<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
Exchange Act of 1934
For the quarterly period ended November 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------- --------------
Commission file number: 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121-2779
(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, 17,771,535 shares outstanding
as of January 8, 1999.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
NOVEMBER 30, 1998 AUGUST 31, 1998
----------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 7,496 $ --
Loans receivable from unconsolidated wireless
operating company - current 31,947 25,227
Loan receivable from related party 10,228 --
Other current assets 3,108 --
--------- ---------
Total current assets 52,779 25,227
--------- ---------
Property - net 2,800 --
Investments in unconsolidated wireless operating companies 194,333 101,719
Loans receivable from unconsolidated wireless
operating companies 21,281 40,076
Other assets 12,873 6,838
--------- ---------
Total assets $ 284,066 $ 173,860
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 3,683 $ 5,789
Loans payable to banks 15,720 9,000
Current portion of long-term debt 10,000 --
--------- ---------
Total current liabilities 29,403 14,789
--------- ---------
Long-term debt 11,542 --
Other liabilities 663
--------- ---------
Total liabilities 41,608 14,789
--------- ---------
Commitments (Notes 3, 8 and 10)
Stockholder's 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, 17,698,777 shares issued
and outstanding 2 --
Additional Paid-in capital 293,003 --
Combined capital accounts -- 197,598
Deficit accumulated during the development stage (47,608) (36,175)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment (2,939) (2,352)
--------- ---------
Total stockholder's equity 242,458 159,071
--------- ---------
Total liabilities and stockholder's equity $ 284,066 $ 173,860
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE PERIOD
NOVEMBER 30, SEPTEMBER 1, 1995
------------------------------------- (INCEPTION) TO
1998 1997 NOVEMBER 30, 1998
------------ ------------ -----------------
<S> <C> <C> <C>
Equity in net loss of unconsolidated
wireless operating companies $ (7,544) $ (967) $ (18,917)
General and administrative expenses (4,364) (737) (30,009)
Interest income 1,526 -- 2,369
Interest expense (1,051) -- (1,051)
------------ ------------ ------------
Loss before income taxes (11,433) (1,704) (47,608)
Income tax expense -- -- --
------------ ------------ ------------
Net loss $ (11,433) $ (1,704) $ (47,608)
============ ============ ============
Net loss per common share $ (0.65)
============
Weighted average common shares outstanding 17,662,760
============
</TABLE>
See accompanying notes.
3
<PAGE> 4
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE PERIOD
NOVEMBER 30, SEPTEMBER 1, 1995
------------------------------- (INCEPTION) TO
1998 1997 NOVEMBER 30, 1998
--------- --------- ------------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (11,433) $ (1,704) $ (47,608)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 124 -- 124
Equity in net loss of unconsolidated wireless
operating companies 7,544 967 18,917
Earned interest accrued to loans receivable (1,219) -- (2,062)
Changes in assets and liabilities:
Other assets (3,200) -- (3,627)
Accounts payable and accrued liabilities (2,533) -- 3,683
Other liabilities 663 -- 663
--------- --------- ---------
Net cash used by operating activities (10,054) (737) (29,910)
--------- --------- ---------
Investing activities:
Purchase of property (2,876) -- (2,876)
Investments in unconsolidated wireless
operating companies (71,414) (1,395) (186,858)
Issuance of loans to unconsolidated
wireless operating companies (15,377) -- (79,837)
Issuance of loan receivable to related party (17,500) -- (17,500)
Repayment of loan receivable to related party 7,500 -- 7,500
Cash paid on acquisition of consolidated
wireless operating companies -- -- (564)
Purchase of wireless communication licenses (689) (6,963)
--------- --------- ---------
Net cash used in investing activities (100,356) (1,395) (287,098)
--------- --------- ---------
Financing activities:
Proceeds from bank loans 6,720 -- 15,720
Borrowings under credit facility 23,315 -- 23,315
Repayment of borrowings under credit facility (7,500) -- (7,500)
Issuance of common stock 103 -- 103
Former parent's investment 95,268 2,132 292,866
--------- --------- ---------
Net cash provided by financing activities 117,906 2,132 324,504
--------- --------- ---------
Net increase in cash and cash equivalents 7,496 -- 7,496
Cash and cash equivalents at beginning of period -- -- --
--------- --------- ---------
Cash and cash equivalents at end of period $ 7,496 $ -- $ 7,496
========= ========= =========
Supplemental disclosure of cash flow information:
Interest received $ 163 $ -- $ 163
========= ========= =========
Supplemental disclosure of noncash investing
and financing activities:
Loan to unconsolidated wireless operating company
converted to equity investment $ 28,196 $ -- $ 28,196
Credit facility fee $ 5,300 $ -- $ 5,300
========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON INCOME (LOSS)-
STOCK ADDITIONAL COMBINED CUMULATIVE
----------------------- PAID-IN CAPITAL ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL ACCOUNTS DEFICIT 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 November 30,
1998 (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 51,092 -- 139 -- -- -- 139
Net loss -- -- -- -- (11,433) -- (11,433)
Cumulative translation adjustment -- -- -- -- -- (587) (587)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at November 30, 1998 17,698,777 $ 2 $ 293,003 $ -- $ (47,608) $ (2,939) $ 242,458
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED 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
Wireless"), a Delaware corporation. On September 23, 1998 (the "Distribution
Date"), QUALCOMM distributed all of the outstanding shares of common stock of
the Company to QUALCOMM's 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. QUALCOMM is a major supplier of CDMA subscriber and
infrastructure equipment to the Company's wireless telecommunications
businesses, and the Company expects that QUALCOMM will continue to be a major
supplier for future wireless telecommunications businesses in which the Company
participates.
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, Inc. (United States), OzPhone Pty. Ltd.
(Australia), and certain other development stage businesses (the "Leap Wireless
Operating Companies"). QUALCOMM and the Company also agreed that, if certain
events occur within 18 months after the Distribution, QUALCOMM will transfer to
the Company its equity interests and working capital loan related to Telesystems
of Ukraine ("TOU"), a wireless telecommunications company in Ukraine. In
connection with the Distribution, QUALCOMM also transferred to the Company cash
and certain indebtedness of the Leap Wireless Operating Companies owed to
QUALCOMM, as well as certain miscellaneous assets 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. QUALCOMM will continue
to be a supplier of CDMA equipment and is expected to provide significant vendor
financing to the Company's wireless telecommunications businesses and ventures.
6
<PAGE> 7
Basis of Presentation
The accompanying interim consolidated and combined financial statements have
been prepared by Leap Wireless 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 stockholder's 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 and combined
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 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. To accommodate the
reporting of the unconsolidated Leap Wireless Operating Companies, the Company
has generally adopted a one-month lag for the recognition of the Company's share
of net earnings or losses of such investments.
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 months ended November 30, 1998. Historical net loss per share for
the three months ended November 30, 1997 is not presented since the Company did
not exist during that period.
The net loss per common share for the three months ended November 30, 1998
was calculated by dividing the net loss for the period by the weighted average
number of common shares outstanding for the period of 17,662,760. Stock options
for 6,299,623 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
approximately 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.
7
<PAGE> 8
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
stockholders' equity. Prior period financial statements have been reclassified
to conform to the requirements of FAS 130.
Comprehensive income (loss) consisted of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE PERIOD
NOVEMBER 30, SEPTEMBER 1, 1995
-------------------------- (INCEPTION) TO
1998 1997 AUGUST 31, 1998
-------- -------- -----------------
<S> <C> <C> <C>
Net loss $(11,433) $ (1,704) $(47,608)
Other comprehensive loss:
Net change in cumulative translation
account (587) (2,345) (2,939)
-------- -------- --------
Comprehensive loss $(12,020) $ (4,049) $(50,547)
======== ======== ========
</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>
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
<S> <C> <C>
Investments at equity $190,334 $ 97,719
Investment at cost 4,000 4,000
-------- --------
$194,334 $101,719
======== ========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
PERCENTAGE OF OWNERSHIP
---------------------------
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
<S> <C> <C>
COST INVESTMENT
Chase Telecommunications, 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>
Condensed combined financial information for the Leap Wireless Operating
Companies during the period under which the Company accounted for the
investments under the equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ---------
<S> <C> <C>
Current assets $ 126,883 $ 73,250
Non-current assets 441,620 170,660
Current liabilities (51,230) (93,064)
Non-current liabilities (149,331) (61,055)
--------- ---------
Total stockholders' capital 367,942 89,791
Other stockholders' share of capital 224,322 40,663
--------- ---------
Company's share of capital 143,620 49,128
Goodwill and other intangible items 46,714 48,591
--------- ---------
Equity investments in unconsolidated wireless
operating companies $ 190,334 $ 97,719
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues $ 208 $ --
Operating expenses (9,918) (2,128)
Other income (expense), net (3,239) 724
Foreign exchange gains 426 --
-------- --------
Net loss (12,523) (1,404)
Other stockholders' share of net loss (5,223) (437)
-------- --------
Company's share of net loss (7,300) (967)
Amortization of goodwill and other intangible items (244) --
-------- --------
Equity in net loss of unconsolidated
wireless operating companies $ (7,544) $ (967)
======== ========
</TABLE>
9
<PAGE> 10
As of November 30, 1998, the Leap Wireless Operating Companies had not
commenced significant commercial revenue generating operations.
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 1/2% and are to be repaid
by June 2006. Borrowings are collateralized by substantially all of the assets
of Chase. At November 30, 1998, borrowings under the facility totaled $21.3
million, including $0.8 million of accrued interest, with a remaining loan
commitment of $4.5 million. In December 1998, the Company loaned an additional
$1.5 million to Chase under the facility. See Note 10.
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 its shares in Chilesat PCS via a wholly-owned
subsidiary, Inversiones Leap Chile, S.A. ("Inversiones Leap"), formerly named
Inversiones QUALCOMM Chile, S.A. The remaining 50% ownership interest
represented by voting common shares is owned by Telex-Chile S.A. and its
subsidiary Chilesat S.A. (together "Telex-Chile"). The Company recorded $3.4
million and $(0.1) million in equity losses (income) resulting from this
investment during the three months ended November 30, 1998 and 1997,
respectively.
In June 1998, the Company and Inversiones Leap 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. If Telex-Chile contributes at least $17.5 million to Chilesat PCS by
January 31, 1999, the Company and Inversiones Leap have agreed to convert $17.5
million of loans to Chilesat PCS into equity. Between September and November
1998, Inversiones Leap funded an additional $6.7 million under its loan
agreement with Chilesat PCS utilizing additional bank debt. At November 30,
1998, borrowings under the loans to Chilesat PCS totaled $31.9 million. On that
date, the Company had a remaining commitment of $3.1 million under its loan
agreements with Chilesat PCS.
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 Mexico 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%. As a result of start-up
10
<PAGE> 11
expenses incurred by PEGASO, the Company recorded $0.7 million and $0.5 million
in equity losses during the three months ended November 30, 1998 and 1997,
respectively.
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"). QUALCOMM and Metrosvyaz have
entered into a $175 million, eight year, multiple drawdown loan facility under
which Metrosvyaz would be able to borrow funds, subject to certain terms and
conditions, to support its business plan, including equipment purchases, and
working capital needs. As of the Distribution Date, the Company assumed $72.4
million of the $175 million financing obligation from QUALCOMM. The $175 million
facility carries a 13% interest rate and borrowings are generally repayable
approximately five years from the date of the draw subject to a final repayment
in August 2006 of any outstanding draws then outstanding. Borrowings under the
facility are collateralized by substantially all the assets of Metrosvyaz.
During fiscal 1998, the Company paid $6.6 million of start-up related costs on
behalf of Metrosvyaz. These advances were later converted to a draw under the
$72.4 million loan facility. In addition, the Company made an additional loan of
$10.7 million under its loan facility with Metrosvyaz. As of November 30, 1998,
the Company had loans totaling $17.9 million to Metrosvyaz, including a facility
fee of $0.6 million, with a remaining commitment of $55.1 million. As a result
of start-up expenses incurred by Metrosvyaz, the Company recorded $2.5 million
and $0.5 million in equity losses resulting from its investment during the three
months ended November 30, 1998 and 1997, 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").
Orrengrove has 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 $0.9 million in
equity losses resulting from its investment during the three months ended
November 30, 1998.
NOTE 4. LOAN RECEIVABLE FROM RELATED PARTY
In September 1998, the Company provided a $17.5 million loan (the "Pegaso
Loan") to Pegaso Comunicaciones y Servicios, S.A. de C.V., a Mexican company
96%-owned by Mr. Alejandro Burillo Azcarraga, a member of the Company's Board of
Directors. The Pegaso Loan accrued interest at the rate of 13% per annum.
Principal installments of $7.5 million and $10 million, plus accrued interest,
were repaid in October and December 1998 respectively. The purpose of the Pegaso
Loan was to facilitate investment by Pegaso Comunicaciones y Servicios, S.A. de
C.V. in PEGASO, and to ensure that the investors in PEGASO made all capital
contributions to PEGASO that were required for the acquisition of the Mexican
licenses on September 30, 1998. See Note 7.
11
<PAGE> 12
NOTE 5. 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 November 30, 1998 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 Federal Communications
Commission ("FCC").
NOTE 6. LOANS PAYABLE
In July 1998 and between September and November 1998, Inversiones Leap
borrowed $9.0 million and $6.7 million, respectively, under notes payable to two
banks in Chile. The notes bear interest at rates of 8.56% and 7.75% per annum,
respectively, and all amounts borrowed are due to be repaid by February 1999.
NOTE 7. 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 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. In September 1998, the Company
also borrowed $17.5 million under the investment capital sub-facility to make a
short-term loan to a related party (see Note 4). In November 1998, the Company
repaid $7.5 million of the investment capital loan, with the remaining balance
of $10.0 million due and payable on January 15, 1999. The Company borrowed $5.8
million under the investment capital sub-facility to make a further loan to a
Leap Wireless Operating Company.
Of amounts borrowed under the Credit Facility, $11.1 million 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 November 30, 1998, $0.4 million of capitalized and accrued interest had been
added to the facility.
NOTE 8. 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
November 30, 1998, these commitments
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totaled approximately $62.8 million. The Company expects to fund its commitments
with borrowings under the Credit Facility.
NOTE 9. 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 November 30, 1998, no shares of preferred stock were
outstanding.
NOTE 10. SUBSEQUENT EVENT
In December 1998, the Company agreed to purchase substantially all the
assets of Chase for $6.3 million, plus a warrant to purchase 1% of the common
stock in a wholly-owned subsidiary of the Company for $1.0 million, transfer of
the Company's stock ownership and warrants to purchase stock in Chase and
certain contingent earn-outs. This acquisition involves the transfer of licenses
which are subject to approval by the FCC, therefore the final closing of the
transaction will not occur unless approval by the FCC is obtained.
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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 (the "Leap Wireless
Operating Companies") have been included as of and for the three months ended
October 31, 1998, a one-month lag.
OVERVIEW
Leap Wireless International, Inc. (the "Company" or "Leap") is a wireless
communications carrier that deploys CDMA telecommunications networks in domestic
and international markets with strong growth potential. In conjunction with its
strategic partners, Leap is building or anticipates building a combination of
fixed and mobile wireless telecommunications systems in Mexico, Chile,
Australia, Russia and the United States. Upon completion of the Company's
pending U.S. spectrum 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.
Domestic and international telecommunications markets are expanding rapidly
as countries seek to increase teledensity (number of telephone lines as a
percentage of the population) and 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.
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Leap's strategy includes identifying and investing in growth markets with
strong 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 benefits of reliable, cost-effective,
and high-quality voice and data services to its operating company customers.
In the first quarter of fiscal year 1999, Leap became an independent company
and began to trade on the NASDAQ National Market after QUALCOMM distributed
Leap's stock to QUALCOMM's stockholders (the "Distribution"). In addition,
during the first quarter of fiscal 1999, two Leap Wireless operating companies,
Chilesat Telefonia Personal, S.A. ("Chilesat") and Chase Telecommunications,
Inc. ("ChaseTel"), launched commercial service. These are the first two Leap
Wireless operating companies with networks in commercial operation. As of
November 30, 1998, the end of the first quarter, approximately 20,500
subscribers were using wireless service provided by Chilesat and ChaseTel.
Leap's equity share was approximately 8,500 subscribers.
In September 1998, a subsidiary of Pegaso Telecomunicaciones, S.A. de C.V.,
Leap's Mexican joint venture, made its final payment to the Mexican government
for telecommunications licenses awarded to it in the Mexican PCS spectrum
auctions. Pegaso has begun network deployment in Tijuana and plans to launch
commercial service in February 1999.
In October 1998, a wholly owned subsidiary of Leap filed an application with
the Federal Communications Commission (the "FCC") to acquire spectrum covering
3.3 million potential customers in North and South Carolina from AirGate
Wireless, L.L.C. ("Airgate"). Five parties have filed comments with the FCC
opposing the application on the grounds that the Company does not qualify as a
"designated entity." Subsequent to the end of the quarter, Leap announced that
it has also reached an agreement to acquire ChaseTel, a Tennessee wireless
service provider. Leap previously held a 7.2% interest in Chase
Telecommunications Holdings, Inc. ("ChaseTel Holdings"), the parent of ChaseTel.
Leap expects to file an application with the FCC in the near future to transfer
the ChaseTel license to the Company. The bases of the comments filed in
opposition to the AirGate license transfer application would also apply to the
application to transfer the ChaseTel license. The two properties are intended to
serve as initial test markets for Leap's strategy of providing a flat-rate
wireless local area telephone service targeted at the mass consumer market.
After the close of the first quarter of fiscal 1999, Chilesat met its
obligation to complete certain network build-out milestones as required by its
licensing agreement with the Chilean government.
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.
As of the end of the first quarter of fiscal 1999, the Leap Wireless
Operating Companies had not commenced significant commercial revenue generating
operations, and Leap has no other current sources of operating income. Revenues
of the operating companies will be derived primarily from fees and usage charges
after they begin commercial operations. Other sources of revenue may include
equipment sales and activation fees. Start-up wireless telecommunications
companies typically require substantial capital
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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
incur increased operating costs and begin to amortize capitalized start-up
costs, Leap's proportionate share of the net losses of its operating companies
will grow.
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL YEAR 1999 COMPARED TO FIRST QUARTER FISCAL YEAR 1998
The Company's net loss in the first quarter of fiscal 1999 was $11.4 million
compared to a net loss of $1.7 million in the corresponding period of the prior
fiscal year.
Equity in net loss of unconsolidated wireless operating companies for the
first quarter of fiscal 1999 was $7.5 million, compared to $1.0 million for the
first quarter of fiscal 1998. The increase consisted primarily of increased Leap
Wireless Operating Company expenses (such as salaries and related benefits,
overhead expenses and professional and consulting fees) associated with license
acquisitions, network development, and marketing activities, increased interest
expense on borrowings, and losses from Orrengrove Investments Ltd., which was
acquired during fiscal 1998.
General and administrative expenses were $4.4 million in the first quarter
of fiscal 1999, compared to $0.7 million in the same period in 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
various other parts of the world.
Interest income for the first quarter of fiscal 1999 was $1.5 million,
primarily from the Company's loans to the Leap Wireless Operating Companies.
Interest expense for the first quarter of fiscal 1999 was $1.0 million due to
borrowings from banks and under the credit facility with QUALCOMM. There was no
interest income or expense during the first quarter of fiscal 1998.
No provision for income taxes was recognized in the first quarters of fiscal
1999 and 1998 as a result of the net losses incurred.
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. Prior to the Distribution of the Company's
stock to QUALCOMM's stockholders on September 23, 1998, the Company's cash
requirements were funded by QUALCOMM. On September 23, 1998, the Company entered
into $265 million credit facility with QUALCOMM which contained a $35.2 million
subfacility to fund working capital and operating expenses of the Company and a
$229.8 million subfacility 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. The Company's credit agreement
with
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QUALCOMM contains covenants typical for a facility of this type, such as a
debt-to-capitalization financial covenant and several operating covenants,
including restrictions on the ability of the Company to incur indebtedness,
merge, consolidate or transfer all or substantially all of its assets, to make
certain sales of assets, to create, incur or to permit the existence of certain
liens and to pay dividends. As a result of these factors, the Company's ability
to obtain additional debt financing may be significantly limited.
As of November 30, 1998, the Company had $243.9 million available to it
under its 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 that point, the Company expects
to be highly leveraged. The degree to which the Company is leveraged could have
important consequences, including: (i) the Company's ability to obtain
additional financing in the future may be impaired, (ii) a substantial portion
of the Company's future cash flows from operations may be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available for operations, (iii) the Company may be hindered in its ability
to adjust rapidly to changing market conditions and (iv) the Company's
substantial degree of leverage may make it more vulnerable in the event of a
downturn in general economic conditions or in its business. There can be no
assurance that the Company's future cash flows will be sufficient to meet the
Company's debt service requirements or that the Company will be able to
refinance any of its indebtedness at maturity.
The Company 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 quarter of fiscal 1999, the Company used $10.1 million for
operating activities, compared to $0.7 million in the first quarter of fiscal
1998. The increase resulted from an increase in net working capital requirements
and an increase in general and administrative expenses. The increase in 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 for
operating activities will increase substantially in the future as a result of
the Company's pending acquisition and consolidation of ChaseTel and other
Company activities related to its strategy of providing a flat-rate wireless
local area telephone service targeted at the mass consumer market.
INVESTING ACTIVITIES
Cash used in investing activities was $100.4 million in the first quarter of
fiscal 1999 and $1.4 million for the first quarter of fiscal 1998. Investments
in the first quarter of fiscal 1999 consisted
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primarily of a $60.7 million capital contribution to Pegaso which was made
before Leap began to operate as an independent company, loans and advances of
$26.1 million to Leap Wireless Operating Companies, and a net loan of $10
million as described below. 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, in September 1998 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. The first principal installment of $7.5 million,
plus accrued interest, was repaid in the first quarter of fiscal 1999.
Subsequent to the end of the quarter, the second and final principal installment
of $10 million, plus accrued interest, was also repaid to the Company.
In October 1998, the Company agreed to purchase 10 MHz F block
telecommunications licenses from AirGate Wireless, L.L.C. for $19.5 million,
subject to the approval of the Federal Communications Commission ("FCC"). The
licenses cover a population of 3.3 million people in portions of North and South
Carolina. Five comments and oppositions have been filed with the FCC in
connection with the Company's application for approval of the license sale. The
comments challenge the Company's status as a "designated entity", which entitles
small businesses to preferential pricing and payment terms when acquiring PCS
frequency in the C and F blocks. Subsequent to the close of the quarter, the
Company filed its response to the comments and oppositions with the FCC.
In December 1998, subsequent to the end of the quarter, the Company agreed
to purchase substantially all of the assets of ChaseTel Holdings, the owner of
ChaseTel, a wireless service provider with 15 MHz C block licenses in Tennessee.
Transfer of ChaseTel's licenses to the Company is subject to the approval of the
FCC. 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 aggregate
payment of $1.0 million; the Company's existing stock and warrants to purchase
stock in ChaseTel Holdings; and the right to receive 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. The licenses cover approximately 6.3 million people in Tennessee,
including the Chattanooga, Nashville, Memphis and Knoxville metropolitan areas,
as well as contiguous portions of six adjacent states. In December 1998,
ChaseTel had 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.
FINANCING ACTIVITIES
Cash provided by financing activities during the first quarter of fiscal
1999 was $117.9 million, representing $95.3 million of funding from QUALCOMM for
Company operations and investing activities prior to the Distribution and $22.6
million of net borrowings. Cash provided by financing activities during the
first quarter of fiscal 1998 was $2.1 million, representing QUALCOMM's funding
of the Company operations and investing activities in this period.
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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 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 $62.8 million of financing it is contractually
bound to provide the Leap Wireless Operating Companies as of November 30, 1998.
The business plans of these companies, however, call for substantial additional
financing to build-out and operate their planned networks, including substantial
financing for 1999 which these companies have not obtained. Although the Leap
Wireless Operating Companies may be able to reduce their capital requirements by
slowing the deployment of new equipment or by decreasing the scope of their
planned networks, it is likely that these businesses will still require
substantial new financing in 1999. The Leap Wireless Operating Companies are
generally seeking new equity and/or debt from existing investors, equipment
vendors and third parties, and the Company has been assisting them in their
efforts. At this time, however, capital markets have been constrained because of
uncertain worldwide economic conditions, and it is difficult for development
stage companies in emerging markets to raise additional capital. As a result,
the Company cannot provide assurances that the Leap Wireless Operating Companies
will be able to obtain the required additional financing. Further, the failure
of any such Leap Wireless Operating Company to gain required new financing could
have a material adverse effect on such company and, as a result, a material
adverse effect on the Company.
Chilesat, the Company's Chilean joint venture, does not currently have
sufficient funds to repay loans of approximately $35 million due to the Company
in January 1999 and approximately $10 million due to QUALCOMM in January and
February 1999, or to finance continuing activities. If Telex-Chile, the
Company's joint venture partner in Chilesat, contributes at least $17.5 million
to Chilesat by January 31, 1999, the Company and its wholly-owned Chilean
subsidiary have agreed to convert $17.5 million of its loan to Chilesat into
equity. If Chilesat does not repay the Company's loan when due, the Company also
has the option to convert such indebtedness into equity in Chilesat. The Company
has certain funds available under its credit facility for additional loans to
Chilesat to finance additional short-term needs. The Company and Chilesat have
been discussing terms under which the Company would be willing to provide
additional loans and/or equity to Chilesat. The Company and Chilesat have not
yet reached agreement on such terms nor can the Company provide assurances that
it will reach such an agreement with Chilesat. The Company has not yet decided
upon the actions it will take if Chilesat defaults on its loan payment to the
Company.
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Chilesat's failure to obtain additional financing in the near future could
have a material adverse affect on its ongoing operations and network expansion
and, as a result, could have a material adverse affect on the Company. Despite
Chilesat's liquidity problems, the Company believes that Chilesat's PCS network
represents a potentially successful business and is working to assist Chilesat
in securing a mutually satisfactory resolution to Chilesat's liquidity problems.
Telex-Chile has also been experiencing liquidity difficulties and has been
unable to make repayments on its outstanding loans. A Chilean court recently
withdrew the limited protection it had previously granted to Telex-Chile from
many of its significant creditors.
Chilesat has experienced some technical equipment problems with its network,
which is not unusual for a newly deployed, large-scale, wireless communication
system. Chilesat has been working with its equipment vendors to resolve these
problems, and the Company believes changes that a vendor has begun implementing
will promptly resolve such problems, although additional hardware replacement
and software development may be required.
As previously disclosed, the Company and QUALCOMM have agreed to provide or
procure up to $500 million of financing for Metrosvyaz Ltd., a Company joint
venture in Russia ("Metrosvyaz"). As a first stage in this multi-year investment
project, QUALCOMM agreed to provide a loan of $175 million to Metrosvyaz for
working capital and the purchase of QUALCOMM equipment. In connection with the
Distribution, the Company assumed $72.4 million of the loan commitment as a
working capital facility for Metrosvyaz.
Turmoil in the Russian economy has raised issues with respect to the
viability of the networks Metrosvyaz plans to deploy, and to the ability of
Metrosvyaz to repay the loans necessary to deploy such networks. As a result,
Metrosvyaz and the Company have agreed to slow the previously planned deployment
of Metrosvyaz's wireless networks in Russia, and QUALCOMM and Metrosvyaz have
agreed in principal to reduce the amount initially available under the QUALCOMM
loan agreement to finance Metrosvyaz's purchase of QUALCOMM equipment.
Metrosvyaz, QUALCOMM and the Company have also agreed in principle to
restructure the terms of the QUALCOMM loan agreement and the Company's working
capital facility for Metrosvyaz. This reduction and the restructuring reflect
the delays in equipment sales associated with the planned slow-down in network
deployment and the increased risks associated with the current Russian political
and economic situation.
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
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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 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.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
10.20 Asset Purchase Agreement among the Company, Chase
Telecommunications Holdings, Inc., Anthony Chase, and Richard
McDugald, dated as of December 24, 1998
27. Financial Data Schedule (Filed with EDGAR filing only.)
(b) Reports on Form 8-K.
On September 18, 1998, the Company filed a Current Report on Form 8-K
which indicated that the Company's Board of Directors had adopted a
Stockholders Rights Plan (the "Rights Plan") on September 9, 1998.
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.
The description and terms of the Rights are set forth in a Rights
Agreement, dated as of September 14, 1998, as the same may be amended
from time to time (the "Agreement"), between the Company and Harris
Trust Company of California, as Rights Agent. A copy of the Rights
Agreement was attached to the Form 8-K.
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: January 13, 1999 By: /s/ Harvey P. White
--------------------------------------
Harvey P. White
President and Chief Executive Officer
Date: January 13, 1999 By: /s/ Stephen P. Dhanens
--------------------------------------
Stephen P. Dhanens
Controller (Chief Accounting Officer)
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EXHIBIT 10.20
ASSET PURCHASE AGREEMENT
AMONG
LEAP WIRELESS INTERNATIONAL, INC.
AND
CHASE TELECOMMUNICATIONS HOLDINGS, INC.,
ANTHONY CHASE, AND RICHARD McDUGALD
DATED AS OF DECEMBER 24, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS......................................................................... 1
2. PURCHASE AND SALE OF TARGET SHARES, LICENSEE SHARES AND OTHER ASSETS................ 8
(A) BASIC TRANSACTION............................................................ 8
(B) PURCHASE PRICE............................................................... 9
(C) THE CLOSING.................................................................. 9
(D) DELIVERIES AT THE CLOSING.................................................... 9
3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION........................... 9
(A) REPRESENTATIONS AND WARRANTIES OF THE SELLER, CHASE AND MCDUGALD............. 9
(B) REPRESENTATIONS AND WARRANTIES OF THE BUYER.................................. 11
4. REPRESENTATIONS AND WARRANTIES CONCERNING THE TARGET AND ITS SUBSIDIARIES........... 12
(A) ORGANIZATION, QUALIFICATION, AND CORPORATE POWER............................. 12
(B) CAPITALIZATION............................................................... 13
(C) NONCONTRAVENTION............................................................. 13
(D) BROKERS' FEES................................................................ 13
(E) TITLE TO ASSETS.............................................................. 13
(F) SUBSIDIARIES................................................................. 14
(G) FINANCIAL STATEMENTS......................................................... 14
(H) EVENTS SUBSEQUENT TO MOST RECENT FISCAL YEAR END............................. 14
(I) UNDISCLOSED LIABILITIES...................................................... 16
(J) LEGAL COMPLIANCE............................................................. 17
(K) TAX MATTERS.................................................................. 17
(L) REAL PROPERTY................................................................ 20
(M) INTELLECTUAL PROPERTY........................................................ 21
(N) TANGIBLE ASSETS.............................................................. 23
(O) INVENTORY.................................................................... 22
(P) CONTRACTS.................................................................... 22
(Q) POWERS OF ATTORNEY........................................................... 24
(R) INSURANCE.................................................................... 24
(S) LITIGATION................................................................... 25
(T) PRODUCT WARRANTY............................................................. 25
(U) EMPLOYEES.................................................................... 25
(V) EMPLOYEE BENEFITS............................................................ 25
(W) GUARANTIES................................................................... 27
(X) ENVIRONMENT, HEALTH, AND SAFETY.............................................. 27
(Y) CERTAIN BUSINESS RELATIONSHIPS WITH THE TARGET AND ITS SUBSIDIARIES.......... 28
(z) FCC Matters.................................................................. 28
(AA) DISCLOSURE................................................................... 29
5. PRE-CLOSING COVENANTS............................................................... 29
(A) GENERAL...................................................................... 29
(B) NOTICES AND CONSENTS......................................................... 29
(C) OPERATION OF BUSINESS........................................................ 30
(D) PRESERVATION OF BUSINESS..................................................... 31
</TABLE>
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<TABLE>
<S> <C>
(E) FULL ACCESS.................................................................. 31
(F) NOTICE OF DEVELOPMENTS....................................................... 31
(G) EXCLUSIVITY.................................................................. 31
(H) CERTAIN DELIVERIES........................................................... 32
6. POST-CLOSING COVENANTS.............................................................. 33
(A) GENERAL...................................................................... 33
(B) LITIGATION SUPPORT........................................................... 33
(C) TRANSITION................................................................... 33
(D) CONFIDENTIALITY.............................................................. 33
(E) COVENANT NOT TO COMPETE...................................................... 34
(F) WARRANTS..................................................................... 34
(G) CONTINUATION OF SELLER....................................................... 35
(H) CERTAIN MATTERS RELATING TO THE EARNOUT...................................... 35
(I) DISTRIBUTION OF PROCEEDS..................................................... 37
7. CONDITIONS TO OBLIGATION TO CLOSE................................................... 37
(A) CONDITIONS TO OBLIGATION OF THE BUYER........................................ 37
(B) CONDITIONS TO OBLIGATION OF THE SELLER....................................... 39
8. REMEDIES FOR BREACHES OF THIS AGREEMENT............................................. 40
(A) SURVIVAL OF REPRESENTATIONS AND WARRANTIES................................... 40
(B) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE BUYER.......................... 40
(C) INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE SELLER......................... 42
(D) MATTERS INVOLVING THIRD PARTIES.............................................. 42
(E) CHARACTERIZATION OF INDEMNIFICATION PAYMENTS................................. 43
(F) BUYER'S RIGHT OF OFFSET...................................................... 43
(G) OTHER INDEMNIFICATION PROVISIONS............................................. 43
9. TAX MATTERS......................................................................... 44
(A) SECTION 338(H)(10) ELECTION.................................................. 44
(B) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE............................. 45
(C) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE............... 45
(D) COOPERATION ON TAX MATTERS................................................... 45
(E) TAX SHARING AGREEMENTS....................................................... 46
(F) CERTAIN TAXES................................................................ 46
(G) NO ELECTION UNDER TREAS. REG. SECTION 1.1502-76(B)........................... 46
10. TERMINATION......................................................................... 46
(A) TERMINATION OF AGREEMENT..................................................... 46
(B) EFFECT OF TERMINATION........................................................ 48
11. MISCELLANEOUS....................................................................... 49
(A) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS...................................... 49
(B) NO THIRD-PARTY BENEFICIARIES................................................. 49
(C) ENTIRE AGREEMENT............................................................. 49
(D) SUCCESSION AND ASSIGNMENT.................................................... 49
(E) COUNTERPARTS................................................................. 49
(F) HEADINGS..................................................................... 49
(G) NOTICES...................................................................... 49
(H) GOVERNING LAW................................................................ 50
(I) AMENDMENTS AND WAIVERS....................................................... 50
(J) SEVERABILITY................................................................. 51
(K) EXPENSES..................................................................... 51
</TABLE>
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<TABLE>
<S> <C>
(L) CONSTRUCTION................................................................. 51
(M) INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES............................ 51
(N) SPECIFIC PERFORMANCE......................................................... 51
(O) SUBMISSION TO JURISDICTION................................................... 51
(P) DISPUTE RESOLUTION........................................................... 52
</TABLE>
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ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is entered into as of
December 24, 1998, by and among Leap Wireless International, Inc., a Delaware
corporation (the "Buyer"), and Chase Telecommunications Holdings, Inc., a
Delaware corporation (the "Seller"), Chase Telecommunications, Inc., a Delaware
corporation (the "Target"), Anthony Chase, an individual ("Chase"), and Richard
McDugald, an individual ("McDugald"). The Buyer, Seller, Target, Chase and
McDugald are referred to collectively herein as the "Parties."
RECITALS
A. Seller owns, directly or indirectly, all of the outstanding capital
stock of the Target and ChaseTel Licensee Corp., a Delaware corporation (the
"Licensee"), and certain other assets which are related to or used in the
Business (as defined below). Chase and McDugald are officers, directors and
controlling stockholders of Seller.
B. This Agreement contemplates a transaction in which the Buyer will
purchase from the Seller and Target, and the Seller and Target will sell to the
Buyer, all of the outstanding capital stock of the Target and Licensee,
respectively, and certain other assets directly owned by Seller, in return for
the transfer to Seller and Target of cash, certain outstanding common stock and
warrants of Seller, certain Warrants, and a contingent "earnout" payment.
C. Concurrently with the execution and delivery of this Agreement, Buyer
and Seller are entering into the Management Agreement and the Trademark License,
and Buyer and each of Chase and McDugald are entering into the Guarantees. The
execution and delivery by the respective parties of the Management Agreement,
the Trademark License and the Guarantees are a condition to Buyer's execution
and delivery of this Agreement.
AGREEMENT
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. Definitions.
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and
fees, including court costs and reasonable attorneys' fees and expenses.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
Section 1504(a).
"Ancillary Agreements" means the Warrants, the Consulting Agreements,
the Management Agreement, the Guarantees, the Subordinated Security Agreement
and the Trademark License.
"Assets" means all real and personal property, whether tangible or
intangible, including, without limitation, the following: (i) all personal
property, plant and equipment; (ii) all real property and improvements thereon;
(iii) all leasehold interests; (iv) all accounts receivable, inventory, purchase
and sales orders, sales, service data and other current assets; (v) all cash,
bank deposits, securities or similar cash items; (vi) all contracts, leases,
easements, commitments and any other agreements or arrangements; (viii) all
municipal, state and federal franchises, licenses, authorizations and permits;
(ix) all patents, trade names, trade dress, trademarks, copyrights and service
marks; (x) all insurance policies; (xi) all books and records (including all
computer records and software); and (xii) all claims, choses-in-action, rights
and entitlements; but specifically excluding the Excluded Assets.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms or could form the basis for any
specified consequence.
"Business" means the Seller's and its Subsidiaries' business of
designing, constructing, and operating wireless communications networks and
marketing and selling wireless communications services in the territories
covered by the FCC Licenses.
"Buyer" has the meaning set forth in the preface above.
"Closing" has the meaning set forth in Section 2(c) below.
"Closing Date" means the date which is selected by Buyer and which is
not more than ten (10) business days after the date on which each of the orders
of the FCC, and all other state and federal regulatory authorities, if
applicable, consenting to the assignment of the Target Shares, the Licensee
Shares and other Assets to Buyer or its designee shall have become a Final
Order.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder.
"Confidential Information" means any information concerning the business
and affairs of Buyer, the Target and its Subsidiaries that is not already
generally available to the public.
"Consulting Agreements" means the Consulting Agreements between Buyer
and each of Anthony Chase and Richard McDugald to be entered into at the
Closing, in the forms attached hereto as Exhibits A-1 and A-2, respectively.
"Controlled Group of Corporations" has the meaning set forth in Code
Section 1563.
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"Cricket Business" means the Business of Seller conducted with Seller's
FCC Licenses, as such business is modified from time to time in connection with
the implementation of the Cricket Business Plan, as amended from time to time.
"Cricket Business Plan" means the initial business plan of Buyer to
design, construct, and operate a wireless communications network, and market and
sell wireless communications services, in the territories covered by Seller's
FCC Licenses, which plan includes a proprietary business model for a wireless
telecommunications provider which involves a low operating cost (less than $0.02
per minute) and a high usage plan (greater than an average of 600 minutes of use
per month per subscriber), with an average revenue per user per month
significantly below existing wireless business models (less than $35.00 per
month). The Cricket Business Plan may, and is likely to, be amended from time to
time, at the discretion of the board of directors or executive management of
Buyer, or such other governing body responsible for the oversight of the Cricket
Business.
"Credit Agreement" means the Credit Agreement by and among Target,
QUALCOMM Incorporated and the other lenders named therein, and QUALCOMM
Incorporated as Collateral Agent, dated June 26, 1998, as amended from time to
time, and all exhibits, schedules and other agreements attached thereto.
"Deferred Intercompany Transaction" has the meaning set forth in Reg.
Section 1.1502-13.
"Disclosure Schedule" has the meaning set forth in Section 4 below.
"Earnout Amount" means an amount payable in cash equal to the quotient
obtained by dividing (i) (A) Target Earnings minus (B) $20 million plus (C) 2.2
(two point two) times the amount of Seller's aggregate legal fees, accounting
fees and severance payments to employees incurred in connection with the
negotiation and execution of this Agreement and the Ancillary Agreements and the
closing of the transactions contemplated hereby, itemized in writing and
certified by an executive officer of Seller at the Closing, by (ii) 2.2 (two
point two), subject to a maximum Earnout Amount equal to the sum of $41 million
(Forty-One Million U.S. Dollars) plus the amount of Seller's aggregate legal
fees, accounting fees and severance payments to employees incurred in connection
with the negotiation and execution of this Agreement and the Ancillary
Agreements and the closing of the transactions contemplated hereby as itemized
in writing and certified by an executive officer of Seller at the Closing.
"Target Earnings" means the EBITDA of the Cricket Business, which is earned by
the Cricket Business during the fifth full fiscal year following the Closing.
"Earnout Payment Date" means the date 120 days following the end of
Buyer's fifth full fiscal year following the Closing Date.
"EBITDA" means for any period (determined on a combined and consolidated
basis without duplication), the sum of the following: (a) net income (or loss)
determined in accordance with GAAP; plus, to the extent deducted in computing
net income for such period (b) the sum of (i) all interest expenses (including,
without limitation, the amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligation, the interest component of any capitalized lease, imputed
interest with respect to sale-
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<PAGE> 8
leaseback transactions, commissions, discounts, and other fees and charges
incurred in respect of letters of credit or bankers' acceptances, and net
payments pursuant to hedging transactions whether or not accounted for in
accordance with GAAP as interest expense), (ii) all income taxes, (iii)
depreciation, depletion, amortization of intangibles and other non-cash charges,
expenses or non-cash losses, (iv) expenses not incurred in the ordinary course
of the Cricket Business consistent with past practice, if such expenses were
incurred during such period with the intent of reducing EBITDA during such
period, (v) the difference between any expenses paid to Affiliates of Buyer
under arrangements requiring payments which are not on arms-length terms and the
amounts which would have been payable for such expenses on arms-length terms,
(vi) the difference between any charges, fees, expenses or allocations from
Buyer relating to overhead or services provided to the Cricket Business under
arrangements which are not on arms-length terms and the amounts which would have
been payable for such charges, fees, expenses or allocations on arms-length
terms, and (vii) charges or fees relating to any extraordinary transactions.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation
or retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes
into ambient air, surface water, ground water, or lands or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes.
"Equipment Purchase Agreement" means the Infrastructure Purchase and
Supply Agreement dated as of May 13, 1997 and amended as of January 6, 1998 by
and between Target and QUALCOMM Incorporated, including all attachments thereto,
including the Statement of Work.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Loss Account" has the meaning set forth in Reg. Section
1.1502-19.
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<PAGE> 9
"Excluded Assets" means the Assets listed on Exhibit H attached hereto.
"Extremely Hazardous Substance" has the meaning set forth in Section 302
of the Emergency Planning and Community Right-to-Know Act of 1986, as amended.
"FCC" means the United States Federal Communications Commission.
"FCC Debt" means the notes payable in connection with the FCC Licenses,
in the aggregate principal amount of $78,790,735.00 as of the date of this
Agreement, as more particularly described on Exhibit J attached hereto.
"FCC Licenses" means the C-Block licenses to construct and operate
personal communications services wireless telecommunications systems, granted by
the FCC to ChaseTel Licensee Corp., as more fully described in Exhibit B
attached hereto.
"Fiduciary" has the meaning set forth in ERISA Section 3(21).
"Final Order" shall mean action by the FCC as to which (i) no request
for stay by the FCC of the action is pending, no such stay is in effect, and, if
any deadline for filing any such request is designated by statute or regulation,
such deadline has passed; (ii) no petition for rehearing or reconsideration of
the action is pending before the FCC and the time for filing any such petition
has passed; (iii) the FCC does not have the action under reconsideration on its
own motion and the time for such reconsideration has passed; and (iv) no appeal
to a court, or request for stay by a court, of the action of the FCC is pending
or in effect, and, if any deadline for filing any such appeal or request is
designated by statute or rule, it has passed.
"Financial Statement" has the meaning set forth in Section 4(g) below.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Guarantees" means the Guaranty executed and delivered by each of
Anthony Chase and Richard McDugald, in the forms attached hereto as Exhibits C-1
and C-2, respectively.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Indemnified Party" has the meaning set forth in Section 8(d) below.
"Indemnifying Party" has the meaning set forth in Section 8(d) below.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, domain names and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, and all applications,
5
<PAGE> 10
registrations, and renewals in connection therewith, (c) all copyrightable
works, all copyrights, and all applications, registrations, and renewals in
connection therewith, (d) all mask works and all applications, registrations,
and renewals in connection therewith, (e) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier lists,
pricing and cost information, and business and marketing plans and proposals),
(f) all computer software (including data and related documentation), (g) all
other proprietary rights, and (h) all copies and tangible embodiments thereof
(in whatever form or medium).
"Knowledge" means actual knowledge of each of Anthony Chase, Richard
McDugald, Mary Bogue Logan and Sunir Kochhar, after reasonable investigation.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Licensee" has the meaning set forth in the Recitals above.
"Licensee Shares" means any shares of outstanding capital stock of the
Licensee, including without limitation, the Common Stock, par value $0.01 per
share, of the Licensee.
"Management Agreement" means the Management Agreement between Buyer and
Target, with Seller as guarantor, attached hereto as Exhibit D.
"Most Recent Balance Sheet" means the balance sheet contained within the
Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in Section
4(g) below.
"Most Recent Fiscal Month End" has the meaning set forth in Section 4(g)
below.
"Most Recent Fiscal Year End" has the meaning set forth in Section 4(g)
below.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Network" means the Target's PCS wireless telecommunications network
infrastructure equipment operating under the FCC Licenses and installed by
QUALCOMM Incorporated pursuant to the Equipment Purchase Agreement.
"Non-Circumvention Agreement" means the Non-Circumvention Agreement
entered into effective February 12, 1998, by and between QUALCOMM Incorporated
and Chase and Target.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
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<PAGE> 11
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Liens" means liens granted by Seller, Target and Licensee in
favor of QUALCOMM Incorporated and Buyer under the Working Capital Facility and
the QUALCOMM Agreements, and liens granted by Licensee in favor of the FCC as
security for the FCC Debt.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Prohibited Transaction" has the meaning set forth in ERISA Section 406
and Code Section 4975.
"Purchase Price" has the meaning set forth in Section 2(b) below.
"QUALCOMM Agreements" means the Equipment Purchase Agreement and the
Credit Agreement excluding the Working Capital Facility.
"Reportable Event" has the meaning set forth in ERISA Section 4043.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, and (b) liens for Taxes not yet due and payable or which are
being contested in good faith by appropriate proceedings.
"Seller" has the meaning set forth in the preface above.
"Subordinated Security Agreement" shall have the meaning set forth in
Section 5(h) hereof.
"Subsidiary" means, with respect to a specified Person (a) any
corporation in an unbroken chain of corporations or other entities beginning
with such Person if each of the corporations or other entities other than the
last corporation in the unbroken chain then owns stock or ownership interests
possessing, or has the power to vote or direct the voting by contract or
otherwise of, 50% or more of the total combined voting power of all classes of
stock or ownership interests in one of the other corporations or other entities
in such chain, (b) any partnership in which such Person or any of its
Subsidiaries is a general partner, (c) any partnership in which such Person or
any of its Subsidiaries possesses a 50% or greater interest in the total capital
or total income of such partnership, or (d) any limited liability company in
which such Person or any of its Subsidiaries is a manager or possesses a 50% or
greater interest in the total capital or total income of such limited liability
company.
"Target" has the meaning set forth in the Recitals above.
"Target Shares" means any shares of outstanding capital stock of the
Target, including without limitation, the Common Stock, par value $0.01 per
share, of the Target.
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<PAGE> 12
"Tax" or "Taxes" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under Code
Section 59A), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not. The terms "Tax" and
"Taxes" include any liability for any of the foregoing items as a result of
being a member of any affiliated, consolidated, combined, unitary or similar
group and any liability for payment of any amounts as a result of a Tax sharing
or indemnity agreement.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 8(d) below.
"Trademark License " means the License Agreement dated as of the date
hereof by and between Buyer and Target, with Seller as guarantor, in the form of
Exhibit E attached hereto.
"Warrants" means the warrants to purchase shares of common stock of
Cricket Communications, Inc., a subsidiary of the Buyer (or any other entity
formed by Buyer prior to the Closing through which Buyer intends at the time of
the Closing to implement the Cricket Business Plan on a nationwide basis), in
substantially the form attached hereto as Exhibit F, which warrants will provide
the holders thereof the right to acquire shares constituting one percent (1%) of
the outstanding common stock of Cricket Communications, Inc. (or such other
entity) at the Closing Date, for an aggregate purchase price for such shares of
$1.0 million, and which expire on the fifth (5th) anniversary of the Closing
Date.
"Working Capital Facility" means the Working Capital Loan Facility under
the Credit Agreement, which has been assigned and assumed by Buyer as the sole
Working Capital Lender (as defined in the Credit Agreement).
2. Purchase and Sale of Target Shares, Licensee Shares and Other Assets.
(a) Basic Transaction. On and subject to the terms and conditions of
this Agreement, Buyer agrees to purchase from the Seller and Target, and the
Seller and Target agree to sell to the Buyer, all of the Target Shares and
Licensee Shares and all other Assets of Seller, free and clear of all liens and
encumbrances (other than Permitted Liens), for the consideration specified below
in this Section 2. Notwithstanding any provision of this Agreement, Buyer shall
not assume, or otherwise be responsible for, any Liabilities of Seller, whether
liquidated or unliquidated, or known or unknown, whether arising out of
occurrences prior to, at or after the date hereof. The Parties acknowledge that
Buyer is acquiring the Licensee Shares subject to the FCC Debt and Buyer is
acquiring the Target Shares subject to certain outstanding indebtedness of
Target under the QUALCOMM Agreements and the Working Capital Facility.
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<PAGE> 13
(b) Purchase Price. Subject to Sections 8(f) and 11(k), the Buyer agrees
to pay to the Seller the following (collectively, the "Purchase Price"): (i)
$6.3 million (Six Million Three Hundred Thousand U.S. Dollars), at the Closing;
(ii) the Warrants, at the Closing; (iii) all of Buyer's outstanding shares of
Common Stock issued by Seller and outstanding warrants to purchase shares of
Common Stock issued by Seller; and (iv) not later than the Earnout Payment Date,
subject to the provisions of Section 6(h) below, the Earnout Amount. The
components of the Purchase Price shall be valued and, subject to Section 9(a)
hereof, allocated between the Target Shares, the Licensee Shares and the
Covenant Not to Compete set forth in Section 6(e) below, as specified in a
written notice from Buyer to Seller after the Closing. To the extent the
Purchase Price is allocated to the Licensee Shares, such amount shall be treated
for all purposes as having been paid to Target and contemporaneously distributed
to Seller (i.e., prior to the close of business on the Closing Date).
(c) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Latham & Watkins in
San Diego, California, commencing at 9:00 a.m. local time on the Closing Date.
Buyer shall provide to Seller at least seven (7) business days' prior written
notice of the Closing Date promptly following Buyer's selection thereof.
(d) Deliveries at the Closing. At the Closing, (i) the Seller will
deliver to the Buyer the various certificates, instruments, and documents
referred to in Section 7(a) below, (ii) the Buyer will deliver to the Seller the
various certificates, instruments, and documents referred to in Section 7(b)
below, including Buyer's outstanding shares of Common Stock issued by Seller and
outstanding warrants to purchase shares of Common Stock issued by Seller,
endorsed in blank or accompanied by duly executed assignment documents, (iii)
Target will deliver to the Buyer stock certificates representing all of the
Licensee Shares, endorsed in blank or accompanied by duly executed assignment
documents, (iv) the Seller will deliver to the Buyer stock certificates
representing all of the Target Shares, endorsed in blank or accompanied by duly
executed assignment documents, (v) the Seller will deliver to the Buyer a bill
of sale, in form and substance satisfactory to Buyer, conveying to Buyer in the
aggregate all of Seller's tangible Assets, (vi) the Seller will deliver to the
Buyer one or more assignments, in form and substance satisfactory to Buyer,
conveying all of Seller's right, title and interest in any leases, contract
rights, patents, trademarks, copyrights and other proprietary rights, and any
other intangible Assets of Seller, and (vi) the Buyer will deliver to the Seller
and Target the consideration specified in Section 2(b)(i) - (iii) above.
3. Representations and Warranties Concerning the Transaction.
(a) Representations and Warranties of the Seller, Chase and McDugald.
Each of the Seller, on the one hand, and Chase and McDugald (jointly and
severally, as to each other, but separately from Seller), on the other hand,
represents and warrants to the Buyer that the statements contained in this
Section 3(a) are true and correct as of the date of this Agreement and will be
true and correct as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
Section 3(a)), except as set forth in Annex I attached hereto; provided,
however, that the statements contained in Section 3(a)(iii) when deemed to be
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<PAGE> 14
made by Chase and McDugald are made only to the actual knowledge of Chase and
McDugald after reasonable investigation.
(i) Organization of Seller. The Seller is duly organized,
validly existing, and in good standing under the laws of Delaware.
(ii) Authorization of Transaction. The Seller has full corporate
power and authority to execute and deliver this Agreement and the
Ancillary Agreements and to perform its obligations hereunder and
thereunder. The Seller has taken all corporate action necessary to
authorize the execution, delivery and performance of this Agreement and
each of the Ancillary Agreements. This Agreement and each of the
Ancillary Agreements constitutes the valid and legally binding
obligation of each of the Seller, Chase and McDugald, enforceable in
accordance with its terms and conditions, except as enforceability may
be limited by bankruptcy laws, similar laws of debtor relief and general
principles of equity. Except as set forth in Annex I attached hereto,
none of the Seller, Chase or McDugald, need give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the
transactions contemplated by this Agreement and the Ancillary
Agreements.
(iii) Noncontravention. Neither the execution and the delivery
of this Agreement or any Ancillary Agreement, nor the consummation of
the transactions contemplated hereby and thereby, will (A) violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Seller, Chase or McDugald is
subject or any provision of Seller's charter or bylaws or (B) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, note, indenture, or
other arrangement to which the Seller, Chase or McDugald is a party or
by which they are bound or to which any of their assets are subject.
(iv) Brokers' Fees. None of the Seller, Chase or McDugald has
any Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions contemplated
by this Agreement for which the Buyer or the Target or its Subsidiaries
could become liable or obligated.
(v) Investment. The Seller (A) understands that neither the
Warrants nor the shares of Cricket Communications, Inc. Common Stock
issuable upon exercise of the Warrants have been, and will not be,
registered under the Securities Act, or under any state securities
laws, and are being offered and sold in reliance upon federal and state
exemptions for transactions not involving any public offering, (B) is
acquiring the Warrants solely for its own account for investment
purposes, and not with a view to the distribution thereof, (C) is a
sophisticated purchaser with knowledge and experience in business and
financial matters, (D) has received certain information concerning
Cricket Communications, Inc. and has had the opportunity to obtain
additional information as
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desired in order to evaluate the merits and the risks inherent in
holding the Warrants, (E) is able to bear the economic risk and lack of
liquidity inherent in holding the Warrants, and (F) is an Accredited
Investor.
(vi) Assets; Target Shares. Except as set forth in Annex I
attached hereto, the Seller directly owns no Assets other than the
Target Shares. The Seller holds of record and owns beneficially all of
the outstanding Target Shares and any other Assets directly owned by
Seller to be transferred to Buyer, free and clear of any restrictions
on transfer (other than any restrictions under the Securities Act and
state securities laws), Security Interests (other than Permitted
Liens), options, warrants, purchase rights, contracts, commitments,
equities, claims, and demands. None of the Seller, Chase or McDugald is
a party to any option, warrant, purchase right, or other contract or
commitment that could require the Seller, Chase or McDugald to sell,
transfer, or otherwise dispose of any capital stock of the Target or
Licensee. None of the Seller, Chase or McDugald is a party to any
voting trust, proxy, or other agreement or understanding with respect
to the voting of any capital stock of the Target or Licensee. Each of
Seller, Chase, McDugald and Target further represent and warrant that
as of the date hereof the consideration to be delivered by Buyer to
Seller and Target described in Section 2(b) above constitutes
equivalent value for the Target Shares, Licensee Shares and other
Assets to be transferred to Buyer hereunder.
(b) Representations and Warranties of the Buyer. The Buyer represents
and warrants to the Seller that the statements contained in this Section 3(b)
are true and correct as of the date of this Agreement and will be true and
correct as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section
3(b)), except as set forth in Annex II attached hereto.
(i) Organization. The Buyer is, and Cricket Communications, Inc.
(or such other entity as will issue the Warrants at the Closing)
("CCI") will be, a corporation duly organized, validly existing, and in
good standing under the laws of Delaware.
(ii) Authorization of Transaction. Subject to the approval of
Buyer's Board of Directors, the Buyer has full corporate power and
authority to execute and deliver this Agreement and each Ancillary
Agreement (other than the Warrant) and to perform its obligations
hereunder and thereunder. Subject to the approval of Buyer's Board of
Directors, this Agreement and each Ancillary Agreement (other than the
Warrant) constitutes the valid and legally binding obligation of the
Buyer, enforceable in accordance with its terms and conditions, except
as enforceability may be limited by bankruptcy laws, similar laws of
debtor relief and general principles of equity. CCI will have at the
Closing full corporate power and authority to execute and deliver the
Warrant and perform its obligations thereunder. The Warrant, when
issued, will constitute the valid and legally binding obligation of
CCI, enforceable in accordance with its terms and conditions, except as
enforceability may be limited by bankruptcy laws, similar laws of
debtor relief and general principles of equity. Neither the Buyer nor
CCI need give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or
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<PAGE> 16
governmental agency in order to consummate the transactions
contemplated by this Agreement, except as set forth in Annex II
attached hereto.
(iii) Noncontravention. Neither the execution and the delivery
of this Agreement and the Warrant, nor the consummation of the
transactions contemplated hereby and thereby, will (A) violate any
constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Buyer or CCI is subject or
any provision of its charter or bylaws or (B) conflict with, result in
a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or
cancel, or require any notice under any material agreement, contract,
lease, license, instrument, or other arrangement to which the Buyer is
a party or by which it is bound or to which any of its assets is
subject.
(iv) Brokers' Fees. Neither the Buyer nor CCI has any Liability
or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement
for which Seller could become liable or obligated.
(v) Investment. The Buyer is not acquiring the Target Shares or
the Licensee Shares with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act.
(vi) Cricket Entity. The corporation issuing the Warrant at the
Closing will be the entity through which Buyer intends at the time of
the Closing to implement the Cricket Business Plan; provided, however,
that the Parties acknowledge that the FCC may require that the FCC
licenses and network used in the Cricket Business reside in an entity
other than the issuer of the Warrant.
4. Representations and Warranties Concerning the Target and Its
Subsidiaries. Each of the Seller, on the one hand, and Chase and McDugald
(jointly and severally as to each other but separately from Seller), on the
other hand, represents and warrants to the Buyer that the statements contained
in this Section 4 are true and correct as of the date of this Agreement and will
be true and correct as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout this
Section 4), except as set forth in the disclosure schedule delivered by the
Seller to the Buyer on the date hereof (the "Disclosure Schedule"); provided,
however, that the statements contained in Sections 4(c), (e), (g), (h) (except
(h)(xi)-(xiii) and (xv)-(xix)), (i)-(l), (o)-(r), (t)-(y) and (aa), when deemed
to be made by Chase and McDugald are made only to the actual knowledge of Chase
and McDugald after reasonable investigation; and provided, further, that the
statements contained in Sections 4 (m) and (n), when deemed to be made by Chase
and McDugald are made only to the actual knowledge of Chase and McDugald without
investigation, and provided, further, that the statements contained in Section
4(z), when deemed to be made by Chase and McDugald are made only to the actual
knowledge of Chase and McDugald after due and diligent inquiry, including direct
consultation with FCC counsel. Chase and McDugald may deliver to Buyer a
Supplement to the Disclosure Schedule (the "Supplement") not less than five (5)
business days prior to the Closing, which will contain any new exceptions to the
representations
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<PAGE> 17
and warranties of Chase and McDugald set forth in this Section 4 as a result of
events or occurrences which arise subsequent to the date of this Agreement.
Notwithstanding anything to the contrary contained herein, the Supplement shall
be deemed to amend the Disclosure Schedule as of the Closing, solely with
respect to the representations and warranties made in Section 4 by Chase and
McDugald. Nothing in the Disclosure Schedule shall be deemed adequate to
disclose an exception to a representation or warranty made herein, however,
unless the Disclosure Schedule identifies the exception with particularity and
describes the relevant facts in reasonable detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein (unless the representation or warranty
has to do with the existence of the document or other item itself). The
Disclosure Schedule will be arranged in paragraphs corresponding to the lettered
and numbered paragraphs contained in this Section 4; provided that disclosure in
any section of the Disclosure Schedule shall be deemed disclosure for purposes
of any other representation or warranty contained herein, whether or not cited
in another section of the Disclosure Schedule, if such disclosure is adequate to
disclose an exception to such other representation or warranty.
(a) Organization, Qualification, and Corporate Power. Each of the Target
and its Subsidiaries is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its incorporation. Each of
the Target and its Subsidiaries is duly authorized to conduct business and is in
good standing under the laws of each jurisdiction where such qualification is
required. Each of the Target and its Subsidiaries has full corporate power and
authority and all material licenses, permits, and authorizations necessary to
carry on the businesses in which it is engaged as of the date hereof and to own
and use the properties owned and used by it. Section 4(a) of the Disclosure
Schedule lists the directors and officers of each of the Target and its
Subsidiaries. The Seller has delivered to the Buyer correct and complete copies
of the charter and bylaws of each of the Target and its Subsidiaries (as amended
to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors, including all actions taken by written consent), the stock
certificate books, and the stock record books of each of the Target and its
Subsidiaries are correct and complete in all material respects. None of the
Target and its Subsidiaries is in default under or in violation of any provision
of its charter or bylaws.
(b) Capitalization. The entire authorized capital stock of the Target
consists of 1000 shares of common stock, $.01 par value per share, of which 1000
shares of common stock are issued and outstanding. All of the issued and
outstanding Target Shares have been duly authorized, are validly issued, fully
paid, and nonassessable, and are held of record by the Seller. There are no
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other contracts or commitments
that could require the Target to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect to the Target. There are no voting trusts, proxies, or other agreements
or understandings with respect to the voting of the capital stock of the Target.
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<PAGE> 18
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of the Target and its Subsidiaries is
subject or any provision of the charter or bylaws of any of the Target and its
Subsidiaries or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
material agreement, contract, lease, license, instrument, note, indenture, or
other arrangement to which any of the Target and its Subsidiaries is a party or
by which it is bound or to which any of its assets is subject (or result in the
imposition of any Security Interest upon any of its assets). None of the Target
and its Subsidiaries needs to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order for the Parties to consummate the transactions contemplated by
this Agreement.
(d) Brokers' Fees. None of the Target and its Subsidiaries has any
Liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement.
(e) Title to Assets. The Target and its Subsidiaries have good and
transferable title to, or a valid leasehold interest in, the Assets used by
them, located on their premises, or shown on the Most Recent Balance Sheet or
acquired after the date thereof, free and clear of all Security Interests (other
than Permitted Liens), except for Assets disposed of in the Ordinary Course of
Business since the date of the Most Recent Balance Sheet or at the specific
recommendation of Buyer or by Buyer pursuant to the Management Agreement.
(f) Subsidiaries. Section 4(f) of the Disclosure Schedule sets forth for
each Subsidiary of the Target (i) its name and jurisdiction of incorporation,
(ii) the number of shares of authorized capital stock of each class of its
capital stock, (iii) the number of issued and outstanding shares of each class
of its capital stock, the names of the holders thereof, and the number of shares
held by each such holder, and (iv) the number of shares of its capital stock
held in treasury. All of the issued and outstanding shares of capital stock of
each Subsidiary of the Target have been duly authorized and are validly issued,
fully paid, and nonassessable. Target holds of record and owns beneficially all
of the outstanding shares of each Subsidiary of the Target, including Licensee,
free and clear of any restrictions on transfer (other than restrictions under
the Securities Act and state securities laws), Security Interests (other than
Permitted Liens), options, warrants, purchase rights, contracts, commitments,
equities, claims, and demands. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require any of the Target
and its Subsidiaries to sell, transfer, or otherwise dispose of any capital
stock of any of its Subsidiaries or that could require any Subsidiary of the
Target to issue, sell, or otherwise cause to become outstanding any of its own
capital stock. There are no outstanding stock appreciation, phantom stock,
profit participation, or similar rights with respect to any Subsidiary of the
Target. There are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of any capital stock of any Subsidiary
of the Target. None of the Target and its Subsidiaries controls directly or
indirectly or has any direct or
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<PAGE> 19
indirect equity participation in any corporation, partnership, trust, or other
business association which is not a Subsidiary of the Target.
(g) Financial Statements. Attached hereto as Exhibit I are the following
financial statements (collectively the "Financial Statements"): (i) audited
balance sheets as of December 31, 1996 and 1997 and statements of operations,
changes in redeemable stock and stockholders' equity, and cash flow for the
fiscal years ended December 31, 1995, 1996, and 1997 (the "Most Recent Fiscal
Year End") for the Seller; and (ii) unaudited consolidated and consolidating
balance sheets and statements of operations, changes in redeemable stock and
stockholders' equity, and cash flow (the "Most Recent Financial Statements") as
of and for the nine months ended September 30, 1998 (the "Most Recent Fiscal
Month End") for the Seller, Target and their Subsidiaries. The Financial
Statements (including the notes thereto) have been prepared in accordance with
GAAP applied on a consistent basis throughout the periods covered thereby,
present fairly the financial condition of the Target and its Subsidiaries as of
such dates and the results of operations of the Target and its Subsidiaries for
such periods, are correct and complete in all material respects, and are
consistent with the books and records of the Target and its Subsidiaries (which
books and records are correct and complete in all material respects) provided,
however, that the Most Recent Financial Statements are subject to normal
year-end adjustments (which will not be material individually or in the
aggregate) and lack footnotes and other presentation items.
(h) Events Subsequent to Most Recent Fiscal Year End. Since the Most
Recent Fiscal Year End, there has not been any material adverse change in the
Assets, Liabilities, business, condition (financial or otherwise), operations or
results of operations of any of the Target and its Subsidiaries (a "Material
Adverse Change"), except as a result of changes directly attributable to the
implementation of the Initial Budget attached to the Management Agreement or as
a result of actions taken by Seller at the specific recommendation of Buyer or
by Buyer pursuant to the Management Agreement. Without limiting the generality
of the foregoing, except as a result of changes directly attributable to the
implementation of the Initial Budget attached to the Management Agreement or any
actions taken by Seller at the specific recommendation of Buyer or by Buyer
pursuant to the Management Agreement, since that date:
(i) none of the Target and its Subsidiaries has sold, leased,
transferred, or assigned any of its assets, tangible or intangible,
other than for a fair consideration in the Ordinary Course of Business;
(ii) none of the Target and its Subsidiaries has entered into
any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) either involving more than
$25,000 or outside the Ordinary Course of Business;
(iii) no party (including any of the Target and its
Subsidiaries) has accelerated, terminated, modified, or canceled any
agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) involving more than
$25,000 to which any of the Target and its Subsidiaries is a party or
by which any of them is bound;
(iv) none of the Target and its Subsidiaries has imposed any
Security Interest (other than Permitted Liens) upon any of its assets,
tangible or intangible;
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<PAGE> 20
(v) except pursuant to the QUALCOMM Agreements, none of the
Target and its Subsidiaries has made any capital expenditure (or series
of related capital expenditures) either involving more than $25,000 or
outside the Ordinary Course of Business;
(vi) except for capital contributions to Licensee to service the
FCC Debt, none of the Target and its Subsidiaries has made any capital
investment in, any loan to, or any acquisition of the securities or
assets of, any other Person (or series of related capital investments,
loans, and acquisitions) either involving more than $5,000 or outside
the Ordinary Course of Business;
(vii) except pursuant to the QUALCOMM Agreements, the FCC Debt
and the Working Capital Facility, none of the Target and its
Subsidiaries has issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money or capitalized lease obligation either involving more than $5,000
singly or $25,000 in the aggregate;
(viii) none of the Target and its Subsidiaries has delayed or
postponed the payment of accounts payable and other Liabilities outside
the Ordinary Course of Business;
(ix) none of the Target and its Subsidiaries has canceled,
compromised, waived, or released any right or claim (or series of
related rights and claims) either involving more than $10,000 or
outside the Ordinary Course of Business;
(x) none of the Target and its Subsidiaries has granted any
license or sublicense of any rights under or with respect to any
Intellectual Property;
(xi) there has been no change made or authorized in the charter
or bylaws of any of the Target and its Subsidiaries;
(xii) none of the Target and its Subsidiaries has issued, sold,
or otherwise disposed of any of its capital stock, or granted any
options, warrants, or other rights to purchase or obtain (including
upon conversion, exchange, or exercise) any of its capital stock;
(xiii) none of the Target and its Subsidiaries has declared, set
aside, or paid any dividend or made any distribution with respect to
its capital stock (whether in cash or in kind) or redeemed, purchased,
or otherwise acquired any of its capital stock;
(xiv) none of the Target and its Subsidiaries has experienced
any material damage, destruction, or loss (whether or not covered by
insurance) to its property;
(xv) none of the Target and its Subsidiaries has made any loan
to, or entered into any other transaction with, any of its directors,
officers, and employees or with Seller outside the Ordinary Course of
Business, which is not terminable at will;
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<PAGE> 21
(xvi) none of the Target and its Subsidiaries has entered into
any employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or agreement;
(xvii) none of the Target and its Subsidiaries has granted any
increase in the base compensation of any of its directors, officers,
and employees outside the Ordinary Course of Business;
(xviii) none of the Target and its Subsidiaries has adopted,
amended, modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of
any of its directors, officers, and employees (or taken any such action
with respect to any other Employee Benefit Plan);
(xix) none of the Target and its Subsidiaries has made any other
change in employment terms for any of its directors, officers, and
employees outside the Ordinary Course of Business;
(xx) none of the Target and its Subsidiaries has made or pledged
to make any charitable or other capital contribution outside the
Ordinary Course of Business;
(xxi) there has not been any other material occurrence, event,
incident, action, failure to act, or transaction outside the Ordinary
Course of Business involving any of the Target and its Subsidiaries;
and
(xxii) none of the Target and its Subsidiaries has committed to
any of the foregoing.
(i) Undisclosed Liabilities. None of the Target and its Subsidiaries has
any Liability (and there is no reasonable Basis for any present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand against any of them giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto); (ii) Liabilities which have arisen after the Most Recent
Fiscal Month End in the Ordinary Course of Business (none of which results from,
arises out of, relates to, is in the nature of, or was caused by any breach of
contract, breach of warranty, tort, infringement, or violation of law); and
(iii) Liabilities which, alone or in the aggregate, do not and would not have a
material adverse effect on the Assets, Liabilities, business, condition
(financial or otherwise), operations or results of operations of Target and its
Subsidiaries, taken as a whole (a "Material Adverse Effect.").
(j) Legal Compliance. Each of the Target, its Subsidiaries, and their
respective predecessors has complied in all material respects with all
applicable laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of federal, state,
local, and foreign governments (and all agencies thereof), and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand, or notice
has been filed or commenced against any of them alleging any failure so to
comply which would have a Material Adverse Effect.
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(k) Tax Matters.
(i) Each of the Seller, Target and their respective Subsidiaries
has timely filed all Tax Returns that it was required to file. All such
Tax Returns were correct and complete in all material respects. For
Federal income Tax purposes, Seller, Target and Licensee constitute an
"affiliated group" under Code Section 1504 and have, since June 1998,
filed a consolidated Tax Return for Federal income Tax purposes. For
state income Tax purposes, the filing status (i.e., separate,
consolidated, unitary, etc.) of Seller, Target and Licensee in each
state in which Tax Returns are filed by or on behalf of Seller, Target
and/or Licensee is set forth on Section 4(k)(i) of the Disclosure
Schedule. All Taxes owed by any of the Seller, Target and their
respective Subsidiaries (whether or not shown on any Tax Return) have
been timely paid, except for Taxes not yet due and payable or contested
in good faith by appropriate proceedings and specified on Section
4(k)(i) of the Disclosure Schedule. None of the Seller, Target or any
of their respective Subsidiaries currently is the beneficiary of any
extension of time within which to file any Tax Return. No written claim
has ever been made by an authority in a jurisdiction where any of the
Seller, Target and their respective Subsidiaries does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
Section 4(k)(i) of the Disclosure Schedule contains a list of all
jurisdictions (whether foreign or domestic) in which Target or any of
its Subsidiaries was required to file (or be included in) a Tax Return
or pay any Tax. There are no Security Interests on any of the assets of
any of the Seller, Target and their respective Subsidiaries that arose
in connection with any failure (or alleged failure) to pay any Tax.
(ii) Each of the Seller, Target and their respective
Subsidiaries has complied in all respects with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code and similar provisions
under any applicable state or foreign laws) and has, within the time
and the manner prescribed by law, paid over to the proper governmental
authorities all amounts so withheld.
(iii) There is no dispute or claim concerning any Tax Liability
of any of the Seller, Target and their respective Subsidiaries either
(A) claimed or raised by any authority in writing or (B) as to which
any of the Seller and the directors and officers (and employees
responsible for Tax matters) of any of the Seller, Target and their
respective Subsidiaries has Knowledge based upon personal contact with
any agent of such authority. Section 4(k)(iii) of the Disclosure
Schedule lists all federal, state, local, and foreign income Tax
Returns filed with respect to any of the Seller, Target and/or their
respective Subsidiaries for taxable periods ended on or before December
31, 1997, indicates those Tax Returns that have been audited, and
indicates those Tax Returns that currently are the subject of audit.
The Seller has delivered to the Buyer correct and complete copies of
all income Tax Returns, examination reports, and statements of
deficiencies filed by or on behalf of or issued with respect to any of
Seller, Target and their respective Subsidiaries since December 31,
1996.
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<PAGE> 23
(iv) Except as set forth in Section 4(k)(iv) of the Disclosure
Schedule, none of the Seller, Target or any of their respective
Subsidiaries has waived any statute of limitations in respect of Taxes
or otherwise agreed in writing to any extension of time with respect to
a Tax assessment or deficiency. Except as set forth in Section 4(k)(iv)
of the Disclosure Schedule, no power of attorney with respect to any
Taxes for which Target or any of its Subsidiaries may be liable is
currently in force.
(v) None of the Seller, Target and their respective Subsidiaries
has filed a consent under Code Section 341(f) concerning collapsible
corporations. None of the Seller, Target and their respective
Subsidiaries has made any payments, is obligated to make any payments,
or is a party to any agreement that under certain circumstances could
obligate it to make any payments that will not be deductible under Code
Section 280G. Neither Target nor any of its Subsidiaries has agreed to
make, or is (or will be as a result of any transactions contemplated by
this Agreement) required to make, any adjustment under Section 481 of
the Code (or any similar provision of the Tax laws of any jurisdiction)
by reason of a change in accounting method or otherwise. None of the
Assets of Target or any of its Subsidiaries (a) is required to be
treated as being owned by any other Person pursuant to the so-called
"safe harbor lease" provisions of former Section 168(f)(8) of the Code,
(b) directly or indirectly secures any debt, the interest of which is
tax-exempt under Section 103(a) of the Code, or (c) is a "tax-exempt
use property" within the meaning of Section 168(h) of the Code. None of
the Seller, Target and their respective Subsidiaries has been a United
States real property holding corporation within the meaning of Code
Section 897(c)(2) during the applicable period specified in Code
Section 897(c)(1)(A)(ii). Seller is not a "foreign person" as defined
in Code Section 1445(f)(3). Each of the Seller, Target and their
respective Subsidiaries has disclosed on its federal income Tax Returns
all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code Section
6662. None of the Seller, Target and their respective Subsidiaries is a
party to any Tax allocation or sharing agreement. None of the Seller,
Target and their respective Subsidiaries (A) has been a member of an
Affiliated Group filing a consolidated federal income Tax Return (other
than a group the common parent of which was the Seller) or (B) has any
Liability for the Taxes of any Person (other than any of the Target and
its Subsidiaries) under Reg. Section 1.1502-6 (or any similar provision
of state, local, or foreign law), as a transferee or successor, by
contract, or otherwise.
(vi) All material elections with respect to Taxes effecting
Target and/or any of its Subsidiaries are set forth on Schedule Section
4(k)(vi).
(vii) Section 4(k)(vii) of the Disclosure Schedule sets forth
the following information with respect to each of the Target and its
Subsidiaries (or, in the case of clause (B) below, with respect to each
of the Subsidiaries) as of September 30, 1998: (A) the basis of the
Target or Subsidiary in its assets; (B) the basis of the stockholder(s)
of the Subsidiary in its stock (or the amount of any Excess Loss
Account); (C) the amount of any net operating loss, net capital loss,
unused investment or other credit, unused foreign tax, or excess
charitable contribution allocable to the Target or Subsidiary which
will, to the extent unused at the Closing, be Tax attributes of the
Target or Subsidiary (as the case may be)
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immediately after the Closing; and (D) the amount of any deferred gain
or loss allocable to the Target or Subsidiary arising out of any
Deferred Intercompany Transaction.
(viii) The unpaid Taxes of the Seller, Target and their
respective Subsidiaries (A) did not, as of the Most Recent Fiscal Month
End, exceed the reserve for Tax Liability (rather than any reserve for
deferred Taxes established to reflect timing differences between book
and Tax income) set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) and (B) do not exceed that reserve
as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practice of the Seller, Target and
their respective Subsidiaries in filing their Tax Returns.
(ix) None of the Seller, Target and their respective
Subsidiaries has any Liability pursuant to Section 6901 of the Code or
otherwise under applicable state or federal law by virtue of any
transfer of an asset or assets to it, and Buyer will not be subject to
such Liability as a result of any of the transactions contemplated by
this Agreement.
(x) None of Target or any of its Subsidiaries is subject to any
joint venture, partnership or other arrangement or contract that is
properly treated as a partnership for income tax purposes.
(l) Real Property.
(i) Neither Target nor any of its Subsidiaries owns any real
property.
(ii) Section 4(l)(ii) of the Disclosure Schedule lists and
describes briefly all real property leased or subleased to any of the
Target and its Subsidiaries. The Sellers have delivered to the Buyer
correct and complete copies of the leases and subleases listed in
Section 4(l)(ii) of the Disclosure Schedule (as amended to date). With
respect to each lease and sublease listed in Section 4(l)(ii) of the
Disclosure Schedule:
(A) the lease or sublease is legal, valid, binding and
enforceable against Target, and to Seller's Knowledge, against
each other party thereto, and is in full force and effect;
(B) the lease or sublease will continue to be legal,
valid, binding and enforceable against Target, and to Seller's
Knowledge, against each other party thereto, and will be in full
force and effect on identical terms following the consummation of
the transactions contemplated hereby;
(C) Target is not in breach or default, and to Seller's
Knowledge, no other party to the lease or sublease is in breach
or default, and no event has occurred which, with notice or lapse
of time, would constitute a breach or default or permit
termination, modification, or acceleration thereunder;
(D) Target has not, and to Seller's Knowledge, no other
party to the lease or sublease has repudiated any provision
thereof;
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(E) there are no disputes, oral agreements, or forbearance
programs in effect as to the lease or sublease;
(F) with respect to each sublease, the representations and
warranties set forth in subsections (A) through (E) above are
true and correct with respect to the underlying lease;
(G) none of the Target and its Subsidiaries has assigned,
transferred, conveyed, mortgaged, deeded in trust, or encumbered
any interest in the leasehold or subleasehold, except pursuant to
the QUALCOMM Agreements;
(H) all facilities leased or subleased thereunder have
received all approvals of governmental authorities (including
licenses and permits) required in connection with the operation
thereof and have been operated and maintained in accordance with
applicable laws, rules, and regulations; and
(I) all facilities leased or subleased thereunder are
supplied with utilities and other services necessary for the
operation of said facilities as of the date hereof.
(m) Intellectual Property.
(i) The Target and its Subsidiaries own or have the right to use
pursuant to license, sublicense, agreement, or permission all
Intellectual Property material to the operation of the businesses of
the Target and its Subsidiaries as presently conducted. Each item of
Intellectual Property owned or used by any of the Target and its
Subsidiaries immediately prior to the Closing hereunder will be owned
or available for use by the Target or the Subsidiary on identical terms
and conditions immediately subsequent to the Closing hereunder. Each of
the Target and its Subsidiaries has taken or is taking all action
reasonably necessary to maintain and protect each item of Intellectual
Property that it owns or uses.
(ii) None of the Target and its Subsidiaries has interfered
with, infringed upon, misappropriated, or otherwise come into conflict
with any Intellectual Property rights of third parties, and none of the
Seller, Target and its Subsidiaries has ever received any charge,
complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that
any of the Target and its Subsidiaries must license or refrain from
using any Intellectual Property rights of any third party), except such
as would not have a Material Adverse Effect. To the Knowledge of
Seller, no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of any of the Target and its Subsidiaries.
(iii) Section 4(m)(iii) of the Disclosure Schedule identifies
each patent or registration which has been issued to any of the Target
and its Subsidiaries with respect to any of its Intellectual Property,
identifies each pending patent application or application for
registration which any of the Target and its Subsidiaries has made with
respect to any of its
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Intellectual Property, and identifies each license, agreement, or other
permission which any of the Target and its Subsidiaries has granted to
any third party with respect to any of its Intellectual Property
(together with any exceptions). The Seller has delivered to the Buyer
correct and complete copies of all such material patents,
registrations, applications, licenses, agreements, and permissions (as
amended to date). Section 4(m)(iii) of the Disclosure Schedule also
identifies each trade name or unregistered trademark used by any of the
Target and its Subsidiaries in connection with any of its businesses.
With respect to each item of Intellectual Property required to be
identified in Section 4(m)(iii) of the Disclosure Schedule:
(A) the Target and its Subsidiaries possess all right,
title, and interest in and to the item, free and clear of any
Security Interest (other than Permitted Liens), license, or other
restriction;
(B) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(C) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or is, to Seller's
Knowledge, threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(D) none of the Target and its Subsidiaries has ever
agreed to indemnify any Person for or against any interference,
infringement, misappropriation, or other conflict with respect to
the item.
(iv) Section 4(m)(iv) of the Disclosure Schedule identifies each
material item of Intellectual Property that any third party owns and
that any of the Target and its Subsidiaries uses pursuant to license,
sublicense, agreement, or permission. The Seller has delivered to the
Buyer correct and complete copies of all such licenses, sublicenses,
agreements, and permissions (as amended to date). With respect to each
item of Intellectual Property required to be identified in Section
4(m)(iv) of the Disclosure Schedule:
(A) the license, sublicense, agreement, or permission
covering the item is legal, valid, binding, enforceable, and in
full force and effect;
(B) the license, sublicense, agreement, or permission will
continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of
the transactions contemplated hereby (including the assignments
and assumptions referred to in Section 2 above);
(C) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has occurred
which with notice or lapse of time would constitute a breach or
default or permit termination, modification, or acceleration
thereunder;
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(D) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;
(E) with respect to each sublicense, the representations
and warranties set forth in subsections (A) through (D) above are
true and correct with respect to the underlying license;
(F) the underlying item of Intellectual Property is not
subject to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(G) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or is, to Seller's
Knowledge, threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual Property;
and
(H) none of the Target and its Subsidiaries has granted
any sublicense or similar right with respect to the license,
sublicense, agreement, or permission.
(v) To the Knowledge of Seller, none of the Target and its
Subsidiaries will interfere with, infringe upon, misappropriate, or
otherwise come into conflict with, any Intellectual Property rights of
third parties as a result of the continued operation of its businesses
as presently conducted.
Notwithstanding the foregoing, the statements contained in this Section
4(m), as applied to the Intellectual Property Rights embodied in the Network,
are made to Seller's Knowledge.
(n) Tangible Assets. Each tangible Asset of Target and its Subsidiaries
is free from material defects (patent and latent), has been maintained in
accordance with normal industry practice, is in good operating condition and
repair (subject to normal wear and tear), and is suitable in all material
respects for the purposes for which it presently is used and as of the date
hereof is proposed to be used. Notwithstanding the foregoing, the statements
contained in this Section 4(n) as applied to the Network are made to Seller's
Knowledge.
(o) Inventory. The inventory of the Target and its Subsidiaries consists
solely of subscriber handsets and accessories (e.g., batteries, cases, chargers
and related accessories) all of which is merchantable and fit for the purpose
for which it was procured or manufactured, and to Seller's Knowledge, none of
which is slow-moving, obsolete, damaged, or defective, subject only to the
reserve for inventory writedown set forth on the face of the Most Recent Balance
Sheet (rather than in any notes thereto). The value of the inventory consisting
of "demo," "loaner," "employee," or "incomplete" equipment does not, and as of
the Closing Date will not, exceed $5,000 in the aggregate, except for inventory
acquired pursuant to the Initial Budget attached to the Management Agreement.
(p) Contracts. Section 4(p) of the Disclosure Schedule lists the
following contracts and other agreements to which any of the Target and its
Subsidiaries is a party:
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(i) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease payments
in excess of $5,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services,
the performance of which will extend over a period of more than one
year, or involve consideration in excess of $5,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which
it has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
$5,000 or under which it has imposed a Security Interest on any of its
assets, tangible or intangible;
(v) any agreement concerning confidentiality or noncompetition;
(vi) any agreement with any of the Seller and its Affiliates
(other than the Target and its Subsidiaries);
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors,
officers, and employees;
(viii) any collective bargaining agreement;
(ix) any agreement for the employment of any individual as a
consultant or independent contractor on a full-time or part-time basis,
providing annual compensation in excess of $25,000, or any employment
agreement providing severance benefits;
(x) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the
Ordinary Course of Business;
(xi) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business,
financial condition, operations, results of operations, or future
prospects of any of the Target and its Subsidiaries; or
(xii) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $10,000.
The Seller has delivered to the Buyer a correct and complete copy of
each written agreement listed in Section 4(p) of the Disclosure Schedule (as
amended to date) and a written summary setting forth the terms and conditions of
each oral agreement referred to in Section 4(p) of the Disclosure Schedule. With
respect to each such agreement: (A) the agreement is legal, valid, binding and
enforceable against Target and/or its Subsidiaries, as applicable, and to
Seller's Knowledge, against all other parties thereto, and in full force and
effect; (B) the agreement will continue to be legal,
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valid, binding and enforceable against Target and/or its Subsidiaries, as
applicable, and to Seller's Knowledge, against all other parties thereto, and in
full force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) Target is not in breach or default, and to
Seller's Knowledge, no other party is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; and (D) Target has not, and to Seller's Knowledge, no other party has
repudiated any provision of the agreement. Section 4(p) of the Disclosure
Schedule need not include any agreements entered into after the date of this
Agreement by Target at the specific request of Buyer or by Buyer pursuant to the
Management Agreement; however, to Seller's Knowledge, the representations and
warranties set forth in clauses (A)-(D) of this paragraph are true and correct
with respect to all such agreements.
(q) Powers of Attorney. Except for any power of attorney granted to
QUALCOMM Incorporated as Collateral Agent under the QUALCOMM Agreements and
pursuant to the Management Agreement, there are no outstanding powers of
attorney executed on behalf of any of the Target and its Subsidiaries.
(r) Insurance. Section 4(r) of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which any of the Target and its Subsidiaries
has been a party, a named insured, or otherwise the beneficiary of coverage at
any time since the date of formation (other than as an additional insured under
the QUALCOMM Agreements):
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder, and
the name of each covered insured;
(iii) the policy number and the period of coverage; and
(iv) the scope (including an indication of whether the coverage
was on a claims made, occurrence, or other basis) and amount (including
a description of how deductibles and ceilings are calculated and
operate) of coverage.
With respect to each such insurance policy: (A) the policy is legal,
valid, binding, enforceable, and in full force and effect; (B) the policy will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (C) neither any of the Target and its Subsidiaries nor, to Seller's
Knowledge, any other party to the policy is in breach or default (including with
respect to the payment of premiums or the giving of notices), and no event has
occurred which, with notice or the lapse of time, would constitute such a breach
or default, or permit termination, modification, or acceleration, under the
policy; and (D) Target has not, and to Seller's Knowledge, no party to the
policy has repudiated any provision thereof. Each of the Target and its
Subsidiaries has been covered since its formation by insurance in scope and
amount customary and reasonable for the
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businesses in which it has engaged during the aforementioned period. Section
4(r) of the Disclosure Schedule describes any self-insurance arrangements
affecting any of the Target and its Subsidiaries.
(s) Litigation. Section 4(s) of the Disclosure Schedule sets forth each
instance in which any of the Target and its Subsidiaries (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a
party or, to Seller's Knowledge, is threatened to be made a party to any action,
suit, proceeding, hearing, or investigation of, in, or before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator. None of the actions, suits, proceedings,
hearings, and investigations set forth in Section 4(s) of the Disclosure
Schedule is reasonably likely to result in any Material Adverse Change. Seller
has no reason to believe that any such action, suit, proceeding, hearing, or
investigation may be brought or threatened against any of the Target and its
Subsidiaries.
(t) Product Warranty. No product manufactured, sold, leased, or
delivered by any of the Target and its Subsidiaries is subject to any guaranty,
warranty, or other indemnity beyond the applicable standard terms and conditions
of sale or lease. Section 4(t) of the Disclosure Schedule includes copies of the
standard terms and conditions of sale or lease for each of the Target and its
Subsidiaries (containing applicable guaranty, warranty, and indemnity
provisions).
(u) Employees. To the Knowledge of Seller, no executive, key employee,
or group of employees has any plans to terminate employment with any of the
Target and its Subsidiaries. None of the Target and its Subsidiaries is a party
to or bound by any collective bargaining agreement, nor has any of them
experienced any strikes, grievances, claims of unfair labor practices, or other
collective bargaining disputes. None of the Target and its Subsidiaries has
committed any unfair labor practice. Seller has no Knowledge of any
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to employees of any of the Target and its Subsidiaries.
There are no agreements, arrangements, understandings or state or local laws
that would restrict the ability of Seller and Target to terminate the employment
of any or all of their respective employees for any lawful reason or for no
reason at all, without penalty or Liability. Section 4(u) of the Disclosure
Schedule contains a full and complete roster of the Employees of Target and its
subsidiaries which identifies each person by name, social security number, date
of hire, current compensation, status as an hourly or salaried employee, status
as a full or part-time employee, and status as an active or inactive employee,
as of December 31, 1998.
(v) Employee Benefits.
(i) Section 4(v) of the Disclosure Schedule lists each Employee
Benefit Plan that any of the Target and its Subsidiaries maintains or
to which any of the Target and its Subsidiaries contributes.
(A) Each such Employee Benefit Plan (and each related
trust, insurance contract, or fund) complies in form and in
operation in all material respects with the applicable
requirements of ERISA, the Code, and other applicable laws.
(B) All required reports and descriptions (including Form
5500 Annual Reports, Summary Annual Reports, PBGC-1's, and
Summary Plan Descriptions)
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have been filed or distributed appropriately with respect to
each such Employee Benefit Plan. The requirements of Part 6 of
Subtitle B of Title I of ERISA and of Code Section 4980B have
been met with respect to each such Employee Benefit Plan which is
an Employee Welfare Benefit Plan.
(C) All contributions (including all employer
contributions and employee salary reduction contributions) which
are due have been paid to each such Employee Benefit Plan which
is an Employee Pension Benefit Plan and all contributions for any
period ending on or before the Closing Date which are not yet due
will have been timely paid to each such Employee Pension Benefit
Plan or accrued in accordance with the past custom and practice
of the Target and its Subsidiaries. All premiums or other
payments for all periods ending on or before the Closing Date
will have been timely paid with respect to each such Employee
Benefit Plan which is an Employee Welfare Benefit Plan.
(D) Each such Employee Benefit Plan which is an Employee
Pension Benefit Plan meets the requirements of a "qualified plan"
under Code Section 401(a) and has received, within the last two
years, a favorable determination letter from the Internal Revenue
Service.
(E) The market value of assets under each such Employee
Benefit Plan which is an Employee Pension Benefit Plan (other
than any Multiemployer Plan) equals or exceeds the present value
of all vested and nonvested Liabilities thereunder determined in
accordance with PBGC methods, factors, and assumptions applicable
to an Employee Pension Benefit Plan terminating on the date for
determination.
(F) The Sellers have delivered to the Buyer correct and
complete copies of the plan documents and summary plan
descriptions, the most recent determination letter received from
the Internal Revenue Service, the most recent Form 5500 Annual
Report, and all related trust agreements, insurance contracts,
and other funding agreements which implement each such Employee
Benefit Plan.
(ii) With respect to each Employee Benefit Plan that any of the
Target, its Subsidiaries, and the Controlled Group of Corporations
which includes the Target and its Subsidiaries maintains or ever has
maintained within the past six years, or to which any of them
contributes, or has contributed or been required to contribute within
the past six years:
(A) No such Employee Benefit Plan which is an Employee
Pension Benefit Plan (other than any Multiemployer Plan) has been
completely or partially terminated or been the subject of a
Reportable Event as to which notices would be required to be
filed with the PBGC. No proceeding by the PBGC to terminate any
such Employee Pension Benefit Plan (other than any Multiemployer
Plan) has been instituted or threatened.
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(B) There have been no Prohibited Transactions with
respect to any such Employee Benefit Plan. No Fiduciary has any
Liability for breach of fiduciary duty or any other failure to
act or comply in connection with the administration or investment
of the assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any such
Employee Benefit Plan (other than routine claims for benefits) is
pending or threatened. None of the Seller and the directors and
officers (and employees with responsibility for employee benefits
matters) of the Target and its Subsidiaries has any Knowledge of
any Basis for any such action, suit, proceeding, hearing, or
investigation.
(C) None of the Target and its Subsidiaries has incurred,
and none of the Seller and the directors and officers (and
employees with responsibility for employee benefits matters) of
the Target and its Subsidiaries has any reason to expect that any
of the Target and its Subsidiaries will incur, any Liability to
the PBGC (other than PBGC premium payments) or otherwise under
Title IV of ERISA (including any withdrawal Liability) or under
the Code with respect to any such Employee Benefit Plan which is
an Employee Pension Benefit Plan.
(iii) None of the Target, its Subsidiaries, and the other
members of the Controlled Group of Corporations that includes the
Target and its Subsidiaries contributes to, or has contributed or has
been required to contribute to, within the past six years, any
Multiemployer Plan, or has any Liability (including withdrawal
Liability) under any Multiemployer Plan.
(iv) None of the Target and its Subsidiaries maintains or ever
has maintained or contributes, ever has contributed, or ever has been
required to contribute to any Employee Welfare Benefit Plan providing
medical, health, or life insurance or other welfare-type benefits for
current or future retired or terminated employees, their spouses, or
their dependents (other than in accordance with Code Section 4980B).
(w) Guaranties. Except for guaranties pursuant to the QUALCOMM
Agreements and the Working Capital Facility, none of the Target and its
Subsidiaries is a guarantor or otherwise is liable for any Liability or
obligation (including indebtedness) of any other Person.
(x) Environment, Health, and Safety. Except as would not have a Material
Adverse Effect:
(i) Each of the Target, its Subsidiaries, and their respective
predecessors and Affiliates has complied with all Environmental,
Health, and Safety Laws, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against any of them alleging any failure so to
comply. Without limiting the generality of the preceding sentence, each
of the Target, its Subsidiaries, and their respective predecessors and
Affiliates has obtained and been in compliance with all of the terms
and conditions of all permits, licenses, and other authorizations which
are required under, and has complied with all other limitations,
restrictions, conditions,
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standards, prohibitions, requirements, obligations, schedules, and
timetables which are contained in, all Environmental, Health, and
Safety Laws.
(ii) None of the Target and its Subsidiaries has any Liability
(and none of the Target, its Subsidiaries, and their respective
predecessors and Affiliates has handled or disposed of any substance,
arranged for the disposal of any substance, exposed any employee or
other individual to any substance or condition, or owned or operated
any property or facility in any manner that could form the Basis for
any present or future action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand against any of the Target and its
Subsidiaries giving rise to any Liability) for damage to any site,
location, or body of water (surface or subsurface), for any illness of
or personal injury to any employee or other individual, or for any
reason under any Environmental, Health, and Safety Law.
(iii) All properties and equipment used in the business of the
Target, its Subsidiaries, and their respective predecessors and
Affiliates have been free of asbestos, PCB's, methylene chloride,
trichloroethylene, 1,2-trans-dichloroethylene, dioxins, dibenzofurans,
and Extremely Hazardous Substances.
(y) Certain Business Relationships with the Target and Its Subsidiaries.
None of the Seller and its Affiliates has been involved in any business
arrangement or relationship with any of the Target and its Subsidiaries within
the past 12 months, and none of the Seller and its Affiliates owns any asset,
tangible or intangible, which is used in the business of any of the Target and
its Subsidiaries.
(z) FCC Matters
(i) The FCC Licenses are validly issued in the name of Licensee.
Seller and its Subsidiaries applied for and obtained the FCC Licenses
in compliance with FCC law, and Licensee is, and on the Closing Date
will be, the exclusive holder of the FCC Licenses. The FCC Licenses
have been granted by Final Order. The FCC Licenses are in full force
and effect, are unimpaired by any acts or omissions of the Seller and
its Affiliates, are free and clear of any restrictions which might
limit the full operation of the Business as proposed to be conducted,
other than such restrictions as are imposed on the wireless
telecommunications industry generally. All reports and other documents
required to be filed by Seller and its Affiliates with the FCC and with
state regulatory authorities have been filed. All such reports and
documents are correct in all material respects.
(ii) None of the Seller, Target and its Subsidiaries have
engaged in any course of conduct which would impair the Licensee's
ability to remain the holder of the FCC licenses and such persons are
not aware of any reason why such FCC Licenses might be revoked,
canceled, suspended or otherwise transferred as a result of the
transactions contemplated hereby. All material fees of the Seller and
its Subsidiaries due and payable to governmental authorities pursuant
to the FCC Licenses have been paid (subject to late fees paid). Subject
to obtaining the consent of the FCC to transfer control to Buyer of
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Target and its Subsidiaries, Licensee has, and on the Closing Date will
have, the absolute and unrestricted right, power and authority under
FCC law to hold the FCC Licenses.
(iii) Section 4(z) of the Disclosure Schedule contains a list of
all resale agreements to which the Seller or any of its Subsidiaries is
a party, both as a reseller and as a provider of resale services to
others. Section 4(z) also contains a list of all roaming agreements to
which the Seller or any of its Subsidiaries is a party. All such resale
and roaming agreements are in full force and effect and are on terms
reasonable and customary in the wireless telecommunications industry.
(iv) Seller, Target and its Subsidiaries are in compliance with
Section 310(b) of the Communications Act, and all rules, regulations or
policies of the FCC promulgated thereunder with respect to alien
ownership.
(v) Section 4(z) of the Disclosure Schedule contains a list of
all of Target's subscriber accounts as of the most recent practicable
date as set forth on such schedule, indicating whether such accounts
are any of the following: (A) active, (B) suspended, (C)
employee/demo/loaner, or (D) rentals. Section 4(z) of the Disclosure
Schedule also sets forth a list of all agents who sell wireless
telecommunications equipment and services on behalf of the Target and
its Subsidiaries as of the date hereof, together with such agent's
address and the number of gross activations produced by each agent
during calendar 1998.
(aa) Disclosure. No representations and warranties contained in this
Section 4, nor any document, exhibit, statement, certificate or schedule
furnished to Buyer or its counsel pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact or omit or will omit to state any material fact necessary in
order to make the statements and information contained therein not misleading.
The Seller, Target and its Subsidiaries have disclosed all events, conditions,
and facts materially affecting the business, prospects and condition (financial
or otherwise) of the Seller, Target and its Subsidiaries.
5. Pre-Closing Covenants. The Parties agree as follows with respect to
the period between the execution of this Agreement and the Closing.
(a) General. Each of the Buyer and Seller will use its reasonable best
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Section 7 below), except that Buyer will use its reasonable efforts to
become qualified to hold the FCC Licenses under the FCC C-Block regulations.
(b) Notices and Consents. The Seller will give and will cause each of
the Target and its Subsidiaries to give any notices to third parties, and will
use and cause each of the Target and its Subsidiaries to use its best efforts to
obtain any third party consents, that the Buyer reasonably may request in
connection with the matters referred to in Section 4(c) above. Each of the
Parties will (and the Seller will cause each of the Target and its Subsidiaries
to) give any notices to, make any filings with, and use its reasonable best
efforts to obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred to in Section
3(a)(ii),
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Section 3(b)(ii) and Section 4(c) above, except that Buyer will use its
reasonable efforts to become qualified to hold the FCC Licenses under the FCC
C-Block regulations. Without limiting the generality of the foregoing covenant,
Buyer will reasonably cooperate with Seller and do all things that are
commercially reasonable to assist Seller to obtain all FCC consents and
approvals necessary for the transfer of control or assignment to Buyer of the
Target Shares, the Licensee Shares, and the Assets (including without
limitation, the FCC Licenses), including the furnishing of financial and other
information specifically with respect to Buyer reasonably required by the FCC.
Seller shall provide adequate prior written notice to Buyer of any meeting with
governmental authorities the purpose of which is to seek a consent or approval
to the transactions contemplated hereby, and Buyer shall use all reasonable
efforts to furnish a representative to attend meetings with appropriate
government authorities for the purpose of obtaining such consents or approvals.
Buyer and Seller hereby agree to prepare and file at their own expense the
necessary Form 490 with the FCC transferring control or assigning the FCC
Licenses to Buyer and diligently pursue, at Buyer's expense, the processing of
the transfer of control or assignment of the FCC Licenses to Buyer and to file
for all other necessary regulatory approvals for the consummation of the
transactions contemplated by this Agreement, all within twenty (20) business
days of the date of execution of this Agreement. Without limiting the generality
of the foregoing, each of the Parties will file (and the Seller will cause each
of the Target and its Subsidiaries to file, if applicable) any Notification and
Report Forms and related material that it may be required to file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice under the Hart-Scott-Rodino Act, will use its reasonable
best efforts to obtain (and the Seller will cause each of the Target and its
Subsidiaries to use its reasonable best efforts to obtain) an early termination
of the applicable waiting period, and will make (and the Seller will cause each
of the Target and its Subsidiaries to make) any further filings pursuant thereto
that may be reasonably necessary, proper, or advisable in connection therewith.
Nothing in Sections 5(a) or 5(b) shall require Buyer to acquire or to divest any
Assets in connection with its efforts to become qualified to hold licenses under
the FCC C-Block regulations.
(c) Operation of Business. Seller will not, and will cause the Target
and its Subsidiaries not to, engage in any practice, take any action, or enter
into any transaction outside the Ordinary Course of Business, except for changes
in Seller's Business directly attributable to the implementation of the Initial
Budget attached to the Management Agreement (as the same may be amended from
time to time) or to any actions taken by Seller at the specific recommendation
of Buyer or by Buyer pursuant to the Management Agreement. Without limiting the
generality of the foregoing, without Buyer's prior consent, not to be
unreasonably withheld, Seller will not, and will cause the Target and its
Subsidiaries not to (i) declare, set aside, or pay any dividend or make any
distribution with respect to its capital stock or redeem, purchase, or otherwise
acquire any of its capital stock, (ii) sell, lease, transfer, mortgage, pledge,
encumber or otherwise dispose of any of its assets, (iii) take any action which
would impair or otherwise be inconsistent with the obligations of Seller, Target
and its Subsidiaries under this Agreement and the Ancillary Agreements, (iv)
change rate plans (or institute new rate plans), sales commission, rates or
subscriber equipment subsidies, (v) change or modify in any respect any roaming
rates, or (vi) otherwise engage in any practice, take any action, or enter into
any transaction of the sort described in Section 4(h) above. Seller will cause
Target to transfer to Buyer all of the Licensee Shares at the Closing, or, at
the request of Buyer and at Buyer's sole expense, Seller will cause each of
Target and Licensee to merge with and into
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Buyer or its designee at the Closing. Seller will cause the Target and its
Subsidiaries to pay all of their respective debts and obligations current prior
to the Closing from cash on hand and, with respect to obligations incurred in
accordance with the Initial Budget attached to the Management Agreement (as it
may be amended from time to time), from funds to be loaned by Buyer pursuant to
the Working Capital Facility. Except for those expenses incurred in accordance
with the Initial Budget attached to the Management Agreement (as it may be
amended from time to time) during the period from the date of this Agreement
until January 23, 1999, which expenses shall be paid from funds provided by
Buyer pursuant to the Working Capital Facility, Seller shall first expend all
but $200,000 of Seller's and Target's approximately $5.0 million cash on hand at
the date of this Agreement to satisfy the cash requirements of Seller and its
Subsidiaries, but, except as otherwise approved by Buyer, solely in accordance
with the Initial Budget attached to the Management Agreement (as it may be
amended from time to time), prior to making any further borrowings under the
Working Capital Facility. None of the foregoing provisions in this Section 5(c),
however, shall require the stockholders of the Seller to provide additional
capital or loans to Seller or any of its Subsidiaries. Notwithstanding the
foregoing, prior to the Closing, Seller will cause Target to satisfy in full or
eliminate in their entirety all severance obligations of Target and its
Subsidiaries to employees and consultants which are owed or may become owing in
the future pursuant to arrangements in existence as of the Closing Date.
(d) Preservation of Business. The Seller will cause each of the Target
and its Subsidiaries to keep its business and properties in good operating
condition and repair, including its present operations, physical facilities,
working conditions, and relationships with lenders, lessors, licensers,
suppliers, customers, and employees (to the extent applicable, from cash on hand
and, with respect to obligations incurred in accordance with the Initial Budget
attached to the Management Agreement (as it may be amended from time to time),
from funds loaned by Buyer pursuant to the Working Capital Facility). Seller
shall cause the Target and its Subsidiaries to maintain the FCC Licenses free
and clear of all liens and encumbrances (other than Permitted Liens), including
without limitation, the timely payment of all amounts due to the FCC in respect
of the FCC Licenses prior to the date on which such payments would be deemed by
the FCC to be in default, from cash on hand and, with respect to obligations
incurred in accordance with the Initial Budget attached to the Management
Agreement, from funds loaned by Buyer pursuant to the Working Capital Facility.
None of the Seller and its Affiliates will take any action that would cause the
FCC or any other governmental authority to institute proceedings regarding
Licensee's qualifications to be the licensee for the Business or take any other
action that would result in the Target or its Subsidiaries being in
noncompliance with any FCC law, rule or regulation that would impair Licensee's
qualifications to be the holder of the FCC Licenses. Nothing in this Section
5(d), however, shall require the stockholders of the Seller to provide
additional capital or loans to Seller or any of its Subsidiaries. Prior to the
Closing, the Seller may continue to operate its Houston, Texas office, provided
that the total costs of operating such office, including the salaries, bonus and
benefits of the employees working at such office, shall not exceed $50,000 per
month, unless otherwise agreed to by Buyer and Seller.
(e) Full Access. The Seller will permit, and the Seller will cause each
of the Target and its Subsidiaries to permit, representatives of the Buyer to
have full access at all reasonable times, and in a manner so as not to interfere
with the normal business operations of the Target and its
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Subsidiaries, to all premises, properties, personnel, books, records (including
Tax records), contracts, and documents of or pertaining to each of the Seller,
Target and its Subsidiaries.
(f) Notice of Developments. Each of the Seller, Chase and McDugald will
give prompt written notice to the Buyer of any development causing a breach of
any of the representations and warranties in Section 4 above. Each Party will
give prompt written notice to the others of any development causing a breach of
any of his or its own representations and warranties in Section 3 above. Except
as otherwise provided herein, no disclosure by any Party pursuant to this
Section 5(f), however, shall be deemed to amend or supplement Annex I, Annex II,
or the Disclosure Schedule or to prevent or cure any misrepresentation, breach
of warranty, or breach of covenant.
(g) Exclusivity. Until the occurrence of a Seller Termination Event (as
defined in Section 10(a) below): (i) Each of the Seller, Chase and McDugald will
not (and the Seller will cause each of the Target and its Subsidiaries not to)
(A) solicit, initiate, or encourage the submission of any proposal or offer from
any Person relating to the acquisition of any capital stock or other voting
securities, or any substantial portion of the assets of, any of the Seller, or
Target and its Subsidiaries (including any acquisition structured as a merger,
consolidation, or share exchange) (a "Sale") or (B) participate in any
discussions or negotiations regarding, furnish any information with respect to,
assist or participate in, or facilitate in any other manner any effort or
attempt by any Person to do or seek any of the foregoing; (ii) the Seller will
not vote its Target Shares, and will cause Target not to vote its Licensee
Shares, in favor of any such acquisition structured as a merger, consolidation,
or share exchange; and (iii) the Seller will notify the Buyer immediately if any
Person makes any proposal, offer, inquiry, or contact with respect to any of the
foregoing, which notice shall include the identity of the Person making the
proposal, offer, inquiry or contact, and a summary of the principal terms
thereof. If a Seller Termination Event occurs, the foregoing exclusivity
provisions of this Section 5(g) shall no longer apply. During the period from
the Seller Termination Event until the earlier of the Closing or the termination
of this Agreement, Seller hereby grants to Buyer a right of first refusal in
respect of the Assets of the Business. During this period, in the event Seller
proposes to enter into a Sale of the Assets of the Business in an arms' length,
bona fide transaction, Seller shall deliver notice to Buyer of Seller's intent
to sell the Assets to a third party, offering to sell the Assets to Buyer on
identical terms and conditions as those to be paid by the proposed third-party
purchaser (the "Offer Notice"). The Offer Notice shall describe the terms and
conditions of the proposed Sale in reasonable detail. In the event Buyer desires
to purchase the Assets of the Business, it shall so notify Seller not later than
fourteen (14) days following its receipt of the Offer Notice, and upon the
giving of such notice, Seller shall be obligated to sell, and Buyer shall be
obligated to purchase, the Assets on the terms and conditions set forth in the
Offer Notice. In the event Buyer does not elect to purchase the Assets on the
terms and conditions specified in the Offer Notice, Seller may then sell the
Assets to the third party offeror, on terms no less favorable than the terms set
forth in the Offer Notice. If Seller has not entered into definitive contracts
for such Sale and filed long-form applications with the FCC seeking approval of
the change in control of the FCC Licenses pursuant to such Sale with sixty (60)
days following the expiration of such 14-day period, then any Sale of the Assets
would again be subject to the right of first refusal provided in this Section
5(g). Seller shall notify Buyer immediately if any definitive contracts for a
Sale are executed.
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(h) Certain Deliveries. Not later than January 4, 1999, Seller, Chase
and McDugald shall deliver to Buyer Annex I and the Disclosure Schedule, and
Buyer shall deliver to Seller Annex II, except that Seller, Chase and McDugald
shall provide the disclosures in the Disclosure Schedule related to Section
4(k)(vii) of the Disclosure Schedule not later than January 15, 1999. Not later
than five (5) business days after the presentation for execution thereof by
Buyer, Seller and Target shall execute and deliver a customary subordinated
pledge and security agreement, in form and substance reasonably satisfactory to
Buyer, and such other documents, financing statements and other instruments as
Buyer may reasonably request, providing for a second priority perfected security
interest in all of the Assets (including Target Shares and Licensee Shares) of
each of Seller and Target, in order to secure the prompt payment, compliance and
performance by Seller and Target of their respective obligations under this
Agreement and the Ancillary Agreements (collectively, the "Subordinated Security
Agreement").
6. Post-Closing Covenants. The Parties agree as follows with respect to
the period following the Closing.
(a) General. In case at any time after the Closing any further action is
necessary to carry out the purposes of this Agreement, each of the Parties will
take such further action (including the execution and delivery of such further
instruments and documents) as any other Party reasonably may request, all at the
sole cost and expense of the requesting Party (unless the requesting Party is
entitled to indemnification therefor under Section 8 below). The Seller
acknowledges and agrees that from and after the Closing the Buyer will be
entitled to possession of all documents, stock books, minute books, records
(including Tax records), agreements, and financial data of any sort relating to
the Business, to the Target and its Subsidiaries, and to any other Assets
transferred to Buyer hereunder.
(b) Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving any of the Target and its Subsidiaries, each of
the other Parties will cooperate with it and its counsel in the contest or
defense, make available their personnel, and provide such testimony and access
to their books and records as shall be necessary in connection with the contest
or defense, all at the sole cost and expense of the contesting or defending
Party (unless the contesting or defending Party is entitled to indemnification
therefor under Section 8 below).
(c) Transition. None of the Seller or any of its Affiliates will take
any action that is designed or intended to have the effect of discouraging any
lender, lessor, licensor, customer, supplier, or other business associate of any
of the Target and its Subsidiaries from maintaining the same business
relationships with the Target and its Subsidiaries after the Closing as it
maintained with the Target and its Subsidiaries prior to the Closing. Each of
the Seller and its Affiliates will refer all customer inquiries relating to the
Business to the Buyer from and after the Closing.
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(d) Confidentiality. Each of the Seller, Chase and McDugald will treat
and hold as such all of the Confidential Information, refrain from using any of
the Confidential Information except in connection with this Agreement, and
deliver promptly to the Buyer or destroy, at the request and option of the
Buyer, all tangible embodiments (and all copies) of the Confidential Information
which are in his or its possession. In the event that any of the Seller, Chase
or McDugald is requested or required (by oral question or request for
information or documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar process) to disclose any Confidential
Information, such person will notify the Buyer promptly of the request or
requirement so that the Buyer may seek an appropriate protective order or waive
compliance with the provisions of this Section 6(d). If, in the absence of a
protective order or the receipt of a waiver hereunder, any of the Seller, Chase
or McDugald is, on the advice of counsel, compelled to disclose any Confidential
Information to any tribunal or else stand liable for contempt, such person may
disclose the Confidential Information to the tribunal; provided, however, that
the disclosing person shall use his or its best efforts to obtain, at the
request of the Buyer, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as the Buyer shall designate. The foregoing provisions shall not apply
to any Confidential Information which is generally available to the public
immediately prior to the time of disclosure.
(e) Covenant Not to Compete. For a period of three (3) years from and
after the Closing Date, neither Seller, nor any of Chase or McDugald or such
individuals' respective Affiliates, will engage directly or indirectly in any
business that competes with the business of Buyer and its Affiliates; provided,
however, that nothing in this Section 6(e) shall prohibit Chase and McDugald
from acting as agents for a local exchange carrier ("LEC") outside of the State
of Tennessee with respect to any business conducted by such carrier outside of
the State of Tennessee. If the final judgment of a court of competent
jurisdiction declares that any term or provision of this Section 6(e) is invalid
or unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
(f) Warrants. (i) The Warrants (and, with respect to the first two
sentences only, each share of stock issued upon exercise of a Warrant) will be
imprinted with a legend substantially in the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SAID SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT. SAID SECURITIES MAY NOT BE TRANSFERRED WITHOUT
THE CONSENT OF LEAP WIRELESS INTERNATIONAL, INC., IN ITS SOLE AND
ABSOLUTE DISCRETION."
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(ii) Warrant may not be transferred by Seller, whether in
connection with a dividend, distribution or dissolution of Seller or
otherwise, without the prior written consent of Buyer, in its sole and
absolute discretion. In the event of transfer, each holder desiring to
transfer a Warrant (or share of stock issued upon exercise of a Warrant)
first must furnish the Buyer with (A) a written legal opinion in form
and substance reasonably satisfactory to the Buyer to the effect that
the holder may transfer the Warrant or underlying shares, as applicable,
as desired without registration under the Securities Act and (B) a
written undertaking executed by the desired transferee reasonably
satisfactory to the Buyer in form and substance agreeing to be bound by
the restrictions on transfer contained herein and in the Warrant
Agreement.
(iii) The Parties understand that the Warrants to be issued at
the Closing will be issued by CCI or another entity through which Buyer
intends, at the time of the Closing, to implement the Cricket Business
Plan on a nationwide basis (the "Warrant Issuer"); provided, however,
that the Parties acknowledge that the FCC may require that the FCC
licenses and network used in the Cricket Business reside in an entity
other than the Warrant Issuer. In the event the Buyer's intent changes
in the future, which it may at Buyer's sole discretion, and Buyer
determines to implement all or a portion of the nationwide Cricket
Business Plan through another entity (other than with respect to the FCC
Licenses and network used in the Cricket Business), or through one or
more additional entities (each such entity, a "Future Cricket Entity"),
then, at the time of such determination, Buyer shall, subject to an
available exemption from registration under applicable securities laws,
cause each such Future Cricket Entity to issue to Seller a warrant,
having substantially the same terms as the Warrant (including exercise
price and actual termination date), to purchase one percent (1%) (or the
then-current percentage interest in the Warrant Issuer represented by
the Warrant) of the outstanding common stock of such Future Cricket
Entity. If, at the time of issuance of such new warrants, the Warrant
Issuer is no longer the entity through which Buyer intends to implement
any portion of the nationwide Cricket Business Plan, Seller agrees to
surrender the Warrant to Buyer for cancellation in exchange for such
newly issued warrant(s). All of the provisions of this Agreement and any
Ancillary Agreement which pertain to the Warrants, including this
Section 6(f) and the set-off provisions of Section 8(f), shall apply to
such newly issued warrant(s).
(g) Continuation of Seller Until at least ninety (90) days following the
Earnout Payment Date, each of Seller, Chase and McDugald agree to maintain
Seller's separate corporate existence and to not commence any proceedings
relating to the liquidation, dissolution or winding-up of Seller.
(h) Certain Matters Relating to the Earnout.
(i) Final Statement. Not later than the Earnout Payment Date,
Buyer shall deliver to Seller (A) the Earnout Amount and (B) at Buyer's
expense, a written statement (the "Final Statement") setting forth the
calculation of the Earnout Amount (including, without limitation, the
calculation of Target Earnings). Such payment shall not prejudice
Seller's rights to dispute the amount of the Earnout Amount as provided
in Section 6(h)(ii)
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below. Together with the Final Statement, Buyer shall deliver to Seller
copies of financial statements of Buyer and, separately, the Cricket
Business (including an audited balance sheet, statement of operations,
statement of cash flows and related financial data).
(ii) Dispute Resolution Regarding Accounting Matters.
(A) This Section 6(h)(ii) shall provide the exclusive
means for disputing the contents of the Final Statement. The
Final Statement shall be prepared based on the books and records
of the Cricket Business.
(B) The amount calculated by Buyer in the Final Statement
shall be conclusive and binding on all interested parties, unless
within thirty (30) days after receipt of the Final Statement,
Seller shall, by written notice to Buyer, object to the Final
Statement. Seller shall deliver its written notice of its
objection (the "Objection Notice") to Buyer: (i) objecting in
good faith to the contents of the Final Statement; (ii) setting
forth the items being disputed and the reasons therefor; and
(iii) specifying Seller's calculation of the items in the Final
Statement.
(C) For thirty (30) days after delivery of the Objection
Notice, Buyer and Seller shall attempt to resolve all disputes
between them regarding the Final Statement. If Buyer and Seller
cannot resolve all such disputes within such thirty (30) day
period, the matters in dispute shall be determined by a
nationally-recognized independent certified public accounting
firm (the "Arbiter") mutually satisfactory to Buyer and Seller
which (unless otherwise agreed by the Parties) does not provide
service to, or have a material relationship with any of Buyer,
Seller, or their respective affiliates. Should Buyer and Seller
fail to agree on the identity of the Arbiter within an additional
ten (10) day period, the Arbiter shall be a nationally-recognized
independent certified public accounting firm selected by the San
Diego office of the American Arbitration Association. Promptly,
but not later than thirty (30) days after the acceptance of its
appointment, the Arbiter shall determine (based solely on
presentations by Seller and Buyer to the Arbiter and not by
independent investigation of the underlying facts and
circumstances presented by the parties) only those items in
dispute and shall render a report as to its resolution of such
items and the resulting calculation of the items in a Final
Statement. The amounts to be included shall be the appropriate
amounts from the Final Statement, as to items that are not in
dispute, and the amounts determined by the Arbiter, as to items
that are submitted for resolution by the Arbiter. Buyer and
Seller shall cooperate with the Arbiter in making its
determination and such determination shall be conclusive and
binding upon Buyer and Seller. In connection with the resolution
of any such dispute, subject to the execution and delivery of
customary confidentiality agreements regarding the information
disclosed, Seller and its legal and accounting advisers will have
reasonable access to the books and records of the Cricket
Business to enable Seller to verify the calculation of the
Earnout Amount.
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(D) The party whose calculation of the Earnout Amount set
forth in the Final Statement or Objection Notice, as applicable,
is closest to the amount set forth in the Final Statement issued
by the Arbiter shall be deemed the "prevailing party." The
non-prevailing party shall bear the fees and expenses of the
Arbiter and the legal, accounting and other professional fees and
expenses incurred by the prevailing party in connection with the
resolution of disputes under this Section 6(h)(ii).
(E) Within thirty (30) days after resolution of an
Objection Notice regarding a Final Statement, Buyer shall pay
Seller by wire transfer of immediately available funds any
payment due Seller arising from such resolution.
(F) Nothing in this Section 6(h)(ii) or in the Final
Statements, reports or documents contemplated hereby shall affect
the parties' rights and obligations in respect of a breach or
alleged breach of any representation, warranty or covenant
herein.
(iii) Conduct of Business. Buyer shall act in good faith with
respect to the operation of the Cricket Business during the Earnout
Period, in a manner intended to maximize the long-term value of the
Cricket Business. Notwithstanding the foregoing, nothing in this
Agreement or otherwise shall prohibit Buyer from discontinuing,
liquidating, dissolving or winding up the Cricket Business, in whole or
in part, at any time in its sole discretion. Buyer will not enter into
any sale of the Cricket Business (whether by sale of equity interests,
merger, consolidation or sale of all or substantially all of the assets
of the Cricket Business), unless Buyer retains the obligations to
timely pay the Earnout Amount or the purchaser of the Cricket Business
assumes all of Buyer's obligations with respect to the payment of the
Earnout Amount under Section 2(b)(iv) and this Section 6(h). Upon
consummation of such transfer (including the assumption referred to in
the preceding sentence), Buyer will have no further liability to Seller
in respect of all matters arising from or relating to the payment of
the Earnout Amount; provided, that Buyer has a good faith belief at the
time of such transfer that the transferee is capable of performing the
assumed obligations with respect to the Earnout. In the event of any
such transfer and any subsequent transfer, the provisions of this
Section 6(h) shall apply to and inure to the benefit of such transferee
and any subsequent transferee.
(i) Distribution of Proceeds.
Except for the Warrants, the proceeds received by Seller pursuant to
Section 2(b) above shall be distributed among the Seller's stockholders in the
manner indicated in Exhibit G attached hereto.
7. Conditions to Obligation to Close.
(a) Conditions to Obligation of the Buyer. The obligation of the Buyer
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
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(i) the representations and warranties set forth in Section 3(a)
and Section 4 above shall be true and correct in all material respects
at and as of the Closing Date, except as a result of changes in
Seller's Business directly attributable to the implementation of the
Initial Budget attached to the Management Agreement or as a result of
any actions taken by Seller at the specific recommendation of Buyer or
by Buyer pursuant to the Management Agreement;
(ii) the Seller shall have performed and complied with all of
its covenants hereunder in all material respects through the Closing,
including, if so requested by Buyer and at Buyer's sole expense,
causing each of Target and Licensee to merge with and into Buyer or its
designee at the Closing;
(iii) the Seller, Target and its Subsidiaries shall have
procured all of the material third party consents specified in Section
5(b) above;
(iv) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, (C) affect adversely the right of the Buyer to own the
Target Shares and the Licensee Shares and to control the Target and its
Subsidiaries, or (D) affect adversely the right of any of the Target
and its Subsidiaries to own its assets and to operate its businesses
(and no such injunction, judgment, order, decree, ruling, or charge
shall be in effect);
(v) the Seller shall have delivered to the Buyer a certificate
to the effect that each of the conditions specified above in Section
7(a)(i)-(iv) is satisfied in all respects; provided, that Seller must
certify with respect to clause (iv) above only as to actions, suits or
proceedings against Chase, McDugald, Seller, Target or any
Subsidiaries;
(vi) all applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated and the Parties, the Target, and its Subsidiaries shall have
received all other authorizations, consents, and approvals of
governments and governmental agencies referred to in Section 3(a)(ii),
Section 3(b)(ii), and Section 4(c) above;
(vii) the relevant parties shall have entered into the Ancillary
Agreements and the same shall be in full force and effect;
(viii) the Buyer shall have received from counsel to the Seller,
Chase and McDugald an opinion in form and substance reasonably
satisfactory to Buyer's counsel, addressed to the Buyer, and dated as
of the Closing Date, except such opinion will not need to address the
absence of conflicts of this Agreement and the Ancillary Agreements
with any agreements, instruments, notes, etc. to which Chase or
McDugald are parties and which relate specifically to their personal
and commercial affairs unrelated to the Business;
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(ix) the Buyer shall have received the resignations, effective
as of the Closing, of each director and officer of the Target and its
Subsidiaries;
(x) there shall not have been any material adverse change in the
business, Assets, Liabilities, condition (financial or otherwise),
operations, results of operations, or future prospects of Target or any
of its Subsidiaries since the Balance Sheet Date, except for changes in
Seller's Business directly attributable to the implementation of the
Initial Budget attached to the Management Agreement or as a result of
any actions taken by Seller at the specific recommendation of Buyer or
by Buyer pursuant to the Management Agreement;
(xi) no event of default shall have occurred under the
Management Agreement, the Trademark License, the Non-Circumvention
Agreement, the Subordinated Security Agreement or the Guarantees by any
party to such agreements (other than the Buyer);
(xii) the FCC shall have consented to and approved the change in
control of Target and its Subsidiaries (including Licensee) from the
Seller to the Buyer, and the application therefor shall have been
approved in substantially the form submitted by the parties, with the
Buyer deemed qualified to hold C-Block PCS licenses pursuant to Section
24.709 of the FCC's C-Block regulations and eligible for installment
financing and bidding credits as a "very small business" under Section
24.720 of the FCC's C-Block regulations, and such consent and approval
shall have become a Final Order of the FCC;
(xiii) the QUALCOMM Amendment and the QUALCOMM Waiver (as such
terms are defined in Section 10(a) below) shall be in full force and
effect and no party (other than Buyer) shall be in breach thereof;
(xiv) Seller shall have furnished to the Buyer documentation
reasonably satisfactory to the Buyer evidencing that all employee
severance obligations of Target and its Subsidiaries owing or which may
become owing in the future have been paid in full or eliminated;
(xv) Seller shall have executed, or caused to be executed, and
delivered to Buyer all forms and other documents required from Seller,
Target and Licensee to enable Buyer to make the Section 338(h)(10)
Election pursuant to Section 9(a) hereof; and
(xvi) all actions to be taken by the Seller in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Buyer.
The Buyer may waive any condition specified in this Section 7(a) if it executes
a writing so stating at or prior to the Closing.
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(b) Conditions to Obligation of the Seller. The obligation of the Seller
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 3(b)
above shall be true and correct in all material respects at and as of
the Closing Date;
(ii) the Buyer shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (A) prevent consummation of any of the
transactions contemplated by this Agreement or (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
(iv) the Buyer shall have delivered to the Seller a certificate
to the effect that each of the conditions specified above in Section
7(b)(i)-(iii) is satisfied in all respects; provided, that Buyer must
certify with respect to clause (iii) above only as to actions, suits
and proceedings against Buyer;
(v) all applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated and the Parties, the Target, and its Subsidiaries shall have
received all other authorizations, consents, and approvals of
governments and governmental agencies referred to in Section 3(a)(ii),
Section 3(b)(ii), and Section 4(c) above, including FCC consent and
approval;
(vi) the Warrant Issuer shall have issued the Warrants and Buyer
shall have executed and delivered the Consulting Agreements, and the
same shall be in full force and effect;
(vii) Mr. Anthony Chase shall have been appointed as a member of
the Board of Directors of Cricket Communications, Inc.;
(viii) the QUALCOMM Waiver (as defined in Section 10(a) below)
shall be in full force and effect and no party (other than Seller,
Target or Licensee) shall be in breach thereof, and QUALCOMM shall have
delivered to Seller all of its outstanding warrants to purchase
Seller's Common Stock, endorsed in blank or accompanied by executed
assignment documents;
(ix) the Guarantees shall have been terminated and released, and
Seller shall have been released from its guarantees of the Management
Agreement and the Trademark License;
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(x) the Seller shall have received from counsel to the Buyer an
opinion in form and substance reasonably satisfactory to Seller's
counsel, addressed to the Seller, and dated as of the Closing Date; and
(xi) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Seller.
The Seller may waive any condition specified in this Section 7(b) if it executes
a writing so stating at or prior to the Closing.
8. Remedies for Breaches of This Agreement.
(a) Survival of Representations and Warranties.
All of the representations and warranties of the Parties contained in
Sections 3(a)(iii)-(iv); Sections 3(b)(iii)-(iv); and Sections 4(c), (d),
(g)-(j), (l)-(u), (w), (y) and (aa) above, shall survive the Closing hereunder
(even if the other Party knew or had reason to know of any misrepresentation or
breach of warranty at the time of Closing) and shall continue in full force and
effect until the eighteen (18) month anniversary of the Closing Date. All of the
other representations and warranties of the Parties contained in this Agreement
(including the representations and warranties of the Seller, Chase and McDugald
contained in Section 4(a), (b), (e), (f), (k), (v), (x) and (z) above) shall
survive the Closing (even if the damaged Party knew or had reason to know of any
misrepresentation or breach of warranty at the time of Closing) and continue in
full force and effect forever thereafter, except that Sections 4(k) and (v)
shall survive only until the expiration of the applicable statutes of
limitations.
(b) Indemnification Provisions for Benefit of the Buyer.
(i) In the event the Seller breaches (or in the event any third
party alleges facts that, if true, would mean the Seller has breached)
any of its representations, warranties, and covenants contained herein
and, if there is an applicable survival period pursuant to Section 8(a)
above and the Buyer makes a written claim against Seller within such
period, then the Seller agrees to indemnify the Buyer and its
directors, officers, stockholders, agents, successors and assigns from
and against the entirety of any Adverse Consequences any such person
may suffer through and after the date of the claim for indemnification
resulting from, arising out of, relating to, in the nature of, or
caused by the breach (or the alleged breach).
(ii) In the event either of Chase or McDugald breaches (or in
the event any third party alleges facts that, if true, would mean Chase
or McDugald has breached) any of his representations, warranties, and
covenants contained herein or if Seller breaches (or in the event any
third party alleges facts that, if true, would mean the Seller has
breached) any of its covenants contained in Sections 6, 9 or 11 hereof,
and, if there is an applicable survival period pursuant to Section 8(a)
above and the Buyer makes a written claim against Chase and McDugald
within such period, then each of Chase and McDugald jointly and
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severally agrees to indemnify the Buyer and its directors, officers,
stockholders, agents, successors and assigns from and against the
entirety of any Adverse Consequences any such person may suffer through
and after the date of the claim for indemnification resulting from,
arising out of, relating to, in the nature of, or caused by the breach
(or the alleged breach).
(iii) Each of the Seller, Chase and McDugald agrees to indemnify
each of the Buyer and its directors, officers, stockholders, agents,
successors and assigns from and against the entirety of any Adverse
Consequences any such person may suffer resulting from, arising out of,
relating to, in the nature of, or caused by any Liability of any of the
Seller, Target and their respective Subsidiaries for any Taxes with
respect to any Tax year or portion thereof ending on or before the
Closing Date (or for any Tax year beginning before and ending after the
Closing Date to the extent allocable (determined in a manner consistent
with Section 9(c)) to the portion of such period beginning before and
ending on the Closing Date).
(iv) Seller agrees to indemnify the Buyer and its directors,
officers, stockholders, agents, successors and assigns from and against
the entirety of any Adverse Consequences any such person may suffer
resulting from, arising out of, relating to, in the nature of, or
caused by facts, events, circumstances or conditions existing as of or
prior to the Closing; except for: (A) those Liabilities accruing,
arising out of, or relating to events or occurrences on or after the
Closing Date under the executory portion of (1) any contract set forth
on Section 4(p) of the Disclosure Schedule or (2) any leases set forth
on Section 4(l)(ii) of the Disclosure Schedule; (B) any indebtedness
which is scheduled for repayment after the Closing under the FCC
Licenses, Working Capital Facility and the QUALCOMM Agreements; and (C)
any obligations incurred as a result of actions taken by Seller at the
specific recommendation of Buyer or by Buyer pursuant to the Management
Agreement.
(v) The Seller will have no obligations to Buyer following the
Closing under Section 8(b)(i) for breaches of representations and
warranties or under Section 8(b)(iv) until the aggregate amount of all
Adverse Consequences suffered by Buyer exceeds $100,000 (One Hundred
Thousand U.S. Dollars), at which time Seller will be liable for the
full amount of all Adverse Consequences (including accrued interest)
including the first $100,000. Neither Chase nor McDugald will have any
obligations to Buyer following the Closing under Section 8(b)(ii) for
breaches of their representations and warranties until the aggregate
amount of all Adverse Consequences suffered by Buyer exceeds $500,000
(Five Hundred Thousand U.S. Dollars), at which time Chase and McDugald
will be liable for the full amount of all Adverse Consequences
(including accrued interest) including the first $500,000.
(c) Indemnification Provisions for Benefit of the Seller. In the event
the Buyer breaches (or in the event any third party alleges facts that, if true,
would mean the Buyer has breached) any of its representations, warranties, and
covenants contained herein, then the Buyer agrees to indemnify the Seller and
its directors, officers, stockholders, agents, successors and assigns from and
against the entirety of any Adverse Consequences any such person may suffer
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through and after the date of the claim for indemnification resulting from,
arising out of, relating to, in the nature of, or caused by the breach (or the
alleged breach).
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Party (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may
give rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 8, then the Indemnified Party
shall promptly notify each Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the Indemnified Party
in notifying any Indemnifying Party shall relieve the Indemnifying
Party from any obligation hereunder unless (and then solely to the
extent) the Indemnifying Party thereby is prejudiced.
(ii) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so long as (A)
the Indemnifying Party notifies the Indemnified Party in writing within
15 days after the Indemnified Party has given notice of the Third Party
Claim that the Indemnifying Party will indemnify the Indemnified Party
from and against the entirety of any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating
to, in the nature of, or caused by the Third Party Claim, (B) the
Indemnifying Party provides the Indemnified Party with evidence
reasonably acceptable to the Indemnified Party that the Indemnifying
Party will have the financial resources to defend against the Third
Party Claim and fulfill its indemnification obligations hereunder, (C)
the Third Party Claim involves only money damages and does not seek an
injunction or other equitable relief, (D) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not, in the good
faith judgment of the Indemnified Party, likely to establish a
precedential custom or practice materially adverse to the continuing
business interests of the Indemnified Party, and (E) the Indemnifying
Party conducts the defense of the Third Party Claim actively and
diligently.
(iii) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 8(d)(ii)
above, (A) the Indemnified Party may retain separate co-counsel at its
sole cost and expense and participate in the defense of the Third Party
Claim, (B) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party (not
to be withheld unreasonably), and (C) the Indemnifying Party will not
consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(d)(ii)
above is or becomes unsatisfied, however, (A) the Indemnified Party may
defend against, and consent to the entry of any judgment or enter into
any settlement with respect to, the Third Party Claim in any manner it
reasonably may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, any Indemnifying Party in
connection therewith),
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(B) the Indemnifying Parties will reimburse the Indemnified Party
promptly and periodically for the costs of defending against the Third
Party Claim (including reasonable attorneys' fees and expenses), and
(C) the Indemnifying Parties will remain responsible for any Adverse
Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party
Claim to the fullest extent provided in this Section 8.
(e) Characterization of Indemnification Payments. All indemnification
payments under this Section 8 shall be deemed adjustments to the Purchase Price.
(f) Buyer's Right of Offset. Notwithstanding any provision of this
Agreement to the contrary, at the Closing the Buyer may withhold and set off
against the $6.3 million payable under Section 2(b), any amount as to which
Seller is obligated to indemnify Buyer pursuant to this Section 8 (including
accrued interest) by notifying Seller that the Buyer is, in good faith, reducing
the cash payable by the amount of such set-off, and any such set-off shall not
otherwise alter or affect Seller's obligations to close the transactions under
this Agreement. Notwithstanding any provision of this Agreement to the contrary,
the Buyer may withhold and set off against the Earnout Amount payable under
Section 2(b) and any other amounts otherwise due Seller, any amount as to which
Seller is obligated to indemnify Buyer pursuant to this Section 8 (including
accrued interest) by notifying Seller that the Buyer is, in good faith, reducing
the Earnout Amount by the amount of each such set-off. In addition, at such time
as Seller (or the holder of the Warrants) seeks to exercise any Warrants by
written notice to Buyer, then Buyer may in its sole discretion cancel and set
off any of the Warrants which the Seller or other holder thereof seeks to
exercise, in satisfaction of any amount as to which Seller is obligated to
indemnify Buyer pursuant to this Section 8 (including accrued interest) by
notifying the Seller or such other holder that the Buyer is, in good faith,
canceling some or all of the Warrants in order to satisfy the amount of such
set-off; provided, that this right of set-off may not be exercised if at such
time Seller or such other holder satisfies such indemnity claim (including
accrued interest) in full and in cash. For purposes of this Section 8(f), each
Warrant so canceled shall be attributed a value equal to the difference between
the Fair Market Value (as defined in the Warrant) per share of stock underlying
such Warrant and the Exercise Price per share under such Warrant. Furthermore,
any indebtedness to the Buyer of Chase or McDugald in respect of their
obligations under this Section 8 shall be satisfied first through the
cancellation or reduction, as applicable, of the remaining term of such person's
Consulting Agreement, with the consulting fee otherwise payable for the canceled
term applied in satisfaction, in whole or in part, of such indebtedness.
(g) Other Indemnification Provisions. If any Party hereto seeks
indemnification under this Section 8, such Party shall notify the other Parties
in writing of the facts and circumstances giving rise to the claim. If any Party
shall fail to pay the full amounts payable in respect of its obligations under
this Section 8 within five (5) business days of delivery of written demand for
the payment thereof, then such amounts shall accrue interest from and after the
end of such five--business day period until paid in full, compounded quarterly,
at a rate per annum equal to the Prime Rate (as published in the Wall Street
Journal, Western Edition on the first business day of each such quarter) plus 3
1/2% (three and one half percent). Except in the case of fraud or willful breach
or pursuant to the enforcement of the Guarantees, the foregoing indemnification
provisions are
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intended to be the sole remedy of the parties for any breach of a
representation, warranty, or covenant hereunder. Each of the Seller, Chase and
McDugald hereby agrees that he or it will not make any claim for indemnification
against any of the Target and its Subsidiaries by reason of the fact that he or
it was a director, officer, employee, stockholder or agent of any such entity or
was serving at the request of any such entity as a partner, trustee, director,
officer, employee, or agent of another entity (whether such claim is for
judgments, damages, penalties, fines, costs, amounts paid in settlement, losses,
expenses, or otherwise and whether such claim is pursuant to any statute,
charter document, bylaw, agreement, or otherwise) with respect to any action,
suit, proceeding, complaint, claim, or demand brought by the Buyer against such
Seller (whether such action, suit, proceeding, complaint, claim, or demand is
pursuant to this Agreement, applicable law, or otherwise).
9. Tax Matters. The following provisions shall govern the allocation of
responsibility as between Buyer and Seller for certain tax matters following the
Closing Date:
(a) Section 338(h)(10) Election. The Seller agrees, if so requested by
the Buyer within six (6) months after the Closing in writing, to join with Buyer
in making an election under Section 338(h)(10) of the Code (and any
corresponding elections under state, local, or foreign tax law) (collectively, a
"Section 338(h)(10) Election") with respect to the purchase and sale of the
stock of the Target and Licensee hereunder. Seller shall execute, or cause to be
executed, and delivered to Buyer at the Closing all forms and other documents
required from Seller, Target and Licensee to enable Buyer to make the Section
338(h)(10) Election and shall, after the Closing, cooperate in all reasonable
respects with Buyer, Target and Licensee to effectuate the Section 338(h)(10)
Election. Seller will pay, within fifteen (15) days after written demand by any
of Buyer, Target or Licensee, any Tax, including any liability of Target and/or
Licensee for Taxes, resulting directly or indirectly from the making of the
Section 338(h)(10) Election and will indemnify each of the Buyer, Target and
Licensee against any Adverse Consequences arising out of any failure to pay such
Tax; provided, however, that Buyer shall pay or shall cause Target and Licensee
to pay the income taxes as they come due which Seller, Target and Licensee may
owe the U.S. Federal Government and the State of Tennessee as a result of the
Section 338(h)(10) Election to the extent such income taxes, in the aggregate,
exceed the amount of such income taxes that would have been owing, in the
aggregate, by Seller, Target and Licensee as a result of the acquisition of the
Target Shares and the Licensee Shares by Buyer pursuant hereto had the Section
338(h)(10) Election not been made. In the event Buyer requests Seller to join in
the making of the Section 338(h)(10) Election pursuant hereto, Buyer shall,
within sixty (60) days thereafter, prepare an allocation of the modified ADSP
(as such term is defined in Treasury Regulations Section 1.338(h)(10)-1) paid
with respect to the Target and its Subsidiaries among the assets of the Target
and its Subsidiaries in accordance with the applicable Treasury Regulations and
provide the allocation to Seller. Such allocation shall be the "Target Price
Allocation" and shall be binding on the parties hereto unless Seller shall,
within 10 days of delivery to Seller of the Target Price Allocation, conclude in
good faith that the Target Price Allocation is manifestly unreasonable. If
Seller concludes in good faith that the Target Price Allocation is manifestly
unreasonable, the parties shall submit the issue for binding arbitration in
accordance with Section 11(p). If the arbitrator concludes that the Target Price
Allocation is manifestly unreasonable, the parties shall engage, at Buyer's
expense, a mutually acceptable "Big 5" accounting firm which does not otherwise
provide services to any of the Parties hereunder, who
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shall perform the allocation in accordance with the applicable Treasury
Regulations, which final Target Price Allocation shall be conclusive and binding
on the parties. Seller and Buyer agree to act in accordance with the Target
Price Allocation in the preparation, filing and audit of any Tax Return.
(b) Tax Periods Ending on or Before the Closing Date. Buyer shall
prepare or cause to be prepared and file or cause to be filed all Tax Returns
for the Target and its Subsidiaries for all periods ending on or prior to the
Closing Date which are filed after the Closing Date other than income Tax
Returns with respect to periods for which a consolidated, unitary or combined
income Tax Return of Seller will include the operations of the Target and its
Subsidiaries. Buyer shall permit Target and its Subsidiaries to review and
comment on each such Tax Return described in the preceding sentence prior to
filing. Seller shall reimburse Buyer for Taxes of the Target and its
Subsidiaries with respect to such periods within fifteen (15) days after payment
by Buyer or the Target and its Subsidiaries of such Taxes.
(c) Tax Periods Beginning Before and Ending After the Closing Date.
Buyer shall prepare or cause to be prepared and file or cause to be filed any
Tax Returns of the Target and its Subsidiaries for Tax periods which begin
before the Closing Date and end after the Closing Date. Seller shall pay to
Buyer within fifteen (15) days after the date on which Taxes are paid with
respect to such periods an amount equal to the portion of such Taxes which
relates to the portion of such Taxable period ending on the Closing Date. For
purposes of this Section, in the case of any Taxes that are imposed on a
periodic basis and are payable for a Taxable period that includes (but does not
end on) the Closing Date, the portion of such Tax which relates to the portion
of such Taxable period ending on the Closing Date shall (x) in the case of any
Taxes other than Taxes based upon or related to income or receipts, be deemed to
be the amount of such Tax for the entire Taxable period multiplied by a fraction
the numerator of which is the number of days in the Taxable period ending on the
Closing Date and the denominator of which is the number of days in the entire
Taxable period, and (y) in the case of any Tax based upon or related to income
or receipts be deemed equal to the amount which would be payable if the relevant
Taxable period ended on the Closing Date. Any credits relating to a Taxable
period that begins before and ends after the Closing Date shall be taken into
account as though the relevant Taxable period ended on the Closing Date. All
determinations necessary to give effect to the foregoing allocations shall be
made in a manner consistent with prior practice of the Target and its
Subsidiaries.
(d) Cooperation on Tax Matters.
(i) Buyer, the Target and its Subsidiaries and Seller shall
cooperate fully, as and to the extent reasonably requested by the other
party, in connection with the filing of Tax Returns pursuant to this
Section and any audit, litigation or other proceeding with respect to
Taxes. Such cooperation shall include the retention and (upon the other
party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding
and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. The Target and its Subsidiaries and Seller agree (A) to
retain all books and records with respect to Tax matters pertinent to
the Target and its Subsidiaries relating
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to any taxable period beginning before the Closing Date until the
expiration of the statute of limitations (and, to the extent notified
by Buyer or Seller, any extensions thereof) of the respective taxable
periods, and to abide by all record retention agreements entered into
with any taxing authority, and (B) to give the other party reasonable
written notice prior to transferring, destroying or discarding any such
books and records and, if the other party so requests, the Target and
its Subsidiaries or Seller, as the case may be, shall allow the other
party to take possession of such books and records.
(ii) Buyer and Seller further agree, upon written request, to
use their reasonable best efforts to obtain any certificate or other
document from any governmental authority or any other Person as may be
necessary to mitigate, reduce or eliminate any Tax that could be
imposed (including, but not limited to, with respect to the
transactions contemplated hereby) as soon as reasonably possible after
the written request.
(iii) Buyer and Seller further agree, upon request, to provide
the other party with all information that either party may be required
to report pursuant to Section 6043 of the Code and all Treasury
Department Regulations promulgated thereunder.
(e) Tax Sharing Agreements. All tax sharing agreements or similar
agreements with respect to or involving the Target and its Subsidiaries shall be
terminated as of the Closing Date and, after the Closing Date, the Target and
its Subsidiaries shall not be bound thereby or have any liability thereunder.
(f) Certain Taxes. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement and the transactions
contemplated hereby, shall be paid by Seller when due, and Seller will, at its
own expense, file all necessary Tax Returns and other documentation with respect
to all such transfer, documentary, sales, use, stamp, registration and other
such Taxes and fees, and, if required by applicable law, Buyer will, and will
cause its affiliates to, join in the execution of any such Tax Returns and other
documentation.
(g) No Election Under Treas. Reg. Section 1.1502-76(b). Seller shall not
file or cause to be filed an election under Treasury Regulation Section
1.1502-76(b)(2)(ii)(D) (or any state or local counterpart or equivalent thereof)
for its taxable year which includes or ends on the Closing Date without Buyer's
written consent (which may be granted or withheld in Buyer's sole and absolute
discretion).
10. Termination.
(a) Termination of Agreement. Certain of the Parties may terminate this
Agreement as provided below:
(i) the Buyer and the Seller may terminate this Agreement by
mutual written consent at any time prior to the Closing;
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(ii) the Buyer may terminate this Agreement by giving written
notice to the other Parties on or before the 30th day following the
date of this Agreement if the Buyer is not satisfied in its sole
discretion, with the results of its continuing business, legal, and
accounting due diligence regarding Seller, the Target and its
Subsidiaries;
(iii) the Buyer may terminate this Agreement by giving written
notice to the Parties at any time prior to the Closing: (A) in the
event the Disclosure Schedule Supplement delivered by Chase and
McDugald to Buyer discloses facts which constitute a material breach of
any representation and warranty by Seller set forth in Section 4
hereof; (B) in the event that any Buyer Termination Event (as defined
below) has occurred, and the Buyer Termination Event has continued
without cure for a period of 30 days (or seven (7) days in the case of
a breach of Section 5(h) after the notice thereof from Buyer to
Seller); (C) if the Closing shall not have occurred on or before the
second (2nd) anniversary of the date of this Agreement, by reason of
the failure of any condition precedent under Section 7(a) hereof
(unless the failure results primarily from the Buyer itself breaching
any representation, warranty, or covenant contained in this Agreement);
or (D) if the failure of any condition precedent under Section 7(a)
hereof results from the failure by the FCC to consent to the
transactions contemplated hereby, such time as Buyer has abandoned in
good faith its efforts to obtain such approvals;
(iv) the Buyer may terminate this Agreement by giving written
notice to the Parties at any time: (A) on or prior to January 16, 1999,
if the Buyer's Board of Directors fails to approve this Agreement, the
Ancillary Agreements, and the transactions contemplated hereby and
thereby; or (B) on or prior to January 23, 1999, if Buyer and QUALCOMM
Incorporated have not agreed on the form of amendment to the Credit
Agreement, which is in form and substance satisfactory to Buyer in its
sole discretion (the "QUALCOMM Amendment");
(v) the Seller may terminate this Agreement by giving written
notice to the Buyer at any time prior to the Closing: (A) in the event
the Buyer has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, and the
breach has continued without cure for a period of 30 days after the
notice of breach from Seller to Buyer; or (B) if the Closing shall not
have occurred on or before the second (2nd) anniversary of the date of
this Agreement, by reason of the failure of any condition precedent
under Section 7(b) hereof (unless the failure results primarily from
any of the Seller, Chase or McDugald breaching any representation,
warranty, or covenant contained in this Agreement) and, if such failure
is the result of the failure by the FCC to consent to the transactions
contemplated hereby, Buyer has abandoned its good faith efforts to
obtain such approvals;
(vi) the Seller may terminate this Agreement by giving written
notice to the Buyer prior to the Closing at any time: (A) after January
17, 1999 if Buyer's Board of Directors has not approved this Agreement,
the Ancillary Agreements and the transactions contemplated hereby and
thereby; (B) after January 23, 1999 if QUALCOMM Incorporated has not
executed a commitment letter regarding: a waiver of Target's
49
<PAGE> 54
covenant under Section 5.1(m) of the Credit Agreement to have received
certain additional capital not later than April 15, 1999; the release
by QUALCOMM at the Closing of the Seller's obligations under the
QUALCOMM Agreements; the release by QUALCOMM at the Closing of all
subordination agreements entered into with respect to the obligations
of Seller in connection with the Credit Agreement; the contribution by
QUALCOMM to Seller at the Closing of its outstanding warrants to
purchase Seller's Common Stock; and QUALCOMM's consent to the
consummation of the transactions contemplated by this Agreement (the
"QUALCOMM Waiver"); or (C) commencing 120 days after the occurrence of
a Seller Termination Event (as defined below); and
(vii) if Seller shall have, following a Seller Termination
Event, entered into a definitive contract for a Sale in accordance with
Section 5(g) hereof, this Agreement shall terminate at the time such
definitive contract is entered into.
For purposes of this Section 10(a), "Buyer Termination Event" means: (1) Seller,
Chase or McDugald has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect; (2) Seller or any
of its Subsidiaries has failed to make any payments when due of any principal,
interest, fees, lease rentals, or any and all other amounts owed, whether to
Buyer or third parties; (3) Seller and its Subsidiaries have breached, or failed
to continue to hold directly or indirectly free and clear of all liens and
encumbrances (other than Permitted Liens), the FCC Licenses; (4) the occurrence
of a Material Adverse Change, except as a result of changes in Seller's Business
directly attributable to the implementation of the Initial Budget attached to
the Management Agreement or as a result of any actions taken by Seller at the
specific recommendation of Buyer or by Buyer pursuant to the Management
Agreement; (5) Seller or any of its Subsidiaries have suffered a material lapse
in the customary types and amounts of insurance coverage carried for the
Business, (6) Seller or any of its Subsidiaries has defaulted on any of its
outstanding indebtedness to the Buyer or third parties having a principal amount
exceeding $250,000, whether as a result of the failure to pay money or
otherwise; (7) Seller or any of its Subsidiaries becomes insolvent, or is unable
to pay its debts as they become due, or makes an assignment for the benefit of
creditors, or files a voluntary petition in bankruptcy, or suffers the filing of
an involuntary petition in bankruptcy, or seeks protection from creditors under
any state law provision, or becomes subject to the appointment of a trustee or
receiver over its assets; (8) one or more judgments have been entered against
Seller or any of its Subsidiaries involving an aggregate amount of greater than
$250,000; or (9) Seller or any of its Subsidiaries has violated ERISA in any
material respect.
For purposes of this Section 10(a), "Seller Termination Event" means: (1) an
acceleration of the indebtedness under the QUALCOMM Agreements; (2) an
acceleration of the indebtedness under the Working Capital Facility; (3) Buyer's
failure to fund additional drawings under the Working Capital Facility in
amounts necessary to pay timely Licensee's obligations under the FCC Debt
(taking into account one 90-day late payment period per payment available from
the FCC); or (4) Buyer's failure to fund additional drawings under the Working
Capital Facility of at least $150,000 per month, less any revenues forecasted
for collection during such month; provided, however, that no Seller Termination
Event shall occur under clauses (3) or (4) above until Seller has expended for
the benefit of Target and its Subsidiaries all but $200,000 of the approximately
$5.0 million cash on
50
<PAGE> 55
hand at the date hereof, in accordance with the Initial Budget attached to the
Management Agreement.
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 10(a) above, all rights and obligations of the Parties
hereunder shall terminate without any Liability of any Party to any other Party
(except for any Liability of any Party then in breach).
11. Miscellaneous.
(a) Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the Buyer and the Seller;
provided, however, that any Party may make any public disclosure it believes in
good faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing Party
will use its reasonable best efforts to advise the other Parties prior to making
the disclosure).
(b) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(d) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and assigns. No Party may assign either this Agreement or any of his or its
rights, interests, or obligations hereunder without the prior written approval
of the Buyer in its sole discretion. Buyer may assign this Agreement or any or
all of its rights, interests and obligations hereunder in its sole discretion,
including without limitation, the provisions contained in Section 6(h) and the
indemnification rights contained in Section 8, and following such assignment,
all references in this Agreement to Buyer shall be deemed to refer to such
assignee.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
51
<PAGE> 56
if to the Seller:
Chase Telecommunications Holdings, Inc.
6420 Richmond Avenue, Suite 620
Houston, TX 77057
Attn.: Richard W. McDugald
Fax: 713-782-0156
with a courtesy copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Attn.: Bruce R. Kraus, Esq.
Telephone: (212) 728-8237
Facsimile: (212) 728-8111
if to the Buyer:
Leap Wireless International, Inc.
10307 Pacific Center Court
San Diego, California 92121-2779
Attention: Legal Department
Telephone: (619) 882-6000
Facsimile: (619) 882-6040
with a courtesy copy to:
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Attention: Barry M. Clarkson, Esq.
Telephone: (619) 236-1234
Facsimile: (619) 696-7419
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF CALIFORNIA WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAW
52
<PAGE> 57
PROVISION OR RULE (WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION)
THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE
STATE OF CALIFORNIA.
(i) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Seller. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence.
(j) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) Expenses Each of the Parties, the Target, and its Subsidiaries will
bear his or its own costs and expenses (including legal fees and expenses)
incurred in connection with this Agreement and the transactions contemplated
hereby. Each of the Seller, Chase and McDugald agrees that none of the
pre-Closing Assets of Seller, Target and its Subsidiaries has borne or will,
unless otherwise agreed by Buyer, bear any of Seller's legal fees, accounting
fees and severance payments to employees incurred in connection with the
negotiation and execution of this Agreement and the Ancillary Agreements and the
closing of the transactions contemplated hereby and thereby and, to the extent
they do, such amount may be set off against the $6.3 million payable pursuant to
Section 2(b) in accordance with the first sentence of Section 8(f) hereof.
(l) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
(m) Incorporation of Exhibits, Annexes, and Schedules. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
(n) Specific Performance. Each of the Parties acknowledges and agrees
that the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement or any Ancillary Agreement are not performed in
accordance with their specific terms or otherwise are
53
<PAGE> 58
breached. Accordingly, each of the Parties agrees that the other Parties shall
be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and each Ancillary Agreement and to enforce
specifically this Agreement or any Ancillary Agreement and the terms and
provisions hereof and thereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter, in addition to any other remedy to which they may be entitled, at law or
in equity.
(o) SUBMISSION TO JURISDICTION. EACH OF THE PARTIES SUBMITS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN SAN DIEGO, CALIFORNIA, IN
ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND AGREES
THAT ALL CLAIMS IN RESPECT OF THE ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT. EACH PARTY ALSO AGREES NOT TO BRING ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY OTHER COURT. EACH
OF THE PARTIES WAIVES ANY DEFENSE OF INCONVENIENT FORUM TO THE MAINTENANCE OF
ANY ACTION OR PROCEEDING SO BROUGHT AND WAIVES ANY BOND, SURETY, OR OTHER
SECURITY THAT MIGHT BE REQUIRED OF ANY OTHER PARTY WITH RESPECT THERETO. ANY
PARTY MAY MAKE SERVICE ON ANY OTHER PARTY BY SENDING OR DELIVERING A COPY OF THE
PROCESS TO THE PARTY TO BE SERVED AT THE ADDRESS AND IN THE MANNER PROVIDED FOR
THE GIVING OF NOTICES IN Section 10(H) ABOVE. NOTHING IN THIS Section 10(O),
HOWEVER, SHALL AFFECT THE RIGHT OF ANY PARTY TO BRING ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY OTHER COURT OR TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AT EQUITY. EACH PARTY
AGREES THAT A FINAL JUDGMENT IN ANY ACTION OR PROCEEDING SO BROUGHT SHALL BE
CONCLUSIVE AND MAY BE ENFORCED BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER
PROVIDED BY LAW OR AT EQUITY.
(p) Dispute Resolution.
(i) Negotiation. The Parties will attempt in good faith to
resolve any claim or controversy arising out of or relating to the
execution, interpretation, performance and enforceability of this
Agreement (including without limitation, claims for indemnification
under Section 8 hereof) or any Ancillary Agreement, promptly by
negotiations between the parties.
(ii) Arbitration. Any claim or controversy arising out of or
relating to the execution, interpretation, performance and
enforceability of this Agreement (including without limitation, claims
for indemnification under Section 8 hereof) or any Ancillary Agreement,
that cannot be resolved by mutual agreement of the Parties as set forth
above shall be submitted to arbitration. The arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the
American Arbitration Association in San Diego, California, who shall
have the powers to hear motions, control discovery, conduct hearings
and otherwise do all that is necessary to resolve the matter. The
arbitration award shall be final and binding, and judgment on the award
may be entered in any court having
54
<PAGE> 59
jurisdiction thereof. It is expressly understood that the parties have
chosen arbitration to avoid the time, burdens, costs and publicity of a
court proceeding, and the arbitrator is expected to handle all aspects
of the matter, including discovery and any hearings, in such a way as
to minimize the expense, time, burden and publicity of the process,
while assuring a fair and just result. In particular, the parties
expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions
or interrogatories) and by restricting the scope of discovery to only
those matters clearly relevant to the dispute. It is further understood
that any award of punitive damages by the arbitrator would be
inconsistent with the commercial purposes of this Agreement and the
Ancillary Agreements and the status of the Parties with respect to one
another, and therefore, neither the arbitrator nor any other tribunal
is authorized or empowered to award punitive damages in any proceeding
based upon the Agreement or any Ancillary Agreement or the dealings
hereby and thereby. Each party shall bear its own attorneys' fees and
expenses in connection with any claim or cause of action brought under
this Agreement or any Ancillary Agreement and any resolution of
disputes under this Section 11(p).
*****
55
<PAGE> 60
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
LEAP WIRELESS INTERNATIONAL, INC.
By: /s/ Harvey P. White
-------------------------------------------
Title: Chairman, CEO
-------------------------------------------
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
By: /s/ Anthony R. Chase
-------------------------------------------
Title: CEO
-------------------------------------------
By: /s/ R. W. McDugald
-------------------------------------------
Title: EVP
-------------------------------------------
CHASE TELECOMMUNICATIONS, INC.
By: /s/ Anthony R. Chase
-------------------------------------------
Title: CEO
-------------------------------------------
By: /s/ R. W. McDugald
-------------------------------------------
Title: EVP
-------------------------------------------
ANTHONY CHASE
By: /s/ Anthony R. Chase
-------------------------------------------
Title:
-------------------------------------------
RICHARD MCDUGALD
By: /s/ Richard W. McDugald
-------------------------------------------
Title:
-------------------------------------------
56
<PAGE> 61
LIST OF EXHIBITS:
Exhibit A--Forms of Consulting Agreements
Exhibit B--Description of FCC Licenses
Exhibit C--Forms of Guarantees
Exhibit D--Form of Management Agreement
Exhibit E--Form of Trademark License
Exhibit F--Form of Warrant
Exhibit G--Distribution Formula for Proceeds
Exhibit H--List of Excluded Assets
Exhibit I--Historical Financial Statements
Exhibit J--Description of FCC Debt
Annex I--Exceptions to the Seller's Representations and Warranties Concerning
the Transaction
Annex II--Exceptions to the Buyer's Representations and Warranties Concerning
the Transaction
Disclosure Schedule--Exceptions to Representations and Warranties Concerning the
Target and Its Subsidiaries
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 7,496
<SECURITIES> 0
<RECEIVABLES> 42,179
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,779
<PP&E> 2,924
<DEPRECIATION> (124)
<TOTAL-ASSETS> 284,066
<CURRENT-LIABILITIES> (29,403)
<BONDS> (12,205)
0
0
<COMMON> (2)
<OTHER-SE> (242,456)
<TOTAL-LIABILITY-AND-EQUITY> (284,066)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,051
<INCOME-PRETAX> (11,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,433)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
