<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K/A
(AMENDMENT NO. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________________ TO________________.
COMMISSION FILE NUMBER 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(Address of Principal Executive Offices) (Zip Code)
(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 [X] NO [_]
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 was filed not later than 120 days after
the registrant's fiscal year ended August 31, 1998.
<PAGE> 2
This Amendment No. 2 to the registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1998 is being filed to amend Item 14(a) to add the
audited financial statements of Orrengrove Investments Ltd. and Pegaso
Telecomunicaciones, S.A. de C.V. in accordance with Rule 3-09 of Regulation S-X.
In addition, a discussion of subsequent events is being added to Note 10 of the
Company's combined financial statements and to Note 14 of the Chilesat Telefonia
Personal S.A. financial statements.
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
------- -----------
<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
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
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(4) Loan Agreement, dated as of September 28, 1998, between
Pegaso Comunicaciones y Servicios, S.A. de C.V. and the
Registrant
10.18(4) Promissory Note, executed September 25, 1998, by Pegaso
Comunicaciones y Servicios, S.A. de C.V. in favor of the
Registrant
10.19(4) 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(5) Consent of Independent Accountants relating to report dated
November 19, 1998 (Leap Wireless International, Inc.)
23.2(5) Consent of Independent Accountants relating to report dated
February 25, 1999 except as to Note 14 b) which is as of
March 16, 1999 (Chilesat Telefonia Personal S.A.)
23.3 (5) Consent of Independent Accountants relating to report
dated April 30, 1999 (Orrengrove Investments Ltd.)
23.4 (5) Consent of Independent Accountants relating to report
dated February 15, 1999 (Pegaso Telecomunicaciones, S.A. de
C.V.)
27.1(4) 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.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1998.
(5) Filed with this Amendment No. 2.
(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 the execution of a definitive Rights Agreement, dated as of
September 14, 1998, between the Company and Harris Trust Company of California.
3
<PAGE> 4
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 17th day of
June, 1999.
Leap Wireless International, Inc.
By: /s/ Thomas D. Willardson
------------------------------------
Thomas D. Willardson
Senior Vice President and Treasurer
4
<PAGE> 5
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)
Combined Financial Statements:
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
CHILESAT TELEFONIA PERSONAL S.A. (COMPANY IN THE DEVELOPMENT STAGE)
Financial Statements:
Report of Independent Accountants........................................................................ F-22
Balance Sheet at December 31, 1998 and 1997.............................................................. F-23
Statement of Income and Comprehensive Income for the year ended December 31, 1998 F-24
and for the period from inception (March 3, 1997) to December 31, 1997 and 1998.......................
Statement of Cash Flows for the year ended December 31, 1998 and for the period from F-25
Inception (March 3, 1997) to December 31, 1997 and 1998...............................................
Statement of Shareholders' Equity for the period from inception (March 3, 1997) to F-27
December 31, 1998.....................................................................................
Notes to the Financial Statements........................................................................ F-28
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (COMPANY IN THE DEVELOPMENT STAGE)
Consolidated Financial Statements:
Report of Independent Accountants........................................................................ F-43
Consolidated Balance Sheet at December 31, 1998.......................................................... F-44
Consolidated Statement of Operations for the period from July 27, 1998 (inception) to
December 31, 1998..................................................................................... F-45
Consolidated Statement of Cash Flows for the period from July 27, 1998 (inception) to
December 31, 1998..................................................................................... F-46
Consolidated Statement of Stockholders' Deficit for the period from July 27, 1998
(inception) to December 31, 1998...................................................................... F-47
Notes to Consolidated Financial Statements............................................................... F-48
PEGASO TELECOMUNICACIONES, S.A. DE C.V. (COMPANY IN THE DEVELOPMENT STAGE)
Consolidated Financial Statements:
Report of Independent Accountants........................................................................ F-59
Consolidated Balance Sheet at December 31, 1998.......................................................... F-60
Consolidated Statement of Income for the period from June 24, 1998 (date of incorporation) to
December 31, 1998..................................................................................... F-61
Consolidated Statement of Cash Flows for the period from June 24, 1998 (date of incorporation) to
December 31, 1998..................................................................................... F-62
Statement of Stockholders' Equity for the period from June 24, 1998 (date of incorporation) to
December 31, 1998..................................................................................... F-63
Notes to Consolidated Financial Statements............................................................... F-64
</TABLE>
F-1
<PAGE> 6
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> 7
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> 8
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
AUGUST 31, FROM 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> 9
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD
AUGUST 31, FROM 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> 10
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> 11
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
F-7
<PAGE> 12
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 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.
F-8
<PAGE> 13
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.
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.
F-9
<PAGE> 14
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 slowly 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. 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
F-10
<PAGE> 15
rates, and are subject to other currency, economic and political risks, which
could impact their results of operations 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.
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.
F-11
<PAGE> 16
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.
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.
F-12
<PAGE> 17
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 2001.
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.
F-13
<PAGE> 18
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>
<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
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
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>
F-14
<PAGE> 19
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.
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
F-15
<PAGE> 20
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 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
F-16
<PAGE> 21
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. 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.
F-17
<PAGE> 22
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.
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.
F-18
<PAGE> 23
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. 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.
F-19
<PAGE> 24
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.
Note 10. Subsequent Events (unaudited)
Chase Telecommunications, Inc.
In December 1998, the Company agreed to purchase substantially all the
assets of Chase for $6.3 million, plus a warrant to purchase 1% of the common
stock in a wholly-owned subsidiary of the Company for $1.0 million, transfer of
the Company's stock ownership and warrants to purchase stock in Chase and
certain contingent earn-outs. This acquisition involves the transfer of
licenses which are subject to approval by the FCC, therefore the final closing
of the transaction will not occur unless approval by the FCC is obtained.
Chilesat Telefonia Personal, S.A.
On April 19, 1999, a wholly-owned subsidiary of the Company acquired all
of the shares of Chilesat PCS that it did not already own from Telex-Chile.
Prior to the acquisition, the Company's wholly-owned subsidiary, Inversiones
Leap Wireless Chile S.A., formerly named Inversiones QUALCOMM Chile, S.A.
("Leap Chile") owned 50% of the shares of Chilesat PCS. The remaining 50% of the
shares of Chilesat PCS were owned by Telex-Chile.
F-20
<PAGE> 25
Leap Chile acquired the shares from Telex-Chile for (1) a cash payment of
$28 million, and (2) the issuance of a $22 million, non-interest bearing note
payable to Telex-Chile on April 19, 2002.
The Company obtained $28 million for the cash payment to Telex-Chile
through a loan under the Company's $265 million revolving credit agreement with
QUALCOMM.
The Company intends that Chilesat PCS continue to operate its wireless
telephone system in Chile and work to expand its network capacity and increase
its business.
Orrengrove Investments Ltd.
On April 5, 1999, the Transworld Companies, partially owned subsidiaries
of Orrengrove, were notified by Mercury, provider of the satellite signal
transmission capacity, that there was an operational failure of all
transponders on the Loutch II satellite. Mercury's prognosis indicates that the
transponders' operational status will not be restored. Although Mercury has
guaranteed the satellite signal transmission capacity, the outcome at this time
remains uncertain. The Transworld Companies have already identified and put
into operation a short-term terrestrial transmission solution by leasing fiber
capacity from a third party. Long-term alternative transmission sources are
being explored, including the use of expanded terrestrial fiber capacity and/or
satellite signal transmission capacity. Orrengrove would experience a material
adverse effect on its financial position, results of operations, and cash flows
if the satellite signal transmission capacity is not replaced by Mercury and if
the Transworld Companies are not able to implement a long-term alternative
transmission source. Should a long term terrestrial transmission source be
employed, certain satellite related assets may be impaired.
F-21
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Chilesat Telefonia Personal S.A.
(Company in the development stage)
In our opinion, the accompanying balance sheets and the related statements of
income and comprehensive income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Chilesat Telefonia Personal S.A. (Company in the development stage) at December
31, 1998 and 1997, and the results of its operations and cash flows for year
ended December 31, 1998 and for the period from inception (March 3, 1997) to
December 31, 1997, in conformity with generally accepted accounting principles
of the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards of the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
At December 31, 1998, the Company had negative working capital of US$ 49.7
million. At that date, US$ 36.6 million of the current liabilities relate to
debt payable to related parties who have the option to convert such debt into
shares should Chilesat Telefonia Personal S.A. be unable to meet its
obligations. As a result of its negative working capital, the Company has not
complied with certain financial conditions of the credit agreement described in
Note 8.
PRICE WATERHOUSE
Santiago, Chile,
February 25, 1999 except as to Note 14 b) which is as of March 16, 1999
F-22
<PAGE> 27
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
BALANCE SHEET
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
As of December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 942 $ 24,875
Accounts receivable - trade 1,017 --
Accounts receivable from related
company -- 10
Other accounts receivable 134 133
Recoverable taxes 6,480 6,228
Inventories 4,419 --
Other current assets 779 695
--------- ---------
Total current assets 13,771 31,941
PROPERTY, PLANT AND EQUIPMENT, NET 124,800 40,093
OTHER ASSETS 712 4
--------- ---------
Total assets $ 139,283 $ 72,038
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Interest payable to related companies $ 6,957 $ 543
Accounts payable 1,804 380
Accounts and notes payable to related companies 52,572 247
Accrued liabilities and withholdings 2,160 960
--------- ---------
Total current liabilities 63,493 2,130
--------- ---------
LONG - TERM LIABILITIES
Note payable to related company 49,807 23,655
Other long-term liabilities 8,496 4,579
--------- ---------
Total long-term liabilities 58,303 28,234
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred stock (8,400,000 shares authorized,
issued and outstanding, with no par value;
liquidation preference up to stated value) 42,000 42,000
Common stock (8,400,000 shares authorized,
issued and outstanding, with no par value) 1,964 1,964
Other capital contributions 493 --
(Deficit) surplus accumulated during the development stage (21,943) 55
Accumulated other comprehensive losses (5,027) (2,345)
--------- ---------
Total shareholders' equity 17,487 41,674
--------- ---------
Total liabilities and shareholders' equity $ 139,283 $ 72,038
========= =========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-23
<PAGE> 28
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
For the period For the period
from inception from inception
For the year ended (March 3, 1997) (March 3, 1997)
December 31, to December 31, to December 31,
1998 1997 1998
------------------ --------------- ----------------
<S> <C> <C> <C>
OPERATING RESULTS
Sales $ 1,284 $ -- $ 1,284
Cost of sales (1,570) -- (1,570)
-------- -------- --------
Gross margin (286) -- (286)
-------- -------- --------
Remunerations and other staff costs (3,916) -- (3,916)
Sales commissions (882) -- (882)
Marketing expenses (3,619) -- (3,619)
General and administrative expenses (2,736) (659) (3,395)
Depreciation and amortization (3,743) (4) (3,747)
-------- -------- --------
Net operating loss (15,182) (663) (15,845)
-------- -------- --------
NON-OPERATING RESULTS
Interest income 1,058 2,022 3,080
Interest expense (3,295) -- (3,295)
Currency exchange losses (4,186) (1,280) (5,466)
Other expenses (393) (24) (417)
-------- -------- --------
Non-operating (loss) income (6,816) 718 (6,098)
-------- -------- --------
Net (loss) income (21,998) 55 (21,943)
OTHER COMPREHENSIVE INCOME
Currency translation adjustment (2,682) (2,345) (5,027)
-------- -------- --------
Comprehensive loss $(24,680) $ (2,290) $(26,970)
======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-24
<PAGE> 29
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF CASH FLOWS
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
For the period For the period
For the from inception from inception
year ended (March 3, 1997) (March 3, 1997)
December 31, to December 31, to December 31,
1998 1997 1998
------------ --------------- ---------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income $(21,998) $ 55 $(21,943)
Adjustments to reconcile to net cash used in
operating activities:
Depreciation and amortization 3,743 4 3,747
Use of the network and signal distribution services 493 -- 493
Changes in working capital:
Accounts receivable - trade (1,017) -- (1,017)
Accounts receivable from related companies 10 (10) --
Other accounts receivable (1) (133) (134)
Recoverable taxes (252) (6,171) (6,423)
Other current assets (118) (695) (813)
Accounts payable 1,424 380 1,804
Accrued interest and accounts payable to
related companies 7,168 511 7,679
Accrued liabilities and withholdings 1,200 957 2,157
-------- -------- --------
Cash flow used in operating activities (9,348) (5,102) (14,450)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisitions of property, plant and equipment (37,766) (14,383) (52,149)
Other (708) (4) (712)
-------- -------- --------
Cash flow used in investing activities (38,474) (14,387) (52,861)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable to related companies 20,271 -- 20,271
Capital increase -- 42,000 42,000
Other long-term liabilities 3,917 4,579 8,496
-------- -------- --------
Cash flow provided by financing activities 24,188 46,579 70,767
-------- -------- --------
Net (decrease) increase in cash (23,634) 27,090 3,456
Effect of exchange rate changes on cash (299) (2,215) (2,514)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (23,933) 24,875 942
Cash and cash equivalents at the beginning of the period 24,875 -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
THE END OF THE PERIOD $ 942 $ 24,875 $ 942
======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-25
<PAGE> 30
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF CASH FLOWS
Expressed in thousands of US Dollars
<TABLE>
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 695 923 1,618
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES
</TABLE>
The following non-cash transactions occurred during the periods presented:
<TABLE>
<CAPTION>
For the period from
For the year ended inception (March 3, 1997)
December 31, to December 31,
1998 1997
------------------ ------------------------
<S> <C> <C>
Long--term financing received from related company
to purchase fixed assets and inventories $ 14,745 $ 23,655
Short--term financing received from related company
to purchase fixed assets and inventories 42,707 --
Purchase of fixed assets from party providing financing (53,067) (23,655)
Purchase of inventories from party providing financing (4,385) --
$ -- $ --
======== ========
</TABLE>
As indicated in Note 1, Chilesat S.A. contributed non-cash assets and
liabilities to the joint venture on March 3, 1997. The net assets contributed at
that date are summarized as follows:
<TABLE>
<S> <C>
Current assets $ 57
Property, plant and equipment 2,189
Current liabilities (282)
-------
Net assets contributed $ 1,964
=======
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-26
<PAGE> 31
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF SHAREHOLDERS' EQUITY
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
(Deficit)
surplus
accumulated Accumulated
Number of Number of Other during the other
preferred common Preferred Common capital development comprehensive
shares shares stock stock contributions stage losses Total
--------- --------- --------- --------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital increase at inception on
March 3, 1997 8,400,000 8,400,000 $ 42,000 $ 1,964 -- -- -- $ 43,964
Share subscriptions receivable -- -- (42,000) -- -- -- -- (42,000)
Payment of share subscriptions
receivable -- -- 42,000 -- -- -- -- 42,000
Net income for the period -- -- -- -- -- $ 55 -- 55
Currency translation adjustment -- -- -- -- -- -- $ (2,345) (2,345)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 8,400,000 8,400,000 $ 42,000 $ 1,964 -- $ 55 $ (2,345) $ 41,674
========= ========= ========= ========= ========= ========= ========= =========
Balance at January 1, 1998 8,400,000 8,400,000 $ 42,000 $ 1,964 -- $ 55 $ (2,345) $ 41,674
Other contributed capital -- -- -- -- $ 493 -- -- 493
Net loss for the period -- -- -- -- -- (21,998) -- (21,998)
Currency translation adjustment -- -- -- -- -- -- (2,682) (2,682)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 8,400,000 8,400,000 $ 42,000 $ 1,964 $ 493 $ (21,943) $ (5,027) $ 17,487
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-27
<PAGE> 32
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. THE COMPANY
Chilesat Telefonia Personal S.A. (the "Company") is a joint venture created on
March 3, 1997 by Telex-Chile S.A. and its subsidiary Chilesat S.A. (together
"Chilesat") and Inversiones Leap Wireless Chile S.A. ("Inversiones", formerly
Inversiones Qualcomm S.A.) for the purpose of building and operating a mobile
PCS telephone system (personal communication system) in Chile. Inversiones is a
wholly-owned subsidiary of Leap Wireless International, Inc.
Pursuant to the terms of the Subscription and Shareholders' Agreement
("Shareholders' Agreement"), Chilesat and Inversiones hold all of the
outstanding common and preferred shares of the Company, respectively. Each
partner has a 50% ownership in the joint venture. Each partner has the right to
elect two representatives to the Board of Directors and a fifth independent
director is elected by a vote of at least 75% of the shareholders. Approval of
4/5 of the directors is required for a number of significant operating and
management decisions. The common directors are entitled to nominate the general
manager, and the preferred directors are entitled to nominate the CFO. However,
approval of the nominations requires approval by 4/5 of the directors.
During 1998, an amendment was made to the Shareholders' Agreement and Qualcomm
Incorporated transferred and assigned its interest in Inversiones to Leap
Wireless International, Inc. All terms and conditions of the shareholders
agreement are now binding on Leap Wireless International Inc.
Because Chilesat's contributions to the joint venture were non-cash assets and
liabilities whose fair values were not readily determinable, the non-cash assets
and liabilities contributed were recorded at their predecessor basis.
As one of the non-cash assets contributed, Chilesat provided a contract
entitling the Company to the right to use a part of Chilesat's network for a
period of 11.5 years and the right to receive signal distribution services for
the same period. The contract is for the Company's sole and exclusive use of
signal transmissions. Chilesat is responsible for meeting the Company's
transmission requirements as well as the supervision, control, maintenance and
repair of the network. Chilesat also contributed the already existing entity
Chilesat Telefonia Personal S.A., among whose assets was the PCS license to
operate in Chile.
The Company is the holder of one of three national licenses to provide PCS
services in Chile. These services were required to be ready for operations under
the conditions of the license by June 23, 1998 in the case of the geographical
area covered by Chile's Fourth to Tenth regions and by December 23, 1998 for the
remainder of the country. The Company completed construction of its mobile PCS
telephone system infrastructure by the required dates. The Company entered into
a System Equipment Purchase Agreement with Qualcomm Incorporated whereby
Qualcomm Incorporated will provide manufacturing, engineering, equipping,
integrating, installing, testing and technical assistance for the mobile PCS
telephone system.
Under the terms of the Shareholders' Agreement, the Company will purchase from
Qualcomm Incorporated all network hardware and software marketed by Qualcomm
Incorporated and at least
F-28
<PAGE> 33
50% of all mobile and fixed handsets purchased by the Company for a period
expiring in September 2000. Similarly, until the later of five years following
the formation of the joint venture or the date on which Inversiones ceases to
hold preferred shares representing more than 24% of the capital stock of the
Company, the Shareholders agree to cause the Company to use only IS95 CDMA
technology.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) General
Chilesat Telefonia Personal S.A. is a development stage company as defined in
accordance with Statement of Financial Accounting Standards No. 7 due to the
fact that the Company has not yet generated significant revenues from commercial
operations. As indicated in Note 1, the Company has completed the construction
of its mobile PCS telephone system infrastructure and testing of the
installations between Chile's Fourth and Tenth regions with friendly users
commenced in July, 1998. The mobile PCS telephone system began operations in
September, 1998. The infrastructure necessary to cover the remainder of Chile
was operational in December 1998.
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("US GAAP"). The preparation
of financial statements in accordance with US GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
b) Period of financial statements
The financial statements for the Company are presented for the year ended
December 31, 1998 with comparative amounts for the period from the date of
formation of the joint venture on March 3, 1997 through December 31, 1997.
c) Translation of the Chilean peso financial statements
The financial statements give effect to the translation of the Chilean peso
financial statements of the Company (not submitted herewith) to United States
dollars. All asset and liability accounts have been translated (after
eliminating the effects of accounting for inflation in Chile) at the Observed
Exchange Rates determined by the Central Bank of Chile at December 31, 1998 and
1997 of Ch$ 472.41 and Ch$ 439.18 per US$ 1, respectively. Capital stock has
been translated at historic Observed Exchange Rates. Income and expense accounts
have been translated at average monthly Observed Exchange Rates. The net effects
of translation are recorded in the cumulative translation adjustment account as
a component of Accumulated other comprehensive losses in the Company's
equity.
d) Monetary assets and liabilities in other currencies
Monetary assets and liabilities denominated in foreign currency have been
translated at year-end exchange rates. The effects of such translation have been
recorded as exchange gains or losses in the statement of income. Certain assets
and liabilities are denominated in UFs (Unidades de Fomento). The UF is a
Chilean inflation-indexed, peso-denominated monetary unit which is set daily in
advance based on changes in the Consumer Price Index. The adjustment to the
closing value of UF-denominated assets and liabilities have also been recorded
as part of Currency exchange losses in the statement of income.
F-29
<PAGE> 34
e) Revenue recognition
Revenue has been accrued at year end for the portion of fixed charge services
earned to date. The Company also recognizes revenues for traffic in excess of
the amounts attributable to the fixed charge contracts in the month such
revenues are billed. The effects of the unbilled revenues at period end not
recognized are not significant.
f) Uncollectable accounts
The Company records an allowance for uncollectable accounts receivable with
respect to those amounts estimated not to be recoverable.
g) Inventory
Inventory is comprised of handsets and accessories not yet placed into service
which are stated at the lower of historical cost, determined under a first-in,
first-out unit flow assumption, or market.
h) Property, plant and equipment
Property, plant and equipment are recorded at acquisition cost plus capitalized
interest and direct costs incurred during the construction phase of the mobile
PCS telephone system. Depreciation is applied using the straight-line method
over the estimated useful lives of the assets once the assets are placed in
service. Depreciation with respect to the infrastructure of the mobile PCS
telephone system was applied beginning in September 1998.
i) Advertising
It is the Company's policy to record the cost of advertising as it is incurred.
For the year ended December 31, 1998, the Company recorded US$ 3,619,000 (US$
338,000 in 1997) as advertising expense.
j) Income taxes
Income taxes have been recorded in accordance with Statement of Financial
Accounting Standards No. 109 (FAS 109). Income taxes payable for the current
year are recorded in current liabilities, if applicable. Future taxes arising
from differences between the amounts shown for assets and liabilities in the
balance sheet and the tax basis of those assets and liabilities at the balance
sheet date have been recorded as deferred income taxes. Deferred income tax
assets are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
k) Long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
F-30
<PAGE> 35
l) Network use and signal distribution services
It is the Company's policy to systematically recognize expense for the use of
the network and signal distribution services provided by a related party as per
an independent valuation on a straight-line basis over the remaining life of the
contract as other capital contributions (Note 11 c).
m) Cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents, including securities
purchased under resale agreements. Securities purchased under agreements to
resell include investments in instruments issued by the Central Bank of Chile
acquired under resale agreements, and are stated at cost plus accrued interest.
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
Cash and bank deposits $ 452 $ 899
Time deposits 490 10,195
Securities purchased under agreements to resell (Note 3) -- 13,736
Other -- 45
------- -------
$ 942 $24,875
======= =======
</TABLE>
n) Recent accounting pronouncements
Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting for
Derivative Instruments and Hedging Activities, is effective for fiscal years
beginning after June 15, 2000. This standard establishes accounting and
reporting standards for derivatives instruments, and for hedging activities. It
requires that an entity recognize all derivatives on the balance sheet at fair
value. Generally, changes in the fair value of derivatives must be recognized in
income when they occur, the only exception being derivatives that qualify as
hedges in accordance with the Standards. If a derivative qualifies as a hedge, a
company can elect to use "hedge accounting" to eliminate or reduce the
income-statement volatility that would arise from reporting changes in a
derivative's fair value in income. The type of accounting to be applied varies
depending on the nature of the exposure that is being hedged. In some cases,
income-statement volatility is avoided by an entity's recording changes in the
fair value of the derivative directly in shareholders' equity. In other cases,
changes in the fair value of the derivative continue to be reported in earnings
as they occur, but the impact is counterbalanced by the entity adjusting the
carrying value of the asset or liability that is being hedged. This standard is
not expected to have an effect on the reporting of the Company for the year
ended December 31, 1998 and period ended December 31, 1997 as it did not hold
derivative instruments during such periods. The effects of FAS 133 in future
periods will depend upon whether the Company enters into transactions in such
periods involving derivative instruments.
F-31
<PAGE> 36
NOTE 3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
At December 31, 1998, the Company held no securities purchased under agreements
to resell. Securities purchased under agreements to resell at December 31, 1997
are summarized as follows:
<TABLE>
<CAPTION>
UNDERLYING
FINANCIAL INSTITUTION FINANCIAL INSTRUMENT AMOUNT MATURITY DATE
- --------------------- -------------------- ------ -----------------
<S> <C> <C> <C>
Banco de A. Edwards Central Bank of Chile Debentures $ 6,417 February 10, 1998
Banco de A. Edwards Central Bank of Chile Debentures 6,491 February 12, 1998
Banco de A. Edwards Central Bank of Chile Debentures 828 February 19, 1998
--------
Total $ 13,736
========
</TABLE>
At December 31, 1997, the underlying financial instruments were in the custody
of the counter party to the agreements. Central Bank of Chile Debentures are
generally considered to be low-risk securities and are generally not subject to
significant market volatility.
NOTE 4. RECOVERABLE TAXES
Recoverable taxes at December 31, 1998 relate to value added taxes (VAT) of US$
6,480,000 (US$ 6,228,000 in 1997), incurred on the purchases of property, plant
and equipment required for the Company's mobile PCS telephone system and goods
and services. VAT relating to the purchases of capital goods may be recovered in
cash by the Company in accordance with Chilean law. Other VAT is recovered by
offset against VAT raised on services rendered.
NOTE 5. INVENTORY
Inventory as of December 31, 1998 is summarized as follows:
<TABLE>
<S> <C>
Handsets $3,137
Accessories 1,282
------
$4,419
======
</TABLE>
F-32
<PAGE> 37
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Land $ 340 $ 140
Buildings and infrastructure 114,926 39,771
Machinery and equipment 1,555 88
Handsets 8,583 --
Other 3,100 98
Less: Accumulated depreciation (3,704) (4)
-------- -------
Total net $124,800 $40,093
======== =======
</TABLE>
Estimated useful lives of assets are:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment 10
Handsets 2
Other 5-10
</TABLE>
For the year ended December 31, 1998, the Company capitalized US$ 4,830,000 (US$
1,508,000 in 1997) of interest as part of the cost of construction of the mobile
PCS Telephone System.
NOTE 7. ACCRUED LIABILITIES AND WITHHOLDINGS
Accrued liabilities and withholdings are summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998 1997
------ ----
<S> <C> <C>
Construction in progress $1,365 $597
Advertising and marketing expenses 321 278
Employee vacations 203 33
Other 271 52
------ ----
Total $2,160 $960
====== ====
</TABLE>
F-33
<PAGE> 38
NOTE 8. RELATED COMPANY TRANSACTIONS
a) Balances with related companies and Qualcomm Incorporated
<TABLE>
<CAPTION>
COMPANY RELATIONSHIP 1998 1997
------- ------------ ------- --------
<S> <C> <C> <C>
Accounts receivable from related company:
Chilesat Servicios
Empresariales S.A Affiliate $ -- $ 10
======== ========
Interest payable to related companies:
Qualcomm Incorporated(1) -- $ (5,326) $ (543)
Leap Wireless International, Inc. Affiliate (528) --
Inversiones Leap Wireless Chile S.A Shareholder (1,103) --
-------- --------
$ (6,957) $ (543)
======== ========
Accounts and notes payable to related companies:
Chilesat Servicios
Empresariales S.A Affiliate $ (134) $ --
Chilesat S.A Shareholder (733) (196)
Qualcomm Incorporated(1) -- (16,555) --
Leap Wireless
International, Inc. Affiliate (14,745) --
Inversiones Leap
Wireless Chile S.A Shareholder (20,271) --
Telex-Chile S.A Shareholder (29) (12)
Telsys S.A Affiliate (105) (39)
-------- --------
$(52,572) $ (247)
======== ========
Note payable to related company - long-term:
Qualcomm Incorporated(1) -- $(49,807) $(23,655)
======== ========
</TABLE>
- ---------------------
(1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998.
F-34
<PAGE> 39
b) Related company transactions
<TABLE>
<CAPTION>
AMOUNT OF TRANSACTIONS
-------------------------
COMPANY RELATIONSHIP TRANSACTION 1998 1997
------- ------------ ----------- ---- ----
<S> <C> <C> <C> <C>
Chilesat Servicios
Empresariales S.A. Affiliate Reimbursement of
costs incurred on
their behalf $ -- $ 47
Reimbursement of
costs incurred in
connection with
construction 130 --
Chilesat S.A. Shareholder Reimbursement of
costs incurred in
connection with
construction 586 589
Rental of office space 171 30
Leap Wireless
International, Inc. Affiliate Financing of purchases
from Qualcomm Inc. 14,745 --
Accrued interest on
note payable 528 --
Inversiones Leap
Wireless Chile S.A. Shareholder Financing 20,271 --
Accrued interest on
note payable 1,103 --
Telex-Chile S.A. Shareholder Reimbursement of costs
incurred in connection
with construction 29 49
Telsys S.A. Affiliate Computer services 965 39
c) Transactions with Qualcomm Incorporated
Qualcomm
Incorporated(1) Purchase of equipment
and inventory $57,452 $23,655
Financing of purchases 42,707 23,655
Accrued interest on
note payable 4,783 543
</TABLE>
- ---------------
(1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998.
F-35
<PAGE> 40
d) Notes payable to Qualcomm Incorporated and related companies
As a means of financing the purchase of infrastructure equipment from Qualcomm
Incorporated, the Company entered into a Deferred Payment Agreement whereby
Qualcomm Incorporated defers collection for the equipment subject to the terms
and conditions set forth in the Agreement. The assets of the Company
collateralize the obligation. The shares of the Company have also been pledged
by Telex-Chile and Chilesat in guaranty of the note payable to Qualcomm
Incorporated.
Under the terms of the agreement, Qualcomm Incorporated will make loans for the
equipment, software and services it provides to the Company up to a maximum of
US$59.5 million. The original Deferred Payment Agreement was amended on June 24,
1998 to allow for an additional commitment of US$14.7 million of principal as a
means of financing of goods and services relating to the PCS system and US$ 25.0
million of principal as a means of financing the acquisition of subscriber
equipment. The rest of the terms and conditions outlined in the original
Deferred Payment Agreement remain unchanged. Loans bear interest based either
upon a LIBOR or Base Rate or the Eurodollar. The obligation to repay these loans
and interest is evidenced by promissory notes. Interest accrues on the principal
but remains unpaid, with accrued interest added monthly to the outstanding
principal amount of the applicable loan until the first principal payment, at
which time interest is payable on the same dates as the principal payments.
Principal and interest on the US$14.7 million is due in full on January 31,
1999. In addition, a conversion right, discussed below, was added to the
agreement relating to this amount. This commitment was subsequently transferred
by Qualcomm Incorporated, as allowed by the Deferred Payment Agreement, to Leap
Wireless International, Inc.
In addition, a Working Capital Loan agreement was entered into on June 24, 1998
with Inversiones for US$20.3 million of principal for the purpose of financing
the final phase of construction, working capital requirements and operating
expenses during the start-up and early operation phase of the PCS system.
Principal and accrued interest is due in full on January 31, 1999 (Note 14).
Interest rates and other terms and conditions of this agreement match those of
the Deferred Payment Agreement, including the conversion right described below.
In the event that the Company fails to pay the outstanding principal balance
plus any accrued interest thereon, or Chilesat fails to contribute to the
Company an aggregate amount of not less than fifty percent of the aggregate
outstanding balance of the additional commitment and the Working Capital Loan on
or before January 31, 1999 pursuant to a capital call by the Company, then, at
any time after January 31, 1999 and on or before July 31, 1999, at Leap Wireless
International, Inc.'s sole option in the case of the additional commitment and
Inversiones' sole option in the case of the Working Capital Loan, the
outstanding balance shall be convertible into shares of the Company's common
stock (Note 14). This option expires in the event that the outstanding balance
is paid in full prior to the conversion date.
F-36
<PAGE> 41
The notes payable at December 31, 1998 are comprised of LIBOR loans and bear
interest at LIBOR + 3%. The scheduled principal repayments, are as follows:
<TABLE>
<CAPTION>
DEFERRED PAYMENT ADDITIONAL WORKING CAPITAL
AGREEMENT COMMITMENT LOAN 1998
---------------- ---------- --------------- --------
<S> <C> <C> <C> <C>
1999 $ 16,555 $ 14,745 $ 20,271 $ 51,571
2000 18,361 -- -- 18,361
2001 16,646 -- -- 16,646
2002 14,199 -- -- 14,199
2003 601 -- -- 601
-------- -------- -------- --------
Total $ 66,362 $ 14,745 $ 20,271 $101,378
======== ======== ======== ========
</TABLE>
The terms of the financing arrangements with Qualcomm Incorporated, Inversiones
and Leap Wireless International, Inc. include certain positive and negative
covenants, the most significant of which are as follows:
The Company shall not
i) Incur any additional encumbrances or liens
ii) Create any indebtedness other than indebtedness incurred for the
purposes of partial or full repayment of the notes payable.
iii) Incur operating lease obligations greater than one year and
exceeding US$ 1 million for any twelve month period.
iv) Consolidate or merge with another entity.
v) Guarantee any indebtedness.
vi) Acquire stock or the assets of any other person.
vii) Advance funds.
viii) Become liable for a capital lease obligation exceeding US$1 million.
ix) Enter into transactions with affiliates, except arm's length
transactions in the ordinary course of business.
x) Invest in other than investment grade instruments.
xi) Declare or pay cash dividends or make distributions in excess of 30%
of excess cash flows during the third and fourth annual periods of
operations of the Company, increasing to 50% after period 4.
xii) Maintain funded debt to total capitalization greater than 0.65, 0.71
and 0.75 in annual periods 1, 2 and 3 and thereafter, respectively.
xiii) Permit Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") to be less than US$ 1.
xiv) Permit funded debt to EBITDA to exceed 23.91, 4.74, 3.32 and 2.4 in
annual periods 2, 3, 4 and 5, respectively.
xv) Permit EBITDA to interest expense to be less than 0.47, 2.38, 3.00
and 3.00 in annual periods 2, 3, 4 and 5, respectively.
xvi) Incur capital expenditures greater than US$ 116 million until the
Company has more than 50,000 subscribers, at which time the
threshold increases.
The Company is not in compliance with some of these covenants (Note
14).
F-37
<PAGE> 42
NOTE 9. OTHER LONG-TERM LIABILITIES
This balance is mainly comprised of deferred customs duties of US$ 8.4 million
at December 31, 1998 (US$ 4.6 million at December 31, 1997).
Under Chilean law, the payment of customs duties levied on machinery and
equipment can be deferred over a period of up to seven years. The balance at
December 31, 1998 represents amounts owing at maturity including accrued
interest. The scheduled repayments are as follows:
<TABLE>
<S> <C>
2000 $1,337
2001 1,081
2002 1,555
2003 1,266
2004 and thereafter 3,206
------
Total 8,445
Other 51
------
Total other long-term liabilities $8,496
======
</TABLE>
NOTE 10. INCOME TAXES
The Company has not made a provision for current income taxes payable as it
incurred tax losses for the year ended December 31, 1998.
At December 31, 1998, income tax loss carryforwards of approximately US$24.3
million (US$5.2 million at December 31, 1997), were available to apply against
income tax liabilities in future years. Under Chilean law, such income tax loss
carryforwards never expire.
Deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
Assets: 1998 1997
------- -----
<S> <C> <C>
Provisions $ 71 $ --
Tax loss carryforwards 3,649 785
Allowance for income tax loss carryforwards (3,720) (655)
------- -----
Deferred income tax assets -- 130
------- -----
Liabilities:
Other -- (130)
------- -----
Deferred income tax liabilities -- (130)
------- -----
Net deferred income taxes $ -- $ --
======= =====
</TABLE>
F-38
<PAGE> 43
Because the Company has only recently begun commercial operations and has no
history of generating taxable income against which tax loss carryforwards would
be applied, an allowance was recorded at December 31, 1998 with respect to those
tax loss carryforwards which, based on the weight of available evidence, are not
likely be realized.
NOTE 11. SHAREHOLDERS' EQUITY
a) Authorized capital
Authorized capital stock of the Company is comprised of 8,400,000 Series A
preferred shares and 8,400,000 Series B ordinary shares. Inversiones holds all
the outstanding preferred shares whereas Chilesat holds all the ordinary shares.
The preference with respect to the preferred shares consists of the right to be
paid before any other series of shares in the event of liquidation of the
Company up to the amount of the stated value of the preferred shares. The
preference has a duration of 6 years as from April 10, 1997, after which all
shareholders shall have equal rights with respect to the liquidation of the
Company.
b) Dividends
Chilean law permits the payment of dividends only in Chilean pesos and these are
limited to the retained earnings balances in the Company's statutory financial
statements at each calendar year end. As the Company has an accumulated deficit
at December 31, 1998 and 1997 in its statutory financial statements, it is
prohibited from declaring and paying dividends until such time that it generates
sufficient retained earnings.
c) Capital increase
Pursuant to the terms of the Shareholders' Agreement, Inversiones agreed to
subscribe for 8,400,000 Series A preferred shares in exchange for its cash
contribution of US$ 42 million and Chilesat agreed to subscribe for 8,400,000
Series B ordinary shares for its contribution of a contract for the right to use
a part of Chilesat's network and signal distribution services, the PCS license
and certain net assets. Inversiones contributed the funds into an escrow account
on March 3, 1997 and a receivable balance for share subscriptions was recorded.
With the exception of US$ 1.5 million of funds made available to the Company,
the funds were not to be distributed to it until official publication of the
awarding of the PCS license. The awarding of the PCS license was published and
the Company received the funds in June, 1997, at which time the share
subscription receivable was settled. An independent valuation of the contract
for the right to use a part of Chilesat's network and signal distribution
services was undertaken and the appraised valued is being systematically
recognized as capital contributions on a straight-line basis over the remaining
life of the contract commencing on September 20, 1998, the date operations
began. Other capital contributions in 1998 amounted to US$493,000 (none in
1997).
At the Extraordinary Meeting held on June 24, 1998, the shareholders agreed to
an increase in the Company's capital from Ch$26.638 million (US$56.4 million)
divided into 8,400,000 Series A preferred shares and 8,400,000 Series B common
shares, to Ch$44.498 million (US$94.2 million) divided into 8,400,000 Series A
preferred shares and 16,000,000 Series B common shares, with no par value, which
will be offered to existing shareholders in proportion to their shareholdings,
and which must be totally subscribed and paid within a period of three years
from the date of the meeting.
Should Telex-Chile S.A. and Chilesat S.A. not subscribe their proportion of the
new issue, they will cede their subscription rights to Inversiones.
F-39
<PAGE> 44
At their Extraordinary meeting held on December 30, 1998, the shareholders
agreed to increase the company's capital by the equivalent in Chilean pesos of
US$254 million by the issue of 32,987,013 Series B common shares to be
subscribed and paid, within a maximum period of three years, at a price
equivalent to US$7.70 per share on the date of payment . On agreeing to issue
the shares, the Board of Directors must set the price for their subscription and
payment at an amount equivalent to the US$7.70 per share mentioned previously
plus a restatement of 10% per annum, or 5% per quarter, for the period elapsed
between this date and the date of payment. The excess over the US$7.70 per share
is to be credited to the "Share Premium Account".
d) Call and put options
As part of an amendment to the Shareholders' Agreement, Chilesat and
Inversiones, each have an option to require the issuance by the Company of
shares of common stock at the Exercise Price to be subscribed by Chilesat and
Inversiones in proportion to their holdings in the capital stock of the Company.
This option may be exercised for common stock with an aggregate value at the
Exercise Price of up to US$35 million. The Exercise Price shall be determined as
of the exercise date and shall be the sum of (i) $5.00 per share plus (ii) 10%
per annum plus an increasing premium on the original $5.00 price thereof equal
to 5% additional for each quarter after the calendar quarter ending June 30,
1997. The option expires upon the exercise of the conversion rights (Note 8 c).
If either Chilesat or Inversiones do not subscribe the shares of stock to which
it is entitled as a result of the exercise of the capital call option, it shall
be subject to dilution. Such shares of common stock as are not exercised by
Chilesat or Inversiones shall be subject to subscription at the Exercise Price
by the other party (or such third party investor as a party may propose),
subject to the non-subscribing party's written consent, which may not be
unreasonably withheld and which may not be withheld with the purpose of
preventing the capital increase.
If Chilesat answers such capital call by making a cash capital contribution to
the Company of not less than fifty percent of the balance due on the convertible
loans on or before January 31, 1999, Inversiones will make its portion of the
capital call by converting fifty percent of the balance due on the convertible
loans into capital equity of the Company at the same price as paid by Chilesat
for equity in the capital call.
Inversiones has an option to sell its preferred shares to Chilesat in the event
that the Company is no longer using Qualcomm technology in its mobile PCS
telephone system
NOTE 12. FAIR VALUE
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments at December 31, 1998 and 1997, when the
estimate of such value is practicable:
- - Cash and cash equivalents, recoverable taxes and accrued liabilities and
withholdings have been stated at carrying value which is equivalent to
fair value.
- - The fair values of the note payable to related company and other long-term
liabilities were based on interest rates currently available to the
Company for debt with similar terms and remaining maturities. The carrying
value of the note payable to related company approximates fair value
because the terms of the loan agreement require that the stated rate of
interest be periodically adjusted to the market rate.
F-40
<PAGE> 45
The estimated fair value of the Company's financial instruments are summarized
as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
--------------------------- ----------------------------
CARRYING CARRYING
AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 942 $ 942 $24,875 $24,875
Recoverable taxes 6,480 6,480 6,228 6,228
------- ------- ------- -------
Total assets $ 7,422 $ 7,422 $31,103 $31,103
======= ======= ======= =======
Liabilities:
Accrued liabilities and withholdings $ 2,160 $ 2,160 $ 960 $ 960
Note payable to related company 49,807 49,807 23,655 23,655
Other long-term liabilities 8,496 6,013 4,579 3,117
------- ------- ------- -------
Total liabilities $60,463 $57,980 $29,194 $27,732
======= ======= ======= =======
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
a) Operating leases
At December 31, 1998, the Company had entered into operating leases relating to
the rental of sites for towers and antennas required for the operation of its
mobile PCS telephone system. The following is a schedule by year of future
minimum rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at December 31, 1998:
<TABLE>
<S> <C>
1999 $1,068
2000 1,066
2001 1,082
2002 1,063
2003 1,040
2004 to 2008 3,457
2009 526
------
Total $9,302
======
</TABLE>
Rental expense for the year ended December 31, 1998 was US$ 602,000 (US$ 91,000
in 1997).
b) Security for debt
The Company has pledged it PCS license as security against the notes payable to
Qualcomm Incorporated.
Telex-Chile S.A. and Chilesat S.A. have pledged 83,920 and 8,316,080 Series B
common shares of the Company, respectively, as security for 50% of the notes
payable to Qualcomm Incorporated.
F-41
<PAGE> 46
NOTE 14. SUBSEQUENT EVENTS
a) On February 15, 1999, Inversiones communicated to the Company that it had
incurred an Event of Default as a result of its failure to repay a US$20.3
million short-term Working Capital Loan plus interest accrued thereon granted on
June 24, 1998 (Note 8) and noncompliance with certain loan covenants. At the
time of granting the loan, Inversiones subscribed to a capital increase and
reserved its right to capitalize the loan, an option that, in addition to other
potential actions to obtain repayment, is still open.
Similarly, on February 15, 1999, Leap Wireless International, Inc. informed both
the Company and Telex-Chile S.A. that the former has incurred an Event of
Default with respect to the Deferred Payment Agreement, as a result of which the
amount of US$14.7 million plus interest accrued thereon is due and payable.
Telex-Chile S.A. is guarantor of 50% of this amount. As in the previous case,
the creditor has an option to capitalize this debt or to pursue payment through
other means.
b) Subsequently on March 2, 1999, Leap Wireless International, Inc. and
Inversiones indicated their withdrawal of the above-mentioned communications
reserving the right to notify the defaults again in the future. On March 16,
1999, Leap Wireless International, Inc. and Inversiones communicated defaults on
the short-term Working Capital Loan of US$20.3 million plus interest accrued
thereon and the Deferred Payment Agreement of US$14.7 million plus interest
accrued thereon on the same terms as expressed above.
c) (Unaudited) On April 12, 1999, an agreement was entered into between the
shareholders whereby Chilesat sold its ownership interest in the Company for
US$28 million in cash and US$22 million, three year, non-interest bearing debt.
On April 19, 1999, the Company agreed to pay Inversiones' obligation to Chilesat
S.A. and in return, the Company was relieved of the obligation to pay certain
amounts to Inversiones.
F-42
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Orrengrove Investments Ltd.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of cash flows and of stockholders' deficit
present fairly, in all material respects, the financial position of Orrengrove
Investments Ltd. and its subsidiaries (the Company) (a development stage
company) at December 31, 1998, and the results of their operations and their
cash flows for the period from July 27, 1998 (inception) to December 31, 1998,
in conformity with generally accepted accounting principles in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As explained in Note 10 to the consolidated financial statements, the Company
has been notified of an operational failure of certain third party equipment
used to provide satellite transmission capacity to its customers. If the Company
is not able to replace the satellite transmission capacity or implement a
long-term alternative, this operational failure may have a material adverse
effect on the Company's financial position, results of operations, and cash
flows.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
April 30, 1999
F-43
<PAGE> 48
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
1998
--------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,659
Other current assets 202
--------
Total current assets 35,861
Property and equipment, net 5,279
Intangible assets, net 14,402
Other assets 8
--------
Total assets $ 55,550
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 5,389
--------
Total current liabilities 5,389
Note payable to related party 54,758
--------
Total liabilities 60,147
--------
Commitments and contingencies (Notes 9 and 10)
Minority interest 679
--------
Stockholders' deficit:
Common stock, no par value per share; authorized, issued and
outstanding 1,000 shares 2
Deficit accumulated during the development stage (5,278)
--------
Total stockholders' deficit (5,276)
--------
Total liabilities and stockholders' deficit $ 55,550
========
</TABLE>
F-44
<PAGE> 49
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
-------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 27, 1998
(INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Loss on investment in joint venture $ (670)
General and administrative expenses (3,624)
Interest expense (2,958)
Interest income 791
-------
Loss before minority interest (6,461)
Minority interest (1,183)
=======
Net loss $(5,278)
=======
</TABLE>
F-45
<PAGE> 50
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
-------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 27, 1998
(INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Cash flows from development activities:
Net loss $ (5,278)
Adjustments to reconcile net loss to net cash used in development activities:
Depreciation and amortization 1,145
Minority interest (1,183)
Loss on investment in joint venture 670
Changes in assets and liabilities:
Increase in current and other assets (228)
Decrease in accounts payable and accrued liabilities (2,483)
Increase in accrued interest - note payable to related party 2,958
--------
Net cash used in development activities (4,399)
--------
Cash flow from investing activities:
Purchases of property and equipment (2,741)
Acquisition of Transworld Companies, net of cash acquired 5,997
--------
Net cash provided by investing activities 3,256
--------
Cash flows from financing activities:
Issuance of note payable to related party 36,800
Issuance of common stock 2
--------
Net cash provided by financing activities 36,802
--------
Net increase in cash and cash equivalents 35,659
Cash and cash equivalents, beginning of period --
--------
Cash and cash equivalents, end of period $ 35,659
========
Supplemental disclosure of non-cash investing and financing activities:
Issuance of note payable to related party to convert short-term note payable
converted upon acquisition of Transworld Companies $ 15,000
========
</TABLE>
F-46
<PAGE> 51
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
JULY 27, 1998 (INCEPTION) TO DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
-------
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE
--------------------------- DEVELOPMENT
SHARES AMOUNT STAGE TOTALS
------- ------- ------------ -------
<S> <C> <C> <C> <C>
Balance at July 27, 1998 (inception) -- $ -- $ -- $ --
Issuance of common stock for cash 1,000 2 2
Net loss (5,278) (5,278)
======= ======= ======= =======
Balance at December 31, 1998 1,000 $ 2 $(5,278) $(5,276)
======= ======= ======= =======
</TABLE>
F-47
<PAGE> 52
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
1. THE COMPANY
Orrengrove Investments Ltd. ("Orrengrove"), was incorporated in the
Republic of Cyprus on July 27, 1998 as a wholly owned subsidiary of
QUALCOMM Telecommunications Ltd. ("QUALCOMMTel"), an Isle of Man company.
In August 1998, Orrengrove acquired a 60% interest in Transworld
Telecommunications, Inc., Transworld Communications Services, Inc. and
Transworld Communications (Bermuda), Ltd. (collectively the "Transworld
Companies"). The Transworld Companies were created to build and operate a
modern long distance telecommunications business that provides domestic
long distance, backhaul, and broadband services such as high speed
internet access to the Commonwealth of Independent States ("CIS"),
formerly known as the Soviet Union. In October 1998, QUALCOMMTel, a
majority owned subsidiary of Leap Wireless International, Inc. ("Leap
Wireless") entered into an agreement with Teletal Limited, a company
affiliated with ITAR-TASS, the Russian government's prime news agency and
a party with certain rights granted to it by the Russian government to
assist in the privatization and expansion of telecommunications in Russia.
QUALCOMMTel transferred to Teletal Limited a 50% ownership in Orrengrove
under the terms of the agreement to the joint venture in exchange for
Teletal Limited's commitment to assist in the development of the
Transworld Companies long distance telecommunications business. Orrengrove
and its majority owned subsidiaries (the "Company") operates in emerging
economies, which by nature have an uncertain economic, political and
regulatory environment. The general risks of conducting business in the
Russian Federation and other CIS developing countries include the
possibility for rapid changes in government policies and regulations,
economic conditions, the tax regime and foreign currency regulations.
The Company is the holder of certain licenses to provide telecommunication
services in 48 regions of the CIS as well as exclusive rights to the
signal transmission capacity on each of two Russian Loutch II satellites.
The first satellite was launched into orbit in October 1995 to serve an
area containing over 85% of the population of the Russia Federation plus
major portions of the Baltic States, Ukraine, Byelorussia and other CIS
countries (see Note 10 for subsequent event). The Company is currently
evaluating whether to exercise its rights to the capacity on the second
satellite which will require the Company to share in the cost of its
launch. Limited service between Moscow and Perm, a region of 3 million
people 1,200 km west of Moscow, began in December 1998. Further expansion
plans are being evaluated.
2. DEVELOPMENT STAGE ACTIVITIES AND DEPENDENCY ON ADDITIONAL FINANCING
The Company is a development stage enterprise which has incurred operating
losses and negative cash flows from network development and operations
since inception. To date,
F-48
<PAGE> 53
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
the Company has focused primarily on the development of its
telecommunications network, including the construction of its system hub
in Moscow and its earth station network, and the implementation of its
sales and marketing strategy. Before the Company can begin significant
revenue generating operations, it must first enter into agreements with
either long-distance companies, in order to carry some of their
long-distance traffic, and/or the local phone companies throughout the
CIS. The Company is currently in such negotiations. The extent to which
this is or is not accomplished and the terms and timing of executing these
contracts may have a significant impact on the business, financial
conditions and results of operations.
The Company's principal license agreement to provide telecommunication
services within the Russian Federation expires in April 2002, and is
subject to certain services related obligations standard for the industry.
Although no assurance can be given that such license will be renewed
beyond its expiration date, the Company believes that such license can be
renewed routinely.
The Company is dependent on the signal transmission capacity of the Loutch
II satellite in orbit and satellite communication earth stations to
provide its satellite based communication services. The Company may
encounter problems, delays and expenses, many of which may be beyond the
Company's control. These may include, but are not limited to, in-orbit
failures (see Note 10 for subsequent event), launch delays and launch
failures of additional or replacement signal transmission capacity,
problems related to technical developments of the system, and regulatory
compliance. Any interruption or delays in service caused by any of the
foregoing matters would adversely affect the Company.
The development of the Company's business and the deployment of its
services and systems will require significant additional capital
expenditures, a substantial portion of which will need to be incurred
before the realization of significant revenues. Together with associated
start-up operating expenses, these capital expenditures will result in
substantial negative cash flow until an adequate revenue-generating
customer base is established.
The Company expects to meet its cash requirements for existing operations
and network construction through fiscal 1999 from available cash balances.
The Company will be seeking additional sources of financing to fund
activities after 1999. Alternatives under consideration include additional
debt, equity financing or other sources. There can be no assurance that
the Company will be successful in raising additional capital in sufficient
amounts to fund its strategic objectives, or that such funds, if
available, will be available on terms that the Company will consider
acceptable. Failure to raise sufficient funds may require the Company to
modify, delay or abandon some of its planned future
F-49
<PAGE> 54
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
expansion or expenditures, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's consolidated financial statements reflect the financial
position, results of operations, cash flows and changes in stockholders'
deficit of Orrengrove and its majority-owned subsidiaries prepared in
accordance with generally accepted accounting principles in the United
States of America. The ownership of the other interest holder is reflected
as minority interest. All significant inter-company accounts and
transactions have been eliminated. The financial statements of the Company
have been presented for the period since its inception on July 27, 1998.
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 expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT IN JOINT VENTURE
The Company has a 50% equity investment in Tass Loutch Telecom (TLT), a
joint venture. The Company uses the equity method to account for
investments in corporate entities in which it has voting interest of 20%
to 50% or in which it otherwise exercises significant influence. 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 TLT, limited
to the extent of the Company's investment in, advances to and financial
guarantees for TLT. The Company is the only contributor of assets, and
therefore loss on investment in joint venture included in the statement of
operations includes 100% of the losses of TLT. To date, TLT has incurred
recurring losses which have reduced the Company's investment in TLT to
zero.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
F-50
<PAGE> 55
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the lesser of the estimated useful lives,
generally ranging from five to ten years for telecommunications equipment
and three to seven years for furniture, fixtures and equipment and other
property. Construction in process reflects amounts incurred for the
configuration and build-out of telecommunications equipment not yet placed
in service.
INTANGIBLE ASSETS
Intangible assets, resulting primarily from the acquisition of the
Transworld Companies (see Note 4), comprising of telecommunications
licenses of $8,061,000 and rights to satellite signal transmission
capacity of $7,327,000, are being amortized on a straight-line basis over
their estimated remaining useful lives ranging from three to five years.
For the period ended December 31, 1998, amortization expense of $986,000
was recorded on the rights to satellite capacity (see Note 10 for
subsequent event). The telecommunications licenses begin amortizing upon
commencement of service.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its
eventual disposition are less than its carrying amount. No such impairment
losses have been recognized to December 31, 1998.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for tax consequences in
future years for differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end, based
on enacted laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce net deferred tax
assets to the amount expected to be realized. The provision for income
taxes consists of the current tax provision and the change during the
period in deferred tax assets and liabilities.
F-51
<PAGE> 56
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
FOREIGN CURRENCY
The functional currency of the Company's foreign operations is United
States dollars. The Company maintains most of the cash balances in dollar
denominated bank accounts and has no significant foreign currency monetary
assets and liabilities at December 31, 1998. Gains and losses resulting
from the Company's foreign currency transactions are included in the
consolidated statement of operations, and to date have been minimal.
The Company does not currently hedge against foreign currency fluctuations
although the Company may take such steps in the future. Under current
practices, the Company's results of operations could be adversely affected
by fluctuations in exchange rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998, the carrying amounts of the Company's cash and cash
equivalents, accounts payable , and notes payable approximate fair value
due to the short-term maturities of these balances.
RECENT ACCOUNTING PRONOUNCEMENTS
As of December 31, 1998, Statement of Financial Accounting Standards No.
130, ("SFAS 130"), Reporting Comprehensive Income, has been adopted by the
Company. SFAS 130 establishes standards for the reporting and display of
comprehensive income (loss) and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
"Comprehensive income (loss)" is defined in this statement as the change
in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period (including net income
(loss)) except those resulting from investments by owners and
distributions to owners. The adoption of this new standard did not impact
the Company's financial statements because there were no differences
between net loss and comprehensive loss.
In addition, during 1998, Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133) was issued. This statement establishes a new model for accounting for
derivatives and hedging activities. Under SFAS 133, all derivatives must
be recognized as assets and liabilities and measured at fair value. SFAS
133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company has not determined the impact of the adoption
of this new accounting standard on its consolidated financial position or
results of operations.
F-52
<PAGE> 57
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
4. ACQUISITION OF THE TRANSWORLD COMPANIES
On August 4, 1998, the Company acquired a 60% common ownership interest in
the Transworld Companies for an aggregate purchase price of $51,800,000,
consisting of a $36,800,000 cash payment to the Transworld Companies and
the conversion to equity of a $15,000,000 short-term loan payable to Leap
Wireless, which was previously issued by the former parent of the
Transworld Companies. The acquisition was recorded under the purchase
method of accounting, and accordingly, the results of operations of the
Transworld Companies are included in the consolidated financial statements
since the date of acquisition. The sum of the fair values of the
identifiable assets acquired, which include telecommunications licenses
and rights to satellite capacity, less liabilities assumed, exceeded the
cost of the acquisition. The fair values of those identifiable assets
acquired were reduced by a proportionate part of the excess to determine
their assigned values.
The purchase price has been allocated to the assets acquired and the
liabilities assumed based upon the fair values on the date of acquisition
as follows (in thousands):
<TABLE>
<S> <C>
Current assets, other than cash $ 41
Property and equipment 2,697
Intangible assets 15,388
Other assets 611
Accounts payable and other expenses (7,872)
Note payable to related party (15,000)
Minority interest (1,862)
--------
Net cash received from acquisition $ (5,997)
========
</TABLE>
F-53
<PAGE> 58
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Telecommunications equipment $ 1,448
Construction-in-progress 3,524
Leasehold improvements 81
Furniture, fixtures and office equipment 385
-------
5,438
Accumulated depreciation (159)
-------
$ 5,279
=======
</TABLE>
The Company's telecommunications equipment and construction-in-progress
are primarily maintained in a foreign country. Construction in progress
consists of earth stations, not yet completed and operational as of
December 31, 1998. See Note 10 for subsequent event.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
1998
-----------
<S> <C>
Accounts payable and other $ 299
Consulting fee-related party (Note 7) 2,500
Consulting fee-third party 2,590
------
$5,389
======
</TABLE>
F-54
<PAGE> 59
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
7. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM A RELATED PARTY
Since inception, the Company has advanced certain amounts to another
investor in TLT for the investor's share of TLT's expenses in exchange for
a note receivable. The Company has advanced approximately $400,000 to the
related party through
December 31, 1998. The note receivable was written off prior to December
31, 1998 since the related party was unable to fund it's share of the
losses in the joint venture.
PAYABLE TO RELATED PARTY
The Company was required to pay a consulting fee, bonus, and severance
totaling $2,500,000 to the majority shareholder of the former parent of
the Transworld Companies. The $2,500,000 was included in the purchase
price allocation (See Note 4) and payment was made in March 1999.
NOTE PAYABLE TO RELATED PARTY
On July 29, 1998, the Company entered into a $51,800,000 collateralized
Promissory Note agreement with Leap Wireless, for the purpose of
purchasing the Transworld Companies. Terms of the Promissory Note provide
for repayment of principal and accrued interest by paying Leap the greater
of 1) 70% of the cash or other assets received by the Company from any
sources, including the Transworld Companies, 2) 70% of the cash or other
assets available for distribution to the Company's stockholders or 3) in
the event of a final distribution from the Transworld Companies, 100% of
the cash or other assets available for distribution to the Company's
stockholders until principal and accrued interest is paid in full.
Interest accrues quarterly in arrears at the rate of 13%, per annum, with
any unpaid interest being added to the outstanding principal. For the
period ended December 31, 1998, interest of $2,958,000 has been accrued,
but not paid. This amount is included in note payable to related party on
the consolidated balance sheet as of December 31, 1998. The Promissory
Note provides for certain restrictions related to dividends, redemptions
and merger, and is collateralized by substantially all the assets of the
Company.
8. INCOME TAXES
The Company has not recorded provisions for income taxes for the period
from July 27, 1998 (inception) to December 31, 1998 due to net operating
losses during the period.
F-55
<PAGE> 60
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
The following is a reconciliation from the statutory Cyprus income tax
rate to the Company's effective rate of income tax expense for the period
ended:
<TABLE>
<CAPTION>
Period from July
27, 1998
(Inception) to
December 31, 1998
-----------------
<S> <C>
Cyprus tax at statutory rate 25%
Minority interest (4)%
Net change in valuation allowance (24)%
Effect of foreign operations 3%
---
Effective tax rate -%
===
</TABLE>
The tax effect of temporary differences which gives rise to significant
portions of the deferred tax assets as of December 31, 1998, are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Net operating loss carryforwards $ 2,968
Net capitalized start-up costs 717
-------
3,685
Less: valuation allowance (3,685)
-------
$ --
=======
</TABLE>
Realization of net deferred tax assets is dependent on the Company's
ability to generate taxable income, which is uncertain. Accordingly, a
full valuation allowance was recorded against these assets as of December
31, 1998.
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $8.5 million for income tax purposes that begin to expire
in various years between 2003 and 2017.
There may be limitations on the annual utilization amount of these net
operating losses as a result of certain changes in ownership that have
occurred since the Company's inception.
F-56
<PAGE> 61
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
9. COMMITMENTS AND CONTINGENCIES
TRANSPONDER AGREEMENTS
The Company obtained, through a number of agreements, the rights to
utilize certain Russian Loutch I and Loutch II satellite capacity. The
agreements give the Company rights to the capacity on satellites under the
Loutch I and Loutch II programs for up to 20 years.
The Company has an agreement with Commercial Company Mercury Ltd.
("Mercury"), the commercial subsidiary of a Russian satellite provider,
for the sole and exclusive use of two transponders on each of the first
two Loutch II satellites. At December 31, 1998, approximately $5,300,000
had been paid to Mercury to modify the transponders on the first Loutch II
satellite for commercial use. A remaining commitment of approximately
$1,700,000 due under this contract is contingent upon Mercury completing
certain milestones related to the launch of the second satellite.
CONSTRUCTION-IN-PROGRESS
The Company has ordered the construction of six earth stations, plus
certain upgrades and spares, under an agreement with a third party. The
agreement established a price guarantee until September 1999 at
approximately $1,000,000 per earth station. In accordance with this
agreement, approximately $3,500,000 has been paid to December 31, 1998.
LEASE COMMITMENTS
The Company leases certain office space in the United States and
internationally under non-cancelable operating lease agreements. Rent
expense for the period July 27, 1998 (inception) to December 31, 1998 was
approximately $200,000. Future minimum lease payments under all
non-cancelable operating lease arrangements as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $ 404,000
2000 414,000
2001 327,000
2002 1,000
2003 --
----------
Total $1,146,000
==========
</TABLE>
F-57
<PAGE> 62
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
LEGAL MATTERS
The Company is a party to various legal actions and administrative
proceedings arising in the normal course of business. In the opinion of
Company's management, disposition of these matters is not expected to have
a material adverse effect on the financial position, results of operations
or cash flows of the Company.
10. SUBSEQUENT EVENT
On April 5, 1999, the Company was notified by Mercury, provider of the
satellite signal transmission capacity, that there was an operational
failure of all transponders on the Loutch II satellite. Mercury's
prognosis indicates that the transponders' operational status will not be
restored. Although Mercury has guaranteed the satellite signal
transmission capacity, the outcome at this time remains uncertain. The
Company has already identified and put into operation a short-term
terrestrial transmission solution by leasing fiber capacity from a third
party. Long-term alternative transmission sources are being explored,
including the use of expanded terrestrial fiber capacity and/or satellite
signal transmission capacity. The Company would experience a material
adverse effect on its financial position, results of operations, and cash
flows if the satellite signal transmission capacity is not replaced by
Mercury and the Company is not able to implement a long-term alternative
transmission source. Should a long term terrestrial transmission source be
employed, certain satellite related assets may be impaired.
F-58
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 15, 1999
To the Board of Directors and Shareholders of
Pegaso Telecomunicaciones, S. A. de C. V.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Pegaso
Telecomunicaciones, S. A. de C. V. and its subsidiaries at December 31, 1998 and
the results of their operations, their cash flows and the changes in their
stockholders' equity for the period from June 24, 1998 (date of incorporation)
to December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United Sates of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As stated in Note 1 to the consolidated financial statements, Pegaso
Telecomunicaciones, S. A. de C. V. was incorporated on June 24, 1998, and at the
date of issuance of this report, was in the development stage.
PricewaterhouseCoopers
Guillermo Pineda M.
F-59
<PAGE> 64
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
(Development stage enterprise)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
Thousands of U.S. dollars
<TABLE>
<S> <C>
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 30,313
Recoverable value added tax 9,531
Other accounts receivable 344
Prepaid advertising 6,256
Other current assets 219
Total current assets 46,663
PROPERTY, FURNITURE AND TELECOMMUNICATIONS
EQUIPMENT - Net 132,296
PUBLIC TELECOMMUNICATIONS NETWORK CONCESSION 233,530
Total assets $ 412,489
=========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Trade payables $ 113,209
Notes payable to affiliated company 5,941
Other accounts payable and accrued expenses 5,256
Income tax payable 321
Total current liabilities 124,727
LONG-TERM BANK LOANS 19,090
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Capital stock 300,000
Accumulated deficit incurred in development stage (31,328)
268,672
Total liabilities and stockholders' equity $ 412,489
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 65
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
(Development stage enterprise)
CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD
FROM JUNE 24 (DATE OF INCORPORATION)
TO DECEMBER 31, 1998
Thousands of U.S. dollars
<TABLE>
<S> <C>
General and administrative expenses $(30,168)
Interest income 1,194
Other income 441
Foreign exchange loss on remeasurement of financial statements (2,474)
Loss before income tax (31,007)
Current income tax (321)
Loss for the period $(31,328)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 66
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
(Development stage enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 24 (DATE OF INCORPORATION)
TO DECEMBER 31, 1998
Thousands of U.S. dollars
<TABLE>
<S> <C>
Cash flows from operating activities:
Loss for the period $ (31,328)
---------
Adjustment to reconcile loss to net cash used in operating activities:
Not affecting resources:
Depreciation and amortization 78
Foreign exchange loss on remeasurement of financial statements 2,474
Recoverable value added tax (9,443)
Other accounts receivable (341)
Prepaid advertising (67)
Other current assets (217)
Other accounts payable and accrued expenses 5,432
Income tax payable 321
---------
Total adjustments (1,763)
---------
Net cash used in operating activities (33,091)
---------
Cash flows from investing activities:
Acquisition of property, furniture and telecommunications equipment (77)
Public telecommunications network concession (233,530)
---------
Net cash used in investing activities (233,607)
---------
Cash flows from financing activities:
Capital stock issued 300,000
---------
Net cash provided by financing activities 300,000
---------
Effect of exchange rate change on cash (2,989)
---------
Cash and cash equivalents at end of period $ 30,313
=========
Supplemental disclosures of cash flow information:
Income taxes paid $ --
Interest paid (net of amount capitalized) 14
Prepaid advertising contracted with notes payable 5,941
Property, furniture and telecommunications equipment acquired through financing 132,297
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 67
PEGASO TELECOMUNICACIONES, S. A. DE C. V.
(Development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
PERIOD FROM JUNE 24 (DATE OF INCORPORATION)
TO DECEMBER 31, 1998
Thousands of U.S. dollars
<TABLE>
<CAPTION>
Accumulated
deficit incurred
Capital in development
stock stage Total
--------- ---------------- ---------
<S> <C> <C> <C>
Issuance of stock at inception
on June 24, 1998 $ 11 $ 11
Additional capital stock
issued on June 30 and
September 28, 1998 299,989 299,989
Loss for the period $ (31,328) (31,328)
Balances at December 31, 1998 $ 300,000 $ (31,328) $ 268,672
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 68
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
(Development stage enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Amounts expressed in thousands of U.S. dollars)
NOTE 1 - OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES:
Pegaso Telecomunicaciones, S. A. de C. V. (Telecomunicaciones) (a development
stage enterprise), a Mexican holding company, was incorporated on June 24, 1998,
for a duration of 99 years. At December 31, 1998, the stockholders and their
participation in Telecomunicaciones were as follows:
<TABLE>
<CAPTION>
Stockholder Participation (%)
----------- -----------------
<S> <C>
Mexican stockholders:
Corporativo del Valle de Mexico, S. A. de C. V 10.00
Pegaso Comunicaciones y Servicios, S. A. de C. V 9.66
Alejandro Burillo Azcarraga 5.34
Foreign stockholders:
Qualcomm PCS Mexico, Inc. 33.33
International Equity Investments, Inc. 18.33
LAIF X, Ltd. 16.67
NI Media Equity, LLC 6.67
------
100.00
======
</TABLE>
Up to September 23, 1998, Qualcomm PCS Mexico, Inc. was a wholly owned
subsidiary of Qualcomm Incorporated (Qualcomm). On that date, as a consequence
of Qualcomm's spin-off of Leap Wireless International (Leap Wireless), Qualcomm
transferred the Qualcomm PCS Mexico, Inc. shares to Leap Wireless.
F-64
<PAGE> 69
At December 31, 1998, Telecomunicaciones and its subsidiaries (collectively, the
"Company") held 100% of the capital stock of the following Mexican subsidiaries:
<TABLE>
<CAPTION>
Company Business
------- --------
<S> <C>
Pegaso PCS, S. A. de C. V. (PCS) Scheduled to provide telephone
services to the general public.
Pegaso Recursos Humanos, S. A. de C. V. Provides administrative services
(Recursos Humanos) to affiliated companies.
Pegaso Comunicaciones y Sistemas, S. A. de C. V. Holds the concessions and the
(Comunicaciones y Sistemas) telecommunications equipment for
telephone services to be
provided by PCS.
</TABLE>
The Company is engaged in providing nationwide telephone services in Mexico, for
which Comunicaciones y Sistemas holds the concessions granted by the Ministry of
Communications (Secretaria de Comunicaciones y Transportes) (SCT) on October 7,
1998. At the date of issuance of these consolidated financial statements, the
Company was in the development stage.
Activities during the development stage are primarily developing the
telecommunication network and in organizing the administrative structure to
provide telephone services.
The concession includes the rights to install, operate and exploit a nationwide
public telecommunications network for a period of up to 20 years, with an option
for the Company to extend the concession at the end of the 20-year period. See
Note 5.
The Company's development from the date of incorporation has been financed by
capital contributions made by the stockholders and through two lines of credit
with a limit of $590,000. See Note 6. These lines of credit are collateralized
by all Company properties, rights and assets. The recoverability of the
Company's investment is dependent upon future events, including, but not limited
to, the stability of the Mexican economic environment, obtaining adequate
financing for the Company's development program and the achievement of a level
of operating revenues that is sufficient to support the Company's cost
structure.
F-65
<PAGE> 70
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements include to the adjustment and
remeasurement of the Mexican peso consolidated financial statements prepared in
conformity with accounting principles generally accepted in Mexico. Such
financial statements constitute a suitable basis for adjustment and
remeasurement into US Dollars and for purposes of expressing them in conformity
with accounting principles generally accepted in the United States of America.
Following are the significant accounting policies, as adjusted:
a. Consolidation:
The accompanying financial statements include the accounts of
Telecomunicaciones and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
b. Cash Equivalents:
Cash equivalents are recorded at cost, which approximates market value,
and include all investments purchased with original maturities of three
months or less.
c. Property, Furniture and Telecommunications Equipment:
Property, furniture and telecommunications equipment are recorded at cost.
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of said items, ranging from three to ten years. See
Note 4.
Leasehold improvements are capitalized at cost and the corresponding
amortization is calculated by the straight-line method, based on the lease
period.
d. Public Telecommunications Network Concession:
The public telecommunications network concession includes the cost of the
radio-electric frequency band concession, and is recorded at cost.
F-66
<PAGE> 71
e. Income Taxes:
Current income tax is the amount of income tax expected to be payable for
the current period. A deferred tax asset 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 carryforwards. A valuation allowance
is established for deferred tax assets not expected to be realized.
f. Employee Benefits:
Seniority premiums, to which employees are entitled upon termination of
employment after fifteen years of service, are recognized as expenses of
the years in which the services are rendered. Because the Company is in
the development stage, this effect is not significant, and therefore no
liability has been recognized.
Severance obligations to personnel for dismissal or death are charged to
income in the period incurred.
g. Translation:
For the purposes of translating its Mexican peso financial statements to
U.S. dollars in accordance with Statement of Financial Accounting Standard
No. 52, the Company considers its functional currency to be the U.S.
dollar, since substantially all its costs and all its financing are
incurred in U.S. dollar. Monetary assets and liabilities 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 are translated at
historical rates. The resulting remeasurement gains or losses are included
in the statement of income.
As of January 1, 1999, Mexico is no longer considered a hyperinflationary
economy. The Company is currently evaluating the functional currency and a
possible change from the U.S. dollar to local currency (the Mexican peso).
h. Capitalized Interest Cost:
Property, furniture and telecommunications equipment, as well as the
public telecommunications network concession, include the capitalization
of the interest costs related to their acquisition.
F-67
<PAGE> 72
i. Advertising Costs:
Television advertising time purchased in advance is expensed when the
advertising time is used. All other advertising costs are expensed as
incurred.
j. Long-lived Assets:
The Company assesses potential impairments of its long-lived assets when
there is evidence that events or changes in circumstances have made
recovery of the asset's carrying value unlikely. An impairment loss would
be recognized when the sum of the expected future net undiscounted cash
flows, grouped at the lowest identifiable level where the cash flows are
independent of cash flows generated by other groups, is less than the
carrying amount of the asset. No such impairment losses have been recorded
by the Company.
k. Estimates:
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. Actual results could differ from those estimates.
l. New Accounting Requirements:
The Company adopted the provision of Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities", issued by the Accounting
Standards Executive Committee of the American Institute of Certified
Public Accountants (AcSEC). In accordance with this pronouncement, all
start-up activities and organization costs incurred in 1998 were expensed
and are included within general and administrative expenses in the
consolidated statement of income.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) issued by the
Financial Accounting Standards Board (FASB). SFAS 130 establishes new rules for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. For the period ended December 31,
1998, the Company has not generated components of other comprehensive income.
The AcSEC issued the Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1) in March
1998. The statement is effective for fiscal periods beginning after December 15,
1998, with earlier application encouraged. SOP 98-1 provides authoritative
guidance for the capitalization of external direct
F-68
<PAGE> 73
costs of materials and services, payroll costs for employees devoting time to
software projects, and interest costs. The Company does not expect the adoption
of SOP 98-1 to significantly impact the financial statements.
On June 15, 1998, the FASB issued SFAS No 133, "Accounting for Derivative
Instruments and Hedging Activities", (SFAS 133). This statement establishes a
new model for accounting for derivatives and hedging activities and supercedes
and amends a number of existing standards. SFAS 133 is effective for fiscal
years beginning after June 15, 1999, but earlier application is permitted as of
the beginning of any fiscal quarter subsequent to June 15, 2000. Upon the
statement's initial application, all derivatives are required to be recognized
in the balance sheet as either assets or liabilities, and measured at fair
value. In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. The Company is not currently
involved in derivative or hedging activities. As a result, management does not
believe that the adoption of this statement will significantly impact the
financial statements of the Company.
NOTE 3 - TRANSACTIONS AND BALANCES WITH AFFILIATED COMPANIES AND OTHER RELATED
PARTIES:
On the next page is a summary of the main transactions and balances with
affiliated companies and other related parties for the period ended December 31,
1998.
F-69
<PAGE> 74
<TABLE>
<CAPTION>
Transactions for
the period ended Balance at
December 31, 1998 December 31, 1998
----------------- -----------------
<S> <C> <C>
Equipment purchases from Qualcomm $80,100(1)
Interest on advances from stockholders 1,697
Professional fees charged by stockholders 586
Advertising services from Grupo Televisa, S. A 6,256 $ 5,941(2)
Rent payments to stockholders 40
</TABLE>
(1) Qualcomm ceased being an affiliated company on September 23, 1998 (see
Note 1).
(2) This amount is reflected as notes payable to affiliated company in the
consolidated balance sheet. Equal principal amounts are payable on a
quarterly basis up to September 15, 1999. These notes are non-interest
bearing.
NOTE 4 - PROPERTY, FURNITURE AND TELECOMMUNICATIONS EQUIPMENT:
<TABLE>
<CAPTION>
Annual
depreciation rate
(%)
-----------------
<S> <C> <C>
Furniture and equipment $ 630 10
Computer equipment 156 30
Transportation equipment 248 25
Leasehold improvements 969 30
---------
2,003
Accumulated depreciation and amortization (78)
---------
1,925
Land 85
Telecommunications equipment in the process of
installation 104,874
Construction in progress 2,234
Advance payments to Alcatel Indetel Industria de
Telecomunicaciones, S. A. de C. V. (Alcatel) 11,478
Advance payments to Qualcomm 9,023
Advance payments to other suppliers 2,677
---------
$ 132,296
=========
</TABLE>
Telecommunications equipment in the process of installation includes $3,114 of
capitalized interest.
F-70
<PAGE> 75
NOTE 5 - PUBLIC TELECOMMUNICATIONS NETWORK CONCESSION:
On October 7, 1998, the Company obtained the concession to frequency bands of
the radio-electric spectrum to provide nationwide wireless fixed and mobile
access telecommunications services. The cost of the concession shown in the
consolidated balance sheet includes $1,278 of capitalized interest.
Concessions include the rights to provide the following:
- - Fixed or mobile wireless telephone service.
- - Transmission or reception of signals, images, voice, sounds or information
of any nature through the network, and additional services authorized by
the SCT.
- - Access to data networks, videos, audio and videoconferences.
The concession agreements contain the following financial covenants:
a. The minimum capital stock must be $120,000.
b. The ratio of total liabilities to stockholders' equity should not exceed
2.78 during the first five years of operations.
At December 31, 1998, these covenants were satisfactorily complied with.
NOTE 6 - FINANCING CONTRACTS:
The Company has entered into certain agreements for the acquisition of
telecommunications equipment, services, and installation consultancy. These
commitments will be covered through the financing contracts which are summarized
on the next page.
<TABLE>
<CAPTION>
Equipment supplier Financing agent Maximum amount
- ------------------ --------------- --------------
<S> <C> <C>
Qualcomm Qualcomm managed by
ABN AMRO Bank N. V $310,000(1)
Alcatel Syndicated loan managed
by Citibank International, Plc 280,000(2)
--------
$590,000
========
</TABLE>
F-71
<PAGE> 76
(1) This line of credit is to be utilized as follows:
<TABLE>
<CAPTION>
Credit Term Maximum amount
------ ---- --------------
<S> <C> <C>
Credit 1 From the date of authorization to
December 31, 2000 $200,000
Credit 2 From January 1, 2001 to
December 31, 2002 90,000
Additional credit From the date of authorization to
December 31, 2002 20,000
--------
$310,000
========
</TABLE>
Advances under credits 1 and 2 are composed of "A" and "B" tranches. Tranche
"A", which is for the financing of equipment purchases, is being provided by the
Export Import Bank of the United States (EXIM Bank) and is subject to interest
at the LIBOR plus 1.5 points. Tranche "B" is for the financing of customs duties
(excluding value added taxes) and transportation costs and is subject to
interest at the LIBOR plus 4.5 points. Interest is to be paid at various
intervals ranging from monthly to biannually, depending upon which credit and
tranche the amount has been disbursed from.
At December 31, 1998, no advances have been made under this line of credit. The
short term trade payables balance shown in the consolidated balance sheet
includes liabilities of $72,521 and $32,868 payable to Qualcomm and Qualcomm
Wireless Services (Mexico), S. A. de C. V., respectively. These
dollar-denominated amounts are expected to be paid through advances on the
line-of-credit facilities.
(2) This line of credit is to be utilized as follows:
<TABLE>
<CAPTION>
Credit Term Maximum amount
------ ---- --------------
<S> <C> <C>
Credit 1 From the date of authorization to
December 31, 2000 $170,000
Credit 2 From January 1, 2001 to
December 31, 2002 100,000
Additional Credit From the date of authorization to
December 31, 2000 10,000
--------
$280,000
========
</TABLE>
F-72
<PAGE> 77
These loans are subject to interest at the Eurodollar rate (5.2 % at December
31, 1998) plus 4.5 points, adjusted monthly. The interest is to be paid on a
quarterly basis. At December 31,1998, $19,090 was outstanding under this line of
credit (Credit 1) and is included in long-term bank loans. This amount will be
paid as follows:
<TABLE>
<CAPTION>
December 31, Amount
- ------------ ------
<S> <C>
2002 $ 3,818
2003 5,727
2004 9,545
-------
$19,090
=======
</TABLE>
Principal payments of "A" and "B" tranches of credit managed by ABM AMRO Bank N.
V. will be negotiated in good faith and must be agreed upon by both the parties
prior to disbursement. Principal payment for other lines of credit will be made
on the dates and in the proportions shown below:
<TABLE>
<CAPTION>
Portion payable on December 31,
-------------------------------------------------------------------------------------
Year in which the
disbursement was made 2002 2003 2004 2005 2006 2007
- --------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1998 and 1999 20% 30% 50%
2000 20% 30% 50%
2001 20% 30% 50%
2002 20% 30% 50%
</TABLE>
In order to collateralize the obligations derived from the financing contracts,
the Company has pledged all properties, rights and assets, as described in Note
1.
The lines of credit establish the following main obligations and restrictions
for the Company:
a. Disbursements from the lines of credit should be utilized only for the
acquisition of telecommunication equipment from Qualcomm and Alcatel.
b. The capital stock should be increased by two contributions of $50,000
each, by July 31, 1999 and on August 30, 2000, respectively.
c. Neither dividend payments nor capital distributions should be made during
the loan periods.
NOTE 7 - STOCKHOLDERS' EQUITY:
Telecomunicaciones was incorporated on June 24, 1998, with a contribution of $11
for the subscription of 100,000 common shares, each with a par value of one
Mexican peso.
F-73
<PAGE> 78
On June 30, 1998, the Company exchanged the original 100,000 common shares for
1,000 shares with no par value. On the same date, the Company received from its
stockholders $1 in exchange for the issuance of an additional 200 common shares.
On September 28, 1998, the Company received $299,988 in exchange for the
issuance of 7,499,388 Series "A", Class II shares, 7,199,412 Series "B", Class
II shares, and 15,300,000 Series "N" Class II shares.
At December 31, 1998, the authorized capital stock is 30,000,000 no-par-value
shares, all of which are issued and outstanding, as follows:
<TABLE>
<CAPTION>
Number of
shares Description Amount
- ---------- ----------- --------
<S> <C> <C>
Class I (fixed minimum portion):
612 Series A $ 6
588 Series B 6
Class II (variable portion):
7,499,388 Series A 74,994
7,199,412 Series B 71,994
15,300,000 Series N 153,000
- ---------- --------
30,000,000 $300,000
========== ========
</TABLE>
Series "N", Class "II" shares have limited voting rights.
In the event of a capital stock reduction, the portion of capital stock
exceeding contributions made is subject to income tax, payable by the Company,
equivalent to 53.85% of such excess.
NOTE 8 - INCOME TAX, ASSET TAX AND EMPLOYEES' STATUTORY PROFIT SHARING:
For the period ended December 31, 1998, Telecomunicaciones generated a net tax
loss of $4,976 and two of its subsidiaries a net tax loss of $8,394. The other
subsidiary, Recursos Humanos, had taxable income of $944 and as a result, the
Company has recognized a current tax provision of $321 in the consolidated
financial statements. The Company has obtained authorization from the Treasury
Ministry (Secretaria de Hacienda y Credito Publico) (SHCP) to determine its
income tax and asset tax on a consolidated basis starting in 1999.
The tax loss carryforwards of $13,370 can be inflation indexed by applying the
Mexican National Consumer Price Index from the date on which losses arise
through the date of their utilization. Such restated tax loss carryforwards can
be offset against future taxable profits, and expire in the year 2008.
F-74
<PAGE> 79
The tax effect of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<S> <C>
Interest and consultancy fees capitalized $ (4,978)
Preoperating expenses 13,706
Tax loss carryforwards 13,370
--------
$ 22,098
========
</TABLE>
The statutory income tax rate for 1998 was 34%. The following items represent
the principal differences between income taxes computed at the statutory tax
rate and the Company's provision for income taxes for the period ended December
31, 1998:
<TABLE>
<S> <C>
Tax at statutory rate (34%)
Foreign exchange loss on remeasurement of financial statements 3%
Permanent items, including inflationary effects 7%
Interest and consultancy fees capitalized (5%)
Preoperating expenses 15%
Valuation allowance 15%
---
Effective income tax rate 1%
===
</TABLE>
Asset tax is determined by applying the rate of 1.8% to the net amount of
certain assets and liabilities, and is payable only when asset tax exceeds
income tax due. For the period ended December 31, 1998, the Company was not
subject to the payment of asset tax.
For the period ended at December 31, 1998, the Company was not subject to the
payment of employees' statutory profit sharing.
NOTE 9 - COMMITMENTS:
As of December 31,1998, the Company is leasing offices and other spaces related
to its activity, under operating agreements expiring through 2003. Future
minimum lease payments under such leases amount to approximately $8,158, as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $2,490
2000 1,743
2001 1,429
2002 1,407
2003 1,089
------
$8,158
======
</TABLE>
Lease payments for the period ended December 31,1998 recorded in the Statement
of Income amounted to $824.
F-75
<PAGE> 80
NOTE 10 - FINANCIAL INSTRUMENTS:
The fair value of the Company's cash and cash equivalents, recoverable taxes,
other accounts receivable, trade payables, income taxes and other accounts
payable and accrued expenses approximate the carrying value due to the
short-maturity of these instruments.
The estimated fair value and carrying value of other financial instruments at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
value value
-------- -------
<S> <C> <C>
Notes payable to affiliated company $ 5,941 $ 5,823
Long-term bank loans 19,090 19,090
</TABLE>
F-76
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION NUMBERED PAGES
------- ----------- --------------
<S> <C> <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(4) Loan Agreement, dated as of September 28, 1998, between Pegaso
Comunicaciones y Servicios, S.A. de C.V. and the Registrant
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION NUMBERED PAGES
------- ----------- --------------
<S> <C> <C>
10.18(4) Promissory Note, executed September 25, 1998, by Pegaso
Comunicaciones y Servicios, S.A. de C.V. in favor of the
Registrant
10.19(4) 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(5) Consent of Independent Accountants relating to report dated
November 19, 1998 (Leap Wireless International, Inc.)
23.2(5) Consent of Independent Accountants relating to report dated
February 25, 1999 except as to Note 14 b) which is as of March
16, 1999 (Chilesat Telefonia Personal S.A.)
23.3(5) Consent of Independent Accountants relating to report dated
April 30, 1999 (Orrengrove Investments Ltd.)
23.4(5) Consent of Independent Accountants relating to report date
February 15, 1999 (Pegaso Telecomunicaciones, S.A. de C.V.)
27.1(4) 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.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1998.
(5) Filed with this Amendment No. 2.
<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/A (Amendment No. 2).
PRICEWATERHOUSECOOPERS LLP
San Diego, California
June 16, 1999
<PAGE> 1
Exhibit 23.2
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 February 25, 1999, except as to Note 14 b) which is as of
March 16, 1999 appearing on Page F-22 of this Annual Report on Form 10-K/A
(Amendment No. 2).
PRICE WATERHOUSE
Santiago, Chile
June 15, 1999
<PAGE> 1
Exhibit 23.3
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 April 30, 1999, appearing on Page F-43 of this Annual Report on
Form 10-K/A (Amendment No. 2).
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
June 16, 1999
<PAGE> 1
Exhibit 23.4
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 February 15, 1999, appearing on Page F-59 of this Annual Report
on Form 10-K/A (Amendment No. 2).
PRICE WATERHOUSE LLP
Mexico City, Mexico
June 16, 1999
