<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 19, 1999
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
0-29752 33-0811062
(Commission file number) (I.R.S. Employer
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)
<PAGE> 2
This amended report is being filed to add pro forma financial statements to
registrant's Current Report on Form 8-K, dated May 4, 1999. The pro forma
financial statements reflect registrant's April 19, 1999 acquisition of the
shares of Chilesat Telefonia Personal S.A. ("Chilesat PCS") that it did not
already own. In addition, the Chilesat PCS financial statements contained in
this amended report have been updated to include unaudited financial information
with respect to the three month period ended March 31, 1999.
ITEM 2. ACQUISITION OF ASSETS
On April 19, 1999, a wholly-owned subsidiary of Leap Wireless International,
Inc. (the "Company") acquired all of the shares of Chilesat PCS that it did not
already own from Telex-Chile S.A. and its operating affiliate, Chilesat S.A.
(collectively "Telex-Chile"). Chilesat PCS, a Chilean corporation that holds a
license to offer wireless telephone services, has deployed and is operating a
nationwide wireless telephone system in Chile. Prior to the acquisition, the
Company's wholly-owned subsidiary, Inversiones Leap Wireless Chile S.A.
("Inversiones") owned 50% of the shares of Chilesat PCS. The remaining 50% of
the shares of Chilesat PCS were owned by Telex-Chile.
Inversiones acquired the shares from Telex-Chile for (1) a cash payment of $28
million, and (2) a $22 million interest free note payable in April 2002.
The terms of the purchase, including the purchase price, were established
through arms-length negotiations between the Company, Telex-Chile S.A. and
Chilesat S.A. 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 Incorporated.
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.
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS
(a) Financial Statements of Business Acquired:
CHILESAT TELEFONIA PERSONAL S.A. (COMPANY IN THE DEVELOPMENT STAGE)
Financial Statements:
Report of Independent Accountants
Balance Sheet at March 31, 1999 (unaudited) and December 31, 1998 and 1997
Statement of Income and Comprehensive Income for the three month period ended
March 31, 1999 and 1998 (unaudited), for the year ended December 31, 1998,
and for the periods from inception (March 3, 1997) to December 31, 1997,
March 31, 1999 (unaudited), and December 31, 1998
Statement of Cash Flows for the three month period ended March 31, 1999 and
1998 (unaudited), for the year ended December 31, 1998 and for the periods
from inception (March 3, 1997) to December 31, 1997, March 31, 1999
(unaudited), and December 31, 1998
Statement of Shareholders' Equity for the period from inception (March 3,
1997) to December 31, 1998, and for the period January 1, 1999 to March 31,
1999 (unaudited)
Notes to the Financial Statements
2
<PAGE> 3
(b) Pro Forma Financial Information:
LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY)
Pro Forma Financial Statements
Unaudited Pro Forma Statement of Operations for the six months ended
February 28, 1999
Unaudited Pro Forma Statement of Operations for year ended August 31, 1998
Unaudited Pro Forma Balance Sheet as of February 28, 1999
Notes to the Pro Forma Financial Statements
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
---------- -----------
<S> <C>
10.21.1(1) Stock Purchase Agreement, dated April 12, 1999, by
and among Inversiones Leap Wireless Chile S.A.,
Telex-Chile S.A., and Chilesat S.A.
10.21.2 Novation and Assumption of Payment Obligation
Agreement, dated May 11, 1999, executed by Chilesat
Telefonia Personal S.A., Chilesat S.A. and
Inversiones Leap Wireless Chile S.A.
23.1 Consent of Independent Accountants
</TABLE>
- ----------
(1) Filed as an Exhibit to the Company's Current Report on Form 8-K dated May
4, 1999.
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 6th day of July,
1999.
Leap Wireless International, Inc.
By: /S/ JAMES E. HOFFMANN
-----------------------------------------
James E. Hoffmann
Senior Vice President and General Counsel
3
<PAGE> 4
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHILESAT TELEFONIA PERSONAL S.A. (COMPANY IN THE DEVELOPMENT STAGE)
Financial Statements:
Report of Independent Accountants....................................................................... F-2
Balance Sheet at March 31, 1999 (unaudited) and December 31, 1998 and 1997.............................. F-3
Statement of Income and Comprehensive Income for the three month period ended
March 31, 1999 and 1998 (unaudited), for the year ended December 31, 1998,
and for the periods from inception (March 3, 1997) to December 31, 1997,
March 31, 1999 (unaudited), and December 31, 1998.................................................... F-4
Statement of Cash Flows for the three month period ended March 31, 1999 and
1998 (unaudited), for the year ended December 31, 1998 and for the periods
from inception (March 3, 1997) to December 31, 1997, March 31, 1999 (unaudited),
and December 31, 1998................................................................................ F-5
Statement of Shareholders' Equity for the period from inception (March 3, 1997) to
December 31, 1998, and for the period January 1, 1999 to March 31, 1999 (unaudited).................. F-7
Notes to the Financial Statements....................................................................... F-8
LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY)
Pro Forma Financial Statements............................................................................ F-23
Unaudited Pro Forma Statement of Operations for the six months ended February 28, 1999.................. F-24
Unaudited Pro Forma Statement of Operations for year ended August 31, 1998.............................. F-25
Unaudited Pro Forma Balance Sheet as of February 28, 1999............................................... F-26
Notes to the Pro Forma Financial Statements............................................................. F-27
</TABLE>
F-1
<PAGE> 5
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, for the period from inception (March 3, 1997) to
December 31, 1997, and for the period from inception (March 3, 1997) to December
31, 1998, 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-2
<PAGE> 6
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
BALANCE SHEET
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
As of As of December 31,
March 31, -------------------------
1999 1998 1997
---------- ---------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,058 $ 942 $ 24,875
Accounts receivable - trade 1,404 1,017 --
Accounts receivable from related company -- -- 10
Other accounts receivable 119 134 133
Recoverable taxes 3,308 6,480 6,228
Inventories 1,421 4,419 --
Other current assets 1,348 779 695
---------- ---------- --------
Total current assets 8,658 13,771 31,941
PROPERTY, PLANT AND EQUIPMENT, NET 123,061 124,800 40,093
OTHER ASSETS 641 712 4
---------- ---------- --------
Total assets $ 132,360 $ 139,283 $ 72,038
========== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Interest payable $ 6,962 $ -- $ --
Interest payable to related companies 2,603 6,957 543
Accounts and note payable 27,033 1,804 380
Accounts and notes payable to related companies 37,167 52,572 247
Accrued liabilities and withholdings 911 2,160 960
---------- ---------- --------
Total current liabilities 74,676 63,493 2,130
---------- ---------- --------
LONG - TERM LIABILITIES
Note payable 43,326 -- --
Note payable to related company -- 49,807 23,655
Other long-term liabilities 8,491 8,496 4,579
---------- ---------- --------
Total long-term liabilities 51,817 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 42,000
Common stock (8,400,000 shares authorized,
issued and outstanding, with no par value) 1,964 1,964 1,964
Other capital contributions 940 493 --
(Deficit) surplus accumulated during the development stage (33,601) (21,943) 55
Accumulated other comprehensive losses (5,436) (5,027) (2,345)
---------- ---------- --------
Total shareholders' equity 5,867 17,487 41,674
---------- ---------- --------
Total liabilities and shareholders' equity $ 132,360 $ 139,283 $ 72,038
========== ========== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-3
<PAGE> 7
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 From the period
For the three month period from inception
period ended For the from inception (March 3, 1997) to
------------------------ year ended (March 3, 1997) --------------------------
March 31, March 31, December 31, to December 31, March 31, December 31,
1999 1998 1998 1997 1999 1998
--------- --------- ------------ --------------- --------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales $ 2,386 $ -- $ 1,284 $ -- $ 3,670 $ 1,284
Cost of sales (1,273) -- (1,570) -- (2,843) (1,570)
-------- -------- -------- -------- -------- --------
Gross margin 1,113 -- (286) -- 827 (286)
Remunerations and other staff costs (1,408) (735) (3,916) -- (5,324) (3,916)
Sales commissions (600) -- (882) -- (1,482) (882)
Marketing expenses (196) (352) (3,619) -- (3,815) (3,619)
General and administrative expenses (1,204) (81) (2,736) (659) (4,599) (3,395)
Depreciation and amortization (4,148) (14) (3,743) (4) (7,895) (3,747)
-------- -------- -------- -------- -------- --------
Net operating loss (6,443) (1,182) (15,182) (663) (22,288) (15,845)
-------- -------- -------- -------- -------- --------
NON-OPERATING RESULTS
Interest income 46 623 1,058 2,022 3,126 3,080
Interest expense (2,702) (7) (3,295) -- (5,997) (3,295)
Currency exchange losses (2,649) (1,242) (4,186) (1,280) (8,115) (5,466)
Other income (expenses) 90 (4) (393) (24) (327) (417)
-------- -------- -------- -------- -------- --------
Non-operating (loss) income (5,215) (630) (6,816) 718 (11,313) (6,098)
-------- -------- -------- -------- -------- --------
Net (loss) income (11,658) (1,812) (21,998) 55 (33,601) (21,943)
OTHER COMPREHENSIVE INCOME
Currency translation adjustment (409) (1,390) (2,682) (2,345) (5,436) (5,027)
-------- -------- -------- -------- -------- --------
Comprehensive loss $(12,067) $ (3,202) $(24,680) $ (2,290) $(39,037) $(26,970)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-4
<PAGE> 8
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF CASH FLOWS
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
For the From the period
For the three month period from inception
period ended For the from inception (March 3, 1997) to
------------------------ year ended (March 3, 1997) -------------------------
March 31, March 31, December 31, to December 31, March 31, December 31,
1999 1998 1998 1997 1999 1998
--------- --------- ------------ --------------- --------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING
ACTIVITIES
Net (loss) income $(11,658) $ (1,812) $(21,998) $ 55 $(33,601) $(21,943)
Adjustments to reconcile to net
cash used in operating activities:
Depreciation and amortization 4,148 14 3,743 4 7,895 3,747
Use of the network and signal
distribution services 447 -- 493 -- 940 493
Changes in working capital:
Accounts receivable - trade (387) (880) (1,017) -- (1,404) (1,017)
Accounts receivable from
related companies -- -- 10 (10) -- --
Other accounts receivable 15 -- (1) (133) (119) (134)
Recoverable taxes 3,172 1,520 (252) (6,171) (3,251) (6,423)
Inventories 3,161 -- -- -- 3,161 --
Other current assets (569) (5,269) (118) (695) (1,382) (813)
Accounts and note payable 3,403 494 1,424 380 5,207 1,804
Accrued interest and accounts
payable to related companies 972 -- 7,168 511 8,651 7,679
Accrued liabilities and
withholdings (1,249) (890) 1,200 957 908 2,157
-------- -------- -------- -------- -------- --------
Cash flow used in operating
activities 1,455 (6,823) (9,348) (5,102) (12,995) (14,450)
-------- -------- -------- -------- -------- --------
CASH FLOW FROM INVESTING
ACTIVITIES
Acquisitions of property, plant
and equipment (4,033) (22,349) (37,766) (14,383) (56,182) (52,149)
Other 71 4 (708) (4) (641) (712)
-------- -------- -------- -------- -------- --------
Cash flow used in investing
activities (3,962) (22,345) (38,474) (14,387) (56,823) (52,861)
-------- -------- -------- -------- -------- --------
CASH FLOW FROM FINANCING
ACTIVITIES
Notes payable to related companies -- 13,207 20,271 -- 20,271 20,271
Capital increase -- -- -- 42,000 42,000 42,000
Other long-term liabilities -- 1,377 3,917 4,579 8,496 8,496
-------- -------- -------- -------- -------- --------
Cash flow provided by
financing activities -- 14,584 24,188 46,579 70,767 70,767
-------- -------- -------- -------- -------- --------
Net (decrease) increase in cash (2,507) (14,584) (23,634) 27,090 949 3,456
Effect of exchange rate changes on cash 2,623 (52) (299) (2,215) 109 (2,514)
-------- -------- -------- -------- -------- --------
(Decrease) increase in cash and
cash equivalents 116 (14,636) (23,933) 24,875 1,058 942
Cash and cash equivalents at the
beginning of the period 942 24,875 24,875 -- -- --
-------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
THE END OF THE PERIOD $ 1,058 $ 10,239 $ 942 $ 24,875 $ 1,058 $ 942
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-5
<PAGE> 9
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF CASH FLOWS
Expressed in thousands of US dollars
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For the From the period
For the three month period from inception
period ended For the from inception (March 3, 1997) to
------------------------ year ended (March 3, 1997) -------------------------
March 31, March 31, December 31, to December 31, March 31, December 31,
1999 1998 1998 1997 1999 1998
--------- --------- ------------ --------------- --------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest paid $ 4 $ -- $695 $923 $1,622 $1,618
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
The following non-cash transactions occurred during the periods presented:
<TABLE>
<CAPTION>
From the period
For the For the period from inception
three month For the from inception (March 3, 1997) to
period ended year ended (March 3, 1997) ---------------------------
March 31, December 31, to December 31, March 31, December 31,
1999 1998 1997 1999 1998
------------ ------------ --------------- --------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Long-term financing received from related
company to purchase fixed assets
and inventories $ -- $ 14,745 $ 23,655 $ 38,400 $ 38,400
Short-term financing received from related
company to purchase fixed assets
and inventories -- 42,707 -- 42,707 42,707
Long-term financing to purchase fixed assets
and inventories 1,578 -- -- 1,578 --
Purchase of fixed assets from party
providing financing (1,415) (53,067) (23,655) (78,137) (76,722)
Purchase of inventories from party
providing financing (163) (4,385) -- (4,548) (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-6
<PAGE> 10
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF SHAREHOLDERS' EQUITY
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
Number of Number of Other
preferred common Preferred Common capital
shares shares stock stock contributions
--------- --------- -------- ------ -------------
<S> <C> <C> <C> <C> <C>
Capital increase at inception
on March 3, 1997 8,400,000 8,400,000 $ 42,000 $1,964 --
Share subscriptions receivable -- -- (42,000) -- --
Payment of share subscriptions
receivable -- -- 42,000 -- --
Net income for the period -- -- -- -- --
Currency translation adjustment -- -- -- -- --
--------- --------- -------- ------ ----
Balance at December 31, 1997 8,400,000 8,400,000 $ 42,000 $1,964 --
========= ========= ======== ====== ====
Balance at January 1, 1998 8,400,000 8,400,000 $ 42,000 $1,964 --
Other contributed capital -- -- -- -- $493
Net loss for the period -- -- -- -- --
Currency translation
adjustment -- -- -- -- --
--------- --------- -------- ------ ----
Balance at December 31,
1998 8,400,000 8,400,000 $ 42,000 $1,964 $493
========= ========= ======== ====== ====
Balance at January 1,
1999 8,400,000 8,400,000 $ 42,000 $1,964 $493
Other contributed capital
(unaudited) -- -- -- -- 447
Net loss for the period
(unaudited) -- -- -- -- --
Currency translation
adjustment (unaudited) -- -- -- -- --
--------- --------- -------- ------ ----
Balance at March 31, 1999
(unaudited) 8,400,000 8,400,000 $ 42,000 $1,964 $940
========= ========= ======== ====== ====
</TABLE>
<TABLE>
<CAPTION>
(Deficit)
surplus
accumulated Accumulated
during the other
development comprehensive
stage losses Total
----------- ------------- --------
<S> <C> <C> <C>
Capital increase at inception
on March 3, 1997 -- -- $ 43,964
Share subscriptions receivable -- -- (42,000)
Payment of share subscriptions
receivable -- -- 42,000
Net income for the period $ 55 -- 55
Currency translation adjustment -- $ (2,345) (2,345)
-------- -------- --------
Balance at December 31, 1997 $ 55 $ (2,345) $ 41,674
======== ======== ========
Balance at January 1, 1998 $ 55 $ (2,345) $ 41,674
Other contributed capital -- -- 493
Net loss for the period (21,998) -- (21,998)
Currency translation
adjustment -- (2,682) (2,682)
-------- -------- --------
Balance at December 31,
1998 $(21,943) $ (5,027) $ 17,487
======== ======== ========
Balance at January 1,
1999 $(21,943) $ (5,027) $ 17,487
Other contributed capital
(unaudited) -- -- 447
Net loss for the period
(unaudited) (11,658) -- (11,658)
Currency translation
adjustment (unaudited) -- (409) (409)
-------- -------- --------
Balance at March 31, 1999
(unaudited) $(33,601) $ (5,436) $ 5,867
======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-7
<PAGE> 11
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.
F-8
<PAGE> 12
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 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. The
unaudited financial statements for three months ended March 31, 1999 are
presented.
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 March 31, 1999,
December 31, 1998 and 1997 of Ch$ 484.08, 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-9
<PAGE> 13
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. For the three months ended March 31,
1999 (unaudited), the Company recorded US $197,000 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-10
<PAGE> 14
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,
As of March 31, --------------------------
1999 1998 1997
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Cash and bank deposits $ 586 $ 452 $ 899
Time deposits -- 490 10,195
Securities purchased under agreements to resell -- -- 13,736
Other 472 -- 45
-------- -------- --------
$ 1,058 $ 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, 1999. 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 three months ended March 31, 1999 (unaudited), 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-11
<PAGE> 15
NOTE 3 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
At December 31, 1998 and March 31, 1999 (unaudited), 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. Recoverable taxes at March 31, 1999 (unaudited) were US$
3,308,000. 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 is summarized as follows:
<TABLE>
<CAPTION>
As of March 31, As of December 31,
1999 1998
--------------- ------------------
(Unaudited)
<S> <C> <C>
Handsets $ 749 $3,137
Accessories 672 1,282
------ ------
$1,421 $4,419
====== ======
</TABLE>
F-12
<PAGE> 16
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
As of December 31,
As of March 31, ----------------------------
1999 1998 1997
--------------- --------- --------
(Unaudited)
<S> <C> <C> <C>
Land $ 332 $ 340 $ 140
Buildings and infrastructure 113,849 114,926 39,771
Machinery and equipment 1,522 1,555 88
Handsets 11,511 8,583 --
Other 3,637 3,100 98
Less: Accumulated depreciation (7,790) (3,704) (4)
--------- --------- --------
Total net $ 123,061 $ 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. The was no interest capitalized for the three month period
ended March 31, 1999.
NOTE 7 - ACCRUED LIABILITIES AND WITHHOLDINGS
Accrued liabilities and withholdings are summarized as follows:
<TABLE>
<CAPTION>
As of As of December 31,
March 31, -------------------------
1999 1998 1997
----------- -------- ------------
(Unaudited)
<S> <C> <C> <C>
Construction in progress $ -- $1,365 $597
Advertising and marketing expenses 167 321 278
Employee vacations 152 203 33
Other 592 271 52
---- ------ ----
Total $911 $2,160 $960
==== ====== ====
</TABLE>
F-13
<PAGE> 17
NOTE 8 - RELATED COMPANY TRANSACTIONS
a) Balances with related companies and Qualcomm Incorporated
<TABLE>
<CAPTION>
As of December 31,
As of March 31, -----------------------
Company Relationship 1999 1998 1997
------- ------------ --------------- -------- --------
(Unaudited)
<S> <C> <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 (1,042) (528) --
Inversiones Leap Wireless Chile S.A. Shareholder (1,561) (1,103) --
-------- -------- --------
$ (2,603) $ (6,957) $ (543)
======== ======== ========
Accounts and notes payable to
related companies:
Chilesat Servicios
Empresariales S.A. Affiliate (170) $ (134) $ --
Chilesat S.A. Shareholder (1,869) (733) (196)
Qualcomm Incorporated(1) -- -- (16,555) --
Leap Wireless
International, Inc. Affiliate (14,745) (14,745) --
Inversiones Leap
Wireless Chile S.A. Shareholder (20,271) (20,271) --
Telex-Chile S.A. Shareholder (35) (29) (12)
Telsys S.A. Affiliate (77) (105) (39)
-------- -------- --------
$(37,167) $(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-14
<PAGE> 18
b) Related company transactions
<TABLE>
<CAPTION>
For the
three month Amount of
period ended transactions
March 31, ----------------------
Company Relationship Transaction 1999 1998 1997
------- ------------ ----------- ------------ -------- --------
(Unaudited)
<S> <C> <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 42 130 --
Chilesat S.A. Shareholder Reimbursement of
costs incurred in
connection with
construction 646 586 589
Rental of office space 533 171 30
Leap Wireless
International, Inc. Affiliate Financing of purchases
from Qualcomm Inc. -- 14,745 --
Accrued interest on
note payable 514 528 --
Inversiones Leap
Wireless Chile S.A. Shareholder Financing -- 20,271 --
Accrued interest on
note payable 458 1,103 --
Telex-Chile S.A. Shareholder Reimbursement of costs
incurred in connection
with construction 9 29 49
Telsys S.A. Affiliate Computer services 15 965 39
</TABLE>
c) Transactions with Qualcomm Incorporated
<TABLE>
<S> <C> <C> <C> <C> <C>
Qualcomm
Incorporated(1) Purchase of equipment
and inventory $ -- $57,452 $23,655
Financing of purchases -- 42,707 23,655
Accrued interest on
note payable -- 4,783 543
</TABLE>
- --------------
(1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998.
F-15
<PAGE> 19
d) Notes payable to Qualcomm Incorporated and related companies
As a means of financing the purchase of infrastructure equipment from Qualcomm
Incorporated, the Company entered into a Deferred Payment Agreement whereby
Qualcomm Incorporated defers collection for the equipment subject to the terms
and conditions set forth in the Agreement. The assets of the Company
collateralize the obligation. The shares of the Company have also been pledged
by Telex-Chile and Chilesat in guaranty of the note payable to Qualcomm
Incorporated.
Under the terms of the agreement, Qualcomm Incorporated will make loans for the
equipment, software and services it provides to the Company up to a maximum of
US$ 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-16
<PAGE> 20
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 Working
payment Additional 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 $101,378
======= ======= ======= ========
</TABLE>
At March 31, 1999 (unaudited), the scheduled repayments for the deferred payment
agreement increased by US$ 1,578,000. There was no change in the additional
commitment and working capital loan.
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-17
<PAGE> 21
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 $8,496
======
</TABLE>
At March 31, 1999 (unaudited), the deferred customs duties and other long-term
liabilities were US$ 8,454,000 and US$ 37,000, respectively.
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.
At March 31, 1999 (unaudited), income tax loss carryforwards were approximately
US$ 35.1 million.
Deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
As of December 31,
As of March 31, -------------------------
1999 1998 1997
--------------- -------- ------
(Unaudited)
<S> <C> <C> <C>
Assets:
Provisions $ 132 $ 71 $ --
Tax loss carryforwards 5,259 3,649 785
Allowance for income tax loss carryforwards (5,391) (3,720) (655)
-------- -------- ------
Deferred income tax assets -- -- 130
-------- -------- ------
Liabilities:
Other -- -- (130)
-------- -------- ------
Deferred income tax liabilities -- -- (130)
-------- -------- ------
Net deferred income taxes $ -- $ -- $ --
======== ======== ======
</TABLE>
F-18
<PAGE> 22
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 to 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-19
<PAGE> 23
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 8c).
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-20
<PAGE> 24
The estimated fair value of the Company's financial instruments are summarized
as follows:
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998 At December 31, 1997
------------------------- ------------------------ -------------------------
Carrying Carrying Carrying
amounts Fair value amounts Fair value amounts Fair value
----------- ---------- -------- ---------- -------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,058 $ 1,058 $ 942 $ 942 $24,875 $24,875
Recoverable taxes 3,308 3,308 6,480 6,480 6,228 6,228
------- ------- ------- ------- ------- -------
Total $ 4,366 $ 4,366 $ 7,422 $ 7,422 $31,103 $31,103
======= ======= ======= ======= ======= =======
Liabilities:
Accrued liabilities and
withholdings $ 911 $ 911 $ 2,160 $ 2,160 $ 960 $ 960
Note payable 43,326 43,326 -- -- -- --
Note payable to related company -- -- 49,807 49,807 23,655 23,655
Other long-term liabilities 8,491 6,121 8,496 6,013 4,579 3,117
------- ------- ------- ------- ------- -------
Total $52,728 $50,358 $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). Rental expense for the three months ended March 31, 1999 (unaudited)
was US$ 267,000.
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-21
<PAGE> 25
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 to
Inversiones 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-22
<PAGE> 26
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA FINANCIAL STATEMENTS
The Pro Forma Financial Statements are based on the historical
consolidated financial statements of Leap Wireless International, Inc. and its
subsidiaries ("Leap" or the "Company") as of February 28, 1999 and for the six
months then ended and for the year ended August 31, 1998, adjusted to give
effect to the Company's acquisition of 50% of the shares of Chilesat Telefonia
Personal S.A. ("Chilesat PCS") on April 19, 1999. As a result of the acquisition
of the 50% of the shares of Chilesat PCS on April 19, 1999, the Company now owns
100% of the outstanding shares of Chilesat PCS.
The Pro Forma Statements of Operations for the six months ended February
28, 1999 and the year ended August 31, 1998 give effect to the acquisition of
the remaining 50% interest in Chilesat PCS as if it had occurred as of September
1, 1997. The Pro Forma Financial Statements include the historical results of
operations of Chilesat PCS for the six months ended December 31, 1998 and for
the year ended June 30, 1998, a two-month lag from Leap. The acquisition and
related adjustments are described in the accompanying notes.
The Pro Forma Financial Statements are based upon available information
and certain assumptions that management believes are reasonable. The Pro Forma
Financial Statements are provided for illustrative purposes only and do not
purport to represent what the Company's results of operations or financial
condition would actually have been had the acquisition of Chilesat PCS in fact
occurred on such date or to project the Company's results of operations or
financial condition for any future period or date. The Pro Forma Financial
Statements and accompanying notes should be read in conjunction with the
historical financial statements of the Company and Chilesat PCS.
F-23
<PAGE> 27
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28, 1999
-----------------------------------------------------------------
PRO FORMA
LEAP CHILESAT ADJUSTMENTS LEAP
HISTORICAL PCS RELATED TO CONSOLIDATED
(RESTATED) HISTORICAL CHILESAT PCS PRO FORMA
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ -- $ 1,284 $ -- $ 1,284
-------- -------- -------- --------
Operating expenses:
Cost of operating revenues -- (1,570) 493 (1) (1,077)
Selling, general & administrative expenses (8,283) (7,158) -- (15,441)
Depreciation and amortization (266) (3,747) (854)(1) (4,867)
-------- -------- -------- --------
Total operating expenses (8,549) (12,475) (361) (21,385)
-------- -------- -------- --------
Net operating loss (8,549) (11,191) (361) (20,101)
Equity in net loss of unconsolidated
wireless operating companies (38,260) -- 8,340 (2) (29,920)
Interest income 5,379 337 (2,407)(3) 3,309
Interest expense (1,913) (3,295) (859)(3) (6,067)
Currency exchange losses -- (1,550) -- (1,550)
Other income (expense) - net -- (362) -- (362)
-------- -------- -------- --------
Net loss $(43,343) $(16,061) $ 4,713 $(54,691)
======== ======== ======== ========
Unaudited pro forma basic and diluted
net loss per common share $ (2.45) $ (3.09)
======== ========
Shares used to calculate unaudited pro forma basic
and diluted net loss per common share 17,717 17,717
======== ========
</TABLE>
See Notes to the Pro Forma Financial Statements.
F-24
<PAGE> 28
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1998
----------------------------------------------------------------
PRO FORMA
LEAP CHILESAT ADJUSTMENTS LEAP
HISTORICAL PCS RELATED TO CONSOLIDATED
(RESTATED) HISTORICAL CHILESAT PCS PRO FORMA
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ -- $ -- $ -- $ --
-------- -------- -------- --------
Operating expenses:
Cost of operating revenues -- -- -- --
Selling, general & administrative expenses (23,888) (4,380) -- (28,268)
Depreciation and amortization -- -- -- --
-------- -------- -------- --------
Total operating expenses (23,888) (4,380) -- (28,268)
-------- -------- -------- --------
Net operating loss (23,888) (4,380) -- (28,268)
Equity in net loss of unconsolidated
wireless operating companies (23,688) -- 3,148 (2) (20,540)
Interest income 843 2,110 (428)(3) 2,525
Interest expense -- (239) (5,126)(3) (5,365)
Currency exchange losses -- (3,970) -- (3,970)
Other income (expense) - net -- (56) -- (56)
-------- -------- -------- --------
Net loss $(46,733) $ (6,535) $ (2,406) $(55,674)
======== ======== ======== ========
Unaudited pro forma basic and diluted net loss
per common share $ (2.65) $ (3.15)
======== ========
Shares used to calculate unaudited pro forma
basic and diluted net loss per common share 17,648 17,648
======== ========
</TABLE>
See Notes to the Pro Forma Financial Statements.
F-25
<PAGE> 29
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1999
------------------------------------------------------------------
PRO FORMA
LEAP ADJUSTMENTS LEAP
HISTORICAL CHILESAT PCS RELATED TO CONSOLIDATED
(RESTATED) HISTORICAL CHILESAT PCS PRO FORMA
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,072 $ 942 $ -- $ 7,014
--------- --------- -------- ---------
Other current assets 344 12,829 -- 13,173
Total current assets 6,416 13,771 -- 20,187
Property and equipment - net 2,733 124,800 -- 127,533
Investments in unconsolidated
wireless operating companies 177,209 -- (28,205)(7) 149,004
Loans receivable from unconsolidated
wireless operating company 37,422 -- (37,422)(4) --
Intangible assets -- -- 54,417 (5) 54,417
Other assets 12,906 712 775 (4) 14,393
--------- --------- -------- ---------
Total assets $ 236,686 $ 139,283 $(10,435) $ 365,534
========= ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities $ 4,022 $ 1,804 $ -- $ 5,826
Notes payable -- 59,529 (36,647)(4) 22,882
Loans payable to banks 16,201 2,160 -- 18,361
--------- --------- -------- ---------
Total current liabilities 20,223 63,493 (36,647) 47,069
Long-term debt 20,636 49,807 43,699 (6) 114,142
Other liabilities 606 8,496 -- 9,102
--------- --------- -------- ---------
Total liabilities 41,465 121,796 7,052 170,313
--------- --------- -------- ---------
Stockholders' equity:
Preferred stock -- 42,000 (42,000)(7) --
Common stock 2 1,964 (1,964)(7) 2
Additional paid-in-capital 293,359 493 (493)(7) 293,359
Deficit accumulated during the
development stage (95,626) (21,943) 21,943 (7) (95,626)
Accumulated other comprehensive
income (loss) (2,514) (5,027) 5,027 (7) (2,514)
--------- --------- -------- ---------
Total stockholders' equity 195,221 17,487 (17,487) 195,221
--------- --------- -------- ---------
Total liabilities and
stockholders' equity $ 236,686 $ 139,283 $(10,435) $ 365,534
========= ========= ======== =========
</TABLE>
See Notes to the Pro Forma Financial Statements.
F-26
<PAGE> 30
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS.
NOTE 1. BASIS OF PRESENTATION
On September 23, 1998, QUALCOMM Incorporated ("QUALCOMM") distributed all
of the outstanding Common Stock of the Company to QUALCOMM's stockholders (the
"Distribution"). The historical consolidated financial statements of the
Company, which have been used to prepare the Pro Forma Financial Statements,
reflect periods during which the Company did not operate as a separate,
independent company, and certain assumptions have been made in preparing such
statements. Therefore, such Pro Forma Financial Statements may not reflect the
results of operations that would have been achieved had the Company been a
separate, independent company for all periods presented.
On April 19, 1999, a wholly owned subsidiary of Leap acquired all of the
shares of Chilesat PCS that it did not already own from Telex-Chile S.A. and its
operating affiliate, Chilesat S.A. (collectively "Telex-Chile"). Chilesat PCS, a
Chilean corporation that holds a license to offer wireless telephone services,
has deployed and is operating a nationwide wireless telephone system in Chile.
Prior to the acquisition, the Company's wholly owned subsidiary, Inversiones
Leap Wireless Chile S.A. ("Inversiones"), owned 50% of the shares of Chilesat
PCS.
Inversiones acquired the remaining 50% of the shares of Chilesat PCS from
Telex-Chile for $28 million in cash and a $22 million, non-interest bearing note
payable to Telex-Chile due on April 19, 2002. Chilesat PCS agreed to pay
Inversiones' note payable to Telex-Chile and, in return, Chilesat PCS was
relieved of the obligation to pay certain amounts to Inversiones. The present
value of the $22 million non-interest bearing note payable to Telex-Chile is
$15.7 million. Therefore, the total purchase price for financial reporting
purposes is $43.7 million. The Company obtained $28 million for the cash payment
to Telex-Chile through a loan under the Company's credit facility with QUALCOMM.
The pro forma financial statements reflect the application of the purchase
method of accounting for the acquisition of all the shares of Chilesat PCS that
the Company did not already own. The purchase method of accounting requires the
purchase price to be allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition of which
approximately $35 million has been allocated to intangible assets, principally
related to licenses and telecommunications network systems. The Company has
previously accounted for its initial 50% interest in Chilesat PCS under the
equity method.
To accommodate the different fiscal periods of the Company and its
operating companies, including Chilesat PCS, the Company has adopted a two-month
lag for the recognition of the Company's share of net earnings or losses of such
investments. Estimates of the fair values of Chilesat PCS's assets and
liabilities as of December 31, 1998 have been used in the preliminary purchase
price allocation.
F-27
<PAGE> 31
The historical financial statements of Chilesat PCS have been converted to
U.S. dollars using the period end exchange rate for the assets and liabilities,
historical exchange rates for stockholders' equity and the average exchange rate
for the statements of operations for the respective periods. In addition,
certain reclassifications have been made to the historical consolidated
financial statements of Leap to conform to the pro-forma financial statement
presentation.
NOTE 2. ACCOUNTING CHANGE
In the third quarter of fiscal 1999, the Company adopted the equity method
of accounting for its existing investment in a United States telecommunications
operator. Under generally accepted accounting principles, a change from the cost
method to the equity method of accounting requires retroactive adjustment to all
prior period financial statements. Accordingly, the Leap historical financial
statements presented in these Pro Forma Financial Statements have been restated
to give effect to this accounting change.
NOTE 3. PRO FORMA ADJUSTMENTS RELATED TO CHILESAT PCS
(1) (a) Additional amortization of $0.4 million for the Chilesat PCS license
(amortized on a straight-line basis over a 28.7 year remaining expected
useful life) resulting from the preliminary purchase price allocation and
(b) reclassification of amortization of the telecommunications network
system of $0.5 million (amortized on a straight-line basis over a 11.5
year expected useful life) from cost of operating revenues to
depreciation and amortization. Consistent with the application of
generally accepted accounting principles applied to the historical
financial statements of Chilesat PCS, amortization of the license and
telecommunications network system began in September 1998 when commercial
telecommunications traffic commenced.
(2) Elimination of the Company's share of the net loss of Chilesat PCS for
the relevant period previously recognized under the equity method of
accounting.
(3) (a) Elimination of interest income recorded by Leap on inter-company
loans advanced to Chilesat PCS, (b) elimination of interest expense
recorded by Chilesat PCS on inter-company loans advanced by Leap to
Chilesat PCS, (c) additional interest expense for the periods reflecting
$28.0 million of borrowings by the Company under its credit facility with
QUALCOMM to fund the cash portion of the purchase price and (d)
additional imputed interest expense on the $22.0 million, non-interest
bearing three-year note payable to Telex-Chile, calculated using an
imputed interest rate of 11.73% commencing September 1, 1997.
(4) Elimination of inter-company loans receivable and payable with Chilesat
PCS, net of $0.8 million of loans receivable from Chilesat PCS not
eliminated due to the two month lag in reporting Chilesat PCS's results.
(5) To record estimated fair value of telecommunications network system and
licenses of $17.8 million and $36.6 million, respectively, in connection
with the preliminary purchase price allocation for Chilesat PCS.
(6) To record (a) $28.0 million of borrowings by the Company under its credit
facility with QUALCOMM; and (b) $15.7 million, representing the estimated
present value (calculated using an imputed interest rate of 11.73%) of
the $22.0 million non-interest bearing note payable to Telex-Chile by
Chilesat PCS, due April 19, 2002, for the acquisition of Chilesat PCS.
(7) Elimination of Leap's investment in and stockholders' equity of Chilesat
PCS upon consolidation with Leap.
F-28
<PAGE> 1
Exhibit 10.21.2
NOVATION
AND
ASSUMPTION OF PAYMENT OBLIGATION AGREEMENT
+++++++++++++++++
CHILESAT S.A.
INVERSIONES LEAP WIRELESS CHILE S.A.
AND
CHILESAT TELEFONIA PERSONAL S.A.
IN SANTIAGO, CHILE, on the eleventh of May of nineteen ninety nine, appear
before me, JOSE MUSALEM SAFFIE, Lawyer and Notary Public, Titular of the of the
Forty Eighth Notary Public's Office of Santiago, with domicile in this city on
Huerfanos number seven hundred and seventy, third floor: CHILESAT S.A. provider
of telecommunications services, Taxpayer Number eighty eight million, three
hundred and eighty one thousand, two hundred dash K, represented here by its
General Manager, Mr. RAMON VALDIVIESO RIOS, Chilean, married, Lawyer, national
identification number seven million nine hundred and five thousand four hundred
and fifty dash K and by its President Mr. JUAN EDUARDO IBANEZ, Chilean, married,
Lawyer, national identification number six million sixty two thousand four
hundred and sixteen dash K, all of them with domicile on Rinconada El Salto
number two hundred and two, Huechuraba, Santiago, hereinafter "CHILESAT";
INVERSIONES LEAP WIRELESS CHILE S.A., company with the line of business
indicated by its name, taxpayer number ninety six million, eight hundred and
nineteen thousand five hundred and twenty dash four, represented here by Mr.
LUIS OCTAVIO BOFILL GENZSCH, Chilean, Married, Lawyer, national identification
card number seven million three thousand six hundred and ninety nine dash one,
both with domicile on Tenderini number one hundred and fifty three, borough and
city of Santiago, hereinafter also called "LEAP"; and CHILESAT TELEFONIA
PERSONAL S.A. company with the line of business indicated by its name, taxpayer
number ninety six million seven hundred and ninety nine thousand two hundred and
fifty dash K, represented here by its General Manager Mr. RICHARD SUTHERLAND
GANSKONSKY, Chilean, married, commercial engineer, national identification card
number six million nine hundred and two thousand three hundred and seventeen
dash seven, both with domicile on Rinconada El Salto number two hundred and two,
borough of Huechuraba, Santiago, hereinafter also called "CHILESAT PCS", all of
those appearing before being of age, and having accredited their identity with
the above mentioned identification cards and manifesting that: /i/ Chilesat and
LEAP have been parties in a contract signed in the English language on April
twelve nineteen ninety nine and called "Stock Purchase Agreement", hereinafter
known as "Purchase and Sale of Shares", under whose terms the first company
transferred to the second all the stock it owned in Chilesat PCS; /ii/ according
to the terms and conditions set forth in the Purchase and Sale of Shares, the
price payable to Chilesat for the sale of its Shares would be paid partly in
cash - and which was in fact paid to Chilesat's entire satisfaction and the
balance, which amounted to twenty two million dollars, would be paid in pesos,
local currency, according to the Observed Dollar Rate for the day immediately
preceding the day of payment, in a period of three years counted
<PAGE> 2
from the day the agreement for the Purchase and Sale of Shares was signed, that
is, April nineteen of the year two thousand and two, accruing no interest; /iii/
Chilesat PCS owes LEAP the amount of thirty five million dollars - merely as
capital, without taking into account the interest accrued until that date - as
can be seen from the Deferred Payment Agreement and the LEAP Loan Agreement;
/iv/ LEAP has suggested to Chilesat that the obligation to pay the balance of
the price of the Purchase and Sale of Shares should be assumed by Chilesat PCS
in the same terms and conditions existing for LEAP, in exchange for a partial
remission of the debt indicated in number /iii/ above; /v/ Chilesat and Chilesat
PCS have irrevocably accepted this payment formula proposed by LEAP, because
aside from being stipulated in Clause one.two c) of the Purchase and Sale of
Shares agreement, and in clause two.two of this instrument, together with LEAP
they signed on April nineteen of nineteen ninety nine, via a private instrument,
a contract for the novation and assumption of indebtedness called in English
"Novation and Assumption of Payment Obligation Agreement", hereinafter known as
"Novation Agreement." Section two.six of the Purchase and Sale of Shares
agreement stipulates the obligation of the buying and selling parties -and the
obligation that the latter has of causing the same action to be followed by
Chilesat PCS -, to sign a Spanish version of the Novation Agreement, via
notarized document containing a true translation of the Novation Agreement, plus
any amendments agreed upon by the parties themselves. It was also stipulated
that once the corresponding notarized document had been granted, the Spanish
language Novation would replace the Novation Agreement definitively.
CONSEQUENTLY, considering the above, and the statements contained in this
instrument, the Novation Agreement and the Purchase and Sale of Shares
agreement, the parties hereto have agreed upon the following Novation and
Assumption of Payment Obligation Agreement, hereinafter referred to as "the
Novation."
FIRST: DEFINITIONS. As used in this Agreement, the terms listed below shall have
the respective meanings set forth below.
"Acquisition" means the acquisition on the date hereof by Leap Chile
or its designee of all of the shares of common stock of the Debtor held by
Telex-Chile and Chilesat S.A.
"Additional Shares of Capital Stock" shall mean all shares of
capital stock (whether common or preferred) of the Debtor issued or sold (or,
pursuant to Section 2.04 (b), deemed to be issued) by the Debtor after the date
hereof.
"Affiliate" means, with respect to any Person, (i) each other Person
of which an economic interest of more than twenty-five percent (25%) is held by
such Person, directly or indirectly, whether by ownership of capital stock,
contract or otherwise and (ii) each other Person which, directly or indirectly,
controls, is controlled by, or is under common control with, such Person
(excluding any trustee under, or any committee with responsibility for
administering, any pension plan or employee benefit plan). A Person shall be
deemed to be "controlled by" another Person if such other Person possesses,
directly or indirectly, power (i) to vote more than twenty-five percent (25%) or
more of the securities (on a fully diluted basis)
<PAGE> 3
having ordinary voting power for the election of directors, managing general
partners or managing members or (ii) to direct or cause the direction of the
management and policies of such Person, whether by contract or otherwise.
"Base Price" shall have the meaning set forth in Section 2.03 (d).
"Business Day" means any day other than a Saturday or a Sunday or
other day on which commercial banks in New York City or Santiago, Chile are
authorized or required by law to close.
"Chilean GAAP" means generally accepted accounting principles in
Chile as in effect from time to time.
"Chilesat S.A." means Chilesat S.A., a corporation organized under
the laws of Chile.
"Debtor" shall have the meaning set forth in the headings hereto.
"Deferred Payment Agreement" means the Amended and Restated Deferred
Payment Agreement, dated June 24, 1998, among the Debtor, Telex-Chile, QUALCOMM
Incorporated and Leap Wireless (as assignee of Qualcomm Incorporated), as
amended, modified or supplemented from time to time.
"Dollar," "Dollars" and "$" shall mean dollars in lawful currency of
the United States of America.
"Event of Default" means any of the events specified in Section
5.01, provided that any requirement for the giving of notice, the lapse of time,
or both, or any other condition, has been satisfied.
"Financial Statements" means, with respect to any accounting period
for a Person, statements of income and cash flows of said Person for such
period, and balance sheets of said Person as of the end of such period, setting
forth in each case in comparative form figures for the corresponding period in
the preceding fiscal year if such period is less than a full fiscal year or, if
such period is a full fiscal year, corresponding figures from the preceding
annual audit, all prepared in reasonable detail and in accordance with Chilean
GAAP consistently applied and which shall fairly present the financial condition
of such Person.
"Governmental Authority" means any nation or government, any state
or other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Holder" shall have the meaning set forth in the headings hereto.
"Indebtedness" means as to any Person, (a) indebtedness of such
Person for borrowed money, (b) all capitalized leases of such Person, (c) all
obligations of such Person for the deferred purchase price of property or
services
<PAGE> 4
(other than trade or other accounts payable in the ordinary course of business
in accordance with customary industry terms).
"Leap Chile" means Inversiones Leap Wireless Chile S.A., a
corporation organized under the laws of Chile.
"Leap Credit Agreement" means the Loan Agreement dated June 24,
1998, among the Debtor, Telex-Chile and Leap Chile, as amended, modified or
supplemented from time to time.
"Leap Wireless" means Leap Wireless International, Inc., a
corporation organized under the laws of Delaware.
"Libor" applicable to any calendar month means the rate per annum
(rounded upward, if necessary, to the next higher 1/16 of 1%) equal to the rate
reported on the Telerate Screen, page 3750, as the rate at which deposits in
Dollars are offered by major banks in the London interbank market at
approximately 11:00 a.m. (London time) two London Business Days before the first
day of such calendar month in an amount approximately equal to the aggregate
principal amount of the outstanding principal due under this Agreement and
subject to such Interest and for a one month period. Libor so determined shall
apply to all principal outstanding under this Agreement and in default during
the applicable calendar month regardless of changes in the Libor occurring
during such month.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority or other security agreement or preferential
agreement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement, or any financing lease
having substantially the same economic effect as any of the foregoing).
"Material Adverse Effect" shall mean (a) a material adverse change
in, or a material adverse effect upon, the operations, business, assets,
properties, condition (financial or otherwise) or prospects of the Debtor and
its Subsidiaries taken as a whole that results in a material impairment of the
ability of the Debtor to perform its obligations hereunder; or (b) a material
adverse effect upon the legality, validity, binding effect or enforceability
against the Debtor of this Agreement.
"Observed Exchange Rate" means, at any date of determination, the
rate of exchange of U.S. dollars and Chilean pesos calculated with reference to
the "dolar observado," as published for such date by the Central Bank of Chile
in accordance with paragraph 6 of Chapter I of Title 1 of the Compendium of
Foreign Exchange Rules of the Central Bank of Chile, or if no such rate is
published by the Central Bank or reported in Chile, then published or announced
rate of Citibank (of if Citibank does not publish or announce such rate, the
rate published or announced by Bank of America) or if neither such bank
announces or publishes a rate than to the foreign exchange spot mid-rates for
such day reported in The Wall Street Journal, or, if not so reported, to the
mid-market foreign exchange spot closing rates for such day
<PAGE> 5
reported in the Financial Times, or, if not so reported, to spot foreign
exchange mid-market rates for trading among banks in amounts of US$1,000,000 or
more.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
limited liability company, Governmental Authority or other entity of whatever
nature.
"Requirements of Law" means, as to any Person, the articles of
incorporation, bylaws, estatutos sociales or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Restricted Payment" shall mean (i) any payment of a dividend or
distribution (whether in cash, securities or other property) with respect to any
shares of any class of capital stock of the Debtor, or (ii) any payment (whether
in cash, securities or other property), on account of the purchase, redemption,
retirement, acquisition, cancellation or termination of any such shares of
capital stock of the Debtor, or (iii) any payment with respect to any option,
warrant or other right to acquire any such shares of capital stock of the
Debtor.
"Stock Purchase Agreement" means the Stock Purchase Agreement, dated
April 12, 1999, among Leap Chile, as Purchaser, and Telex-Chile and Chilesat
S.A., as Sellers.
"Subsidiary" means, as to any Person, an entity of which fifty
percent (50%) of the shares of stock (or similar equity interests) having
ordinary voting power (other than stock having such power only by reason of the
occurrence of a contingency) are at the time owned or controlled, directly or
indirectly, through one or more intermediaries, or both, by such Person.
"Telex-Chile" means Telex-Chile S.A., a corporation organized under
the laws of Chile.
SECOND: NOVATION AND ASSUMPTION OF PAYMENT OBLIGATION
Two.one. As stipulated in Clause One.two /c/ of the Purchase and Sale of Shares
agreement, the Original Debtor owes the Creditor a balance of twenty two million
dollars of the price. This sum is subject to a deduction or compensation
according to the Right to Receive Compensation and must be paid in the terms and
under the conditions stipulated in the Purchase and Sale of Shares, hereinafter
"the Obligation". Two.two. According to what is stipulated in the Purchase and
sale of Shares, Chilesat and LEAP agreed that the obligation would be assigned
by the latter company to Chilesat PCS, substituting it in such a way that the
latter company would assume unconditionally and irrevocably the Obligation,
releasing LEAP of the obligation of fulfilling the same. Two.three. LEAP hereby
assigns and transfers to
<PAGE> 6
Chilesat PCS the Obligation, which the latter company assumes. This assignment
and transfer is accepted by Chilesat, all of which is done by the parties with
the express purpose of novating by means of the change or substitution of the
Original Debtor by the Delegated debtor and under the terms and conditions
stipulated in the Novation. Two.four. The Delegated Debtor hereby expressly puts
on record that his consent has been given as a consideration and in compensation
for the liquidation, for the same amount of twenty two million dollars as of
this date, of the Delegated Debtor's obligation to pay LEAP, which is included
in the LEAP Loan Agreement. Two.five. For its part, the Creditor hereby declares
that it accepts what the Delegated Debtor says and acknowledges him as the new
debtor in the Obligation, debtor that subrogates and replaces fully and
definitively the Original Debtor in relation to the Obligation and consequently
the latter is unconditionally and irrevocably freed of any responsibility to
this respect. Two.six. The parties hereto manifest and acknowledge that what has
been said in the previous numerals is a novation involving the substitution of
the debtor and, therefore, they declare the Original Debtor's Obligation
extinguished, Likewise, the parties acknowledge that as a result of the
Novation, each and every one of the terms and conditions of the Obligation will
be fully valid and in force in relation to the Delegated Debtor. Finally, the
parties hereby expressly put on record that the irrevocable and unconditional
assumption of the Obligation by the Delegated Debtor is an element of the
essence for the Creditor's consent to the Purchase and sale of Shares.
Two.seven. By virtue of the Novation, the Delegated Debtor as new debtor in the
Obligation assumes responsibility for all commitments incurred by the Original
Debtor on occasion of that Obligation, undertaking to pay that obligation in the
terms and conditions indicated further on in this document.
THIRD: TERMS OF PAYMENT
SECTION 3.1. Interest. All sums payable hereunder shall be without
interest, except for default interest in accordance with Section 3.6.
SECTION 3.2. Optional Prepayments. The Debtor may at any time prepay
this Agreement in whole or in part.
SECTION 3.3. Mandatory Prepayments. (a) If the Debtor shall (i) make
any Restricted Payment to Leap Chile, Leap Wireless or any of their respective
Subsidiaries or (ii) make any Restricted Payment to a Person other than Leap
Chile, Leap Wireless or any of their respective Subsidiaries, successors or
assigns except out of retained earnings or profits, the Debtor shall on the date
of such Restricted Payment first prepay this Agreement in full.
(b) If the Debtor shall make a payment, repurchase, or redemption of
any principal due under any Indebtedness of the Debtor held by Leap Chile, Leap
Wireless, their respective Subsidiaries or, in the case of Indebtedness
outstanding as of March 29, 1999, to Leap Chile and/or to Leap Wireless or to
any of their respective successors, assigns or transferees, the Debtor shall on
the date of such payment first prepay this Agreement in full.
<PAGE> 7
(c) After the Debtor shall have issued any Additional Shares of
Capital Stock or incurred any Indebtedness and received net proceeds (whether in
cash, securities, other property, but not including forgiveness of Indebtedness)
in an aggregate amount (in combination with all issuances of capital stock or
incurrences of Indebtedness from the date hereof) in excess of U.S.$200,000,000,
the Debtor shall apply on the date of each such issuance or incurrence an amount
equal to 50% of the net proceeds thereof in excess of the amount of
U.S.$200,000,000 toward the prepayment of this Agreement.
(d) If at any time on or before March 19, 2000 the Debtor or Leap
Chile sells capital stock (whether common or preferred) of the Debtor to any
Person for more than the Base Price per share (as defined and adjusted from time
to time as provided in Section 3.4 (the "Base Price")), the Debtor shall, on the
date of such sale, (i) if the sale occurs on or before June 30, 1999, apply an
amount equal to 50% of the excess net proceeds over the Base Price per share
realized in such sale multiplied by the number of shares sold toward the
prepayment of this Agreement and (ii) if the sale occurs after June 30, 1999 and
on or before March 19, 2000, apply an amount equal to 25% of the excess net
proceeds over the Base Price per share realized in such sale multiplied by the
number of shares sold toward the prepayment of this Agreement. Any sale of
shares of a holding company of Debtor established between Leap Chile and Debtor
which does not have material assets and/or liabilities other than the shares of
Debtor shall be treated as a sale of the underlying shares of Debtor (with
appropriate proportional adjustments to the applicable Base Price to reflect any
differences in the number of shares outstanding in such holding company and the
number of shares outstanding in Debtor (e.g. if the applicable Base Price is
$5.00 per share and Debtor has 20 Million shares outstanding before the sale and
the holding company has 10 Million shares outstanding before such sale, the Base
Price applicable to the holding company shall be $10 per share)).
(e) Notwithstanding anything to the contrary in this Section 3.3,
the conversion of the loans under the Leap Credit Agreement or the Deferred
Payment Agreement into equity of the Debtor shall not under any circumstances
require the Debtor to prepay this Agreement or affect the Base Price.
SECTION 3.4 Adjustment of Base Price. (a) On the date of this
Agreement, the Base Price for common shares shall be U.S.$5.00 per share and the
Base Price for preferred shares shall be U.S.$5.00 plus such sum as determined
by the board of directors of the Debtor in good faith to be the amount of the
increased value of the preferred shares over common shares as a result of the
rights, preferences and privileges of the preferred shares. Thereafter, in case
the Debtor at any time or from time to time after the date hereof shall issue or
sell Additional Shares of Common Stock (including Additional Shares of Capital
Stock deemed to be issued pursuant to Section 3.4 (b)) for a consideration per
share less than the Base Price in effect immediately prior to such issue or
sale, then, and in each such case, such Base Price shall be adjusted,
concurrently with such issue or sale to a price per share (calculated to the
nearest .001 of a cent) determined by multiplying such Base Price by a fraction
<PAGE> 8
(i) the numerator of which shall be (A) the number of shares of
capital stock of the Debtor outstanding immediately prior to such issue or sale,
plus (B) the number of shares of capital stock of the Debtor which the aggregate
consideration received by the Debtor for the total number of such Additional
Shares of Capital Stock so issued or sold would purchase at such Base Price,
plus (c) the number of shares of capital stock of the Debtor sold to a Person
other than Leap Chile, Leap Wireless or any of their respective Affiliates, and
(ii) the denominator of which shall be the number of shares of
capital stock of the Debtor outstanding immediately after such issue or sale,
provided that, for purposes of this Section 3.4, (X) immediately after any
Additional Shares of Capital Stock are deemed to have been issued pursuant to
Section 3.4(b), such Additional Shares shall be deemed to be outstanding, and
(Y) treasury shares shall not be deemed to be outstanding.
(b) In case the Debtor at any time or from time to time after the
date hereof shall declare or pay any dividend on its capital stock payable in
capital stock, or shall effect a subdivision of the outstanding shares of its
capital stock into a greater number of shares of capital stock (by
reclassification or otherwise than by payment of a dividend in capital stock),
then, and in each such case, Additional Shares of Capital Stock shall be deemed
to have been issued (i) in the case of any such dividend, immediately after the
close of business on the record date for the determination of holders of any
class of securities entitled to receive such dividend, or (ii) in the case of
any such subdivision, at the close of business on the day immediately prior to
the day upon which such corporate action becomes effective.
(c) For the purposes of this Section 3.4,
(i) the consideration for the issue or sale of any Additional Shares
of Capital Stock shall, irrespective of the accounting treatment of such
consideration,
(A) insofar as it consists of cash, be computed at the net
amount of cash received by the Debtor,
(B) insofar as it consists of property (including securities)
other than cash, be computed at the fair market value thereof at the time of
such issue or sale, as determined in good faith by the Board of Directors of the
Debtor, and
(C) in case Additional Shares of Capital Stock are issued or
sold together with other stock or securities or other assets for consideration
which covers both, be the portion of such consideration so received, computed as
provided in clauses (A) and (B) above, allocable to such Additional Shares of
Capital Stock, all as determined in good faith by the Board of Directors of the
Debtor; and
(ii) Additional Shares of Capital Stock deemed to have been issued
pursuant to Section 3.4(b), relating to stock dividends, stock splits, etc.,
shall be deemed to have been issued for no consideration.
<PAGE> 9
SECTION 3.5. Payments and Computations. (a) The Debtor shall make
each payment hereunder not later than 12:00 Noon (Santiago time) on the day when
due in the amount of Chilean Pesos (equivalent to the U.S. dollars due converted
at the Observed Exchange Rate on the day before the date of payment) in same day
funds to the Holder at its address referred to in Section 7.2 or to the account
of the Holder designated in writhing by the Holder.
(b) Whenever any payment hereunder shall be stated to be due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business Day.
SECTION 3.6. Default Interest. Any overdue principal or other amount
payable under this Agreement shall bear interest, payable on demand, for each
day until paid at a rate per annum equal to Libor (as defined below) plus five
percent (5%) on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest is payable.
SECTION 3.7. Right of Set-off. The Debtor is hereby authorized, to
the fullest extent permitted by law, to set off and apply any amounts payable by
Telex-Chile or Chilesat S.A. to the Debtor and/or Leap Chile on account of the
indemnities set forth in the Stock Purchase Agreement against any and all of the
obligations of the Debtor under this Agreement; provided, however, that if a
right of set off is claimed in bad faith, damages shall be payable to Holder
equivalent to fifty percent (50%) of the amount of the set off that is so
asserted. Any such damages shall be in addition to any costs and expenses
payable pursuant to Section 7.4 hereof.
FOURTH: REPRESENTATIONS AND WARRANTIES
SECTION 4.1. Representations and Warranties of the Debtor. The
Debtor represents and warrants as follows:
(a) Corporate Existence. The Debtor (i) is a corporation duly
incorporated and validly existing under the laws of Chile and (ii) has the
corporate power and authority to own its property and carry on its business as
now being conducted.
(b) Corporate Power; Authorization. The execution, delivery and
performance by the Debtor of this Agreement are within its corporate powers,
have been duly authorized by all necessary corporate action, and do not (i)
contravene the Debtor's estatutos sociales, (ii) violate any law or any
contractual restriction binding on or affecting the Debtor, except where such
violation may not reasonably be expected to have a Material Adverse Effect, or
(iii) result in or require the creation of any Lien, security interest or other
charge or encumbrance upon or with respect to any of its properties.
<PAGE> 10
(c) Approvals. To the Debtor's best knowledge following consultation
with Grasty, Quintana, Majlis y Cia, no consent, order, authorization or
approval or other action by, and no notice to or filing with, any Governmental
Authority or regulatory body is required for (i) the due execution, delivery and
performance by the Debtor of this Agreement, or (ii) the legality, validity,
binding effect or enforceability hereof.
(d) Enforceability. This Agreement is the legal, valid and binding
obligation of the Debtor, enforceable against the Debtor in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
relating to or affecting the enforcement of creditors' rights generally and by
equitable principles.
FIFTH: COVENANTS OF THE DEBTOR
SECTION 5.1. Affirmative Covenants. So long as any amount under this
Agreement shall remain unpaid, the Debtor shall, unless the Holder shall
otherwise consent in writing:
(a) Reporting Requirements. Furnish to the Holder copies of each of
the following:
(i) as prepared in the ordinary course of business (A)
quarterly Financial Statements of the Debtor and (B) audited annual Financial
Statements of the Debtor and each of its Subsidiaries accompanied, in the case
of (B) by an audit opinion letter by an accounting firm of recognized
international standing;
(ii) at the time of delivery of audited annual Financial
Statements Debtor shall deliver to Holder (x) a certificate from the Chief
Financial Officer of the Debtor certifying (A) that the Financial Statements
attached were prepared in accordance with Chilean GAAP and fairly present the
financial condition of such Person, and (B) that such officer is familiar with
the terms of this Agreement and that no Event of Default has occurred and is
continuing under this Agreement, or if such an Event of Default has occurred and
is continuing, containing a statement as to the nature thereof and the steps
being taken with respect thereto, and (y) a certificate of accountants of the
Debtor stating that in making the examination necessary for their certification
they have obtained no knowledge of any Event of Default which has occurred and
is continuing, or if, in the opinion of such accountants, an Event of Default
has occurred and is continuing, a statement as to the nature thereof; and
(iii) promptly after the sending or filing thereof, copies of
all reports which the Debtor and its Subsidiaries send to any of their
securities holders and any and all press releases issued by the Debtor and each
of its Subsidiaries.
(b) Insurance. Maintain, and cause each Subsidiary to maintain,
insurance with such insurance companies and associations, in such amounts and
covering such risks as may be determined in good faith by the board of
directors of
<PAGE> 11
the Debtor to be commercially reasonable. The Holder agrees that continuing
existing insurance coverage shall be commercially reasonable.
(c) Financial Records. Keep and maintain, and cause each of its
Subsidiaries to keep and maintain, accurate books and records of account in
accordance with Chilean GAAP consistently applied. Upon reasonable request and
with the consent of the Debtor, which consent will not be unreasonably withheld,
the Holder may request a certificate of accountants of Debtor stating that they
have made a reasonable examination necessary for their certificate and that they
have obtained no knowledge of an event of default which has occurred and is
continuing or, if in the opinion of such accountants, an event of default has
occurred and is continuing, a statement as to the nature thereof. Upon receipt
of such request, the Debtor, may at its option, either (i) provide such
certificate of the Debtor or (ii) permit the Holder or its representatives
during customary business hours to inspect and examine the Debtor's books and
records and to discuss its affairs, finances and accounts with its principal
officers. If the Debtor elects to provide the certificate as described in
Subparagraph (i) above, and the auditors certify that no event of default has
occurred which has not previously been disclosed to the Holder, the Holder shall
pay all costs and expenses associated with providing such certificate.
SECTION 5.2. Negative Covenants. So long as any amount under this
Agreement shall remain unpaid, the Debtor shall not, without the written consent
of the Holder enter into any transaction, including without limitation, the
purchase, sale, lease or exchange of property, the rendering of any service or
the payment of any management, advisory or similar fees, with any Affiliates,
unless such transaction is (i) in the ordinary course, and (ii) upon fair and
reasonable terms comparable to those obtainable in an arm's-length transaction
with a Person not an Affiliate.
SIXTH: EVENTS OF DEFAULT
SECTION 6.1. Events of Default. The occurrence of any of the
following events shall constitute an Event of Default hereunder:
(a) The Debtor shall fail to pay the principal amount of this
Agreement when the same becomes due and payable or shall fail to pay any other
amounts payable under this Agreement when the same become due and payable and
any such failure shall continue for five (5) Business Days; or
(b) A representation or warranty made by the Debtor under or in
connection with this Agreement shall prove to have been incorrect in any
material respect when made; or
(c) The Debtor shall fail to perform or observe (i) any term,
covenant or agreement contained in Section 6.2, or (ii) any other term, covenant
or agreement contained in this Agreement on its part to be performed or observed
and such failure shall continue for ten (10) Business Days after the Debtor has
notice of such failure from Holder; or
<PAGE> 12
(d) The Debtor shall (i) apply for or consent to the appointment of
a receiver, trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) make a general assignment for the benefit
of its creditors, (iii) be dissolved or liquidated in full or in part, (iv)
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
consent to any such relief or to the appointment of or taking possession of its
property by any official in an involuntary case or other proceeding commenced
against it; or
(e) Proceedings for the appointment of a receiver, trustee,
liquidator or custodian of the Debtor or of all or a substantial part of its
properties, or an involuntary case or other proceedings seeking liquidation,
reorganization or other relief with respect to the Debtor, under any bankruptcy,
insolvency or other similar law now or hereafter in effect shall be commenced
and an order for relief entered or such proceeding shall not be dismissed or
discharged within ninety (90) days after commencement thereof; or
(f) The Debtor and its Subsidiaries shall sell all or substantially
all its assets or property or shall otherwise cease to engage in a wireless
telecommunication business.
SECTION 6.2. Remedies. Upon the occurrence and continuance of any
Event of Default, the Holder may, upon the expiration of any applicable grace
period, exercise all rights and remedies granted to it by this Agreement or by
applicable law, in equity or otherwise.
SEVENTH: MISCELLANEOUS
SECTION 7.1. Amendments, Etc. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by the Debtor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the Holder and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
SECTION 7.2. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telegraphic and facsimile
communication) and sent by reliable courier, telegraphed, facsimiled or
delivered, and addressed to the Debtor or the Holder at its address shown below,
or at such other address as such party may, by written notice received by the
other party, have designated as its address for such purposes.
<PAGE> 13
Debtor: CHILESAT TELEFONIA PERSONAL S.A.
Rinconada El Salto 202
Huechuraba
Santiago
CHILE
Attention: Chief Financial Officer
Fax No. 011-562-382-5142
With copy to:
LEAP WIRELESS INTERNATIONAL, INC.
10307 Pacific Center Court
San Diego, CA
USA
Attention: General Counsel
Fax No. 1-619-882-6040
Holder: CHILESAT S.A.
Rinconada El Salto 202
Huechuraba
Santiago
CHILE
Attention: Gerente General
Fax No. 011-562-382-
With Copy to: General Counsel
All such notices and communications shall, when sent via courier, telexed,
telegraphed or facsimiled, be effective, if sent via courier, five Business Days
after delivery to the courier, if sent by telex, upon confirmation of receipt,
if telegraphed, upon delivery by the telegraph company, or if facsimiled, upon
being telecopied, with receipt telephonically confirmed by sender, respectively,
addressed as aforesaid.
SECTION 7.3. No Waiver; Remedies. No failure on the part of the
Holder to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies provided in this Agreement are cumulative and
not exclusive of any remedies provided by law.
SECTION 7.4. Costs and Expenses. The Debtor agrees to pay the Holder
on demand all reasonable costs and expenses, if any (including, without
limitation, reasonable attorneys' fees and expenses) incurred by the Holder in
connection with the enforcement of this Agreement.
SECTION 7.5. Binding Effect; Assignments; Governing Law.
(a) This Agreement shall be binding upon and inure to the benefit of
the Debtor, the Holder and their respective successors and assigns. The Debtor
shall
<PAGE> 14
remain primarily liable under this Agreement notwithstanding any assignment or
transfer of its assets or any purported delegation of duties under this
Agreement.
(b) The Debtor and the Holder hereby agree that the Holder shall be
entitled to sell, transfer or assign, through the sale of participation
interests or otherwise, all or any part of its rights, obligations and interests
that arise under this Agreement, in addition to this Agreement itself, without
any limitation whatsoever. The Debtor hereby grants its unconditional
authorization to the Holder to execute any such assignment, and agrees that it
shall be sufficient that there exist only an agreement between the Holder and
its assignee.The Holder shall notify the Debtor of the assignment in writing,
pursuant to the provisions of Section 7.2. The Debtor and the Holder hereby
agree that in the event of any such assignment, the rights and interests in and
to the Debtor's payment and performance of its obligations under this Agreement
shall be assigned in favor of the one or several assignees, to be shared jointly
with the Holder or such other assignees if the assignment is in part. The Holder
may disclose the Agreement and any financial or other information relating to
Debtor to any potential assignee or participant provided that such potential
assignee or participant agrees not to disclose the Agreement and such
information to other third parties except (i) to its Affiliates and to those
Persons with which a confidential relationship is maintained (including
regulators, legal counsel, accountants, or designated agent(s); (ii) where
required by law, regulation or legal process, provided that to the extent
practicable such potential assignee or participant shall give the Holder and
Debtor prior notice of any such legally required disclosure; (iii).with respect
to any such information that has become generally available other than through
any breach of this Agreement; or (iv) with the prior written consent of the
Holder and the Debtor.
(c) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE REPUBLIC OF CHILE WITHOUT REGARD TO THE CONFLICT OF LAW
PRINCIPLES THEREOF.
SECTION 7.6. Resolution of Disputes; Submission to Arbitration. The
parties hereto hereby agree that any legal action or proceeding brought by the
Holder with respect to this Agreement may be brought, at the Holder's sole and
exclusive option, in the ordinary courts of Chile, sitting in the Comuna de
Santiago, or, in the form of arbitration, before the Camara de Comercio de
Santiago. By execution hereof, the Debtor accepts and consents to, for itself
and with respect to its property, generally and unconditionally, the
non-exclusive jurisdiction of such courts and submission to such arbitral
proceeding and form; provided, however, that upon the commencement and pendency
of an arbitral proceeding pursuant to Article 6 of the Stock Purchase Agreement,
the Debtor's payment obligations hereunder shall be suspended in an amount up to
such amount as shall be contended in good faith in such arbitral proceeding by
the Debtor or Assignor as subject to reduction in accordance with the right of
set-off granted pursuant to Section 2.07 herein and Section 4.2 in the Stock
Purchase Agreement. Subject to the right of set-off, all amounts owing shall be
reinstated upon the resolution or termination of any such arbitral proceeding
commenced pursuant to the Stock Purchase Agreement.
<PAGE> 15
SECTION 7.7. Right of Suspension. If, following the closing of the
Acquisition, the validity of the Acquisition is challenged in any litigation,
arbitration or other legal proceeding, by a party other than Leap Chile, Leap
Wireless or any of their respective Affiliates, then until such proceeding is
finally resolved or settled, the Debtor shall be entitled to suspend payments
under this Agreement, and the due dates of any such payments shall be deferred
accordingly until the date on which such proceeding is finally resolved or
settled. All parties hereto agree not to take any action or position in any such
proceeding contrary to the validity of the Acquisition or this Agreement and
agree to cooperate in any such proceeding in order to resolve the matters
contested therein in favor of the validity of the Acquisition and this
Agreement.
SECTION 7.8. Interpretation. A) Severability. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. B) Headings.
Headings in this Agreement are for convenience of reference only and are not
part of the substance hereof. C) Joint Preparation. This Agreement is to be
deemed to have been prepared jointly by the Debtor and the Holder and any
uncertainty or ambiguity existing herein, if any, shall not be interpreted
against either party, but shall be interpreted according to the application of
the rules of interpretation for arm's length agreements.
SECTION 7.9. Survival. All indemnities herein shall survive the
execution and delivery of this Agreement and the repayment of the principal
amount thereof.
<PAGE> 16
SECTION 7.10 Special Domicile: The parties to this Novation agree to
establish as special domicile the city of Santiago for all legal purposes
related to the same.
CHILESAT TELEFONIA PERSONAL S.A.
By: /S/ RICHARD A. SUTHERLAND
Print Name: RICHARD A. SUTHERLAND
Title: GENERAL MANAGER
As Holder: As Assignor:
CHILESAT S.A. INV. LEAP WIRELESS CHILE S.A.
By: /S/ JUAN EDUARDO IBANEZ By: /S/ OCTAVIO BOFILL
Print Name: JUAN EDUARDO IBANEZ Print Name: OCTAVIO BOFILL
Title: PRESIDENT Title: GENERAL MANAGER
By: /S/ RAMON VALDIVIESO
Name: RAMON VALDIVIESO
Title: GENERAL MANAGER
<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 February 25, 1999 except as to Note 14 b) which is as of March
16, 1999, relating to the financial statements of Chilesat Telefonia Personal
S.A., which appears in this Current Report on Form 8-K/A (Amendment No. 1) of
Leap Wireless International, Inc. dated July 6, 1999.
PRICE WATERHOUSE
Santiago, Chile
July 6, 1999
