<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the quarterly period ended February 28, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from __________ to________
Commission file number: 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121-2779
(Address of Principal Executive Offices) (Zip Code)
(619) 882-6000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $0.0001 par value per share, 17,911,833 shares outstanding as of
April 8, 1999.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
February 28, August 31,
1999 1998
----------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,072 $ --
Loans receivable from unconsolidated wireless
operating company - current -- 25,227
Other current assets 344 --
--------- ---------
Total current assets 6,416 25,227
--------- ---------
Property and equipment - net 2,733 --
Investments in unconsolidated wireless operating companies 181,209 101,719
Loans receivable from unconsolidated wireless
operating companies 61,945 40,076
Other assets 12,906 6,838
--------- ---------
Total assets $ 265,209 $ 173,860
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 4,022 $ 5,789
Loans payable to banks 16,201 9,000
--------- ---------
Total current liabilities 20,223 14,789
--------- ---------
Long-term debt 20,636 --
Other liabilities 606 --
--------- ---------
Total liabilities 41,465 14,789
========= =========
Commitments (Notes 7 and 9)
Stockholders' equity:
Preferred stock - authorized 10,000,000 shares
$.0001 par value, no shares issued and outstanding -- --
Common stock - authorized 75,000,000 shares;
$.0001 par value, 17,823,619 shares issued
and outstanding 2 --
Additional paid-in capital 293,359 --
Former parent capital -- 197,598
Deficit accumulated during the development stage (67,103) (36,175)
Accumulated other comprehensive income (loss) (2,514) (2,352)
--------- ---------
Total stockholders' equity 223,744 159,071
--------- ---------
Total liabilities and stockholders' equity $ 265,209 $ 173,860
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNDAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED FOR THE PERIOD
FEBRUARY 28, FEBRUARY 28, SEPTEMBER 1, 1995
--------------------------- --------------------------- (INCEPTION) TO
1999 1998 1999 1998 FEBRUARY 28, 1999
------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C>
Equity in net loss of unconsolidated
wireless operating companies $ (18,301) $ (2,013) $ (25,845) $ (2,980) $ (37,218)
General and administrative expenses (4,185) (1,432) (8,549) (2,169) (34,194)
Interest income 3,853 -- 5,379 -- 6,222
Interest expense (862) -- (1,913) -- (1,913)
------------ ------------ ------------ ------------ ------------
Net loss $ (19,495) $ (3,445) $ (30,928) $ (5,149) $ (67,103)
============ ============ ============ ============ ============
Net loss per common share $ (1.10) $ (1.75)
============ ============
Weighted average common shares
outstanding 17,770,465 17,717,486
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE PERIOD
FEBRUARY 28, SEPTEMBER 1, 1995
---------------------------- (INCEPTION) TO
1999 1998 FEBRUARY 28, 1999
--------- --------- -----------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (30,928) $ (5,149) $ (67,103)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 265 -- 265
Equity in net loss of unconsolidated wireless
operating companies 25,845 2,980 37,218
Interest accrued to loans - net (2,916) -- (3,759)
Changes in assets and liabilities:
Other assets (4,677) -- (4,677)
Accounts payable and accrued liabilities (1,767) -- 4,022
Other liabilities 606 -- 606
--------- --------- ---------
Net cash used in operating activities (13,572) (2,169) (33,428)
========= ========= =========
Investing activities:
Purchase of property and equipment (2,950) -- (2,950)
Investments in unconsolidated wireless
operating companies (75,627) (3,835) (191,071)
Loans to unconsolidated wireless
operating companies (17,925) (480) (82,385)
Loan receivable to related party (17,500) -- (17,500)
Repayment of loan receivable from related party 17,500 -- 17,500
Acquisition of consolidated wireless
operating company -- -- (564)
Purchase of wireless communication licenses (689) -- (6,963)
--------- --------- ---------
Net cash used in investing activities (97,191) (4,315) (283,933)
========= ========= =========
Financing activities:
Proceeds from bank loans 6,720 -- 15,720
Borrowings under credit facility 31,888 -- 31,888
Repayment of borrowings under credit facility (17,500) -- (17,500)
Exercise of stock options 459 -- 459
Former parent's investment 95,268 6,484 292,866
--------- --------- ---------
Net cash provided by financing activities 116,835 6,484 323,433
--------- --------- ---------
Net increase in cash and cash equivalents 6,072 -- 6,072
Cash and cash equivalents at beginning of period -- -- --
--------- --------- ---------
Cash and cash equivalents at end of period $ 6,072 $ -- $ 6,072
========= ========= =========
Supplemental disclosure of non-cash investing and financing activities:
Loans to unconsolidated wireless operating
company converted to equity investment $ 28,196 -- $ 28,196
Deferred charge for credit facility fee due on
long-term debt $ 5,300 -- $ 5,300
</TABLE>
See accompanying notes.
4
<PAGE> 5
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON DEFICIT ACCUM- INCOME (LOSS),
STOCK ADDITIONAL COMBINED ULATED DURING CUMULATIVE
---------------------- PAID-IN CAPITAL THE DEVELOPMENT TRANSLATION
SHARES AMOUNT CAPITAL ACCOUNTS STAGE ADJUSTMENT TOTALS
---------- ---------- ---------- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 1, 1995 -- $ -- $ -- $ -- $ -- $ -- $ --
(inception)
Transfers from former parent -- -- -- 285 -- -- 285
Net loss -- -- -- -- (396) -- (396)
---------- ---------- ---------- ---------- -------------- ------------ ----------
Balance at August 31, 1996 -- -- -- 285 (396) -- (111)
Transfer from former parent -- -- -- 47,193 -- -- 47,193
Net loss -- -- -- -- (1,154) -- (1,154)
Cumulative translation adjustment -- -- -- -- -- 60 60
---------- ---------- ---------- ---------- -------------- ------------ ----------
Balance at August 31, 1997 -- -- -- 47,478 (1,550) 60 45,988
Transfers from former parent -- -- -- 150,120 -- -- 150,120
Net loss -- -- -- -- (34,625) -- (34,625)
Cumulative translation adjustment -- -- -- -- -- (2,412) (2,412)
---------- ---------- ---------- ---------- -------------- ------------ ----------
Balance at August 31, 1998 -- -- -- 197,598 (36,175) (2,352) 159,071
September 1, 1998 to February 28, 1999
(Unaudited): --
Transfers from former parent -- -- -- 95,268 -- -- 95,268
Net assets distributed by former
parent 17,647,685 2 292,864 (292,866) -- -- --
Exercise of stock options 175,934 -- 495 -- -- -- 495
Net loss -- -- -- -- (30,928) -- (30,928)
Cumulative translation adjustment -- -- -- -- -- (162) (162)
---------- ---------- ---------- ---------- -------------- ------------ ----------
Balance at February 28, 1999(Unaudited): 17,823,619 $ 2 $ 293,359 $ -- $ (67,103) $ (2,514) $ 223,744
========== ========== ========== ========== ============== ============ ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
On June 24, 1998, QUALCOMM Incorporated ("QUALCOMM") created a wholly owned
subsidiary, Leap Wireless International, Inc. (the "Company" or "Leap"), a
Delaware corporation. On September 23, 1998 (the "Distribution Date"), QUALCOMM
distributed all of the outstanding shares of common stock of the Company to
QUALCOMM's stockholders as a taxable dividend (the "Distribution"). In
connection with the Distribution, one share of the Company's common stock was
issued to every four shares of QUALCOMM common stock outstanding on September
11, 1998. Following the Distribution, QUALCOMM and the Company are operating as
independent companies.
The Company's business strategy is to operate, manage, support and otherwise
participate in Code Division Multiple Access ("CDMA") based wireless
telecommunications businesses and ventures in emerging international markets and
in the United States. Initially, the Company's principal markets for its
intended activities are in Latin America, Eastern Europe, Asia-Pacific and the
United States.
The Distribution
In connection with the Distribution, QUALCOMM transferred to the Company
its equity interests in the following domestic and international emerging
terrestrial based wireless telecommunications operating companies: Pegaso
Telecomunicaciones, S.A. de C.V. (Mexico), Metrosvyaz Limited (Russia),
Orrengrove Investments Limited (Russia), Chilesat Telefonia Personal, S.A.
(Chile), Chase Telecommunications Holdings, Inc. (United States), OzPhone Pty.
Ltd. (Australia), and certain other development stage businesses (the "Leap
Wireless Operating Companies"). QUALCOMM and the Company also agreed that, if
certain events occur within 18 months after the Distribution, QUALCOMM will
transfer to the Company its equity interests and working capital loan related to
Telesystems of Ukraine ("TOU"), a wireless telecommunications company in
Ukraine. To date, these conditions have not been satisfied. In connection with
the Distribution, QUALCOMM also transferred to the Company cash and certain
indebtedness of the Leap Wireless Operating Companies owed to QUALCOMM, as well
as certain miscellaneous assets and liabilities. The aggregate net tangible book
value of the assets transferred by QUALCOMM to the Company in connection with
the Distribution was $250 million.
The Company has agreed to assume certain of QUALCOMM's obligations to manage
operations of and finance costs relating to ongoing build-outs of the wireless
telecommunications systems being deployed by the Leap Wireless Operating
Companies, as well as certain miscellaneous liabilities.
Basis of Presentation
The accompanying interim consolidated financial statements have been
prepared by Leap without audit, in accordance with the instructions to Form 10-Q
and, therefore, do not necessarily include all information and footnotes
necessary for a fair presentation of its financial position, results of
operations, of cash flows and of stockholders' equity in accordance with
generally accepted accounting principles. In the opinion of management, the
unaudited financial information for the interim periods presented reflects all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation. These consolidated financial statements and notes thereto
should be read in conjunction with the combined financial statements, and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1998. Operating results for interim periods are not necessarily
indicative of operating results for an entire fiscal year. Certain prior period
amounts have been reclassified to conform to the current period presentation.
The preparation of financial statements in conformity with generally accepted
accounting
6
<PAGE> 7
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Investments in the Leap Wireless Operating Companies
Investments in corporate entities with less than 20% voting interest are
generally accounted for under the cost method. The Company uses the equity
method to account for investments in corporate entities in which it has voting
interest of 20% to 50% or in which it otherwise exercises significant influence.
Under the equity method, the investment is originally recorded at cost and
adjusted to recognize the Company's share of net earnings or losses and
cumulative translation adjustments of the investee, limited to the extent of the
Company's investment in, advances to and financial guarantees for the investee.
Such earnings or losses of the Company's investees are adjusted to reflect the
amortization of any differences between the carrying value of the investment and
the Company's equity in the net assets of the investee. For those unconsolidated
subsidiaries where Leap and its wholly owned subsidiaries are the only
contributors of assets, equity in net losses of unconsolidated wireless
operating companies includes 100% of the losses of the equity investee. To
accommodate the different fiscal periods of the Company and the unconsolidated
Leap Wireless Operating Companies, the Company has extended the lag for
recognition of the Company's share of net earnings or losses of such investments
from one month to two months. The effect of this change on previously reported
amounts was not considered material for restatement.
Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share",
which the Company has adopted to compute the net loss per common share amount
for the three and six months ended February 28, 1999. Historical net loss per
share for the three and six months ended February 28, 1998 is not presented
since the Company did not exist during those periods.
The net loss per common share for the three and six months ended February
28, 1999 was calculated by dividing the net loss for each of the periods by the
weighted average number of common shares outstanding for each of the periods of
17,770,465 and 17,717,486, respectively. The weighted average number of common
shares outstanding assumes that the shares issued at Distribution were
outstanding for the portion of the period prior to the Distribution. Stock
options for 6,205,029 common shares, the conversion of QUALCOMM's Trust
Convertible Preferred Securities which are convertible into 2,271,060 shares of
the Company's Common Stock, and the exercise of a warrant issued to QUALCOMM for
5,500,000 shares of the Company's Common Stock have not been considered in
calculating net loss per common share because their effect would be
anti-dilutive. As a result, the Company's basic and diluted net loss per common
share is the same.
NOTE 2. REPORTING COMPREHENSIVE INCOME
Effective September 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income". This
statement requires the Company to report in the financial statements, in
addition to net income (loss), comprehensive income (loss) and its components.
The adoption of FAS 130 had no impact on the Company's results of operations or
financial position. In accordance with FAS 130, the accumulated balance of other
comprehensive income (loss) is disclosed as a separate component of
stockholder's equity. Prior period financial statements have been reclassified
to conform to the requirements of FAS 130.
7
<PAGE> 8
Comprehensive income (loss) consisted of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED FOR THE PERIOD
FEBRUARY 28, FEBRUARY 28, SEPTEMBER 1, 1995
--------------------- --------------------- (INCEPTION) TO
1999 1998 1999 1998 FEBRUARY 28, 1999
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net loss $(19,495) $ (3,445) $(30,928) $ (5,149) $(67,103)
Other comprehensive income (loss):
Cumulative translation adjustment 425 -- (162) -- (2,514)
-------- -------- -------- -------- --------
Comprehensive loss $(19,070) $ (3,445) $(31,090) $ (5,149) $(69,617)
======== ======== ======== ======== ========
</TABLE>
NOTE 3. INVESTMENTS AND LOANS TO UNCONSOLIDATED LEAP WIRELESS OPERATING
COMPANIES
The Company and its consolidated subsidiaries have equity interests in
companies that hold wireless telephone licenses or are seeking such licenses.
Its participation in each company differs and the Company does not have majority
interests in such companies. The Company's ability to withdraw funds, including
dividends, from its participation in such investments is dependent in many cases
on receiving the consent of the other participants, over which the Company has
no control. The Company and its consolidated subsidiaries have investments in
Leap Wireless Operating Companies consisting of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
1999 1998
------------ ----------
<S> <C> <C>
Investments at equity $177,209 $ 97,719
Investment at cost 4,000 4,000
-------- --------
$181,209 $101,719
======== ========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF OWNERSHIP
-------------------------
FEBRUARY 28, AUGUST 31,
1999 1998
------------ ----------
<S> <C> <C>
COST INVESTMENT
Chase Telecommunications Holdings, Inc. (US) 7.2% 7.2%
EQUITY INVESTMENTS
Chilesat Telefonia Personal, S.A. (Chile) 50% 50%
Pegaso Telecomunicaciones, S.A. de C.V. (Mexico) 33% 49%
Metrosvyaz Limited (Russia) 50% 50%
Orrengrove Investments Limited (Russia) 50% 50%
</TABLE>
8
<PAGE> 9
Condensed combined financial information for the Leap Wireless Operating
Companies accounted for the investments under the equity method is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
February 28, August 31,
1999 1998
------------ ---------
<S> <C> <C>
Current assets $ 106,518 $ 73,250
Non-current assets 532,973 182,328
Current liabilities (195,917) (93,064)
Non-current liabilities (97,216) (61,055)
--------- ---------
Total stockholders' capital 346,358 101,459
Other stockholders' share of capital 188,611 25,307
--------- ---------
Company's share of capital 157,747 76,152
Excess cost of investment 19,462 21,567
--------- ---------
Equity investments in unconsolidated wireless
operating companies $ 177,209 $ 97,719
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, February 28,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 1,076 $ -- $ 1,284 $ --
======== ======== ======== ========
Operating expenses (36,197) (3,647) (45,907) (5,775)
Other income (expense), net 1,926 883 (1,313) 1,607
Foreign exchange loss (4,450) -- (4,024) --
-------- -------- -------- --------
Net loss (38,721) (2,764) (51,244) (4,168)
Other stockholders' share of net loss (20,486) (751) (25,709) (1,188)
-------- -------- -------- --------
Company's share of net loss (18,235) (2,013) (25,535) (2,980)
Amortization of excess cost of investment (66) -- (310)
-------- -------- -------- --------
Equity in net loss of unconsolidated
wireless operating companies $(18,301) $ (2,013) $(25,845) $ (2,980)
======== ======== ======== ========
</TABLE>
As of February 28, 1999, the Leap Wireless Operating Companies had not
commenced significant commercial revenue generating operations.
9
<PAGE> 10
Chase Telecommunications Holdings, Inc.
In June 1998, the Company agreed to provide a $25 million working capital
facility to Chase Telecommunications Holdings, Inc. ("Chase"). Borrowings under
the facility are subject to interest at prime plus 4.5% and are to be repaid by
June 2006. Borrowings are collateralized by substantially all of the assets of
Chase. At February 28, 1999, borrowings under the facility totaled $24.5
million, including $1.4 million of accrued interest. In December 1998, the
Company agreed to purchase substantially all the assets of Chase for $6.3
million; a warrant to purchase 1% of the common stock in a wholly-owned
subsidiary of the Company exercisable at $1.0 million; the Company's existing
stock ownership and warrants to purchase stock in Chase; and certain contingent
earn-outs. This acquisition involves the transfer of licenses, which is subject
to approval by the Federal Communications Commission ("FCC"), therefore, the
final closing of the transaction will not occur unless approval by the FCC is
obtained.
Chilesat Telefonia Personal, S.A.
The Company has a 50% ownership interest in a privately held corporate joint
venture, Chilesat Telefonia Personal, S.A. ("Chilesat PCS"), a development stage
company. The Company holds it shares in Chilesat PCS via a wholly owned
subsidiary, Inversiones Leap Chile, S.A. ("Inversiones"), formerly named
Inversiones QUALCOMM Chile, S.A. The remaining 50% ownership interest
represented by voting commons shares is owned by Telex-Chile, S.A. and its
subsidiary Chilesat, S.A. (together "Telex-Chile"). The Company recorded $4.9
million and $8.3 million in equity losses resulting from this investment during
the three and six months ended February 28, 1999, respectively and $35,000 and
($53,000) in equity losses during the three and six months ended February 28,
1998, respectively.
In June 1998, the Company and Inversiones entered into agreements with
Chilesat PCS to provide $35 million in short-term loans, convertible into common
equity if not repaid on or before January 31, 1999. If converted, the Company
and Inversiones Leap would hold voting shares of approximately 65% of Chilesat
PCS. At February 28, 1999, borrowings under the loans to Chilesat PCS remained
unpaid and totaled $37.4 million, including $2.4 million of accrued interest.
In February 1999, the Company and Inversiones communicated to Chilesat PCS that
it had incurred an event of default as a result of its failure to repay the
loans and of noncompliance with certain loan covenants. The Company and
Inversiones have the option to convert this debt into common equity or to pursue
payment through other means. Based on these events of default the loan has been
reclassified to non-current at February 28, 1999. See Note 9.
Pegaso Telecomunicaciones, S.A. de C.V.
The Company, through a wholly-owned subsidiary, QUALCOMM PCS Mexico, Inc.,
had a 49% ownership interest in a development stage company, Pegaso
Telecomunicaciones, S.A. de C.V. ("PEGASO"), a Mexican corporation. During
fiscal 1998, the Company advanced a portion of PEGASO's start-up working capital
requirements and provided a loan of $27.4 million to PEGASO. The purpose of the
loan was to fund a portion of the first PCS license payment. Interest on the
loan accrued at a rate of 10% and was added to the principal amount of the loan
outstanding. In September 1998, the Company provided $60.7 million of funding
and converted its advances and loan, with accrued interest, into common stock of
PEGASO. The Company's total investment in PEGASO after these transactions was
$100 million. On the same date, other investors also subscribed for and
purchased common stock of PEGASO such that, after these transactions, the total
par value of the common equity of PEGASO was $300 million. As a result, the
Company's ownership interest in PEGASO was diluted from 49% to 33%. Start-up
expenses incurred by PEGASO resulted in the Company recording $8.1 million and
$8.8 million in equity losses during the three and six months ended February 28,
1999, respectively and $0.7 million and $1.2 million in equity losses during the
three and six months ended February 28, 1998, respectively.
10
<PAGE> 11
QUALCOMM Telecommunications Ltd., Cayman Islands
The Company has a 70% interest in QUALCOMM Telecommunications Ltd.
("QUALCOMMTel Cayman"), a Cayman Islands corporation. QUALCOMMTel Cayman has a
50% interest in Metrosvyaz Limited ("Metrosvyaz"). The Company has agreed to
provide a $72.5 million loan facility to Metrosvyaz to support its business plan
and working capital needs. The $72.5 million loan facility was assumed by the
Company from QUALCOMM [at the Distribution Date] and forms part of a $175
million loan facility provided by QUALCOMM to Metrosvyaz in February 1998. The
Company has pledged its interest in Metrosvyaz as security for QUALCOMM's loan
facility. Borrowings under the facility are subject to interest at 13% and are
due in August 2007. Interest will be payable semi-annually beginning August 2000
and, prior to such time, added to the principal amount outstanding. At February
28, 1998, borrowings under the facility totaled $23.1 million, including $1.0
million of accrued interest, with a remaining loan commitment of $50.4 million.
As a result of start-up expenses incurred by Metrosvyaz, the Company recorded
$3.7 million and $6.2 million in equity losses during the three and six months
ended February 28, 1999, respectively and $0.6 million and $1.1 million in
equity losses during the three and six months ended February 28, 1998,
respectively.
QUALCOMM Telecommunications Ltd., Isle of Man
The Company has a 70% interest in QUALCOMM Telecommunications Ltd.
("QUALCOMMTel Isle of Man"), an Isle of Man corporation. QUALCOMMTel Isle of Man
holds a 50% investment in Orrengrove Investments Limited ("Orrengrove").
In August 1998, Orrengrove acquired a 60% interest in Transworld
Telecommunications, Inc., Transworld Communications Services, Inc., and
Transworld Communications (Bermuda), Ltd. (the "Transworld Companies"). As a
result of start-up expenses incurred by the Transworld Companies, the Company
recorded $1.6 million and $2.5 million in equity losses resulting from its
investment during the three and six months ended February 28, 1999,
respectively. See Note 9.
NOTE 4. INVESTMENTS IN OTHER ENTITIES AND ASSETS
The Company, through a wholly owned subsidiary, OzPhone Pty Limited
("OzPhone"), an Australian company, has several wireless communication licenses
in Australia. At February 28, 1999 the total cost of the licenses were $6.3
million.
In October 1998, the Company agreed to purchase a telecommunications license
from AirGate Wireless, L.L.C. for $19.5 million, paying an escrow deposit of
$0.6 million. The purchase is subject to approval of the FCC.
NOTE 5. LOANS PAYABLE
In July 1998 and between September and November 1998, Inversiones borrowed
$15.7 million under notes payable to banks in Chile. In February 1999,
Inversiones was granted a one year extension for the payment of the loans. The
renewed loans of $9.0 million and $6.7 million, along with capitalized interest
and fees, bear interest at rates of 8.1% and 8.5% per annum, respectively, and
are due to be repaid in February 2000.
NOTE 6. LONG-TERM DEBT
The Company entered into a secured credit facility with QUALCOMM (the
"Credit Facility") on September 23, 1998. The Credit Facility consists of two
sub-facilities. The first sub-facility enables the Company to borrow up to $35.2
million from QUALCOMM. The proceeds from this sub-facility may be used by the
Company solely to meet the normal working capital and operating expenses of the
Company, including salaries and overhead, but excluding, among other things,
strategic capital investments in wireless operators, substantial acquisitions of
capital equipment, and/or the acquisition of telecommunications
11
<PAGE> 12
licenses. The other sub-facility enables the Company to borrow up to $229.8
million from QUALCOMM. The proceeds from this second sub-facility may be used by
the Company solely to make certain identified investments.
In September 1998, the Company borrowed $5.3 million under the working
capital sub-facility to pay QUALCOMM a 2% facility fee. At February 28, 1999,
$14.4 million under the investment capital sub-facility has been borrowed to
make further loans to the Leap Wireless Operating Companies.
Amounts borrowed under the Credit Facility will be due and payable
approximately eight years following the Distribution Date. QUALCOMM has a first
priority security interest in, subject to some exceptions, substantially all of
the assets of the Company for so long as any amounts are outstanding under the
Credit Facility. The Credit Facility requires the Company to meet certain
financial and operating covenants. Amounts borrowed under the Credit Facility
bear interest at a variable rate equal to LIBOR plus 5.25% per annum. Interest
will be payable quarterly beginning September 30, 2001 and, prior to such time,
accrued interest shall be added to the principal amount outstanding. At February
28, 1999, $0.9 million of capitalized and accrued interest had been added to the
facility. See Note 9.
NOTE 7. COMMITMENTS
The Company has made guarantees and commitments to invest additional equity
and working capital into certain of the Leap Wireless Operating Companies. As of
February 28, 1999, these commitments totaled approximately $50.4 million. The
Company expects to fund its commitments with borrowings under the Credit
Facility.
NOTE 8. STOCKHOLDER RIGHTS PLAN
On September 9, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, the Board of
Directors declared a dividend, payable on September 16, 1998, of one preferred
purchase right (a "Right") for each share of common stock, $.0001 par value, of
the Company outstanding at the close of business on September 11, 1998. Similar
Rights will generally be issued in respect to common stock subsequently issued.
Each Right entitles the registered holder to purchase from the Company a one
one-thousandth share of Series A Junior Participating Preferred Stock, $0.0001
par value per share, at a purchase price of $90 (subject to adjustment). The
Rights are exercisable only if a person or group (an "Acquiring Person"), other
than QUALCOMM with respect to its exercise of the warrant granted to it in
connection with the Distribution, acquires beneficial ownership of 15% or more
of the Company's outstanding shares of common stock. Upon exercise, holders
other than an Acquiring Person, will have the right (subject to termination) to
receive the Company's common stock or other securities having a market value (as
defined) equal to twice the purchase price of the Right. The Rights, which
expire on September 10, 2008, are redeemable in whole, but not in part, at the
Company's option at any time for a price of $0.01 per Right.
In conjunction with the distribution of the Rights, the Company's Board of
Directors designated 75,000 shares of preferred stock as Series A Junior
Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Rights. At February 28, 1999, no shares of preferred stock were
outstanding.
NOTE 9. SUBSEQUENT EVENTS
In connection with the Distribution, the Company issued to QUALCOMM a
warrant to purchase approximately 17.5% of the Company's common stock. In March
1999, for cash consideration of $3 million, QUALCOMM agreed to forego the right
to acquire 1 million of the Company's common shares, such that QUALCOMM will not
hold more than 15% of the Company's common stock in the event that the remainder
of the warrant were fully exercised. The Company borrowed $3 million under the
Credit Facility to make the payment.
12
<PAGE> 13
In March 1999, the Company borrowed $20 million under the investment capital
sub-facility of the Credit Facility to submit a deposit payment for bidding in
the federal government's re-auction of broadband PCS spectrum.
The Transworld Companies, partially owned subsidiaries of Orrengrove,
obtained through a number of agreements the rights to utilize the capacity on
certain Russian satellites in order to provide commercial long-distance voice,
video and data services to the Russian Federation and the countries of the
former East Bloc. On April 5, 1999, the Transworld Companies were notified by
Mercury Telesat ("Mercury"), provider of the satellite capacity, that the
initial satellite launched under the agreements, Loutch II- Flight 1, had
experienced a thermal-related performance problem. The satellite's prognosis at
this time does not indicate that its operational status will be restored.
Although Mercury has guaranteed the satellite's performance, the outcome at this
time remains uncertain. The Transworld Companies have already identified and put
into operation a short-term terrestrial transmission solution; long-term
alternative transmission sources are being explored.
On April 13, 1999, the Company announced that it had agreed to increase its
ownership interest in Chilesat PCS from 50% to 100%. The Company's Chilean
subsidiary will purchase 50% of Chilesat PCS from Telex-Chile for $28 million
and the issuance by Chilesat PCS of a non-interest bearing $22 million note
payable in three years. The purchase agreement is subject to certain conditions
including the consent of the creditors of Telex-Chile.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
and combined financial statements and the notes thereto included in Item 1 of
this Quarterly Report and the audited combined financial statements and notes
thereto and Management's Discussion and Analysis of Results of Operations and
Financial Condition included in the Company's 1998 Annual Report on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences,
including factors relating to joint ventures and other entities in which the
Company has interests, include: the ability to successfully deploy wireless
networks; the ability to raise sufficient funds to finance such deployment; the
ability to control costs relating to constructing, expanding, and operating the
networks; the ability to attract new subscribers and the rate of growth of the
subscriber base; the usage and revenue generated from subscribers; the level of
airtime and equipment prices; the rate of churn of subscribers; the range of
services offered; the ability to effectively manage growth and the intense
competition in the wireless communications industry, as well as conditions
governing the use of network licenses set by various government and regulatory
authorities; developments in current or future litigation; and the other risks
detailed in the Company's Annual Report on Form 10-K under the heading "Factors
That Could Affect Future Performance."
PRESENTATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the financial position, results of operations, cash flows and
changes in stockholders' equity of the business that was transferred to the
Company by QUALCOMM Incorporated ("QUALCOMM") on September 23, 1998 as if the
Company were a separate entity for all periods discussed. In addition, the
results of the Company's unconsolidated operating companies have been included
as of and for the three months ended December 31, 1998, a two-month lag.
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
Leap Wireless International, Inc. (the "Company" or "Leap") is a wireless
communications carrier that owns, operates and deploys CDMA telecommunications
networks in domestic and international markets with strong growth potential.
Through its operating companies, Leap has launched all digital wireless networks
in Chile, Mexico and the United States, and plans to offer service in Russia and
Australia. Upon completion of the Company's pending U.S. asset acquisitions, the
Company will have interests in existing and planned telecommunications systems
covering 162 million potential customers, of which Leap's equity share will be
approximately 62 million. The Company is also seeking to acquire additional
C-block spectrum by bidding in the federal government's re-auction of broadband
PCS spectrum which began on March 23, 1999.
Domestic and international telecommunications markets are expanding rapidly
as countries seek to increase teledensity (i.e., the number of telephone lines
as a percentage of the population) and to increase competition among carriers.
Increased demand, decreased government regulation, and new spectrum auctions
have created opportunities for new providers to capture market share. Leap
believes that wireless is the cheapest and fastest way to increase teledensity
in regions not yet connected by copper telephone lines, and that the Company
possesses the expertise to oversee and manage the entry of new wireless
operating companies into these competitive markets.
Leap's strategy includes identifying and investing in growth markets with local
partners who provide familiarity with the market and an ability to facilitate
deployment. For each of its ventures in which it holds a significant position,
Leap is actively involved in the management of the networks, combining its
expertise in international markets with its wireless technical expertise in
CDMA. Leap is committed to bringing the
14
<PAGE> 15
benefits of reliable, cost-effective, and high-quality voice and data services
to its operating company customers.
Leap and its operating companies (the "Leap Wireless Operating Companies")
are in the early stages of development and are subject to the risks inherent in
establishing a new business enterprise. Leap's results of operations must be
considered in light of the risks, expenses and difficulties encountered by
companies at this stage of development, particularly companies involved in new
and rapidly evolving international markets and companies experiencing rapid
growth.
In the second quarter of fiscal 1999, Leap's Mexican operating company,
Pegaso, launched commercial operations in Tijuana, the first of four cities in
which it expects to begin offering wireless service in 1999. In addition, Pegaso
and Sprint PCS signed a roaming agreement during the second quarter of fiscal
1999 that will enable Pegaso's customers to use Sprint PCS's nationwide wireless
network in the United States. Under the agreement, Sprint PCS customers will
also be able to roam on Pegaso's network in Mexico.
On March 1, 1999, shortly after the end of the second quarter, Leap and Chase
Telecommunications, Inc., a company that Leap agreed to acquire in January 1999
("ChaseTel"), launched Leap's concept of providing flat-rate local area service
targeted at the mass consumer market. The service, called "comfortable wireless"
and marketed under the name "Cricket", was introduced in Chattanooga, Tennessee
using ChaseTel's existing infrastructure. Cricket provides customers with a
simple and affordable wireless communication option by allowing them to make
unlimited local calls for a flat rate. Leap and ChaseTel launched the service
under an agreement that stipulates that ChaseTel's management will control the
business until Leap's proposed acquisition of ChaseTel receives all necessary
governmental approvals and is completed.
Leap currently owns 7.2% of Chase Telecommunications Holdings, Inc., the
parent of ChaseTel. ChaseTel began offering wireless service in Chattanooga in
October 1998. On February 1, 1999, in anticipation of the launch of Cricket,
ChaseTel ceased selling conventional wireless service to new subscribers.
ChaseTel had approximately 4,900 subscribers at that time.
As of February 28, 1999, the end of the second quarter, approximately 32,000
subscribers were using wireless services provided by ChaseTel and Chilesat
Telefonia Personal S.A. ("Chilesat PCS"), Leap's operating company in Chile.
Subscriber numbers do not include Pegaso which launched commercial service on
February 25, 1999. Leap's equity share of these 32,000 subscribers was
approximately 13,500 subscribers.
On April 13, 1999, the Company announced that it had agreed to increase its
ownership interest in Chilesat PCS from 50% to 100%. The Company's Chilean
subsidiary has agreed to purchase 50% of Chilesat PCS from Telex-Chile, a
Chilean telecommunications company, and its affiliate, Chilesat S.A., for $28
million and the issuance by Chilesat PCS of a non-interest bearing $22 million
note payable in three years. Although the purchase agreement is subject to
certain conditions, including the consent of the creditors of Telex-Chile and
Chilesat S.A., the Company expects to complete the purchase within the near
future.
Subsequent to the end of the second quarter, QUALCOMM announced that it had
agreed to sell its CDMA wireless infrastructure division to Ericsson. QUALCOMM's
infrastructure division is the primary supplier of network infrastructure
equipment to Leap and the Leap Wireless Operating Companies. The Company is
uncertain how the sale may affect Leap and the Leap Wireless Operating
Companies, but the Company does not currently expect that the sale will have a
material effect on the existing financing commitments or supply agreements
between the Company and QUALCOMM. The Company understands that Ericsson will
assume many of QUALCOMM's obligations under such commitments and agreements.
As previously reported, the Company has agreed to acquire spectrum in North and
South Carolina from AirGate Wireless, L.L.C. and has agreed to acquire ChaseTel,
including its spectrum licenses, from Chase Telecommunications Holdings, Inc.,
in each case subject to Federal Communications Commission ("FCC") approval of
such acquisitions. The Company's application to the FCC to acquire the AirGate
spectrum has been opposed on the grounds that the Company does not qualify as a
"designated entity", a designation
15
<PAGE> 16
which entitles small businesses to preferential pricing and payment terms when
acquiring spectrum in the C and F blocks. During the second quarter, the Company
attended public hearings before the FCC and answered questions concerning the
proposed acquisitions and the Company's status as a "designated entity." The
Company believes that it qualifies as a "designated entity" and that it meets
all FCC requirements to obtain approval for the proposed asset acquisitions,
however, the FCC has not yet rendered a decision with respect to these matters.
If the FCC ultimately determines that the Company is not a "designated entity"
the Company does not expect to complete either of the two pending asset
acquisitions and the Company will not be permitted to complete the purchase of
any C block spectrum it would otherwise be entitled to purchase as a result of
the federal government's re-auction of broadband PCS spectrum.
In March 1999, Leap agreed to pay QUALCOMM $3,000,000 to amend QUALCOMM's
existing warrant to acquire Leap common stock by reducing the number of shares
for which the warrant is exercisable from 5,500,000 shares to 4,500,000 shares.
Leap believes that it paid a fair value for this amendment to the warrant. In
addition, Leap believes that this amendment will strengthen Leap's position that
it is a "designated entity" under FCC regulations by reducing QUALCOMM's
potential ownership interest in the Company.
Start-up wireless telecommunications companies typically require substantial
capital expenditures for the construction of their networks, license fees and
license acquisition costs. These costs are generally capitalized. In addition,
such companies typically incur significant marketing and other expenses as they
begin commercial operations. Accordingly, as the Leap Wireless Operating
Companies continue to build-out their networks, expand their operations, and
amortize their capitalized start-up costs, their net operating losses and Leap's
proportionate share of such losses will grow.
RESULTS OF OPERATIONS
The Company's consolidated net loss during the three and six month periods
ended February 28, 1999 was $19.5 million and $30.9 million, respectively,
compared to a net loss of $3.4 million and $5.1 million in the corresponding
periods of the prior fiscal year. The increases were primarily the result of
substantial start-up costs associated with the Company's international
subsidiaries.
Equity in net loss of unconsolidated wireless operating companies during the
three and six month periods ended February 28, 1999 was $18.3 million and $25.8
million, respectively, compared to $2.0 million and $3.0 million in the
corresponding periods of the prior fiscal year. The significant increases in the
Company's share in the net loss of unconsolidated wireless operating companies
were primarily related to increased network development and the significant
investment undertaken preparing to launch network service by the Company's
operating companies, primarily in the Company's subsidiary in Mexico.
General and administrative expenses were $4.2 million and $8.5 million for
the three and six month periods ended February 28, 1999, respectively, compared
to $1.4 million and $2.2 million in the corresponding periods of the prior
fiscal year. The increase is attributed primarily to increased Company staffing
and business development activity related to creating a wireless operating
company in the United States. The Company expects that general and
administrative expenses will continue to increase and that the amounts presented
will not be indicative of future periods due to the pending acquisition and
consolidation of ChaseTel. The Company also expects that it will continue to add
to its managerial resources as it expands its involvement in wireless projects
in the United States and various other parts of the world.
Interest income for the three and six month periods ended February 28, 1999
was $3.9 million and $5.4 million, respectively, primarily from the Company's
loans to the Leap Wireless Operating Companies. Interest expense was $0.9
million and $1.9 million for the three and six month periods ended February 28,
1999, respectively, due to borrowings from banks and under the credit facility
with QUALCOMM. There was no interest income or expense during the corresponding
periods of the prior fiscal year.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company expects to have significant future capital requirements over the
next several years in relation to existing operations, current development
projects and additional new projects. The Company's only current sources of
liquidity are $6.1 million of cash and cash equivalents and its $265 million
credit facility with QUALCOMM which contains a $35.2 million sub-facility to
fund working capital and operating expenses of the Company and a $229.8 million
sub-facility to fund specified portfolio investments by the Company. The
Company's obligations under the credit facility are secured by substantially all
of the assets of the Company. As of February 28, 1999, the Company had $245.3
million available to it under this credit facility. The Company expects to meet
its cash requirements for existing operations and for further investments in its
development projects through fiscal 1999 from available cash balances and
borrowings under its credit facility.
The Company expects that it will have reached its borrowing limit under its
credit facility at or about the end of 1999, at which point the Company expects
to be highly leveraged.
The Company is seeking additional sources of financing to fund its activities
after 1999. Alternatives under consideration include additional debt, equity
financing or other sources. There can be no assurances that additional financing
will be available or, if available, that it will be offered to the Company on
acceptable terms. If the Company does not obtain additional working capital or
financing in 1999, management plans to reduce future capital needs by reducing
or discontinuing the funding of uncommitted investments. In addition, to the
extent necessary, management will consider other strategic modifications to its
operational plans, including reducing corporate activities and possibly selling
all or portions of its interests in one or more of the Leap Wireless Operating
Companies.
OPERATING ACTIVITIES
In the first six months of fiscal 1999, $13.6 million in cash was used in
operating activities, compared to $2.2 million used in operating activities in
the corresponding period of the prior fiscal year. Cash used by operating
activities in the first six months of fiscal 1999 includes $5.1 million of net
working capital requirements in addition to $8.5 million of net cash flow used
by operations. The use of cash for net working capital requirements primarily
consisted of cash used by QUALCOMM as liabilities were paid and receivables
created prior to the Distribution. The Company expects that cash used in
operating activities will increase further as the Company continues to expand
its project development efforts on existing and new project opportunities. In
addition, the Company expects that cash used in operating activities will
increase substantially in the future as a result of the Company's acquisition of
Chilesat PCS, its pending acquisition of ChaseTel and other Company activities
related to its strategy of providing a flat rate wireless local area telephone
service.
INVESTING ACTIVITIES
Cash used in investing activities was $97.2 million in the first six months
of fiscal 1999, compared to $4.3 million in the same period of fiscal 1998.
Significant investments in the first six months of fiscal 1999 consisted of a
$60.7 million capital contribution to Pegaso which was made before Leap began to
operate as an independent company, and loans and advances of $32.8 million to
Leap Wireless Operating Companies. The Company and its wholly owned subsidiaries
expect to continue making significant investments and loans to the Leap Wireless
Operating Companies and investments in capital assets, including wireless
network equipment, throughout fiscal 1999. Investment activity in the
corresponding period in fiscal 1998 consisted of start-up expenses advanced to
Leap Wireless Operating Companies in Mexico and Russia.
As previously reported, the Company has agreed to purchase a 10 MHz F block
telecommunications license from AirGate Wireless, L.L.C. for $19.5 million and
to purchase substantially all the assets of
17
<PAGE> 18
ChaseTel Holdings, the owner of ChaseTel, a wireless service provider with 15MHz
C block licenses in Tennessee. The purchase price for the assets is $6.3
million; a warrant to purchase 1% of the Company subsidiary that will operate a
wireless communications network in the territories covered by the ChaseTel
licenses, exercisable for an aggregated payment of $1.0 million; the Company's
existing stock and warrants to purchase stock in ChaseTel Holdings; and the
right to received additional compensation based upon the performance of the
business operating under the ChaseTel licenses during the Company's fifth full
fiscal year after the closing of the acquisition. ChaseTel has approximately
$100 million of debt, including a low-interest loan of approximately $80 million
from the FCC, with principal payments deferred until 2002. This low-interest,
deferred payment FCC loan reduces ChaseTel's operating costs and improves its
cash flow from levels that would otherwise exist. In each case, the transfer of
the licenses to the Company is subject to the approval of the FCC as previously
discussed.
In March 1999, subsequent to the end of the quarter, the Company submitted a
$20 million deposit for bidding in the federal government re-auction of C, D, E
and F block broadband PCS spectrum. The Company has been conditionally approved
to bid but awaits FCC approval to complete the purchase of any such spectrum.
FINANCING ACTIVITIES
Cash provided by financing activities during the first six months of fiscal
1999 was $116.8 million, representing $95.3 million of funding from QUALCOMM for
Company operations and investing activities prior to the Distribution and $21.1
million of net borrowings. Cash provided by financing activities during the
first six months of fiscal 1998 was $6.5 million, representing QUALCOMM's
funding of the Company operations and investing activities in this period.
In the first quarter of fiscal 1999, the Company loaned $17.5 million to
Pegaso Comunicaciones y Servicios, S.A. de C.V., a Mexican company 96%-owned by
Mr. Alejandro Burillo Azcarraga, a member of the Company's Board of Directors.
The purpose of the loan was to facilitate investment by Pegaso Comunicaciones y
Servicios, S.A. de C.V. in Pegaso, the joint venture in which the Company has an
interest, and to ensure that the investors in Pegaso made all capital
contributions to Pegaso that were required for the acquisition of Mexican
telecommunications licenses in September 1998. The loan accrued interest at a
rate of 13% per annum, was guaranteed by Mr. Burillo, and was secured by a
pledge of all of the shares of Pegaso Comunicaciones y Servicios, S.A. de C.V.
and Mr. Burillo's interest in an unrelated joint venture with QUALCOMM. As
scheduled, the first principal installment of $7.5 million, plus accrued
interest, was repaid in the first quarter of fiscal 1999, and the second and
final principal installment of $10 million, plus accrued interest, was repaid in
the second quarter of fiscal 1999.
In connection with the Distribution, the Company issued to QUALCOMM a
warrant to purchase approximately 17.5% of the Company's common stock. In March
1999, for cash consideration of $3 million, QUALCOMM agreed to forego the right
to acquire 1 million of the Company's common shares, such that QUALCOMM will not
hold more than 15% of the Company's common stock in the event that the remainder
of the warrant were fully exercised. The Company borrowed $3 million under the
Credit Facility to make the payment.
LIQUIDITY AND SUBSTANTIAL LEVERAGE OF OPERATING COMPANIES
The Company generally expects that its operating companies will be financed
initially with equity contributions and loans from the Company and its partners.
The Company also expects that its operating companies will seek stand-alone
third party financing after their initial stages of development. In some cases,
the Company and its partners may provide additional equity or loans to operating
companies after their initial contributions.
Although each of the Leap Wireless Operating Companies has obtained substantial
equity contributions, they generally are or may become highly leveraged as is
typical for start-up wireless telecommunications companies. The ability of these
companies to obtain future financings and to meet debt covenants in
18
<PAGE> 19
connection with such financings will be dependent upon their future performance,
including the generation of revenue and cash flow, and upon prevailing economic
conditions which are beyond their control. In addition, some of the Leap
Wireless Operating Companies are expected to be substantially funded through
equipment financing arrangements from vendors. Such equipment financings will be
contingent upon meeting planned levels of performance. If the operating
companies fail to meet such performance requirements, the related equipment
financings could be materially restricted or terminated.
The Company's credit facility provides it with sufficient liquidity to
contribute the approximately $50.4 million of financing it is contractually
bound to provide the Leap Wireless Operating Companies as of February 28, 1999.
The business plans of these companies, however, call for substantial additional
financing to build-out and operate their planned networks. The Leap Wireless
Operating Companies are generally seeking new equity and/or debt from existing
investors, equipment vendors and third parties, and the Company has been
assisting them in their efforts. At this time, however, capital markets have
been constrained because of uncertain worldwide economic conditions, and it is
difficult for development stage companies in emerging markets to raise
additional capital. As a result, the Company cannot provide assurances that the
Leap Wireless Operating Companies will be able to obtain the required additional
financing. Further, the failure of any such Leap Wireless Operating Company to
gain required new financing could have a material adverse effect on such company
and, as a result, a material adverse effect on the Company.
After the end of the second quarter of fiscal 1999, the Company entered into
a substitute loan agreement to provide $72.5 million of working capital to
Metrosvyaz. As previously contemplated, the amount available to Metrosvyaz under
its credit agreement with QUALCOMM was simultaneously reduced by $72.5 million
to $102.5 million, making a combined total of $175 million available to
Metrosvyaz from QUALCOMM and the Company. The Company intends to fund its loan
to Metrosvyaz, which is subordinated to QUALCOMM's loan to Metrosvyaz, through
borrowings under the Company's $265 million credit facility with QUALCOMM.
In response to restricted capital markets and economic difficulties in
Russia, Metrosvyaz reduced the capacity of the networks it planned to construct
or procure in 1999. Petrosvyaz, a Metrosvyaz joint venture in St. Petersburg,
expects to launch commercial service in April 1999. Metrosvyaz expects to launch
commercial operations in several additional Russian cities through joint
ventures in the following months. The Company expects that the $175 million
available to Metrosvyaz under its current QUALCOMM credit facility and Company
credit facility will provide Metrosvyaz with sufficient liquidity to fund its
deployment and operations through the end of 1999.
In March 1999, subsequent to the end of the second quarter, Pegaso announced
that it had obtained a commitment for a $100 million working capital facility.
The commitment is subject to conditions typical of financial arrangements of
this type and size, including the negotiation and execution of definitive
documentation. The Company expects that the transaction will be completed and,
upon completion, to finance Pegaso's capital and operating requirements through
the end of 1999.
Chilesat PCS, the Company's Chilean joint venture, has an immediate need for
cash to fund operating expenses. Chilesat PCS did not repay loans in a principal
amount of approximately $35 million due to the Company and subsidiary in January
1999. As previously discussed, subsequent to the end of the fiscal quarter, the
Company's Chilean subsidiary agreed to purchase the 50% interest in Chilesat PCS
that it did not already own. Although the purchase agreement is subject to
certain conditions, including the consent of the creditors of Telex-Chile and
Chilesat S.A., the Company expects to complete the purchase within the near
future. The Company has approximately $30 million available to loan to Chilesat
PCS under the Company's credit agreement. Upon completion of the acquisition,
the Company expects to seeks additional capital for Chilesat PCS and increase
marketing efforts.
Chilesat PCS experienced technical equipment problems with its network. The
Company believes that changes Chilesat PCS and one of its vendors have
implemented have resolved most of such problems, although additional hardware
replacement and software development are planned in the future.
19
<PAGE> 20
The Company is still seeking suitable strategic partners to help it develop
its wireless licenses in Australia. The Company is also continuing to work to
develop a business plan for the Australian market. In addition, as a result of
continued difficulties between QUALCOMM and its partners in Telesystems of
Ukraine, QUALCOMM's Ukrainian wireless venture ("TOU"), the Company now believes
that it is unlikely that QUALCOMM's interest in TOU will be transferred to the
Company.
Orrengrove Investments Limited, a Leap Wireless Operating Company, maintains
interests in several related companies (the "Transworld Companies"), one of
which had begun to implement a satellite based long distance network in Russia.
After the end of the fiscal quarter, Orrengrove was notified that the satellite
that provided relay services for the long distance business had experienced a
thermal-related performance problem. The satellite's prognosis at this time does
not indicate that its operational status will be restored. Although the provider
of the satellite capacity has contractually guaranteed the satellite's
performance, the outcome at this time remains uncertain. The Transworld
Companies have already identified and put into operation a short-term
terrestrial transmission solution; long-term alternative transmission sources
are being explored.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software programs
have been written using two digits rather than four to represent a specific
year. Any computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
As the Company and the Leap Wireless Operating Companies have recently begun
their respective businesses, there exists uncertainty as to the impact the Year
2000 issue could have on the Company. The Company does not believe that the Year
2000 issue will significantly impact its administrative and accounting software,
which have been acquired recently or will be acquired. The Company generally
subjects its vendors to Year 2000 compliance requirements in connection with the
Company's acquisitions of software. Also, the Company believes that the Year
2000 issue will not significantly impair the ability of the Leap Wireless
Operating Companies' wireless communications networks to perform as intended.
The Leap Wireless Operating Companies are expected to have direct or indirect
computerized interfaces to third parties relating to the transmission of
telecommunications traffic over local, national and international
telecommunications networks. The Leap Wireless Operating Companies are
vulnerable to the failure of such third parties to adequately address their Year
2000 issues. Such failures, should they occur, could cause significant
disruption to the operations of the Leap Wireless Operating Companies, including
the ability to provide certain services and correctly bill customers, resulting
in the potential for revenue loss and increased costs. The Company is not
currently aware of any significant third party problems concerning the
computerized interfaces, but as the Leap Wireless Operating Companies have only
recently begun network build-out and commercial activities, they are still
evaluating the risk associated with third party interfaces and the Year 2000
issue. The Company expects to consult with the Leap Wireless Operating Companies
in connection with their risk evaluation and development of any required
remediation plans. The Company is in the process of developing a risk profile to
evaluate all third parties in regard to their capability to become compliant
with Year 2000.
To date, the Company has not incurred any material costs in support of the
Year 2000 issue. The Company estimates that it will spend $500,000 or less in
fiscal year 1999 to review and correct any non-compliant technology systems as
well as to support material third party relationships. The Company has not
developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all Year
2000 problems in its systems, the systems of the Leap Wireless Operating
Companies or third party systems with which the Company or the Leap Wireless
Operating Companies will have computerized interfaces in advance of their
occurrence or that the Company will be able to successfully remedy any problems.
The expenses associated
20
<PAGE> 21
with the Company's efforts to remedy any Year 2000 problems, the expenses or
liabilities to which the Company may become subject as a result of such problems
or the impact of Year 2000 problems on the ability of Leap Wireless Operating
Companies to do business with the Company could have a material adverse effect
on the Company's business, prospects, operating results and financial condition.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on January 14, 1999, the following
matters were submitted and approved by shareholders, with each matter receiving
the number of votes indicated:
1. Election of Directors:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE / ABSTAINING
----------- ---------------------
<S> <C> <C>
James E. Hoffmann 15,564,755 27,140
Michael B. Targoff 15,564,833 26,062
</TABLE>
Directors whose term of office continued after the annual meeting are:
Thomas J. Bernard, Alejandro Burillo Azcarraga, Harvey P. White,
Jeffrey P. Williams and Scot B. Jarvis.
2. Ratification of Selection of PricewaterhouseCoopers LLP as the Company's
Independent Accountants:
<TABLE>
<S> <C>
Affirmative Votes 15,557,309
Negative Votes 13,795
Abstaining 20,791
</TABLE>
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
<TABLE>
<S> <C>
4.2.1 Letter Agreement, dated March 5, 1999, from QUALCOMM Incorporated to
the Company regarding reduction in shares exercisable under QUALCOMM
Incorporated's warrant to purchase Company stock.
4.2.2 Superceding Warrant, dated April 1, 1999, issued to
QUALCOMM Incorporated.
27. Financial Data Schedule (Filed with EDGAR filing only.)
</TABLE>
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAP WIRELESS INTERNATIONAL, INC.
Date: April 14, 1999 By: /s/ HARVEY P. WHITE
-------------------------------------
Harvey P. White
President and Chief Executive Officer
Date: April 14, 1999 By: /s/ STEPHEN P. DHANENS
-------------------------------------
Stephen P. Dhanens
Corporate Controller
(Chief Accounting Officer)
22
<PAGE> 1
[QUALCOMM, INCORPORATED LETTERHEAD]
Exhibit 4.2.1
March 5, 1999
Thomas Willardson
Senior Vice President, Finance and Treasurer
Leap Wireless International, Inc.
10307 Pacific Center Court
San Diego, California 92121
Dear Mr. Willardson:
You have explained to us the objections that have been raised against the
application of Cricket Holdings, Inc. ("Cricket") to acquire four F-Block PCS
licenses from AirGate Wireless, LLC. These objections focus in large part on (i)
QUALCOMM Incorporated's ("QUALCOMM") outstanding warrant (the "Warrant") to
purchase approximately 17.5% of Leap Wireless International, Inc.'s ("Leap")
common stock, and (ii) options to purchase Leap common stock that are personally
held by officers and inside directors of QUALCOMM.
As you know, Section 5.14 of the Warrant, by its express terms, prevents
QUALCOMM from exercising the Warrant in a manner that would (i) preclude Leap
from qualifying as a Publicly Trade Corporation With Widely Disbursed Voting
Power" (a "PTC") under 47 C.F.R. Section 24.720(m) to hold C or F Block PCS
licenses, or (ii) cause any change in Leap's small business designated entity
status that would jeopardize the Leap's ability to hold C and F Block PCS
licenses. QUALCOMM expressly agreed to this provision. QUALCOMM views this
provision as a valid and binding restriction on QUALCOMM's ability to exercise
the Warrant in the fashion described by the objecting petitioners in the
AirGate-Cricket proceeding.
Nevertheless, in consideration for a cash payment of $3,000,000 offered by
Leap, QUALCOMM, out of an abundance of caution, is willing to agree to changes
to the Warrant and to certain other measurers. These changes and measures are
intended (i) to alleviate the FCC's concerns with respect to the objections
raised in connection with the AirGate-Cricket assignment application, and (ii)
to facilitate the prompt processing thereof.
Specifically, QUALCOMM agrees to the following:
1. For cash consideration of $3,000,000 payable by Leap, QUALCOMM agrees to
forego the right to acquire 1,000,000 of Leap's common shares pursuant to the
terms of the Warrant, and the Warrant shall be correspondingly amended to delete
the number "5,000,000" appearing in the caption and in the first paragraph of
the Warrant and inserting in its place the number "4,500,000" (such that
QUALCOMM will not hold more than 15% of Leap common stock in the event that the
remainder of the Warrant were fully exercised). Leap shall pay such cash
consideration within two business days of the date of this letter upon surrender
of the original Warrant, and Leap shall thereupon deliver to QUALCOMM a
substitute warrant
<PAGE> 2
Mr. Willardson
Leap Wireless International
March 5, 1999
page 2
identical in all respects except that it shall be exercisable for such 4,500,000
shares. In the event that by March 28, 1999 the FCC finds by order that Leap or
Cricket is not qualified to hold C or F Block PCS licenses, then either party
shall have the right, by written notice to the other and exercisable within five
business days of the date of any such FCC determination, to cause this reduction
in the Warrant to be rescinded. Within five business days after any such written
notice is received by either party, the $3,000,000 payment shall be returned to
Leap, together with the substitute warrant, in return for a new warrant
identical in all respects to the Warrant;
2. Within 30 days of the date of this letter, QUALCOMM will permit Leap to
amend Section 5.14 of the Warrant, or QUALCOMM will execute a separate
instrument, to reflect QUALCOMM's explicit agreement not to purchase and
thereupon hold more than 15% of Leap shares, through exercise of the Warrant or
otherwise on a going-forward basis, unless such purchase will not disqualify
Leap as a PTC or as a Very Small Business designated entity eligible to hold C
or F Block PCS licenses, as those terms are defined in FCC rules, policies and
orders;
3. Within 30 days of the date of this letter, QUALCOMM will permit Leap to
amend Section 5.14 of the Warrant, or QUALCOMM will execute a separate
instrument, to clarify that the aggregate 15% ownership limitations contemplated
by Section 5.14 will expressly include all options and shares of Leap that may
be held or that, on a going-forward basis, may be acquired by QUALCOMM's
officers and inside directors (and include not only the options, warrants and
shares that may be held by QUALCOMM), to the extent including such options and
warrants is required pursuant to FCC rules, policies and orders. With Leap's
reasonable assistance, QUALCOMM agrees to also implement a QUALCOMM compliance
program for QUALCOMM's officers and inside directors in order to permit QUALCOMM
to monitor the number of Leap options and shares held by such individuals for
the purpose of QUALCOMM complying with the provisions of Section 5.14 of the
Warrant; and
4. QUALCOMM agrees that, upon the amendment of the Warrant or the execution
of the instruments described above, QUALCOMM will also amend the Warrant or
enter into a separate contractual instrument, voting trust or other vehicle,
that will expressly prevent QUALCOMM, upon exercise of the Warrant or upon
QUALCOMM otherwise acquiring Leap shares, from voting its Leap shares (i) for as
long as Leap or Cricket needs to remain qualified as a PTC or as a small
business designated entity eligible to hold C or F Block PCS licenses, as those
terms are defined in FCC rules, policies or orders, and (ii) to the extent
QUALCOMM's ability to vote such shares would otherwise disqualify Leap as a PTC
or as a small business designated entity eligible to hold C or F Block PCS
licenses, as those terms are so defined. QUALCOMM will also make reasonable
efforts to impose similar voting restrictions on QUALCOMM officers and inside
directors who hold Leap shares and options. QUALCOMM hereby confirms that
QUALCOMM's inside directors and QUALCOMM's key officers, including the Chief
Executive Officer, the Chief Operating Officer, the Chief Financial
<PAGE> 3
Mr. Willardson
Leap Wireless International
March 5, 1999
page 3
Officer and the General Counsel, have indicated that they will agree to restrict
their Leap voting rights in a similar fashion as those imposed on QUALCOMM.
QUALCOMM believes that the above changes and measures will remove any and
all questions regarding Leap's or Cricket's qualifications to hold C or F Block
PCS licenses under FCC rules. However, to the extent that they do not, and the
FCC nevertheless finds by final order that Leap or Cricket is not qualified to
hold C or F Block PCS licenses, QUALCOMM and Leap reserve the right to
reconsider the commitments set forth in paragraphs 2, 3 and 4 of this letter,
since they would no longer be relevant to the preservation of Leap's
entrepreneurial or small business status. Please sign this letter where
indicated below and return a signed copy to QUALCOMM to evidence Leap's
agreement with the provisions of this letter, including Leap's agreement to
reduce the number of shares covered by the Warrant in the manner set forth
above.
Very truly yours,
QUALCOMM Incorporated
By: /s/ A. Thornley
-----------------------------
Title: EVP & CFO
--------------------------
Acknowledged and Agreed:
Leap Wireless International, Inc.
By: /s/ Tom Willardson
---------------------------------
Title: SVP Finance & Treasurer
-------------------------------
<PAGE> 1
EXHIBIT 4.2.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
SUPERCEDING
WARRANT TO PURCHASE 4,500,000 SHARES
OF COMMON STOCK OF
LEAP WIRELESS INTERNATIONAL, INC.
(VOID AFTER SEPTEMBER 23, 2008)
This certifies that QUALCOMM Incorporated, a Delaware corporation, or
its assigns ("QUALCOMM" or the "Holder"), for value received, is entitled to
purchase from LEAP WIRELESS INTERNATIONAL, INC., a Delaware corporation (the
"Company"), having a place of business at 10307 Pacific Center Court, San Diego,
California, up to 4,500,000 fully paid and nonassessable shares (as adjusted for
the stock split to be effected on or about September 14, 1998) of the Company's
Common Stock ("Common Stock") at a per share price (the "Stock Purchase Price")
equal to the average price of the last sales price per share of the Company's
Common Stock on the Nasdaq National Market for each of the five (5) consecutive
trading days (provided if no such sale is made on any of such trading days, then
the last sales price per share for such day(s) shall be deemed to be the last
sales price per share on the closest preceding day on which a sale was made)
beginning with and including September 23, 1998 (the "Effective Date"), any time
or from time to time up to and including 5:00 p.m. (Pacific time) on the date
that is ten (10) years from the date of this Warrant (the "Expiration Date"),
subject to the terms and conditions of this Warrant hereinafter set forth. The
Company agrees that it will calculate the Stock Purchase Price as soon as
practicable (which calculation shall be subject to approval by the Holder, which
may not unreasonably be withheld); and upon presentation of this Warrant to the
Company by the Holder, the Company shall attach to this Warrant a Schedule that
sets forth the Stock Purchase Price and the calculation thereof (and such
Schedule shall constitute a part hereof).
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
holder of record hereof, at any time or from time to time, up to the Expiration
Date for all or any part of the shares of Common Stock (but not for a fraction
of a share) which may be purchased hereunder. The Company agrees that the shares
of Common Stock purchased under this Warrant shall be and are deemed to be
issued to the Holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall
<PAGE> 2
have been surrendered properly endorsed, a completed, executed Form of
Subscription shall have been delivered, and payment shall have been made for
such shares in accordance with the Subscription Form in the form of cash,
cancellation of indebtedness of the Company, delivery to the Company of Common
Stock of the Company having a fair market value as of the date of exercise equal
to the Stock Purchase Price times the number of shares to be received upon
exercise, or in any other form of consideration approved by the Board of
Directors of the Company. Certificates for the shares of Common Stock so
purchased, together with any other securities or property to which the Holder
hereof is entitled upon such exercise, shall be delivered to the Holder hereof
by the Company at the Company's expense within a reasonable time after the
rights represented by this Warrant have been so exercised. In case of a purchase
of less than all the shares which may be purchased under this Warrant, the
Company shall cancel this Warrant and execute and deliver a new Warrant or
Warrants of like tenor for the balance of the shares purchasable under the
Warrant surrendered upon such purchase to the Holder hereof within a reasonable
time. Each stock certificate so delivered shall be in such denominations of
Common Stock as may be requested by the Holder hereof and shall be registered in
the name of such Holder.
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to
the contrary, if the fair market value of one share of the Company's Common
Stock is greater than the Stock Purchase Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant for cash, the Holder may
elect to convert this Warrant (in whole or in part) into shares equal to the
value (as determined below) of this Warrant (or the portion thereof being
canceled) by surrender of this Warrant at the principal office of the Company
together with the properly endorsed Form of Subscription and notice of such
election in which event the Company shall issue to the Holder a number of shares
of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the Holder
Y = the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised, the
portion of the Warrant being canceled (at the
date of such calculation)
A = the fair market value of one share of the
Company's Common Stock (at the date of such
calculation)
B = Stock Purchase Price (as adjusted to the
date of such calculation)
2
<PAGE> 3
For purposes of the above calculation, fair market value of one share of Common
Stock shall be determined as follows:
(a) If traded on a securities exchange or the Nasdaq
National Market, the fair market value of the Common Stock shall be deemed to be
the average of the closing or last reported sale prices of the Common Stock on
such exchange or market over the five (5) day period ending five business days
prior to the date the Holder surrenders this Warrant at the principal office of
the Company together with the properly endorsed Form of Subscription (the
"Determination Date");
(b) If otherwise traded in an over-the-counter market, the
fair market value of the Common Stock shall be deemed to be the average of the
closing or last reported sale prices of the Common Stock over the five (5) day
period ending five business days prior to the Determination Date;
(c) If there is no public market for the Common Stock, or
if a public market has existed for a period less than is necessary for a date
mentioned under subsection (a) or (b) above, then fair market value shall be
determined by mutual agreement of the holder of this Warrant and the Company,
and if the holder and the Company are unable to so agree, at the Company's sole
expense by an investment banker of national reputation selected by the Company
and reasonably acceptable to the holder of this Warrant.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants
and agrees that all shares of Common Stock which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Common Stock may be listed. The Company will not take
any action which would result in any adjustment of the Stock Purchase Price (as
set forth in Section 3 hereof) if the total number of shares of Common Stock
issuable after such action upon exercise of all outstanding warrants, together
with all shares of Common Stock then outstanding and all shares of Common Stock
then issuable upon exercise of all options and upon the conversion of all
convertible securities then outstanding, would exceed the total number of shares
of Common Stock then authorized by the Company's Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
3
<PAGE> 4
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Stock Purchase Price in effect immediately prior
to such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Common Stock or any shares of stock or other
securities which are at any time directly or indirectly convertible into or
exchangeable for Common Stock, or any rights or options to subscribe for,
purchase or otherwise acquire any of the foregoing by way of dividend or other
distribution, or
(b) Common Stock or additional stock or other securities
or property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement (other than shares of
Common Stock issued as a stock split or adjustments in respect of which shall be
covered by the terms of Section 3.1 above);
then and in each such case, the Holder hereof shall, upon the exercise of this
Warrant, be entitled to receive in addition to the number of shares of Common
Stock receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the case referred to in clause (b) above) which such Holder would hold on the
date of such exercise had he been the holder of record of such Common Stock as
of the date on which holders of Common Stock received or became entitled to
receive such shares or all other additional stock and other securities and
property. Notwithstanding the foregoing, in the case of a dividend or
distribution described in clause (b) above and any subsequent exercise
hereunder, the Company's Board of Directors may by resolution determine with
respect to such exercise, in its sole discretion, instead of the adjustment
provided above, to adjust the Stock Purchase Price in accordance with the
formula set forth below and to adjust the number of shares of Common Stock
purchasable pursuant hereto upon such exercise as provided in the lead-in
paragraph to this Section 3:
4
<PAGE> 5
B' = B x A - F
-----
A
where:
B' = the adjusted Stock Purchase Price
B = the current Stock Purchase Price
A = the fair market value of one share of Common Stock (at the date of
the exercise)
F = the fair market value at the date of exercise of the securities or
property distributed in respect of one share of Common Stock as determined in
good faith by the Board of Directors of the Company.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the capital
stock of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
"Organic Change"), then, as a condition of such Organic Change, lawful and
adequate provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby. In the event of
any Organic Change, appropriate provision shall be made by the Company with
respect to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof (including, without limitation, registration rights
and provisions for adjustments of the Stock Purchase Price and of the number of
shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, in relation to any shares of stock, securities or
assets thereafter deliverable upon the exercise hereof. The Company will not
effect any such consolidation, merger or sale unless, prior to the consummation
thereof, the successor corporation (if other than the Company) resulting from
such consolidation or the corporation purchasing such assets shall assume by
written instrument reasonably satisfactory in form and substance to the Holder,
executed and mailed or delivered to the registered Holder hereof at the last
address of such Holder appearing on the books of the Company, the obligation to
deliver to such Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such Holder may be entitled to
purchase.
3.4 CERTAIN EVENTS. If any change in the outstanding Common Stock
of the Company or any other event occurs as to which the other provisions of
this Section 3 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the Holder of the Warrant in accordance
with such provisions, then the
5
<PAGE> 6
Board of Directors of the Company shall make an adjustment in the number and
class of shares available under the Warrant, the Stock Purchase Price or the
application of such provisions, so as to protect such purchase rights as
aforesaid. The adjustment shall be such as will give the Holder of the Warrant
upon exercise for the same aggregate Stock Purchase Price the total number,
class and kind of shares as he would have owned had the Warrant been exercised
prior to the event and had he continued to hold such shares until after the
event requiring adjustment.
3.5 NOTICES OF CHANGE.
(a) Immediately upon any adjustment in the number or class
of shares subject to this Warrant or of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder
at least 30 business days prior to the date on which the Company closes its
books or takes a record for determining rights to receive any dividends or
distributions, or any offer for subscription pro rata to the holders of Common
Stock any additional shares of stock of any class or any other rights.
(c) The Company shall also give written notice to the
Holder at least 30 business days prior to the date on which an Organic Change
shall take place.
4. REGISTRATION RIGHTS.
4.1 DEFINITIONS. As used in this Section 4, the following terms
shall have the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FORM S-3" means such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"HOLDER" means any person owning of record Registrable
Securities (as defined in Section 4) that have not been sold to the public or
any assignee of record of such Registrable Securities (as defined in Section 4)
in accordance with Section 4.9 hereof.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES" means (a) Common Stock of the Company
issued or issuable upon exercise of this Warrant; and (b) any Common Stock of
the
6
<PAGE> 7
Company issued as (or issuable upon the conversion or exercise of any warrant,
right or other security which is issued as) a dividend or other distribution
with respect to the Common Stock issuable upon exercise of this Warrant, or in
exchange for or in replacement of, such above-described securities.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and either (a) are then issued and
outstanding or issuable upon exercise of this Warrant, or (b) are issuable
pursuant to then exercisable or convertible securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Sections 4.2, 4.3 and 4.4 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, reasonable fees and disbursements of a
single special counsel for the Holders, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company).
"SEC" or "COMMISSION" means the Securities and Exchange
Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale.
"SHARES" shall mean the Company's Common Stock issued upon
exercise of this Warrant.
4.2 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 4.2, if the
Company shall receive a written request from the Holders of a majority of the
Registrable Securities then outstanding (the "Initiating Holders") that the
Company file a registration statement under the Securities Act covering the
registration of at least a majority of the Registrable Securities then
outstanding (or a lesser percent if the anticipated aggregate offering price,
net of underwriting discounts and commissions, would exceed $5,000,000), then
the Company shall, within thirty (30) days of the receipt thereof, give written
notice of such request to all Holders, and subject to the limitations of this
Section 4.2, use its best efforts to effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities that the
Holders request to be registered.
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 4.2 or any request pursuant to Section 4.4 and the Company shall
include such information in the written notice referred to in Section 4.2(a) or
Section 4.4(a), as applicable. In such event, the
7
<PAGE> 8
right of any Holder to include its Registrable Securities in such registration
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders (which
underwriter or underwriters shall be reasonably acceptable to the Company).
Notwithstanding any other provision of this Section 4.2 or Section 4.4, if the
underwriter advises the Company that marketing factors require a limitation of
the number of securities to be underwritten (including Registrable Securities)
then the Company shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares that
may be included in the underwriting shall be allocated first to the Company and
then to the Holders of such Registrable Securities on a pro rata basis based on
the total number of Registrable Securities requested to be registered by all
such Holders (including the Initiating Holders); provided, however, that after
the first firm commitment underwritten public offering effected by the Company
following the Effective Date (the "First Public Offering"), the number of shares
of Registrable Securities to be included in such underwriting and registration
shall not be reduced unless all other securities of the Company are first
entirely excluded from the underwriting and registration and in no event shall
the number of Registrable Securities to be included in such underwriting and
registration by the Initiating Holders be reduced to less than thirty percent
(30%) of such Registrable Securities requested to be included in the
registration. Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from the registration.
(c) The Company shall not be required to effect a
registration pursuant to this Section 4.2:
(i) during the one year period following the
Effective Date;
(ii) after the Company has effected one (1)
registration pursuant to this Section 4.2, and such registration has been
declared or ordered effective; or
(iii) if the Initiating Holders propose to
dispose of shares of Registrable Securities that may be immediately registered
on Form S-3 pursuant to a request made pursuant to Section 4.4 below.
4.3 PIGGYBACK REGISTRATIONS. The Company shall notify all
Holders of Registrable Securities in writing at least thirty (30) days prior to
the filing of any registration statement under the Securities Act for purposes
of a public offering of securities of the Company (including, but not limited
to, registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
8
<PAGE> 9
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within fifteen (15) days after the above-described notice from the
Company, so notify the Company in writing. Such notice shall state the intended
method of disposition of the Registrable Securities by such Holder. If a Holder
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, such Holder shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent registration statement or registration statements as may be filed by
the Company with respect to offerings of its securities, all upon the terms and
conditions set forth herein.
(a) UNDERWRITING. If the registration statement under
which the Company gives notice under this Section 4.3 is for an underwritten
offering, the Company shall so advise the Holders of Registrable Securities. In
such event, the right of any such Holder to be included in a registration
pursuant to this Section 4.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by the Company.
Notwithstanding any other provision of the Agreement, if the underwriter
determines in good faith that marketing factors require a limitation of the
number of shares to be underwritten, the number of shares that may be included
in the underwriting shall be allocated first to the Company and then to the
Holders on a pro rata basis based on the total number of Registrable Securities
requested to be registered by such Holders; provided however, that after the
First Public Offering, no such reduction shall reduce the amount of securities
of the selling Holders included in the registration to less than thirty percent
(30%) of the total amount of Registrable Securities requested to be included in
such registration by such Holders. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by written notice
to the Company and the underwriter, delivered at least ten (10) business days
prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration. For any Holder which is a partnership or
corporation, the partners, retired partners and shareholders of such Holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing person shall be deemed to be a
single "Holder", and any pro rata reduction with respect to such "Holder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such "Holder," and requested to be
registered by such Holder as defined in this sentence.
(b) RIGHT TO TERMINATE REGISTRATION. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 4.3 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration. The
Registration Expenses of such withdrawn registration shall be borne by the
Company in accordance with Section 4.5 hereof.
9
<PAGE> 10
4.4 FORM S-3 REGISTRATION. In case the Company shall receive from
any Holder or Holders of Registrable Securities a written request or requests
that the Company effect a registration on Form S-3 or any similar short-form
registration statement and any related qualification or compliance with respect
to all or a part of the Registrable Securities owned by such Holder or Holders,
and the anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $5,000,000, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders
of Registrable Securities; and
(b) as soon as practicable, effect such registration and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within fifteen (15) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance pursuant to this Section 4.4:
(i) if Form S-3 (or any successor or similar
form) is not available for such offering by the Holders, or
(ii) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) Subject to the foregoing, the Company shall file a
Form S-3 registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. Registrations effected pursuant to this
Section 4.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 4.2 or 4.3, respectively.
4.5 EXPENSES OF REGISTRATION. Except as specifically provided
herein, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 4.2 or any registration under
Section 4.3 or Section 4.4 herein shall be borne by the Company. All Selling
Expenses incurred in connection with any registrations hereunder, shall be borne
by the holders of the securities so registered pro rata on the basis of the
number of shares so registered. The Company shall not, however, be required to
pay for expenses of any registration proceeding begun pursuant to Section 4.2 or
4.4, the request of which has been subsequently withdrawn by the Initiating
Holders unless (a) the withdrawal is based upon material adverse information
concerning the Company of which the Initiating Holders were not aware at the
time of such request or (b) the Holders of a majority of Registrable Securities
agree to forfeit their right to a requested registration pursuant to Section
4.2, in which event such right
10
<PAGE> 11
shall be forfeited by all Holders). If the Holders are required to pay the
Registration Expenses, such expenses shall be borne by the holders of securities
(including Registrable Securities) requesting such registration in proportion to
the number of shares for which registration was requested. If the Company is
required to pay the Registration Expenses of a withdrawn offering pursuant to
clause (a) above, then the Holders shall not forfeit their rights pursuant to
Section 4.2 or Section 4.4 to a demand registration.
4.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use all reasonable efforts to
cause such registration statement to become effective, and, upon the request of
the Holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for up to one (1) year or, if
earlier, until the Holder or Holders have completed the distribution related
thereto. The Company shall not be required to file, cause to become effective or
maintain the effectiveness of any registration statement that contemplates a
distribution of securities on a delayed or continuous basis pursuant to Rule 415
under the Securities Act.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its reasonable best efforts to register and
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter(s) of such offering. Each
Holder participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to
11
<PAGE> 12
be delivered under the Securities Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Use its best efforts to furnish, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, (i) an opinion, dated as of such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and (ii)
a letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering addressed to the underwriters.
4.7 DELAY OF REGISTRATION; FURNISHING INFORMATION.
(a) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 4.
(b) It shall be a condition precedent to the obligations
of the Company to take any action pursuant to Section 4.2, 4.3 or 4.4 that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities.
4.8 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 4.2, 4.3 or 4.4:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation") by the Company: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities
12
<PAGE> 13
law or any rule or regulation promulgated under the Securities Act, the Exchange
Act or any state securities law in connection with the offering covered by such
registration statement; and the Company will pay as incurred to each such
Holder, partner, officer, director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 4.8(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers and
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of such other Holder may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will pay as incurred any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 4.8(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that in no event shall any
indemnity provided by any Holder under this Section 4.8 exceed the net proceeds
from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 4.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 4.8, deliver to
the indemnifying party a written
13
<PAGE> 14
notice of the commencement thereof and the indemnifying party shall have the
right to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 4.8, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 4.8.
(d) If the indemnification provided for in this Section
4.8 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the Violation(s) that resulted
in such loss, claim, damage or liability, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by a court of law by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission; provided, that in no event shall any contribution by
a Holder hereunder exceed the proceeds from the offering received by such
Holder.
(e) The obligations of the Company and Holders under this
Section 4.8 shall survive completion of any offering of Registrable Securities
in a registration statement and the termination of this Warrant. No indemnifying
party, in the defense of any such claim or litigation, shall, except with the
consent of each indemnified party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or litigation.
4.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 4 may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(a) is a subsidiary, parent, general partner, limited partner, retired partner,
member or retired member of a Holder, or (b) acquires at least one million
(1,000,000) shares of Registrable Securities (as adjusted for stock splits and
combinations); provided, however, (i) the transferor shall
14
<PAGE> 15
furnish to the Company written notice of the name and address of such transferee
or assignee and the securities with respect to which such registration rights
are being assigned and (ii) such transferee shall agree to be subject to all
restrictions set forth in this Agreement.
4.10 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date
of this Agreement, the Company shall not, without the prior written consent of
the Holders of a majority of the Registrable Securities then outstanding, enter
into any agreement with any holder or prospective holder of any securities of
the Company that would grant such holder registration rights that would prevent
the Company from honoring the registration rights of Holders described herein.
4.11 AGREEMENT TO FURNISH INFORMATION. Each Holder agrees to
execute and deliver such other agreements as may be reasonably requested by the
Company or the underwriter which are consistent with the foregoing or which are
necessary to give further effect thereto. In addition, if requested by the
Company or the representative of the underwriters of Common Stock (or other
securities) of the Company, each Holder shall provide, within ten (10) days of
such request, such information as may be required by the Company or such
representative in connection with the completion of any public offering of the
Company's securities pursuant to a registration statement filed under the
Securities Act. The obligations described in this Section 4.11 shall not apply
to a registration relating solely to employee benefit plans on Form S-1 or Form
S-8 or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future.
4.12 RULE 144 REPORTING. With a view to making available to the
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those
terms are understood and defined in SEC Rule 144 or any similar or analogous
rule promulgated under the Securities Act, at all times after the registration
by the Company of its Common Stock or any other securities under the Exchange
Act or the effective date of the first registration filed by the Company for an
offering of its securities to the general public;
(b) File with the SEC, in a timely manner, all reports and
other documents required of the Company under the Exchange Act; and
(c) So long as a Holder owns any Registrable Securities,
furnish to such Holder forthwith upon request: a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144 of
the Securities Act, and of the Exchange Act (at any time after it has become
subject to such reporting requirements); a copy of the most recent annual or
quarterly report of the Company; and such other reports and documents as a
Holder may reasonably request in availing itself of
15
<PAGE> 16
any rule or regulation of the SEC allowing it to sell any such securities
without registration.
4.13 MARKET STANDOFF. Each Holder hereby agrees that it shall not
sell or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by such Holder (excluding shares to be distributed by
QUALCOMM in accordance with the Separation and Distribution Agreement between
QUALCOMM and the Company dated on or about the date hereof) for a period of
ninety (90) days following the effective date of a registration statement of the
Company filed under the Securities Act of 1933, as amended, provided that the
officers and directors of the Company enter into similar agreements.
5. MISCELLANEOUS
5.1 ISSUE TAX. The issuance of certificates for shares of Common
Stock upon the exercise of the Warrant shall be made without charge to the
Holder of the Warrant for any issue tax (other than any applicable income taxes)
in respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5.2 CLOSING OF BOOKS. The Company will at no time close its
transfer books against the transfer of any warrant or of any shares of Common
Stock issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
5.3 AUTOMATIC EXERCISE. To the extent this Warrant is not
previously exercised, and if the fair market value of one share of the Company's
Common Stock is greater than the Stock Purchase Price then in effect, this
Warrant shall be deemed automatically exercised pursuant to Section 1 (even if
not surrendered) immediately before its expiration. To the extent this Warrant
or any portion thereof is deemed automatically exercised pursuant to this
Section 5.3, the Company agrees to promptly notify the holder hereof of the
number shares of Common Stock, if any, the holder hereof is entitled to receive
by reason of such automatic exercise, and the Holder shall have 30 days from the
receipt of such notice to determine whether such automatic exercise shall be
made pursuant to Section 1.1 or 1.2 hereof.
5.4 NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY.
Nothing contained in this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive notice as a
shareholder of the Company or any other matters or any rights whatsoever as a
shareholder of the Company. Except as may be set forth herein, no cash dividends
or interest shall be payable or accrued in respect of this Warrant or the
interest represented hereby or the shares purchasable hereunder until, and only
to the extent that, this Warrant shall have been exercised. No provisions
hereof, in the absence of affirmative action by the holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
holder hereof, shall give
16
<PAGE> 17
rise to any liability of such Holder for the Stock Purchase Price or as a
shareholder of the Company, whether such liability is asserted by the Company or
by its creditors.
5.5 WARRANTS TRANSFERABLE. Subject to compliance with applicable
federal and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.
5.6 RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The
rights and obligations of the Company, of the holder of this Warrant and of the
holder of shares of Common Stock issued upon exercise of this Warrant, shall
survive the exercise of this Warrant.
5.7 MODIFICATION AND WAIVER. This Warrant and any provision
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
5.8 NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall be
delivered or shall be sent by certified mail, postage prepaid, to such Holder at
its address as shown on the books of the Company, attention: Chief Executive
Officer, or to the Company at the address indicated therefor in the first
paragraph of this Warrant, or such other address as either may from time to time
provide to the other.
5.9 BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding
upon any corporation succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets. All of the
obligations of the Company relating to the Common Stock issuable upon the
exercise of this Warrant shall survive the exercise and termination of this
Warrant. All of the covenants and agreements of the Company shall inure to the
benefit of the successors and assigns of the holder hereof.
5.10 DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description
headings of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of California.
5.11 LOST WARRANTS. The Company represents and warrants to the
Holder hereof that upon receipt of evidence reasonably satisfactory to the
Company of the
17
<PAGE> 18
loss, theft, destruction, or mutilation of this Warrant and, in the case of any
such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
5.12 FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
5.13 NO IMPAIRMENT OF RIGHTS. The Company will not, by amendment
of its Charter or through any other means, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such action as may be necessary or appropriate in order to protect the rights of
the holder of this Warrant against impairment.
5.14 FCC ISSUES. Notwithstanding any other provision of this
Warrant, Holder hereby agrees that it will not exercise the Warrant or any
portion thereof in a manner that would (i) preclude the Company from qualifying
as a "Publicly Traded Corporation With Widely Disbursed Voting Power" (a
"PTCWWDVP") under 47 CFR 24.720(m) as a result of the Company not satisfying the
provisions of 47 CFR 24.720(m)(2) (which restriction on exercise shall only be
applicable so long as the Company is seeking to acquire, acquires and/or holds,
directly or indirectly, C-Block and F-Block broadband PCS licenses on the basis
of qualifying as a PTCWWDVP), or (ii) cause any change in the Company's status
as a "very small business" designated entity as defined by the rules and
regulations of the Federal Communications Commission (the "FCC") (to the extent
the Company thereupon would not be qualified to hold or acquire, directly or
indirectly, C-Block and F-Block broadband PCS licenses as to which it is or
would be, directly or indirectly, the licensee), and any such exercise shall be
invalid ab initio to the extent such exercise would preclude such qualification
or cause any such change; provided, however, that in the event the rules and
regulations of the FCC should later be changed (or a waiver of any such rules
and regulations is obtained) to permit exercise of any rights otherwise
restricted as described above, Holder shall then be entitled to exercise such
additional rights. Holder acknowledges and agrees that in determining whether
any exercise of the Warrant or any portion thereof would preclude the
qualification referred to in clause (i) or cause any change referred to in
clause (ii) of this Section 5.14, Holder will expressly include in its ownership
calculations all shares of Company capital stock held by or which after the date
of this Warrant are acquired by (whether by gift, purchase, pursuant to stock
options, warrants or convertible securities, or otherwise acquired by or
received by in any manner), any officers or inside directors of the Holder.
This superceding warrant replaces and supercedes a
substantially similar warrant dated March 9, 1999 to purchase 4,500,000 shares
of the Company's
18
<PAGE> 19
common stock which in turn replaced and superceded a substantially similar
warrant dated September 23, 1999 to purchase 5,500,000 shares of the Company's
common stock.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this 1st day of April, 1999.
LEAP WIRELESS INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Thomas J. Bernard
---------------------------------------
Thomas J. Bernard
Executive Vice President
ATTEST:
By: /s/ James E. Hoffmann
--------------------------------------
James E. Hoffmann
Senior Vice President, General Counsel
and Secretary
19
<PAGE> 20
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, 19___
Leap Wireless International, Inc.
10307 Pacific Center Court
San Diego, California 92121
Attn: President
Ladies and Gentlemen:
[ ] The undersigned hereby elects to exercise the warrant issued to it by
Leap Wireless International, Inc. (the "Company") and dated ___________
_____ (the "Warrant") and to purchase thereunder
__________________________________ shares of Common Stock of the Company
(the "Shares") at the Stock Purchase Price.
The undersigned hereby elects to pay the Purchase Price in the following manner:
[ ] cash
[ ] cancellation of indebtedness of the Company
[ ] delivery to the Company of other common stock of the Company
having a fair market value as of the date of exercise equal to
the Stock Purchase Price times the number of shares to be
acquired upon exercise
[ ] other form of consideration approved by the Board of Directors
of the Company
[ ] The undersigned hereby elects to convert _______________________ percent
(____%) of the value of the Warrant pursuant to the provisions of
Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
----------------------------------------
By:
-------------------------------------
Title:
----------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 6,072
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,416
<PP&E> 2,986
<DEPRECIATION> (253)
<TOTAL-ASSETS> 265,209
<CURRENT-LIABILITIES> (20,223)
<BONDS> (21,242)
0
0
<COMMON> (2)
<OTHER-SE> (223,742)
<TOTAL-LIABILITY-AND-EQUITY> (265,209)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 862
<INCOME-PRETAX> (19,495)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,495)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,495)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
