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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
COMMISSION FILE NUMBER 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 33-811062
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(619) 882-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE
(TITLE OF CLASS)
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of November 10, 1998, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$104,817,000, based on the closing price of the Company's Common Stock on the
Nasdaq National Market on November 10, 1998 of $6.03 per share.
As of November 10, 1998, 17,684,367 shares of registrant's Common Stock,
$.0001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders of the Registrant, which is expected to be filed not later than
120 days after the Registrant's fiscal year ended August 31, 1998.
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FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. This document contains certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and includes this statement for purposes of such
safe harbor provisions. Forward-looking statements, which are based upon certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believes," "expects,"
"intends," "anticipates," "plans to," "estimates," "projects" or similar
expressions. The ability of the Company to predict results or the actual effect
of future plans or strategies is inherently uncertain. Important factors which
may cause actual results to differ materially from the forward-looking
statements contained herein or in other public statements by the Company are
described in the section entitled "Factors That Could Affect Future Performance"
in Item 1, and other risks identified from time to time in the Company's filings
with the Securities and Exchange Commission, press releases and other
communications. The Company assumes no obligation to update forward-looking
statements.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Leap Wireless International, Inc. ("Leap Wireless" or the "Company")
manages, supports, operates or otherwise participates in Code Division Multiple
Access ("CDMA")-based wireless telecommunications businesses and ventures in the
United States, Mexico, Russia, Chile and Australia. Most of these systems are at
an early stage of development. The current United States and Chilean businesses
began limited commercial operations in late 1998, and the Company expects
commercial launch of the other systems in 1999. The Company is also pursuing
opportunities to provide, manage, support, operate and invest in additional
wireless telecommunications systems in other targeted United States and
international markets offering high growth potential.
Leap Wireless was formed in June 1998 as a subsidiary of QUALCOMM
Incorporated ("QUALCOMM"), a leading provider of CDMA-based digital wireless
communications equipment, technologies and services. On September 23, 1998 (the
"Distribution Date"), QUALCOMM distributed all of the outstanding shares of
Common Stock of the Company, par value $.0001 per share, (the "Common Stock") to
QUALCOMM's stockholders as a taxable dividend (the "Distribution").
QUALCOMM is a major supplier of CDMA subscriber and infrastructure
equipment for the Company's wireless telecommunications businesses, and the
Company expects that QUALCOMM will continue to be a major supplier for future
wireless telecommunications businesses in which the Company participates. Prior
to the Distribution, QUALCOMM agreed to provide significant vendor financing to
several of Leap Wireless' businesses and ventures that purchase QUALCOMM
infrastructure and subscriber equipment. These ongoing supply and financing
relationships could place QUALCOMM in conflict with Leap Wireless. In addition,
QUALCOMM and Leap Wireless are parties to a number of agreements, including but
not limited to, a Separation and Distribution Agreement, a Credit Agreement and
a Master Agreement Regarding Equipment Procurement (the "Equipment Agreement").
Such Agreements contain restrictions on Leap Wireless' ability to invest in
other joint ventures.
Leap Wireless owns, directly or indirectly, joint venture or equity
interests in the following telecommunication companies: Pegaso
Telecomunicaciones S.A. de C.V. (Mexico), Metrosvyaz Limited (Russia),
Orrengrove Investments Limited (Russia), ChileSat Telefonia Personal, S.A.
(Chile), Chase Telecommunications, Inc. (U.S.) and OzPhone Pty. Ltd. (Australia)
(collectively, the "Leap Wireless Operating Companies"). These interests were
formerly held by QUALCOMM and were transferred to the Company on the
Distribution Date. In addition, Leap Wireless is pursuing and intends to pursue
additional telecommunications opportunities in domestic and international
markets. QUALCOMM and Leap Wireless have also agreed that, if certain events
occur before April 2000, certain assets and liabilities related to Telesystems
of Ukraine ("TOU"), a wireless operating company in the Ukraine, will be
transferred to Leap Wireless. QUALCOMM holds a 49% interest in TOU. There can be
no assurance that such events will occur or that legal impediments to transfer
will be removed, or that QUALCOMM's interest in TOU will be so transferred.
The Company's wireless telecommunications systems are based on CDMA
technology, a proprietary integrated software and hardware system invented by
QUALCOMM and used for digitally transmitting telecommunications signals in a
wireless network. The Company believes that 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 systems have been
commercially deployed or are under development in approximately 30 countries
with over 16 million commercial subscribers worldwide. For purposes of this
report, "cdmaOne" shall mean those fixed or mobile wireless telecommunications
systems based on or derived from QUALCOMM's CDMA technology which (i) have been
adopted as an industry standard by the Telecommunications Industry Association
("TIA") or other recognized international standards bodies, and the adoption of
such standard has been voted in favor of by QUALCOMM ("QUALCOMM Approved
Standards"), (ii) are compatible with or employ the same physical layer as
QUALCOMM Approved
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Standards ("QUALCOMM Approved Systems"), or (iii) are compatible with the
infrastructure and subscriber equipment manufactured and sold by QUALCOMM.
CdmaOne currently includes, by way of example and not by limitation, the TIA's
IS-95 digital cellular standard and ANSI JSTD-008 digital personal
communications service ("PCS") standard. If a terrestrial-based wireless
telecommunications system is considered a cdmaOne system in one country,
QUALCOMM and Leap Wireless have agreed that it would be considered a cdmaOne
system in any other country, irrespective of whether or not such system has been
adopted (or approved by QUALCOMM) as a standard in such other country.
The Company's senior management has many years experience in the wireless
telecommunications industry. A number of the Company's senior management members
were previously members of QUALCOMM's senior management and joined the Company
from QUALCOMM in connection with the formation of the Company, including Harvey
P. White, a co-founder of QUALCOMM and formerly President and later Vice
Chairman of the Board of QUALCOMM, who is the Company's President, Chief
Executive Officer and Chairman of the Board; Thomas J. Bernard, formerly Senior
Vice President of QUALCOMM, who is the Company's Executive Vice President; and
James E. Hoffmann, formerly Vice President, Legal Counsel of QUALCOMM, who is
the Company's Senior Vice President and General Counsel. Leap Wireless believes
its continuing relationship with QUALCOMM and the other participants in its
operating companies, the experience and expertise of its management team, and
the quality of CDMA and other products and services to be offered by Leap
Wireless' operating entities, among other factors, will position Leap Wireless
to become a significant provider of wireless telecommunications services
worldwide.
The Company participates in its wireless telecommunications businesses
primarily through joint ventures and strategic alliances with other parties. The
Company provides 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 provides these services using its
own employees as well as through consultants with substantial experience in the
telecommunications industry. The Company intends to continue to focus on
providing such management and operational support in its future wireless
telecommunications business opportunities.
The Company has only operated as an independent company since September
1998 and it, and each of its wireless telecommunications businesses and
ventures, are at an early stage of development. Through the date of this report,
the Company has generated no revenues from the Leap Wireless Operating
Companies, and the Company expects such entities to incur substantial losses for
the foreseeable future. Leap Wireless has generated net losses since inception,
and will be required to recognize a share of the start-up operating losses of
such businesses and ventures as a result of the Company's ownership interests
therein. The Company's ability to generate revenues will be dependent on a
number of factors, including the future operations and profitability of the
Company's wireless telecommunications businesses and ventures.
The Company expects to have significant future capital requirements
relating to funding commitments to its wireless telecommunications businesses
and ventures and other general working capital needs. The Company expects to
obtain much of its required near-term financing through borrowings under its
Credit Agreement with QUALCOMM. As a result of its capital requirements,
including borrowings under the Credit Agreement, the Company expects that it
will become highly leveraged during its fiscal year ending on August 31, 1999.
The Company believes that recent changes in the telecommunications 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, improvements in voice quality, and lower equipment and maintenance
costs. 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 phone.
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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. QUALCOMM agreed to participate in several of such business
opportunities. QUALCOMM has now transferred its interests in the Leap Wireless
Operating Companies to Leap Wireless, and Leap Wireless believes that it has an
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 build out. Leap Wireless anticipates that there will be
an increasing number of opportunities where new licensees or licensees seeking
to expand their business will seek help from Leap Wireless for operational
support, management and capital.
Leap Wireless intends to continue its strategy of entering into joint
ventures to access new markets and opportunities. Leap Wireless expects that it
will selectively focus on a limited number of high-growth opportunities, taking
into account its management and capital resources. Leap Wireless plans to focus
its operations on areas where the potential to provide value added services, and
thereby launch successful wireless ventures, is higher. Leap Wireless will
strive to expand its expertise through the experience gained on its current and
future ventures to become a sought after and more valuable participant in future
joint ventures.
Leap Wireless believes that it will not have the opportunity for majority
ownership in many of these operating joint ventures, due to a variety of reasons
ranging from government policy to investment limitations prescribed by license
holders and/or the desire to bring many parties with diverse experience into a
joint venture. Leap Wireless does not believe that the ownership percentage of a
participant in such a joint venture is necessarily determinative of the level of
services supplied or the degree of operational or project management provided by
such participant to the venture. Generally, Leap Wireless plans to have a
significant initial ownership and to be active in the management of all the
systems in which it has an equity interest, consistent with applicable laws,
contractual arrangements and other requirements. Over time, however, Leap
Wireless expects that its percentage ownership interests will be reduced as part
of the dilution that will occur as the Leap Wireless Operating Companies raise
additional capital to expand or build out the systems. From time to time, it may
also sell ownership interests as part of a strategy of returning value to Leap
Wireless stockholders from the increase in value of the systems in which it has
participated. Such sales are expected to provide funds for future participation
in new projects thereby providing for growth in Leap Wireless. The Company
anticipates that sales of partial interests in any operation will not
significantly affect Leap Wireless' management or operational role with that
entity.
Leap Wireless' operating companies hold licenses to provide wireless
telecommunications services to an aggregate of approximately 159 million
potential subscribers as of November 1, 1998. In addition, Leap Wireless'
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 117
million potential subscribers. Leap Wireless also intends to identify and
develop new opportunities in the United States by acquiring frequency spectrum,
or entering into reseller agreements for minutes of use, principally in the PCS
bands, and by establishing new businesses to provide competitive wireless
services.
Leap Wireless expects its operating company in Mexico, which holds licenses
to provide nationwide services throughout Mexico, will provide high-quality,
cost-effective cdmaOne wireless telecommunications services to selected markets
within that country beginning February 1999. In Russia, Leap Wireless'
subsidiary QUALCOMMTel and an affiliate of Itar Tass, the official news agency
of the Russian Federation, have formed a joint venture in which they hold equal
shares. The joint venture, Metrosvyaz, is in the process of entering into other
joint ventures with local telecommunications operators to finance, build and
operate wireless systems in Russia. A separate Leap Wireless subsidiary, also
named QUALCOMMTel, is a joint venture participant in Orrengrove Investments,
Ltd., which is building a long distance network in Russia through its
subsidiaries. Leap Wireless participates in the Chilean telecommunications
market through its 50% investment in Chilesat Telefonia Personal S.A. ("Chilesat
PCS"), which holds a nationwide Chilean PCS license. Chilesat PCS began limited
commercial operations in September 1998 and had approximately 10,000 subscribers
as of November 15, 1998. In Australia, Leap Wireless' wholly owned subsidiary
owns a license to operate wireless telecommunications in 13 regions covering
approximately 6.4 million potential
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customers ("POPs"). In addition, QUALCOMM and Leap Wireless have agreed that, if
certain events occur before April 2000, certain QUALCOMM assets and liabilities
related to Telesystems of Ukraine will be transferred to Leap Wireless. There
can be no assurance that such events will occur, that the legal impediments to
transfer will be removed, or that QUALCOMM's interest in TOU will ever be
transferred to Leap Wireless. TOU is scheduled to commence commercial operations
in Kiev in early 1999 and expects to later expand to additional major Ukrainian
cities.
The following table summarizes Leap Wireless' current joint ventures and
other interests and provides certain information relating thereto:
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ACTUAL/
EXPECTED
EQUITY REAL GDP LICENSED EQUITY TOTAL EQUITY COMMERCIAL
INVESTMENT LOCATION INTEREST PER CAPITA POPS POPS SUBSCRIBERS SUBSCRIBERS LAUNCH
---------- ---------- -------- ---------- -------- ------ ----------- ----------- ----------
(US$) (IN MILLIONS)
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Pegaso Telecomunicaciones,
S.A. de C.V.(1).............. Mexico 33%(2) $ 2,947 99.0 32.7(2) N/A N/A Feb 99
Chase Telecommunications,
Inc.......................... Tennessee, 7.2% 27,175(3) 6.3 0.5 3,100 -- Sep 98
U.S.A.
Chilesat Telefonia Personal,
S.A.(4)...................... Chile 50% 5,270 14.9 7.5 10,000 5,000 Sep 98
QUALCOMMTel/Metrosvyaz......... Russia *(5) 2,128(3) 32.1(6) 5.6(6) N/A N/A Dec 97(7)
QUALCOMMTel/Orrengrove......... Russia *(8) 2,128(3) *(8) *(8) N/A N/A Dec 98
(Long distance venture)
Oz Phone....................... Australia 100% 20,062(3) 6.4 6.4 N/A N/A Dec 99
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(1) Leap Wireless' holdings are through a wholly owned subsidiary, Qualcomm PCS
Mexico, Inc., which in turn owns thirty-three percent (33%) of Pegaso
Telecomunicaciones, S.A. de C.V. Pegaso Telecomunicaciones, S.A. de C.V.
owns three companies, one of which owns the license, one of which owns the
operating assets and operates the business, and one of which employs the
operating personnel.
(2) Leap Wireless' interest in Pegaso Telecomunicaciones, S.A. de C.V. is
expected to be diluted to approximately 25% through new capital that other
investors have committed to contribute, and this will reduce the Company's
equity POPs to 24.8 million.
(3) Real GDP (Gross Domestic Product adjusted for inflation) is stated for the
country as a whole, although existing licenses cover only a portion of the
country.
(4) Leap Wireless' holdings are through a wholly owned subsidiary, Inversiones
QUALCOMM Chile S.A., which in turn owns fifty percent (50%) of Chilesat.
(5) Leap Wireless' holdings in Russia are through two distinct subsidiaries.
Leap Wireless holds a seventy percent (70%) owned subsidiary, QUALCOMM
Telecommunications Ltd., a Cayman Islands company, which in turn owns fifty
percent (50%) of Metrosvyaz Limited, which plans to own fifty percent (50%)
of several operating joint ventures in Russia. See Note 8 below regarding
the second subsidiary.
(6) Licensed POPs (licenses covering a number of potential customers) and Equity
POPs (licensed POPs multiplied by equity percentage ownership) are based on
the populations of regions that Metrosvyaz expects to serve through joint
ventures, based upon letters of intent regarding the formation of joint
ventures which had been signed as of November 10, 1998.
(7) The first system in Rostov on Don became operational in December 1997
outside of a planned joint venture. Leap Wireless expects the system to be
contributed to the joint venture.
(8) In addition to the subsidiary discussed in Note 5, Leap Wireless holds a 70%
interest in QUALCOMM Telecommunications Ltd., an Isle of Man company, which
in turn owns a 50% interest in Orrengrove Investments Limited
("Orrengrove"), which in turn owns a 60% interest three related companies
(the "Transworld Companies"), one of which is the 50% owner of Tass Loutch
Telecom. Orrengrove is building a long distance network in Russia through
its affiliates. Because Orrengrove intends to provide long distance services
to operators and not wireless communications services to subscribers, no
figures are listed for Licensed POPs and Equity POPs.
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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 systems. The number of wireless licenses and the
amount of spectrum allocated to wireless networks are growing rapidly. Awards of
multiple licenses for fixed and mobile wireless telecommunications operations to
multiple carriers to spur the growth of teledensity and competition are
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 national and/or regional carriers. These changes have
created a need for capital to build out these new (largely wireless) systems and
expertise to oversee and manage the entry of these new systems into their
competitive markets.
Significant demand for high-quality wireless telecommunications systems
also exists in more developed international markets. In many such countries,
telecommunications systems have been closely regulated by local governments, and
licenses to provide services have been largely unavailable. Decreased government
regulation, and active solicitation of new and better services through auctions
of licenses, have created opportunities for local and foreign providers to
capture market share. Such opportunities have been recognized in many countries,
including those where Leap Wireless has operations.
Wireless telecommunications service is currently available using either
analog or digital technology. Although analog technology is more widely deployed
than digital technology, its use is growing more slowly and 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
digitally based 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 predominant variations: (i) Global System for Mobile
Communications ("GSM"), a system standardized in Europe and widely exported and
deployed throughout the world, including a variant used for PCS in the United
States; (ii) U.S. TDMA, a standard for cellular and PCS in the U.S. which has
had limited success outside the Americas; and (iii) PDC, a Japanese standard.
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 currently provides more than 10 times the capacity of analog
wireless technologies in large scale systems, and more than three to five 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 also require fewer cell sites
than other wireless technologies to cover a given area, which can reduce initial
capital expenditures as well as ongoing operational and maintenance costs. Based
on product improvement announcements, the Company expects that the current
capacity of cdmaOne may double. 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
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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 over 50 manufacturers who are licensed to
produce CDMA network equipment, subscriber handsets, and test equipment, thus
providing a wide choice in suppliers, competitive equipment pricing and
continued product developments. The developer and licenser of CDMA, QUALCOMM,
continues to maximize the performance of the technology across its broad CDMA
product lines, and is a leader in the advancement of the CDMA standard and CDMA
equipment. Ongoing enhancements have decreased costs and increased performance
of CDMA systems.
CdmaOne is evolving to support new features and services such as higher
speed data and more capacity. The community of CDMA manufacturers has
demonstrated widespread commitment to evolve this technology to the next
generation of systems. The Company believes that by deploying cdmaOne networks,
service providers are well positioned to migrate their networks from the current
to the next generation of networks. As a result, Leap Wireless 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.
CORPORATE STRATEGY
Leap Wireless' strategy is to provide management and project expertise to,
selectively invest in, and manage, joint ventures and other collaborative
efforts to provide cdmaOne wireless telecommunications services in markets with
significant growth potential. The Company believes its experience, technical and
commercial expertise, and access to equipment and technology will benefit the
Company and the entities in which it invests. Elements of the Company's strategy
include:
Focus on National/International Growth Markets. The Company expects to
continue to invest in entities that serve or intend to serve markets in which
Leap Wireless' contributions could result in added value and contribute to an
enterprise that captures significant market share. Leap Wireless' equity
interests in Russia are examples of the Company's plan to invest in developing
countries and provide wireless service to markets without significant wireline
penetration. Joint ventures and equity interests in Australia, Chile and Mexico
are consistent with the Company's strategy of obtaining licenses in markets
where such licenses were previously unavailable or more limited in number and
scope.
Actively Participate in Operating Company Management. The Company exercises
(to varying degrees) significant management influence and oversight over the
businesses in which it invests. Leap Wireless 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. Leap Wireless has the right to appoint or nominate
certain management personnel for, and has representation on the Boards of
Directors of, the operating companies in which it holds significant equity
positions. Moreover, Leap Wireless 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 and
professional team consists of individuals with substantial collective experience
in the wireless communications industry, including experience with large,
international deployments of networks and services. Moreover, Harvey P. White,
Thomas J. Bernard and James E. Hoffmann have played a significant role in the
rapid growth of QUALCOMM, the development and standardization of QUALCOMM's CDMA
technology and the formation of the Leap Wireless joint ventures. Leap Wireless
believes the experience and expertise of its management team enables it to add
significant value in its relationships with operating companies.
Leverage Strategic Alliances. Leap Wireless has developed strong
relationships with telecommunications and other companies including those with
which it has jointly invested. In securing investment partners, Leap Wireless
seeks entities that can provide familiarity with local markets, 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 relationships with its co-investors in various markets in order that
each investor
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can contribute to the success of a particular operating company. 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. Leap Wireless' operating companies are
comprised principally of joint ventures in which QUALCOMM was a partner or
substantial stockholder. The Company has a close relationship with QUALCOMM that
it believes helps position the Company as an attractive partner. Leap Wireless
also believes that this relationship provides it with competitive advantages in
identifying and participating in international telecommunications joint ventures
on terms and conditions that are mutually beneficial to both companies. Leap
Wireless also expects to have certain access to technical expertise and
experience of QUALCOMM and its employees and affiliated entities, through its
relationship under the Equipment Agreement and QUALCOMM's ongoing relationship
with the Leap Wireless Operating Companies under equipment and other agreements.
QUALCOMM has committed $265 million to the Company by way of a secured credit
facility (the "Credit Facility"). The Credit Facility consists of two
sub-facilities. The first sub-facility (the "Working Capital Facility") will
enable Leap Wireless to borrow up to $35.2 million from QUALCOMM, subject to the
terms thereof. The proceeds from the Working Capital Facility may be used by
Leap Wireless solely to meet the normal working capital and operating expenses
of Leap Wireless, including salaries and overhead, but excluding, among other
things, strategic capital investments in wireless operators, substantial
acquisitions of capital equipment, and/or the acquisition of telecommunications
licenses. The other sub-facility (the "Investment Capital Facility") will enable
Leap Wireless to borrow up to $229.8 million from QUALCOMM, subject to the terms
thereof. The proceeds from the Investment Capital Facility may be used by Leap
solely to make certain identified portfolio investments, unless Leap Wireless
and QUALCOMM otherwise agree. Leap Wireless and QUALCOMM also have entered into
the Equipment Agreement pursuant to which QUALCOMM has the right to provide its
CDMA equipment to certain of Leap Wireless' existing and future operating
companies. QUALCOMM also has existing contracts to supply and finance equipment,
and other contractual relationships, with Leap Wireless' 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 the Leap Wireless Operating Companies.
Build Industry-Leading Networks. The Company's wireless networks are and
will be designed to utilize cdmaOne technology. The Company intends that its
operating companies will build high-quality, industry-leading networks that
provide state-of-the-art services and sophistication. The Company believes
cdmaOne technology will allow 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 its use of CDMA technology will
give it an advantage over competitors utilizing competing technologies in terms
of the costs to deploy and operate networks, spectral efficiencies, improved
service offerings to customers, enhanced voice quality, privacy and fraud
protection, and fewer dropped calls.
LEAP WIRELESS OPERATING COMPANIES
Leap Wireless' operating companies consist of joint ventures and other
entities around the world, each of which is described below.
PEGASO TELECOMUNICACIONES, S.A. DE C.V. AND PEGASO COMUNICACIONES Y
SISTEMAS, S.A. DE C.V., MEXICO
General. The Company holds an interest in Pegaso Telecomunicaciones, S.A.
de C.V. ("PEGASO"), a joint venture formed for the purpose of obtaining
telecommunications licenses and constructing a wireless telecommunications
network in the United Mexican States ("Mexico"). In May of 1998, Pegaso
Comunicaciones y Sistemas, S.A. de C.V., a wholly-owned subsidiary of PEGASO,
acquired nationwide PCS licenses in the 1.9GHz frequency bands in Mexico for
approximately US$221 million (based on exchange rates in effect on the dates the
license payments were made -- averaging 9.86 Mexican pesos per U.S. dollar). A
legal challenge in Mexico to the constitutionality of the government's transfer
of the frequency licenses was
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dismissed for procedural reasons. Neither the Company nor any Leap Wireless
Operating Company was a party to the litigation, and the Company believes that
the challenge, if refiled, will not have a material adverse effect on Leap
Wireless and the Leap Wireless Operating Companies taken as a whole. The Company
has an agreement to provide operating services to PEGASO. PEGASO plans 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 begin
initial commercial service by mid-1999 and will be followed by construction in
up to 61 additional cities. There can be no assurance that PEGASO will be able
to complete such construction projects for the amount budgeted or on a timely
basis. The opportunity to assist in the license acquisition, financing, design,
construction and operation of a new wireless cdmaOne system in an area
previously underserved makes Leap Wireless' Mexico operation a blueprint for
future Leap Wireless 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. In early 1998, the Mexican government auctioned four
additional licenses in each region of Mexico to allow additional competition in
the mobile wireless market. Pegaso acquired nationwide PCS licenses in these
auctions, recognizing the opportunity to become involved with a CDMA nationwide
network given the expected future expansion of the Mexican economy and the
currently low penetration levels of telecommunications services in the country.
Mexico's population of approximately 99 million people is approximately 70%
urban with approximately 50% living in the three largest cities. Mexico's real
GDP per capita in 1997 was $2,947 with a teledensity of approximately 9.4%. The
cellular penetration was only 1.6% at the end in 1997.
Strategic Partners. In addition to the Company's interest, Pegaso
Comunicaciones y Servicios, S.A. de C.V. ("Pegaso S.A. de C.V.") and Corporativo
del Valle de Mexico, S.A. de C.V., an affiliate of Grupo Televisa S.A.
("Televisa") (collectively the "Consortium") have interests in PEGASO. Televisa
is the largest media company in the Spanish-speaking world and is a major
participant in the international entertainment business. Leap Wireless
management believes the Consortium's strong financing resources, as well as its
political access in Mexico, provide PEGASO critical skills and relationships for
assisting the network build-out and in marketing and distributing PEGASO's
wireless services.
In late September 1998, the Company provided a $17.5 million loan (the
"Pegaso Loan") to Pegaso Comunicaciones y Servicios, S.A. de C.V., a Mexican
company 96%-owned by Mr. Alejandro Burillo Azcarraga, a member of the Company's
Board of Directors. The Pegaso Loan bears interest at the rate of 13% per annum.
The first principal installment of $7.5 million, plus accrued interest, was
repaid on October 29, 1998 as scheduled, and the second principal installment of
$10 million, plus accrued interest, is due on or before December 31, 1998. The
purpose of the Pegaso Loan was to facilitate investment by Pegaso Comunicaciones
y Servicios, S.A. de C.V. in PEGASO, the joint venture in which the Company has
an interest, and to ensure that the investors in PEGASO made all capital
contributions to PEGASO that were required for the acquisition of the Mexican
licenses on September 30, 1998. The Pegaso Loan is guaranteed by Mr. Burillo and
is secured by a pledge of all of the shares of Pegaso Comunicaciones y
Servicios, S.A. de C.V. and Mr. Burillo's interest in an unrelated joint venture
with QUALCOMM to operate a satellite tracking, management and two-way
communications system for the trucking industry in Mexico.
Leap Wireless Rights and Interests. Leap Wireless, through a wholly-owned
subsidiary, currently owns a 33% interest in PEGASO and has invested $100
million of the $400 million of capital contributed and committed by the members
of the joint venture. Once all committed capital has been contributed to this
venture, Leap Wireless, Pegaso S.A. de C.V. and Televisa will hold approximately
25%, 29% and 15% of the voting shares, respectively, with several other
investors holding the balance of the shares. Under the joint venture agreement
with PEGASO, Leap Wireless has a contractual right to elect two of nine
directors for so long as Leap Wireless owns 15% or more of the equity. Leap
Wireless is under contract with PEGASO to provide operator services to PEGASO
and expects to subcontract many of those services to GTE. GTE is one
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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 $1.2 billion to $1.4 billion. To date, the
members of the joint venture, including Leap Wireless, have contributed $300
million of equity, including Leap Wireless' $100 million equity investment. In
addition, QUALCOMM and another equipment vendor have agreed to provide over $500
million of equipment financing to the venture. PEGASO is also working with
investment bankers to obtain additional financing which is required in 1999. At
this time, however, the availability of financing for start-up companies in
emerging markets is constrained. Thus, there can be no assurance this additional
financing will be obtained.
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 telecommunications 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.
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
which operated with a regulated duopoly in each region prior to the recent
auction of additional wireless licenses. Prior to the auction, seven operators
provided cellular telephone service to one or more regions in Mexico: Telcel
(which held the only nationwide license prior to the recent auctions), Iusacell,
Norcel, Portatel, Baja Cellular Mexican, Movitel and Cedetel. As a result of the
auction, PEGASO and the following wireless operators won the right to purchase
licenses to operate in the Mexican PCS market: Unefon, Midicell, Grupo Hermes,
Dipsa (a subsidiary of Telmex), and Iusacell. Furthermore, the local access
market has been liberalized and new providers of local service are in the
process of being licensed.
Currently, the largest cellular operator, Telcel, a subsidiary of Telmex,
is the Band A national cellular operator and covers all nine regions with a
subscriber base of approximately 1.1 million subscribers. In the auctions,
Telemex, through its subsidiary Dipsa, 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 all regions and thus does not have a nationwide footprint. The
license purchased by Grupo Hermes covers only 1 of the 9 regions in Mexico.
Unefon and Midicell did not pay the 80% balance of their license payments on
September 30, 1998. The Mexican regulatory authorities have given these
delinquent bidders six months to make final payment, plus interest. Delinquent
bidders making payment on or before December 31, 1998 may not launch commercial
service until July 1, 1999. Those making payment between January 1 and March 30,
1999 may not launch service until six months after payment. The other existing
cellular operators, primarily those bordering the U.S., are run by operators
significantly owned by Motorola.
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In summary, in the cellular and PCS bands there is one existing nationwide
operator, Telemex, which operates through subsidiaries Telcel and Dipsa; one
carrier Iusacell, with a large mixed band footprint (four 800 MHz licenses and
two 1900 MHz licenses); and PEGASO, which holds a nationwide PCS license. Other
competitors hold regional licenses and/or have not paid for, and therefore
cannot operate under, their licenses.
QUALCOMM TELECOMMUNICATIONS LTD., RUSSIA
The Company holds a 70% interest in two companies which both have the name
QUALCOMM Telecommunications Ltd. The first of such companies is a company
organized under the laws of Cayman Islands ("QUALCOMMTel Cayman") and is a joint
venture partner in Metrosvyaz Ltd. ("Metrosvyaz"). Metrosvyaz was formed to
develop joint ventures with local Russian telecommunications operators (the
"Joint Ventures") for the formation, development, financing and operation of
wireless local loop (fixed) telephone services in the Russian Federation. Many
local operators are currently licensed to operate wireless systems in Russia.
Partnerships are being used to facilitate the implementation of such operations.
Metrosvyaz expects to partner with local operators to offer the regional
telephone companies and other licensed telecommunications operators a local
solution, including financing, for the delivery of wireless telecommunications
systems in their regions. Metrosvyaz hopes to obtain approximately 10 million
new wireless local loop lines through the Metrosvyaz Joint Ventures during the
ten years following the Distribution. There can be no assurance that Metrosvyaz
will successfully obtain such wireless local loop lines. Fourteen such Joint
Ventures have been formed or are in the process of being formed as of November
10, 1998. Metrosvyaz expects to own 50% of each such Joint Venture. Three of
QUALCOMM's original customers who are in the process of implementing CDMA
wireless local loop services with equipment provided by QUALCOMM have agreed to
transfer their current operations, including their telecommunications licenses,
to a Joint Venture. Long distance and international traffic are expected to be
carried by Tass Loutch Telecom, a company organized under the laws of the
Russian Federation and the holder of licenses for international and long
distance telephone services in Russia. Tass Loutch Telecom currently has
agreements in place to transmit long distance traffic. Tass Loutch Telecom has
agreed to represent Metrosvyaz as its agent in connection with establishing the
Joint Ventures and is being paid a commission based upon subscriber lines sold
to the Joint Venture.
In addition, Leap Wireless holds an interest in QUALCOMM Telecommunications
Ltd., an Isle of Man company ("QUALCOMMTEL Isle of Man"), which in turn owns a
50% interest in Orrengrove Investments Ltd. ("Orrengrove"). Orrengrove currently
holds a 60% interest in three related companies (the "Transworld Companies") one
of which is the 50% owner of Tass Loutch Telecom. One of the Transworld
Companies, through a subsidiary, intends to implement a long distance network in
Russia consisting of earth stations deployed in various regions of Russia. The
long distance network has been designed to work in conjunction with satellite
services being provided by another Transworld Company to Tass Loutch Telecom.
This network is intended to be used by Tass Loutch Telecom to offer long
distance and international telephone services in Russia to local operators.
The Company contemplates that the Transworld Companies and the Joint
Ventures will enter into cooperative arrangements in the future, pursuant to
which Tass Loutch Telecom will carry long distance and international traffic
generated by the Joint Venture's wireless local loop operations.
Market Opportunity. The Company believes that the Russian Federation market
represents a significant CDMA service market opportunity. Russia currently has a
population of approximately 149 million people with a teledensity of only 18%.
Recently, the Russian telecommunications authorities announced that they intend
to add 30 million additional subscriber lines of fixed service over the next
10-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 of 1997 with very little wireless
local loop service.
Strategic Partners. The 50% of Metrosvyaz and the 50% of Orrengrove not
owned by the respective QUALCOMMTel organizations are owned by Teletal Limited,
a holding company affiliated with Itar Tass, the official news agency of the
Russian Federation. The 30% of each of the QUALCOMMTel entities not owned by the
Company are held by Tiller International Ltd. ("Tiller"), a private investment
company, with
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telecommunications interests in Russia and significant contacts with Russian
telecommunications regulators and regional operators.
Company Rights and Interests. The Company holds a 70% interest in each of
the QUALCOMMTEL entities. QUALCOMMTel Cayman owns a 50% interest in Metrosvyaz,
organized in 1997, a joint venture with Teletal Limited. The Company holds a 70%
interest in QUALCOMMTel Isle of Man, which in turn owns a 50% interest in
Orrengrove. Orrengrove was organized in 1998 and also is a joint venture with
Teletal Limited. In each of Metrosvyaz and Orrengrove, QUALCOMMTel has a right
to elect four of nine Directors with Teletal Limited also having a right to
elect four Directors. The ninth director will be jointly elected by the
respective QUALCOMMTel entity and Teletal Limited. In addition, each of the
QUALCOMMTel entities has agreed to cause one of the Directors to be elected by
it to be a representative of Tiller. Leap Wireless has a right to elect four of
seven Directors of each of the QUALCOMMTel entities and Tiller has the right to
elect the remaining three Directors.
The Company intends to play a significant role in the operation of
Metrosvyaz as the implementation and rollout of the Joint Venture companies are
initiated. The Company intends to provide oversight and direct support for the
services in areas including marketing, distribution, customer care, billing and
service initiation. The expertise of Leap Wireless' management will be applied
(through Metrosvyaz) to assist the Joint Venture operators in managing
successful system launches. Leap Wireless also intends to play a significant
role in the implementation and rollout of the operations of the Transworld
Companies, including construction, marketing, distribution, customer care,
billing and service implementation.
Capital Requirements and Project Investments. QUALCOMMTel Cayman, the
Company and QUALCOMM have agreed to be responsible for providing or procuring
financing for Metrosvyaz, on and subject to terms to be agreed and without the
need for any direct guarantee from Teletal Limited or Tiller, up to an aggregate
amount of $500 million to be invested in stages, the first of which is a loan
agreement for the provision of $175 million from QUALCOMM. Metrosvyaz has agreed
to purchase from QUALCOMM all of its CDMA equipment necessary to implement the
Joint Ventures. Leap Wireless expects to loan Metrosvyaz approximately $55
million prior to December 1999. Metrosvyaz expects to require approximately $8
billion of capital over a 10-year period in order to provide the 10 million
lines targeted by Metrosvyaz management.
Leap Wireless has invested $51.8 million in Orrengrove in the form of a
promissory note. Orrengrove, in turn, invested this amount in the Transworld
Companies. Approximately $44 million of this sum is expected to provide the
initial funding required for the buildout of two additional earth stations. The
Transworld Companies will require additional loans or equity to complete the
buildout of the nationwide long distance service.
There can be no assurance that either Metrosvyaz or the Transworld
Companies will be able to obtain the additional financing required.
Regulatory Environment. The Russian Ministry of Communications is
responsible for regulation and oversight of the telecommunications sector.
Improving and maintaining the installed infrastructure are principal objectives
of the Ministry of Communications in Russia. Deregulation and privatization of
the telecommunications industry is occurring throughout the country. One
company, Svyazinvest, a partially state-owned company with foreign investors,
controls the majority of the voting interest in Russia's 89 regional PTT's. CDMA
is currently only being used for wireless local loop in Russia. The Company
believes that CDMA will, in the future, be made certified for mobility in the
Russian Federation.
Competition. Most of the targeted operators with whom Metrosvyaz expects to
enter into joint venture agreements are established, government-owned,
telecommunications companies in the various regions of Russia. The competition
with the Joint Venture in most of the regions will be primarily with wireline
services operated by the local partner of the Joint Venture. In some larger
cities, however, including Moscow and St. Petersburg, there is meaningful
competition from private cellular operators. In the long distance area, the
principal competition will be from Rostelecom, the established long distance and
international carrier in Russia.
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CHILESAT TELEFONIA PERSONAL, S.A., CHILE
General. Chilesat Telefonia Personal, S.A. ("Chilesat PCS") is a joint
venture company in which Leap Wireless holds a 50% interest. In 1997, Chilesat
PCS acquired a nationwide license to offer PCS services in Chile. Chilesat PCS
has deployed a nationwide cdmaOne system provided and financed by QUALCOMM. The
system began limited commercial operation in September 1998 and has
approximately 10,000 subscribers in late November 1998.
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 $5,270. 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., which 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. Telex Chile, in
cooperation with its lenders, is seeking to sell some or all of its holdings in
Chilesat PCS to improve its financial base. 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.
Leap Wireless Rights and Interests. Leap Wireless holds 50% of the stock of
Chilesat PCS through an equity class that has a liquidation preference over the
shares held by Telex Chile and its affiliates. Each of the major partners is
entitled to elect two of the five directors of Chilesat PCS and Leap Wireless is
entitled to nominate the chief financial officer. Leap Wireless is providing
management advice on deployment, marketing, back office and customer care issues
to Chilesat PCS. If the short term loans described below are not repaid on or
before January 31, 1999, Leap Wireless will have the right to convert such loans
into equity in Chilesat PCS and thereby increase its voting shares to
approximately 65%. In addition, a Subscription and Shareholders Agreement
provides a substantial list of items which require a super majority vote,
further extending Leap Wireless' management rights.
Capital Requirements and Projected Investments. Leap Wireless estimates
that Chilesat PCS will require a total financing of approximately $240 million
(excluding handset financing but including the in-kind contributions described
below) through 1999 to create a nationwide wireless system. 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 also
provided short term loans of approximately $35 million to Chilesat PCS in 1998
to fund network completion and working capital. Leap Wireless expects that
Chilesat PCS will seek further vendor financing to satisfy a portion of its
uncommitted financing requirements through 1999, and that Chilesat PCS will seek
additional equity and/or debt financing to satisfy the balance of its
requirements through 1999. In addition to the financing described above,
QUALCOMM has committed to provide three year handset financing of up to $25
million.
In connection with the Distribution, QUALCOMM transferred to Leap Wireless
QUALCOMM's equity interest in Chilesat PCS and its right to receive payment from
Chilesat PCS under the $35 million short term loans. Chilesat PCS has indicated
that it intends to issue a $35 million capital call by January 1999 to allow it
to repay the $35 million loans. Although Telex Chile has been experiencing
financial difficulties (see Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Substantial Leverage of
Operating Companies), it has informed the Company that it intends, and will have
the ability, to fund its $17.5 million portion of the expected capital call
prior to January 31, 1999. If Chilesat PCS does not repay the $35 million of
loans on or before January 31, 1999, Leap Wireless may
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convert the short term loans into equity in Chilesat PCS. Such a conversion
would give Leap Wireless control over Chilesat PCS, subject to certain rights of
Telex Chile under supermajority voting provisions.
Regulatory Environment. The Subsecretaria Telecomunicaciones regulates the
basic telecommunications network in Chile. In April 1997, Subsecretaria
Telecomunicaciones awarded three licenses for PCS (1900MHz) mobile operations in
Chile -- one to Chilesat PCS and two to affiliates of Entel Cellular. In
addition, three major cellular operators (including Entel Cellular) were
previously licensed by the government and are operating in Chile. 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. In addition to Chilesat PCS, there are three major operators
of wireless services in Chile, each of which effectively provides nationwide
service. Entel Cellular and CTC/Star Cell operate separate nationwide cellular
systems. Bell South operates in central Chile, but it has established reciprocal
roaming agreements with Entel Cellular. Through this arrangement, Bell South
also effectively provides nationwide coverage. In addition to these cellular
services, Entel launched a commercial PCS service using GSM technology in March
of 1998 and currently has approximately 210 base stations deployed throughout
Chile. A second PCS license, also controlled by Entel, has not been built out or
put into operation.
CHASE TELECOMMUNICATIONS, UNITED STATES
General. Chase Telecommunications, Inc., a Delaware corporation ("Chase"),
was the winning bidder for 11 wideband PCS "C Block" licenses and now holds
15MHz (as a result of voluntarily disaggregating half of its C Block spectrum)
of spectrum covering approximately 6.3 million POPs in the Tennessee region with
coverage of about 98% of Tennessee. Major markets include Nashville, Memphis,
Knoxville and Chattanooga. Chase was the sixth largest winner in the PCS C Block
auction. Unlike the other Leap Wireless opportunities, Leap Wireless has
invested a relatively small amount of equity capital in Chase, and is not
significantly involved in the management of Chase. Limited involvement is
required in this instance by the regulations of the Federal Communications
Commission ("FCC") relating to ownership and control of C Block PCS license
holders.
Chase has begun deploying a cdmaOne wireless telecommunications network
that will serve its licensed areas. It completed its initial system and launched
commercial service in Chattanooga in October 1998. It is the first PCS provider
in the Chattanooga area and, as of November 15, 1998, had approximately 3,100
subscribers. Chase requires additional financing to continue operations in
Chattanooga and to expand to other areas in which it holds licenses. Chase has
begun design of its Nashville, Knoxville and Memphis networks and, if suitable
additional financing can be obtained, expects to launch services in these
metropolitan areas in 1999. Chase acquired its PCS licenses through the FCC C
Block spectrum auctions in 1996 and has benefited from both favorable government
financing terms on the auction price and a 50% reduction in the aggregate
principal amount due as a result of the subsequent C Block restructuring in
which Chase elected to disaggregate 15MHz of its 30MHz of spectrum in each of
its markets.
Market Opportunity. Chase presented Leap Wireless an opportunity to be
involved in 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.
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Strategic Partners. Chase was founded by Tony Chase, formerly the chairman
and CEO of Faith Broadcasting Corporation which operates radio communications
licenses in several major markets in Texas. In addition, Chase has established
strong strategic relationships with QUALCOMM, as an equipment supplier.
Leap Wireless Rights and Interests. Leap Wireless holds a 7.2% interest in
Chase. Leap Wireless does not have a right to board representation or to
otherwise participate in management to any material degree.
Leap Wireless expects that, from time to time, it will provide Chase with advice
with respect to CDMA deployments and network operations.
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. QUALCOMM has agreed to
provide Chase $22 million in vendor financing and Leap Wireless has agreed to
provide Chase with $25 million in working capital financing, which has allowed
Chase to complete the initial build-out and startup of the Chattanooga system.
As a result of these interim financings, Leap Wireless holds warrants to acquire
up to an additional 8.5% of the currently outstanding Chase equity. Chase needs
to obtain additional financing in the near future. If Chase successfully
completes a high-yield debt offering, the Company expects QUALCOMM will expand
its vendor financing to $130 million, and Leap Wireless has committed, subject
to certain conditions and exceptions, to convert the working capital loan into
$25 million of senior unsecured notes in Chase.
Regulatory Environment. In maintaining its PCS licenses, Chase is required
to comply with numerous FCC requirements, including qualifying as a "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. The Company believes that
such competitors currently are or will soon begin operating their respective
networks in such territories. Additionally, the FCC rules allow licensees to
partition or disaggregate their spectrum. If other licensees create such
partitioned or disaggregated licenses, this could increase the number of
competitors and the types of competition in Chase's market.
OZPHONE PTY. LTD., AUSTRALIA
General. Leap Wireless holds a 100% equity interest in OzPhone Pty. Ltd.
("OzPhone"), an Australian corporation formed to participate in Australia's
personal communication services auctions. OzPhone has been awarded ten 800MHz
licenses covering approximately 6.4 million POPs to provide digital mobile and
wireless local loop services in major metropolitan and rural areas throughout
Australia. The three regions covered are Tasmania, Perth and the Brisbane/Cairns
region and neighboring 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. OzPhone has a commitment from QUALCOMM to provide
wireless telecommunications subscriber and infrastructure equipment with 100%
financing.
OzPhone's license does not require it to begin operations or provide
coverage to specified segments of the Australian population by a specific date.
Market Opportunity. Leap Wireless believes that there is promising growth
potential in telecommunications services in Australia and believes that it can
achieve a market niche through an appropriate regionalized wireless marketing
strategy. Australia is a highly developed country with a stable economic and
regulatory environment and an advanced telecommunications infrastructure.
Australia's population of approximately
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19 million people is largely centered on its west and east coasts. Australia's
real GDP per capita in 1997 was $20,062 with a teledensity of approximately
49.7%. The cellular penetration was only 29% at the end in 1997.
Strategic Partners. Leap Wireless 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 build out the network
through 1999 and launch service to its first markets. Final capital raising
plans have not yet been completed. As of September 1, 1998, Leap Wireless has
invested $6 million to acquire the licenses and expects to invest an additional
$13.3 million in equity to begin limited operations before the end of 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. In addition, the Australian
government has indicated that, over the long term, it intends to phase-out all
analog service throughout Australia.
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 added three additional competitors to the
market, including Hutchinson and AAPT in addition to OzPhone. The Company
expects that the new entrants will attempt to win market share through
innovative marketing and distribution strategies and the utilization of
advances-in-use capacity, especially with CDMA technology. OzPhone will face
difficulty in competing with the existing wireless carriers and resellers due to
lack of brand name recognition and an existing operating history in Australia.
UNITED STATES WIRELESS OPPORTUNITIES
General. Leap Wireless is investigating wireless telecommunications
opportunities in the United States based on providing a fixed fee, limited
mobility cdmaOne telephone service targeted at the mass consumer market. This
strategy is different from the existing model used by most current wireless
operators in the United States. The Company believes this approach may also be
appropriate in selected foreign markets. Leap Wireless has entered into a
contract to acquire F Block licenses to operate wireless telecommunications
systems in four BTAs in North and South Carolina, and the Company is currently
exploring opportunities to acquire other spectrum in the United States. The
Company has formed two wholly-owned subsidiaries to pursue these opportunities.
In order to pursue wireless telecommunications opportunities in the United
States and implement its strategy, the Company or one or more entities in which
the Company will hold an equity interest, intends to acquire spectrum and
operate in the U.S. broadband PCS frequency blocks. The Company anticipates that
it will acquire such spectrum either directly or through one or more
subsidiaries. To the extent that available spectrum is in the C and F Blocks,
the Company's equity participation will have to be through companies designed to
satisfy the FCC "Designated Entity" requirements. Leap Wireless expects that it
or one of the newly formed subsidiaries of Leap Wireless, and those affiliates
which are attributable to it under the FCC rules relating to Designated
Entities, will qualify as a Designated Entity, although there can be no
assurance
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that it will. If Leap and/or its subsidiaries do not so qualify, complying with
the "Designated Entity" requirements would limit Leap Wireless' ownership in
such C and F Block license holding companies to 25% of the equity of such
license holder. If the Company is not able to directly or indirectly acquire
spectrum, it may enter into reseller agreements with PCS operators for minutes
of use, with Leap Wireless making equity investments in such operators in
accordance with applicable law.
In the U.S., PCS and cellular provide essentially the same service but
differ in two ways: frequency and bandwidth. 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.
Market Opportunity. Wireless telephony penetration is currently
approximately 24% 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 intended strategy is to provide a
high-quality, fixed fee, limited mobility cdmaOne wireless telephone service
targeted at the mass consumer market.
Strategic Partners. The Company expects to implement its United States
wireless opportunities through a strategic consortium of companies and
investors.
Capital Requirements and Projected Investments. Because the scope of this
opportunity has not yet been developed and is subject to market research and
trials, Leap Wireless has not yet developed a detailed capital budget or
investment strategy. However, Leap Wireless has budgeted approximately $81
million to pursue this strategy in the U.S. wireless market. The Company will
look for opportunities to acquire spectrum in the U.S. PCS frequency Blocks A,
B, D and E. In addition, the Company may look for opportunities to participate
in PCS service provision by establishing and entering into reseller agreements
with qualifying "Designated Entities" that can hold C and F Block frequency.
Furthermore, the Company may enter into reseller agreements with other holders
of spectrum on favorable terms and conditions. Leap Wireless anticipates that it
will structure its reseller relationships and relationships with any Designated
Entities in a fashion to maximize the potential benefit to Leap Wireless
shareholders as a whole while complying with applicable FCC requirements. The
Company also anticipates that it may participate in the upcoming re-auction of
PCS spectrum by the FCC, currently scheduled to commence in March 1999.
Regulatory Environment. In this effort, Leap Wireless will operate in the
complex United States FCC regulatory scheme. The Company will be required to
maintain compliance with all of the requirements for conducting 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 10 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 competi-
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tive development of new service offerings, to expand the availability of
telecommunications services and to streamline the regulation of the industry.
Competition. The U.S. wireless industry is characterized by intense
competition between PCS, cellular and other wireless service providers. There
can be no assurance that the Company will be able to compete successfully or
that new technologies and products that are more commercially effective than the
Company's technologies and products will not be developed. In addition, most 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 and bundle other services, such
as cable television access, long distance, landline telephone service and
Internet access with their wireless telecommunications service offerings. The
Company plans to enter into agreements with others that will allow it to offer
some or all of these services, but it has not yet entered into any such
agreements and it cannot provide assurances that it will conclude any such
agreements. 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's planned service would compete with some or all of the
services offered by (i) the historic landline operators and other local exchange
carriers ("CLECs"), (ii) PCS carrier, and (iii) cellular carriers. Landline and
CLEC operators have established market positions which put the Company at a
significant market disadvantage. Other PCS providers in the U.S. include major
competitors such as PrimeCo, Sprint and AT&T, all of which have large coverage
systems and 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. 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,
will continue to upgrade their networks. The Company further expects to compete
with other telecommunications technologies such as paging, enhanced specialized
mobile radio and global satellite networks.
Network and Development Plan. The business plan, if successful in trials,
will be developed for nationwide sales and service in the U.S.
TELESYSTEMS OF UKRAINE
QUALCOMM and Leap Wireless have agreed that, if certain events occur before
April 2000, certain assets and liabilities related to QUALCOMM's operating
company in Ukraine, Telesystems of Ukraine ("TOU"), will be transferred to Leap
Wireless. There can be no assurance that such events will occur or that legal
impediments to transfer will be removed, or that QUALCOMM's interest in TOU will
ever be transferred to Leap Wireless.
General. Under the terms of the Separation and Distribution Agreement, if
QUALCOMM is able to transfer its full 49% equity interest in TOU to Leap
Wireless on or before April 2000, Leap Wireless is obligated to accept the
transferred interest. In April of 1997, TOU obtained a license to construct,
own, operate and maintain CDMA wireless local loop telecommunications systems
throughout most of Ukraine. In March of 1998, TOU obtained a national and
international long distance license for the nine major regions of Ukraine
covering most of the 51 million POPs in that country.
TOU currently is in the process of deploying wireless local loop
telecommunications systems in the Ukrainian capital city of Kiev. TOU recently
commenced a soft launch of the system and the Company expects that TOU will
commercially launch the system in Kiev in early 1999. If the commercial launch
in Kiev is successful, TOU plans to deploy a second system in Odessa and then
deploy systems in additional major Ukrainian cities based on a schedule and
funding plan to be completed based on the success of the Kiev system. TOU
intends to offer subscribers wireless local loop services as well as mobile
services within each region of Ukraine. TOU is the first communications operator
to provide CDMA in Ukraine. In addition to
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providing wireless local loop and mobility service, TOU is permitted under the
terms of its national and international access license to provide national and
international long distance services.
Market Opportunity. Ukraine is the second largest of the former Soviet
countries and represents an attractive market for wireless telecommunications
services. The Ukrainian telecommunications market remains significantly
under-served by existing wireline and wireless operators. To improve the
telephone services in Ukraine, the Ukrainian government has established a
telecommunications program with a goal of increasing teledensity from 14.97% in
1993 to 30% by 2000. Ukraine's population of approximately 51 million people is
approximately 68% urban. The real GDP per capita in 1997 was $2,853 and is
declining. The wireless penetration was only 0.13% at the end in 1997.
Strategic Partners. In the event QUALCOMM transfers its interest in TOU to
Leap Wireless, the Company's partners will include Rhuta-Farm, a Ukrainian
limited company ("Rhuta-Farm"), which holds a 41.1% participation interest in
TOU. Rhuta-Farm is engaged in the manufacture, import and distribution of
pharmaceuticals throughout Ukraine. The majority owner of Rhuta-Farm is Victor
Zholinski, who has extensive knowledge of the Ukrainian telecommunications
market and Ukrainian political environment. In addition to Rhuta-Farm,
Ukrtelecom, the national wireline provider in Ukraine, holds a 9.9%
participation interest in TOU. Since this venture was formed, the number of
competitors has increased in Kiev (TOU will be the sixth). Furthermore, the
overall relationship with Rhuta-Farm has become strained. QUALCOMM and
Rhuta-Farm currently have material disagreements on speed and method of system
deployment, the terms of acceptable project financing and the day-to-day control
of the operation of TOU. These disagreements have delayed funding of the system
and have resulted in delays in commercial operation of the system. See "Factors
That Could Affect Future Performance -- Joint Ventures."
Leap Wireless Rights and Interests. In the event QUALCOMM transfers its
interest in TOU to Leap Wireless, Leap Wireless will have up to 49% of the
voting rights of TOU, though by contract Leap Wireless would also have the right
to elect the majority of TOU's board of directors. Leap Wireless would also have
the right to appoint many of the operating officers of the company. Leap
Wireless would play a significant role in the operation of TOU, offering
oversight and direct support for services in areas including system design,
planning, installation, marketing, distribution, customer care, billing and
service initiation. In the event QUALCOMM transfers its interest in TOU to Leap
Wireless, Leap Wireless expects to apply its expertise to assure that TOU
manages a successful system launch resulting in forecasted subscriber growth and
revenue.
Capital Requirements and Projected Investments. TOU will require
approximately $51 million to complete license acquisition and the build-out and
initial operation of the system in Kiev of which approximately $35 million is
expected to be provided by Leap Wireless and/or QUALCOMM. The partners in TOU
contributed approximately $150,000 in equity to the venture. In addition, as of
June 29, 1998, QUALCOMM has invested approximately $16 million pursuant to an
Agreement on Joint Investment Activity which, under Ukrainian law, is equity
with features similar to a redeemable preferred stock. If transferred to Leap
Wireless, this equity interest would provide Leap Wireless a favorable preferred
return on the invested capital and a return of capital before any of the other
partners received a return on their investments. The Company expects that if
QUALCOMM transfers its interest in TOU to Leap Wireless, then QUALCOMM will
provide equipment to TOU and up to $70 million of equipment financing for a full
country build-out and may provide additional working capital on terms to be
negotiated. Funding for build-out beyond Kiev is not yet committed.
Regulatory Environment. The Ukrainian Parliament adopted CDMA as a
nationwide wireless standard on June 28, 1996. In April 1997, the Ukrainian
Ministry of Communications ("MOC") issued TOU a nationwide license to operate a
CDMA wireless local loop telecommunications system in the 800 MHz band. The MOC
is responsible for the regulation and oversight of the telecommunications
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 applicable law. 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
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investments in telecommunications companies pursuant to joint investment
agreements. Under this format, a Ukrainian partner can allocate up to 100% of
the profits in a telecommunications venture to a foreign partner until the
foreign partner has been repaid its investment. Leap Wireless anticipates
proceeding under this authority. The nationwide CDMA license granted to TOU
allows TOU to construct, own, operate and maintain a wireless local loop
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 telecommunications network
and connect to international telecommunications networks. 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 telecommunications 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 telecommunications company
providing digital AMPS services. Wellcom (USR) is a cellular telecommunications
company providing GSM services.
COMPETITION
There is increasing competition in the wireless telecommunications industry
in the United States and throughout the world. There can be no assurance that
the Company will be able to compete successfully or that new technologies and
products that are more commercially effective than the Company's technologies
and products will not be developed. In addition, most 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 telecommunications 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 Leap Wireless 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 "Factors That Could Affect Future Performance -- Rapid
Technological Change." The Company also expects that the price that its
operating companies charge for their products and services in certain regions
will decline over the next few years as competition intensifies in their
markets. See "-- Leap Wireless Operating Companies."
The U.S. wireless industry is characterized by intense competition between
PCS, cellular and other wireless service providers. A limited number of the
Company's prospective competitors are operating, or planning to operate, through
joint ventures and affiliation arrangements, wireless telecommunications
networks that cover most of the United States. The Company's planned U.S.
service would compete with some or all of the services offered by (i) the
historic landline operators and other local exchange carriers ("CLECs"), (ii)
PCS carriers, and (iii) cellular carriers. Landline and CLEC operators have
established market positions which put the Company at a significant market
disadvantage. Other PCS providers in the U.S. include major competitors such as
PrimeCo, Sprint and AT&T, all of which have large coverage systems and entered
the PCS market earlier than the Company. There can be no assurance that the
time-to-market advantage of these providers 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
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access, long distance, landline telephone service and Internet access with their
wireless telecommunications service offerings. The Company plans to enter into
agreements with others that will allow it to offer some or all of these
services, but it has not yet entered into any such agreements and it cannot
provide assurances that it will conclude any such agreements. 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 markets. 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,
will continue to upgrade their networks. The Company further expects to compete
with other telecommunications technologies such as paging, enhanced specialized
mobile radio and global satellite networks. See "-- Leap Wireless Operating
Companies -- United States Wireless Opportunities."
In addition, 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 compete with the Company for such projects. Also,
QUALCOMM will not be restricted from pursuing wireless telecommunications
opportunities that may compete directly with the Company or the Leap Wireless
Operating Companies. Any such competition or potential competition could result
in conflict between the Company and QUALCOMM and adversely affect other
relationships between the companies. Moreover, there can be no assurance that
the Company would be able to compete effectively with QUALCOMM with respect to
these opportunities.
In addition, the Company believes that companies holding equity interests
in multiple operating companies throughout the world will be increasingly
predominant in the wireless communications industry and expects to experience
increasing competition from entities with structures resembling that of Leap
Wireless.
GOVERNMENT REGULATION
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in each of the countries outside the United States in which
Leap Wireless has operations are regulated by governmental authorities in each
such country. In some cases, the regulatory authorities also operate or control
the operations of the competitors of the operating companies. Changes in the
current regulatory environment of these markets or future judicial intervention,
or regulations affecting the pricing of the operating companies' services, could
have a material adverse effect on the Company. In addition, the regulatory
framework and authorities in certain of the countries where the Company operates
are relatively recent and, therefore, the enforcement and interpretation of
regulations, the assessment of compliance, and the degree of flexibility of
regulatory authorities are uncertain. Further, changes in the regulatory
framework may limit the ability to add subscribers to developing systems. An
operating company's failure to comply with applicable governmental regulations
or operating requirements could result in the loss of licenses, penalties and/or
fines or otherwise could have a material adverse effect on the Company. For a
more detailed description of the regulatory environment in the United States and
each of the other countries in which Leap Wireless operates, see the "Regulatory
Environment" discussion for each of the Leap Wireless Operating Companies under
"Business -- Leap Wireless Operating Companies."
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in the United States are regulated to varying degrees by
state regulatory agencies, the FCC, the United States Congress and the courts.
The Leap Wireless Operating Companies doing business in the United States, and
Leap Wireless, will be required to maintain compliance with all of the
requirements for conducting 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
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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
On November 1, 1998 the Company had approximately 60 full time employees,
including temporary employees but excluding employees of the Leap Wireless
Operating Companies. It also had several consultants under contract to work on
specific projects.
RELATIONSHIP BETWEEN QUALCOMM AND THE COMPANY
To facilitate an orderly transfer of the businesses and ventures of the
Company (the "Leap Wireless Business") from QUALCOMM to the Company and an
orderly transition to the status of two separate independent companies, QUALCOMM
and the Company entered into various agreements and relationships, including
those described in this section. The agreements summarized in this section are
included as exhibits to this report. For purposes of the agreements described
below, the term "QUALCOMM" refers to QUALCOMM and its subsidiaries, to the
extent applicable.
QUALCOMM's relationships as equipment vendor to Leap Wireless and the Leap
Wireless Operating Companies and as lender under the Credit Facility will give
QUALCOMM significant influence over Leap Wireless and will create certain
conflicts with Leap Wireless. In addition, QUALCOMM is not restricted from
competing with the Company or any of the Leap Wireless Operating Companies or
pursuing directly wireless telecommunications businesses which would also be
attractive to Leap Wireless.
SEPARATION AND DISTRIBUTION AGREEMENT
Immediately prior to the Distribution, QUALCOMM and the Company entered
into the Separation and Distribution Agreement (the "Separation and Distribution
Agreement") which 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 transferred the Leap Wireless Business
to Leap Wireless. QUALCOMM also contributed to Leap Wireless the following: (i)
$10 million in cash; (ii) certain indebtedness of the Leap Wireless Operating
Companies owed to QUALCOMM; (iii) QUALCOMM's rights under certain agreements to
the extent relating solely to the Leap Wireless Business (such as registration
rights and other similar rights as a holder of equity interest in the Leap
Wireless Operating Companies); and (iv) miscellaneous assets. QUALCOMM's
performance as an equipment vendor is not a condition to payment to Leap
Wireless under the notes and other indebtedness transferred. No intellectual
property was transferred to Leap Wireless in connection with the Separation, and
QUALCOMM retained all rights not expressly transferred with respect to any and
all agreements with the Leap Wireless Operating Companies.
In connection with such transfer of assets and rights by QUALCOMM, Leap
Wireless issued QUALCOMM a warrant to purchase 5,500,000 shares of Leap Wireless
Common Stock for approximately $6.11 per share, or an aggregate of approximately
$33.6 million dollars (the "Warrant"). The Warrant is currently exercisable and
remains exercisable for ten years.
In addition, Leap Wireless assumed certain liabilities of QUALCOMM,
including without limitation (i) significant funding obligations with respect to
the Leap Wireless Operating Companies totaling approximately $75 million (of
which approximately $14 million has been funded by Leap Wireless since the
Distribution Date); (ii) QUALCOMM's rights and obligations to participate in the
management of the Leap
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Wireless Operating Companies; and (iii) certain accrued liabilities with respect
to Leap Wireless' employees in the amount of approximately $2 million.
The Separation and Distribution Agreement also (i) included releases of
claims of each party to the other, except as expressly set forth in the
Separation and Distribution Agreement, (ii) provided for the allocation of
certain contingent liabilities and (iii) provided the parties with certain
indemnification rights against each other.
Leap Wireless also agreed in the Separation and Distribution Agreement
that, until January 1, 2004, it will, subject to certain specified limited
exceptions, deploy only systems using or planning to use cdmaOne. CdmaOne is the
original standard for fixed or mobile wireless telecommunications systems based
on or derived from QUALCOMM's CDMA technology and successor standards that
QUALCOMM has adopted. CdmaOne has been adopted as an industry standard by the
TIA and other recognized international standards bodies. For purposes of the
Separation and Distribution Agreement, cdmaOne also includes other CDMA systems
that are compatible with or employ the same physical layer as the original
cdmaOne and adopted by QUALCOMM, or that are compatible with the infrastructure
and subscriber equipment manufactured and sold by QUALCOMM (e.g., the
TIA/EIA/IS-95 digital cellular standard and ANSI JSTD-008 digital PCS standard
to be published).
The Company also agreed that, until January 1, 2004, it will, subject to
certain specified limited exceptions, invest only in companies using cdmaOne
systems, in connection with terrestrial wireless activities. Pursuant to the
Separation and Distribution Agreement, and subject to certain exceptions,
QUALCOMM has a non-exclusive, royalty-free license to any patent rights
developed by Leap Wireless or any of Leap Wireless' affiliates. In addition,
pursuant to the Separation and Distribution Agreement, the Company granted to
QUALCOMM a right of first refusal for a period of three years with respect to
proposed transfers by Leap Wireless of interests in joint venture and equity
interests included in the Leap Wireless Business at the time of the
Distribution, subject to preexisting rights of other investors. Leap Wireless
further agreed to take an active role in the management of companies with which
it has joint venture or equity interests, consistent with its own business needs
and applicable laws, contractual arrangements and other requirements. The
parties also agreed, with certain limited exceptions, that for a period of three
years following the Distribution neither party will solicit or hire employees of
the other.
Under the Separation and Distribution Agreement, QUALCOMM and Leap Wireless
agreed that, if certain events occur before April 2000, certain assets and
liabilities related to TOU will be transferred to Leap Wireless. There can be no
assurance that such events will occur or that legal impediments to transfer will
be removed, or that QUALCOMM's interest in TOU will ever be transferred to Leap
Wireless.
CREDIT FACILITY
Immediately prior to the Distribution, the Company entered into a secured
Credit Facility with QUALCOMM. The Credit Facility consists of two
sub-facilities. The Working Capital Facility enables Leap Wireless to borrow up
to $35.2 million from QUALCOMM, subject to the terms thereof. The proceeds from
the Working Capital Facility may be used by Leap Wireless solely to meet the
normal working capital and operating expenses of Leap Wireless, 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 enables Leap Wireless to borrow up to $229.8 million from QUALCOMM,
subject to the terms thereof. The proceeds from the Investment Capital Facility
may be used by Leap Wireless solely to make certain identified portfolio
investments.
Amounts borrowed under the Credit Facility are due and payable in September
2006, subject to earlier payment pursuant to the terms of the Agreement. The
Credit Facility required a 2% origination fee. QUALCOMM has a first priority
security interest in, subject to certain exceptions, substantially all of the
assets of Leap Wireless for so long as any amounts are outstanding under the
Credit Facility. Amounts borrowed under the Credit Facility bear interest at a
variable rate equal to LIBOR plus 5.25% per annum. Interest is payable quarterly
beginning September 30, 2001; and prior to such time, accrued interest shall be
added to the principal amount outstanding. After QUALCOMM assigns more than 10%
of the aggregate
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funding commitments to other lenders, a commitment fee is payable in favor of
the lenders on unused balances under the Credit Facility.
The Credit Facility requires the Company to, among other things, achieve
and maintain a total debt to total capitalization financial ratio. The Credit
Facility also contains operating covenants, including restrictions on the
ability of the Company to incur indebtedness, merge, consolidate or transfer all
or substantially all of its assets, make certain sales of assets, create, incur
or permit the existence of certain liens or pay dividends. Pursuant to the
Credit Agreement, Leap Wireless agreed that it will not at any time permit the
quotient obtained by dividing total debt by total capitalization of Leap
Wireless to exceed the following levels during the indicated periods:
<TABLE>
<CAPTION>
PERIOD LEVEL
------ -----
<S> <C>
Through September 2002...................................... 70%
After September 2002........................................ 50%
</TABLE>
The Company was in compliance with the financial covenant on August 31,
1998. In addition, the Credit Facility permits uses of funds only for specified
purposes, restricts the nature and breadth of the Company's joint venture and
equity interests, and imposes other restrictions on the operation of the
Company's business. Upon certain sales of assets, certain agreed percentages of
the proceeds are required to prepay the Credit Facility.
MASTER AGREEMENT REGARDING EQUIPMENT PROCUREMENT
The Master Agreement Regarding Equipment Procurement (the "Equipment
Agreement") sets forth certain obligations of Leap Wireless and QUALCOMM with
respect to the purchase and sale of certain terrestrial-based cdmaOne
infrastructure and subscriber equipment. Pursuant to the Equipment Agreement,
Leap Wireless agreed that as long as QUALCOMM offers equipment on competitive
terms and conditions as set forth in the Equipment Agreement, then: (i) Leap
Wireless will purchase from QUALCOMM not less than 50% of Leap Wireless' direct
requirements for infrastructure and subscriber equipment during the five-year
period following the first such purchase; (ii) with respect to each direct or
indirect investment by Leap Wireless which is made prior to October 2002 in a
wireless telecommunications operating entity operating in the United States in
which Leap Wireless has not previously invested (a "U.S. Operator"), Leap
Wireless shall cause each such U.S. Operator, as a condition of and prior to
making such investment, to enter into an equipment requirements agreement with
QUALCOMM which shall require such U.S. Operator to purchase from QUALCOMM not
less than 50% of its requirements for infrastructure and subscriber equipment
during a five year period commencing on the date of such investment; and (iii)
with respect to each direct or indirect investment by Leap Wireless in a U.S.
Operator which is made after September 2002, Leap Wireless shall exercise its
commercially reasonable efforts to cause the U.S. Operator, as a condition of
making such investment, to provide QUALCOMM with a reasonable opportunity to bid
on such U.S. Operator's requirements for infrastructure and subscriber
equipment, and encourage such U.S. Operator to acquire such equipment from
QUALCOMM. Such obligations shall be imposed upon Leap Wireless for such
infrastructure and subscriber equipment so long as QUALCOMM's bid for such (i)
infrastructure equipment and related services or (ii) subscriber equipment, as
applicable, is on competitive terms and conditions (except, in the case of
equipment for U.S. systems, the bid for such equipment may not be greater than
110% of the lowest competing bid that Leap Wireless designates that Leap
Wireless is willing to accept, taking into account all reasonably quantifiable
and/or objective factors associated with the sale and financing of wireless
telecommunications equipment and related services; provided, however, that once
QUALCOMM has been awarded contracts for an aggregate $250 million of
infrastructure equipment and related services on the one hand, or subscriber
equipment, as applicable (calculated separately), the 110% criterion shall be
lowered to 100% for subsequent purchases of such equipment).
Further, until the earlier to occur of (i) September 2002 and (ii) the date
on which Leap Wireless has received an aggregate $60 million of debt or equity
financing (by parties other than QUALCOMM and excluding the proceeds from the
exercise of Leap Wireless stock options), Leap Wireless shall cause each
wireless telecommunications operating entity operating outside the United States
in which Leap Wireless has
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<PAGE> 26
not previously invested (a "Non-U.S. Operator") in which Leap Wireless has made
a direct or indirect investment, as a condition of and prior to making such
investment, to enter into an equipment requirements agreement with QUALCOMM
which shall provide that such Non-U.S. Operator shall purchase from QUALCOMM not
less than 50% of such Non-U.S. Operators' requirements for infrastructure and
subscriber equipment during the five year period commencing on the date of such
investment. With respect to any Non-U.S. Operators in which Leap Wireless makes
a direct or indirect investment following the above-described applicable period,
Leap Wireless shall use commercially reasonable efforts to cause such Non-U.S.
Operator, as a condition of making such investment, to provide QUALCOMM with a
reasonable opportunity to bid on such U.S. Operator's infrastructure and
subscriber equipment, and encourage such U.S. Operator to acquire such equipment
from QUALCOMM. The obligations of all such Non-U.S. Operators shall be subject
to QUALCOMM providing competitive prices, taking into account all reasonably
quantifiable and/or objective factors associated with the sale and financing of
wireless telecommunications equipment and related services. Certain additional
terms limit the respective obligations of the parties to perform under specified
circumstances. All such obligations with respect to equipment purchases shall
expire on the date nine years following the Distribution.
QUALCOMM's right to supply infrastructure and subscriber equipment
constitutes a right of first refusal of QUALCOMM. To the extent Leap Wireless
(or any subject U.S. Operator or Non-U.S. Operator) attempts to procure
infrastructure equipment and subscriber equipment on a "bundled" basis (that is,
the prospective buyer is seeking to enter into a contract for the purchase of
infrastructure equipment and subscriber equipment from the same vendor on a
concurrent basis), then under certain prescribed circumstances QUALCOMM shall be
entitled to respond separately to each portion of the proposed "bundled"
procurement. To the extent Leap Wireless does not attempt to procure, in any
instance, such equipment on a competitive basis from multiple prospective
vendors, but instead elects to negotiate exclusively with QUALCOMM to supply
such equipment, then QUALCOMM agrees to offer and sell such equipment to Leap
Wireless on a "most favored pricing" basis.
INTERIM SERVICES AGREEMENT
The Company and QUALCOMM entered into an Interim Services Agreement
immediately prior to the Distribution (the "Interim Services Agreement"),
governing the provision by QUALCOMM to the Company, on an interim basis, of
certain data processing and telecommunications services (which may include voice
telecommunications and data transmission, accounting, financial management, tax,
payroll, stockholder, governmental and public relations, legal, human resources
administration, procurement, real estate management and other administrative
functions), each as mutually agreed to and on the terms set forth therein. The
Company agreed to pay QUALCOMM the hourly rate of the QUALCOMM employees
providing such services, plus associated general and administrative overhead
(which shall be deemed to equal an additional 150% of the hourly rate of the
employee) and all out-of-pocket costs and expenses. These interim services are
not expected to extend beyond September 1999.
EMPLOYEE BENEFITS AGREEMENT
The Employee Benefits Agreement (the "Employee Benefits Agreement") governs
the employee benefit obligations of the Company, including both compensation and
benefits, with respect to employees assigned to the Company as of the
Distribution Date. Pursuant to the Employee Benefits Agreement, the Company
assumed and agreed to pay, perform, fulfill and discharge, in accordance with
their respective terms, all liabilities to, or relating to, former employees of
QUALCOMM or its affiliates employed by the Company. In addition, Leap Wireless
granted options to purchase shares of Leap Wireless Common Stock to certain
holders of options to purchase shares of QUALCOMM Common Stock.
TAX AGREEMENT
The Tax Agreement (the "Tax Agreement") generally requires QUALCOMM to pay,
and indemnify Leap Wireless 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
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<PAGE> 27
will be paid by Leap Wireless and against which Leap Wireless will indemnify
QUALCOMM: (i) all United States federal, state, local and foreign taxes relating
to Leap Wireless and its U.S. subsidiaries for periods after the Distribution;
(ii) all United States federal, state, local and foreign taxes relating to Leap
Wireless' non-U.S. subsidiaries or any predecessor or successor thereof for all
periods before and after the Distribution (other than with respect to certain
restructuring transactions incident to the Distribution); and (iii) all United
States federal, state, local and foreign taxes arising out of certain actions
taken by, or in respect of, Leap Wireless or any of its subsidiaries that cause
adverse tax consequences to QUALCOMM, Leap Wireless or their respective
subsidiaries with respect to the Distribution or the transactions related
thereto; provided, however, that under certain limited circumstances Leap
Wireless' indemnification obligation described in this subparagraph (iii) may be
reduced.
The Tax Agreement further provides for cooperation with respect to certain
tax matters, the exchange of information and retention of records that may
affect the tax liability of either party.
CONVERSION AGREEMENT
Pursuant to the Conversion Agreement (the "Conversion Agreement") and in
consideration for the transfer of the Leap Wireless Business by QUALCOMM to the
Company, the Company agreed to issue up to 2,271,060 shares of Leap Wireless
Common Stock to holders of the Trust Convertible Preferred Securities (the
"Trust Preferred Securities") of QUALCOMM Financial Trust I, a wholly-owned
statutory business trust of QUALCOMM, upon the conversion of such securities
and, at all times, to have reserved and keep available, solely for issuance and
delivery upon such conversion, all Leap Wireless Common Stock issuable from time
to time upon such conversion. Leap Wireless is also obligated to file and keep
effective, subject to certain exceptions, a registration statement covering the
shares of Leap Wireless Common Stock issuable upon conversion of the Trust
Preferred Securities. Such registration statement (Commission File No. 333-
64459) was declared effective by the Securities and Exchange Commission on
October 13, 1998. Thus, the Company's offering of such Common Stock to the
holders of the Trust Preferred Securities commenced on October 13, 1998. No
Company Common Stock has yet been issued pursuant to this offering and the
offering has not yet terminated. Upon conversion of such Trust Preferred
Securities, QUALCOMM will receive benefit in the form of forgiveness of debt,
but Leap Wireless will receive no additional benefit or other consideration.
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<PAGE> 28
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
OPERATING HISTORY
The Company does not have an operating history since it has only operated
as an independent company since September 1998 and it, and each of the Leap
Wireless Operating Companies, are at an early stage of development. As such, the
Company is subject to the risks inherent in the establishment of a new business
enterprise and its prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets and companies
experiencing rapid growth.
UNCERTAINTY OF FUTURE PROFITABILITY
As of the date of this report, the Company has generated no revenue from
its ownership interests in or management roles with the Leap 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 Leap
Wireless Operating Companies. The Leap Wireless Operating Companies are expected
to incur substantial losses for the foreseeable future and are subject to
substantial risks. The Company will be required to recognize a share of these
companies' start-up operating losses as a result of the Company's ownership
interests in the Leap Wireless Operating Companies. The industry in which the
Leap Wireless Operating Companies operate is highly competitive and is subject
to a number of significant project, market, political, credit and exchange
risks, among others. The Company, QUALCOMM and others will be required to
provide substantial funding to these entities to finance completion of their
wireless operating systems. The build-out of the Leap Wireless Operating
Companies' wireless systems may take a number of years to complete. There can be
no assurance that any of the Leap Wireless 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 FCC and other
regulatory agencies, or become profitable. The failure of these companies to
build-out their systems, meet their payment obligations or become profitable
would adversely affect the value of the Company's assets and its future
profitability. Further, the above factors could also adversely affect the value
of the Leap Wireless Common Stock in the public market. The time required for
the Company to reach or sustain profitability is highly uncertain, and there can
be no assurance that the Company will be able to achieve or maintain
profitability. Moreover, if profitability is achieved, the level of such
profitability cannot be predicted and may vary significantly from quarter to
quarter.
ADDITIONAL CAPITAL NEEDS
The Company expects to have significant future capital requirements
relating (i) to funding commitments to the Leap Wireless Operating Companies and
other operating companies in which the Company may acquire joint venture or
equity interests and (ii) to general working capital needs and other cash
requirements. The magnitude of these capital requirements will depend on a
number of factors, including the specific capital needs of the Leap Wireless
Operating Companies, additional capital needed to acquire or maintain other
joint venture or equity interests or to pursue other telecommunications
opportunities, competing technological and market developments and changes in
existing and future relationships. The capital markets in the United States and
worldwide are currently experiencing severe volatility and uncertainty. There
can be no assurance that such markets will improve or that the Company will be
able to access such markets or raise additional capital on favorable terms or at
all. Failure to satisfy such capital requirements would have a material adverse
effect on the Company's business, results of operations, liquidity and financial
position and could also adversely affect the value of the Leap Wireless Common
Stock in the public market. For example, if the Company is unable to access the
capital markets to the extent necessary to fulfill its cash requirements, it may
be required to sell its interests in one or more operating companies earlier
than it otherwise planned and/or at a significant loss.
The businesses in which the Company has invested, the Leap Wireless
Operating Companies, also have substantial capital requirements. Most
importantly, the business plans of these companies call for substantial
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<PAGE> 29
additional financing in 1999 which has not yet been obtained. Although the Leap
Wireless Operating Companies may be able to reduce their capital requirements by
slowing the deployment of new equipment or by decreasing the scope of their
planned networks, it is likely that these businesses will still require
substantial new financing in 1999. The Leap Wireless Operating Companies are
generally seeking new equity and/or debt from existing investors, equipment
vendors and third parties, and the Company has been assisting them in their
efforts. At this time, however, capital markets have been constrained because of
uncertain worldwide economic conditions, and it is difficult for development
stage companies in emerging markets to raise additional capital. As a result,
the Company cannot provide assurances that the Leap Wireless Operating Companies
will be able to obtain the required additional financing. Further, the failure
of any such Leap Wireless Operating Company to gain required new financing could
have a material adverse effect on such company, and, as a result, a material
adverse effect on Leap Wireless.
SUBSTANTIAL LEVERAGE
The Company expects to obtain much of its required near term financing
through borrowings under the Credit Facility provided by QUALCOMM. The Company
expects that it will need to draw down the entire $35.2 million borrowing limit
under the Working Capital Facility and most of the $229.8 million borrowing
limit under the Investment Capital Facility by the end of fiscal 1999. The
Credit Facility bears a variable interest rate, which exposes the Company to
interest rate risk. The Company has no other available sources of working
capital or financing as of the date of this report for the period subsequent to
fiscal 1999. There can be no assurance that the Company will be able to obtain
such additional required financing on favorable terms or at all. The terms of
the Credit Facility, including the security interest in favor of QUALCOMM and
other restrictive covenants, may significantly limit or prevent the Company's
ability to obtain additional debt financing. If additional funds are raised
through equity financings, dilution to the Company's existing stockholders would
result. To the extent that such additional financing is raised by the sale or
other transfer of any of the Company's equity interests in the Leap Wireless
Operating Companies, the Companies' percentage ownership in the Leap Wireless
Operating Companies will be diluted or the Company may relinquish certain
operating control over the Leap Wireless Operating Companies. If adequate
additional financing is not available, the Company may be forced to default on
its funding obligations to the Leap Wireless 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 become highly
leveraged during fiscal 1999. 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 and investments; (iii) the Company may be
hindered in its ability to adjust rapidly to changing market conditions; (iv)
the Company's substantial degree of leverage may make it more vulnerable in the
event of a downturn in general economic conditions or in its business; and (v)
the Company's substantial degree of leverage could impair stockholders'
investment in the Company since the Company's debt holders would have priority
with respect to the Company's assets in the event of a liquidation. There can be
no assurance that the Company's future cash flows will be sufficient to meet the
Company's debt service requirements or that the Company will be able to
refinance any of its indebtedness at maturity.
The Leap Wireless Operating Companies have used or intend to use various
sources of financing for their respective funding. Although each of them has
received equity infusions, many are or will be highly leveraged. The ability of
the Leap Wireless Operating Companies to meet debt covenants will be dependent
upon their future performance, which will be subject to prevailing economic
conditions and to financial, business and other factors beyond their control.
The ability of the Leap Wireless Operating Companies to obtain future financings
on acceptable terms will be limited by their leverage and cash flows. In
addition, the Leap Wireless Operating Companies will be substantially funded
through equipment financing arrangements from vendors. See "-- Potential
Conflicts with QUALCOMM." Such equipment financings will be contingent upon
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<PAGE> 30
meeting planned levels of performance, and should any Leap Wireless 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 years ended August 31, 1998,
1997 and 1996 of approximately $34.6 million, $1.2 million and $396,000,
respectively. According to applicable accounting rules, the Company is required
to recognize a share of the Leap Wireless Operating Companies' operating losses,
which are likely to be substantial. The principal Leap Wireless 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 Leap Wireless Operating
Companies will achieve or sustain profitability in the near term or at all.
Failure to achieve profitability could have an adverse effect on the market
value of the Leap Wireless Common Stock.
INTERNATIONAL RISKS
The Company is subject to numerous risks as a result of its international
activities. The Leap Wireless Operating Companies are dependent, in large part,
on the economies of the markets in which they have operations. Those markets and
other markets in which the Company may operate are in countries with economies
in various stages of development or structural reform, some of which are subject
to rapid fluctuations in currency exchange rates, consumer prices, inflation,
employment levels and gross domestic product. The Company and the Leap Wireless
Operating Companies are exposed to market risk from changes in foreign currency
exchange rates and interest rates, and are subject to other currency, economic
and political risks, which could impact their results of operations and
financial condition. In particular, many of the agreements under which the Leap
Wireless Operating Companies purchase equipment or services require or are
expected to require payment in U.S. Dollars. In contrast, the expected income
stream for most Leap Wireless Operating Companies is in the local currency.
Changes in the exchange rate between the U.S. Dollar and the local currency of
the Leap Wireless Operating Companies could have a material adverse affect on
such companies and, thus, on Leap Wireless.
In addition, applicable agreements relating to the Company's interests in
the Leap Wireless Operating Companies are frequently governed by foreign law and
are subject to dispute resolution in the courts of, or through arbitration
proceedings in, the country or region in which each such Leap Wireless Operating
Company is located or another jurisdiction agreed upon by the parties.
Agreements between Leap Wireless and/or the Leap Wireless Operating Companies
and other parties relating to the development, construction or operation of
wireless operating systems in international markets may be abandoned or breached
by such other parties or may be difficult to enforce in such markets due to
political and market instability, the limited development of the judicial
systems in such markets and other factors affecting such markets. Further,
public awareness of the risks associated with international operations may
increase the volatility of the market price of Leap Wireless Common Stock. This
potential volatility has been evidenced recently by stock market fluctuations
attributed to recent developments in Russia, Latin America, Asia and other
emerging markets. The risks and volatility associated with the Company's markets
may adversely impact the ability of the Company and the Leap Wireless Operating
Companies to raise capital.
The value of the Company's interest in a Leap Wireless Operating Company is
partially a function of the currency exchange rate between the U.S. Dollar and
the applicable local currency. Exchange rates for currencies of the countries in
which the Company's Leap Wireless Operating Companies do business may fluctuate
in relation to the U.S. Dollar, and such fluctuations may have a material
adverse effect on the Company's earnings or assets, or on the likelihood of
repayment of certain obligations to the Company.
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A significant part of the Company's strategy involves its planned
activities in a number of developing nations. Various challenges and risks are
attendant to doing business in certain of these countries, including, among
other things, high real estate prices and a shortage of skilled
middle-management employees in addition to risks associated with international
business generally. The Company's activities in developing nations are
significant to the Company's business and the failure of the Company to
effectively implement its strategy in these and other developing nations could
have a material adverse effect on the Company's business, results of operations,
liquidity and financial position.
In addition to the general risks associated with the international
operations of the Leap Wireless Operating Companies, the Company will also be
subject to risks specific to the individual countries in which the Leap Wireless
Operating Companies are located, including political, regulatory and competitive
risks. The following is a summary of such country-specific risks:
Doing Business in Russia. The Russian economy recently has experienced
severe volatility in both financial and currency markets despite the monetary
support and financing provided by the IMF. The Russian Ruble has been allowed to
devalue significantly and generally lacks convertibility into other currencies.
The Russian government is experiencing extreme political volatility and has
defaulted on certain of its obligations to foreign investors and governments.
News reports have indicated that a number of Russian banks have become
insolvent. The pace of political reform has slowed and the recent dismissal of a
significant number of government leaders by the Russian President has
contributed to continuing political instability. Such political instability
could lead to a return to a state controlled economy, market inefficiencies and
hyperinflation. Further, the IMF has indicated that continued support would be
conditioned on continued implementation of political reform and the institution
of a market based economy, which cannot be assured. This economic and political
instability could have a material adverse effect on the value of the Company's
businesses and prospects in Russia, including but not limited to nationalization
of telecommunications operations. In addition, the regulatory framework and
authorities in Russia are relatively recent and, therefore, the enforcement and
interpretation of regulations, the assessment of compliance, and the degree of
flexibility of regulatory authorities are uncertain. Further, QUALCOMM's CDMA
equipment has not yet been approved in Russia for mobility applications. If the
operating companies' licenses are expanded to include mobile applications, the
time required to obtain approval for QUALCOMM's CDMA equipment could delay or
prevent the operating companies' implementation of mobile applications and,
thus, adversely affect the growth and profitability of the operating companies.
Any or all of these factors could negatively impact the Company's prospects in
Russia. Moreover, the Company's Russian operating companies are currently
subject to increasing competition from other telecommunications carriers. There
can be no assurance that the Company's Russian operating companies will be able
to compete successfully.
Doing Business in Australia. The Leap Wireless Operating Company in
Australia is dependent, in large part, on the economy of that country. The
recent economic crisis in Asia has had a negative impact on the growth of the
Australian economy which could, in turn, negatively impact the Company's
prospects in Australia. There can be no assurances that Australia's economy will
not continue to be negatively impacted by the Asian economic crisis or that the
Company's operations in Australia will not similarly be affected. In addition,
three of the Company's existing competitors in Australia have nationwide
operations, have been in operation for years with well established brands and
customer acceptance, and have substantially greater financial, technical,
marketing, sales and distribution resources than those of the Company. The
Company's Australian Operating Company has only regional coverage and the
Australian telecommunications market is expected to have new entrants. There can
also be no assurance that the Company will be able to obtain additional required
financing on favorable terms or at all from significant investors to support its
operations in Australia.
Doing Business in Chile. The Leap Wireless Operating Company in Chile is
dependent, in large part, on the economy of that country which historically has
been closely tied to fluctuations in the price of certain natural resources. The
recent economic crisis in Asia has had a negative impact on certain commodity
prices which could, in turn, negatively impact the Company's prospects in Chile.
Although Chilean prices and its currency generally have been stable, such
stability has required continued intervention by the Chilean government. In
addition, although the Company's Chilean operating company is the only vendor in
Chile of
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CDMA technology, the Company's existing competitors in Chile currently have
cellular and/or PCS network systems based on alternative technology in place.
Further, the Chilean telecommunications market has historically been very price
competitive and the existing competitors in Chile have greater financial
resources, larger distribution networks, and established brands and customer
acceptance which provide them with substantial resources to compete with the
Company on prices. There can be no assurance that the Company's Chilean
operating company will be able to compete successfully.
Doing Business in Mexico. Mexico continues to experience a high rate of
inflation, and the country's currency and financial markets continue to be
volatile. The impact on the Mexican economy of the recent economic crisis in
Asia and the economic slowdown in the U.S. is not yet clear and there can be no
assurances that Mexico's economy will not be negatively impacted by such
economic factors or that the Company's operations in Mexico will not similarly
be affected. The economy of Mexico historically has also been closely tied to
fluctuations in the price of oil and petroleum products and fluctuations in the
prices of such products could also negatively impact the Company's prospects as
could continuing political tensions in Mexico. Additionally, a number of large
American and European companies and large international telecommunications
companies, including Bell Atlantic, AT&T, MCI, Sprint, SBC and their suppliers
are actively engaged in programs to develop and commercialize telecommunications
services in Mexico. Many of these competitors have substantially greater
financial, technical, marketing, sales and distribution resources than those of
the Company. There can be no assurance that the Company or its Mexican operating
company will be able to compete effectively.
Doing Business in Ukraine. Under the Separation and Distribution Agreement,
QUALCOMM and Leap Wireless have agreed that, if certain events occur before
April 2000, certain assets and liabilities related to TOU will be transferred to
Leap Wireless. There can be no assurance that such events will occur or that
legal impediments to transfer will be removed, or that QUALCOMM's interest in
TOU will ever be transferred to Leap Wireless.
In the event QUALCOMM's interest in TOU is transferred to the Company, it
will subject the Company to certain risks of doing business in Ukraine. The
Ukrainian economy recently experienced a deep recession and is expecting only
relatively low growth of 1 - 2% of GDP during 1998 and 1999. Ukraine also has a
very high debt service requirement and had per capita GDP of only $2,853.
Politically, Ukraine has been subject to a number of risks and the upcoming
parliamentary and presidential elections in 1999 could negatively impact the
Company's prospects in that country. In addition, although TOU is currently the
only known vendor in Ukraine of CDMA technology, a number of TOU's existing
competitors in Ukraine have planned cellular network systems. TOU also competes
against the landline carriers, including government-owned telephone companies.
There can be no assurance that TOU will be able to compete successfully.
POTENTIAL CONFLICTS WITH QUALCOMM
Leap Wireless owns QUALCOMM's former joint venture and equity interests in
the Leap Wireless Operating Companies. QUALCOMM, however, will continue to be a
supplier of CDMA equipment and is expected to provide significant vendor
financing to those companies. QUALCOMM has retained substantially all of its
rights under its equipment supply and vendor finance agreements with such
entities, and such entities will continue to rely on QUALCOMM and its equipment
and technology. The ability of the Leap Wireless Operating Companies to
construct and operate their wireless operating systems and their business and
future prospects may be substantially dependent upon QUALCOMM's performance
under QUALCOMM's agreements with the Leap Wireless Operating Companies. Neither
Leap Wireless nor any of the Leap Wireless Operating Companies will be able to
exercise any substantial control over QUALCOMM or its management or the
performance by QUALCOMM of such agreements. There can be no assurance that
QUALCOMM will perform services or other obligations under such agreements in a
timely or sufficient manner, or at all. Failure by QUALCOMM to fully perform
under such agreements could have a material adverse effect on Leap Wireless
and/or the Leap Wireless Operating Companies. In addition, QUALCOMM's
relationship with the Leap Wireless Operating Companies could place QUALCOMM in
a position in conflict with the Company's with respect to the Leap Wireless
Operating Companies.
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The Company and QUALCOMM are subject to several agreements between them.
For instance, the Company will initially be dependent upon the Credit Facility
with QUALCOMM to meet its needs for capital. The Credit Facility contains a
financial covenant and operating covenants, including restrictions on the
ability of the Company to incur indebtedness, to merge, consolidate or transfer
all or substantially all of its assets, to make certain sales of assets, to
create, incur or permit the existence of certain liens and to pay dividends. In
addition, the Credit Facility permits uses of funds only for specified purposes
(without further agreement from QUALCOMM), restricts the nature and breadth of
the Company's joint venture and equity interests and imposes other restrictions
on the Company's business. The Company and QUALCOMM have also entered into the
Equipment Agreement, pursuant to which the Company has made certain commitments
with respect to its own and its operating companies' purchase of certain CDMA
products from QUALCOMM. The relationships with QUALCOMM, including the Equipment
Agreement and the Credit Facility, may restrict the Company's ability to invest
in other joint ventures. These agreements will allow QUALCOMM to continue to
exert significant influence over the Company, and there can be no assurance that
the Company and QUALCOMM will not experience disputes or other difficulties with
respect to their performance under these agreements. The deterioration of the
Company's relationship with QUALCOMM could have an adverse effect on the value
of the Leap Wireless Common Stock through the public market.
AVAILABILITY AND MAINTENANCE OF LICENSES
The ability of the Company and the Leap Wireless 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 will 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 renewals of licenses will be granted on
terms favorable to the Company or at all, or that the Company or the Leap
Wireless Operating Companies will be able to secure additional desired licenses.
CONSTRUCTION AND SYSTEM PERFORMANCE RISKS
The Company and the Leap Wireless 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. There can be no assurance that the Company
and the Leap Wireless Operating Companies will be able to complete current or
future construction projects for the amount budgeted or on a timely basis, which
could jeopardize subscriber contracts, franchises or licenses and could have a
material adverse effect on the Company and the Leap Wireless Operating
Companies.
Even if the Leap Wireless Operating Companies complete construction in a
timely and cost effective manner, these relatively new companies will also face
challenges in managing and operating the many facets of their telecommunication
systems, including the sales, advertising, customer support, billing, and
collection functions. A failure to successfully implement any of such functions
could seriously undermine customer satisfaction and lead to fewer than expected
subscribers, increased churn and reduced revenues, all of which could have a
material adverse effect on the Leap Wireless Operating Companies and, thus, on
Leap Wireless.
LONG TERM CONTRACTS
In addition, the Leap Wireless Operating Companies and Leap Wireless have
several significant contracts, including certain network infrastructure
contracts with QUALCOMM and others, 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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<PAGE> 34
JOINT VENTURES
The Company is a participant in joint venture companies that hold wireless
telephone licenses or are seeking such licenses. Many of Leap Wireless' partners
in 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 limited or no
control. Additionally, many of the partners in the joint ventures have invested
relatively small amounts of their own funds in such joint ventures. Any material
disagreement with respect to the operational strategy and system implementation
plans of these joint ventures between the Company and its joint venture partners
could have a material adverse effect on the Company. Additionally, the inability
of any of the Company's joint venture partners to meet its funding or other
obligations with respect to a Leap Wireless Operating Company could also have a
material adverse effect on the Company, and could force the Company to make
additional investments in such Leap Wireless Operating Companies.
INVESTMENT COMPANY ACT
A significant portion of the Company's assets consist of equity and other
interests in its operating companies. Significant investments in entities that
are not majority owned by the Company could subject the Company to the
registration requirements of the Investment Company Act of 1940 (the "Investment
Company Act"). The Investment Company Act requires registration of, and imposes
substantial restrictions on, certain companies that engage, or propose to
engage, primarily in the business of investing, reinvesting, owning, holding, or
trading in securities, or that fail certain statistical tests concerning a
company's asset composition and sources of income. Primarily because the
Company's operating companies will be engaged in telecommunications 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 attempt to
adjust the nature of its interests in and involvement with operating companies
in order to avoid subjecting the Company to the registration requirements of the
Investment Company Act. In addition, in order to clarify the Company's status
under the Investment Company Act, on September 21, 1998 the Company filed a
request for an exemptive order from the Securities and Exchange Commission
finding and declaring the Company to be primarily engaged in a business other
than investing, reinvesting, owning, holding or trading in securities, either
directly, through majority-owned subsidiaries or through controlled companies
conducting similar types of businesses. There can be no assurance that the
Company's business activities will not ultimately subject the Company to the
Investment Company Act, or that the exemptive order will be issued. If the
Company were required to register as an investment company under the Investment
Company Act, it would become subject to regulations that would have a material
adverse impact on its business.
COMPETITION
There is increasing competition in the wireless telecommunications industry
in the United States and throughout the world. There can be no assurance that
the Company or its operating companies will be able to compete successfully or
that new technologies and products that are more commercially effective than the
Company's or its operating companies' products and services will not be
developed. In addition, many of the Company's prospective competitors have
substantially greater financial, technical, marketing, sales and distribution
resources than those of the Company.
Although the implementation of advanced telecommunications services is in
its early stages in many developing countries, the Company believes competition
is intensifying as businesses and foreign governments realize the market
potential of telecommunications services. Many of the Company's operating
companies currently face competition from existing telecommunications 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
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<PAGE> 35
companies. In some cases, the competition is from government-controlled or
- -supported entities that are, or may in the future be, privatized or otherwise
become more efficient and competitive. In addition, the Leap Wireless Operating
Companies throughout the world may face competition with new technologies and
services introduced in the future. Although the Leap Wireless Operating
Companies intend to employ relatively new technologies, there will be a
continuing competitive threat from even newer technologies that may render the
technologies employed by such companies obsolete. The Company also expects that
the price that the Leap Wireless 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
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 the time-to-market advantage of these providers 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 markets. The Company also believes that the
two incumbent cellular providers in each of the Company's planned United States
markets, all of which have infrastructure in place, a customer base and a brand
name, and have been operational for five to ten years or more, have upgraded or
will upgrade their networks to provide services in competition with the Company.
The Company further expects to compete with other telecommunications
technologies such as paging, enhanced specialized mobile radio and global
satellite networks.
In addition, QUALCOMM may choose to pursue new CDMA-based wireless
telecommunications businesses and ventures that would also be attractive
projects for the Company. QUALCOMM will have no obligation to refer any such
project to the Company and may in fact compete with the Company for such
projects. Also, QUALCOMM will not be restricted from pursuing wireless
telecommunications opportunities that may compete directly with the Company or
the Leap Wireless Operating Companies. Any such competition or potential
competition could result in conflict between the Company and QUALCOMM and
adversely affect other relationships between the companies. Moreover, there can
be no assurance that the Company would be able to compete effectively with
QUALCOMM with respect to these opportunities. Competitive pressures could also
suppress the market price of Leap Wireless Common Stock, which would adversely
affect the Company's stockholders.
In addition, the Company believes that companies holding equity interests
in multiple operating companies throughout the world will be increasingly
predominant in the wireless communications industry and expects to experience
increasing competition from entities with structures resembling that of Leap
Wireless.
RAPIDLY CHANGING TECHNOLOGY
CDMA is a proprietary integrated software and hardware system invented by
QUALCOMM and used for digitally transmitting telecommunications signals in a
wireless network. The Company believes CDMA offers a number of advantages over
analog and other digital technologies, and plans to operate only cdmaOne
networks through the Leap Wireless Operating Companies and any future operating
companies in which the Company invests. CdmaOne is the original standard for
fixed wireless telecommunications systems based on or derived from QUALCOMM's
CDMA technology and successor standards that QUALCOMM has adopted.
The telecommunications industry is subject to rapid and significant changes
in technology that could lead to new products and services that compete with
those offered by the Leap Wireless Operating Companies or lower the cost of
competing products and services to the point where the Leap Wireless Operating
Companies' products and services could become non-competitive, thereby requiring
them to reduce their prices or amend
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<PAGE> 36
their business plans. The effect of technological changes on the Company's
businesses cannot be predicted. Also, there can be no assurance that the Leap
Wireless Operating Companies will not experience technical difficulties in their
commercial deployment. Further, the emergence of a competing technology superior
to cdmaOne could have a material adverse effect on the Company's business,
results of operations, liquidity and financial position.
GOVERNMENT REGULATION
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in each of the countries outside the United States in which
Leap Wireless has operations are regulated by governmental authorities in each
such country. In some cases, the regulatory authorities also operate or control
the operations of the competitors of the operating companies. Changes in the
current regulatory environment of these markets or future judicial intervention,
or regulations affecting the pricing of the operating companies' services, could
have a material adverse effect on the Company. In addition, the regulatory
framework and authorities in certain of the countries where the Company operates
are relatively recent and, therefore, the enforcement and interpretation of
regulations, the assessment of compliance, and the degree of flexibility of
regulatory authorities are uncertain. Further, changes in the regulatory
framework may limit the ability to add subscribers to developing systems. An
operating company's failure to comply with applicable governmental regulations
or operating requirements could result in the loss of licenses, penalties and/or
fines or otherwise could have a material adverse effect on the Company. For a
more detailed description of the regulatory environment in the United States and
each of the other countries in which Leap Wireless operates, see the "Regulatory
Environment" discussion for each of the Leap Wireless Operating Companies under
"Business."
The construction, operation, sale and interconnection arrangements of
wireless telecommunications systems and the grant, maintenance and renewal of
applicable licenses in the United States are regulated to varying degrees by
state regulatory agencies, the FCC, the United States Congress and the courts.
The Leap Wireless Operating Companies doing business in the United States, and
Leap Wireless, will be required to maintain compliance with all of the
requirements for conducting 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.
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<PAGE> 37
SUBSTANTIAL FUTURE DILUTION FROM LEAP WIRELESS SHARE RESERVES
An aggregate of 17,647,685 shares of Leap Wireless Common Stock were issued
in the Distribution. The holders of such shares are subject to potential
substantial dilution due to the significant number of shares of Leap Wireless
Common Stock that are reserved for issuance. Collectively, there were 16,471,060
shares of Leap Wireless Common Stock reserved for issuance following the
Distribution, consisting of the following: 5,500,000 shares for issuance upon
exercise of the Warrants issued to QUALCOMM (exercisable at approximately $6.11
per share or approximately $33.6 million in the aggregate); 3,157,260 shares for
future issuance to its employees, officers, directors and consultants pursuant
to Leap Wireless' equity incentive plans (which the Company generally expects to
issue at an exercise price equal to the fair market value of the Leap Wireless
Common Stock on the date of the related option grant); 5,542,740 shares for
issuance upon exercise of options to purchase Leap Wireless Common Stock granted
to QUALCOMM employees, officers, directors and consultants as a result of option
grants to such persons in connection with the Distribution (issuable for an
average of $3.71 per share); and 2,271,060 shares for issuance upon conversion
of the Trust Preferred Securities. The Company agreed to issue Common Stock upon
the future conversion of the Trust Preferred Securities in consideration for the
transfer of the businesses and ventures of the Company (the "Leap Wireless
Business") from QUALCOMM to the Company in connection with the Distribution. The
Company will receive no additional consideration or forgiveness of debt upon
conversion of the Trust Preferred Securities and the issuance of Common Stock.
Upon conversion of the Trust Preferred Securities, QUALCOMM will receive benefit
in the form of forgiveness of debt. Though the Company does not expect all of
the aforementioned reserved shares to be issued, if all such shares were issued,
the holders of shares of the Company's outstanding Common Stock would be
substantially diluted and would hold 51.8% of the outstanding Leap Wireless
Common Stock.
NO PRIOR MARKET FOR LEAP WIRELESS COMMON STOCK; VOLATILITY
Leap Wireless Common Stock began trading, on a when issued basis, on
September 23, 1998. There can be no assurance that an active trading market will
develop over the long-term. As a "start-up" company with substantial interests
in emerging markets, the price for shares of the Leap Wireless Common Stock may
be volatile depending on a number of factors, including business performance,
industry dynamics, news announcements, international factors, or changes in
general market conditions, among others.
ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws"), including provisions classifying the Board of Directors,
prohibiting stockholder action by written consent and requiring advance notice
for nomination of directors and stockholder proposals, may inhibit changes of
control of the Company that are not approved by the Company's Board of
Directors. Such Certificate of Incorporation and Bylaw provisions could diminish
the opportunities for a stockholder to participate in certain tender offers,
including tender offers at prices above the then-current fair market value of
the Leap Wireless Common Stock, and may also inhibit fluctuations in the market
price of the Leap Wireless Common Stock that could result from takeover
attempts. In addition, the Company's Board of Directors, without further
stockholder approval, may issue preferred stock that could have the effect of
delaying, deferring or preventing a change in control of the Company. The
issuance of preferred stock could also adversely affect the voting power of the
holders of Leap Wireless Common Stock, including the loss of voting control to
others. The Company has no present plans to issue any preferred stock. The
provisions of the Certificate of Incorporation and Bylaws may have the effect of
discouraging or preventing an acquisition of the Company or a disposition of
certain of the Company's businesses.
The preferred stock purchase rights (the "Rights") attached to each
outstanding share of Leap Wireless Common Stock may have some anti-takeover
affects. The Rights are designed to assure that all of the Company's
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company and to guard against partial tender offers, open market
accumulations and other abusive tactics to gain control of the Company without
paying all stockholders a control premium. The Rights will cause
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<PAGE> 38
substantial dilution to a person or group that acquires 15% or more of the
Company's stock on terms not approved by the Company's Board of Directors (an
"Acquiring Person"), excluding shares of the Company's stock acquired by
QUALCOMM upon exercise of the Warrant. The Rights should not interfere with any
merger or other business combination approved by the Board of Directors at any
time prior to the first date that a person or group has become an Acquiring
Person.
PRODUCT LIABILITY
Testing, manufacturing, marketing and use of the Company's and the Leap
Wireless Operating Companies' products entail the risk of product liability. An
inability to maintain insurance at an acceptable cost or to otherwise protect
against potential product liability could prevent or inhibit the
commercialization of the Company's or any Leap Wireless Operating Company's
products. In addition, a product liability claim or recall could have a material
adverse effect on the business, results of operations, liquidity and financial
position of the Company.
News reports have asserted that power levels associated with hand-held
wireless telephones may pose certain health risks. The Company is not aware of
any study that has concluded that there are any significant health risks from
using hand-held wireless telephones. If it were determined that electromagnetic
waves carried through the antennas of wireless telephones create a significant
health risk, there could be a material adverse effect on the Company's or the
Leap Wireless Operating Companies' ability to market and sell wireless telephone
products. In addition, there may also be certain safety risks associated with
the use of hand-held wireless phones while driving, which also could have a
material adverse effect on the Company's or the Leap Wireless Operating
Companies' ability to market and sell wireless telephones.
SUBSTANTIAL STOCK SALES
The Distribution involved the distribution of an aggregate of 17,647,685
shares of Leap Wireless Common Stock to the stockholders of QUALCOMM. A
substantial portion of such shares are eligible for immediate resale in the
public market. The Company is unable to predict whether substantial amounts of
Leap Wireless Common Stock will be sold in the open market soon after the
Distribution. A higher volume of such sales may also occur if stockholders of
QUALCOMM Common Stock choose to sell shares of Leap Wireless Common Stock in
order to pay the additional tax liability created as a result of the
Distribution. Any sales of substantial amounts of Leap Wireless Common Stock in
the public market, or the perception that such sales might occur, could have a
material adverse effect on the market price of the Leap Wireless Common Stock.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software
programs have been written using two digits rather than four to represent a
specific year. Any computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
As the Company and the Leap Wireless Operating Companies have recently
begun their respective businesses, there exists uncertainty as to the impact the
Year 2000 issue could have on the Company. The Company does not believe that the
Year 2000 issue will significantly impact its administrative and accounting
software, which have been acquired recently or will be acquired. The Company
generally subjects its vendors to Year 2000 compliance requirements in
connection with the Company's acquisitions of software. Also, the Company
believes that the Year 2000 issue will not significantly impair the ability of
the Leap Wireless Operating Companies' wireless communications networks to
perform as intended. The Leap Wireless Operating Companies are expected to have
direct or indirect computerized interfaces to third parties relating to the
transmission of telecommunications traffic over local, national and
international telecommunications networks. The Leap Wireless Operating Companies
are vulnerable to the failure of such third parties to adequately address their
Year 2000 issues. Such failures, should they occur, could cause significant
disruption
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<PAGE> 39
to the operations of the Leap Wireless Operating Companies, including the
ability to provide certain services and correctly bill customers, resulting in
the potential for revenue loss and increased costs. The Company is not currently
aware of any significant third party problems concerning the computerized
interfaces, but as the Leap Wireless Operating Companies have only recently
begun network build-out and commercial activities, they have not yet completed
their assessment of the risk associated with third party interfaces and the Year
2000 issue. This overall assessment is expected to continue through December
1998. At that time, the concurrently developed remediation plan will begin, with
an expected completion date of July 1, 1999. The Company is in the process of
developing a risk profile to evaluate all third parties in regard to their
capability to become compliant with Year 2000.
As of the date hereof, the Company has not incurred any material costs in
support of the Year 2000 issue. The Company estimates that it will spend
$500,000 in fiscal year 1999 to review and correct any non-information
technology systems as well as support material third party relationships. The
Company has not developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all
Year 2000 problems in its systems, the systems of the Leap Wireless Operating
Companies or third party systems with which the Company or the Leap Wireless
Operating Companies will have computerized interfaces in advance of their
occurrence or that the Company will be able to successfully remedy any problems.
The expenses associated with the Company's efforts to remedy any Year 2000
problems, the expenses or liabilities to which the Company may become subject as
a result of such problems or the impact of Year 2000 problems on the ability of
Leap Wireless 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.
ITEM 2. PROPERTIES
The Company has leased approximately 50,000 square feet of office space in
San Diego, California, U.S.A. The Company currently leases this building for
sales, marketing, product development and administrative purposes. The Company
does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of the Leap Wireless Operating Companies is a
party to any litigation that the Company believes would, individually or in the
aggregate, have a material adverse effect on Leap Wireless and the Leap Wireless
Operating Companies, taken as a whole, and Leap Wireless is not aware that any
such litigation is threatened. A legal challenge in Mexico to the
constitutionality of the government's transfer of the frequency licenses was
recently dismissed on procedural grounds. Neither the Company nor any Leap
Wireless Operating Company was a party to the litigation, and the Company
believes that the challenge, if refiled, will not have a material adverse effect
on Leap Wireless and the Leap Wireless Operating Companies taken as a whole. See
"Item 1. Business -- Leap Wireless Operating Companies -- Pegaso
Telecomunicaciones, S.A. de C.V. and Pegaso Comunicaciones y Sistemas, S.A. de
C.V., Mexico."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended August 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.0001 par value per share, has traded on The
Nasdaq National Market under the symbol "LWIN" since September 24, 1998. The
following table sets forth the high and low sale prices for the Common Stock as
reported by the Nasdaq National Market from September 24, 1998 to November 10,
1998.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ----
<S> <C> <C>
From September 24, 1998 to November 10, 1998................ 9 2 11/16
</TABLE>
As of November 10, 1998 there were approximately 17,684,367 shares of
Common Stock outstanding held by approximately 1,902 holders of record.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company is currently prohibited from paying dividends by
the terms of the Credit Agreement between the Company and QUALCOMM. The Company
intends to retain any earnings for use in the operation and expansion of its
business.
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<PAGE> 41
ITEM 6. SELECTED FINANCIAL DATA
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 report. The selected combined
historical financial data of the Company relates to the Leap Wireless Business
as it was operated by QUALCOMM. 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,
YEARS ENDED AUGUST 31, 1995 (INCEPTION)
---------------------------- TO AUGUST 31,
1998 1997 1996 1998
-------- ------- ----- -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Equity in net income (loss) of wireless
operating companies...................... $(11,580) $ 207 $ -- $(11,373)
General and administrative expenses......... (23,888) (1,361) (396) (25,645)
------- -----
Interest Income............................. 843 -- -- 843
-------- ------- ----- --------
Loss before income taxes.................... (34,625) (1,154) (396) (36,175)
Income tax expense.......................... -- -- -- --
-------- ------- ----- --------
Net loss.................................... $(34,625) $(1,154) $(396) $(36,175)
======== ======= ===== ========
Unaudited pro forma basic and diluted net
loss per common share.................... $ (1.96)
========
Shares used in computing unaudited pro forma
basic and diluted net loss per common
share.................................... 17,648
========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)................... (14,789) $ (279) $(111)
Total assets................................ 173,860 46,267 --
Stockholder's equity........................ 159,071 45,988 (111)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 relating to joint ventures and other entities in which the
Company has interests, include, but are not specifically limited to: the ability
to successfully deploy wireless networks, the ability to raise sufficient funds
to finance such deployment, 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 "Item 1. Factors That Could Affect Future Performance."
PRESENTATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the financial position, results of operations, cash flows and
changes in stockholder's equity of the business that was transferred to the
Company from QUALCOMM on September 23, 1998 as if the Company were a separate
entity for all periods discussed. In addition, the results of the unconsolidated
Leap Wireless Operating Companies have been included as of and for the twelve
months ended July 31, a one-month lag.
OVERVIEW
Leap Wireless' strategy is to build an operating entity that provides
management and project expertise and selectively participates in and manages
joint ventures and other collaborative efforts to provide cdmaOne wireless
telecommunications services in telecommunications markets with significant
growth potential. The Company believes its experience, technical and commercial
expertise, and access to equipment and technology will benefit the Company and
the entities in which it has interests.
Domestic and international telecommunications markets are expanding rapidly
as countries seek to increase teledensity (number of telephone lines as a
percentage of the population) and competition among carriers. Often the fastest,
most economical and easiest way to meet these demands is through the
implementation and operation of wireless networks and systems. In many such
countries, telecommunications systems have been closely regulated by local
governments, and licenses to provide services have been largely unavailable.
Decreased government regulation, and active solicitation of new and better
services through auctions of licenses, have created opportunities for local and
foreign providers to capture market share. These changes create the need to
provide both the capital to build out these new (largely wireless) systems and
the expertise to oversee and manage their entry into these competitive markets.
Such opportunities have been recognized in many countries, including those where
Leap Wireless has operations.
The Company and its operating companies are in the early stages of
development and are subject to the risks inherent in the establishment of a new
business enterprise. The Company's results of operations must be considered in
light of the risks, expenses and difficulties encountered by companies at this
stage of development, particularly companies in new and rapidly evolving markets
and companies experiencing rapid growth. It is expected that the launch,
development and expansion of the Company's wireless services over the next
several years, as well as the pursuit of additional telecommunications
opportunities, will require significant capital. The Company's future growth and
results of operations will therefore depend upon its ability to raise sufficient
funds to meet its capital requirements.
The entities in which the Company has joint venture and equity interests
have not generated any revenues from operations for the Company, and the Company
has no other current sources of income. Costs associated with the construction
and testing of the wireless networks are being capitalized. Accordingly, the
Company's proportionate share of the net losses of such entities accounted for
under the equity method of accounting has been limited to date.
40
<PAGE> 43
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 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
FISCAL YEAR ENDED AUGUST 31, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1997
Equity in net losses of wireless operating companies for fiscal 1998 was
$11.6 million, which represents the Company's share of the net losses of the
wireless operating companies in which it holds an ownership interest accounted
for under the equity method of accounting. These losses consisted of costs
incurred prior to service launch during the network build-out and testing
phases, such as salary and related benefits, overhead expenses and professional
and consulting fees. Through August 31, 1998, there was no depreciation of
network equipment and no amortization of licenses as service had not been
launched commercially. For fiscal 1997, equity in net earnings of wireless
operating companies amounted to $207,000, reflecting interest on investments and
the fact that the wireless operating companies in which the Company invested had
only recently begun network planning and build-out activities. The increase in
equity in net losses of wireless operating companies from fiscal 1997 to 1998
reflects greater network planning and build out activities in the latter period.
General and administrative expenses were $23.9 million for fiscal 1998,
compared to $1.4 million for fiscal 1997. The increase was due principally to
increases in business development activities relating to projects to create
wireless operating companies in Mexico and Russia and a $1.7 million provision
for bad debts against a receivable from a potential business acquiree, described
in greater detail below. Such development activities 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.
During November 1997, QUALCOMMTel entered into a letter of intent to
purchase a controlling interest in a Russian telephone company for approximately
$10 million, subject to adjustment and pending due diligence procedures. In
connection with the potential acquisition, during November and December of 1997
QUALCOMMTel provided $1.7 million in interest-bearing loans under an exclusivity
clause to meet the interim working capital needs of the potential acquiree.
Subsequent negotiations failed to result in an acquisition agreement and, due to
substantial doubt on the ability of the potential acquiree to repay such loans,
the Company provided a $1.7 million bad debt allowance against the receivable.
No provision for income taxes was recognized for fiscal 1998 and 1997, as a
result of the net losses incurred.
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1996
Equity in net earnings of wireless operating companies for fiscal 1997 was
$207,000, which represents the Company's share of the net income of wireless
operating companies in which it holds an ownership interest
41
<PAGE> 44
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 included salary and related benefits, overhead expenses and
professional and consulting fees. Through August 31, 1997, there was no
depreciation of network equipment and no amortization of licenses as service had
not been launched commercially. Through August 31, 1996, the Company did not
have any operating company interests, and, accordingly, there was no equity in
earnings of investees during the year then ended.
General and administrative expenses were $1.4 million for fiscal 1997,
compared to $0.4 million for fiscal 1996. This increase was due principally to
increases in business development activity relating to projects to create a
wireless operating company in Chile. Such development activity resulted in
higher professional and consulting fees. Additionally, the Company incurred
higher incremental labor and travel expenses to develop the wireless operating
companies.
No provision for income taxes was recognized for the years ended August 31,
1997 and 1996, as a result of the net losses incurred.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As explained in greater detail below, the Leap Wireless Operating Companies
require substantial financing to build-out and operate their planned networks,
including substantial financing for 1999 which the Leap Wireless Operating
Companies have not obtained. As the result of a $265 million secured Credit
Facility with QUALCOMM, the Company has sufficient liquidity to contribute the
approximately $75 million of financing it is contractually bound to provide the
Leap Wireless Operating Companies as of the Distribution Date. The Company also
expects to use a substantial portion of the amount available under the Credit
Facility for other Company wireless ventures. Even without these other planned
investments, however, the Credit Facility does not provide the Company with
sufficient liquidity to satisfy the total capital requirements of the Leap
Wireless Operating Companies. Thus, these companies must seek third party debt
and/or equity financing, which is difficult for start-up companies in emerging
markets to obtain in today's unsettled financial markets.
As a result of its contractual funding commitments to the Leap Wireless
Operating Companies and the additional voluntary investments the Company expects
to make in 1999, the Company expects to have reached its borrowing limit under
the QUALCOMM Credit Facility at or about the end of 1999. At that point, the
Company expects to be highly leveraged and, thus, it may be difficult for the
Company to obtain additional debt to finance further contributions to the
existing Leap Wireless Operating Companies and new investments in opportunities
the Company may identify. The Company's obligations to QUALCOMM under the
QUALCOMM Credit Facility are secured by substantially all of the assets of the
Company. The QUALCOMM Credit Facility also imposes debt-to-capitalization
requirements on the Company. As a result of these factors, the QUALCOMM Credit
Facility may significantly limit the Company's ability to obtain additional debt
financing or may prevent the Company from obtaining such financing.
GENERAL
The Company expects to have significant future capital requirements over
the next several years in relation to existing operations, development projects
and additional new projects. Prior to the Distribution, the Company's cash
requirements were funded by QUALCOMM. The proceeds were primarily used to fund
the Company's joint venture and equity interests in wireless operating
companies, including the expenses incurred in seeking and evaluating new
business opportunities, and to fund corporate overhead expenses as allocated to
the Company by QUALCOMM.
As of August 31, 1998, the Company had no outstanding long-term
indebtedness and had no cash balances. To provide short-term liquidity over the
12-month period following the Distribution, the Company received $10 million in
cash from QUALCOMM in connection with the Separation and entered into a credit
42
<PAGE> 45
agreement with QUALCOMM for a secured Credit Facility in an aggregate amount of
$265 million. The Company expects to meet its short-term cash requirements for
existing operations and current development projects through fiscal 1999 from
available cash balances and borrowings under the Credit Facility. To the extent
that such cash resources are insufficient to fund the Company's activities on a
short-term basis, the Company may be required to raise additional funds which
may be derived through additional debt, equity financing or other sources. If
additional capital is raised through the sale of additional equity or
convertible debt securities, dilution to the Company's stockholders could occur.
The Company continues to evaluate financing alternatives, including unsecured
bank facilities and other sources of short-term debt or equity financing. There
can be no assurances such additional short-term financing will be available or,
if available, that it will be on acceptable terms.
The Company expects that it will become highly leveraged during fiscal
1999. 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.
As fiscal 1999 progresses, if management comes to believe that it will be
unable to obtain working capital or financing in addition to the Credit
Facility, management expects to reduce the Company's capital requirements by
slowing or discontinuing the funding of uncommitted investments. In addition, to
the extent necessary, management will consider other strategic modifications to
its operational plans, including reducing corporate activities and possibly
selling portions of its interests in one or more of the Leap Wireless Operating
Companies.
OPERATING ACTIVITIES
In the fiscal 1998, $18.4 million in cash was used in operating activities,
compared to $1.2 million used in operating activities in fiscal 1997. The
increase resulted from an increase in general and administrative expenses. It is
expected that cash used in operating activities will further increase as the
Company continues to expands its project development efforts on existing and new
project opportunities. Also, the Company has budgeted $81.3 million over 15
months to pursue its strategy of providing a fixed fee, limited cdmaOne
telephone service targeted at the United States mass market.
INVESTING ACTIVITIES
Cash used in investing activities was $140.7 million for fiscal 1998 and
$46.0 million for fiscal 1997. The 1998 activity results primarily from $133.9
million of investments and loans to the Company's business ventures, and the
purchase of additional spectrum in Australia. Investment activity in the
corresponding period for fiscal 1997 represented the Company's $42 million
investment in preferred voting stock of Chilesat PCS and the $4.0 million
purchase of Series B Common Stock in Chase Telecommunications, Inc. The Company
had $150.3 million in outstanding non-cancelable debt commitments to its
investments in wireless operating companies as of August 31, 1998. As a result
of fundings made after the end of the fiscal year, the Company's outstanding
debt commitments had been reduced to approximately $75 million as of the
Distribution Date. Such commitments are expected to be funded by the end of
calendar 1999. The Company expects that its investments in wireless operating
companies will increase significantly in the near future.
FINANCING ACTIVITIES
Cash provided by financing activities during fiscal 1998 and 1997 amounted
to $159.1 million and $47.2 million, respectively, consisting of QUALCOMM's
funding of the operating and investing cash used by
43
<PAGE> 46
the Company and a short term bank loan in fiscal 1998 to a consolidated
subsidiary in connection with the Chilean venture.
QUALCOMM CREDIT FACILITY
In connection with the Distribution, the Company entered into a $265.0
million secured Credit Facility pursuant to which it has access to funds from
QUALCOMM. The Credit Facility consists of two sub-facilities. The first
sub-facility (the "Working Capital Facility") enables Leap Wireless to borrow up
to $35.2 million from QUALCOMM, subject to the terms thereof. The proceeds from
the Working Capital Facility may be used by Leap Wireless solely to meet the
normal working capital and operating expenses of Leap Wireless, 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") enables Leap Wireless to borrow
up to $229.8 million from QUALCOMM, subject to the terms thereof. The proceeds
from the Investment Capital Facility may be used by Leap Wireless solely to make
certain specified portfolio investments. The Credit Facility contains a
financial covenant and operating covenants, including restrictions on the
ability of the Company to incur indebtedness, merge, consolidate or transfer all
or substantially all of its assets, to make certain sales of assets, to create,
incur or permit the existence of certain liens and to pay dividends.
Pursuant to the Credit Agreement, Leap Wireless has agreed that it will not
at any time permit the quotient obtained by dividing total debt by total
capitalization of Leap Wireless to exceed the following levels during the
indicated periods:
<TABLE>
<CAPTION>
PERIOD LEVEL
------ -----
<S> <C>
Through September 2002...................................... 70%
After September 2002........................................ 50%
</TABLE>
The Company was in compliance with the financial covenant as of August 31, 1998.
In addition, the Credit Facility permits uses of funds only for specified
purposes consistent with approved business plans, restricts the nature and
breadth of the Company's investments and imposes other restrictions peculiar to
the Company's business. The restrictions imposed by QUALCOMM related to the
Credit Facility could have a material adverse effect on the Company.
The Company expects to have significant long-term future capital
requirements beyond fiscal 1999 relating (i) to funding commitments to the Leap
Wireless Operating Companies and other operating companies in which the Company
may acquire joint venture or equity interests and (ii) to general working
capital needs and other cash requirements. The magnitude of these long-term
capital requirements will depend on a number of factors, including the specific
capital needs of the Leap Wireless Operating Companies, additional capital
needed to acquire or maintain other joint venture or equity interests or to
pursue other telecommunications opportunities, competing technological and
market developments and changes in existing and future relationships. The
Company intends to address its long-term liquidity needs through access to
private and/or public equity and/or high yield debt markets; however, there can
be no assurance that the Company will be successful in its efforts to raise the
capital required to fund operations on a long-term basis. Failure to satisfy
such capital requirements would have a material adverse effect on the Company's
business, results of operations, liquidity and financial position.
LIQUIDITY AND SUBSTANTIAL LEVERAGE OF OPERATING COMPANIES
The Company generally expects that its operating companies will be financed
initially with equity contributions and loans from the Company and its partners.
The Company also expects that its operating companies will seek stand-alone
third party financing after their initial stages of development. In some cases,
the Company and its partners may provide additional equity or loans to operating
companies after their initial contributions.
44
<PAGE> 47
Although each of the Leap Wireless Operating Companies has obtained
substantial equity contributions, they generally are or expect to be highly
leveraged. The ability of these companies to obtain future financings and to
meet debt covenants in connection with such financings will be dependent upon
their future performance, including the generation of revenue and cash flow, and
upon prevailing economic conditions which are beyond their control. In addition,
some of the Leap Wireless Operating Companies are expected to be substantially
funded through equipment financing arrangements from vendors. Such equipment
financings will be contingent upon meeting planned levels of performance and, if
the operating companies fail to meet such performance requirements, the related
equipment financings could be materially restricted or terminated.
The Company has met or has sufficient resources to meet its financing
commitments to the Leap Wireless Operating Companies. The business plans of
these companies, however, call for substantial additional financing in 1999
which has not yet been obtained. Although the Leap Wireless Operating Companies
may be able to reduce their capital requirements by slowing the deployment of
new equipment or by decreasing the scope of their planned networks, it is likely
that these businesses will still require substantial new financing in 1999. The
Leap Wireless Operating Companies are generally seeking new equity and/or debt
from existing investors, equipment vendors and third parties, and the Company
has been assisting them in their efforts. At this time, however, capital markets
have been constrained because of uncertain worldwide economic conditions, and it
is difficult for development stage companies in emerging markets to raise
additional capital. As a result, the Company cannot provide assurances that the
Leap Wireless Operating Companies will be able to obtain the required additional
financing. Further, the failure of any such Leap Wireless Operating Company to
gain required new financing could have a material adverse effect on such company
and, as a result, a material adverse effect on Leap Wireless.
The Company's 50% joint venture partner in Chilesat PCS, Telex-Chile, has
been unable to make principal repayments on its outstanding loans and is under
court ordered protection from many of its significant lenders. Thus, the Company
may not be able to rely on Telex-Chile to meet its financial commitments or to
provide additional capital to Chilesat PCS. The Company expects that Chilesat
PCS will have sufficient funds to meet its needs for operations and network
expansion for the remainder of calendar 1998 through vendor financing and a $35
million short-term cash facility provided by QUALCOMM. Chilesat PCS requires
additional financing in 1999, however, and there can be no assurance that such
financing will be obtained. Chilesat PCS's failure to obtain such financing
could have a material adverse effect on its ongoing operations and network
expansion and, as a result, a material adverse effect on the Company.
CURRENCY FLUCTUATION RISKS
The Company reports its financial statements in U.S. Dollars. The Company's
principal operating companies function in different currency jurisdictions and
all report in local currencies. Consequently, the Company's results of
operations as well as the value of its ownership interests in its operating
companies or start-up projects will be affected by fluctuations in currency
exchange rates between the U.S. Dollar and the applicable local currency.
The Company's operating companies are exposed to risk from fluctuations in
foreign currency and interest rates, which could impact each company's
respective results of operations and financial condition. Because many of the
operating companies' contracts with equipment suppliers, including QUALCOMM,
will be denominated in Dollars, a significant change in the value of the Dollar
against the national currency of any operating company could result in the
increase of the relative cost of such contracts and could restrict such company
from fulfilling certain of its contractual obligations. As a result, any
devaluation in the local currency relative to the currencies in which such
liabilities are payable could have a material adverse effect on the Company. In
some developing countries, including Mexico and Russia, significant devaluations
relative to the U.S. Dollar have occurred and may occur again in the future. In
such circumstances, the Company may experience economic loss with respect to its
ownership interests and fluctuations in its results of operations solely as a
result of exchange rate fluctuations.
The Company seeks to reduce its foreign exchange exposure arising from
transactions by matching, where possible, assets and liabilities. There can be
no assurance that the Company will be able to match its
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<PAGE> 48
assets and liabilities or otherwise reduce its foreign exchange exposure. In
some cases, the operating companies may borrow in U.S. Dollars rather than in
local currencies because such U.S. Dollar borrowings are the only funding source
available to them at the time. In such circumstances, the Company has decided,
in conjunction with its partners, to accept the inherent currency risk
principally because of the relatively high cost of buying or the inability to
buy forward cover in currencies of the countries in which the operating
companies conduct business.
In general, the Company may elect to enter into hedging arrangements from
time to time in the future, although it is not currently party to any such
transaction and does not have a policy to systematically hedge against foreign
currency exchange rate risks.
INFLATION AND DEFLATION
Inflation has had and may continue to have adverse effects on the economies
and securities markets of certain emerging market countries and could have
adverse effects on the operating companies and start-up projects in those
countries, including their ability to obtain financing. Russia, Chile and
Mexico, for example, have periodically experienced relatively high rates of
inflation. The operating companies, where permitted, and subject to competitive
pressures, intend to increase their tariffs to account for the effects of
inflation. However, in those jurisdictions where tariff rates are regulated or
specified in the license, the operating companies may not be able to mitigate
the impact of inflation on their operations. The Company believes risks
associated with deflation have recently increased, particularly given recent
deflation in certain parts of Asia. Significant deflation could have a material
adverse effect on the Company's revenues, profit and overall performance.
While system equipment costs may increase over time as a result of
inflation, the Company expects that the cost of subscriber equipment will
decrease over time, although there can be no assurance that this will be the
case. General operating expenses such as salaries, employee benefits and lease
costs are, however, subject to normal inflationary or deflationary pressures.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software
programs have been written using two digits rather than four to represent a
specific year. Any computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
As the Company and the Leap Wireless Operating Companies have recently
begun their respective businesses, there exists uncertainty as to the impact the
Year 2000 issue could have on the Company. The Company does not believe that the
Year 2000 issue will significantly impact its administrative and accounting
software, which have been acquired recently or will be acquired. The Company
generally subjects its vendors to Year 2000 compliance requirements in
connection with the Company's acquisitions of software. Also, the Company
believes that the Year 2000 issue will not significantly impair the ability of
the Leap Wireless Operating Companies' wireless communications networks to
perform as intended. The Leap Wireless Operating Companies are expected to have
direct or indirect computerized interfaces to third parties relating to the
transmission of telecommunications traffic over local, national and
international telecommunications networks. The Leap Wireless Operating Companies
are vulnerable to the failure of such third parties to adequately address their
Year 2000 issues. Such failures, should they occur, could cause significant
disruption to the operations of the Leap Wireless Operating Companies, including
the ability to provide certain services and correctly bill customers, resulting
in the potential for revenue loss and increased costs. The Company is not
currently aware of any significant third party problems concerning the
computerized interfaces, but as the Leap Wireless Operating Companies have only
recently begun network build-out and commercial activities, they have not yet
completed their assessment of the risk associated with third party interfaces
and the Year 2000 issue. This overall assessment is expected to continue through
December 1998. At that time, the concurrently developed remediation plan will
begin, with an expected completion date of July 1, 1999. The Company is in the
process of developing a risk profile to evaluate all third parties in regard to
their capability to become compliant with Year 2000.
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<PAGE> 49
As of the date hereof, the Company has not incurred any material costs in
support of the Year 2000 issue. The Company estimates that it will spend
$500,000 in fiscal year 1999 to review and correct any non-information
technology systems as well as support material third party relationships. The
Company has not developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all
Year 2000 problems in its systems, the systems of the Leap Wireless Operating
Companies or third party systems with which the Company or the Leap Wireless
Operating Companies will have computerized interfaces in advance of their
occurrence or that the Company will be able to successfully remedy any problems.
The expenses associated with the Company's efforts to remedy any Year 2000
problems, the expenses or liabilities to which the Company may become subject as
a result of such problems or the impact of Year 2000 problems on the ability of
Leap Wireless Operating Companies to do business with the Company could have a
material adverse effect on the Company's business, prospects, operating results
and financial condition.
FUTURE ACCOUNTING REQUIREMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
may be primarily from foreign currency translation adjustments and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its financial statement disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of the Company
is incorporated by reference to the section entitled "Directors and Executive
Officers" in the Company's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders of the Company (the "Proxy Statement"), which is
expected to be filed not later than 120 days after the Registrant's fiscal year
ended August 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the headings "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1), (2) Financial Statements and Schedules. See index on Page F-1.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------
<C> <S>
3.1(1) Form of Amended and Restated Certificate of Incorporation of
the Registrant
3.2(1) Form of Amended and Restated Bylaws of the Registrant
3.3(2) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Registrant
4.1(1) Form of Common Stock Certificate
4.2(3) Warrant, dated as of September 23, 1998, issued to QUALCOMM
Incorporated ("QUALCOMM")
4.3(2) Rights Agreement, dated as of September 14, 1998, between
the Registrant and Harris Trust Company of California
10.1(3) Separation and Distribution Agreement, dated as of September
23, 1998, between QUALCOMM and the Registrant
10.2(3) Credit Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant
10.3(3) Tax Matters Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.4(3) Interim Services Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------
<C> <S>
10.5(3) Master Agreement Regarding Equipment Procurement, dated as
of September 23, 1998, between QUALCOMM and the Registrant
10.6(3) Employee Benefits Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.7(3) Conversion Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.8(3) Assignment and Assumption Agreement, dated as of September
23, 1998, between QUALCOMM and the Registrant
10.9(1) Form of Registrant's 1998 Stock Option Plan (the "Option
Plan")
10.10(1) Form of non-qualified/incentive stock option under the
Option Plan
10.11(1) Form of non-qualified stock option under the Option Plan to
be granted to QUALCOMM option holders in connection with the
Distribution
10.12(1) Form of Registrant's 1998 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan")
10.13(1) Form of non-qualified stock option under the Directors' Plan
10.14(1) Form of Registrant's Employee Stock Purchase Plan
10.15(1) Assignment and Assumption of Lease dated August 11, 1998
between QUALCOMM and Vaxa International, Inc.
10.16(1) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers
10.17 Loan Agreement, dated as of September 28, 1998, between
Pegaso Comunicaciones y Servicios, S.A. de C.V. and the
Registrant
10.18 Promissory Note, executed September 25, 1998, by Pegaso
Comunicaciones y Servicios, S.A. de C.V. in favor of the
Registrant
10.19 Pledge Agreement, dated as of September 28, 1998, by and
between Pegaso Comunicaciones y Servicios, S.A. de C.V., the
Registrant and the other parties thereto
21.1(1) Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Filed as an exhibit to the Company's Registration Statement on Form 10, as
amended (File No. 0-29752), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 14, 1998, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-64459) dated October 13, 1998, and
incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K under Item 5 thereof on
September 18, 1998, relating to the adoption of the Company's Stockholders
Rights Plan and entering into of a definitive Rights Agreement, dated as of
September 14, 1998, between the Company and Harris Trust Company of California.
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 25th day of
November, 1998.
By: /s/ HARVEY P. WHITE
------------------------------------
Harvey P. White
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ HARVEY P. WHITE President, Chief Executive November 25, 1998
- ----------------------------------------------------- Officer and Director
Harvey P. White (Principal Executive
Officer)
/s/ TOM WILLARDSON Senior Vice President, November 25, 1998
- ----------------------------------------------------- Finance and Treasurer
Tom Willardson (Principal Financial
Officer)
/s/ THOMAS J. BERNARD Executive Vice President and November 25, 1998
- ----------------------------------------------------- Director
Thomas J. Bernard
/s/ STEPHEN DHANENS Controller (Principal November 25, 1998
- ---------------------------------------------------- Accounting Officer)
Stephen Dhanens
/s/ JAMES E. HOFFMAN Senior Vice President, November 25, 1998
- ----------------------------------------------------- General Counsel and Director
James E. Hoffmann
Director November , 1998
- -----------------------------------------------------
Alejandro Burillo Azcarraga
/s/ SCOT B. JARVIS Director November 25, 1998
- -----------------------------------------------------
Scot B. Jarvis
/s/ MICHAEL B. TARGOFF Director November 25, 1998
- -----------------------------------------------------
Michael B. Targoff
/s/ JEFFREY P. WILLIAMS Director November 25, 1998
- -----------------------------------------------------
Jeffrey P. Williams
</TABLE>
50
<PAGE> 53
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE
COMPANY)
Report of Independent Accountants......................... F-2
Combined Balance Sheets at August 31, 1998 and 1997....... F-3
Combined Statements of Operations for the fiscal years
ended August 31, 1998, 1997 and 1996 and for the period
from September 1, 1995 (inception) to August 31,
1998................................................... F-4
Combined Statements of Cash Flows for the fiscal years
ended August 31, 1998, 1997 and 1996 and for the period
from September 1, 1995 (inception) to August 31,
1998................................................... F-5
Combined Statements of Stockholder's Equity for each of
the fiscal years in the period from September 1, 1995
(inception) to August 31, 1998......................... F-6
Notes to Combined Financial Statements.................... F-7
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Leap Wireless International, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of cash flows and of stockholder's equity
present fairly, in all material respects, the financial position of Leap
Wireless International, Inc. (a development stage company) at August 31, 1998
and 1997, and the results of its operations and its cash flows for the fiscal
years ended August 31, 1998, 1997 and 1996 and for the period from September 1,
1995 (inception) through August 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 19, 1998
F-2
<PAGE> 55
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Current assets.............................................. $ -- $ --
Investments in unconsolidated wireless operating
companies................................................. 101,719 46,267
Loans receivable from unconsolidated wireless operating
companies................................................. 65,303 --
Other assets................................................ 6,838 --
-------- -------
Total assets...................................... $173,860 $46,267
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities.................... $ 5,789 $ 279
Loan payable to bank........................................ 9,000 --
-------- -------
Total liabilities................................. 14,789 279
-------- -------
Commitments (Note 7)
Stockholder's equity:
Parent's investment....................................... 197,598 47,478
Deficit accumulated during the development stage.......... (36,175) (1,550)
Cumulative translation adjustment......................... (2,352) 60
-------- -------
Total stockholder's equity........................ 159,071 45,988
-------- -------
Total liabilities and stockholder's equity........ $173,860 $46,267
======== =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 56
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD FROM
AUGUST 31, SEPTEMBER 1, 1995
-------------------------- (INCEPTION) TO
1998 1997 1996 AUGUST 31, 1998
-------- ------- ----- -------------------
<S> <C> <C> <C> <C>
Equity in net income (loss) of unconsolidated
wireless operating companies.................. $(11,580) $ 207 $ -- $(11,373)
General and administrative expenses............. (23,888) (1,361) (396) (25,645)
Interest income................................. 843 -- -- 843
-------- ------- ----- --------
Loss before income taxes................... (34,625) (1,154) (396) (36,175)
Income tax expense.............................. -- -- -- --
-------- ------- ----- --------
Net loss................................... $(34,625) $(1,154) $(396) $(36,175)
======== ======= ===== ========
Unaudited pro forma basic and diluted net loss
per common share (Note 1)..................... $ (1.96)
========
</TABLE>
See accompanying notes.
F-4
<PAGE> 57
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD FROM
AUGUST 31, SEPTEMBER 1, 1995
---------------------------- (INCEPTION) TO
1998 1997 1996 AUGUST 31, 1998
--------- -------- ----- -------------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss......................................... $ (34,625) $ (1,154) $(396) $ (36,175)
Adjustments to reconcile net loss to net cash
used by operating activities:
Equity in net loss (income) of unconsolidated
wireless operating companies................ 11,580 (207) -- 11,373
Earned interest accrued to loans receivable... (843) -- -- (843)
Change in accounts payable and accrued
liabilities................................. 5,510 168 111 5,789
--------- -------- ----- ---------
Net cash used in operating activities.............. (18,378) (1,193) (285) (19,856)
--------- -------- ----- ---------
Investing activities:
Investments in unconsolidated wireless operating
companies..................................... (69,444) (46,000) -- (115,444)
Issuance of loans to unconsolidated wireless
operating companies........................... (64,460) -- -- (64,460)
Cash paid on acquisition of consolidated wireless
operating company............................. (564) -- -- (564)
Purchase of wireless communication licenses...... (6,274) -- -- (6,274)
--------- -------- ----- ---------
Net cash used in investing activities.............. (140,742) (46,000) -- (186,742)
--------- -------- ----- ---------
Financing activities:
Proceeds from bank loan.......................... 9,000 -- -- 9,000
Parent's investment.............................. 150,120 47,193 285 197,598
--------- -------- ----- ---------
Net cash provided by financing activities.......... 159,120 47,193 285 206,598
--------- -------- ----- ---------
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-5
<PAGE> 58
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
PARENT'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at September 1, 1995 (inception)...... $ -- $ -- $ $ --
Transfers from Parent....................... 285 -- -- 285
Net loss.................................... -- (396) -- (396)
-------- -------- ------- --------
Balance at August 31, 1996.................... 285 (396) -- (111)
Transfers from Parent....................... 47,193 -- -- 47,193
Net loss.................................... -- (1,154) -- (1,154)
Cumulative translation adjustment........... -- -- 60 60
-------- -------- ------- --------
Balance at August 31, 1997.................... 47,478 (1,550) 60 45,988
Transfers from Parent....................... 150,120 -- -- 150,120
Net loss.................................... -- (34,625) -- (34,625)
Cumulative translation adjustment........... -- -- (2,412) (2,412)
-------- -------- ------- --------
Balance at August 31, 1998.................... $197,598 $(36,175) $(2,352) $159,071
======== ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 59
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
On June 24, 1998, QUALCOMM Incorporated ("QUALCOMM") created a wholly-owned
subsidiary, Leap Wireless International, Inc. (the "Company" or "Leap
Wireless"), a Delaware corporation. On September 23, 1998 (the "Distribution
Date"), QUALCOMM distributed all of the outstanding shares of common stock of
the Company to QUALCOMM's stockholder as a taxable dividend (the
"Distribution"). In connection with the Distribution, one share of the Company's
common stock was issued to every four shares of QUALCOMM common stock
outstanding on September 11, 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
in the United States. Initially, the Company's principal markets for its
intended activities are in Latin America, Eastern Europe, Asia-Pacific and the
United States. QUALCOMM is a major supplier of CDMA subscriber and
infrastructure equipment to the Company's wireless telecommunications
businesses, and the Company expects that QUALCOMM will continue to be a major
supplier for future wireless telecommunications businesses in which the Company
participates.
Following the Distribution, QUALCOMM and the Company are operating as
independent companies. QUALCOMM and the Company, however, continue to have a
relationship as a result of the various agreements entered into in connection
with the Distribution.
The Distribution
In connection with the Distribution, QUALCOMM transferred to the Company
its joint venture and equity interests in the following domestic and
international emerging terrestrial based wireless telecommunications operating
companies: Pegaso Telecomunicaciones, S.A. de C.V. (Mexico), Metrosvyaz Limited
(Russia), Orrengrove Investments Limited (Russia), Chilesat Telefonia Personal,
S.A. (Chile), Chase Telecommunications, Inc. (United States), OzPhone Pty. Ltd.
(Australia), and certain other development stage businesses (the "Leap Wireless
Operating Companies"). QUALCOMM and the Company also agreed that, if certain
events occur within 18 months after the Distribution, QUALCOMM will transfer to
the Company its equity interests and working capital loan related to Telesystems
of Ukraine ("TOU"), a wireless telecommunications company in Ukraine. In
connection with the Distribution, QUALCOMM also transferred to the Company cash
and certain indebtedness of the Leap Wireless Operating Companies owed to
QUALCOMM, as well as certain miscellaneous assets. The aggregate net tangible
book value of the assets transferred by QUALCOMM to the Company in connection
with the Distribution was approximately $258 million.
The Company has agreed to assume certain of QUALCOMM's obligations to
manage operations of and finance costs relating to ongoing build-outs of the
wireless telecommunications systems being deployed by the Leap Wireless
Operating Companies, including approximately $75 million of funding obligations
to such operating companies, as well as certain miscellaneous liabilities.
QUALCOMM will continue to be a supplier of CDMA equipment and is expected to
provide significant vendor financing to the Company's wireless
telecommunications businesses and ventures.
The Company entered into a secured credit facility with QUALCOMM (the
"Credit Facility"). The Credit Facility consists of two sub-facilities. The
first sub-facility enables the Company to borrow up to $35.2 million from
QUALCOMM. The proceeds from this sub-facility may be used by the Company solely
to meet the normal working capital and operating expenses of the Company,
including salaries and overhead, but excluding, among other things, strategic
capital investments in wireless operators, substantial acquisitions of
F-7
<PAGE> 60
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
capital equipment, and/or the acquisition of telecommunications licenses. The
other sub-facility enables the Company to borrow up to $229.8 million from
QUALCOMM. The proceeds from this second sub-facility may be used by the Company
solely to make certain identified portfolio investments.
Amounts borrowed under the Credit Facility will be due and payable
approximately eight years following the Distribution Date. QUALCOMM has a first
priority security interest in, subject to some exceptions, substantially all of
the assets of the Company 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 will be payable
quarterly beginning September 30, 2001 and, prior to such time, accrued interest
shall be added to the principal amount outstanding.
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 was transferred to the Company from QUALCOMM as if: (i) the Company were a
separate entity for all periods presented, and (ii) the historical investments
in the Leap Operating Wireless Operating Companies as of August 31, 1998 and
significant agreements entered into with such companies prior to the
Distribution were owned or entered into by the Company. However, for the periods
covered by the financial statements, such investments were directly or
indirectly legally owned by QUALCOMM. Additionally, the results of the Company's
unconsolidated Leap Wireless Operating Companies have been included as of and
for the twelve months ended July 31, a one month lag. The financial statements
have been presented as if the Company were a development stage company with an
inception date of September 1, 1995. 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 businesses attributed to
the Company did not engage in any significant activity prior to fiscal 1996 and,
as of August 31, 1998, neither the Company nor the businesses in which it was
deemed to own an equity investment had generated any revenues from their planned
principal operations. The Company had no cash balances as of August 31, 1998 and
1997 as no specific cash accounts had been designated by QUALCOMM for the
Company. When Company liabilities were paid or investments 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 the Leap Wireless Operating
Companies.
The Company had no employees nor were any 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. Following the Distribution, the Company hired its own staff to perform
necessary functions using its own resources or purchased resources and is
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.
F-8
<PAGE> 61
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Developmental Stage Activities and Additional Capital Needs
The Company has only operated as an independent public company since the
Distribution 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 Leap 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 its
operating companies. The Leap Wireless 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 the Leap Wireless Operating Companies and other 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 Leap Wireless Operating Companies, additional
capital needed to acquire or maintain other joint venture or equity interests,
competing technological and market developments and changes in existing and
future relationships.
The Company expects to obtain much of its required near term financing
through borrowings under the Credit Facility. The Company expects, however, that
it will reach its borrowing limit under both sub-facilities of the Credit
Facility on or about the end of fiscal 1999. The Company had no other agreements
for working capital or financing. In addition, the Company is subject to
restrictive covenants and other obligations under the Credit Facility. There can
be no assurance that the Company will have continued access to borrowings under
the Credit Facility when required.
There can be no assurance that the Company will be able to obtain
additional required financing on favorable terms or at all. The terms of the
Credit Facility 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 Leap Wireless Operating
Companies, the Company will be diluted or relinquish ownership of such
interests. As fiscal 1999 progresses, if management comes to believe that it
will be unable to obtain working capital or financing in addition to the Credit
Facility, management expects to reduce the Company's capital requirements by
slowing or discontinuing the funding of uncommit-
F-9
<PAGE> 62
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
ted investments. In addition, to the extent necessary, management will consider
other strategic modifications to its operational plans, including reducing
corporate activities and possibly selling portions of its interests in one or
more of the Leap Wireless Operating Companies. The failure to obtain adequate
additional financing may 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.
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, 1998,
1997 and 1996 of $34.6 million, $1.2 million and $396,000, respectively.
Following the Distribution, the Company is 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, the Leap Wireless Operating Companies are in the early stages
of developing and deploying their respective telecommunications systems. Such
systems 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 Leap Wireless Operating Companies will
achieve or sustain profitability in the near term or at all.
International Risks
The Company is subject to numerous risks as a result of its international
activities. The Leap Wireless Operating Companies are dependent, in large part,
on the economies of the markets in which they have operations. Those markets and
other markets in which the Company may operate are in countries with economies
in various stages of development or structural reform, some of which are subject
to rapid fluctuations in currency exchange rates, consumer prices, inflation,
employment levels and gross domestic product. The Company and the Leap Wireless
Operating Companies are exposed to market risk from changes in foreign currency
exchange rates and interest rates, and are subject to other currency, economic
and political risks, which could impact their results of operations and
financial condition.
Year 2000 Compliance
As the Company and the Leap Wireless Operating Companies have recently
begun their respective businesses, there exists uncertainty as to the impact the
Year 2000 issue could have on the Company. The Company does not believe that the
Year 2000 issue will significantly impact its administrative and accounting
software, which have been acquired recently or will be acquired. The Company
generally subjects its vendors to Year 2000 compliance requirements in
connection with the Company's acquisitions of software. Also, the Company
believes that the Year 2000 issue will not significantly impair the ability of
the Leap Wireless Operating Companies' wireless communications networks to
perform as intended. The Leap Wireless
F-10
<PAGE> 63
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Operating Companies are expected to have direct or indirect computerized
interfaces to third parties relating to the transmission of telecommunications
traffic over local, national and international telecommunications networks. The
Leap Wireless Operating Companies are vulnerable to the failure of such third
parties to adequately address their Year 2000 issues. Such failures, should they
occur, could cause significant disruption to the operations of the Leap Wireless
Operating Companies, including the ability to provide certain services and
correctly bill customers, resulting in the potential for revenue loss and
increased costs. The Company is not currently aware of any significant third
party problems concerning the computerized interfaces, but as the Leap Wireless
Operating Companies have only recently begun network build-out and commercial
activities, they have not yet completed their assessment of the risk associated
with third party interfaces and the Year 2000 issue. This overall assessment is
expected to continue through December 1998. At that time, the concurrently
developed remediation plan will begin, with an expected completion date of July
1, 1999. The Company is in the process of developing a risk profile to evaluate
all third parties in regard to their capability to become compliant with Year
2000.
As of the date hereof, the Company has not incurred any material costs in
support of the Year 2000 issue. The Company estimates that it will spend
$500,000 in fiscal year 1999 to review and correct any non-information
technology systems as well as support material third party relationships. The
Company has not developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all
Year 2000 problems in its systems, the systems of the Leap Wireless Operating
Companies or third party systems with which the Company or the Leap Wireless
Operating Companies will have computerized interfaces in advance of their
occurrence or that the Company will be able to successfully remedy any problems.
The expenses associated with the Company's efforts to remedy any Year 2000
problems, the expenses or liabilities to which the Company may become subject as
a result of such problems or the impact of Year 2000 problems on the ability of
Leap Wireless 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.
Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in the Leap Wireless Operating Companies
Investments in corporate entities with less than 20% voting interest are
generally accounted for under the cost method. The Company uses the equity
method to account for investments in corporate entities in which it has voting
interest of 20% to 50% or in which it otherwise exercises significant influence
and for ownership interests in partnerships. Under the equity method, the
investment is originally recorded at cost and adjusted to recognize the
Company's share of net earnings or losses of the investee, limited to the extent
of the Company's investment in, advances to and financial guarantees for the
investee. Such earnings or losses of the Company's investees are adjusted to
reflect the amortization of any differences between the carrying value of the
investment and the Company's equity in the net assets of the investee. To
accommodate the reporting of the unconsolidated Leap Wireless Operating
Companies, the Company has adopted a one-month lag for the recognition of the
Company's share of net earnings or losses of such investments.
F-11
<PAGE> 64
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
total amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition are less than its carrying amount.
Foreign Currency
Results of operations for international investments are translated using
average exchange rates during the period, while assets and liabilities are
translated using end-of-period rates. The resulting exchange gains or losses are
accumulated in the "cumulative translation adjustment" account, a component of
stockholder's equity. The functional currency of the Company's foreign investees
that operate in highly inflationary economies is the U.S. Dollar. The monetary
assets and liabilities of these foreign investees are translated into U.S.
Dollars at the exchange rate in effect at the balance sheet date. Revenues,
expenses, gains and losses are translated at the average exchange rate for the
period, and non-monetary assets and liabilities are translated at historical
rates. Resulting remeasurement gains or losses of these foreign investees are
recognized in the combined results of operations. The effects of translating the
financial position and results of operations of local currency operations have
not been significant to the Company's financial statements. Gains and losses
resulting from the Company's foreign currency transactions have not been
significant in relation to its operations.
Income Taxes
Historically, the Company's operations have been included in the
consolidated income tax returns filed by QUALCOMM. Income tax expense in the
Company's financial statements has been calculated on a separate tax return
basis.
Current income tax benefit is the amount expected to be receivable 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 Basic and Diluted 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 1998.
The Company had no shares of common stock outstanding during fiscal 1998.
The unaudited pro forma net loss per common share was calculated by dividing the
1998 net loss of $34.6 million by the 17,647,685 shares of Common Stock the
Company issued at Distribution. Stock options for 5,542,740 shares issued
subsequent to the Distribution Date, the conversion of QUALCOMM's Trust
Convertible Preferred Securities which are convertible into shares of QUALCOMM
Common Stock and 2,271,060 shares of the Company's Common Stock, and the
exercise of a warrant to be issued to QUALCOMM for approximately 5,500,000
shares of common stock have not been considered in calculating the unaudited pro
forma net loss per common share because their effect would be anti-dilutive. As
a result, the Company's unaudited pro forma basic and diluted net loss per
common share are the same.
F-12
<PAGE> 65
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Future Accounting Requirements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
may be primarily from foreign currency translation adjustments and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its financial statement disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2000.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
NOTE 2. INVESTMENTS AND LOANS TO UNCONSOLIDATED LEAP WIRELESS OPERATING
COMPANIES
The Company and its consolidated subsidiaries have joint venture and equity
interests in companies that hold wireless 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. The Company and its consolidated subsidiaries
have investments in Leap Wireless Operating Companies consisting of the
following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Investments at equity................................... $ 97,719 $42,267
Investment at cost...................................... 4,000 4,000
-------- -------
$101,719 $46,267
======== =======
</TABLE>
F-13
<PAGE> 66
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP
AUGUST 31,
--------------
1998 1997
----- -----
<S> <C> <C>
COST INVESTMENT
Chase Telecommunications, Inc (U.S.)...................... 7.2% 7.2%
EQUITY INVESTMENTS
Chilesat Telefonia Personal S.A. (Chile).................. 50% 50%
Pegaso Telecomunicaciones, S.A. de C.V. (Mexico).......... 49% --
Metrosvyaz Limited (Russia)............................... 50% --
Orrengrove Investments Limited (Russia)................... 50% --
</TABLE>
Condensed financial information for the Leap Wireless Operating Company
during the period under which the Company accounted for the investment under the
equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Current assets.......................................... $ 73,250 $37,565
Non-current assets...................................... 170,660 15,058
Current liabilities..................................... (93,064) (665)
Non-current liabilities................................. (61,055) (7,461)
-------- -------
Total partners' and stockholders' capital..... 89,791 44,497
Other partners' and stockholders' share of capital...... 40,663 22,249
-------- -------
Company's share of capital.............................. 49,128 22,248
Goodwill and other intangible items..................... 48,591 20,019
-------- -------
Equity investments in unconsolidated wireless
operating companies................................ $ 97,719 $42,267
======== =======
Operating expenses...................................... $(15,803) $ (274)
Other income (expense), net............................. (1,380) 688
-------- -------
Net income............................................ (17,183) 414
Other partners' and stockholders' share of net income
(loss)................................................ (5,603) 207
-------- -------
Company's share of net income (loss).................... (11,580) 207
Amortization of goodwill and other intangible items..... -- --
-------- -------
Equity in net income (loss) of unconsolidated
wireless operating companies....................... $(11,580) $ 207
======== =======
</TABLE>
As of August 31, 1998, the Leap Wireless Operating Companies had not
commenced commercial revenue generating operations. Any income derived resulted
principally from earnings on investments and cash.
Chase Telecommunications, Inc.
In December 1996, the Company purchased $4 million of Chase
Telecommunications, Inc. ("Chase"), a development stage company, Class B Common
Stock, representing 7.2% 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.
F-14
<PAGE> 67
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Company agreed to provide a $25 million working capital
facility to Chase. Borrowings under the facility are subject to interest at
prime plus 4 1/2% and are to be repaid by June 2006. Borrowings are
collateralized by substantially all of the assets of Chase. At August 31, 1998,
borrowings under the facility totaled $12.1 million, including $307,000 of
accrued interest. The Company has committed, subject to certain conditions and
exceptions, to convert the facility into $25 million of redeemable preferred
stock in Chase. The Company received warrants, in connection with this
financing, to acquire up to an additional 8.5% of the currently outstanding
Chase equity.
Although Chase has commenced limited commercial operations, it is a
development stage company that will require significant financing to expand 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.
Chilesat Telefonia Personal, S.A.
In February 1997, the Company entered into a subscription and shareholders
agreement to purchase $42 million of voting preferred shares representing a 50%
ownership interest in a privately held corporate joint venture, Chilesat
Telefonia Personal, S.A. ("Chilesat PCS"), a development stage company. The
Company holds its shares in Chilesat PCS via a wholly-owned subsidiary,
Inversiones QUALCOMM Chile, S.A. ("Inversiones QUALCOMM"), which held no other
assets and had no liabilities as of August 31, 1998. The remaining 50% ownership
interest represented by voting common shares is owned by Telex-Chile S.A. and
its subsidiary Chilesat S.A. (together "Telex-Chile"). The preferred shares are
entitled to a liquidation preference equal to the original purchase price per
share if Chilesat PCS is liquidated by April 2003. The Company accounts for its
investment under the equity method of accounting. As of August 31, 1998,
Chilesat PCS had completed its initial network build-out, but operational
activity was not significant. The Company recorded $3.1 million in equity losses
resulting from this investment during fiscal 1998 and $207,000 in equity income
during fiscal 1997
During June 1998, the Company and Inversiones QUALCOMM entered into
agreements with Chilesat PCS to provide $35 million in short-term loans,
convertible into common equity if not repaid on or before January 31, 1999. If
converted, the Company and Inversiones QUALCOMM would hold voting shares of
approximately 65% of Chilesat PCS. This conversion is available to the Company
and Inversiones QUALCOMM only if the loans are not repaid on or before January
31, 1999. Chilesat PCS currently contemplates that it will issue a $35 million
capital call by January 1999 which may be used to repay the convertible loan or
to provide for additional operating expenses. If Telex-Chile makes at least a
$17.5 million cash contribution before January 31, 1999 pursuant to such capital
call, the Company and Inversiones QUALCOMM have committed to convert $17.5
million of the short-term loans to equity. At August 31, 1998, borrowings under
the loan totaled $25.2 million.
Telex-Chile has been unable to make principal repayments on its outstanding
loans and is under standstill agreements with many of its significant lenders.
However, Telex-Chile has informed the Company that it has the intention to, and
will have the ability to, fund its $17.5 million portion of the capital call
prior to January 31, 1999.
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 $58 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
F-15
<PAGE> 68
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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. In the event the failure to meet the network
build-out milestones are the direct result of QUALCOMM's failure to supply and
install equipment under its existing supply contract, QUALCOMM may be required
to reimburse the Company its portion of the fine.
Pegaso Telecomunicaciones, S.A. de C.V.
In April 1998, the Company, through a wholly-owned subsidiary, QUALCOMM PCS
Mexico, Inc., entered into a joint venture agreement pursuant to which it
obtained a 49% ownership interest in a newly formed development stage company,
Pegaso Telecomunicaciones, S.A. de C.V. ("PEGASO"), a Mexico corporation. In May
of 1998, PEGASO obtained the right to acquire PCS licenses throughout Mexico.
During 1998, the Company advanced a portion of PEGASO's start-up working
capital requirements, including expenses incurred during the PCS spectrum
auction. At August 31, 1998, advances totaled $11.1 million. As a result of
start-up expenses incurred by PEGASO, the Company reported $2.4 million in
equity losses during fiscal 1998. In addition to the advances of working
capital, in June 1998, the Company provided a loan of $27.4 million to PEGASO.
The purpose of the loan was to fund a portion of the first PCS license payment.
Interest on the loan will accrue at a rate of 10% and has been added to the
principal amount of the loan outstanding. The Company converted the advances and
the loan including accrued interest into common stock in September 1998 (see
Note 8).
QUALCOMM Telecommunications Ltd., Cayman Islands
During October 1997, the Company became a 70% common owner in a start-up
joint venture, QUALCOMM Telecommunications Ltd. ("QUALCOMMTel Cayman"), a Cayman
Islands corporation. Upon its formation, QUALCOMMTel Cayman had no significant
assets or liabilities. The 30% minority interest is held by Tiller International
Limited ("Tiller"), a private investment company. In the event that QUALCOMMTel
Cayman makes a capital call on its stockholders to provide equity contributions,
at the request of Tiller, the Company is required to fund 100% of Tiller's share
of the equity contributions. Such advances by the Company for Tiller are
collateralized by Tiller's shares in QUALCOMMTel Cayman and carry an interest
rate of LIBOR plus 3% with principal and interest to be repayable from 80% of
future net earnings of QUALCOMMTel Cayman. QUALCOMMTel Cayman is intended to be
an intermediate holding company to facilitate the Company's business prospects
for wireless local loop (fixed) telephone service in the Russian Federation.
In August 1998, QUALCOMMTel Cayman became a 50% owner and partner in
Metrosvyaz Limited ("Metrosvyaz"), a newly-formed joint venture with Teletal
Limited ("Teletal"). As of the formation, Metrosvyaz had no assets or
liabilities and no historical operating activity. Concurrent with the formation
of Metrosvyaz, QUALCOMM entered into a $175 million, eight year, multiple
drawdown loan facility under which Metrosvyaz would be able to borrow funds,
subject to certain terms and conditions, to support its business plan, including
equipment purchases, and working capital needs. The $175 million facility is
related to a $500 million financing commitment entered into by QUALCOMM in
February 1998. As of the Distribution Date, QUALCOMMTel Cayman has assumed $72.4
million of the $175 million financing obligation from QUALCOMM. Furthermore, of
the original $500 million commitment, the Company expects that $150 million of
financing will be provided by QUALCOMMTel Cayman, with the remaining $350
million to be provided by QUALCOMM as vendor financing.
The $175 million facility carries a 13% interest rate and borrowings are
generally repayable approximately four years from the date of the draw subject
to a final repayment in August 2006 of any outstanding draws then outstanding.
Borrowings under the facility are collateralized by substantially all the assets
of Metrosvyaz.
F-16
<PAGE> 69
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
During 1998, QUALCOMMTel Cayman paid $6.6 million of start-up related costs on
behalf of Metrosvyaz. These advances were later converted to a draw under the
$72.4 million loan facility. Because the loan facility from QUALCOMMTel Cayman
is the only source of working capital for Metrosvyaz at this time, and because
the equity of QUALCOMMTel Cayman is 100% funded by the Company, the Company will
fully consolidate the net earnings and losses of Metrosvyaz until such time the
Company recoups its investment. Accordingly, and as a direct result of these
start-up costs, the Company recorded $6.1 million in equity losses resulting
from its investment during fiscal 1998.
QUALCOMM Telecommunications Ltd., Isle of Man
In August 1998, the Company became a 70% common owner in a start-up joint
venture, QUALCOMM Telecommunications Ltd. ("QUALCOMMTel Isle of Man"), an Isle
of Man corporation. QUALCOMMTel Isle of Man holds a 50% investment in Orrengrove
Investments Limited ("Orrengrove"). The 30% minority interest of QUALCOMMTel
Isle of Man not owned by the Company is held by Tiller and the 50% of Orrengrove
not held by QUALCOMMTel Isle of Man is held by Teletal.
In August 1998, Orrengrove purchased 60% of the common stock of Transworld
Telecommunications, Inc., Transworld Communications Services, Inc., and
Transworld Communications (Bermuda), Ltd. (the "Transworld Companies") for an
aggregate purchase price of $51.8 million. The Transworld Companies together are
telecommunications companies in the development stage formed in part to help
create a modern telecommunications infrastructure for the Russian Federation and
the countries of the former East Bloc. The Transworld Companies have developed
and are completing the installation of a satellite-based communications system
for long-distance voice, video and data services using their exclusive rights to
Russian Loutch II satellite capacity. Orrengrove will account for the
acquisition under the purchase method of accounting. Because the Company funded
the acquisition of the Transworld Companies in the form of a promissory note
with Orrengrove, and because the equity of QUALCOMMTel Isle of Man is 100%
funded by the Company, the Company will fully consolidate the net earnings and
losses of Orrengrove until such time the Company recoups its investment.
NOTE 3. OTHER ASSETS
In June 1998, the Company purchased all the shares of OzPhone Pty Limited
("OzPhone"), an Australian company, for $564,000. OzPhone then acquired several
wireless communication licenses to provide digital mobile and wireless local
loop services in Australia. The total cost of the licenses was approximately
$6.2 million.
NOTE 4. EMPLOYEE BENEFIT PLANS
Prior to August 31, 1998, 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 has formed
employee benefit plans including an equity incentive plan which will provide for
the grant of various types of equity-based compensation to employees of the
Company, an incentive stock option plan, a non-qualified stock option plan 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 (See Note 9).
NOTE 5. INCOME TAXES
The Company has not recorded provisions for federal and state income taxes
for fiscal 1998, 1997 and 1996 due to net operating losses ("NOL") during those
years. The Company will not be able to utilize NOL carryforwards generated prior
to the Distribution, as such NOLs will remain with QUALCOMM.
F-17
<PAGE> 70
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
At August 31, 1998, 1997 and 1996, the Company had total deferred tax
assets of approximately $14.5 million, $0.6 million and $0.2 million,
respectively, which consisted of NOL carryforwards. 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, 1998, the Company had NOL carryforwards available to offset
future income for federal income tax reporting purposes of approximately $10.7
million, $0.4 million and $0.1 million, which expire in years 2017, 2011 and
2010, respectively. State NOL carryforwards of approximately $3.2 million and
$0.1 million at August 31, 1998 expire in years 2002 and 2001, respectively.
NOTE 6. LOAN PAYABLE TO BANK
In July 1998, Inversiones QUALCOMM borrowed $9.0 million under a note
payable to a bank in Chile. The note bears interest at a rate of 8.56% per annum
and all amounts borrowed are due to be repaid by February 1999.
NOTE 7. COMMITMENTS
The Company has made guarantees and commitments to invest additional equity
and working capital into certain of the Leap Wireless Operating Companies. As of
August 31, 1998, these commitments totaled approximately $150.3 million. Prior
to the Distribution, these commitments were funded by QUALCOMM. Upon
Distribution, the Company expects to fund its commitments with borrowings under
the Credit Facility.
The Company has entered into an agreement to lease its facility and certain
equipment under non-cancelable operating leases, with terms ranging from five to
seven years. Future minimum lease payments in each of the next five years from
fiscal 1999 through 2003 are approximately $700,000 each year, and $1.3 million
cumulative thereafter.
NOTE 8. SUBSEQUENT EVENTS, PRIOR TO THE DISTRIBUTION
In September 1998, Inversiones QUALCOMM funded an additional $3.4 million
under its loan agreement with Chilesat PCS utilizing additional bank debt. As of
the Distribution Date, the Company and Inversiones QUALCOMM had loans totaling
$28.6 million to Chilesat PCS, with remaining commitments to fund $6.4 million.
In September 1998, the Company provided $60.7 million of funding and
converted its advances and loan, with accrued interest, into common stock of
PEGASO. The Company's total investment in PEGASO after these transactions was
$100 million. On the same date, other investors also subscribed for and
purchased common stock of PEGASO such that, after these transactions, the total
par value of the common equity of PEGASO was $300 million. As a result, the
Company's ownership interest in PEGASO has been diluted from 49% to 33%.
In September 1998, the Company provided a $17.5 million loan (the "Pegaso
Loan") to Pegaso Comunicaciones y Servicios, S.A. de C.V., a Mexican company
96%-owned by Mr. Alejandro Burillo Azcarraga, a member of the Company's Board of
Directors. The Pegaso Loan bears interest at the rate of 13% per annum. The
first principal installment of $7.5 million, plus accrued interest, was repaid
on October 29, 1998 as scheduled, and the second principal installment of $10
million, plus accrued interest, is due on or before December 31, 1998. The
purpose of the Pegaso Loan was to facilitate investment by Pegaso Comunicaciones
y Servicios, S.A. de C.V. in PEGASO, the joint venture in which the Company has
an interest, and to ensure that the investors in PEGASO made all capital
contributions to PEGASO that were required for the acquisition of the Mexican
licenses on September 30, 1998. The Pegaso Loan is guaranteed by Mr. Burillo and
is secured by a pledge of all of the shares of Pegaso Comunicaciones y
Servicios, S.A. de C.V.
F-18
<PAGE> 71
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
and Mr. Burillo's interest in an unrelated joint venture with QUALCOMM to
operate a satellite tracking, management and two-way communications systems for
the trucking industry in Mexico.
In September 1998, QUALCOMTel Cayman invested $3.1 million of equity in
Metrosvyaz. In addition, the Company made an additional loan of $10.7 million
under its loan facility with Metrosvyaz. As of the Distribution Date,
QUALCOMMTel Cayman had loans totaling $17.3 million to Metrosvyaz, with a
remaining commitment of $55.1 million.
NOTE 9. SUBSEQUENT EVENTS, POST DISTRIBUTION
During October and November 1998, Chase borrowed an additional $8.6 million
under the working capital facility it has with the Company. Borrowings by Chase
to date total $20.4 million, with a remaining loan commitment of $4.6 million.
In November 1998, Inversiones QUALCOMM funded the remaining $3.3 million
under its loan agreement with Chilesat PCS utilizing additional bank debt. The
Company has a remaining commitment of $3.1 million under its loan agreement with
Chilesat PCS.
The Company has made borrowings under the Credit Facility with QUALCOMM
subsequent to the Distribution Date. In September 1998, the Company borrowed
$5.3 million under the working capital sub-facility to pay QUALCOMM the 2% fee
on the $265 million facility. The Company also borrowed a net total of $15.8
million under the investment capital sub-facility to make further investment and
loans to certain of the Leap Wireless Operating Companies.
ADOPTION OF EMPLOYEE BENEFIT PLANS
Employee Savings and Retirement Plan. In September 1998, the Company
adopted a 401(k) plan that allows eligible employees to contribute up to 15% of
their salary, subject to annual limits. The Company matches a portion of the
employee contributions and may, at its discretion, make additional contributions
based upon earnings.
Stock Option Plans. In September 1998, the Company adopted the 1998 Stock
Option Plan ("the Plan") that allows the Board of Directors to grant options to
selected employees, directors and consultants to the Company to purchase shares
of the Company's common stock. The Plan provides for the grant of both incentive
and non-qualified stock options. Incentive stock options are exercisable at a
price not less than 100% of the fair market value of the common stock on the
date of grant. Non-qualified stock options are exercisable at a price not less
than 85% of the fair market value of the common stock on the date of grant.
Generally, options vest over a five year period and are exercisable for up to
ten years from the grant date. The Company also adopted a Non-Employee Directors
Stock Option Plan, under which options to purchase common stock are granted to
non-employee directors on an annual basis. The options are exercisable at a
price equal to the fair market value of the common stock on the date of grant,
vest over a five year period and are exercisable for up to ten years from the
grant date.
Employee Stock Purchase Plan. In September 1998, the Company adopted an
employee stock purchase plan for all eligible employees to purchase shares of
common stock at 85% of the lower of the fair market value of such stock on the
first or the last day of each offering period. Employees may authorize the
Company to withhold up to 15% of their compensation during any offering period,
subject to certain limitations.
Executive Retirement Plan. In September 1998, the Company adopted a
voluntary retirement plan that allows eligible executives to defer up to 100% of
their income on a pretax basis. On a quarterly basis, participants receive up to
a 10% match of their deferral in the form of the Company's common stock based on
the then current market price, to be issued to the participant upon eligible
retirement. The income deferred and the Company match are unsecured and subject
to the claims of general creditors of the Company.
F-19
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
3.1(1) Form of Amended and Restated Certificate of Incorporation of
the Registrant..............................................
3.2(1) Form of Amended and Restated Bylaws of the Registrant.......
3.3(2) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Registrant.............
4.1(1) Form of Common Stock Certificate............................
4.2(3) Warrant, dated as of September 23, 1998, issued to QUALCOMM
Incorporated ("QUALCOMM")...................................
4.3(2) Rights Agreement, dated as of September 14, 1998, between
the Registrant and Harris Trust Company of California.......
10.1(3) Separation and Distribution Agreement, dated as of September
23, 1998, between QUALCOMM and the Registrant...............
10.2(3) Credit Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant.................................
10.3(3) Tax Matters Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant.........................
10.4(3) Interim Services Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant.........................
10.5(3) Master Agreement Regarding Equipment Procurement, dated as
of September 23, 1998, between QUALCOMM and the
Registrant..................................................
10.6(3) Employee Benefits Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant.........................
10.7(3) Conversion Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant.........................
10.8(3) Assignment and Assumption Agreement, dated as of September
23, 1998, between QUALCOMM and the Registrant...............
10.9(1) Form of Registrant's 1998 Stock Option Plan (the "Option
Plan")......................................................
10.10(1) Form of non-qualified/incentive stock option under the
Option Plan.................................................
10.11(1) Form of non-qualified stock option under the Option Plan to
be granted to QUALCOMM option holders in connection with the
Distribution................................................
10.12(1) Form of Registrant's 1998 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan").........................
10.13(1) Form of non-qualified stock option under the Directors'
Plan........................................................
10.14(1) Form of Registrant's Employee Stock Purchase Plan...........
10.15(1) Assignment and Assumption of Lease dated August 11, 1998
between QUALCOMM and Vaxa International, Inc................
10.16(1) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers...................
10.17 Loan Agreement, dated as of September 28, 1998, between
Pegaso Comunicaciones y Servicios, S.A. de C.V. and the
Registrant..................................................
10.18 Promissory Note, executed September 25, 1998, by Pegaso
Comunicaciones y Servicios, S.A. de C.V. in favor of the
Registrant..................................................
</TABLE>
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<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
10.19 Pledge Agreement, dated as of September 28, 1998, by and
between Pegaso Comunicaciones y Servicios, S.A. de C.V., the
Registrant and the other parties thereto....................
21.1(1) Subsidiaries of the Registrant..............................
23.1 Consent of Independent Accountants..........................
27.1 Financial Data Schedule.....................................
</TABLE>
- ---------------
(1) Filed as an exhibit to the Company's Registration Statement on Form 10, as
amended (File No. 0-29752), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 14, 1998, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-64459) dated October 13, 1998, and
incorporated herein by reference.
<PAGE> 1
EXHIBIT 10.17
LOAN AGREEMENT
THIS LOAN AGREEMENT is made as of the 28th day of September, 1998 by and among
I. Pegaso Comunicaciones y Servicios, S.A. de C.V. a company incorporated
in and under the laws of Mexico (as defined herein), hereinafter
referred to as the "BORROWER";
II. Leap Wireless International, Inc. a company incorporated in and under
the laws of the State of Delaware, United States of America,
hereinafter referred to as the "LENDER".
WHEREAS:
a) the Borrower owns 31.5% of the capital stock issued by Pegaso
Telecomunicaciones, S.A. de C.V. ("Telecomunicaciones") and such
company owns, as of this date, shares representing the 99.9% of the
capital stock issued by Pegaso Comunicaciones y Sistemas, S.A. de C.V.
b) the Borrower indirectly owns an ownership interest in Pegaso
Comunicaciones y Sistemas, S.A. de C.V. (the "Licensee"), a company
incorporated in and under the laws of Mexico, which is engaged, among
others, in the business of using, operation and exploiting a public
telecommunications network pursuant to a concession granted by the
Ministry of Communications and Transportation ("SCT") for such
purposes, in order to provide fixed and mobile wireless telephone
services known as Personal Communications System (the "Services") in
Mexico;
c) the Licensee entered into a bidding process in order to obtain a
concession to be granted by SCT in order to use and exploit frequency
bands of the radioelectric spectrum, necessary to provide the Services
within Mexico (the concession described in paragraph b) above and the
concession described in this paragraph shall collectively be referred
hereto as the "Licenses");
d) SCT, through the Federal Telecommunications Commission ("Cofetel"),
granted Licensee the rights to obtain the concession specified in the
preceding paragraph c) and therefore, Licensee, in accordance with such
bidding process, has to pay SCT, through Cofetel, certain fees in order
to obtain the concession for using and exploiting the frequency bands
of the radioelectric spectrum (the "Fees");
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e) the Borrower is willing to indirectly make certain capital
contributions to the Licensee in order to provide it with the necessary
proceeds for the payment of the Fees;
e) the Borrower has requested the Lender to finance, in part, the capital
contributions that the Borrower will made to the Licensee for the
payment of the Fees, by granting to the Borrower a loan up to a maximum
amount of USD$17,500,000;
f) subject to the terms and conditions set forth below the Lender has
agreed to make such a loan available to the Borrower.
NOW, THEREFORE, in consideration of the premises and the mutual covenants set
forth herein the parties hereby agree as follows:
SECTION 1. DEFINITIONS
The following terms will have the meanings set forth below:
"Affiliate" will mean any intermediary, affiliate, subsidiary or agent
of the Lender.
"Availability Period" will mean the period commencing on the signing
date of this Agreement and expiring on September 29, 1998.
"Business Day" will mean any day other than a Saturday, Sunday, on
which banking operations are permitted or required by law, executive
order or governmental decree to be carry on in the City of New York and
in Mexico City.
"Capital Contribution" will mean the capital contribution to be made by
the Borrower in Telecomunicaciones in order for it to make a capital
contribution in the Licensee.
"Cofetel" will mean the Mexican Federal Telecommunications Commission.
"Commitment" will mean the commitment of Lender to make the Loan up to
the maximum amount of USD$17,500,000.
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<PAGE> 3
"CVM" will mean Corporacion del Valle de Mexico, S.A. de C.V.
"Debt" will mean at any date, (i) all indebtedness for borrowed money
and all obligations to pay the deferred purchase price of fixed assets,
(ii) all obligations evidenced by bonds, debentures, notes or similar
investments, (iii) all obligations as lessee under leases which shall
have been or should be, in accordance with GAAP, recorded as capital
leases, (iv) all obligations of the Borrower to make payments under
noncompete or royalty agreements, (v) all obligations to reimburse any
bank, or other Person, in respect to amounts paid under a letter of
credit and (vi) all items of indebtedness or liability which in
accordance with GAAP, would be included in determining total
liabilities as shown on the liabilities side of a balance sheet as of
the date as of which Debt is to be determined, but excluding deferred
tax liabilities which, although uncertain if and when due in the
future, according to GAAP are classified as Debt.
"Draw Request" will mean an irrevocable notice from the Borrower to the
Lender to provide the Drawing, which notice will be in form and
substance equal to Annex "A" hereto.
"Drawing" will mean the drawdown of the Loan by the Lender pursuant to
Section 2.03 hereof.
"Event of Default" will have the meaning set forth in Section 7 hereof.
"Fees" will mean the fees to be paid by the Licensee to SCT, through
Cofetel, in accordance with the bidding process to obtain a concession
for the use and exploitation of frequency bands in Mexico, as described
hereto in Recital d).
"Financial Statements" will mean the balance sheet, income statement
and such other supplementary statements (including the notes thereto)
as may be prepared in conjunction therewith.
"First Payment Date" will mean October 30, 1998.
"GAAP" will mean those accounting principles applied on a consistent
basis generally accepted from time to time in the certified public
accounting profession of Mexico; and "applied on a consistent basis"
means that the accounting principles observed in the period covered by
any report required under the terms of this Agreement are compatible in
all material respects with those applied in any preceding period and
report.
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<PAGE> 4
"Governmental Agency" will mean any ministry, directorate, department,
authority, corporation, or other juridical entity which is part of the
Mexican Government, whether autonomous or not.
"Governmental Approval" will mean any authorization, approval, consent,
license or opinion of or filing for registration with any ministry,
directorate, department, agency, instrumentality or other juridical
entity of any jurisdiction.
"Impulsos" will mean Impulsos Corporativos, S.A. de C.V.
"Interest Payment Date" will mean with respect to Tranche "1", the
First Payment Date, and with respect to Tranche "2", the Second Payment
Date.
"Issuers" will mean collectively the Borrower and Impulsos.
"JV Agreement" shall have the meaning ascribed to such term in Section
5.13 hereof.
"Law" will mean any convention or treaty, law, ordinance, decree, rule,
directive, regulation, judicial or arbitral decision, or any voluntary
restraint, policy or guideline not having the force of law but
compulsory in character, and any of the provisions of such Laws binding
on or affecting the party referred to in the context in which the term
is used.
"Lender" will mean Leap Wireless International, Inc.
"Licensee" will mean Pegaso Comunicaciones y Sistemas, S.A. de C.V.
"Licenses" will mean the concessions granted or to be granted by SCT to
the Licensee in order to enable it to provide the Services in Mexico,
which are described in Recitals b) and c) hereof.
"Lien" will mean any mortgage, charge, pledge, lien, attachment,
encumbrance or other security interest or any segregation of assets or
revenues or other preferential arrangement (whether or not constituting
a security interest and whether or not legally enforceable in law) with
respect to any present or future assets, revenues or rights to the
receipt of income of the party referred to in the context in which the
term is used.
"Loan" will mean the aggregate principal amount under this Agreement,
not to exceed USD$17,500,000 or the
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<PAGE> 5
amount actually outstanding at the time referred to in the context in
which the term is used.
"Loan Documents" will mean this Agreement, the Promissory Note, the
Pledge Agreement, the Draw Request and all other agreements between the
Borrower and the Lender, executed pursuant to or in connection with the
transaction contemplated hereby, and all other documents specified in,
required by, and executed pursuant to the terms hereof and all
modifications, renewals, amendments and supplements of any of the
foregoing.
"Mexico" will mean the United Mexican States.
"Person" will mean any individual, corporation, association, limited
liability corporation, trust, joint stock company, unincorporated
association, joint venture, or any other entity and any Governmental
Agency.
"Pledge Agreement" will mean the Pledge Agreement executed the date
hereof between the Pledgors and the Lender, to create a pledge (i) on
the outstanding, subscribed and paid common stock issued by the
Borrower representing 100% of its corporate capital, and (ii) on the
outstanding, subscribed and paid common stock issued by Impulsos
representing 100% of its corporate capital, to secure the obligations
of the Borrower under this Agreement.
"Pledgors" will mean Messrs. Alejandro Burillo Azcarraga, Alejandro
Diez Barroso Salido, Raul Quintana Fernandez and Marco Chavez Mayer.
"Potential Event of Default" will mean an event, known to the Borrower
or which should have been known to the Borrower pursuant to the
circumstances prevailing at the time, which, if it continued, would
constitute an Event of Default, only with the giving of notice and/or
lapse of time and/or the making of any determination.
"Promissory Note" will mean the promissory note signed and delivered by
the Borrower to the Lender and guaranteed "por aval" by Mr. Alejandro
Burillo Azcarraga, evidencing the obligation of the Borrower to pay to
the Lender the principal amount of Tranche "1" and Tranche "2" and the
corresponding interest, in the form attached hereto as Annex "B"
hereto.
"SCT" will mean the Mexican Ministry of Communications and
Transportation.
"Second Payment Date" will mean December 31, 1998.
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<PAGE> 6
"Services" shall have the meaning ascribed to such term in Recital b)
hereto.
"Shareholders" shall have the meaning ascribed to such term in Section
6.a)iii) hereto.
"Subsidiary" will mean any corporation or other business entity in
which the Borrower owns or controls directly or indirectly fifty
percent (50%) or more of the outstanding capital stock or other
ownership interest having ordinary voting power to elect directors,
managers or trustees of such corporation or other business entity
(whether or not capital stock or other ownership interest of any other
class or classes will or might have voting power upon the occurrence of
any contingency) or any corporation or other business entity otherwise
controlled directly or indirectly by the Borrower. Notwithstanding the
foregoing, the term Subsidiary shall include Pegaso Telecomunicaciones,
S.A. de C.V., on which the Borrower owns 31.5% of the ownership
interest of such company.
"Telecomunicaciones" will mean Pegaso Telecomunicaciones, S.A. de C.V.
"Tranche "1"" will mean the aggregate principal amount of part of the
Loan up to USD$7,500,000.
"Tranche "2"" will mean the aggregate principal amount of part of the
Loan up to USD$10,000,000.
"USD", "United States Dollars" and the sign "$" will mean the lawful
currency of the United States of America.
"United States" will mean the United States of America.
SECTION 2. THE DRAWING
2.01 AGREEMENT TO LEND
Subject to the terms and conditions of this Agreement, the Lender hereby agrees
to grant a loan to the Borrower, up to, but not exceeding the amount of
USD$17,500,000 (seventeen million five hundred thousand dollars, currency of the
United States of America), in the understanding that such amount does not
include interest or any other amount than the principal, which the Borrower is
bounded to pay to Lender pursuant to the terms of this Agreement.
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<PAGE> 7
2.02 PURPOSE
The Loan will be used by the Borrower exclusively to contribute in the financing
of the Capital Contributions, most of which shall be used by Telecomunicaciones
and by the Licensee to the payment of the Fees.
2.03 DRAWING
(a) During the Availability Period and subject to the terms and conditions
hereof, the Borrower has the right to (i) borrow the Loan for an amount
of USD$17,500,000.
(b) The Drawing will be made provided that:
- the Lender has received on the date of Drawing (i) the Draw
Request from the Borrower, which notice, once given, shall be
irrevocable, and (ii) the Promissory Note duly executed by the
Borrower and guaranteed "por aval" by Mr. Alejandro Burillo
Azcarraga;
- the Lender will have received, in form and substance
satisfactory to it, the documents listed in Section 6 hereof
at least the day on which the Drawing is to be made;
- the proposed date of Drawing is a Business Day;
- the Borrower is in compliance with covenants provided herein;
- the Borrower's representations and warranties as per Section 4
hereafter are and remain true and valid; and
- no Event of Default has occurred.
(c) The Drawing will be made available to the Borrower by transferring the
amount of the Drawing in accordance with the Borrower's disbursement
instructions provided in the Draw Request.
(d) After the Availability Period has ended, the Lender shall at no time be
obliged to honor any request for disbursement under this Agreement.
2.04 INTEREST
(a) The Borrower agrees to pay to the Lender on the First Payment Date
interest on the principal outstanding
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<PAGE> 8
amount of Tranche "1" at an annual fixed rate of 13% (thirteen percent)
per annum, in the understanding that such rate shall be increased in an
amount necessary to ensure the Lender receives interest at an annual
rate equal to 13% (thirteen percent), free and clear of any tax or
withholding.
(b) The Borrower agrees to pay to the Lender on the Second Payment Date
interest on the principal outstanding amount of Tranche "2" at an
annual fixed rate of 13% (thirteen percent) per annum, in the
understanding that such rate shall be increased in an amount necessary
to ensure the Lender receives interest at an annual rate equal to 13%
(thirteen percent), free and clear of any tax or withholding.
(c) Interest will accrue on the basis of a year of 360 days and the actual
days elapsed.
2.05 DEFAULT INTEREST
(a) If the Borrower fails to make payment when due of any sum hereunder or
under any document provided for hereunder (whether at its stated
maturity, by acceleration or otherwise) the Borrower will pay to the
Lender default interest on the unpaid amount during the period from and
including the date immediately following such due date to and including
the date of the payment of said sum in full (after as well as before
judgment) at the fixed rate per annum (calculated on the basis of a
year of 360 days and actual days elapsed) of 18% (eighteen per cent)
per annum. Such interest will be payable upon demand of the Lender.
(b) In addition to payment of the interest referred to in paragraph
2.05(a), the Borrower will indemnify Lender against any costs and
losses resulting from the failure of the Borrower to pay when due any
amounts due hereunder, including without limitation any Funding Losses.
2.06 REPAYMENT OF LOAN
The Borrower agrees to repay the Lender the total amount of the Loan in the
following manner:
(a) Tranche "1" and the interest accrued therewith shall be paid by the
Borrower to the Lender precisely on the First Payment Date.
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<PAGE> 9
(b) Tranche "2" and the interest accrued therewith shall be paid by the
Borrower to the Lender precisely on the Second Payment Date.
2.07 PROMISSORY NOTE
(a) The obligations of the Borrower to pay to the Lender the principal
amount of Tranche "1" and Tranche "2" and the corresponding interest,
shall be evidenced by a Promissory Note duly signed by an authorized
officer of the Borrower in favor of the Lender, which shall be dated
the date of the Drawing, shall be payable to the order of the Lender,
at its offices specified in the signature page hereof and shall bear
interest in accordance with the terms thereof, and shall be guaranteed
"por aval" by Mr. Alejandro Burillo Azcarraga.
(b) The execution and delivery by the Borrower of the Promissory Note shall
not limit, reduce or otherwise affect the obligations of the Borrower
under this Agreement, and the rights and claims of the Lender under the
Promissory Note shall not replace or supersede the rights and claims of
said parties hereunder.
(c) Payment by the Borrower of any amount owing under the Promissory Note
or this Agreement shall discharge the liability of the Borrower in
respect of a corresponding amount owing under this Agreement or the
Promissory Note, respectively.
2.08 PAYMENTS
(a) All sums payable to the Lender hereunder or under any other Loan
Document shall be made in United States Dollars and in immediately
available funds not later than 12:00 p.m., New York time, on the day in
question, to such account which Lender designates in writing.
(b) Any payments made to the Lender hereunder or under any other Loan
Document will be applied first against reasonable costs, losses,
expenses and indemnities due hereunder; then against default interest,
if any; then against interest due on the Loan; and thereafter against
the principal amount of the Loan.
(c) If any date on which a payment is due hereunder or under any Loan
Document would otherwise fall on a day which is not a Business Day,
such due date will instead fall on
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<PAGE> 10
the next succeeding Business Day, unless such date would fall in the
next calendar month, in which case such Business Day will be the
immediately preceding Business Day.
SECTION 3. YIELD PROTECTION
3.01 TAXES
(a) All sums payable by the Borrower hereunder or under any document or
instrument provided for hereunder, whether of principal, interest,
expenses or otherwise, will be paid in full and without set-off or
counterclaim, free of any deductions or withholdings.
In the event that the Borrower is prohibited by Law from making such
payments free of such deductions or withholdings, the Borrower will pay
such additional amounts to the Lender as may be necessary to ensure
that the actual amount received by the Lender after all deductions or
withholdings (and after payment of such additional amounts) will equal
the amount that would have been received by the Lender if no deduction
or withholding were required.
(b) The Borrower will promptly pay directly to the appropriate taxing
authority any and all present and future taxes, levies, imposts,
deductions, stamp or other duties, filing and other fees or charges and
all liabilities of the Lender or any Affiliate with respect thereto
imposed by Law or by any taxing authority on or with regard to any
aspect of the transactions contemplated by this Agreement or any other
Loan Document or the execution and delivery of this Agreement or any
other Loan Document, except taxes imposed on the overall net income of
the Lender by the jurisdiction of its incorporation.
The Borrower will hold the Lender and its respective Affiliates
harmless from any liability with respect to the delay or failure by the
Borrower to pay any such taxes or charges and will reimburse each of
them upon demand for any such taxes or charges paid by any of them in
connection herewith, whether or not such taxes will be correctly or
legally asserted or otherwise contested or contestable, together with
any interest, penalties and expenses asserted in connection therewith.
(c) Should the Borrower pay any tax or charge as provided herein or make
any deductions or withholdings from amounts paid hereunder or under any
document or
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<PAGE> 11
instrument provided for hereunder, the Borrower will promptly forward
to the Lender official receipts or other evidence acceptable to the
Lender establishing payment of such amounts.
(d) The Borrower will furnish the Lender with the receipts for the
withholding taxes paid with regard to the Loan, if any.
3.02 COMPLIANCE COSTS
In the event that under any Law imposed, instituted, amended or given a new
interpretation after the date of this Agreement, the Lender incurs costs for
maintaining any reserves or special deposits against its Loan or any other costs
in connection with this Agreement of complying with such Law, it will promptly
notify the Borrower thereof and the Borrower will pay on demand to the Lender
the amount of such costs, in the currency in which such costs were incurred.
3.03 ILLEGALITY
(a) In the event that it will become unlawful for the Lender to make the
Loan or to maintain Loan, then the Commitment will forthwith terminate
and the Borrower will immediately prepay the amount outstanding under
the Loan. Upon the occurrence of any such event, the Lender will
promptly notify the Borrower thereof and will furnish the Borrower with
certified evidence as to such unlawfulness. The termination of the
Commitment will be effective and the outstanding amount will be due and
payable upon the giving of a notice to the Borrower.
(b) The Borrower will hold the Lender harmless from any liability with
respect to any penalty accrued against it due to such unlawfulness and
will reimburse the Lender upon demand after having received certified
evidence for any such penalty paid by the Lender to the relevant
authorities in connection herewith together with any interest and
expenses asserted in connection therewith.
3.04 CURRENCY AND PLACE OF PAYMENT
This is an international loan transaction in which the specification of USD and
payment in USD are of the essence, and except as expressly provided herein USD
will be the currency of account and of payment in all events. The payment
obligations under this Agreement and other Loan Document will not be discharged
by an amount paid in any currency other
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<PAGE> 12
than the currency specified or in another place, whether pursuant to a
judgment or otherwise.
In the event that any payment, whether pursuant to a judgment or otherwise, will
be made in a currency other than USD, such amount will be promptly converted to
USD (or such other specified currency) and transferred under normal banking
procedures. In the event that such payment does not satisfy the obligations of
the Borrower under this Agreement and each document provided for hereunder, the
Lender will be entitled to immediate payment of, and will have a separate cause
of action for, the USD (or such other specified currency) deficiency in respect
of the payments due. In the event that the transfer and/or conversion of such
payment results in receipt by the Lender of an amount in excess of all amounts
then due from the Borrower hereunder, the Lender will refund the amount of such
excess to the Borrower.
3.05 EXPENSES AND STAMP DUTIES
(a) The Borrower will pay or, as the case may be, reimburse the Lender
promptly once it have received reasonable evidence, for its respective
costs and expenses (including, without limitation, legal fees) incurred
in connection with (i) the negotiation, preparation and execution of
any waiver, consent or amendment required hereunder, (ii) the
determination whether there has occurred an Event of Default or, (iii)
the administration and enforcement of this Agreement from and after the
occurrence of such an Event of Default. Such fees and expenses will be
paid or reimbursed whether or not they arise during the term of this
Agreement or whether or not the Lender gives notice of such Event of
Default or demands acceleration of the Loan or takes other action to
enforce the provisions of this Agreement or any document provided for
hereunder.
(b) The Borrower will pay any stamp or documentary taxes or any similar
duties or levies imposed in connection with the execution, delivery,
registration, performance or enforcement of this Agreement or any other
Loan Document.
SECTION 4. REPRESENTATIONS AND WARRANTIES
The Borrower represents, warrants and covenants to the Lender as follows:
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4.01 POWER AND AUTHORITY
The Borrower is a company incorporated and existing under the laws of Mexico,
has full power and authority to enter into this Agreement and other obligations
provided for in this Agreement and all other Loan Documents, to execute and
deliver this Agreement and all other Loan Documents, and to perform its
obligations hereunder and thereunder.
4.02 AUTHORIZATION OF BORROWING
The Borrower has taken all necessary action to authorize the execution and
delivery of this Agreement, the Promissory Note and all other Loan Document to
be executed by the Borrower to authorize the performance and observance of the
terms and conditions hereof and thereof.
4.03 GOVERNMENTAL APPROVALS
Any necessary governmental approvals, consents, licenses, authorizations or
concessions required for the Borrower or the Licensee with respect to conduct
their business as now are being conducted have been obtained or renewed, and as
of this date, they are in full force and effect.
4.04 AGREEMENT BINDING
This Agreement, the Promissory Note and the other Loan Documents constitute,
when executed and delivered will constitute legal, valid and binding obligations
of the Borrower and the other parties hereto and thereto (other than the
Lender), enforceable in accordance with its respective terms and will constitute
direct obligations of the Borrower and the other parties hereto and thereto
(other than the Lender).
The execution, delivery and performance of this Agreement, the Promissory Note
and the other Loan Documents to be executed by the Borrower hereunder and the
payment by the Borrower of all amounts due on the dates and in the currency
provided for herein and therein (a) do not and will not violate or contravene
any provision of Law, (b) will not conflict with the "Estatutos Sociales" of the
Borrower, (c) do not and will not conflict with or result in the breach of any
provision of, or in the imposition of any Lien under, any agreement to which the
Borrower or any of its Subsidiaries is a party or by which it or any of its
properties or assets is bound, and (d) do not and will not constitute an Event
of Default under any such agreements.
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4.05 NO DEFAULT IN OTHER AGREEMENTS
The Borrower is not in default (a) in respect of any Debt or (b) in respect of
any obligation which might affect the validity or enforceability of this
Agreement or any other Loan Document or (c) under any agreement, obligation or
duty to which it is a party or by which it or any of its properties or assets is
bound, which default might have a material adverse effect on its financial
position or results of operations or its ability to perform its obligations
under this Agreement or any other Loan Document.
4.06 LITIGATION
There are no pending or threatened legal actions or arbitration or other
proceedings which may materially adversely affect the financial condition of the
Borrower or the validity, effectiveness or enforceability of this Agreement or
any other Loan Document.
4.07 WITHHOLDING AND OTHER TAXES
Other than the currently applicable "retencion del impuesto sobre la renta",
there is no withholding, income or other tax or charge in Mexico or in any
political subdivision or taxing authority thereof or therein or of any taxing
authority, federation or association of which Mexico is member, applicable to
any payment to be made by the Borrower pursuant to the terms of this Agreement
or any other Loan Document provided for hereunder or to be imposed on or by
virtue of the execution, delivery, performance or enforcement of this Agreement
or any other Loan Document.
4.08 SOVEREIGN IMMUNITY
The execution, delivery, performance and observance of this Agreement and any
other Loan Document to be executed by the Borrower hereunder constitute private
and commercial acts and no governmental or public acts and neither the Borrower
nor any of its assets have any right of immunity on the grounds of sovereignty
or otherwise from any legal action, suit or proceeding, from set-off or
counterclaim, from attachment or from execution or any other legal process in
respect of any of its obligations under or relating to this Agreement or any
other Loan Document.
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4.09 FINANCIAL STATEMENTS
The audited consolidated Financial Statements of the Borrower and the Issuers
for the period ending 1997 which have been delivered to the Lender are complete
and correct and present the consolidated financial position and the results of
operations of the Borrower and the Issuers at the date thereof and for the
period then ended in conformity with GAAP, consistently applied. There are no
liabilities (whether direct or indirect, fixed or contingent) of the Borrower or
any of its Subsidiaries or any Issuer as of the dates of such Financial
Statements that are not reflected therein. Since the date of such Financial
Statements there has been no material adverse change in the consolidated
financial position or operations of the Borrower or any of its Subsidiaries or
any Issuer.
4.10 MATERIAL ADVERSE FINANCIAL PERFORMANCE
The Borrower is not aware of any circumstances which may materially adversely
affect the financial condition of the Borrower or the validity, effectiveness or
enforceability of this Agreement or any other Loan Document.
4.12 SHARES TO BE PLEDGED
The Pledge Agreement creates a duly perfected first priority security interest
on the stock therein mentioned in favor of the Lender.
4.13 SURVIVAL / REPEAT OF REPRESENTATION AND WARRANTIES
The representations and warranties set out in this Section 4 will survive the
execution of this Agreement.
SECTION 5. COVENANTS OF BORROWER
In addition to the other undertakings herein contained the Borrower hereby
covenants with the Lender that during the term of this Agreement, the Borrower
will comply or cause compliance with each of the following obligations:
5.01 PERFORMANCE OF OBLIGATIONS
The Borrower will punctually pay all Debt and all amounts due under this
Agreement and each of the other Loan Documents to be executed by the Borrower
hereunder at the times and on the
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dates specified herein and therein. The Borrower will perform when due all of
their other obligations, undertakings and covenants under this Agreement and
each of the other Loan Documents.
5.02 FINANCIAL STATEMENTS: OTHER REPORTS
(a) The Borrower will maintain an accounting system to permit preparation
of individual, consolidated and consolidating Financial Statements in
accordance with GAAP, and each of the Financial Statements described
below shall be prepared from such system and records.
(b) As soon as available but not later than 30 (thirty) days after the end
of each calendar quarter, the Borrower will deliver to the Lender the
unaudited individual and consolidated Financial Statements of the
Borrower and the Issuers and consolidating balance sheet and income
statement of the Borrower and the Issuers with regard to such preceding
quarter, in form prepared in accordance with GAAP, as referred to under
(a) above.
(c) The Borrower will permit the Lender and its representatives at all
reasonable times to inspect its respective facilities, activities,
books of account and records, and will cause its employees and
accountants to give its full cooperation and assistance in connection
with any such visits of inspection or any financial conferences called
by the Lender. The Borrower will also make available such further
information concerning its businesses and affairs as the Lender may
from time to time reasonably request.
5.03 PERFORMANCE AND NOTICE
The Borrower will promptly give notice to the Lender of (a) any substantial
dispute between Borrower or any of its Subsidiaries with any Governmental Agency
with respect to taxes or any other matter; (b) any change in taxes, levies,
stamp or other duties, filing or other fees, imposed by withholding or
otherwise, applicable to any aspect of the transactions contemplated by this
Agreement; (c) the occurrence of any Event of Default; (d) any circumstances
which would materially affect the fulfillment by the Borrower of its obligations
hereunder.
5.04 MAINTENANCE AND CONTINUITY OF BUSINESS/INSURANCE
(a) The Borrower will maintain and shall cause its Subsidiaries to maintain
their corporate existence in
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good standing and in compliance, in every material aspect, with all
applicable laws and regulations, will maintain and will cause its
Subsidiaries to maintain their respective corporate rights, privileges
and franchises, and will conduct and will cause its Subsidiaries to
conduct their respective business substantially as such businesses are
now conducted and in compliance with all applicable laws.
(b) The Borrower will maintain and shall cause its Subsidiaries to maintain
their properties and assets in good repair, working order and
condition, with insurance coverage of such properties and assets as is
customarily by other businesses of comparable type and size, and
insurance against operational risks and liabilities and all other
calamities with coverage and in amounts as are customarily for
businesses of a like nature in the jurisdiction in which such
properties and assets are located or in which such businesses are
conducted.
(c) The relevant policy or policies as meant in Section 5.04 (b) shall have
to be satisfactory to the Lender.
(d) The Borrower can not enter into any transactions with any Person, other
than on ordinary commercial terms and on an arm's length basis; or
enter into any agreement whereby the Borrower's income is shared with
any Person which is not a Subsidiary; or enter into transactions
whereby the Borrower might receive less than the ordinary commercial
price for any goods sold or services rendered or might pay more than
the ordinary commercial price for any goods purchased or services
procured.
5.05 OTHER OBLIGATIONS
(a) The Borrower will not guarantee the Debt of third parties or provide
"avales", Liens or other sureties for the obligations of third parties.
(b) So long as any part of the Loan remains unpaid, the Borrower will not,
without the prior written approval from the Lender, make capital
expenditures in excess of USD$1,000,000 or the countervalue thereof in
other currency, unless such investments are financed through additional
equity contributions.
5.06 TAXES
The Borrower will pay and discharge all its taxes and governmental charges,
including without limitation any taxes or governmental charges assessed against
any of its
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properties or assets, prior to the date after which penalties attach for failure
to pay, except to the extent that such taxes and governmental charges are being
contested in good faith, adequate reserves having been set aside for the payment
thereof. The Borrower will make timely filings of all tax returns and
governmental reports required to be filed or submitted under any applicable law.
5.07 DIVIDEND PAYMENTS
The Borrower will not pay dividends and will not make any other distribution of
cash or of other assets to its shareholders or affiliates, in whatever form.
5.08 COMPLIANCE WITH LAW AND GOVERNMENTAL APPROVALS
The Borrower will do and cause to be done all things necessary to comply with
all applicable Law and will obtain all Governmental Approvals which may at any
time be required with respect to the obligations of the Borrower under this
Agreement or any document provided for hereunder or any amendment or supplement
hereto or thereto and will take all necessary and appropriate action to ensure
the continuance of all Governmental Approvals so obtained to the extent
necessary for the performance by the Borrower of such obligations.
5.09 MERGER AND SPIN-OFF
The Borrower will not merge with any other corporation and will not spin-off, in
any way, or purchase or otherwise acquire all or substantially all of the
properties and assets of any other corporation, partnership or sole
proprietorship.
5.10 POTENTIAL EVENT OF DEFAULT
The Borrower will promptly notify the Lender of the occurrence of an Event of
Default or a Potential Event of Default, and provide the Lender with full
details of any steps which it is taking, or is considering taking, in order to
remedy or mitigate the effect of the Event of Default, without limiting the
provisions of Section 7 hereof.
5.11 LIENS
The Borrower will not create or permit to exist any Lien with respect to any of
its properties.
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5.12 SALE OF ASSETS. LEASES.
(a) The Borrower will not convey, sell, lease, or otherwise dispose of (or
agree to do any of the foregoing at any future time) all or
substantially all or a substantial part of its property or assets or
any part of its property or assets essential to the conduct of its
business as presently conducted.
(b) The Borrower will not convey, sell, lease, or otherwise dispose of any
other assets except for sales of such assets in the ordinary course of
business for a fair and adequate consideration.
5.13 OTHER COVENANTS
(a) The Borrower will not redeem, amortize or purchase any of its
outstanding shares nor reduce or increase its share capital or refund
any part thereof.
(b) The Borrower shall not pledge, encumber or create any Lien on the
shareholdings or ownership interests that it owns in its Subsidiaries.
In addition, the Borrower shall cause its respective shareholders not
to pledge, encumber or create any Lien in any share issued by the
Borrower.
(c) The Borrower will do and cause to be done all things necessary to
comply with all applicable local and federal environmental regulations.
SECTION 6. CONDITIONS OF DRAWING
The obligation of the Lender to make available the Loan is subject to the
fulfillment, as determined by the Lender, of the following conditions precedent
on or prior to the date of each Drawing:
a) AUTHORIZATIONS. The Lender will have received:
i) a copy, certified by an appropriate officer of the
Borrower, of any provision of Law and any
Governmental Approval relating to the authority of
the Borrower to enter into this Agreement, the
Promissory Note and all other Loan Document to be
executed by the Borrower hereunder and to incur the
Debt to be created hereunder and under any Loan
Document to be executed by the Borrower;
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ii) the specimen signature of the persons which will act
on its behalf in the execution and delivery of this
Agreement, the Promissory Note and any other Loan
Document, certified by an appropriate official of the
Borrower to be a true specimen thereof; and
iii) a written approval from any party holding voting stock
or limited voting stock in Telecomunicaciones (the
"Shareholders"), in terms of Article 7 of the JV
Agreement, whereby the Shareholders shall authorize
any transfer (either judicial or extrajudicial) of any
direct or indirect ownership in the stock of the
Borrower pledged pursuant to the Pledge Agreement,
which could derive from the breach of the Borrower of
the terms and conditions of this Agreement.
(b) DRAW REQUEST. The Lender will have received from the Borrower in
connection with the Drawing the Draw Request, duly executed by the
Borrower.
(c) PLEDGE AGREEMENT. The Lender will have received the Pledge Agreement
duly executed by the Pledgors.
(d) PROMISSORY NOTE. The Lender shall have received in connection with the
Drawing the Promissory Note.
(e) FINANCIAL STATEMENTS. The Lender will have received copy of the
Financial Statements referred to in Section 4.09 of this Agreement.
(f) REPRESENTATIONS AND WARRANTIES. All the representations and warranties
of the Borrower contained in this Agreement are true and correct as of
the date of the Drawing.
(g) COVENANTS. All covenants of the Borrower set forth in this Agreement
will have been fully met and performed to the extent required as of the
date of the Drawing.
SECTION 7. EVENTS OF DEFAULT
7.01 EVENTS OF DEFAULT
Each of the following events and occurrences will constitute an Event of Default
under this Agreement:
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(a) The Borrower fails to pay any principal of the Loan or any interest on
the Loan or any other amount payable under this Agreement when due.
(b) Any representation or warranty made or deemed to be made by the
Borrower herein will have been incorrect or misleading in any material
respect when made or confirmed, or any certificate or opinion furnished
under this Agreement proves to have been false or misleading as of its
date in any material respect.
(c) The Borrower fails to perform or violates any provision of this
Agreement and such failure or violation is not remediable or, if
remediable, continues unremedied for a period of 10 (ten) days after
the occurrence of such failure.
(d) Any other Debt of the Borrower and/or its Subsidiaries, towards any
creditor will not be paid at its stated maturity or within any
applicable period of grace, whichever is later, or by reason of its
default which will have continued for more than any applicable period
of grace, will become due or be declared due prior to its stated
maturity.
(e) Any registration, license, authorization, consent or approval necessary
that enables the Borrower to comply with its obligations hereunder is
revoked, withdrawn, modified or withheld or will otherwise fail to
remain in force and effect.
(f) The Borrower changes, or threatens to change, ceases or threatens to
cease business as presently conducted other than in the normal course
of business or if the assets comprising the cease to be used in the
normal operation of the Borrower.
(g) The Borrower or any of its Subsidiaries will be unable, or admit in
writing its inability to pay its debts as they mature, make an
assignment for the benefit of creditors, or commit any act of
bankruptcy, or any lien or encumbrance is foreclosed upon or any order
relating to dissolution, liquidation, bankruptcy or insolvency or for
the appointment of a liquidator or receiver or juridical administrator
or trustee or the levy of any execution will be passed, commenced or
made with respect to it or any of its assets.
(h) A distress or execution or writ of seizure and sale or attachment is
levied upon or issued against any of the property or assets of a
certain substantial amount of the Borrower which is not discharged
within 30 (thirty) days thereof.
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(i) This Agreement, the Promissory Note and/or any other Loan Document, or
any provision thereof is or becomes or is claimed to be, for any
reason, invalid or unenforceable or at any time it is unlawful or
impossible for the Borrower to perform any of its obligations hereunder
or it is unlawful or impossible for the Lender to exercise any of its
rights hereunder or thereunder.
(j) Any arbitration award, judgment or decree for money damages or for a
fine or penalty is entered against the Borrower, which in the
reasonable opinion of the Lender may or will substantially materially
affect the Lender's rights under this Agreement.
(k) Any competent Governmental Agency takes (i) any action to condemn,
seize, requisition or otherwise appropriate any substantial portion of
the properties or assets of the Borrower or any of its Subsidiaries
(either with or without payment of compensation) or (ii) any action
which, in the opinion of the Lender, adversely affects the Borrower's
ability to pay its Debt hereunder.
(l) The Borrower's amount of its authorized share capital is materially
decreased.
(m) All or any of the Borrower's properties or rights are nationalized or
expropriated and such nationalization or expropriation shall materially
affect the operation of its business.
(n) If the shareholdings' structure of the Borrower has been changed or a
change has occurred in the ownership of the Borrower or in the
controlling ownership of the shareholders of the Borrower or in the
controlling ownership of its Subsidiaries or if the Borrower fails to
comply its obligations set forth in Section 5.13 above.
(o) The Lender is of the reasonable and justifiable opinion that any of its
claims or rights under this Agreement, and/or any other Loan Document
is in jeopardy.
(p) The pledge created in accordance with the Pledge Agreement is not at
any time a first priority security interest in favor of the Lender.
(q) If the approval mentioned in Sections 5.13(d) and 6.a)iii) hereof are
not timely obtained and delivered to the Lender.
(r) The Loan is used by the Borrower for other purposes than such
authorized by this Agreement in Section 2.02 hereof.
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(s) If an Additional Event of Default (as such term is defined in the
Pledge Agreement) occurs.
7.02 CONSEQUENCE OF DEFAULT
If an Event of Default will occur or be continuing, the entire Loan together
with accrued interest, costs and losses (including without limitation any
Funding Losses) of the Lender resulting from such Event of Default and any other
sum payable hereunder or under any Loan Document will be immediately due and
payable and the Loan will thereupon become due and payable without presentment,
demand, protest or notice of any kind, all of which are expressly waived by the
Borrower and the Commitment of the Lender shall be thereafter terminated.
No waiver of any Event of Default will constitute a waiver of any other or any
succeeding Event of Default except to the extent provided in such waiver.
SECTION 8. MISCELLANEOUS
8.01 TERM
This Agreement will remain in full force and effect until payment in full of all
principal, interest and other sums payable by the Borrower hereunder and any
other document provided for hereunder. The indemnities of the Borrower will
survive the term of this Agreement and the repayment of the Loan.
8.02 ENTIRE AGREEMENT
This Agreement and the documents provided for hereunder constitute the entire
obligation of the parties hereto with respect to the subject matter hereof and
will supersede any prior expressions of intent or understandings with respect to
this transaction. The written consent of the parties will be required for an
amendment to this Agreement or any waiver of the terms hereof.
8.03 WAIVER: CUMULATIVE RIGHTS
The failure or delay of the Lender to require performance by the Borrower of any
provision of this Agreement will not affect its right to require performance of
such provision unless and until such performance has been waived by the
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Lender in writing in accordance with the terms hereof. Each and every right
granted to the Lender hereunder or under any other document delivered hereunder
or in connection herewith, or allowed to any of them, will be cumulative and may
be exercised in part or in whole from time to time.
8.04 ASSIGNMENT AND PARTICIPATION
This Agreement will be binding upon and will be enforceable by the Borrower, the
Lender, their respective successors and assignees.
The Borrower will have no right to assign its rights or obligations hereunder.
The Lender is entitled to assign all or a part of its rights and obligations
hereunder. Upon an assignment by the Lender, the Lender as used herein will be
deemed to refer to such assignee to the extent of its interest thereunder and it
will be entitled to the benefit of all indemnities and tax reimbursements of the
Lender pursuant to this Agreement as fully as if a party hereto.
8.05 GOVERNING LAW
The execution and fulfillment of this Agreement shall be governed, construed and
enforced in accordance to the laws of the United Mexican States without regard
to conflicts of laws principles.
8.06 SUBMISSION TO JURISDICTION
ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE BORROWER ARISING OUT OF OR RELATING
TO THIS AGREEMENT MAY BE BROUGHT IN ANY COMPETENT COURT OF MEXICO CITY, FEDERAL
DISTRICT OR ANY COURT IN ANY JURISDICTION WHERE ASSETS OF THE BORROWER MAY BE
FOUND, AS THE LENDER MAY ELECT, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT,
BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES
ANY DEFENSE OF FORUM NON CONVENIENT AND IRREVOCABLY AGREES TO BE BOUND BY ANY
JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT.
8.07 NOTICES
Unless otherwise specifically provided for herein, any notice required or
permitted to be given hereunder will be in writing and will be (a) personally
delivered, (b) delivered
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by internationally recognized courier service, or (c) transmitted by telex,
telefax or cable to the parties as follows (as elected by the party giving such
notice):
To the Borrower:
Pegaso Comunicaciones y Servicios, S.A. de C.V.
Paseo de los Tamarindos No. 400-A Piso 32
Col. Bosques de las Lomas
05120 Mexico, D.F.
To the Lender:
Leap Wireless International, Inc.
Attn: General Counsel
6455 Lusk Blvd.
92121 San Diego, California
Except as otherwise specified herein, all notices and other communications will
be deemed to have been duly given on (i) the date of receipt if delivered
personally or by courier, (ii) the date of transmission with confirmed
answerback of transmitted by telex, telefax or cable, whichever will first
occur; provided that any notice to be given to one of the parties will be
effective only when actually received by such party.
Any party may, on 5 (five) days' notice given in accordance with this Section
8.08 to the other parties, designate another address for receipt of notices
hereunder.
All notices hereunder and all documents delivered in connection with this
transaction will be in the English language.
8.08 COUNTERPARTS
This Agreement may be signed in any number of counterparts. Any single
counterpart or a set of counterparts signed, in either case, by all the parties
hereto will constitute a full and original agreement for all purposes.
8.09 COSTS AND EXPENSES
The Borrower shall pay all reasonable costs and expenses derived from the
negotiation, execution and preparation of this Agreement, including the
reasonable costs and expenses regarding its drafting, negotiation, translation
and formalization. The Borrower shall pay to the Lender any cost or expense
incurred by it in connection with the enforcement
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of this Agreement and/or any document or agreement established herewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized representatives as of the day and year first
written above.
The Borrower The Lender
/s/ Alejandro Diez Barroso /s/ Tom Willardson
- ---------------------------------- ------------------------------------
Pegaso Comunicaciones y Ser- Leap Wireless International,
vicios, S.A. de C.V. Inc.
By: Alejandro Diez Barroso By: Tom Willardson
Title: Title:Sr VP Finance &
Treasurer
26
<PAGE> 1
EXHIBIT 10.18
PROMISSORY NOTE
AMOUNT: US$17,500,000.00 DOLLARS.
By this Promissory Note (the "Promissory Note"), Pegaso Comunicaciones y
Servicios, S.A. de C.V. (the "Borrower"), an entity duly organized and validly
existing under the laws of the United Mexican States, hereby unconditionally
promises to pay to the order of Leap Wireless, Inc. (the "Lender"), an entity
duly organized and validly existing under the laws of the State of Delaware,
United States of America, the principal amount of US$17,500,000.00 (seventeen
million five hundred thousand dollars, Currency of the United States of
America), as follows:
1. October 30, 1998: US$ 7,500,000.00 ("Tranche "1""), and
2. December 31, 1998: US$10,000,000.00 ("Tranche "2"").
The Borrower also unconditionally promises to pay to the Lender interest on the
unpaid balance of this Promissory Note at an annual fixed rate equal to 13%
(thirteen percent) per annum, calculated by the actual number of days elapsed on
the basis of a year of 360 days, in the understanding that such rate shall be
increased in an amount necessary to ensure the Lender receives interest at an
annual rate equal to 13% (thirteen percent), free and clear of any tax or
withholding. Interest accrued on Tranche "1" shall be paid on October 30, 1998,
and interest accrued on Tranche "2" shall be paid on December 31, 1998.
In the event that any amount owed to the Lender under this Promissory Note is
not paid when due, the unpaid principal balance of this Promissory Note shall
bear penalty interest, during the period from and including the date immediately
following the due date to and including the actual payment date, at a fixed rate
per annum, calculated by the actual number of days
PAGARE
IMPORTE: $17,500,000.00 DE DOLARES.
Por este Pagare (el "Pagare"), Pegaso Comunicaciones y Servicios, S.A. de C.V.
(la "Acreditada"), una sociedad constituida y validamente existente conforme a
las leyes de los Estados Unidos Mexicanos, promete incondicionalmente pagar a la
orden de Leap Wireless, Inc. (el "Acreditante"), una sociedad debidamente
constituida y existente de conformidad con las leyes del Estado de Delaware,
Estados Unidos de America, la suma principal de US$17,500,000.00 (diecisiete
millones quinientos mil dolares, Moneda de curso legal en los Estados Unidos de
America), como sigue:
1. Octubre 31, 1998: US$ 7,500,000.00 (la "Porcion "1""), y
2. Diciembre 31, 1998: US$10,000,000.00 (la "Porcion "2"").
La Acreditada, asimismo, promete incondicionalmente pagar al Acreditante
intereses sobre el saldo insoluto del presente Pagare a razon de una tasa fija
anual igual al 13% (trece por ciento) por ano, calculado a razon de los dias
efectivamente transcurridos en un ano de 360 dias, en el entendido de que dicha
tasa se incrementara en la medida necesaria para asegurar que el Acreditante
reciba intereses a una tasa anual igual al 13% (trece por ciento), libres de
todo impuesto o retencion. Los intereses generados sobre la Porcion "1" seran
pagados el 30 de octubre de 1998, y los intereses generados sobre la Porcion "2"
seran pagados el 31 de diciembre de 1998.
En caso de que cualquier cantidad adeudada al Acreditante conforme al presente
Pagare no sea pagada a su vencimiento, causara intereses moratorios durante el
periodo desde e incluyendo el dia inmediatamente posterior a la fecha en que era
debida al e incluyendo el dia de pago, a una tasa fija por ano, calculada a
razon de los dias efectivamente
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elapsed on the basis of a year of 360 days, equal to 18% (eighteen percent).
All payments of principal and interests to be made to the Lender by the Borrower
hereunder, shall be made in immediately available funds at no later than 12:00
a.m., New York time, on the day in question to the account designated in writing
by the Lender, in lawful currency of the United States of America, free, clear
of and without any deduction for any and all tax, levy, impost, duty, charge and
withholding or any other liability with respect thereto. If at any time, any
tax, levy, impost, withholding, deduction, charge or any tax liability together
with interests, penalties, fines or charges thereon (the "Taxes") shall be
payable in the United Mexican States or any taxing authority therein, on or with
respect hereto or to any payment hereunder, the Borrower agrees to pay to the
appropriate tax authority, on behalf of the Lender, the amount of any such
Taxes, and shall pay to the Lender such additional amounts as may be necessary
to ensure that the Lender receives the full amount which the Lender would have
received had no such payment of Taxes been made.
The Borrower hereby waives any diligence, presentment, demand, protest or notice
of any kind whatsoever. The non-exercise by the holder of his rights hereunder
in any particular instance shall not constitute a waiver thereof in that or any
subsequent instance.
This Promissory Note shall be governed by and construed in accordance with the
law of the United Mexican States. For the
transcurridos en un ano de 360 dias, igual a un 18% (dieciocho por ciento).
Todos los pagos de principal e intereses a ser realizados al Acreditante por la
Acreditada conforme al presente Pagare, deberan ser hechos en fondos
inmediatamente disponibles a mas tardar a las 12:00 a.m., tiempo de Nueva York
el dia en cuestion a la cuenta que el Acreditante designe por escrito, en moneda
de curso legal en los Estados Unidos de America, libres, exentos y sin deduccion
por concepto o a cuenta de cualquier impuesto, tributo, retencion, deduccion,
carga o cualquier otra responsabilidad fiscal. Si en cualquier momento los
Estados Unidos Mexicanos, a traves de cualquier autoridad fiscal impone, carga o
cobra cualquier impuesto, tributo, retencion, deduccion u otra responsabilidad
fiscal junto con intereses, sanciones, multas o cargos derivados de los mismos
(los "Impuestos") sobre o respecto a este Pagare o a cualquier pago respecto al
mismo, la Acreditada pagara oportunamente a la autoridad fiscal correspondiente,
por cuenta del Acreditante, el monto de cualquiera de dichos Impuestos y pagara
al Acreditante las cantidades adicionales que se requieran para asegurar que el
Acreditante reciba la cantidad integra que hubiese recibido si el pago de dichos
Impuestos no hubiere sido hecho.
La Acreditada renuncia a cualquier diligencia, presentacion, solicitud, protesto
o aviso de cualquier clase. La omision por parte del tenedor de ejercitar
cualquiera de sus derechos segun el presente en cualquier instancia en
particular no constituira una renuncia a los mismos en esa instancia o en
cualquier instancia posterior.
Este Pagare se regira e interpretara de conformidad con las leyes de los Estados
Unidos Mexicanos. Para la interpretacion,
2
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construction, fulfillment and enforcement of this Promissory Note, the Borrower
hereby expressly submits itself to the jurisdiction of the competent courts of
the city of Mexico, Federal District, and the Borrower hereby expressly waives
to any other jurisdiction to which it might be entitled by reason of its present
or future domicile or by any other reason whatsoever.
This Promissory Note (Pagare) is executed in both the English and Spanish
languages, both versions of which shall bind the Borrower, provided, however,
that in the event of any inconsistency between the English version and the
Spanish version, or in the case of any doubt as to the proper interpretation or
construction of this Promissory Note (Pagare); the Spanish version shall be
controlling in all instances.
In testimony whereof this Promissory Note is executed in Mexico City, on this
day 25_ of the month of September, 1998.
The Borrower / La Acreditada:
Pegaso Comunicaciones y Servicios, S.A. de C.V.
/s/ Alejandro Diez Barroso Salido
- -------------------------------------
By/Por: Alejandro Diez Barroso Salido
ejecucion o cumplimiento del presente Pagare, la Acreditada se somete
expresamente a la jurisdiccion de los tribunales competentes de la ciudad de
Mexico, Distrito Federal, renunciado expresamente a cualquier otra jurisdiccion
que le pudiere corresponder por razon de su domicilio presente o futuro o por
cualquier otra causa.
Este Pagare se firma en ingles y espanol y ambas versiones obligan a la
Acreditada, en el entendido, sin embargo, de que en el caso de cualquier
inconsistencia entre la version en ingles y la version en espanol, o en el caso
de cualquier duda acerca de la interpretacion, correcta de este Pagare, la
version en espanol sera la que prevalezca en todos los casos.
En testimonio de lo cual este Pagare se suscribe en la ciudad de Mexico, este
dia 25 del mes de septiembre de 1998.
Guaranteed "por aval" / por aval
Alejandro Burillo Azcarraga
/s/ Alejandro Burillo Azcarraga
- -------------------------------------
3
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EXHIBIT 10.19
PLEDGE AGREEMENT ENTERED INTO BY AND AMONG MESSRS. ALEJANDRO BURILLO AZCARRAGA,
RAUL QUINTANA FERNANDEZ, MARCO CHAVEZ MAYER AND ALEJANDRO DIEZ BARROSO SALIDO
(HEREINAFTER COLLECTIVELY REFERRED HERETO AS THE "GUARANTORS"), IMPULSOS
CORPORATIVOS, S.A. DE C.V. ("IMPULSOS"), REPRESENTED BY MR. RAUL QUINTANA
FERNANDEZ AND PEGASO COMUNICACIONES Y SERVICIOS, S.A. DE C.V. (THE "BORROWER"),
REPRESENTED BY MR. ALEJANDRO DIEZ BARROSO SALIDO (IMPULSOS AND THE BORROWER
COLLECTIVELY REFERRED HERETO AS THE "ISSUERS") AND LEAP WIRELESS INTERNATIONAL,
INC., REPRESENTED BY MR. ____________________ (HEREINAFTER REFERRED HERETO AS
THE "LENDER"), PURSUANT TO THE FOLLOWING RECITALS, REPRESENTATIONS AND CLAUSES.
R E C I T A L
SOLE. WHEREAS, Pegaso Comunicaciones y Servicios, S.A. de C.V. (the
"Borrower"), as borrower, and the Lender, as lender, executed a Loan
Agreement on September 28, 1998 (the "Loan Agreement"), pursuant to
which the Lender, subject to the terms and conditions stated therein,
granted to the Borrower a loan up to the amount of U.S.$17,500,000
dollar (SEVENTEEN MILLION FIVE HUNDRED THOUSAND DOLLARS 00/100 CURRENCY
OF THE UNITED STATES OF AMERICA).
R E P R E S E N T A T I O N S
I. Mr. Alejandro Burillo Azcarraga represents and warrants to Lender as follows:
a) He is a Mexican individual, fully authorized to enter into this
agreement and to assume the obligations implied hereunder.
b) He is married under the estate regime of separation of marital
property, and he does not need his wife's consent to execute this
agreement and to assume the obligations herein contained.
c) He is the owner of record of (i) 48 Series "A", common, registered
shares, with a par value of $1,000.00 Mex.Cy. each, issued by the
Borrower, and (ii) 1,335 Series "B", common, registered shares, with a
par value of $1,000.00 Mex.Cy. each, issued by the Borrower
(collectively referred hereto as the "Shares "1""),
1
<PAGE> 2
represented by the definitive share certificates Nos. 1 and 3, that
represent 99.85% (ninety nine point eighty five percent) of the capital
stock of said corporation, which are legally issued, totally subscribed
and paid, free and clear of any lien, encumbrance, domain limitation,
option and/or assignment whatsoever.
d) He does not require any governmental or corporate authorization,
consent or approval whatsoever to enter into this agreement and to
pledge Shares "1" in favor of the Lender.
e) He is willing to enter into this agreement in order to create a
first priority lien in favor of the Lender on Shares "1" to secure the
punctual performance of each and all of the Borrower's obligations
derived from the Loan Agreement.
II. Mr. Alejandro Diez Barroso Salido represents and warrants to Lender as
follows:
a) He is a Mexican individual, fully authorized to enter into this
agreement and to assume the obligations implied hereunder.
b) He is married under the estate regime of separation of marital
property, and he does not need his wife's consent to execute this
agreement and to assume the obligations herein contained.
c) He is the owner of record of 2 Series "A", common, registered
shares, with a par value of $1,000.00 Mex.Cy. each, issued by the
Borrower (the "Shares "2""), represented by the definitive share
certificate Nos. 2, that represent 0.15% (point fifteen percent) of the
capital stock of said corporation, which are legally issued, totally
subscribed and paid, free and clear of any lien, encumbrance, domain
limitation, option and/or assignment whatsoever.
d) He does not require any governmental or corporate authorization,
consent or approval whatsoever to enter into this agreement and to
pledge Shares "2" in favor of the Lender.
e) He is willing to enter into this agreement in order to create a
first priority lien in favor of the Lender on Shares "2" to secure the
punctual performance of each and all of the Borrower's obligations
derived from the Loan Agreement.
III. Mr. Raul Quintana Fernandez represents and warrants to
2
<PAGE> 3
Lender as follows:
a) He is a Mexican individual, fully authorized to enter into this
agreement and to assume the obligations implied hereunder.
b) He is married under the estate regime of separation of marital
property, and he does not need his wife's consent to execute this
agreement and to assume the obligations herein contained.
c) He is the owner of record of (i) 40 Series "I", common, registered
shares, with a par value of $1,000.00 Mex.Cy. each, issued by Impulsos,
and (ii) 72,400 Series "II", common, registered shares, with a par
value of $1,000.00 Mex.Cy. each, issued by Impulsos (collectively
referred hereto as the "Shares "3""), represented by the definitive
share certificates Nos. 2-I, 1-II, 2-II, 3-II, 4-II, 5-II and 6-II,
that represent 99.9% (ninety nine point nine percent) of the capital
stock of said corporation, which are legally issued, totally subscribed
and paid, free and clear of any lien, encumbrance, domain limitation,
option and/or assignment whatsoever.
d) He does not require any governmental or corporate authorization,
consent or approval whatsoever to enter into this agreement and to
pledge Shares "3" in favor of the Lender.
e) He is willing to enter into this agreement in order to create a
first priority lien in favor of the Lender on Shares "3" to secure the
punctual performance of each and all of the Borrower's obligations
derived from the Loan Agreement.
IV. Mr. Marco Chavez Mayer represents and warrants to Lender as follows:
a) He is a Mexican individual, fully authorized to enter into this
agreement and to assume the obligations implied hereunder.
b) He is married under the estate regime of separation of marital
property, and he does not need his wife's consent to execute this
agreement and to assume the obligations herein contained.
c) He is the owner of record of 60 Series "I", common, registered
shares, with a par value of $1,000.00 Mex.Cy. each, issued by Impulsos,
(the "Shares "4""), represented by the definitive share certificates
Nos. 1-I and 3-I, that represent 0.10% (point ten percent) of
3
<PAGE> 4
the capital stock of said corporation, which are legally issued,
totally subscribed and paid, free and clear of any lien, encumbrance,
domain limitation, option and/or assignment whatsoever.
d) He does not require any governmental or corporate authorization,
consent or approval whatsoever to enter into this agreement and to
pledge Shares "4" in favor of the Lender.
e) He is willing to enter into this agreement in order to create a
first priority lien in favor of the Lender on Shares "4" to secure the
punctual performance of each and all of the Borrower's obligations
derived from the Loan Agreement.
V. Impulsos represents and warrants to the Lender, through its representative,
as follows:
a) It is a corporation duly organized and existing under the laws of
the United Mexican States, fully authorized pursuant to its corporate
purpose to enter into this agreement and to assume the obligations
implied hereunder.
b) Its representative has full authority to enter into this agreement
on its behalf and to bind it in accordance with the same, and that said
faculties have not been amended, limited or revoked in any manner
whatsoever as of the date of this agreement.
c) It is the owner of record of (i) ____ Series "___", common,
registered shares, with a par value of $_____.00 Mex.Cy. issued by
Corporacion Nacional de Radiodeterminacion, S.A. de C.V. that represent
49% (forty nine percent) of the capital stock of said corporation, (ii)
____ Series "___", common, registered shares, with a par value of
$_____.00 Mex.Cy. issued by Control y Localizacion, S.A. de C.V. that
represent __% (______ percent) of the capital stock of said
corporation, and (iii) ____ Series "___", common, registered shares,
with a par value of $_____.00 Mex.Cy. issued by Rentatrail, S.A. de
C.V. that represent __% (______ percent) of the capital stock of said
corporation, (collectively referred hereto as the "Stock "1""), which
are legally issued, totally subscribed and paid, free and clear of any
lien, encumbrance, domain limitation, option and/or assignment
whatsoever.
d) Except for the shares and ownership interests described in paragraph
c) above, it does not own, directly and indirectly, any other share,
ownership interest or participation in any other company,
4
<PAGE> 5
corporation, business entity, trust, joint venture or unincorporated
association.
e) It is willing to enter into this agreement for the purposes herein
mentioned.
VI. Borrower represents and warrants to the Lender, through its representative,
as follows:
a) It is a corporation duly organized and existing under the laws of
the United Mexican States, fully authorized pursuant to its corporate
purpose to enter into this agreement and to assume the obligations
implied hereunder.
b) Its representative has full authority to enter into this agreement
on its behalf and to bind it in accordance with the same, and that said
faculties have not been amended, limited or revoked in any manner
whatsoever as of the date of this agreement.
c) It is the owner of record of 31,500 Series "A", common, registered
shares, with a par value of $1.00 Mex.Cy. issued by Pegaso
Telecomunicaciones, S.A. de C.V. that represent 31.5% (thirty one point
five percent) of the capital stock of said corporation (the "Stock
"2""), which are legally issued, totally subscribed and paid, free and
clear of any lien, encumbrance, domain limitation, option and/or
assignment whatsoever.
d) Except for the shares and ownership interests described in paragraph
c) above, it does not own, directly and indirectly, any other share,
ownership interest or participation in any other company, corporation,
business entity, trust, joint venture or unincorporated association.
e) It is willing to enter into this agreement for the purposes herein
mentioned.
VII. Lender declares, through its representative, that:
a) It is a corporation duly organized and existing under the laws of
the State of Delaware, United States of America, fully authorized
pursuant to its corporate purpose to enter into this agreement and to
assume the obligations implied hereunder.
b) Its representative has full authority to enter into this agreement.
5
<PAGE> 6
NOW THEREFORE, in consideration of the premises and the mutual covenants set
forth herein, the parties hereby agree as follows:
C L A U S E S
FIRST. Definition of Terms. Unless otherwise expressly provided herein,
capitalized terms used in this agreement and related hereunder, shall have the
following meanings:
"Additional Event of Default" shall mean any of the events set forth in clause
tenth of this agreement.
"Additional Pledge" shall mean collectively, any share, negotiable instrument,
equity interest or partnership interest or increase of the value of any
partnership interest, which any Guarantor might be entitled to receive as owner
of record of its respective Shares as a consequence of the payment of dividends
in shares, in kind, increase in the capital stock or nominal capital,
assignment, distributions in case of liquidation or spin-off, re-capitalization
or re-classification or other amendments in the capital structure of the Issuers
by reason of merger, spin-off, consolidation, sale of assets, exchange of shares
or by any other reason whatsoever, jointly with the certificates or titles
covering such securities or partnership interest or a part thereof.
"Borrower" shall mean Pegaso Comunicaciones y Servicios, S.A. de C.V.
"Credit Agreement" shall mean the credit agreement executed on September 25,
1998, between Qualcom, Inc and Pegaso Comunicaciones y Sistemas, S.A. de C.V.
"Dollars" and "U.S.$" shall mean the lawful currency in the United States of
America.
"Event of Default" shall mean any of the events of default set forth in Section
7 of the Loan Agreement.
"Guarantors" shall mean collectively Messrs. Alejandro Burillo Azcarraga,
Alejandro Diez Barroso Salido, Raul Quintana Fernandez and Marco Chavez Mayer.
"Impulsos" shall mean Impulsos Corporativos, S.A. de C.V.
"Issuers" shall mean collectively Impulsos and the Borrower.
"Law" shall mean the General Law of Negotiable Instruments and Credit
Transactions.
6
<PAGE> 7
"Lender" shall mean Leap Wireless International, Inc., its successors and
assignees.
"Loan Agreement" shall mean the agreement described in the Recital hereof.
"Loan Documents" shall mean the Loan Agreement, this pledge agreement, the
Promissory Note and any document or agreement between the Borrower and the
Lender executed pursuant to or related with the loan granted pursuant to the
Loan Agreement, any document specified in, required by or executed pursuant to
the terms of the Loan Agreement and any amendment, extension or supplement of
the Loan Agreement or any document referred to herein.
"Obligations" shall mean (i) each and all of the Borrower's obligations derived
from (a) the Loan Agreement, (b) the Promissory Note and this agreement and (c)
any other obligation derived from the Loan Documents; specially, the payment of
the principal portion of the loan, its ordinary and default interests, (ii) the
Borrower's obligations for the payment of any and all costs or expenses incurred
by the Lender in connection with the negotiation and preparation of the Loan
Agreement and any other Loan Document, (iii) the Borrower's obligations for the
payment of any and all costs and expenses arisen in connection with the lawsuit
brought to obtain the judicial or extra-judicial collection of the obligations
derived from the Loan Agreement, the Promissory Note and/or any other Loan
Document.
"Promissory Note" shall mean the promissory note subscribed by the Borrower in
favor of the Lender and guaranteed "por aval" by Mr. Alejandro Burillo
Azcarraga, to evidence the advance made by the Lender pursuant to the terms of
the Loan Agreement.
"Shares" shall mean collectively Shares "1", Shares "2", Shares "3" and Shares
"4".
"Shares "1"" shall mean the shares described in Representation I.c) hereof owned
by Mr. Alejandro Burillo Azcarraga, which represent 99.85% (ninety nine point
eighty five percent) of the capital stock of the Borrower.
"Shares "2"" shall mean the shares described in Representation II.c) hereof
owned by Mr. Alejandro Diez Barroso Salido, which represent 0.15% (point fifteen
percent) of the capital stock of the Borrower.
"Shares "3"" shall mean the shares described in Representation III.c) hereof
owned by Mr. Raul Quintana Fernandez, which represent 99.9% (ninety nine point
nine percent) of the capital stock of Impulsos.
7
<PAGE> 8
"Shares "4"" shall mean the shares described in Representation IV.c) hereof
owned by Mr. Marco Chavez Mayer, which represent 0.10% (point ten percent) of
the capital stock of Impulsos.
"Stock" shall mean collectively the Stock "1" and the Stock "2".
"Stock "1"" shall mean all the shares and ownership interests described in
Representation V.c) hereof, which are all the shares, ownership interests and
participation which Impulsos, as of this date, owns in other companies,
corporations, business entities, trusts, joint ventures or unincorporated
associations.
"Stock "2"" shall mean all the shares and ownership interests described in
Representation VI.c) hereof, which are all the shares, ownership interests and
participation which the Borrower, as of this date, owns in other companies,
corporations, business entities, trusts, joint ventures or unincorporated
associations.
SECOND. Creation of the Pledge. The Guarantors hereby create a first priority
pledge on the Shares in favor of the Lender to secure (i) the punctual
performance of each and all of the Obligations of the Borrower derived from the
Loan Agreement, from the Promissory Note, from this agreement and from any other
Loan Document and (ii) specially, the payment of the principal portion of the
Obligations, ordinary and default interests of the Obligations and any cost or
expense reasonably incurred by the Lender in connection with (x) the negotiation
and preparation of the Loan Documents (y) the collection of the Obligations or
(z) the mandatory execution of any Loan Document.
THIRD. Delivery, Endorsement and Registry. The pledge on the Shares referred to
in Clause Second above is created in accordance with section II of article 334
and other applicable provisions of the Law, through (i) the endorsement in
guaranty in favor of the Lender of the representative certificates of the
Shares, (ii) the delivery to the Lender of the representative certificates of
the Shares duly endorsed in guaranty to the satisfaction of the Lender and (iii)
the registration of the pledge in the stock registry book of the Issuers.
The Guarantors shall irrevocably instruct the Issuers to deliver the Lender the
Additional Pledge to which any of the Guarantors might be eventually entitled,
in order for it to be part of the pledge created pursuant to this agreement, and
8
<PAGE> 9
the Issuers agree to deliver such Additional Pledge to the Lender as soon as
practicable, but in any event within the 5 (five) calendar days following to the
issuance of such Additional Pledge.
FOURTH. Voting Rights. Provided that an Event of Default or an Additional Event
of Default has not occurred, the Guarantors shall exercise all voting rights to
which they are entitled derived from the Shares or the Additional Pledge which
might be part of the pledge created pursuant to this agreement, whichever is the
case, in the understanding that the exercise of such voting rights by the
Guarantors will not be inconsistent with the provisions of this agreement, of
the Loan Agreement or of any other Loan Document. Likewise, the Lender shall
issue any necessary certificate or document in order to enable the Guarantors to
exercise said voting rights.
As of the date on which an Event of Default or an Additional Event of Default
has occurred and during all the time that such Event of Default is continuing,
the Lender shall have the exclusive right to exercise each and all of the voting
rights conferred by the Shares and by the Additional Pledge which might be part
of the pledge created pursuant to this agreement.
FIFTH. Dividends and Profits. The Lender shall have the right to receive and
withhold, subject to this pledge, any dividend in cash, or any sharing of
profits, or any distribution in cash, or any payment in cash made by any of the
Issuers as a consequence of the rights conferred by the Shares or the Additional
Pledge which might be part of the pledge created pursuant to this agreement. In
case that any of the Guarantors receives any such dividends, profits,
distributions or payments, such Guarantor must immediately deliver them to the
Lender in order for them to be subject to this pledge. In such case, and
provided that the delivery is carried out, the Guarantors must keep the
dividends they receive in deposit.
In addition, as provided by article 343 of the Law, if all or part of the Shares
or the Additional Pledge which might be part of the pledge created pursuant to
this agreement are redeemed, the Lender shall be entitled to receive in guaranty
the amounts and/or the profit certificates received by it by means of such
redemption in substitution of the Shares or, if such is the case, of the
Additional Pledge to be redeemed.
SIXTH. Term. The pledge created pursuant to this agreement shall remain in force
and shall be in effect until
9
<PAGE> 10
each and all of the Obligations are paid in full pursuant to the Loan Agreement,
the Promissory Note and any other Loan Document.
SEVENTH. Restitution of the Shares. Once the Obligations, the principal amount
and the ordinary and default interests accrued thereof have been paid in full,
and each and all of the obligations assumed by the Borrower pursuant to the Loan
Agreement, the Promissory Note and any other Loan Document have been timely
performed, the Lender will release (i) the Shares in favor of the Guarantors,
restoring the representative certificates of the Shares, (ii) if it is the case,
the Additional Pledge which might be part of the pledge created pursuant to this
agreement, and (iii) any dividend in cash, or any distribution in cash, or any
payment in cash withheld by the Lender and paid by any of the Issuers as a
consequence of the rights conferred by the Shares or by the Additional Pledge.
EIGHTH. Obligations of the Guarantors. Until each and all of the Obligations are
paid in full pursuant to the Loan Agreement, the Promissory Note and any other
Loan Document, or until the Lender otherwise authorizes in writing, the
Guarantors, whichever is the case, must perform or cause to be performed, the
following obligations:
(i) Simultaneously to the execution of this agreement, the Secretary of the
Board of Directors or the Sole Administrator of the Issuers must
deliver to the Lender a certificate evidencing that the pledge on the
corresponding Shares has been duly recorded in the stock registry book
of each of the Issuers.
(ii) Within the 5 (five) calendar days immediately following the date on
which, pursuant to this agreement, the Lender is entitled to receive an
Additional Pledge, the Secretary of the Board of Directors or the Sole
Administrator of the Issuers, respectively, shall deliver to the Lender
a certificate evidencing that the pledge on the shares that integrate
the Additional Pledge has been duly recorded in the stock registry book
of the corresponding Issuer.
(iii) Within the 15 (fifteen) calendar days immediately following to the date
of this agreement (i) Messrs. Raul Quintana Fernandez and Marco Chavez
Mayer shall hold an Extraordinary Shareholders Meeting in which will be
amend clause sixth of the By-laws ("Estatutos Sociales") of Impulsos in
order to allow foreign entities to hold and own shares and ownership
interests issued by Impulsos, and (ii) such individuals shall provide
Lender
10
<PAGE> 11
with a certificate copy of the corresponding deed in which is
protocolized the minutes of said Extraordinary Shareholders Meeting.
(iv) Simultaneously to the execution of this agreement, the Guarantors must
deliver to the Lender a legal opinion issued by their legal counsel
whereby, among others, it is stated that the obligations assumed by the
Guarantors pursuant to this agreement are valid and binding obligations
and that the pledge on the Shares is duly created in favor of the
Lender.
(v) The Guarantors must execute as soon as practicable, and must deliver
the necessary documents and instruments and carry out any necessary
action, or any action reasonably required by the Lender, in order to
duly create and to protect the guaranty granted pursuant to this
agreement or to permit the Lender to exercise its rights under this
agreement.
(vi) The Guarantors shall not agree on any sale or assignment and shall not
dispose or grant any option on the Shares or on the Additional Pledge
or on any corporate or ownership interest derived from the Shares, and
shall not create or permit the existence of an encumbrance, option or
any other lien in regard to the Shares or on the Additional Pledge,
except for the security interest created pursuant to this agreement.
NINTH. Negative Pledge. Until each and all of the Obligations are paid in full
pursuant to the Loan Agreement, the Promissory Note and any other Loan Document,
or until the Lender otherwise authorizes in writing, the Issuers must perform or
cause to be performed the following:
(i) The Stock shall not be redeemed, amortized or transferred in any
manner.
(ii) The Stock shall not be pledged, encumber nor any lien shall be created
on the Stock.
TENTH. Additional Events of Default. Each of the following events and
occurrences will constitute an Additional Event of Default:
(a) if any of the Guarantors and/or the Issuers fails to comply any of their
obligations set forth in clause eight of this agreement;
(b) if the Lender, pursuant to the provisions of this agreement, has the right
to an Additional Pledge and such
11
<PAGE> 12
Additional Pledge can not be created or perfected by means of the Guarantors
and/or the Issuers;
(c) if the pledge created pursuant to this agreement by any circumstance and at
any time does not constitute a first priority lien in favor of the Lender in a
percentage of the nominal capital of the Issuers equal to those described in the
Representations of this agreement; and
(d) if the Stock is redeemed, amortized or transferred in any manner or if the
Stock is pledged, encumber or any lien is created on such Stock.
ELEVENTH. Enforcement. Upon the occurrence of an Event of Default or an
Additional Event of Default, or in case of any failure in the performance of the
obligations assumed hereunder or in the event set forth in article 340 of the
Law, the Lender, pursuant to the procedure stated in article 341 of the Law, may
request the applicable judicial authorization to carry out the sale of the
Shares and the Additional Pledge which might be part of the pledge created
pursuant to this agreement.
TWELFTH. Notices. All communications to be given pursuant to this agreement
shall be sent in writing with acknowledge of receipt, and shall be delivered at
the following domiciles:
The Lender
Attn: General Counsel
6455 Lusk Blvd.
92121 San Diego, California
The Guarantors
Paseo de los Tamarindos No. 400-A Piso 32
Col. Bosques de las Lomas
05120 Mexico, D.F.
The Issuers
Paseo de los Tamarindos No. 400-A Piso 32
Col. Bosques de las Lomas
05120 Mexico, D.F.
THIRTEENTH. Applicable Law and Jurisdiction. This agreement shall be governed
and construed in accordance with the laws of the United Mexican States. For its
construction, fulfillment and enforcement, the parties hereby expressly and
irrevocably submit themselves to the jurisdiction of the courts of the Federal
District of Mexico, waiving to any other jurisdiction to which they might be
entitled by reason
12
<PAGE> 13
of their present or future domiciles or by any other reason whatsoever.
FOURTEENTH. Language. This agreement is executed in both English and Spanish
languages and both versions shall bind upon the parties, in the understanding
that in case of any doubt on the construction of the documents or any
inconsistency between both versions, the Spanish version shall prevail in all
instances.
IN WITNESS WHEREOF, this agreement is executed in the City of Mexico, Federal
District, on the 28 day of the month of September, 1998.
/s/ Alejandro Burillo Azcarraga /s/ Raul Quintana Fernandez
- ---------------------------------- ------------------------------------
Alejandro Burillo Azcarraga Raul Quintana Fernandez
/s/ Marco Chavez Mayer /s/ Alejandro Diez Barroso Salido
- ---------------------------------- ------------------------------------
Marco Chavez Mayer Alejandro Diez Barroso Salido
/s/ Raul Qintana Fernandez /s/ Alejandro Diez Barroso Salido
- ---------------------------------- ------------------------------------
Impulsos Corporativos, S.A. Pegaso Comunicaciones y Ser-
de C.V. vicios, S.A. de C.V.
By: Raul Qintana Fernandez By: Alejandro Diez Barroso
Salido
/s/ Tom Willardson
---------------------------------
Leap Wireless International, Inc.
By: Tom Willardson
13
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-63823) of Leap Wireless International, Inc. of
our report dated November 19, 1998 appearing on page F-2 of this Annual Report
on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LEAP
WIRELESS INTERNATIONAL, INC. AUGUST 31, 1998 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED
IN ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 173,860
<CURRENT-LIABILITIES> 14,789
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (2,352)
<TOTAL-LIABILITY-AND-EQUITY> 173,860
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (34,625)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,625)
<EPS-PRIMARY> (1.96)
<EPS-DILUTED> (1.96)
</TABLE>
