusions provided by the Code. However, for corporate
Holders of QUALCOMM Common Stock, the Dividend Amount will be subject to the
Code's extraordinary dividend rules, which could reduce a corporate Holder's
basis in its QUALCOMM Common Stock by the amount of the deduction, if the
Dividend Amount equals at least 10% of the Holder's adjusted basis in its
QUALCOMM Common Stock. Moreover, to the extent that the untaxed Dividend Amount
exceeds the corporate Holder's adjusted basis in its QUALCOMM Common Stock, gain
will be recognized by such corporate Holder.
Sale Of SpinCo Shares. Upon the sale of SpinCo Shares, the Holders will
have a capital gain or loss equal to the difference between the sale price and
the Holder's adjusted tax basis in the SpinCo Shares sold. This gain or loss
will be short-term if the SpinCo Shares have a holding period of one year or
less on the sale date. For noncorporate Holders, short-term capital gain is
currently subject to federal income tax at a maximum rate of 39.6%. For
noncorporate Holders, capital gain income from assets like SpinCo Shares, that
have a holding period of more than a year on the sale date, is subject to
federal income tax at rates that vary from 28% to 10%, depending upon the
taxpayer's income level and the length of the holding period. If the holding
period is more than one year but not more than 18 months (mid-term capital gain
holding period), the maximum federal income tax rate upon sale is 28% for
noncorporate Holders. If the holding period is more than 18 months (long-term
capital gain holding period), the maximum federal income tax rate is 20% for
noncorporate Holders. Note that the phase-out or elimination of certain
deductions and exemptions at higher income levels can have the effect of raising
the marginal tax rate at those levels for other income of the taxpayer. There is
presently no difference in federal income tax rates between ordinary income and
capital gains of corporations. Limitations may apply to prevent or defer a
Holder's deduction of capital loss realized on any subsequent sale of SpinCo
Shares.
A Holder's initial adjusted tax basis in SpinCo Shares received in the
Distribution will be the fair market value of those SpinCo Shares at the time of
the Distribution. The holding period for SpinCo Shares received in the
Distribution will begin with the date of the Distribution.
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THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO STOCKHOLDERS WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES, CORPORATIONS (OR OTHER ENTITIES
TAXABLE AS CORPORATIONS) ORGANIZED UNDER THE LAWS OF THE UNITED STATES OR ANY
STATE THEREIN (INCLUDING THE DISTRICT OF COLUMBIA) OR WHO ARE OTHERWISE SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE. ALL STOCKHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, AND FOREIGN AND
APPLICABLE MINIMUM OR ALTERNATIVE MINIMUM TAX LAWS.
RELATIONSHIP BETWEEN QUALCOMM
AND THE COMPANY AFTER THE DISTRIBUTION
For purposes of facilitating an orderly transfer on the Distribution Date
of the SpinCo Business to the Company and an orderly transition to the status of
two separate independent companies, QUALCOMM and the Company, and certain of
their executive officers, will enter into various agreements and relationships,
including those described in this section. The agreements summarized in this
section are included as exhibits to the Registration Statement of which this
Information Statement forms a part. For purposes of agreements described below,
the term "QUALCOMM" refers to QUALCOMM and its subsidiaries, to the extent
applicable.
QUALCOMM's relationships as equipment vendor to SpinCo and the SpinCo
Operating Companies and as lender under the Credit Facility will give QUALCOMM
significant influence over SpinCo and will create certain conflicts with SpinCo.
In addition, QUALCOMM is not restricted from competing with the Company or any
of the SpinCo Operating Companies or pursuing directly wireless
telecommunications businesses which would also be attractive to SpinCo.
SEPARATION AND DISTRIBUTION AGREEMENT
Prior to the Distribution Date, QUALCOMM and the Company will enter into
the Separation and Distribution Agreement which will set forth the agreements
between the Company and QUALCOMM with respect to the principal transactions
required to effect the separation of the companies (the "Separation") and the
Distribution, and certain other agreements governing the relationship between
the parties thereafter.
To effect the Separation, QUALCOMM will agree to transfer the SpinCo
Business to SpinCo. QUALCOMM will also agree to contribute to SpinCo the
following: (i) $10 million in cash; (ii) approximately $35 million in notes
convertible into equity interests in one of its operating companies included in
the SpinCo Business (in connection with which QUALCOMM is not required to
perform or otherwise satisfy any obligation as a condition to payment or
conversion) and certain other indebtedness of such companies to QUALCOMM; (iii)
QUALCOMM's rights under certain agreements to the extent relating solely to the
SpinCo Business (such as registration rights and other similar rights as a
holder of equity interest in the SpinCo Operating Companies); and (iv)
miscellaneous assets. QUALCOMM's performance as an equipment vendor is not a
condition to payment to SpinCo under the notes and other indebtedness to be
transferred. No intellectual property will be transferred to SpinCo in
connection with the Separation, and QUALCOMM will retain substantially all
rights not expressly transferred with respect to any and all agreements with the
SpinCo Operating Companies.
In connection with such transfer of assets and rights by QUALCOMM, SpinCo
will issue to QUALCOMM the SpinCo Shares and the Warrant. In addition, SpinCo
will agree to assume certain liabilities of QUALCOMM, including without
limitation (i) significant funding obligations with respect to the SpinCo
Operating Companies; (ii) QUALCOMM's obligations to manage operations of and
finance certain costs relating to ongoing systems and build-outs by the SpinCo
Operating Companies other than equipment financing obligations; and (iii)
certain obligations with respect to SpinCo's employees.
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The Separation and Distribution Agreement will provide that, subject to the
terms and conditions thereof, QUALCOMM and the Company will take all reasonable
steps necessary and appropriate to cause all conditions to the Distribution to
be satisfied, and to effect the Distribution on the Distribution Date. The
Separation and Distribution Agreement will also (i) include releases of claims
of each party to the other, except as expressly set forth in the Separation and
Distribution Agreement, (ii) provide for the allocation of certain contingent
liabilities and (iii) provide the parties with certain indemnification rights
against each other.
SpinCo will also agree in the Separation and Distribution Agreement that,
until January 1, 2004, it will deploy only systems using cdmaOne. CdmaOne is the
original standard for fixed or mobile wireless telecommunications systems based
on or derived from QUALCOMM's CDMA technology and successor standards that
QUALCOMM has adopted. CdmaOne has been adopted as an industry standard by the
TIA and other recognized international standards bodies. For purposes of the
Separation and Distribution Agreement, cdmaOne also includes other CDMA systems
that are compatible with or employ the same physical layer as the original
cdmaOne and adopted by QUALCOMM, or that are compatible with the infrastructure
and subscriber equipment manufactured and sold by QUALCOMM (e.g., the
TIA/EIA/IS-95 digital cellular standard and ANSI JSTD-008 digital PCS standard
to be published).
The Company will also agree to invest only in companies using cdmaOne
systems, in connection with terrestrial wireless activities. Pursuant to the
Separation and Distribution Agreement, and subject to certain exceptions
QUALCOMM will have a non-exclusive, royalty-free license to any intellectual
property rights developed through SpinCo's use of CDMA technology. In addition,
pursuant to the Separation and Distribution Agreement, the Company will grant to
QUALCOMM a right of first refusal for a period of three (3) years with respect
to proposed transfers by SpinCo of interests in joint venture and equity
interests included in the SpinCo Business at the time of the Distribution,
subject to preexisting rights of other investors. SpinCo will further agree to
take an active role in the management of companies with which it has joint
venture or equity interests, subject to applicable laws, contractual
arrangements and other requirements. The parties will also agree, with certain
limited exceptions, that for a period of three (3) years following the
Distribution neither party will solicit or hire employees of the other.
CREDIT FACILITY
Prior to the Distribution, the Company will enter into the Credit Facility
with QUALCOMM, secured by substantially all of SpinCo's assets. The Credit
Facility will consist of two sub-facilities. The Working Capital Facility will
enable SpinCo to borrow up to $25 million from QUALCOMM, subject to the terms
thereof. The proceeds from the Working Capital Facility may be used by SpinCo
solely to meet the normal working capital and operating expenses of SpinCo,
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 SpinCo to borrow up to $225 million from QUALCOMM,
subject to the terms thereof. The proceeds from the Investment Capital Facility
may be used by SpinCo solely to meet certain equity and debt funding obligations
of SpinCo.
Amounts borrowed under the Credit Facility will be due and payable eight
years following the Distribution Date. QUALCOMM will have a first priority
security interest in substantially all of the assets of SpinCo 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 2003;
and prior to such time, accrued interest shall be added to the principal amount
outstanding.
The Credit Facility will require the Company to, among other things,
achieve and maintain certain financial ratios. The Credit Facility will also
contain financial 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, make certain sales of assets, create, incur or
permit the existence of certain liens or pay dividends. In addition, the Credit
Facility will permit uses of funds only for specified purposes, restricts the
nature and breadth of the Company's joint venture and equity interests, requires
the Company's affiliates to use
30
<PAGE> 36
QUALCOMM's cdmaOne or certain other technologies, and will impose other
restrictions on the operation of the Company's business.
MASTER AGREEMENT REGARDING EQUIPMENT PROCUREMENT
The Master Agreement Regarding Equipment Procurement (the "Equipment
Agreement") will set forth certain obligations of SpinCo and QUALCOMM with
respect to the purchase and sale of certain terrestrial-based CDMA
infrastructure and subscriber equipment. Pursuant to the Equipment Agreement,
SpinCo will agree that: (i) SpinCo will purchase from QUALCOMM not less 50% of
SpinCo'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 SpinCo 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 SpinCo has not
previously invested (a "U.S. Operator"), SpinCo shall cause each such U.S.
Operator to enter into an equipment purchase 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 SpinCo in a U.S. Operator which is made after
the fourth anniversary of the Distribution Date, SpinCo shall exercise its
commercially reasonable efforts to cause the U.S. Operator to enter into an
equipment purchase 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. Such obligations shall be imposed upon
SpinCo for such infrastructure and subscriber equipment so long as QUALCOMM's
bid for such equipment is not greater than 110% of the lowest competing bid, and
QUALCOMM provides competitive features and financing and other terms and
conditions; provided, however, that once QUALCOMM has been awarded contracts for
an aggregate $250 million of infrastructure or subscriber equipment (calculated
separately), the 110% criterion shall be lowered to 100% for subsequent
purchases of such equipment as the volume for such category of equipment 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 SpinCo has received an aggregate
$60 million of debt or equity financing (by parties other than QUALCOMM), SpinCo
shall cause each wireless telecommunication operating entity operating outside
the United States in which SpinCo has not previously invested (a "Non-U.S.
Operator") in which SpinCo has made a direct or indirect investment to enter
into an equipment purchase agreement with QUALCOMM which shall provide that such
Non-U.S. Operator shall purchase from QUALCOMM not less than 50% of such
Non-U.S. Operators' requirements for infrastructure and subscriber equipment
during the five year period commencing on the date of such investment. With
respect to any Non-U.S. Operators in which SpinCo makes a direct or indirect
investment following the applicable period, SpinCo shall use commercially
reasonable efforts to cause such Non-U.S. Operator to purchase infrastructure
and subscriber equipment from QUALCOMM. The obligations of all such Non-U.S.
Operators shall be subject to QUALCOMM providing competitive prices, features
and financing, and other terms and conditions. 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.
INTERIM SERVICES AGREEMENT
The Company and QUALCOMM will enter into an Interim Services Agreement
prior to the Distribution Date (the "Interim Services Agreement"), governing the
provision by each to the other, on an interim basis, of certain data processing
and telecommunications services (including voice telecommunications and data
transmission) and certain corporate support services (including accounting,
financial management, tax, payroll, stockholder, governmental and public
relations, legal, human resources administration, procurement, real estate
management and other administrative functions), each as specified and on the
terms set forth therein. Specified charges for such services will generally be
intended to allow the providing company to recover the fully allocated costs of
providing the services, plus all out-of-pocket costs and expenses, but
31
<PAGE> 37
without any profit. These interim services are not expected to extend beyond one
year following the Distribution Date.
EMPLOYEE BENEFITS AGREEMENT
The Employee Benefits Agreement (the "Employee Benefits Agreement") will
govern the employee benefit obligations of the Company, including both
compensation and benefits, with respect to employees assigned to the Company as
of the Distribution Date. Pursuant to the Employee Benefits Agreement, the
Company will assume and agree to pay, perform, fulfill and discharge, in
accordance with their respective terms, all Liabilities (as defined therein) to,
or relating to, former employees of QUALCOMM or its affiliates who will be
employed by the Company. With respect to stock plans, SpinCo will have in place
its 1998 Equity Incentive Plan and 1998 Non-Employee Directors' Stock Option
Plan, each of which are described in this Information Statement. SpinCo will
also adopt a 401(k) plan that will be substantially similar to QUALCOMM's, to
which certain assets will be transferred from QUALCOMM's. Otherwise, effective
immediately after the Distribution, the Company will have in effect its own
employee benefit plans, which generally will be the same as QUALCOMM's plans as
in effect at that time.
TAX AGREEMENT
The Tax Agreement generally will require QUALCOMM to pay, and indemnify
SpinCo 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 SpinCo and
against which SpinCo will indemnify QUALCOMM: (i) all United States federal,
state, local and foreign taxes relating to SpinCo and its U.S. subsidiaries for
periods after the Distribution; (ii) all United States federal, state, local and
foreign taxes relating to SpinCo'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, SpinCo or any
of its subsidiaries that cause adverse tax consequences to QUALCOMM, SpinCo or
their respective subsidiaries with respect to the Distribution or the
transactions related thereto; provided, however, that under certain limited
circumstances SpinCo's indemnification obligation described in this subparagraph
(iii) may be reduced.
The Tax Agreement will further provide for cooperation with respect to
certain tax matters, the exchange of information and retention of records that
may affect the tax liability of either party.
CONSULTING AGREEMENTS
Prior to the Distribution Date, the executive officers and certain other
employees of SpinCo who have been QUALCOMM employees may enter into consulting
arrangements related to their respective areas of expertise with QUALCOMM for a
term of generally one to two years in order to facilitate the completion of
ongoing projects and to provide QUALCOMM with the benefit of their expertise for
the term of the arrangement. The Company does not expect that such consulting
arrangements will interfere with the ability of such officers and other
employees to perform all their responsibilities to SpinCo.
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<PAGE> 38
CAPITALIZATION
(IN THOUSANDS)
The following table sets forth, as of February 28, 1998, the Company's
historical capitalization and pro forma capitalization as if the Distribution
occurred as of that date. This data should be read in conjunction with the pro
forma balance sheet and the introduction to the pro forma financial statements
appearing elsewhere in this Information Statement. The pro forma information may
not reflect the capitalization of the Company in the future or as it would have
been had the Company been a separate, independent company on February 28, 1998.
Assumptions regarding the number of shares of SpinCo Common Stock may not
reflect the actual number of shares at the Distribution Date. See "Pro Forma
Financial Statements."
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1998
------------------------
HISTORICAL PRO FORMA
---------- ----------
<S> <C> <C>
Credit facility(1).......................................... $ -- $ --
-------- --------
Stockholder's equity:
Stockholder's investment.................................. 63,184 --
Deficit accumulated during the development stage(2)....... (12,546) --
Common stock(3)........................................... -- 1,734
Additional paid-in-capital(4)............................. -- 249,824
Cumulative translation adjustment......................... (1,774) (1,774)
-------- --------
Total stockholder's equity................................ 48,864 249,784
-------- --------
Total capitalization...................................... $ 48,864 $249,784
======== ========
</TABLE>
(1) QUALCOMM will provide the Company with the Credit Facility. A $25 million
Working Capital Facility and a $225 million Investment Capital Facility are
available under the Credit Facility for working capital and investment
capital purposes, respectively. The facility will be payable eight years
following the Distribution Date. The loan will bear interest at a variable
rate equal to LIBOR plus 5.25% per annum. Interest will accrue quarterly
with cash interest payments beginning September 2003. No amounts are
anticipated to be outstanding as of the Distribution Date.
(2) For the combined historical financial statements, the Company presents an
accumulated deficit since September 1, 1995 (inception) to highlight that
the Company is in the development stage. However, upon the date of the
Distribution, the Company's deficit accumulated during the development stage
prior to the Distribution will be eliminated, and the Company will begin its
accumulation of losses as a legally independent company.
(3) Based on each holder of QUALCOMM Common Stock receiving a dividend of one
share of SpinCo Common Stock for every four shares of QUALCOMM Common Stock,
the numbers of shares of SpinCo Common Stock outstanding as of the
Distribution Date is anticipated to be 17,338,858 based on QUALCOMM common
stock outstanding as of June 18, 1998. Such shares reflect the expected
issuance upon the distribution of one of the Company's shares of common
stock for every four shares of QUALCOMM common stock outstanding. See Note 1
of Combined Financial Statements.
(4) Reflects the contribution of net assets by QUALCOMM to the Company,
including $223 million in investments in wireless operating companies.
33
<PAGE> 39
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 February 28, 1998 and for the six months then ended and as
of August 31, 1997 and for the year then ended included elsewhere in this
Information Statement, adjusted to give effect to the Distribution. The
Unaudited Pro Forma Statements of Operations for the six months ended February
28, 1998 and the year ended August 31, 1997 gives effect to the Distribution as
if it had occurred as of September 1, 1996 and the Unaudited Pro Forma Balance
Sheet gives effect to the Distribution as if it had occurred as of February 28,
1998. The Distribution and the related adjustments are described in the
accompanying notes. The Pro Forma Financial Statements are based upon available
information and certain assumptions that management believes are reasonable. The
Pro Forma Financial Statements do not purport to represent what the Company's
results of operations or financial condition would actually have been had the
Distribution in fact occurred on such dates or to project the Company's results
of operations or financial condition for any future period or date. The Pro
Forma Financial Statements should be read in conjunction with the historical
combined financial statements of the Company included elsewhere in this
Information Statement and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Pro Forma Financial Statements assume the completion of the
transactions contemplated by the Distribution Agreement and the agreements to be
entered into pursuant to the Distribution Agreement including the completion of
all the asset transfers and contract assignments contemplated thereby.
Assumptions regarding the number of shares of SpinCo Common Stock may not
reflect the actual numbers at the Distribution Date.
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28, 1998
-----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Equity in net losses of wireless operating
companies.......................................... $ (797) $ -- $ (797)
General and administrative expenses.................. (10,142) (5,631)(1) (15,773)
----------- -------- -----------
Loss before income taxes............................. (10,939) (5,631) (16,570)
Income tax expense................................... -- -- --
----------- -------- -----------
Net loss............................................. $ (10,939) $ (5,631) $ (16,570)
=========== ======== ===========
Unaudited pro forma basic and diluted net loss per
common share(2).................................... $ (0.63) $ (0.96)
=========== ===========
Shares used in computing unaudited pro forma basic
and diluted net loss per common share(2)........... 17,338,858 17,338,858
=========== ===========
</TABLE>
- - ---------------
(1) The pro forma adjustment to general and administrative expenses includes
additional expenses which would have been incurred by the Company, if it
were a separate stand alone entity, including incremental executive
compensation and fringe benefits, public relations, insurance, accounting
fees, public company,
34
<PAGE> 40
recruiting and other administrative expenses. The adjustment also reflects
assumed staffing levels that are consistent with the investment activity for
the period.
(2) The Company had no common shares outstanding during the first six months of
fiscal 1998. The pro forma net loss per common share was calculated by
dividing the net loss for the first six months of fiscal 1998 by the
17,338,858 expected shares of common stock of the Company to be issued upon
the Distribution based on QUALCOMM common shares outstanding as of June 18,
1998. Such shares reflect the expected issuance upon the Distribution of one
of the Company's shares of common stock for every four shares of QUALCOMM
common stock outstanding. See Note 1 of Combined Financial Statements.
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
-----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Equity in net earnings of wireless operating
companies.......................................... $ 167 $ -- $ 167
General and administrative expenses.................. (1,378) (5,269)(1) (6,647)
----------- ------- -----------
Loss before income taxes............................. (1,211) (5,269) (6,480)
Income tax expense................................... -- -- --
----------- ------- -----------
Net loss............................................. $ (1,211) $(5,269) $ (6,480)
=========== ======= ===========
Unaudited pro forma basic and diluted net loss per
common share(2).................................... $ (0.07) $ (0.37)
=========== ===========
Shares used in computing unaudited pro forma basic
and diluted net loss per common share(2)........... 17,338,858 17,338,858
=========== ===========
</TABLE>
- - ---------------
(1) The pro forma adjustment to general and administrative expenses includes
additional expenses which would have been incurred by the Company, if it
were a separate stand alone entity, including incremental executive
compensation and fringe benefits, public relations, insurance, accounting
fees, public company, recruiting and other administrative expenses. The
adjustment reflects assumed staffing levels that are consistent with the
investment activity for the period.
(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 17,338,858 expected shares of common stock of the Company to be issued
upon the Distribution based on QUALCOMM common shares outstanding as of June
18, 1998. Such shares reflect the expected issuance upon the Distribution of
one of the Company's shares of common stock for every four shares of
QUALCOMM common stock outstanding. See Note 1 of Combined Financial
Statements.
35
<PAGE> 41
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1998
-------------------------------------------
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ -- $ 10,000(2) $ 10,000
Other current assets................................. -- 450(3) 450
-------- -------- --------
Total current assets................................... -- 10,450 10,450
Investments in wireless operating companies............ 50,831 172,169(4) 223,000
Convertible loans receivable........................... -- 35,000(5) 35,000
Other assets........................................... -- 1,297(6) 1,297
-------- -------- --------
Total assets................................. $ 50,831 $218,916 $269,747
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 1,967 $ (1,967)(7) $ --
Other current liabilities............................ -- 2,963(8) 2,963
-------- -------- --------
Total current liabilities.............................. 1,967 996 2,963
Loans payable to banks................................. -- 17,000(5) 17,000
Long-term debt......................................... -- --(9) --
-------- -------- --------
Total liabilities............................ 1,967 17,996 19,963
-------- -------- --------
COMMITMENTS(10)
STOCKHOLDERS' EQUITY:
Stockholder's investment............................... 63,184 (63,184)(11) --
Common stock........................................... -- 1,734(12) 1,734
Additional paid-in-capital............................. -- 249,824(11) 249,824
Deficit accumulated during the development stage....... (12,546) 12,546(13) --
Cumulative translation adjustment...................... (1,774) -- (1,774)
-------- -------- --------
Total stockholders' equity................... 48,864 200,920 249,784
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 50,831 $218,916 $269,747
======== ======== ========
</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 SpinCo common stock
to QUALCOMM stockholders.
(2) Reflects the transfer of $10 million in cash from QUALCOMM to SpinCo prior
to the Distribution Date.
(3) Reflects estimated prepaid rent transferred by QUALCOMM prior to the
Distribution Date.
(4) Reflects investments expected to be made in the following companies prior
to the Distribution Date: Chase Telecommunications, Inc., Telesystems of
Ukraine, Pegaso, S.A. de C.V., Chilesat Telefonia Personal, S.A.,
QUALCOMMTel/Metrosvyaz and OzPhone. Such investments will be transferred by
QUALCOMM to SpinCo prior to the Distribution Date.
(5) Reflects loans to be issued to Chilesat PCS which are convertible into
common shares of Chilesat PCS if the loans are not repaid by January 31,
1999 and loans payable to banks to be incurred in connection with the
partial funding of the loans receivable.
36
<PAGE> 42
(6) Reflects executive retirement plan assets and computer equipment which will
be contributed by QUALCOMM to SpinCo 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 executive retirement plan liabilities, vacation
and sick accruals and accrued bonuses from QUALCOMM to SpinCo prior to the
Distribution Date.
(9) QUALCOMM will provide the Company with a senior secured multiple drawdown
credit facility. A $25 million Working Capital Facility and a $225 million
Investment Capital Facility are available under the Credit Facility for
working capital and investment capital purposes, respectively. The facility
will be payable eight years following the Distribution Date. The loan will
bear interest at a variable rate of LIBOR plus 5.25%. Interest will accrue
quarterly with cash interest payments beginning September 2003. No amounts
are anticipated to be outstanding as of the Distribution Date.
(10) The Company is expected to have $102 million in outstanding non-cancelable
equity commitments to its investments in wireless operating companies as of
the Distribution Date.
(11) Reflects the distribution of all outstanding shares of SpinCo common stock
to QUALCOMM stockholders.
(12) Reflects the distribution of 17,338,858 SpinCo shares to QUALCOMM
shareholders at $0.0001 per share par value based on QUALCOMM Shares
outstanding as of June 18, 1998. Such shares reflect the expected issuance
upon the Distribution of one of the Company's shares of Common Stock for
every four shares of QUALCOMM Common Stock outstanding. See Note 1 of
Combined Financial Statements.
(13) For the combined historical financial statements, the Company presents an
accumulated deficit since September 1, 1995 (inception) to highlight that
the Company is in the development stage. However, upon the date of the
Distribution, the Company's deficit accumulated during the development
stage prior to the Distribution will be eliminated, and the Company will
begin its accumulation of losses as a legally independent company.
37
<PAGE> 43
SELECTED HISTORICAL COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected historical combined financial data of the Company
should be read in conjunction with the historical combined financial statements
and notes thereto included elsewhere in this Information Statement. The selected
combined historical financial data relates to the SpinCo Business as it was
operated by QUALCOMM. The following selected historical combined financial data
are derived from the historical combined financial statements of the Company.
The annual historical combined financial information has been adjusted for those
parts of the infrastructure business unit which are to remain under QUALCOMM
ownership and management after the Distribution. The selected historical
combined financial data that relate to the two year period ended August 31, 1997
have been derived from audited historical combined financial statements included
in this Information Statement. The selected historical combined financial data
that relate to the six months ended February 28, 1998 and 1997 and for the
period from September 1, 1995 (inception) to February 28, 1998 have been derived
from unaudited historical combined financial statements included in this
Information Statement.
The historical combined financial data of the Company may not reflect the
results of operations or financial position that would have been achieved had
the Company been a separate, independent company for the years presented.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM SEPTEMBER 1, SIX MONTHS ENDED FEBRUARY
1995 (INCEPTION) 28, YEARS ENDED AUGUST 31,
TO FEBRUARY 28, --------------------------- ----------------------
1998 1998 1997 1997 1996
------------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Equity in net (losses) earnings of
wireless operating companies....... $ (630) $ (797) $ -- $ 167 $ --
General and administrative
expenses........................... (11,916) (10,142) (546) (1,378) (396)
-------- ----------- ----- ----------- -----
Loss before income taxes............. (12,546) (10,939) (546) (1,211) (396)
Income tax expense................... -- -- -- -- --
-------- ----------- ----- ----------- -----
Net loss............................. $(12,546) $ (10,939) $(546) $ (1,211) $(396)
======== =========== ===== =========== =====
Unaudited pro forma basic and diluted
net loss per common share.......... $ (0.63) $ (0.07)
=========== ===========
Shares used in computing unaudited
pro forma basic and diluted net
loss per common share.............. 17,338,858 17,338,858
=========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital...................... $ (1,967) $ (1,967) $ (282) $(111)
Total assets......................... 50,831 50,831 54,884 --
Stockholder's equity................. 48,864 48,864 54,602 (111)
</TABLE>
38
<PAGE> 44
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
SpinCo'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
SpinCo has operations.
The Company and its operating companies are in the early stages of
development and are subject to the risks inherent in the establishment of a new
business enterprise. The Company's results of operations must be considered in
light of the risks, expenses and difficulties encountered by companies at this
stage of development, particularly companies in new and rapidly evolving markets
and companies experiencing rapid growth. It is expected that the launch,
development and expansion of the Company's wireless services over the next
several years, as well as the pursuit of additional telecommunications
opportunities, will require significant capital. The Company's future growth and
results of operations will therefore depend upon its ability to raise sufficient
funds to meet its capital requirements.
The entities in which the Company has joint venture and equity interests
have not generated any revenues from operations, and the Company has no other
current sources of income. Costs associated with the construction and testing of
the wireless networks are being capitalized. Accordingly, the Company's
proportionate share of the net losses of such entities accounted for under the
equity method of accounting to date has been limited.
Upon commercial launch of operations, revenues of the operating companies
will be derived primarily from fees and usage charges. Other sources of revenue
may include equipment sales and activation fees. Wireless telecommunications
projects usually experience significant losses and negative cash flows in their
initial years of operation. Such projects require substantial capital
expenditures for the construction of their networks, license fees and license
acquisition costs, some of which are payable upon issuance of the license, and
significant marketing and other expenses needed to start the business. As such,
the Company expects its
39
<PAGE> 45
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
SIX MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO SIX MONTHS ENDED FEBRUARY 28,
1997
Equity in net losses of wireless operating companies for the first six
months of fiscal 1998 was $0.8 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 consist 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 February 28, 1998, there
was no depreciation of network equipment and no amortization of licenses as
service had not been launched commercially. Through February 28, 1997, the
Company's investments were accounted for under the cost method and, accordingly,
there was no equity activity during the six months then ended.
General and administrative expenses were $10.1 million for the first six
months of fiscal 1998, compared to $0.5 million for the first six months of
fiscal 1997. The dollar increase was due principally to increases in business
development activity, relating to projects to create wireless operating
companies in Mexico and Russia. Such development activity resulted in
significantly higher professional and consulting expenses and an increase in
QUALCOMM corporate overhead allocated to the Company. 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 six months ended
February 28, 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
$0.2 million, which represents the Company's share of the net income of wireless
operating companies in which it holds an ownership interest accounted for under
the equity method of accounting. The net earnings represent the excess of
interest income from the entities' temporary investment of their capital funds
prior to being expended for network build-out, offset by costs incurred prior to
service launch during the network build-out and testing phases. Such costs
include 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. This increase was due principally to
increases in business development activity relating to projects to create
wireless operating companies in Chile and Ukraine. 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.
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<PAGE> 46
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to have significant future capital requirements over
the next several years in relation to existing operations, development projects
and additional new projects. Prior to the Distribution, the Company's cash
requirements have been funded by QUALCOMM. The proceeds were primarily used to
fund the Company's joint venture and equity interests in wireless operating
companies, including the expenses incurred in seeking and evaluating new
business opportunities and to fund corporate overhead expenses as allocated to
the Company by QUALCOMM.
As of February 28, 1998, the Company had no outstanding long-term
indebtedness and had no cash balances. To provide liquidity, the Company expects
to receive $10 million in cash from QUALCOMM in connection with the Separation
and to enter into a credit agreement with QUALCOMM for a secured Credit Facility
in an aggregate amount of $250 million. The Company expects to meet its 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, 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 debt or equity financing. There can be no
assurances such additional 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 after the
Distribution. The degree to which the Company is leveraged could have important
consequences, including: (i) the Company's ability to obtain additional
financing in the future may be impaired, (ii) a substantial portion of the
Company's future cash flows from operations may be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
for operations, (iii) the Company may be hindered in its ability to adjust
rapidly to changing market conditions and (iv) the Company's substantial degree
of leverage may make it more vulnerable in the event of a downturn in general
economic conditions or in its business. There can be no assurance that the
Company's future cash flows will be sufficient to meet the Company's debt
service requirements or that the Company will be able to refinance any of its
indebtedness at maturity.
Operating Activities
In the first six months of fiscal 1998, $6.8 million in cash was used in
operating activities, compared to $0.5 million used in operating activities in
the first six 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 $61 million 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 $3.4 million for the first six months
of fiscal 1998 and $4.0 million for the corresponding period in fiscal 1997. The
1998 activity results from continuing investment of $1.7 million into the
Company's Ukraine project, Telesystems of Ukraine ("TOU"), a Ukrainian limited
liability company. Also, the Company funded a $1.7 million loan receivable to a
potential business combination acquiree. Investment activity in the
corresponding period for fiscal 1997 represented the Company's $4.0 million
purchase of Series B Common Stock in Chase Telecommunications, Inc. The Company
is expected to have $102 million in outstanding non-cancelable equity
commitments to its
41
<PAGE> 47
investments in wireless operating companies as of the date 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 $54.7 million in fiscal
1997. There were no investments in fiscal 1996. Significant components in fiscal
1997 consisted of the purchase of $42 million of voting preferred shares
representing a 50% ownership interest in a corporate joint venture, Chilesat
PCS, the investment of $8.7 million for a 49% ownership interest in and funding
of a joint investment activity with TOU, and the investment of $4 million in
Chase Telecommunications Inc. in which the Company holds less than a 6%
ownership interest.
Financing Activities
Cash provided by financing activities during the first six months of fiscal
1998 and 1997 amounted to $10.1 million and $4.5 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 $56 million in fiscal 1997 compared to $0.3
million in fiscal 1996. The investment represents QUALCOMM's funding of the
operating and investing cash used by the Company.
QUALCOMM Credit Facility
In connection with the Distribution, the Company is expected enter into a
$250 million secured Credit Facility pursuant to which it will have access to
funds from QUALCOMM. The Credit Facility will consist of two sub-facilities. The
first sub-facility (the "Working Capital Facility") will enable SpinCo to borrow
up to $25 million from QUALCOMM, subject to the terms thereof. The proceeds from
the Working Capital Facility may be used by SpinCo solely to meet the normal
working capital and operating expenses of SpinCo, 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 SpinCo to borrow up to $225 million
from QUALCOMM, subject to the terms thereof. The proceeds from the Investment
Capital Facility may be used by SpinCo solely to meet the project funding
obligations of SpinCo as of the Distribution Date with respect to the operating
companies in which SpinCo holds an equity interest. The Credit Facility will
contain financial 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. More
specifically, the Credit Facility will permit uses of funds only for specified
purposes consistent with approved business plans, restrict the nature and
breadth of the Company's investments, require the Company's affiliates to use
QUALCOMM's cdmaOne or other approved technologies, and impose other restrictions
peculiar to the Company's business. The restrictions imposed by QUALCOMM related
to the Credit Facility could have a material adverse effect on the Company.
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 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
42
<PAGE> 48
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 functions 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, for example Ukraine, significant devaluations
relative to the United States dollars have occurred in the past 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. Chile and Ukraine have,
in the past, 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
the inflation on their operations. The Company believes risks associated with
deflation have recently increased, particularly given recent deflation in
certain parts of Asia. Significant deflation could have a material adverse
effect on the Company's revenues, profit and overall performance.
While system equipment costs may increase over time as a result of
inflation, the Company expects that the cost of subscriber equipment will
decrease over time as volume increases, 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.
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<PAGE> 49
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.
44
<PAGE> 50
BUSINESS
INTRODUCTION
QUALCOMM SpinCo, Inc. ("SpinCo" 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, Ukraine, 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. SpinCo
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.
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. 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.
The current form of CdmaOne has been adopted as an industry standard by the TIA
and other recognized international standards bodies.
The Company's senior management has many years experience in the wireless
telecommunications industry. A number of the Company's senior management members
have been members of QUALCOMM's senior management and joined the Company from
QUALCOMM in connection with the formation of the Company, including Harvey P.
White, currently Vice Chairman of the Board of QUALCOMM and the Company's
President, Chief Executive Officer and Chairman of the Board; Thomas J. Bernard,
currently Senior Vice President of QUALCOMM, who is the Company's Executive Vice
President; and James E. Hoffmann, currently Vice President, Legal Counsel of
QUALCOMM, who is the Company's Senior Vice President and General Counsel. SpinCo
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
SpinCo's operating entities, among other factors, will position SpinCo 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.
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<PAGE> 51
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 SpinCo, SpinCo believes
that it has a significant advantage in being already established in the business
of managing, supporting and/or investing in CDMA wireless networks that are
being built out or are in the planning stages of such build out. SpinCo
anticipates that there will be an increasingly large number of opportunities
where new licensees or expansions of existing licensees will seek help from
SpinCo 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.
SpinCo intends to continue its strategy of entering into joint ventures to
access new markets and opportunities. SpinCo expects that it will selectively
focus on a limited number of high-growth opportunities, taking into account its
management and capital resources. SpinCo plans to focus its operations on areas
where the potential to provide value added services and thereby launch
successful wireless ventures is higher. SpinCo 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.
SpinCo 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. SpinCo 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. SpinCo will, generally, plan to have a significant
initial ownership and to be active in the management of all the systems in which
has an equity interest, consistent with applicable laws, contractual
arrangements and other requirements, even those where the ownership percentage
is relatively small. In addition, SpinCo'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 SpinCo 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 SpinCo. It
is anticipated that sales of partial interests in any operation should not
affect SpinCo's management or operational role with that entity.
SpinCo'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, SpinCo'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. SpinCo 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.
SpinCo 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, SpinCo'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
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<PAGE> 52
and operate wireless systems in Russia. SpinCo'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 , 1998, Chilesat PCS had
approximately subscribers after only months of operation. In Australia,
SpinCo's wholly owned subsidiary owns a license to operate wireless
telecommunications in eight regions covering approximately 5.4 million potential
customers ("POPs"). SpinCo's Ukrainian venture, Telesystems of Ukraine, is
scheduled to commence commercial operation in Kiev in August 1998 and is
anticipated to follow with national coverage.
The following table summarizes SpinCo's current joint ventures and other
interests and provides certain information relating thereto:
<TABLE>
<CAPTION>
ACTUAL/
REAL EXPECTED
EQUITY GDP PER LICENSED EQUITY TOTAL EQUITY COMMERCIAL
INVESTMENT LOCATION INTEREST CAPITA POPS POPS SUBSCRIBERS SUBSCRIBERS LAUNCH
---------- ---------- -------- ------- -------- ------ ----------- ----------- ----------
(US$) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAS
Pegaso S.A. de C.V.(1)....... Mexico 49%(2) $2,947 99.0 48.5(2) N/A N/A Dec 98
Chase Telecommunications,
Inc........................ Tennessee,
U.S.A. 5.8% 27,175(3) 6.3 0.3 N/A N/A Sep 98
Chilesat Telefonia Personal,
S.A.(4).................... Chile 50% 3,229 14.9 7.5 TBD at TBD at Aug 98
Filing Filing
EASTERN EUROPE
Telesystems of Ukraine....... Ukraine 49% 2,853 51.8 25.4 N/A N/A Aug 98
QUALCOMMTel/Metrosvyaz....... Russia 70%(5) 2,128(3) 20.9(6) 3.7(6) N/A N/A Dec 97 (7)
OTHER MARKETS
Oz Phone..................... Australia 100% 20,062(3) 5.4 5.4 N/A N/A Mar 99
</TABLE>
- - ---------------
(1) SpinCo's holdings are through a wholly owned subsidiary Qualcomm PCS
Mexico, Inc. which in turn owns forty-nine percent (49%) of Pegaso S.A. de
C.V.. Pegaso 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) SpinCo's interest in Pegaso is expected to be diluted to no less than a 25%
equity interest through new capital raising committed prior to the date of
this Information Statement, and this will reduce the equity POPs to 24.8
million.
(3) Real GDP (Gross Domestic Product adjusted for inflation) is stated for the
country as a whole, although existing licenses cover only a portion of the
country.
(4) SpinCo's holdings are through a wholly owned subsidiary INVERSIONES
QUALCOMM CHILE S.A. which in turn owns fifty percent (50%) of Chilesat.
(5) SpinCo's holdings are through a seventy percent (70%) owned subsidiary
QUALCOMM Telecommunications Ltd. which in turn owns fifty percent (50%) of
Metrosvyaz Limited which in turn will own fifty percent (50%)of the
operating joint ventures.
(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
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<PAGE> 53
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.
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 SpinCo 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.
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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, SpinCo is committed to managing
networks utilizing CDMA technology and has established a relationship with
QUALCOMM that provides a framework for obtaining and financing infrastructure
and subscriber equipment.
SpinCo's Markets. The following information relates to certain of SpinCo'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 and Ukraine. 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. 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. Wireless penetration was only 0.13% in Ukraine at the end of 1997.
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
SpinCo'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:
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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 SpinCo's contributions could most likely result in added value and
contributions to an enterprise that captures significant market share. SpinCo's
joint ventures and equity interests in Russia and Ukraine 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. SpinCo'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.
Actively Participate in Operating Company Management. The Company intends
to exercise significant management influence and oversight over its joint
ventures and equity interests. SpinCo 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, SpinCo secures the right to appoint or
nominate management personnel. SpinCo also generally seeks representation on the
Boards of Directors of its operating companies. Moreover, SpinCo 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 SpinCo joint ventures. SpinCo believes the experience
and expertise of its management team enables it to add significant value in its
relationships with operating companies.
Leverage Strategic Alliances. SpinCo has developed strong relationships
with telecommunications and other companies including those with which it has
jointly invested. In securing an investment partner, SpinCo seeks an entity that
can provide familiarity with local markets, or an ability to facilitate
development in a particular market, or other necessary features of a successful
network-building enterprise. The Company intends to cultivate its existing
relationship with its co-investors in various markets in order that each
investor can contribute to the success of a particular operating company, in the
areas of operations, management, technology and others. The Company also intends
to continue to search for strategic partners with whom it can invest in new
enterprises supported by a wide range of expertise and available resources. The
Company seeks to ensure that its strategic alliances enable it to better prepare
and equip its operating companies for successful development.
Leverage QUALCOMM Relationship. The Company's operating companies are
comprised principally of joint ventures in which QUALCOMM became a partner
during the past two years. Following the Distribution, the Company will have a
close relationship with QUALCOMM that it believes helps position the Company as
an attractive partner that can help an operating company succeed. SpinCo
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. SpinCo 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 SpinCo Operating Companies under equipment and
other agreements. QUALCOMM will commit approximately $250 million to the Company
by way of the Credit Facility. SpinCo and QUALCOMM will also enter into the
Equipment Agreement pursuant to which QUALCOMM will have the right to provide
its CDMA equipment to certain of SpinCo's existing and future operating
companies. QUALCOMM also has existing contracts to supply and finance equipment,
and other contractual relationships, with SpinCo'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.
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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.
SPINCO OPERATING COMPANIES
SpinCo's operating companies consist of joint ventures and other entities
around the world. The joint ventures are described below in order of their size
and the perceived opportunity for SpinCo to carry out its strategies.
PEGASO, S.A. DE C.V. AND PEGASO S.A. DE C.V. Y SISTEMAS, S.A. DE C.V.,
MEXICO
General. The Company holds an interest in Pegaso, 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 acquired nationwide PCS licenses in
the 1.9GHz frequency bands in Mexico at a price of US$3.25 per POP. 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 early 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 SpinCo's Mexico operation
a blueprint for future SpinCo 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. SpinCo 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 capital 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 S.A. de
C.V. y Servicios, S.A. de C.V. ("Pegaso S.A. de C.V.") and Grupo Televisa S.A.
("Televisa") (collectively the "Consortium") have an interest in PEGASO.
Televisa is the largest media company in the Spanish-speaking world and is a
major participant in the international entertainment business. SpinCo management
believes Pegaso S.A. de C.V.' strong financing resources and access to Televisa,
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.
SpinCo Rights and Interests. SpinCo currently owns a 49% interest in PEGASO
and has committed to invest $100 million of the $400 million of capital
committed by all members of the joint venture. Once all committed capital has
been contributed to this venture, SpinCo, Pegaso S.A. de C.V. and Televisa will
hold approximately 27%, 28% and 20% of the voting shares, respectively. Under
the joint venture agreement with PEGASO, SpinCo has a contractual right to elect
two of nine directors for so long as SpinCo owns 15% or
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more of the equity. Such agreement also establishes significant supermajority
rights that are expected to give SpinCo significant control over the actions of
PEGASO. SpinCo 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 SpinCo, have obtained commitments for
equity capital of approximately $400 million, including SpinCo's $100 million
(the final $80 million of which is expected to be contributed on or before
September 30, 1998). In addition, the members of the joint venture are working
with investment bankers to complete an approximately $250 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 with respect to
possible assistance from a major international wireless operator in the initial
startup 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, it
has acquired an additional nationwide 10MHz PCS license. Iusacell is the second
largest cellular operator in Mexico, covering four regions, including Mexico
City and Guadalajara. However, even after acquiring two 10MHz PCS licenses at
the auctions, Iusacell does not have licenses in regions II, III and V (VIII for
cellular license) such that it would have a nationwide footprint. SPC purchased
a nationwide 30MHz PCS license. Midicell and Grupo Hermes have both purchased
PCS licenses, but do not hold such licenses in all nine regions. The other
existing cellular operators, primarily those bordering the U.S., are run by
operators significantly owned by Motorola.
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QUALCOMMTEL, RUSSIA
General. SpinCo holds a 70% interest in QUALCOMM Telecommunications Ltd.
("QUALCOMMTel"), which is a joint venture partner in Metrosvyaz, Limited
("Metrosvyaz"). Metrosvyaz was formed to develop joint ventures with local
Russian telecommunications operators (the "Joint Ventures") for the formation,
development, financing and operation of wireless local loop (fixed) telephone
service in the Russian Federation. Local operators are currently licensed to
operate wireless systems in Russia but generally are seeking technical and
financial partnerships to facilitate the implementation of such operations.
Metrosvyaz expects to fill this role by offering regional PTTs and other
licensed telecommunication operators a total solution, including financing, for
delivery of wireless telecommunication systems. Metrosvyaz expects to obtain
approximately 10 million new wireless local loop lines through the Metrosvyaz
Joint Ventures over a five-year period. There can be no assurance that
Metrosvyaz will successfully obtain such wireless local loop lines.
Six such Joint Ventures have been formed or are in the process of being
formed as of August , l998. Metrosvyaz owns 50% of each of such Joint
Ventures. Two of the Joint Ventures have begun offering CDMA wireless local loop
services as of August , 1998 with equipment provided by QUALCOMM prior to the
organization of the Joint Ventures. 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 and to provide long distance
and international telephony services on the basis of a commercial agency
agreement with Tass Loutch Telecom, a company organized under the laws of the
Russian Federation. Tass Loutch Telecom currently has leases in place to
transmit its long distance traffic. Tass Telecom has agreed to represent
QUALCOMM as its agent in connection with equipment sales to the Joint Ventures
and is being paid a commission on such sales.
In addition to its agreements with Tass Loutch to provide long distance
service, SpinCo and QUALCOMMTel are currently in negotiations to acquire a
controlling interest in affiliates of Transworld Communications, Inc., one of
two licensed operators for international long distance access in Russia. If the
acquisition is successful, Metrosvyaz expects to be able to also offer
international long distance access and thereby obtain revenue from the Joint
Ventures and others for international calling.
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 telecommunication authorities announced that they intend
to effect an increase of 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 real GDP per capita in 1997 was
$2,128. The cellular penetration was only 0.5% at the end in 1997 with very
little wireless local loop service.
Strategic Partners. The 50% of Metrosvyaz not owned by QUALCOMMTel is owned
by Tass Telecom, an affiliate of the ITAR TASS, the official news agency of the
Russian Federation. The 30% of QUALCOMMTel not owned by the Company is held by
Tiller International Limited ("Tiller"), a private investment company, with
telecommunications interests in Russia and significant contacts with Russian
telecommunications regulators and regional operators.
SpinCo Rights and Interests. SpinCo holds a 70% interest in QUALCOMMTel.
QUALCOMMTel owns a 50% interest in Metrosvyaz, organized in 1997 as a joint
venture with Tass Telecom. SpinCo has the right to elect four of seven directors
of QUALCOMMTel and to elect four of eight directors in Metrosvyaz with the
QUALCOMMTel directors carrying a "casting" or tie-breaking vote. Tass Telecom is
entitled to appoint three of the remaining directors of Metrosvyaz, with the
eighth director to be appointed jointly by both parties.
SpinCo intends to play a significant role in the operation of Metrosvyaz as
the implementation and roll-out of the Joint Venture companies is initiated.
SpinCo intends to provide oversight and direct support for services in areas
including marketing, distribution, customer care, billing and service
initiation. The expertise
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of SpinCo management will be applied (through Metrosvyaz) to assist the Joint
Venture operators in managing successful system launches.
Capital Requirements and Projected Investments. SpinCo and Tiller (by way
of a loan from QUALCOMM) are expected to each invest $3 million in QUALCOMMTel,
which in turn is expected to invest $3 million in Metrosvyaz. QUALCOMMTel and
SpinCo have agreed to be responsible for providing or procuring financing for
Metrosvyaz, on and subject to terms to be agreed and without the need for any
direct guarantee from Tass Telecom, up to an aggregate amount of $500 million to
be funded in stages, the first of which is a loan agreement for the provision of
up to $175 million. Metrosvyaz has agreed to purchase from QUALCOMM all of the
CDMA equipment necessary to implement the Joint Ventures. SpinCo expects to loan
Metrosvyaz approximately $13 million in 1999.
Metrosvyaz will require approximately $8 billion of capital over a ten year
period in order to provide service to the ten million lines targeted by
Metrosvyaz management.
Regulatory Environment. The Russian Ministry of Communications is
responsible for the 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 are occurring throughout the country. One
company, Svyazinvest, a partially state owned company with foreign investors,
controls a majority voting interest in Russia's 89 regional PTTs. CDMA is
currently only being used for wireless local loop in Russia, where CDMA has not
been licensed for mobility. The Company believes that CDMA will, in the future,
be made legal for mobility in the Russian Federation.
Competition. Most of the targeted operators with whom Metrosvyaz expects to
enter into Joint Ventures are the established, government-owned
telecommunication companies in the various regions. Competition with the Joint
Venture in many regions will be primarily with the wireline and cellular service
operated by the local partner of the Joint Venture. In some of the larger
cities, however, including Moscow and St. Petersburg, there is meaningful
competition from private operators.
TELESYSTEMS OF UKRAINE, UKRAINE
General. SpinCo holds a 49% participation interest in Telesystems of
Ukraine, a Ukrainian limited company ("TOU"). In April of 1997, TOU obtained a
license to construct, own, operate and maintain a CDMA wireless local loop and
mobile telecommunication systems throughout most of Ukraine. In March of 1998,
TOU obtained a national and international long distance license for the nine
major regions of Ukraine covering most of the 51 million POPs in that country.
TOU currently is in the process of deploying a wireless local loop and
mobile telecommunication systems in the Ukrainian capital city of Kiev. It is
currently estimated that TOU will commercially launch the system in Kiev in
August 1998. After successful commercial launch of the system in Kiev, TOU plans
to deploy systems in the balance of the country based on a schedule and funding
plan to be completed based on the success of the Kiev system. TOU intends to
offer subscribers wireless local loop services as well as mobile services within
each region of Ukraine. TOU is the first communications operator to provide CDMA
in Ukraine. In addition to providing wireless local loop and mobility service,
TOU is permitted under the terms of its national and international access
license to provide national and international long distance services.
Market Opportunity. Ukraine is the second largest of the former Soviet
countries and represents an attractive market for wireless telecommunication
services. The Ukrainian telecommunications market remains significantly
under-served by existing wireline and wireless operators. To improve the
telephone services in Ukraine, the Ukrainian government has established a
telecommunications program with a goal of increasing teledensity from 14.97% in
1993 to 30% by 2000. Ukraine's population of approximately 51 million people is
approximately 68% urban. The real GDP per capita in 1997 was $2,853 and is
declining. The wireless penetration was only 0.13% at the end in 1997.
Strategic Partners. The Company's partners include Rhuta-Farm, a Ukrainian
limited company ("Rhuta-Farm"), which holds a 41.1% participation interest in
TOU. Rhuta-Farm is engaged in the
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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. Currently, Rhuta-Farm and SpinCo
have material disagreements with respect to the operational strategy and system
implementation plans of TOU. See "Risk Factors -- General Risks -- Joint
Ventures."
SpinCo Rights and Interests. SpinCo has 49% of the voting rights of TOU,
though by contract SpinCo also has the right to elect the majority of TOU's
board of directors. SpinCo will also have the right to appoint many of the
operating officers of the company. SpinCo plays 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. SpinCo 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. The partners in TOU contributed
approximately $150,000 in equity to the venture. In addition, as of June 29,
1998, SpinCo 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 provides SpinCo 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 $35 million of equipment
financing and is expected to 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 and mobile telecommunication system in the 800 MHz
band. The MOC is responsible for the regulation and oversight of the
telecommunication sector, including wireline and wireless local loop operations.
The MOC supervises and audits the performance of each licensee's legal and
contractual obligations. The MOC also has general authority to issue regulations
for telecommunications operators, subject to such regulations being in
accordance with applicable law. The Ukrainian law requires that licensees
operating telecommunications systems issue a minimum of 51% of their equity (on
a fully diluted basis) to Ukrainian corporations or individuals. However, to
attract foreign investment, the Ukrainian Foreign Investment Laws allow foreign
investments in telecommunications companies pursuant to joint investment
agreements. Under this format, a Ukrainian partner can allocate up to 100% of
profits in a telecommunication venture to a foreign partner until the foreign
partner has been repaid its investment. SpinCo is proceeding 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.
CHILESAT TELEFONIA PERSONAL, S.A., CHILE
General. Chilesat Telefonia Personal, S.A. ("Chilesat PCS") is a joint
venture company in which SpinCo 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.
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The balance of the national network is expected to be completed not later than
September 1998. Chilesat PCS intends to be in commercial operation in July 1998
and to have approximately 25,000 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."
SpinCo Rights and Interests. SpinCo 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 SpinCo is entitled to
nominate the chief financial officer. SpinCo 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, SpinCo 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 SpinCo'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, SpinCo 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 SpinCo 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 SpinCo.
The approximately $35 million of loans from QUALCOMM will be convertible
into common equity that would provide control of Chilesat PCS to SpinCo
following the conversion. This conversion is available to SpinCo 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,
SpinCo 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
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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 SpinCo
opportunities, Chase involves an investment by SpinCo of a relatively small
amount of equity capital at this time and does not entail any significant
involvement by SpinCo in the management of Chase. Limited involvement is
required in this instance by the FCC regulations relating to ownership and
control of C block PCS license holders.
Chase has begun designing and building the cdmaOne wireless
telecommunication network that will serve its licensed areas. It has completed
its system design and base station site selection process on a majority of its
Chattanooga base station sites and has commenced network construction. Chase is
expected to complete its Chattanooga build-out in time to launch service in the
fourth quarter of 1998, which is expected to make Chase the first PCS provider
in the Chattanooga area. Chase has also begun design of its Nashville, Knoxville
and Memphis networks and expects to launch services in these metropolitan areas
in the first half of 1999. Chase acquired its PCS licenses through the FCC C
Block spectrum auctions in 1996 and has benefited from both favorable government
financing terms on the auction price and a 50% reduction in the aggregate
principal amount due as a result of the subsequent C Block restructuring in
which Chase elected to disaggregate 15MHz of its 30MHz of spectrum in each of
its markets.
Market Opportunity. Chase presented SpinCo an opportunity to break into the
competitive United States markets with a relatively small investment. Chase's
Nashville, Memphis, Knoxville and Chattanooga markets account for approximately
4.6 million of Chase's approximately 6.3 million POPs. The state of Tennessee is
situated in the heart of the growing Southeast with a diverse economic base
including manufacturing, services, retail and wholesale trade, transportation,
finance and agriculture. Tennessee has experienced strong population and
economic growth over the period from 1991 to 1996. In addition, Tennessee's
median household income grew at the second highest rate in the United States
between 1992 and 1994 and at 129% of the national average from 1991 to 1996.
Tennessee continues to attract people and businesses due to its low state excise
and franchise taxes and lack of both personal income tax on earned income and
property tax. Tennessee's job growth was 125% of the U.S. average from 1991 to
1996 and continues to present strong growth for small and mid-sized business.
Strategic Partners. Chase was founded by Tony Chase, formerly the chairman
and CEO of Faith Broadcasting Corporation which operates radio communications
licenses in several major markets in Texas. In addition, Chase has established
strong strategic relationships with QUALCOMM, as an equipment supplier, and
PrimeCo, a major provider of PCS services in the United States. PrimeCo consists
of a partnership of major cellular telephone providers including AirTouch
Communications, Inc. and Bell Atlantic Corporation.
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PrimeCo commenced CDMA PCS service in all of its major markets in 1996 and had
over 500,000 subscribers by March 31, 1998. Current intentions are for Chase to
arrange roaming agreements and to use brand recognition under the PrimeCo brand
name.
SpinCo Rights and Interests. SpinCo holds a 5.8% interest in Chase and has
certain super majority voting rights. SpinCo does not have a right to board
representation or to otherwise participate in management to any material degree.
SpinCo does expect that the expertise SpinCo 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 $23 million in vendor
financing and SpinCo 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,
SpinCo will hold warrants to acquire up to an additional 10.5% of the Chase
equity. After the Chattanooga build-out is complete, it is expected that Chase
will again need to seek high-yield debt in the public market and, upon
successful completion of such an offering; the Company expects QUALCOMM will
expand its vendor financing to $130 million; and SpinCo has committed, subject
to certain exceptions, to convert the working capital loan into $25 million of
redeemable preferred stock 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, AUSTRALIA
General. SpinCo holds a 100% equity interest in OzPhone Pty. Ltd.
("OzPhone") (an Australian corporation formed to participate in Australia's
personal communication services auctions). OzPhone has been awarded eight 800MHz
licenses covering approximately 5.4 million POPs to provide digital mobile and
wireless local loop services in major metropolitan and rural areas throughout
Australia. The regions covered are Brisbane, Perth, Cairns and certain regions
of the gold coast, Tasmania and regional west regions. Planning is underway to
launch regional wireless service in these areas.
OzPhone expects to build regional wireless telephony networks using CMDA
technology and will offer advanced wireless services to improve service quality
and increase choices for customers. The Company believes CDMA technology and
spectral efficiency will be suitable for large city operations and the wide
coverage afforded by CDMA base stations will allow OzPhone's networks to be
extended to rural areas to provide roaming capabilities as well as services to
those areas. OzPhone has a commitment from QUALCOMM to provide wireless
telecommunications subscriber and infrastructure equipment with 100% financing.
Market Opportunity. SpinCo 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
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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. SpinCo 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,
SpinCo has invested $6 million to acquire the licenses and expects to invest an
additional $24 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. SpinCo'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.
In order to pursue wireless telecommunication opportunities in the United
States and implement its strategy, the Company, through 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 SpinCo will
acquire such spectrum through a subsidiary in which SpinCo initially holds 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 SpinCo will enter into reseller
agreements with operators, with SpinCo 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. Among other things, it is anticipated that complying with
the
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"Designated Entity" requirements would limit SpinCo'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, SpinCo has not yet developed a detailed capital budget or investment
strategy. However, SpinCo has budgeted approximately $61 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. SpinCo anticipates that it will structure its
reseller relationships and relationships with any Designated Entities in a
fashion to maximize the potential benefit to SpinCo shareholders as a whole
while complying with applicable FCC requirements.
Regulatory Environment. In this effort, SpinCo will operate in the complex
United States FCC regulatory scheme. The Company will be required to maintain
compliance with all of the requirements for operating wireless operations in the
United States and the requirements for entering into reseller agreements with
United States operators, including the requirements applicable to Designated
Entities to the extent the subject spectrum is in the C and F Blocks. PCS
licenses are granted for a ten year period at the end of which the licensee must
apply for renewal. Licenses may be revoked by the FCC at any time for cause
including failure to comply with the terms of the licenses or failure to qualify
for such licenses, malfeasance or other misconduct. Construction regulations and
moratoria are in effect in some markets which can create certain risks and costs
associated with the construction of a network. The licensing, construction,
operation, sale and interconnection agreements of wireless telecommunications
systems are regulated to varying degrees by the FCC and State regulatory
agencies. Such regulation is continually evolving and there are a number of
issues on which regulation has been or in the future may be suggested. The
Telecommunications Act of 1996 mandates significant changes in existing
regulations of the telecommunications industry to promote competitive
development of new service offerings to expand the availability of
telecommunication services and to streamline the regulation of the industry.
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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.
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 "-- SpinCo Operating Companies."
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The U.S. wireless industry is characterized by intense competition between
PCS, cellular and other wireless service providers. A limited number of the
Company's prospective competitors are operating, or planning to operate, through
joint ventures and affiliation arrangements, wireless telecommunications
networks that cover most of the United States. In the United States, the Company
will compete directly with other wireless providers in each of its markets, a
number of whom entered the PCS market earlier than the Company. There can be no
assurance that such time-to-market advantage will not have a material adverse
effect on the Company's ability to successfully implement its strategy. Some
competitors are also expected to market other services, such as cable television
access, landline telephone service and Internet access with their wireless
telecommunications service offerings. Furthermore, certain competing licensees
may partition and disaggregate their competing licenses into smaller service
areas, which could provide new entrants with further opportunities to enter the
Company's market. The Company also believes that the two incumbent cellular
providers in each of the Company's planned United States markets, all of which
have infrastructure in place, a customer base and a brand name, and have been
operational for five to ten years or more, have upgraded or will upgrade their
networks to provide services in competition with the Company. The Company
further expects to compete with other telecommunications technologies such as
paging, enhanced specialized mobile radio and global satellite networks. See
"-- United States Wireless Opportunities."
In addition, following the Distribution QUALCOMM may choose to pursue new
CDMA-based wireless telecommunications businesses and ventures that would also
be attractive projects for the Company. QUALCOMM will have no obligation to
refer any such project to the Company and may in fact compete with the Company
for such projects. Also, QUALCOMM will not be restricted from pursuing wireless
telecommunications opportunities that may compete directly with the Company or
the SpinCo 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 SpinCo.
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
SpinCo 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 SpinCo operates, see the "Regulatory
Environment" discussion for each of the SpinCo 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 SpinCo Operating Companies doing business in the United States, and SpinCo,
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
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evolving and there are a number of issues on which regulation has been or in the
future may be suggested. The Telecommunications Act of 1996 mandates significant
changes in existing regulations of the telecommunications industry to promote
competitive development of new service offerings to expand the availability of
telecommunications services and to streamline the regulation of the industry.
There can be no assurance that the FCC, Congress, the courts or state agencies
having jurisdiction over the business of any of the Company's United States
operating companies will not adopt or change regulations or take other actions
that would adversely affect the Company's financial condition or results of
operations. Many of the FCC's rules relating to the businesses of the Company's
United States operating companies have not been tested by the courts and are
subject to being changed by Congressional action. In addition, FCC licenses are
subject to renewal and revocation. There can be no assurance that the licenses
of the Company's United States operating companies will be renewed or not be
revoked.
EMPLOYEES
Upon completion of this Distribution, the Company is expected to have
approximately 50 full time employees, excluding employees of the SpinCo
Operating Companies. It will also have consultants under contract to work on
specific projects.
FACILITIES
The Company intends to lease approximately 50,000 square feet of space for
office and warehouse use in San Diego, California, U.S.A.
LEGAL PROCEEDINGS
Neither the Company nor any of the SpinCo Operating Companies is a party to
any litigation that would, individually or in the aggregate, have a material
adverse effect on SpinCo and the SpinCo Operating Companies, taken as a whole,
and SpinCo is not aware that any such litigation is threatened.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Currently, the Board of Directors of the Company is comprised of Harvey P.
White, Thomas J. Bernard and James E. Hoffmann. As of the Distribution, the
Board of Directors of the Company will consist of Mr. White and six other
individuals to be identified in this Information Statement and appointed by the
Board prior to the Distribution. Each executive officer listed below will be
elected to the indicated office with the Company on or prior to the Distribution
Date and will serve at the pleasure of the Board of Directors.
The following table sets forth information concerning the individuals who
will serve as directors and executive officers of the Company following the
Distribution:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harvey P. White.............................. 64 Chairman, Chief Executive Officer, President
and Director
Thomas J. Bernard............................ 66 Executive Vice President and Director
James E. Hoffmann............................ 48 Senior Vice President, General Counsel,
Secretary and Director
Daniel O. Pegg............................... 52 Senior Vice President, Public Affairs
Leonard C. Stephens.......................... 41 Senior Vice President, Human Resources
Tom Williardson.............................. 41 Senior Vice President, Finance and Treasurer
</TABLE>
Certain additional information concerning the directors and executive
officers is set forth below:
Harvey P. White, one of the founders of QUALCOMM, has served as Vice
Chairman of the Board since June 1998. From May 1992 until June 1998 he served
as President of QUALCOMM and from February 1994 to August 1995 as Chief
Operating Officer of QUALCOMM. Prior to May 1992 he was Executive Vice President
and Chief Operating Officer and has also been a Director of QUALCOMM since it
began operations in July 1985. From March 1978 to June 1985, Mr. White was an
officer of LINKABIT (M/A-COM LINKABIT after August 1980), where he was
successively Chief Financial Officer, Vice President, Senior Vice President and
Executive Vice President. Mr. White became Chief Operating Officer of LINKABIT
in July 1979 and a Director of LINKABIT in December 1979. He holds a B.A. degree
in Economics from Marshall University.
Thomas J. Bernard served as a Senior Vice President of QUALCOMM from April
1996 through June 1998. From April 1996 until June 1998, he was also General
Manager of the Infrastructure Product Division of QUALCOMM. He retired in April
1994, but returned to QUALCOMM in August 1995 as Executive Consultant and became
Senior Vice President, Marketing, in December 1995. Mr. Bernard first joined
QUALCOMM in September 1986. He served as Vice President and General Manager for
the OmniTRACS division and in September 1992 was promoted to Senior Vice
President. From March 1982 to September 1986, Mr. Bernard held various positions
at M/A-COM LINKABIT. Prior to joining QUALCOMM in September 1986, Mr. Bernard
was Executive Vice President and General Manager, M/A-COM Telecommunication
Division, Western Operations. Mr. Bernard has served on the Board of Directors
of Sigma Circuits, Inc., a circuit board manufacturing company, since April
1995.
James E. Hoffmann has served as Vice President, Legal Counsel of QUALCOMM
since June 1998. From February 1995 until June 1998, he served as Vice President
of QUALCOMM and Division Counsel for the Infrastructure Products Division and as
Senior Legal Counsel for QUALCOMM. Prior to joining QUALCOMM, Mr. Hoffmann was a
partner in the law firm of Gray, Cary, Ames & Frye. He holds a B.S. degree in
from the United States Naval Academy, an M.B.A. degree from Golden Gate
University and a J.D. degree from University of California, Hastings College of
the Law.
Daniel O. Pegg has served as Senior Vice President, Public Affairs QUALCOMM
since March 1997. Prior to joining QUALCOMM, Mr. Pegg was President and Chief
Executive Officer of the San Diego Economic Development Corporation for fourteen
years. Mr. Pegg served on the Board of Directors of Gensia
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Pharmaceuticals from 1986 to 1996. Mr. Pegg holds a B.A. degree from California
State University at Los Angeles.
Leonard C. Stephens has served as Vice President Human Resources Operations
for QUALCOMM since December 1995. Prior to joining QUALCOMM, Mr. Leonard was
employed by Pfizer Inc., where he served in a number of human resources
positions over a fourteen year career. He holds a B.A. degree in Political
Science from Howard University.
Tom Williardson joined QUALCOMM in July 1998 and will serve as Senior Vice
President, Finance and Treasurer of the Company. From July 1995 to July 1998,
Mr. Williardson 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. Williardson served as a
principal at The Fremont Group, an investment company. Mr. Williardson 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.
CLASSIFIED BOARD OF DIRECTORS
The Company's Certificate of Incorporation will provide for a classified
Board of Directors consisting of three classes as nearly equal in number as
possible with the directors in each class serving staggered three-year terms.
The members of the Board will be divided into such classes prior to the
Distribution and following appointment of all of the seven members of the Board.
The terms of the Class I, Class II and Class III directors will expire initially
in 1999, 2000 and 2001, respectively. At each annual meeting of the stockholders
of the Company, the successors to the class of directors whose term expires will
be elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following their election. See "Description
of Company Capital Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company currently intends to establish 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 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.
COMPENSATION OF DIRECTORS
When traveling from out-of-town, the members of the Board of Directors are
eligible for reimbursement for their travel expenses incurred in connection with
attendance at Board meetings and meetings of committees of the Board of
Directors. Employee directors will not receive any compensation for their
participation in Board or Board committee meetings. The Directors' Plan will
provide for initial option grants to persons upon first joining the Board and
annual option grants to non-employee directors who continue to serve on the
Board. See "-- Equity Incentive Plans."
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<PAGE> 71
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.
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........................ 1997 $395,713 $250,000 $ 0 0 $37,011
President 1996 $354,963 $100,000 $ 0 85,000 $34,437
1995 $297,462 $150,000 $ 0 60,000 $ 4,654
Thomas J. Bernard...................... 1997 $245,142 $ 65,000 $ 6,086 0 $ 6,086
Executive Vice President and Director 1996 $186,976 $ 40,000 $ 0 60,000 $ 0
1995 $ 7,200(3) $ 0 $ 0 0 $ 0
James E. Hoffmann...................... 1997 $149,283 $ 50,000 $ 0 3,000 $ 2,145
Senior Vice President, General 1996 $131,646 $ 20,000 $ 0 4,000 $ 2,191
Counsel, Secretary and Director 1995 $117,454 $ 15,000 $ 0 5,000 $ 2,134
Leonard C. Stephens.................... 1997 $146,828 $ 45,000 $ 42,268 3,000 $ 1,816
Senior Vice President, Human 1996 $112,711 $ 25,000 $ 43,644 15,000 $ 0
Resources 1995 $ 0 $ 0 $ 0 0 $ 0
Daniel O. Pegg......................... 1997 $111,174(4) $ 55,000 $ 0 50,000 $ 0
Senior Vice President, Public Affairs 1996 $ 0 $ 0 $ 0 0 $ 0
1995 $ 0 $ 0 $ 0 0 $ 0
</TABLE>
- - ---------------
(1) As permitted by rules established by the Commission, no amounts are shown
with respect to certain "perquisites" where such amounts do not exceed the
lesser of either $50,000 or 10% of the total of annual salary and bonus.
(2) In December 1995, Leonard C. Stephens joined QUALCOMM as Vice President of
Human Resources. The Company made payments related to his relocation as
shown above.
(3) Mr. Bernard served as a consultant to QUALCOMM in 1995, and the reported
salary constitutes consulting fees.
(4) Mr. Pegg joined QUALCOMM in March 1997. If he had been employed by QUALCOMM
during the entire 1997 fiscal year at the same annual base salary rate, his
salary for fiscal 1997 would have been $212,000.
(5) Includes QUALCOMM matching 401(k) contributions, executive benefits payments
and executive retirement stock matching as follows:
66
<PAGE> 72
<TABLE>
<CAPTION>
QUALCOMM EXECUTIVE TOTAL
MATCHING EXECUTIVE RETIREMENT OTHER
401(K) BENEFITS CONTRIBUTIONS COMPEN-
NAME YEAR CONTRIBUTIONS PAYMENTS (1) SATION
---- ---- ------------- --------- ------------- -------
<S> <C> <C> <C> <C> <C>
Harvey P. White...................... 1997 $2,145 $2,520 $32,346 $37,011
1996 $2,191 $2,520 $29,726 $34,437
1995 $2,134 $2,520 $ 0 $ 4,654
Thomas J. Bernard.................... 1997 $1,816 $4,270 $ 0 $ 6,086
1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
James E. Hoffmann.................... 1997 $2,145 $ 0 $ 0 $ 2,145
1996 $2,191 $ 0 $ 0 $ 2,191
1995 $2,134 $ 0 $ 0 $ 2,134
Leonard C. Stephens.................. 1997 $1,816 $ 0 $ 0 $ 1,816
1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
Daniel O. Pegg....................... 1997 $ 0 $ 0 $ 0 $ 0
1996 $ 0 $ 0 $ 0 $ 0
1995 $ 0 $ 0 $ 0 $ 0
</TABLE>
- - ---------------
(1) QUALCOMM has a voluntary retirement plan that allows eligible executives to
defer up to 100% of their income on a pre-tax basis. The participants
receive 50% company stock match on a maximum deferral of 15% of income
payable only upon eligible retirement. Participants become fully vested in
the stock benefit at age 65 and may become partially vested earlier upon
reaching age 62 1/2 and completing ten years of employment with QUALCOMM.
The employee contributions and the stock benefit are unsecured and subject
to the general creditors of QUALCOMM. At September 28, 1997, 1,008 shares
were vested on behalf of Harvey P. White.
STOCK OPTION TABLE
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 1997:
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES % OF TOTAL INDIVIDUAL GRANTS ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS --------------------- PRICE APPRECIATION FOR OPTION
OPTIONS GRANTED TO TERM(2)
GRANTED EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME (#)(1) FISCAL YEAR PRICE DATE 5% 10%
---- ---------- ------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James E. Hoffmann......... 3,000 0.07% $39.81 12/12/06 $ 75,082.88 $ 190,259.78
Leonard C. Stephens....... 3,000 0.07% $39.81 12/12/06 $ 75,082.88 $ 190,259.78
Daniel O. Pegg............ 50,000 1.18% $60.25 03/06/07 $1,893,889.17 $4,799,109.10
</TABLE>
- - ---------------
(1) Such options vest according to the following schedule: 20% vest on each of
the first, second, third, fourth and fifth anniversaries of the date of
grant.
(2) Calculated on the assumption that the market value of the underlying stock
increases at the stated values, compounded annually. Options granted under
QUALCOMM's Option Plan generally have a maximum term of ten years. The total
appreciation of the options over their ten year terms at 5% and 10% is 63%
and 159%, respectively.
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<PAGE> 73
AGGREGATED QUALCOMM OPTION EXERCISES DURING 1997
AND 1997 FISCAL YEAR END OPTION VALUES
The following table shows for each Named Executive Officer the specified
information with respect to exercises of QUALCOMM Options during 1997 and the
value of unexercised options at the end of 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
VALUE OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES REALIZED YEAR-END YEAR-END(1)
ACQUIRED ON ON --------------------------- ---------------------------
NAME EXERCISE EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey P. White............... 0 $0 119,000 176,000 $2,892,030 $3,618,120
Thomas J. Bernard............. 0 $0 6,000 54,000 $ 58,500 $ 699,000
James E. Hoffmann............. 0 $0 9,000 19,000 $ 286,860 $ 488,270
Daniel O. Pegg................ 0 $0 0 50,000 $ 0 $ 0
Leonard C. Stephens........... 0 $0 0 18,000 $ 0 $ 301,950
</TABLE>
- - ---------------
(1) Represents the closing price per share of the underlying shares on the last
day of the fiscal year less the option exercise price multiplied by the
number of shares. The closing value per share was $56.06 on the last trading
day of the fiscal year as reported on the Nasdaq National Market.
EQUITY INCENTIVE PLANS
1998 Equity Incentive Plan. Prior to the Distribution Date, the Company
expects to adopt the SpinCo 1998 Equity Incentive Plan (the "1998 Plan"), which
will provide for the grant of various types of equity-based compensation to
employees of the Company. The Stock Plan will be approved by QUALCOMM, as sole
stockholder of the Company, prior to the Distribution Date. The 1998 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 Stock Plan may not exceed 7,000,000 subject to adjustment as described
below, which number of shares includes options that will be granted to holders
of outstanding QUALCOMM Options immediately prior to the Distribution. See
"Treatment of QUALCOMM Employee Stock Options in the Distribution."
The Stock Plan provides for the granting of options, including "incentive
stock options" ("ISOs") within the meaning of Section 422 of the Code and
non-qualified stock options, and the granting of other stock-based awards
(collectively, "Awards"). All Awards will be evidenced by an award agreement
setting forth the terms and conditions applicable thereto. Awards may generally
be granted to key employees (including those who are also directors) of the
Company or any of its subsidiaries.
The 1998 Plan will be administered by the Board of Directors of the
Company, which may act through its Compensation Committee (such Board of
Directors or committee is referred to herein as the "Plan Administrator").
Eligibility criteria, the number of participants, and the number of shares
subject to Awards and all other terms and conditions of Awards will be
determined by the Plan Administrator. The option price payable for the shares of
Common Stock subject to each ISO or non-qualified stock option shall not be less
than the fair market value of the Common Stock on the date such option is
granted.
1998 Non-Employee Directors' Stock Option Plan. The Company has also
adopted the 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 Directors' Plan is
administered by the Board, unless the Board delegated administration to a
committee of directors.
A total of 500,000 shares of Common Stock have been reserved for issuance
under the Directors' Plan pursuant to the exercise of options granted under the
Directors' Plan which number of shares includes options that will be granted to
holders of outstanding QUALCOMM Options immediately prior to the Distribution.
See "Treatment of QUALCOMM Employee Stock Options in the Distribution." Pursuant
to the terms of the
68
<PAGE> 74
Directors' Plan, (i) non-employee directors other than the current directors,
upon their election or appointment as directors, will receive options to
purchase 5,000 shares of the Company's Common Stock and (ii) on the date of each
annual meeting of stockholders following this offering, each non-employee
director with at least ninety days' service will receive an option to purchase
2,500 shares of Common Stock.
No option granted under the Directors' Plan may be exercised after the
expiration of ten (10) years from the date it was granted. Options granted under
the Directors' Plan shall vest at the rate of 20% of the underlying shares each
year for five years following the date of grant. Such vesting shall occur
provided that the optionee has, during the entire period prior to such vesting
date, continuously served as a non-employee director or employee of, or
consultant to, the Company. The exercise price of options under the Directors'
Plan must be equal to the fair market value of the Common stock on the date of
grant. Options granted under the Directors' Plan are transferable only in
certain limited circumstances. Unless otherwise terminated by the Board of
Directors, the Directors' Plan automatically terminates in 2113.
TREATMENT OF QUALCOMM EMPLOYEE
STOCK OPTIONS IN THE DISTRIBUTION
As of June 18, 1998, there were outstanding options (the "QUALCOMM
Options") to purchase (i) 19,947,975 shares of QUALCOMM Common Stock under the
QUALCOMM Incorporated 1991 Stock Option Plan (the "QUALCOMM Option Plan") and
(ii) 665,500 shares of QUALCOMM Common Stock under the QUALCOMM Incorporated
1998 Non-employee Directors Stock Option Plan (the "QUALCOMM Director Plan").
Immediately prior to the Distribution, SpinCo intends to grant, under the 1998
Plan and the Directors' Plan, as appropriate (to account for outstanding options
under the QUALCOMM Option Plan and QUALCOMM Director's Plan, respectively),
options to purchase SpinCo Common Stock ("SpinCo Options") to each holder of an
outstanding QUALCOMM Option. The SpinCo Options will be exercisable for SpinCo
Common Stock on the basis of one share of SpinCo Common Stock for every four
shares of QUALCOMM Common Stock subject to the outstanding QUALCOMM Options. No
SpinCo Options to purchase fractional shares of SpinCo Common Stock will be
granted, but will instead be rounded up to the nearest whole share. Based on the
number of QUALCOMM Options outstanding on June 18, 1998, it is anticipated that
SpinCo Options to purchase a total of approximately 5,348,369 shares of SpinCo
Common Stock will be granted in connection with the Distribution to QUALCOMM
option holders.
In connection with the grant of such SpinCo Options, the exercise price of
the QUALCOMM Options will be adjusted and the exercise price of the SpinCo
Options will be determined in a manner designed to preserve the economic value
of the QUALCOMM Options existing immediately prior to the Distribution. The
exercise prices will be based on a formula using the deemed fair market value
per share of common stock of each company, which will be the average of the last
sales price per share of that common stock on the Nasdaq National Market for
each of the five (5) consecutive trading days beginning with and including the
Distribution Date. As a result, following the Distribution each holder of an
outstanding QUALCOMM Option prior to the Distribution will have the opportunity
after the Distribution to obtain SpinCo Common Stock and the same number of
shares of QUALCOMM Common Stock at the same aggregate exercise price as if such
individual had exercised the QUALCOMM Options in full (as if such options were
fully vested) prior to the Distribution Date.
The vesting schedules and term of outstanding QUALCOMM Options will not be
affected by the Distribution, and the SpinCo Options will be subject to the same
vesting schedule and term. Vesting and termination of such options will,
however, be dependent upon an employee's continued employment with QUALCOMM or
SpinCo, as applicable (under the terms of the companies' respective plans),
following the Distribution.
69
<PAGE> 75
TREATMENT OF QUALCOMM TRUST CONVERTIBLE PREFERRED
SECURITIES IN THE DISTRIBUTION
In February 1997, QUALCOMM Financial Trust I (the "Trust"), a QUALCOMM
wholly-owned subsidiary trust created under the laws of the State of Delaware,
completed a private placement of $660 million of 5 3/4% Trust Convertible
Preferred Securities (the "QUALCOMM Trust Convertible Preferred Securities").
The sole assets of the Trust are QUALCOMM Incorporated 5 3/4% Convertible
Subordinated Debentures ("Convertible Subordinated Debentures") due February 24,
2012. Holders of the QUALCOMM Trust Convertible Preferred Securities are
entitled to periodic payments from the Trust. The payments by QUALCOMM to the
Trust pursuant to the payment terms of the Convertible Subordinated Debentures
are designed to permit the Trust to fulfill its payment obligations with respect
to the QUALCOMM Trust Convertible Preferred Securities. Pursuant to the terms of
a guaranty, under certain circumstances QUALCOMM may be obligated to make
certain payments to the holders of the QUALCOMM Trust Convertible Preferred
Securities if the Trust fails to make them.
The QUALCOMM Trust Convertible Preferred Securities are convertible into
QUALCOMM Common Stock at the rate of 0.6882 shares of QUALCOMM Common Stock for
each QUALCOMM Trust Convertible Preferred Security (equivalent to a conversion
price of $72.6563 per share of common stock). Distributions on the QUALCOMM
Trust Convertible Preferred Securities are payable until subject to mandatory
redemption on February 24, 2012, at a redemption price of $50 per preferred
security. QUALCOMM has reserved 9,084,240 shares of QUALCOMM Common Stock as of
June 18, 1998 for possible conversion of the QUALCOMM Trust Convertible
Preferred Securities at the option of the holders.
As of June 18, 1998, there were outstanding approximately 13.2 million
QUALCOMM Trust Convertible Preferred Securities, convertible into 9,084,240
shares of QUALCOMM Common Stock as described above. As a result of and
subsequent to the Distribution, each QUALCOMM Trust Convertible Preferred
Security will be convertible, subject and pursuant to the terms of the
Convertible Subordinated Debentures, into both QUALCOMM Common Stock and SpinCo
Common Stock at the rate of 0.6882 and 0.17205 shares respectively for each
QUALCOMM Trust Convertible Preferred Security. Upon conversion of such Trust
Convertible Preferred Securities, QUALCOMM will receive benefit in the form of
forgiveness of debt, but SpinCo will receive no such benefit or other
considerations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The businesses to be conducted by the Company have in the past engaged in
transactions with QUALCOMM and its businesses. Following the Distribution,
QUALCOMM will continue to have a significant relationship with the Company as a
result of the agreements being entered into by QUALCOMM and the Company in
connection with the Distribution, and due to its warrant to purchase 5,600,000
shares of the Company. QUALCOMM's relationships as equipment vendor to SpinCo
and the SpinCo Operating Companies and as lender under the Credit Facility will
give QUALCOMM significant influence over SpinCo and will create certain
conflicts with SpinCo. In addition, QUALCOMM is not restricted from competing
with the Company or the SpinCo Operating Companies or pursuing directly wireless
telecommunications businesses or interests which would also be attractive to
SpinCo. See "Risk Factors -- Potential Conflicts with QUALCOMM," and
"Relationship Between QUALCOMM and the Company After the Distribution."
70
<PAGE> 76
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Immediately prior to the Distribution, all of the outstanding Company
shares will be held by QUALCOMM. The following table sets forth the projected
beneficial ownership of SpinCo Common Stock immediately following the
Distribution, based on beneficial ownership with respect to shares of QUALCOMM
as of June 18, 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 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 24.1
Harvey P. White(4)(5)(6).................................... 142,774 *
Thomas J. Bernard(5)(6)..................................... 7,525 *
James E. Hoffmann(5)(6)..................................... 4,988 *
Daniel O. Pegg(5)(6)(7)..................................... 2,550 *
Leonard C. Stephens(5)(6)................................... 900 *
All Officers and Directors as a group (5 persons)........... 158,737 *
</TABLE>
- - ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders of QUALCOMM and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "Commission"). Unless otherwise
indicated in the footnotes to this table and subject to marital property
laws where applicable, each of the stockholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 17,338,858 shares of
SpinCo Common Stock outstanding based on the number of shares of QUALCOMM
Common Stock outstanding on June 18, 1998, adjusted as required by rules
promulgated by the Commission.
(2) Except as otherwise noted, reflects, in each case, the number of shares of
QUALCOMM Common Stock beneficially owned as of June 18, 1998, divided by
four (4). In addition to shares held in the individual's sole name, this
column includes shares held by the spouse and other members of the named
person's immediate household who share that household with the named person,
and shares held in family trusts.
(3) Consists entirely of a warrant to purchase shares of SpinCo Common Stock
exercisable immediately following the Distribution, which expires 10 years
following the Distribution.
(4) Includes 2,500 shares held in a foundation of which Mr. White disclaims
beneficial ownership. Also includes 75,256 shares held in family trusts,
7,500 held in a Family Limited Partnership, 250 shares held in a charitable
remainder trust, and 6,768 shares held in trusts for the benefit of
relatives.
(5) Includes shares issuable upon exercise of options exercisable within 60 days
of June 18, 1998 as follows: Mr. Bernard, 6,600 shares (including 2,100
shares subject to options held by Mr. Bernard's wife); Mr. Hoffmann, 4,850
shares; Mr. Pegg, 2,500; Mr. Stephens, 900; and Mr. White, 50,500 shares.
(6) Does not include shares issuable upon exercise of QUALCOMM stock options.
The officers as of the Distribution will hold options to purchase shares of
QUALCOMM exercisable within 60 days following June 18, 1998 in the following
amounts: Mr. Bernard, 26,400 shares (including 8,400 shares subject to
options held by Mr. Bernard's wife); Mr. Hoffmann, 19,400 shares; Mr. Pegg,
10,000; Mr. Stephens, 3,600; and Mr. White, 202,000 shares.
(7) Includes 25 shares held in a custodial account for the benefit of Mr. Pegg
and 25 shares held in a custodial account for the benefit of Mr. Pegg's
spouse.
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<PAGE> 77
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 60 million,
consisting of 10 million shares of preferred stock, par value $0.0001 per share
("Preferred Stock") and 50 million shares of SpinCo Common Stock. Based on the
number of shares of QUALCOMM Common Stock outstanding at June 18, 1998
approximately 17,338,858 shares of SpinCo Common Stock will be issued to
stockholders of QUALCOMM.
COMMON STOCK
The holders of SpinCo Common Stock will be entitled to one vote for each
share on all matters voted on by stockholders, and the holders of such shares
will possess all voting power, except as otherwise required by law or provided
in any resolution adopted by the Board of Directors of the Company with respect
to any series of Preferred Stock. It is currently expected that the first annual
meeting of stockholders of the Company will be held in January 1999. Subject to
any preferential or other rights of any outstanding series of Company preferred
stock that may be designated by the Board of Directors of the Company, the
holders of SpinCo Common Stock will be entitled to such dividends as may be
declared from time to time by the Board of Directors of the Company from funds
available therefor, and upon liquidation will be entitled to receive pro rata
all assets of the Company available for distribution to such holders. See "Risk
Factors -- Dividend Policy."
PREFERRED STOCK
The Board of Directors of the Company will be authorized to provide for the
issuance of shares of Preferred Stock, in one or more series, and to determine,
with respect to any series, the terms and rights of such series, including the
following: (i) the designation of such series; (ii) the rate and time of, and
conditions and preferences with respect to, dividends, and whether such
dividends are cumulative; (iii) the voting rights, if any, of shares of such
series; (iv) the price, timing and conditions regarding the redemption of shares
of such series and whether a sinking fund should be established for such series;
(v) the rights and preferences of shares of such series in the event of
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company; and (vi) the right, if any, to convert or exchange shares of
such series into or for stock or securities of any other series or class.
The Company believes that the availability of the Preferred Stock will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs which might
arise. Having such authorized shares available for issuance will allow the
Company to issue shares of Preferred Stock without the expense and delay of a
special stockholders' meeting. The authorized shares of Preferred Stock, as well
as shares of SpinCo 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.
WARRANTS
Following the Distribution, there will be an outstanding warrant (the
"Warrant"), held by QUALCOMM, to purchase 5,500,000 shares of SpinCo Common
Stock at an exercise price equal to the average price of the last sales price
per share of the SpinCo Common Stock on the Nasdaq National Market for each of
the five (5) consecutive trading days beginning on and including the
Distribution Date. The Warrant is exercisable at any time during the ten (10)
years following the Distribution. Based upon the number of shares expected to be
outstanding and reserved for issuance pursuant to outstanding options and
convertible securities as of the Distribution, upon exercise in full of the
Warrant, QUALCOMM would hold approximately 18% of the outstanding SpinCo Common
Stock, assuming exercise of all such outstanding options and convertible
securities.
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<PAGE> 78
SPINCO COMMON STOCK RESERVED FOR ISSUANCE
QUALCOMM will retain the Warrant following the Distribution, which will be
immediately exercisable and will entitle QUALCOMM to purchase 5,500,000 shares
of SpinCo Common Stock at a purchase price equal to the average of the last
sales price per share of SpinCo Common Stock on the Nasdaq National Market for
each of the five (5) consecutive trading days beginning with and including the
Distribution Date. In addition, based on the number of QUALCOMM Options
outstanding on June 18, 1998, it is anticipated that SpinCo Options to purchase
a total of approximately 5,348,369 shares of SpinCo Common Stock will be granted
in connection with the Distribution to QUALCOMM option holders. In addition to
the SpinCo Options to be granted to QUALCOMM option holders who will continue as
employees of SpinCo after the Distribution, SpinCo intends to grant stock
options to purchase SpinCo Common Stock following the Distribution to employees,
officers, directors and consultants of SpinCo as part of its ongoing equity
incentive program. SpinCo has reserved an aggregate 7,500,000 shares for
issuance to its employees, officers, directors and consultants under its 1998
Equity Incentive Plan and 1998 Directors' Stock Option Plan, which will permit
the grant of options to purchase an additional approximately 2,151,631 shares
following the grant of options to QUALCOMM option holders in connection with the
Distribution. Finally, due to and subsequent to the Distribution, the
outstanding Trust Convertible Preferred Securities convertible into QUALCOMM
Common Stock will additionally be convertible into an aggregate 2,271,060 shares
of SpinCo Common Stock. As a result, collectively, there will be 15,271,060
shares of SpinCo Common Stock reserved for issuance following the Distribution.
RECENT SALES OF UNREGISTERED SECURITIES
In June 1998, SpinCo sold 1,000 shares of Common Stock to QUALCOMM for $.10
in a transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof. In connection with the Distribution
contemplated by the Information Statement, SpinCo will issue an additional
17,337,858 shares of Common Stock to QUALCOMM in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. In connection with the Distribution, SpinCo will also issue a warrant
to purchase 5,500,000 shares of Common Stock to QUALCOMM in a transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
NO PREEMPTIVE RIGHTS
No holder of any stock of the Company of any class authorized at the
Distribution Date will then have any preemptive right to subscribe to any
securities of the Company of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the SpinCo Common Stock will be Harris
Trust Company of California.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"), an anti-takeover law. In general, the
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation contains a provision (the "Fair
Price Provision") that requires the approval of the holders of at least 66 2/3%
of the Company voting stock as a condition to a merger or certain other business
transactions with, or proposed by, a holder of 15% or more of the Company's
voting stock (an "Interested Stockholder"), except in cases where the Continuing
Directors (as hereinafter defined)
73
<PAGE> 79
approve the transaction or certain minimum price criteria and other procedural
requirements are met. A "Continuing Director" is a director originally elected
upon incorporation of the Company or a director who is not an Interested
Stockholder or affiliated with an Interested Stockholder or whose nomination or
election to the Board of Directors is recommended or approved by a majority of
the Continuing directors. The minimum price criteria generally require that, in
a transaction in which stockholders are to receive payments, holders of Common
Stock must receive a value equal to the highest price paid by the Interested
Stockholder for Common Stock during the prior two years, and that such payment
be made in cash or in the type of consideration paid by the Interested
Stockholder for the greatest portions of its shares. The Company's Board of
Directors believes that the Fair Price Provision will assure that all of the
Company's stockholders will be treated similarly if certain kinds of business
combinations are effected. However, the Fair Price Provision may make it more
difficult to accomplish certain transactions that are opposed by the incumbent
Board of Directors and that could be beneficial to stockholders.
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 the Board of Directors, the
Chairman of the Board or the president of the Company or by any person or
persons holding shares representing at least 10% of the outstanding SpinCo
Common Stock. 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. These provisions
may have the effect of deterring hostile takeovers or delaying changes in
control or management of the Company.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Officers and directors of the Company are covered by certain provisions of
the DGCL, the Certificate of Incorporation, the By-laws and insurance policies
which serve to limit, and, in certain instances, to indemnify them against,
certain liabilities which they may incur in such capacities. None of such
provisions would have retroactive effect for periods prior to the Distribution
Date, and the Company is not aware of any claim or proceeding in the last three
years, or any threatened claim, which would have been or would be covered by
these provisions. These various provisions are described below.
Elimination of Liability in Certain Circumstances. In June 1986, Delaware
enacted legislation which authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. This duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations now authorized by such
legislation, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting negligence or gross negligence in
the exercise of their duty of care. Although the statute does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of Directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by such legislation. Specifically, the
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as director, except for liability: (i) for
any breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for unlawful payments of
dividends or unlawful share repurchases or redemptions as provided in Section
174 of the DGCL; or (iv) for any transaction from which the director derived an
improper personal benefit.
Indemnification and Insurance. As a Delaware corporation, the Company has
the power, under specified circumstances generally requiring the director or
officer to act in good faith and in a manner he reasonably believes to be in or
not opposed to the Company's best interests, to indemnify its directors and
officers in connection with actions, suits or proceedings brought against them
by a third party or in the name of the Company, by reason of the fact that they
were or are such directors or officers, against expenses, judgments,
74
<PAGE> 80
fines and amounts paid in settlement in connection with any such action, suit or
proceeding. The By-laws generally provide for mandatory indemnification of the
Company's directors and officers to the full extent provided by Delaware
corporate law.
The Company intends to purchase and maintain insurance on behalf of any
person who is or was a director or officer of the Company, or is or was a
director or officer of the Company serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Company would have the power or
obligation to indemnify him against such liability under the provisions of the
By-laws.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the SpinCo Shares in
the Distribution will be passed upon for QUALCOMM by Cooley Godward LLP, San
Diego, California and for the Company by Latham & Watkins, San Diego,
California.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
10 (the "Registration Statement," which term shall include any amendments or
supplements thereto) under the Exchange Act with respect to the shares of SpinCo
Common Stock being received by QUALCOMM stockholders in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. With respect to each contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by the Company
with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site
that contains reports, proxy statements, registration statements and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov. Copies of all or any part of the Registration Statement
and reports, proxy statements and the other information filed electronically by
the Company may be obtained from the Commission at its principal offices in
Washington D.C. after payment of amounts prescribed by the Commission.
Following the Distribution, the Company intends to furnish to its
stockholders annual reports containing consolidated financial statements
prepared in accordance with generally accepted accounting principles and audited
by an independent public accounting firm accompanied by an opinion expressed by
such independent public accounting firm.
75
<PAGE> 81
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUALCOMM SPINCO, INC. (A DEVELOPMENT STAGE COMPANY)
Condensed Combined Financial Statements (unaudited):
Condensed Combined Balance Sheet at February 28, 1998
(unaudited)............................................ F-2
Condensed Combined Statements of Operations for the six
months ended
February 28, 1998 and 1997 and for the period from
September 1, 1995 (inception) to February 28, 1998
(unaudited)............................................ F-3
Condensed Combined Statements of Cash Flows for the six
months ended
February 28, 1998 and 1997 and for the period from
September 1, 1995 (inception) to February 28, 1998
(unaudited)............................................ F-4
Condensed Combined Statements of Stockholder's Equity for
the six months ended February 28, 1998 and the period
from September 1, 1995 (inception) to February 28, 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
Report of Coopers & Lybrand, Independent Accountants...... F-11
Combined Balance Sheets at August 31, 1997 and 1996....... F-12
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-13
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-14
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-15
Notes to Combined Financial Statements.................... F-16
CHILESAT TELEFONIA PERSONAL S.A. (A COMPANY IN THE
DEVELOPMENT STAGE)
Financial Statements:
Report of Price Waterhouse LLP, 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
</TABLE>
F-1
<PAGE> 82
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
-----------------
<S> <C>
Current assets.............................................. $ --
Investments in wireless operating companies................. 50,831
--------
Total assets................................................ $ 50,831
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities.................... $ 1,967
--------
Commitments (Note 4)
Stockholder's equity:
Stockholder's investment.................................. 63,184
Deficit accumulated during the development stage.......... (12,546)
Cumulative translation adjustment......................... (1,774)
--------
Total stockholder's equity............................. 48,864
--------
Total liabilities and stockholder's equity.................. $ 50,831
========
</TABLE>
See accompanying notes.
F-2
<PAGE> 83
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE PERIOD FROM
FEBRUARY 28, SEPTEMBER 1, 1995
----------------- (INCEPTION)
1998 1997 TO FEBRUARY 28, 1998
-------- ----- --------------------
<S> <C> <C> <C>
Equity in net losses of wireless operating companies... $ (797) $ -- $ (630)
General and administrative expenses.................... (10,142) (546) (11,916)
-------- ----- --------
Loss before income taxes............................... (10,939) (546) (12,546)
Income tax expense..................................... -- -- --
-------- ----- --------
Net loss............................................... $(10,939) $(546) $(12,546)
======== ===== ========
Unaudited proforma basic and diluted net loss per
common share (Note 1)................................ $ (0.63)
========
</TABLE>
See accompanying notes.
F-3
<PAGE> 84
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE PERIOD
FEBRUARY 28, FROM SEPTEMBER 1, 1995
------------------- (INCEPTION)
1998 1997 TO FEBRUARY 28, 1998
-------- ------- ----------------------
<S> <C> <C> <C>
Operating activities:
Net loss......................................... $(10,939) $ (546) $(12,546)
Equity in net losses of wireless operating
companies..................................... 797 -- 630
Provision for bad debt........................... 1,700 -- 1,700
Change in accounts payable and accrued
liabilities...................................... 1,685 71 1,967
-------- ------- --------
Net cash used in operating activities.............. (6,757) (475) (8,249)
-------- ------- --------
Investing activities:
Investments in wireless operating companies...... (1,657) (4,000) (56,316)
Issuance of loans receivable..................... (1,700) -- (1,700)
-------- ------- --------
Net cash used in investing activities.............. (3,357) (4,000) (58,016)
-------- ------- --------
Financing activities:
Stockholder's investment......................... 10,114 4,475 66,265
-------- ------- --------
Net cash provided by financing activities.......... 10,114 4,475 66,265
-------- ------- --------
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> 85
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
STOCKHOLDER'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
------------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at September 1, 1995 (Inception)...... $ -- $ -- $ -- $ --
Transfers from QUALCOMM....................... 285 -- -- 285
Net loss...................................... -- (396) -- (396)
------- -------- ------- -------
Balance at August 31, 1996.................... 285 (396) -- (111)
Transfers from QUALCOMM....................... 55,866 -- -- 55,866
Net loss...................................... (1,211) -- (1,211)
Cumulative translation adjustment............. -- -- 58 58
------- -------- ------- -------
Balance at August 31, 1997.................... 56,151 (1,607) 58 54,602
Transfers from QUALCOMM....................... 10,114 -- -- 10,114
Net loss...................................... -- (10,939) -- (10,939)
Intercompany profit elimination............... (3,081) -- -- (3,081)
Cumulative translation adjustment............. -- -- (1,832) (1,832)
------- -------- ------- -------
Balance at February 28, 1998.................. $63,184 $(12,546) $(1,774) $48,864
======= ======== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 86
QUALCOMM SPINCO, 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, QUALCOMM SpinCo, Inc. (the "Company" or "SpinCo"), 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 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 27, 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 QUALCOMM SpinCo, Inc. (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
F-6
<PAGE> 87
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
equity interests in wireless operating companies were owned by the Company.
However, for the periods covered by the financial statements, such joint venture
and equity interests were directly or indirectly owned by QUALCOMM. It is not
yet certain that QUALCOMM will obtain necessary agreement from other contractual
parties to allow QUALCOMM to transfer such joint venture and equity interests,
or elements and obligations thereof, to the Company upon the Distribution. 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 February 28,
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 February 28, 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. For the combined financial
statements, the Company presents an accumulated deficit since inception
(September 1, 1995) to highlight that the Company is in the development stage.
However, upon the date of the Distribution, the Company's deficit accumulated
during the development stage prior to the Distribution will be eliminated, and
the Company will begin its accumulation of losses as a legally independent
company.
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 six months ended February 28, 1998.
The Company had no shares of common stock outstanding during the six months
ended February 28, 1998. The unaudited pro forma net loss per common share was
calculated by dividing the net loss for the first six months of fiscal 1998 of
$10,939,000 by the 17,338,858 expected shares of Common Stock of the Company to
be issued upon the Distribution based on QUALCOMM shares outstanding as of June
18, 1998. Such shares reflect the expected issuance upon the Distribution of one
of the Company's shares of common stock for every four shares of QUALCOMM common
stock outstanding. Replacement stock options and awards
F-7
<PAGE> 88
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
and the conversion of QUALCOMM's Trust Convertible Preferred Securities which
are convertible into shares of QUALCOMM and 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.
NOTE 2. INVESTMENTS IN WIRELESS OPERATING COMPANIES
The Company's joint venture and equity interests in wireless operating
companies consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
-----------------
<S> <C>
Investments at equity....................................... $46,831
Investment at cost.......................................... 4,000
-------
$50,831
=======
</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.
During the first six months of fiscal 1998, QUALCOMMTel provided a $1.7
million short-term loan to a potential business combination acquiree. Subsequent
negotiations failed to result in an acquisition agreement and the Company has
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 February 28, 1998, QUALCOMMTel has no other assets and
no liabilities.
During the first six months of fiscal 1998, QUALCOMM recognized revenues on
equipment sold to companies in which the Company holds an ownership interest
accounted for under the equity method of accounting. As the joint venture and
equity interests of the Company were directly or indirectly legally owned by
QUALCOMM as of February 28, 1998, in accordance with the equity method of
accounting, QUALCOMM eliminated its ownership share of the profits on the sales
thereby reducing its equity investment in the companies. The profit elimination
has been presented as a reduction to the Company's investment and as a reduction
in the stockholder's net investment. The profit elimination has been treated as
a non-cash transaction for purposes of the statement of cash flows. Upon the
spin-off, SpinCo's investments in the wireless carriers will no longer be
impacted by such intercompany profit eliminations on post-Distribution QUALCOMM
sales activity.
The cumulative profit eliminated as of February 28, 1998 amounted to
$3,081,000. The resulting basis differential as compared to the Company's
underlying equity in the investee will be amortized against equity in earnings
of the investee as the equipment is sold or utilized by the investees.
F-8
<PAGE> 89
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Condensed combined financial information for wireless operating companies
accounted for under the equity method is summarized follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
-----------------
<S> <C>
Condensed Combined Balance Sheet Information:
Current assets............................................ $27,711
Non-current assets........................................ 70,770
Current liabilities....................................... 7,642
Non-current liabilities................................... 41,993
Redeemable preferred equity............................... 11,034
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, 1998
-----------------
<S> <C>
Condensed Combined Statement of Operations Information:
Operating expenses........................................ $(1,717)
Net losses................................................ (2,263)
</TABLE>
As of February 28, 1998, the wireless operating companies had not yet
commenced commercial revenue and cash flow generating operations. The Company
did not hold any joint venture or equity interests in wireless operating
companies treated under the equity method as of February 28, 1997.
NOTE 3. INCOME TAXES
The Company has not recorded provisions for federal and state income taxes
for the six months ended February 28, 1998 and 1997 due to net operating losses
during those periods.
NOTE 4. COMMITMENTS
The Company did not have any firm commitments to provide equity or debt to
its joint venture or equity interests as of February 28, 1998. 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 February 28, 1998.
F-9
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of QUALCOMM SpinCo, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying combined balance sheets and the related combined statements of
operations, of cash flows and of changes in stockholder's equity present fairly,
in all material respects, the financial position of QUALCOMM SpinCo, 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 did not audit the
combined restated financial statements of Telesystems Ukraine, an investee,
which statements reflect total assets of $8,640,000 at August 31, 1997 and a net
loss of $82,000 for the period from inception (April 1, 1997) to August 31,
1997. Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Telesystems Ukraine, is based solely on the report of
the other auditors. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
June 29, 1998
F-10
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the stockholders of both Telesystems of Ukraine Limited Liability Company and
the Joint Investment Activity between Telesystems of Ukraine Limited Liability
Company and Qualcomm International Inc., together referred to as "Telesystems
Ukraine" (a development stage enterprise):
We have audited the combined restated balance sheet of Telesystems Ukraine as at
31 August 1997 and the related combined statements of income, changes in
stockholders' equity and cash flows for the period from inception of the Joint
Investment Activity (1 April 1997) to 31 August 1997. These combined financial
statements (not presented separately herein) have been restated in accordance
with generally accepted accounting principles in the United States of America
and have been prepared from the Ukrainian financial statements. They are not the
Statutory financial statements of either Telesystems of Ukraine Limited
Liability Company or the Joint Investment Activity between Telesystems of
Ukraine Limited Liability Company and Qualcomm International Inc. The
preparation of the Ukrainian financial statements and the information required
for restatement in accordance with generally accepted accounting principles in
the United States of America is the responsibility of the management of
Telesystems Ukraine. Our responsibility is to express an opinion on these
restated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards 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 our opinion.
In our opinion, the combined restated financial statements referred to above
present fairly, in all material respects, the combined financial position of
Telesystems of Ukraine Limited Liability Company and the Joint Investment
Activity between Telesystems of Ukraine Limited Liability Company and Qualcomm
International Inc. at 31 August 1997 and the combined results of their
operations and their cash flows for the period then ended, in conformity with
generally accepted accounting principles in the United States of America.
COOPERS & LYBRAND
Kyiv, Ukraine
June 24, 1998
F-11
<PAGE> 92
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------
1997 1996
------- -----
<S> <C> <C>
Current assets.............................................. $ -- $ --
Investments in wireless operating companies................. 54,884 --
------- -----
Total assets................................................ $54,884 $ --
======= =====
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities.................... $ 282 $ 111
------- -----
Commitments (Note 5)
Stockholder's equity:
Stockholder's investment.................................. 56,151 285
Deficit accumulated during the development stage.......... (1,607) (396)
Cumulative translation adjustment......................... 58 --
------- -----
Total stockholder's equity............................. 54,602 (111)
------- -----
Total liabilities and stockholder's equity.................. $54,884 $ --
======= =====
</TABLE>
See accompanying notes.
F-12
<PAGE> 93
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED AUGUST 31, FROM SEPTEMBER 1, 1995
---------------------- (INCEPTION)
1997 1996 TO AUGUST 31, 1997
--------- ------- ----------------------
<S> <C> <C> <C>
Equity in net earnings of wireless operating
companies........................................ $ 167 $ -- $ 167
General and administrative expenses................ (1,378) (396) (1,774)
------- ----- -------
Loss before income taxes........................... (1,211) (396) (1,607)
Income tax expense................................. -- -- --
------- ----- -------
Net loss........................................... $(1,211) $(396) $(1,607)
======= ===== =======
Unaudited pro forma basic and diluted net loss per
common share (Note 1)............................ $ (0.07)
=======
</TABLE>
See accompanying notes.
F-13
<PAGE> 94
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED AUGUST 31, FROM SEPTEMBER 1, 1995
----------------------- (INCEPTION)
1997 1996 TO AUGUST 31, 1997
---------- ------- ----------------------
<S> <C> <C> <C>
Operating activities:
Net loss........................................ $ (1,211) $(396) $ (1,607)
Equity in net earnings of wireless operating
companies.................................... (167) -- (167)
Change in accounts payable and accrued
liabilities.................................. 171 111 282
-------- ----- --------
Net cash used in operating activities............. (1,207) (285) (1,492)
-------- ----- --------
Investing activities:
Investments in wireless operating companies..... (54,659) -- (54,659)
-------- ----- --------
Net cash used in investing activities............. (54,659) -- (54,659)
-------- ----- --------
Financing activities:
Stockholder's investment........................ 55,866 285 56,151
-------- ----- --------
Net cash provided by financing activities......... 55,866 285 56,151
-------- ----- --------
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-14
<PAGE> 95
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
STOCKHOLDER'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
------------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at September 1, 1995 (inception)..... $ -- $ -- $-- $ --
Transfers from QUALCOMM...................... 285 -- -- 285
Net loss..................................... -- (396) -- (396)
------- ------- --- -------
Balance at August 31, 1996................... 285 (396) -- (111)
Transfers from QUALCOMM...................... 55,866 -- -- 55,866
Net loss..................................... -- (1,211) -- (1,211)
Cumulative translation adjustment............ -- -- 58 58
------- ------- --- -------
Balance at August 31, 1997................... $56,151 $(1,607) $58 $54,602
======= ======= === =======
</TABLE>
See accompanying notes.
F-15
<PAGE> 96
QUALCOMM SPINCO, 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, QUALCOMM SpinCo, Inc. (the "Company" or "SpinCo"), 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 27, 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 and as if the historical investments
in wireless operating companies were owned by the Company. However, for the
periods covered by the financial statements, such investments were directly or
indirectly legally owned by QUALCOMM. It is not yet certain that QUALCOMM will
obtain necessary agreement from other contractual parties to allow QUALCOMM to
transfer such investments, or elements and obligations thereof, to the Company
upon the Distribution. 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. For the
combined financial statements, the Company presents an accumulated deficit since
inception (September 1, 1995) to highlight that the Company is in the
development stage. However, upon the date of the Distribution, the Company's
deficit accumulated during the development stage prior to the Distribution will
be eliminated and the Company will begin its accumulation of losses as a legally
independent company.
F-16
<PAGE> 97
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-17
<PAGE> 98
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-18
<PAGE> 99
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 ownership interests in partnerships and for investments in
corporate entities in which it has voting interest of 20% to 50% or in which it
otherwise exercises significant influence. 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.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
total amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition are less than its carrying amount.
Foreign Currency
Results of operations for international investments are translated using
average exchange rates during the period, while assets and liabilities are
translated using end-of-period rates. The resulting exchange gains or losses are
accumulated in the "cumulative translation adjustment" account, a component of
stockholder's equity. For operations in countries treated as highly
inflationary, financial statement amounts are translated at historical exchange
rates, with all other assets and liabilities translated at year-end exchange
rates. The effects of translating the financial position and results of
operations of local currency operations have not been significant to the
Company's financial statements. Gains and losses resulting from the Company's
foreign currency transactions have not been significant in relation to its
operations.
Income Taxes
Historically, the Company's operations have been included in the
consolidated income tax returns filed by QUALCOMM. Income tax expense in the
Company's financial statements has been calculated on a separate tax return
basis.
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset and/or liability is computed
for both the expected future impact of differences between the financial
statement and tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carry forwards. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be "more likely than not" realized in future tax returns. Tax
rate changes are reflected in income in the period such changes are enacted.
Unaudited Pro Forma Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share"
which the Company has adopted to compute the unaudited pro forma net loss per
common share ("EPS") amount for fiscal 1997.
The Company had no shares of common stock outstanding during fiscal 1997
and 1996. The unaudited pro forma net loss per common share was calculated by
dividing the 1997 net loss of $1,211,000 by the 17,338,858 expected shares of
Common Stock of the Company to be issued upon the Distribution based on QUALCOMM
shares outstanding as of June 18, 1998. Such shares reflect the expected
issuance upon the Distribution of one of the Company's shares of common stock
for every four shares of QUALCOMM common stock outstanding. Replacement stock
options and awards and the conversion of QUALCOMM's
F-19
<PAGE> 100
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Trust Convertible Preferred Securities which are expected to be convertible into
shares of QUALCOMM and the Company 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.
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>
Investments at equity.................................... $50,884 $ --
Investment at cost....................................... 4,000 --
------- -------
$54,884 $ --
======= =======
</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.
Condensed combined financial information for wireless operating companies
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 Combined Balance Sheet Information:
Current assets............................................ $37,824
Non-current assets........................................ 23,439
Current liabilities....................................... 559
Non-current liabilities................................... 7,589
Redeemable preferred equity............................... 8,850
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997
---------------
<S> <C>
Condensed Combined Statement of Operations Information:
Operating expenses........................................ $ (331)
Net income................................................ 332
</TABLE>
As of August 31, 1997, none of the wireless operating companies had
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 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.
F-20
<PAGE> 101
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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. The Company accounts for its share of Chilesat PCS profits and
losses in accordance with its percentage ownership interest, provided that
during the Preference Period, all of the cumulative net losses are allocated to
Telex-Chile until the adjusted capital account of Telex-Chile, reflecting its
initial contribution of the wireless licenses and an 11.5 year right to use the
Telex-Chile nationwide fiber-optic network valued by the joint venture partners
at $28 million and $14 million, respectively, has been depleted. 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.
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.
Telesystems of Ukraine
In April of 1997, the Company, through a QUALCOMM wholly owned subsidiary,
QUALCOMM International Inc., paid approximately $74,000 to acquire a 49%
ownership interest in Telesystems of Ukraine ("TOU"), a development stage
Ukrainian limited liability company. The Company has the contractual right to
elect four of the seven members to serve on the TOU Board of Directors. However,
the Company does not exercise control of TOU as significant participatory
company governance decisions are made at the shareholder level over which the
Company does not have majority voting rights. The Company, via QUALCOMM
International Inc., also invested approximately $8.6 million pursuant to a joint
investment agreement ("JIA") with TOU to establish a wireless communications
network in Ukraine. Under Ukranian law, the JIA investment is equity with
features similar to redeemable preferred stock. The Company accounts for its
combined investments under the equity method of accounting. The Company will
record all of the profits and losses of the joint activity with TOU until the
Company's $8.6 million investment plus a specified
F-21
<PAGE> 102
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
return has been repaid, thereafter, profits and losses will be recorded
according to the Company's ownership interest in TOU. The Company's equity
losses amounted to $40,000 in fiscal 1997. During fiscal 1997, TOU purchased
frequency licenses and began network planning efforts for a wireless
communications network in Ukraine. The Company may provide further investments
and debt as necessary to support future network build-out and operational needs.
During fiscal 1997, QUALCOMM entered into agreements with TOU to supply
wireless local loop infrastructure and subscriber equipment and services. As of
August 31, 1997, QUALCOMM had not provided any significant equipment or services
under the agreements.
Chase Telecommunications, Inc.
In December 1996, the Company purchased $4 million of Chase
Telecommunications, Inc. ("Chase") Class B Common Stock, representing less than
6% 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.
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 $0.5 million and $0.2 million, respectively, which consisted of
NOL carryforwards. Realization of the future tax benefits of
F-22
<PAGE> 103
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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, QUALCOMM entered into the following
significant agreements concerning wireless operating companies which are
expected to be transferred to the Company upon the Distribution:
PEGASO
In April 1998, QUALCOMM, through its 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, 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, QUALCOMM 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. QUALCOMM expects that it will invest $100 million in the joint venture
before October 1, 1998. QUALCOMM expects that PEGASO will begin commercial
service of wireless services in December 1998.
QUALCOMMTel
During October 1997, QUALCOMM formed QUALCOMM Telecommunications Ltd.
("QUALCOMMTel"), a Cayman Islands corporation. QUALCOMM holds a 70% ownership
interest in QUALCOMMTel. The minority 30% interest is held by Tiller
International Limited, a private investment company. QUALCOMMTel is intended to
be an intermediate holding company to facilitate the Company's business
prospects in the Russian Federation.
In February 1998, QUALCOMMTel entered into an agreement with Tass Telecom,
a Russian company, providing for their participation, subject to terms and
conditions, in the development of wireless communications networks in the
Russian Federation. Pursuant to the agreement and subject to terms and
conditions, QUALCOMMTel and TASS Telecomm will become 50/50 joint venture
partners in Metrosvyaz Interna-
F-23
<PAGE> 104
QUALCOMM SPINCO, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
tional ("Metrosvyaz"), a Cypress 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 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.
OzPhone
In June 1998, QUALCOMM, 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, QUALCOMM 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, QUALCOMM and Inversiones QUALCOMM would hold
voting shares of approximately 65% of Chilesat PCS. This conversion is available
to QUALCOMM 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, QUALCOMM 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 QUALCOMM's existing 50% voting preferred shares in Chilesat PCS.
Telex-Chile has been unable to make principal reductions in its outstanding
loans and is under standstill agreements with many of its significant lenders.
Thus, the Company may not be able to count on Telex-Chile to provide additional
capital to Chilesat PCS when and if needed.
Other
QUALCOMM has entered into a letter of intent to purchase controlling
interests in certain related companies for approximately $52 million, subject to
adjustment and pending due diligence procedures expected to be completed in July
1998. If such interests are acquired, QUALCOMM may transfer such interests to
the Company upon the Distribution. In connection with the potential acquisition,
during May 1998, QUALCOMM provided $15 million in loans that will become part of
the purchase price consideration in the event the acquisition is completed.
Otherwise, the $15 million loan, collateralized by all of the assets of the
potential acquiree, will be repayable within one year of the date of its
issuance.
F-24
<PAGE> 105
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Chilesat Telefonia Personal S.A.
(a company in the development stage)
In our opinion, the accompanying balance sheet and the related statements of
income, of cash flows and of changes in shareholders' equity present fairly, in
all material respects, the financial position of Chilesat Telefonia Personal
S.A. (a company in the development stage) at December 31, 1997, and the results
of its operations and cash flows for the period from inception (March 3, 1997)
to December 31, 1997, in conformity with generally accepted accounting
principles of the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards of
the United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Santiago, Chile,
February 27, 1998
F-25
<PAGE> 106
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
THUS$
------
<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> 107
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>
THUS$
------
<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> 108
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>
THUS$
-------
<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> 109
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
---------- --------- ------ ----------- ----------- -------
THUS$ THUS$ THUS$ THUS$ THUS$
<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> 110
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 predecessor basis.
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. As there was no predecessor value associated with the right to
use of the network and to receive signal distribution services, there will be no
ongoing cost associated with the use of the network and receipt of signal
distribution services charged to results of operations by the Company for 11.5
years.
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
F-30
<PAGE> 111
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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.
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 ThUS$ 338 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
F-31
<PAGE> 112
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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>
THUS$
------
<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> 113
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>
FINANCIAL INSTITUTION UNDERLYING FINANCIAL INSTRUMENT AMOUNT THUS$ 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
ThUS$ 6,228 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>
THUS$
------
<S> <C>
Land........................................................ 140
Buildings and infrastructure................................ 39,771
Machinery and equipment..................................... 88
Other....................................................... 98
Less: Accumulated depreciation.............................. (4)
------
Total net......................................... 40,093
======
Estimated useful lives of assets are:
</TABLE>
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Machinery and equipment..................................... 10
Other....................................................... 5 - 10
</TABLE>
For the period from inception (March 3, 1997) to December 31, 1997 the
Company capitalized ThUS$ 1,508 of interest as part of the cost of construction
of the mobile PCS telephone system.
F-33
<PAGE> 114
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>
THUS$
-----
<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
------- ------------ ----------- ------------ ---------- --------
THUS$ THUS$ THUS$
<S> <C> <C> <C> <C> <C>
Chilesat Servicios Affiliate Reimbursement of 47 10 --
Empresariales S.A. costs incurred on
their behalf
Chilesat S.A Shareholder Reimbursement of 589 -- 196
costs incurred in
connection with
construction
Rent 30 -- --
Qualcomm Incorporated Affiliate Purchase of 23,655 -- 23,655
equipment
Accrued interest on 543 -- 543
note payable
Telex-Chile S.A Shareholder Reimbursement of 49 -- --
costs incurred in
connection with
construction
Telsys S.A Affiliate Computer services 39 -- 39
</TABLE>
b) NOTE PAYABLE TO RELATED COMPANY
As a means of financing the Company's purchase of infrastructure equipment
from Qualcomm Incorporated, it entered into a Deferred Payment Agreement whereby
Qualcomm Incorporated defers payment for the equipment subject to the terms and
conditions set forth in the Agreement. The assets of the Company secure the
obligation. The shares of the Company have also been pledged by Telex-Chile in
guaranty. Qualcomm Incorporated and Bank of America's liens on the Company's
assets and shares are pari passu interests.
Under the terms of the agreement, Qualcomm Incorporated will make loans for
the equipment, software and services it provides to the Company up to a maximum
of US$ 59.5 million. Loans may bear interest based upon a LIBOR or Base Rate or
the Eurodollar. The obligation to repay these loans and interest is evidenced by
promissory notes. Interest accrues on the principal but remains unpaid, with
accrued interest added monthly to the outstanding principal amount of the
applicable loan until the first principal payment, at which time interest is
payable on the same dates as the principal payments.
F-34
<PAGE> 115
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>
THUS$
------
<S> <C>
1999........................................................ 3,025
2000........................................................ 6,050
2001........................................................ 6,049
2002........................................................ 6,049
2003........................................................ 3,025
------
Total............................................. 24,198
======
</TABLE>
The terms of the financing arrangement with Qualcomm Incorporated include
certain positive and negative covenants, the most significant of which are as
follows:
The Company shall not
<TABLE>
<C> <S>
i) Incur any additional encumbrances or liens.
ii) Create any indebtedness other than indebtedness incurred for
the purposes of partial or full repayment of the notes
payable.
iii) Incur operating lease obligations greater than one year and
exceeding US$ 1 million for any twelve month period.
iv) Consolidate or merge with another entity.
v) Guarantee any indebtedness.
vi) Acquire stock or the assets of any other person.
vii) Advance funds.
viii) Become liable for a capital lease obligation exceeding US$ 1
million.
ix) Enter into transactions with affiliates, except arm's length
transactions in the ordinary course of business.
x) Invest in other than investment grade instruments.
xi) Declare or pay cash dividends or make distributions in
excess of 30% of excess cash flows during the third and
fourth annual periods of operations of the Company,
increasing to 50% after period 4.
xii) Maintain funded debt to total capitalization greater than
0.65, 0.71 and 0.75 in annual periods 1, 2 and 3 and
thereafter, respectively.
xiii) Permit Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") to be less than US$ 1.
xiv) Permit funded debt to EBITDA to exceed 23.91, 4.74, 3.32 and
2.4 in annual periods 2, 3, 4 and 5, respectively.
xv) Permit EBITDA to interest expense to be less than 0.47,
2.38, 3.00 and 3.00 in annual periods 2, 3, 4 and 5,
respectively.
xvi) Incur capital expenditures greater than US$ 116 million
until the Company has more than 50,000 subscribers, at which
time the threshold increases.
</TABLE>
The Company is in compliance with these covenants.
F-35
<PAGE> 116
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 8 -- OTHER LONG-TERM LIABILITIES
This balance is mainly comprised of deferred customs duties.
Under Chilean law, the payment of customs duties levied on machinery and
equipment can be deferred over a period of up to seven years. The balance at
December 31, 1997 represents amounts owing at maturity including accrued
interest. The scheduled repayments are as follows:
<TABLE>
<CAPTION>
THUS$
-----
<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
ThUS$5,233 were available to apply against income tax liabilities in future
years. Under Chilean law, such income tax loss carryforwards never expire.
Deferred income taxes at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
THUS$
-----
<S> <C>
Assets:
Tax loss carryforwards...................................... 785
Allowance for income tax loss carryforwards................. (655)
----
Deferred income tax assets.................................. 130
----
Liabilities:
Capitalized interest........................................ (130)
----
Deferred income tax liabilities............................. (130)
----
Net deferred income taxes................................... --
====
</TABLE>
Because the Company is in the development stage and has no history of
generating taxable income against which tax loss carryforwards would be applied,
an allowance was recorded at December 31, 1997 with respect to those tax loss
carryforwards which, based on the weight of available evidence, are not likely
be realized.
NOTE 10 -- SHAREHOLDERS' EQUITY
a) AUTHORIZED CAPITAL
Authorized capital stock of the Company is comprised of 8,400,000 Series A
preferred shares and 8,400,000 Series B ordinary shares. Qualcomm holds all the
outstanding preferred shares whereas Chilesat
F-36
<PAGE> 117
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
holds all the ordinary shares. The preference with respect to the preferred
shares consists of the right to be paid before any other series of shares in the
event of liquidation of the Company up to the amount of the stated value of the
preferred shares. The preference has a duration of 6 years as from April 10,
1997, after which all shareholders shall have equal rights with respect to the
liquidation of the Company.
b) DIVIDENDS
Chilean law permits the payment of dividends only in Chilean pesos and
these are limited to the retained earnings balances in the Company's statutory
financial statements at each calendar year end. As the Company has an
accumulated deficit at December 31, 1997 in its statutory financial statements,
it is prohibited from declaring and paying dividends until such time that it
generates sufficient retained earnings.
c) CAPITAL INCREASE
Pursuant to the terms of the shareholders' agreement, Qualcomm agreed to
subscribe for 8,400,000 Series A preferred shares in exchange for its cash
contribution of US$42 million and Chilesat agreed to subscribe for 8,400,000
Series B ordinary shares for its contribution of a contract for the right to use
a part of Chilesat's network and signal distribution services and certain net
assets. Qualcomm contributed the funds into an escrow account on March 3, 1997
and a receivable balance for share subscriptions was recorded. With the
exception of US$1,500,000 of funds made available to the Company, the funds were
not to be distributed to it until official publication of the awarding of the
PCS license. The awarding of the PCS license was published and the Company
received the funds in June, 1997, at which time the share subscription
receivable was settled.
d) PUT AND CALL OPTIONS
As part of the Shareholders' Agreement between Qualcomm and Chilesat,
Chilesat acquired an option to purchase, for the purpose of placement with (i) a
reputable international operator or (ii) an investor not in competition with
Qualcomm as vendor and system integrator, either 50% or 100% of the preferred
shares held by Qualcomm at the option of Chilesat. The option is exercisable
until the earlier of (i) 21 months following the award of the PCS license to the
Company or (ii) 3 months following the release of the Company's surety
obligations with Subtel. At the same time, Qualcomm acquired an option to sell
its preferred shares to Chilesat in the event that the Company is no longer
using Qualcomm technology in its mobile PCS telephone system.
NOTE 11 -- FAIR VALUE
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at December 31, 1997, when the estimate
of such value is practicable:
- Cash and cash equivalents, recoverable taxes and accrued liabilities and
withholdings have been stated at carrying value which is equivalent to
fair value.
- The fair values of the note payable to related company and other
long-term liabilities were based on interest rates currently available to
the Company for debt with similar terms and remaining maturities. The
carrying value of the note payable to related company approximates fair
value because the terms of the loan agreement require that the stated
rate of interest be periodically adjusted to the market rate.
F-37
<PAGE> 118
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The estimated fair value of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------
CARRYING
AMOUNTS FAIR VALUE
-------- ----------
THUS$ THUS$
-------- ----------
<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>
THUS$
-----
<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 ThUS$91.
b) SECURITY FOR DEBT AND OTHER OBLIGATIONS
The Company was required to provide a standby letter of credit facility in
the amount of US$58 million in favor of the Subsecretariat of Telecommunications
of Chile ("Subtel") to assure the fulfillment of the requirement that the
Company's PCS services be operational by June 23, 1998 in the case of the
geographical area covered by Chile's 4th to 10th regions and by December 23,
1998 for the remainder of the country. If the Company meets this condition by
these dates, the standby letter of credit will no longer be required by Subtel.
The Company solicited the Bank of America National Trust to issue a standby
letter of credit in favor of local financial institutions which, in turn, issued
a standby letter of credit in favor of Subtel.
The Company has pledged it PCS license as security against the notes
payable to Qualcomm Incorporated and the standby letter of credit from the Bank
of America National Trust.
Telex-Chile S.A. and Chilesat S.A. have pledged 83,920 and 8,316,080 Series
B common shares of the Company, respectively, as security for 50% of the notes
payable to Qualcomm Incorporated and the standby
F-38
<PAGE> 119
CHILESAT TELEFONIA PERSONAL S.A.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
letter of credit from the Bank of America National Trust. Inversiones Qualcomm
Chile S.A. has also pledged 8,400,000 Series A preferred shares of the Company
as security for the standby letter of credit from the Bank of America National
Trust.
NOTE 13 -- SUBSEQUENT EVENTS
a) NOTES PAYABLE TO RELATED COMPANIES
During the period from January 1, 1998 through February 27, 1998, the
Company borrowed an additional ThUS$11,932 under its financing agreement with
Qualcomm Incorporated relating to additional equipment purchases for its mobile
PCS telephone system.
b) TELEX-CHILE S.A.
Telex-Chile S.A., a shareholder of the Company and the parent company of
Chilesat S.A., also a shareholder of the Company, had a working capital
deficiency of approximately US$ 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 ThUS$5,551 of VAT from the
Chilean Government relating to the importation of equipment for its mobile PCS
telephone system.
F-39
<PAGE> 120
ANNEX 1
DRAFT, SUBJECT
TO COMPLETION OF
ANALYSES AND INTERNAL
LEHMAN BROTHERS
APPROVAL
Board of Directors
QUALCOMM Incorporated
6455 Lusk Boulevard
San Diego, CA 92121
Dear Members of the Board:
We understand that QUALCOMM Incorporated ("QUALCOMM" or the "Company") has
announced its plans to distribute to the holders of common stock of the Company
100% of the outstanding shares of common stock of QUALCOMM SpinCo, Inc.
("SpinCo"), so that holders of shares of common stock of QUALCOMM will receive
one share of SpinCo for every four shares of QUALCOMM owned by them (the
"Distribution"). SpinCo is a wholly owned subsidiary of QUALCOMM, created in
connection with the Distribution, which will own all of the outstanding capital
stock of SpinCo, the operating subsidiary of QUALCOMM which is being spun off.
Information about the Distribution is included in the Registration Statement of
the Company on Form 10, as filed with the Securities and Exchange Commission
(the "Commission") on June 30, 1998 [and amended to the date hereof] (the "Form
10"), and in the Information Statement dated as of the date hereof to be mailed
to QUALCOMM shareholders in connection with the Distribution (the "Information
Statement"). QUALCOMM after the Distribution is hereinafter referred to as "New
QUALCOMM." Certain elements of the relationship between New QUALCOMM and SpinCo
following the Distribution are set forth in a series of intercompany agreements
(the "Agreements") which were filed as exhibits to the Form 10. Upon advice of
QUALCOMM and its legal and accounting advisors, we understand that receipt of
the SpinCo common stock will be treated as a taxable dividend to the
stockholders of QUALCOMM for federal income tax purposes.
In connection with the Distribution, we have been requested by QUALCOMM to
render our opinion with respect to (i) the fairness, from a financial point of
view, to the holders of common stock of QUALCOMM, of the Distribution, and (ii)
whether the Distribution will materially impair the ability of New QUALCOMM and
SpinCo to fund in the future, from external sources or through internally
generated funds, their respective currently anticipated operating and capital
requirements (as currently projected in the financial forecasts prepared by the
management of QUALCOMM). We have not been requested to opine as to, and our
opinion does not in any manner address, (i) QUALCOMM's underlying business
decision to proceed with or effect the Distribution or (ii) the ability of New
QUALCOMM or SpinCo to access the capital markets at any time following the
distribution.
In arriving at our opinion, we reviewed and analyzed: (i) the Agreements,
(ii) the Form 10, the Information Statement and such other publicly available
information concerning QUALCOMM, New QUALCOMM, SpinCo and the Distribution which
we believe to be relevant to our inquiry, (iii) financial and operating
information with respect to the business, operations and prospects of QUALCOMM,
New QUALCOMM and SpinCo furnished to us by QUALCOMM, (iv) a comparison of the
historical financial results and present financial conditions of QUALCOMM and,
on a pro forma basis, New QUALCOMM and SpinCo, with those of other publicly held
companies that we deemed relevant, (v) the trading history of QUALCOMM common
stock and a comparison of such trading history with those of other publicly held
companies that we deemed relevant, (vi) publicly available research reports
regarding QUALCOMM, (vii) the terms of selected recent spin-off transactions
that we deemed relevant and the market performance of securities involved in
such transactions both before and after the consummation of such transactions,
(viii) the terms of certain recent public stock offerings and merger
transactions that we deemed relevant, and (ix) the proposed terms of the credit
facility to be provided to SpinCo by New QUALCOMM. In addition,
A-1
<PAGE> 121
we have had discussions with the management of QUALCOMM and the proposed
management of SpinCo concerning the business, operations, assets, financial
condition and prospects of QUALCOMM and, on a pro forma basis, New QUALCOMM and
SpinCo, and undertook such other studies, analyses and investigations as we
deemed appropriate.
We have assumed and relied upon the accuracy and completeness of the
financial and other information used by us in arriving at our opinion without
independent verification and have further relied upon the assurances of the
management of QUALCOMM that they are not aware of any facts that would make such
information inaccurate or misleading. With respect to the financial forecasts of
New QUALCOMM and SpinCo, upon advice of QUALCOMM we have assumed that such
forecasts have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of QUALCOMM as to the future
financial performance of New QUALCOMM and SpinCo and that New QUALCOMM and
SpinCo will perform in accordance with such forecasts. In arriving at our
opinion, we have not conducted a physical inspection of the properties or
facilities of QUALCOMM or SpinCo and have not made nor obtained any evaluations
or appraisals of the assets or liabilities of QUALCOMM or SpinCo. [In addition,
you have not authorized us to solicit, and we have not solicited, any
indications of interest from any third party with respect to a purchase of the
businesses or assets of SpinCo.] Our opinion is necessarily based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
In addition, we express no opinion as to the prices at which shares of
common stock of New QUALCOMM or SpinCo actually will trade following the
consummation of the Distribution. The process by which securities trading
markets establish a market price for any security is complex, involving the
interaction of numerous factors, and market prices will fluctuate with changes
in, among other things, the financial condition, business and prospects of the
issuer and comparable companies and economic and financial market conditions. In
addition, trading in shares of SpinCo will likely be characterized by a period
of redistribution among QUALCOMM's shareholders who receive such shares in the
Distribution (especially in light of the taxable nature of the distribution
which may temporarily depress the market price of such shares during such
period). Accordingly, this opinion should not be viewed as providing any
assurance that the combined market value of the shares of common stock of New
QUALCOMM and the shares of common stock of SpinCo to be received by a
stockholder of QUALCOMM in the Distribution will be in excess of the current
market value of the common stock of QUALCOMM owned by such stockholder at any
time prior to announcement or consummation of the Distribution.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that the Distribution (i) is fair, from a financial point of view,
to the holders of common stock of QUALCOMM and (ii) will not materially impair
the ability of New QUALCOMM and SpinCo to fund in the future, from external
sources or through internally generated funds, their respective currently
anticipated operating and capital requirements (as currently projected in the
financial forecasts prepared by the management of QUALCOMM).
We have acted as financial advisor to QUALCOMM in connection with the
Distribution and will receive a fee for our services which is contingent upon
the consummation of the Distribution. In addition, QUALCOMM has agreed to
indemnify us for certain liabilities that may arise out of the rendering of this
opinion. We also have performed various investment banking services for QUALCOMM
in the past and have received customary fees for such services. In the ordinary
course of our business, we actively trade in the securities of QUALCOMM for our
own account and for the accounts of our customers and, accordingly, may at any
time hold long and/or short positions in such securities or in the securities of
New QUALCOMM or SpinCo following the Distribution.
A-2
<PAGE> 122
This opinion is solely for the use and benefit of the Board of Directors of
QUALCOMM. This opinion is not intended to be and does not constitute a
recommendation to any current or prospective stockholders of QUALCOMM, New
QUALCOMM or SpinCo as to any action or investment decisions which may be taken
by such stockholders with respect to shares owned or to be received by them.
Very truly yours,
LEHMAN BROTHERS
By:
--------------------------------------
Managing Director
A-3
