<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ____________.
COMMISSION FILE NUMBER 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(Address of Principal Executive Offices) (Zip Code)
(619) 882-6000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 10, 1998, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$104,817,000, based on the closing price of the Company's Common Stock on the
Nasdaq National Market on November 10, 1998 of $6.03 per share.
As of November 10, 1998, 17,684,367 shares of registrant's Common Stock,
$.0001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the definitive Proxy Statement for the 1999 Annual Meeting
of Stockholders of the registrant, which was filed not later than 120 days after
the registrant's fiscal year ended August 31, 1998.
<PAGE> 2
This Amendment No. 1 to the registrant's Annual Report on Form 10-K for
the fiscal year ended August 31, 1998 is being filed solely to amend Item 14(a)
to add the audited financial statements of Chilesat Telefonia Personal S.A. in
accordance with Rule 3-09 of Regulation S-X.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1), (2) Financial Statements and Schedules. See index on Page F-1.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Form of Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Form of Amended and Restated Bylaws of the Registrant
3.3(2) Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of the Registrant
4.1(1) Form of Common Stock Certificate
4.2(3) Warrant, dated as of September 23, 1998, issued to QUALCOMM
Incorporated ("QUALCOMM")
4.3(2) Rights Agreement, dated as of September 14, 1998, between the
Registrant and Harris Trust Company of California
10.1(3) Separation and Distribution Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.2(3) Credit Agreement, dated as of September 23, 1998, between QUALCOMM and
the Registrant
10.3(3) Tax Matters Agreement, dated as of September 23, 1998, between QUALCOMM
and the Registrant
10.4(3) Interim Services Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant
10.5(3) Master Agreement Regarding Equipment Procurement, dated as of September
23, 1998, between QUALCOMM and the Registrant
10.6(3) Employee Benefits Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant
10.7(3) Conversion Agreement, dated as of September 23, 1998, between QUALCOMM
and the Registrant
10.8(3) Assignment and Assumption Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.9(1) Form of Registrant's 1998 Stock Option Plan (the "Option Plan")
10.10(1) Form of non-qualified/incentive stock option under the Option Plan
10.11(1) Form of non-qualified stock option under the Option Plan to be granted
to QUALCOMM option holders in connection with the Distribution
10.12(1) Form of Registrant's 1998 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan")
10.13(1) Form of non-qualified stock option under the Directors' Plan
10.14(1) Form of Registrant's Employee Stock Purchase Plan
10.15(1) Assignment and Assumption of Lease dated August 11, 1998 between
QUALCOMM
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
and Vaxa International, Inc.
10.16(1) Form of Indemnity Agreement to be entered into between the Registrant
and its directors and officers
10.17(4) Loan Agreement, dated as of September 28, 1998, between Pegaso
Comunicaciones y Servicios, S.A. de C.V. and the Registrant
10.18(4) Promissory Note, executed September 25, 1998, by Pegaso Comunicaciones
y Servicios, S.A. de C.V. in favor of the Registrant
10.19(4) Pledge Agreement, dated as of September 28, 1998, by and between Pegaso
Comunicaciones y Servicios, S.A. de C.V., the Registrant and the other
parties thereto
21.1(1) Subsidiaries of the Registrant
23.1(5) Consent of Independent Accountants relating to report dated November
19, 1998 (United States)
23.2(5) Consent of Independent Accountants relating to report dated February
25, 1999 except as to Note 14 b) which is as of March 16, 1999 (Chile)
27.1(4) Financial Data Schedule
</TABLE>
- ----------
(1) Filed as an exhibit to the Company's Registration Statement on Form 10,
as amended (File No. 0-29752), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 14, 1998, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-64459) dated October 13, 1998, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1998.
(5) Filed with this Amendment No. 1.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K under Item 5 thereof on
September 18, 1998, relating to the adoption of the Company's Stockholders
Rights Plan and the execution of a definitive Rights Agreement, dated as of
September 14, 1998, between the Company and Harris Trust Company of California.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 1999.
Leap Wireless International, Inc.
By: /s/ HARVEY P. WHITE
--------------------------------------
Harvey P. White
President, Chief Executive
Officer and Director
4
<PAGE> 5
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEAP WIRELESS INTERNATIONAL, INC. (A DEVELOPMENT STAGE COMPANY)
Combined Financial Statements:
Report of Independent Accountants................................................... F-2
Combined Balance Sheets at August 31, 1998 and 1997................................. F-3
Combined Statements of Operations for the fiscal years ended August 31, 1998,
1997 and 1996 and for the period from September 1, 1995 (inception)
to August 31, 1998................................................................ F-4
Combined Statements of Cash Flows for the fiscal years ended August 31, 1998,
1997 and 1996 and for the period from September 1, 1995 (inception)
to August 31, 1998................................................................ F-5
Combined Statements of Stockholder's Equity for each of the fiscal
years in the period from September 1, 1995 (inception) to August 31, 1998......... F-6
Notes to Combined Financial Statements.............................................. F-7
CHILESAT TELEFONIA PERSONAL S.A. (COMPANY IN THE DEVELOPMENT STAGE)
Financial Statements:
Report of Independent Accountants................................................... F-21
Balance Sheets at December 31, 1998 and 1997........................................ F-22
Statement of Income and Comprehensive Income for the year ended December 31, 1998
and for the period from inception (March 3, 1997) to December 31, 1998
and 1997 ......................................................................... F-23
Statement of Cash Flows for the year ended December 31, 1998 and for the
period from Inception (March 3, 1997) to December 31, 1998 and 1997............... F-24
Statement of Shareholders' Equity for the period from inception (March 3, 1997) to
December 31, 1998................................................................. F-26
Notes to the Financial Statements.................................................... F-27
</TABLE>
F-1
<PAGE> 6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Leap Wireless International, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of cash flows and of stockholder's equity
present fairly, in all material respects, the financial position of Leap
Wireless International, Inc. (a development stage company) at August 31, 1998
and 1997, and the results of its operations and its cash flows for the fiscal
years ended August 31, 1998, 1997 and 1996 and for the period from September 1,
1995 (inception) through August 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 19, 1998
F-2
<PAGE> 7
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Current assets ........................................... $ -- $ --
Investments in unconsolidated wireless operating
companies .............................................. 101,719 46,267
Loans receivable from unconsolidated wireless
operating companies .................................... 65,303 --
Other assets ............................................. 6,838 --
--------- ---------
Total assets ......................................... $173,860 $46,267
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities ................. $ 5,789 $ 279
Loan payable to bank ..................................... 9,000 --
--------- ---------
Total liabilities .................................... 14,789 279
--------- ---------
Commitments (Note 7)
Stockholder's equity:
Parent's investment .................................... 197,598 47,478
Deficit accumulated during the development stage ....... (36,175) (1,550)
Cumulative translation adjustment ...................... (2,352) 60
--------- ---------
Total stockholder's equity ........................... 159,071 45,988
--------- ---------
Total liabilities and stockholder's equity ........... $173,860 $46,267
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD FROM
AUGUST 31, SEPTEMBER 1, 1995
------------------------------------------ (INCEPTION) TO
1998 1997 1996 AUGUST 31, 1998
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Equity in net income (loss) of
unconsolidated Wireless
operating companies.................. $(11,580) $ 207 $ -- $(11,373)
General and administrative expenses .... (23,888) (1,361) (396) (25,645)
Interest income ........................ 843 -- -- 843
-------- -------- -------- --------
Loss before income taxes ........... (34,625) (1,154) (396) (36,175)
Income tax expense ..................... -- -- -- --
-------- -------- -------- --------
Net loss ........................... $(34,625) $ (1,154) $ (396) $(36,175)
======== ======== ======== ========
Unaudited pro forma basic and diluted
net loss per common share (Note 1).... $ (1.96)
========
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD FROM
AUGUST 31, SEPTEMBER 1, 1995
----------------------------------------- (INCEPTION) TO
1998 1997 1996 AUGUST 31, 1998
--------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss ........................................... $ (34,625) $ (1,154) $ (396) $ (36,175)
Adjustments to reconcile net loss to
net cash used by operating activities:
Equity in net loss (income) of
unconsolidated wireless operating companies .... 11,580 (207) -- 11,373
Earned interest accrued to loans receivable ...... (843) -- -- (843)
Change in accounts payable and
accrued liabilities ............................ 5,510 168 111 5,789
--------- --------- --------- ---------
Net cash used in operating activities ................ (18,378) (1,193) (285) (19,856)
--------- --------- --------- ---------
Investing activities:
Investments in unconsolidated
wireless operating companies...................... (69,444) (46,000) -- (115,444)
Issuance of loans to unconsolidated
wireless operating companies ..................... (64,460) -- -- (64,460)
Cash paid on acquisition of
consolidated wireless operating company .......... (564) -- -- (564)
Purchase of wireless communication licenses ........ (6,274) -- -- (6,274)
--------- --------- --------- ---------
Net cash used in investing activities ................ (140,742) (46,000) -- (186,742)
--------- --------- --------- ---------
Financing activities:
Proceeds from bank loan ............................ 9,000 -- -- 9,000
Parent's investment ................................ 150,120 47,193 285 197,598
--------- --------- --------- ---------
Net cash provided by financing activities ............ 159,120 47,193 285 206,598
--------- --------- --------- ---------
Net change in cash and cash equivalents .............. -- -- -- --
Cash and cash equivalents at beginning
of period .......................................... -- -- -- --
--------- --------- --------- ---------
Cash and cash equivalents at end of period ........... $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 10
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
PARENT'S ACCUMULATED TRANSLATION
INVESTMENT DEFICIT ADJUSTMENT TOTAL
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at September 1, 1995 (inception) $ -- $ -- $ -- $ --
Transfers from Parent ................ 285 -- -- 285
Net loss ............................. -- (396) -- (396)
--------- --------- --------- ---------
Balance at August 31, 1996 ............. 285 (396) -- (111)
Transfers from Parent ................ 47,193 -- -- 47,193
Net loss ............................. -- (1,154) -- (1,154)
Cumulative translation adjustment .... -- -- 60 60
--------- --------- --------- ---------
Balance at August 31, 1997 ............. 47,478 (1,550) 60 45,988
Transfers from Parent ................ 150,120 -- -- 150,120
Net loss ............................. -- (34,625) -- (34,625)
Cumulative translation adjustment .... -- -- (2,412) (2,412)
--------- --------- --------- ---------
Balance at August 31, 1998 ............. $ 197,598 $ (36,175) $ (2,352) $ 159,071
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 11
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
On June 24, 1998, QUALCOMM Incorporated ("QUALCOMM") created a
wholly-owned subsidiary, Leap Wireless International, Inc. (the "Company" or
"Leap Wireless"), a Delaware corporation. On September 23, 1998 (the
"Distribution Date"), QUALCOMM distributed all of the outstanding shares of
common stock of the Company to QUALCOMM's stockholder as a taxable dividend (the
"Distribution"). In connection with the Distribution, one share of the Company's
common stock was issued to every four shares of QUALCOMM common stock
outstanding on September 11, 1998.
The Company's business strategy is to operate, manage, support and
otherwise participate in Code Division Multiple Access ("CDMA") based wireless
telecommunications businesses and ventures in emerging international markets and
in the United States. Initially, the Company's principal markets for its
intended activities are in Latin America, Eastern Europe, Asia-Pacific and the
United States. QUALCOMM is a major supplier of CDMA subscriber and
infrastructure equipment to the Company's wireless telecommunications
businesses, and the Company expects that QUALCOMM will continue to be a major
supplier for future wireless telecommunications businesses in which the Company
participates.
Following the Distribution, QUALCOMM and the Company are operating as
independent companies. QUALCOMM and the Company, however, continue to have a
relationship as a result of the various agreements entered into in connection
with the Distribution.
The Distribution
In connection with the Distribution, QUALCOMM transferred to the Company
its joint venture and equity interests in the following domestic and
international emerging terrestrial based wireless telecommunications operating
companies: Pegaso Telecomunicaciones, S.A. de C.V. (Mexico), Metrosvyaz Limited
(Russia), Orrengrove Investments Limited (Russia), Chilesat Telefonia Personal,
S.A. (Chile), Chase Telecommunications, Inc. (United States), OzPhone Pty. Ltd.
(Australia), and certain other development stage businesses (the "Leap Wireless
Operating Companies"). QUALCOMM and the Company also agreed that, if certain
events occur within 18 months after the Distribution, QUALCOMM will transfer to
the Company its equity interests and working capital loan related to Telesystems
of Ukraine ("TOU"), a wireless telecommunications company in Ukraine. In
connection with the Distribution, QUALCOMM also transferred to the Company cash
and certain indebtedness of the Leap Wireless Operating Companies owed to
QUALCOMM, as well as certain miscellaneous assets. The aggregate net tangible
book value of the assets transferred by QUALCOMM to the Company in connection
with the Distribution was approximately $258 million.
The Company has agreed to assume certain of QUALCOMM's obligations to
manage operations of and finance costs relating to ongoing build-outs of the
wireless telecommunications systems being deployed by the Leap Wireless
Operating Companies, including approximately $75 million of funding obligations
to such operating companies, as well as certain miscellaneous liabilities.
QUALCOMM will continue to be a supplier of CDMA equipment and is expected to
provide
F-7
<PAGE> 12
significant vendor financing to the Company's wireless telecommunications
businesses and ventures.
The Company entered into a secured credit facility with QUALCOMM (the
"Credit Facility"). The Credit Facility consists of two sub-facilities. The
first sub-facility enables the Company to borrow up to $35.2 million from
QUALCOMM. The proceeds from this sub-facility may be used by the Company solely
to meet the normal working capital and operating expenses of the Company,
including salaries and overhead, but excluding, among other things, strategic
capital investments in wireless operators, substantial acquisitions of capital
equipment, and/or the acquisition of telecommunications licenses. The other
sub-facility enables the Company to borrow up to $229.8 million from QUALCOMM.
The proceeds from this second sub-facility may be used by the Company solely to
make certain identified portfolio investments.
Amounts borrowed under the Credit Facility will be due and payable
approximately eight years following the Distribution Date. QUALCOMM has a first
priority security interest in, subject to some exceptions, substantially all of
the assets of the Company for so long as any amounts are outstanding under the
Credit Facility. Amounts borrowed under the Credit Facility will bear interest
at a variable rate equal to LIBOR plus 5.25% per annum. Interest will be payable
quarterly beginning September 30, 2001 and, prior to such time, accrued interest
shall be added to the principal amount outstanding.
Basis of Presentation
The combined financial statements reflect the financial position,
results of operations, cash flows and changes in stockholder's equity of the
business that was transferred to the Company from QUALCOMM as if: (i) the
Company were a separate entity for all periods presented, and (ii) the
historical investments in the Leap Operating Wireless Operating Companies as of
August 31, 1998 and significant agreements entered into with such companies
prior to the Distribution were owned or entered into by the Company. However,
for the periods covered by the financial statements, such investments were
directly or indirectly legally owned by QUALCOMM. Additionally, the results of
the Company's unconsolidated Leap Wireless Operating Companies have been
included as of and for the twelve months ended July 31, a one month lag. The
financial statements have been presented as if the Company were a development
stage company with an inception date of September 1, 1995. The financial
statements have been prepared using the historical basis in the assets and
liabilities and historical results of operations related to the Company's
business. The businesses attributed to the Company did not engage in any
significant activity prior to fiscal 1996 and, as of August 31, 1998, neither
the Company nor the businesses in which it was deemed to own an equity
investment had generated any revenues from their planned principal operations.
The Company had no cash balances as of August 31, 1998 and 1997 as no specific
cash accounts had been designated by QUALCOMM for the Company. When Company
liabilities were paid or investments made, it is assumed that the cash used by
the Company was funded by a stockholder cash contribution. Changes in
stockholder's equity represent QUALCOMM's contribution after giving effect to
the net operating cash used by the Company and amounts necessary to finance the
acquisition of ownership interests in the Leap Wireless Operating Companies.
The Company had no employees nor were any QUALCOMM employees wholly
dedicated to its business during the fiscal periods presented. QUALCOMM
departmental labor and other direct costs have been allocated to the Company
based on estimates of incremental efforts expended and incremental costs
incurred related to the Company's business. General corporate overhead related
to QUALCOMM's corporate headquarters and common support divisions have been
allocated to the Company generally based on the proportion of the Company's
costs and expenses to QUALCOMM's costs and expenses.
Management believes these allocations reasonably approximate costs
incurred by QUALCOMM on behalf of the Company's operations. However, the costs
as allocated to the
F-8
<PAGE> 13
Company are not necessarily indicative of the costs that would have been
incurred if the Company had performed these functions as a stand-alone entity.
Following the Distribution, the Company hired its own staff to perform necessary
functions using its own resources or purchased resources and is responsible for
the costs and expenses associated with the management of a public corporation.
The financial information included herein may not necessarily reflect
the financial position, results of operations, cash flows and changes in
stockholder's equity of the Company in the future or what they would have been
had it been a separate, stand-alone entity during the periods presented.
Developmental Stage Activities and Additional Capital Needs
The Company has only operated as an independent public company since the
Distribution and is at an early stage of development. As such, the Company is
subject to the risks inherent in the establishment of a new business enterprise
and its prospects must be considered in light of the risks, expenses and
difficulties encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets and companies
experiencing rapid growth. To date, the Company has generated no revenue from
its ownership interests in or management roles with the Leap Wireless Operating
Companies. The Company's ability to generate revenues will be dependent on a
number of factors, including the future operations and profitability of its
operating companies. The Leap Wireless Operating Companies are expected to incur
substantial losses for the foreseeable future and are subject to substantial
risks. The Company will be required to recognize a share of these companies'
start-up operating losses as a result of the Company's ownership interests in
these companies. The industry in which the operating companies operate is highly
competitive and is subject to a number of significant project, market,
political, credit and exchange risks, among others. The Company may be required
to provide substantial funding to these entities to finance completion of their
wireless operating systems. The build-out of the operating companies' wireless
systems may take a number of years to complete. There can be no assurance that
any of the existing operating companies or any other companies in which the
Company may acquire a joint venture or equity interest will be able to obtain
sufficient financing to build-out their systems, meet their payment obligations
to the Company or others, including the Federal Communications Commission
("FCC") and other regulatory agencies, or become profitable. The failure of
these companies to build-out their systems, meet their payment obligations or
become profitable would adversely affect the value of the Company's assets and
its future profitability. The time required for the Company to reach or sustain
profitability is highly uncertain, and there can be no assurance that the
Company will be able to achieve or maintain profitability. Moreover, if
profitability is achieved, the level of such profitability cannot be predicted
and may vary significantly from quarter to quarter.
The Company expects to have significant future capital requirements
relating to funding of the Leap Wireless Operating Companies and other operating
companies in which the Company may acquire joint venture or equity interests and
to general working capital needs and other cash requirements. The magnitude of
these capital requirements will depend on a number of factors, including the
specific capital needs of the Leap Wireless Operating Companies, additional
capital needed to acquire or maintain other joint venture or equity interests,
competing technological and market developments and changes in existing and
future relationships.
The Company expects to obtain much of its required near term financing
through borrowings under the Credit Facility. The Company expects, however, that
it will reach its borrowing limit under both sub-facilities of the Credit
Facility on or about the end of fiscal 1999. The Company had no other agreements
for working capital or financing. In addition, the Company is subject to
restrictive covenants and other obligations under the Credit Facility. There can
be no assurance that the Company will have continued access to borrowings under
the Credit Facility when required.
F-9
<PAGE> 14
There can be no assurance that the Company will be able to obtain
additional required financing on favorable terms or at all. The terms of the
Credit Facility include security interests in favor of QUALCOMM and other
restrictive covenants, and may significantly limit or prevent the Company from
obtaining additional debt financing. If additional funds are raised through
equity financings, dilution to the Company's existing stockholders would result.
To the extent that such additional financing is raised by the sale or other
transfer of any of the Company's equity interests in the Leap Wireless Operating
Companies, the Company will be diluted or relinquish ownership of such
interests. As fiscal 1999 progresses if management comes to believe that it will
be unable to obtain working capital or financing in addition to the Credit
Facility, management expects to reduce the Company's capital requirements by
slowing or discontinuing the funding of uncommitted investments. In addition, to
the extent necessary, management will consider other strategic modifications to
its operational plans, including reducing corporate activities and possibly
selling portions of its interests in one or more of the Leap Wireless Operating
Companies. The failure to obtain adequate additional financing may have a
material adverse effect on the Company's business, results of operations,
liquidity and financial position.
As a result of its capital requirements, including expected borrowings
under the Credit Facility, the Company expects that it will be highly leveraged.
The degree to which the Company is leveraged could have important consequences,
including: (i) the Company's ability to obtain additional financing in the
future may be impaired; (ii) a substantial portion of the Company's future cash
flows from operations may be dedicated to the payment of principal and interest
on its indebtedness, thereby reducing the funds available for operations; (iii)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; and (iv) the Company's substantial degree of leverage may make it
more vulnerable in the event of a downturn in general economic conditions or in
its business. There can be no assurance that the Company's future cash flows
will be sufficient to meet the Company's debt service requirements or that the
Company will be able to refinance any of its indebtedness at maturity.
The Company experienced net losses for the years ended August 31, 1998,
1997 and 1996 of $34.6 million, $1.2 million and $396,000, respectively.
Following the Distribution, the Company is responsible for the additional costs
associated with being an independent public company, including costs related to
corporate governance, listed and registered securities and investor relations
issues. Further, the Leap Wireless Operating Companies are in the early stages
of developing and deploying their respective telecommunications systems. Such
systems require significant expenditures, a substantial portion of which are
incurred before corresponding revenues are generated. In addition, the degree to
which the Company and its operating companies are expected to be leveraged will
lead to significant interest expense and principal repayment obligations with
respect to outstanding indebtedness. The Company therefore expects to incur
significant expenses in advance of generating revenues, and as a result, to
incur substantial additional losses in the foreseeable future. There can be no
assurance that the Company or any of the Leap Wireless Operating Companies will
achieve or sustain profitability in the near term or at all.
International Risks
The Company is subject to numerous risks as a result of its
international activities. The Leap Wireless Operating Companies are dependent,
in large part, on the economies of the markets in which they have operations.
Those markets and other markets in which the Company may operate are in
countries with economies in various stages of development or structural reform,
some of which are subject to rapid fluctuations in currency exchange rates,
consumer prices, inflation, employment levels and gross domestic product. The
Company and the Leap Wireless Operating Companies are exposed to market risk
from changes in foreign currency exchange rates and interest rates, and are
subject to other currency, economic and political risks, which could impact
their results of operations and financial condition.
F-10
<PAGE> 15
Year 2000 Compliance
As the Company and the Leap Wireless Operating Companies have recently
begun their respective businesses, there exists uncertainty as to the impact the
Year 2000 issue could have on the Company. The Company does not believe that the
Year 2000 issue will significantly impact its administrative and accounting
software, which have been acquired recently or will be acquired. The Company
generally subjects its vendors to Year 2000 compliance requirements in
connection with the Company's acquisitions of software. Also, the Company
believes that the Year 2000 issue will not significantly impair the ability of
the Leap Wireless Operating Companies' wireless communications networks to
perform as intended. The Leap Wireless Operating Companies are expected to have
direct or indirect computerized interfaces to third parties relating to the
transmission of telecommunications traffic over local, national and
international telecommunications networks. The Leap Wireless Operating Companies
are vulnerable to the failure of such third parties to adequately address their
Year 2000 issues. Such failures, should they occur, could cause significant
disruption to the operations of the Leap Wireless Operating Companies, including
the ability to provide certain services and correctly bill customers, resulting
in the potential for revenue loss and increased costs. The Company is not
currently aware of any significant third party problems concerning the
computerized interfaces, but as the Leap Wireless Operating Companies have only
recently begun network build-out and commercial activities, they have not yet
completed their assessment of the risk associated with third party interfaces
and the Year 2000 issue. This overall assessment is expected to continue through
December 1998. At that time, the concurrently developed remediation plan will
begin, with an expected completion date of July 1, 1999. The Company is in the
process of developing a risk profile to evaluate all third parties in regard to
their capability to become compliant with Year 2000.
As of the date hereof, the Company has not incurred any material costs
in support of the Year 2000 issue. The Company estimates that it will spend
$500,000 in fiscal year 1999 to review and correct any non-information
technology systems as well as support material third party relationships. The
Company has not developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all
Year 2000 problems in its systems, the systems of the Leap Wireless Operating
Companies or third party systems with which the Company or the Leap Wireless
Operating Companies will have computerized interfaces in advance of their
occurrence or that the Company will be able to successfully remedy any problems.
The expenses associated with the Company's efforts to remedy any Year 2000
problems, the expenses or liabilities to which the Company may become subject as
a result of such problems or the impact of Year 2000 problems on the ability of
Leap Wireless Operating Companies to do business with the Company could have a
material adverse effect on the Company's business, prospects, operating results
and financial condition.
Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE> 16
Investments in the Leap Wireless Operating Companies
Investments in corporate entities with less than 20% voting interest are
generally accounted for under the cost method. The Company uses the equity
method to account for investments in corporate entities in which it has voting
interest of 20% to 50% or in which it otherwise exercises significant influence
and for ownership interests in partnerships. Under the equity method, the
investment is originally recorded at cost and adjusted to recognize the
Company's share of net earnings or losses of the investee, limited to the extent
of the Company's investment in, advances to and financial guarantees for the
investee. Such earnings or losses of the Company's investees are adjusted to
reflect the amortization of any differences between the carrying value of the
investment and the Company's equity in the net assets of the investee. To
accommodate the reporting of the unconsolidated Leap Wireless Operating
Companies, the Company has adopted a one-month lag for the recognition of the
Company's share of net earnings or losses of such investments.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the total amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition are less than its carrying amount.
Foreign Currency
Results of operations for international investments are translated using
average exchange rates during the period, while assets and liabilities are
translated using end-of-period rates. The resulting exchange gains or losses are
accumulated in the "cumulative translation adjustment" account, a component of
stockholder's equity. The functional currency of the Company's foreign investees
that operate in highly inflationary economies is the U.S. Dollar. The monetary
assets and liabilities of these foreign investees are translated into U.S.
Dollars at the exchange rate in effect at the balance sheet date. Revenues,
expenses, gains and losses are translated at the average exchange rate for the
period, and non-monetary assets and liabilities are translated at historical
rates. Resulting remeasurement gains or losses of these foreign investees are
recognized in the combined results of operations. The effects of translating the
financial position and results of operations of local currency operations have
not been significant to the Company's financial statements. Gains and losses
resulting from the Company's foreign currency transactions have not been
significant in relation to its operations.
Income Taxes
Historically, the Company's operations have been included in the
consolidated income tax returns filed by QUALCOMM. Income tax expense in the
Company's financial statements has been calculated on a separate tax return
basis.
Current income tax benefit is the amount expected to be receivable for
the current year. A deferred tax asset and/or liability is computed for both the
expected future impact of differences between the financial statement and tax
bases of assets and liabilities and for the expected future tax benefit to be
derived from tax loss and tax credit carry forwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in future tax returns. Tax rate changes
are reflected in income in the period such changes are enacted.
F-12
<PAGE> 17
Unaudited Pro Forma Basic and Diluted Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per
Share", which the Company has adopted to compute the unaudited pro forma net
loss per common share ("EPS") amount for fiscal 1998.
The Company had no shares of common stock outstanding during fiscal
1998. The unaudited pro forma net loss per common share was calculated by
dividing the 1998 net loss of $34.6 million by the 17,647,685 shares of Common
Stock the Company issued at Distribution. Stock options for 5,542,740 shares
issued subsequent to the Distribution Date, the conversion of QUALCOMM's Trust
Convertible Preferred Securities which are convertible into shares of QUALCOMM
Common Stock and 2,271,060 shares of the Company's Common Stock, and the
exercise of a warrant to be issued to QUALCOMM for approximately 5,500,000
shares of common stock have not been considered in calculating the unaudited pro
forma net loss per common share because their effect would be anti-dilutive. As
a result, the Company's unaudited pro forma basic and diluted net loss per
common share are the same.
Future Accounting Requirements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company will be required to adopt for fiscal
year 1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. Upon adoption, the Company will also be required to
reclassify financial statements for earlier periods provided for comparative
purposes. The Company currently expects that the effect of adoption of FAS 130
may be primarily from foreign currency translation adjustments and has not yet
determined the manner in which comprehensive income will be displayed.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which the Company will be required to adopt for fiscal
year 1999. This statement establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under FAS 131,
operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. The Company has not determined the impact
of the adoption of this new accounting standard on its financial statement
disclosures.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," which the Company will be required to adopt for fiscal year
2000. This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial position or results of operations.
F-13
<PAGE> 18
NOTE 2. INVESTMENTS AND LOANS TO UNCONSOLIDATED LEAP WIRELESS OPERATING
COMPANIES
The Company and its consolidated subsidiaries have joint venture and
equity interests in companies that hold wireless telephone licenses or are
seeking such licenses. Its participation in each company differs and the Company
does not have majority interests in such companies. The Company's ability to
withdraw funds, including dividends, from its participation in such investments
is dependent in many cases on receiving the consent of the other participants,
over which the Company has no control. The Company and its consolidated
subsidiaries have investments in Leap Wireless Operating Companies consisting of
the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Investments at equity $ 97,719 $ 42,267
Investment at cost .. 4,000 4,000
-------- --------
$101,719 $ 46,267
======== ========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF OWNERSHIP
AUGUST 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
COST INVESTMENT
Chase Telecommunications, Inc (U.S.) ........... 7.2% 7.2%
EQUITY INVESTMENTS
Chilesat Telefonia Personal S.A. (Chile) ....... 50% 50%
Pegaso Telecomunicaciones, S.A. de C.V. (Mexico) 49% --
Metrosvyaz Limited (Russia) .................... 50% --
Orrengrove Investments Limited (Russia) ........ 50% --
</TABLE>
Condensed financial information for the Leap Wireless Operating Company
during the period under which the Company accounted for the investment under the
equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Current assets ................................... $ 73,250 $ 37,565
Non-current assets ............................... 170,660 15,058
Current liabilities .............................. (93,064) (665)
Non-current liabilities .......................... (61,055) (7,461)
--------- ---------
Total partners' and stockholders' capital ...... 89,791 44,497
Other partners' and stockholders' share of capital 40,663 22,249
--------- ---------
Company's share of capital ....................... 49,128 22,248
Goodwill and other intangible items .............. 48,591 20,019
--------- ---------
Equity investments in unconsolidated wireless
operating companies .......................... $ 97,719 $ 42,267
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating expenses .................................. $(15,803) $ (274)
Other income (expense), net ......................... (1,380) 688
-------- --------
Net income ........................................ (17,183) 414
Other partners' and stockholders' share of net income
(loss)............................................. (5,603) 207
-------- --------
Company's share of net income (loss) ................ (11,580) 207
Amortization of goodwill and other intangible items . -- --
-------- --------
Equity in net income (loss) of unconsolidated
wireless operating companies .................... $(11,580) $ 207
======== ========
</TABLE>
F-14
<PAGE> 19
As of August 31, 1998, the Leap Wireless Operating Companies had not
commenced commercial revenue generating operations. Any income derived resulted
principally from earnings on investments and cash.
Chase Telecommunications, Inc.
In December 1996, the Company purchased $4 million of Chase
Telecommunications, Inc. ("Chase"), a development stage company, Class B Common
Stock, representing 7.2% of the outstanding capital stock of Chase. The Company
is accounting for its investment under the cost method of accounting. It is not
practicable to estimate the fair value of the investment as Chase is a closely
held domestic corporation and is not publicly traded.
In June 1998, the Company agreed to provide a $25 million working
capital facility to Chase. Borrowings under the facility are subject to interest
at prime plus 4 1/2% and are to be repaid by June 2006. Borrowings are
collateralized by substantially all of the assets of Chase. At August 31, 1998,
borrowings under the facility totaled $12.1 million, including $307,000 of
accrued interest. The Company has committed, subject to certain conditions and
exceptions, to convert the facility into $25 million of redeemable preferred
stock in Chase. The Company received warrants, in connection with this
financing, to acquire up to an additional 8.5% of the currently outstanding
Chase equity.
Although Chase has commenced limited commercial operations, it is a
development stage company that will require significant financing to expand its
Personal Communications Services ("PCS") network build-out and to meet its
payment obligations relating to the purchase of PCS licenses covering the
Tennessee region from the FCC. Chase's failure to obtain sufficient financing or
to meet its obligations to the FCC could adversely affect the value of the
Company's investment in Chase. There can be no assurance that Chase will be
successful in obtaining sufficient financing for its network build-out or in
meeting its payment obligations to the FCC.
Chilesat Telefonia Personal, S.A.
In February 1997, the Company entered into a subscription and
shareholders agreement to purchase $42 million of voting preferred shares
representing a 50% ownership interest in a privately held corporate joint
venture, Chilesat Telefonia Personal, S.A. ("Chilesat PCS"), a development stage
company. The Company holds its shares in Chilesat PCS via a wholly-owned
subsidiary, Inversiones QUALCOMM Chile, S.A. ("Inversiones QUALCOMM"), which
held no other assets and had no liabilities as of August 31, 1998. The remaining
50% ownership interest represented by voting common shares is owned by
Telex-Chile S.A. and its subsidiary Chilesat S.A. (together "Telex-Chile"). The
preferred shares are entitled to a liquidation preference equal to the original
purchase price per share if Chilesat PCS is liquidated by April 2003. The
Company accounts for its investment under the equity method of accounting. As of
August 31, 1998, Chilesat PCS had completed its initial network build-out, but
operational activity was not significant. The Company recorded $3.1 million in
equity losses resulting from this investment during fiscal 1998 and $207,000 in
equity income during fiscal 1997
During June 1998, the Company and Inversiones QUALCOMM entered into
agreements with Chilesat PCS to provide $35 million in short-term loans,
convertible into common equity if not repaid on or before January 31, 1999. If
converted, the Company and Inversiones QUALCOMM would hold voting shares of
approximately 65% of Chilesat PCS. This conversion is available to the Company
and Inversiones QUALCOMM only if the loans are not repaid on or before January
31, 1999. Chilesat PCS currently contemplates that it will issue a $35 million
capital call by January 1999 which may be used to repay the convertible loan or
to provide for additional operating expenses. If Telex-Chile makes at least a
$17.5 million cash contribution before January 31, 1999 pursuant to such capital
call, the Company and Inversiones QUALCOMM have committed to
F-15
<PAGE> 20
convert $17.5 million of the short-term loans to equity. At August 31, 1998,
borrowings under the loan totaled $25.2 million.
Telex-Chile has been unable to make principal repayments on its
outstanding loans and is under standstill agreements with many of its
significant lenders. However, Telex-Chile has informed the Company that it has
the intention to, and will have the ability to, fund its $17.5 million portion
of the capital call prior to January 31, 1999.
Under its licensing agreement with the Chilean government, Chilesat PCS
is obligated to meet certain network build-out milestones by December 1998 and
has provided a $58 million letter of credit to support the payment of government
fines if the build-out milestones are not met. The Company has guaranteed
reimbursement to the issuing bank of the Company's proportional share, based on
its ownership interest, of any government fines paid under the letter of credit.
Additionally, the Company has pledged its shares in Chilesat PCS to the issuing
bank as collateral for the letter of credit facility. In the event the failure
to meet the network build-out milestones are the direct result of QUALCOMM's
failure to supply and install equipment under its existing supply contract,
QUALCOMM may be required to reimburse the Company its portion of the fine.
Pegaso Telecomunicaciones, S.A. de C.V.
In April 1998, the Company, through a wholly-owned subsidiary, QUALCOMM
PCS Mexico, Inc., entered into a joint venture agreement pursuant to which it
obtained a 49% ownership interest in a newly formed development stage company,
Pegaso Telecomunicaciones, S.A. de C.V. ("PEGASO"), a Mexico corporation. In May
of 1998, PEGASO obtained the right to acquire PCS licenses throughout Mexico.
During 1998, the Company advanced a portion of PEGASO's start-up working
capital requirements, including expenses incurred during the PCS spectrum
auction. At August 31, 1998, advances totaled $11.1 million. As a result of
start-up expenses incurred by PEGASO, the Company reported $2.4 million in
equity losses during fiscal 1998. In addition to the advances of working
capital, in June 1998, the Company provided a loan of $27.4 million to PEGASO.
The purpose of the loan was to fund a portion of the first PCS license payment.
Interest on the loan will accrue at a rate of 10% and has been added to the
principal amount of the loan outstanding. The Company converted the advances and
the loan including accrued interest into common stock in September 1998 (see
Note 8).
QUALCOMM Telecommunications Ltd., Cayman Islands
During October 1997, the Company became a 70% common owner in a start-up
joint venture, QUALCOMM Telecommunications Ltd. ("QUALCOMMTel Cayman"), a Cayman
Islands corporation. Upon its formation, QUALCOMMTel Cayman had no significant
assets or liabilities. The 30% minority interest is held by Tiller International
Limited ("Tiller"), a private investment company. In the event that QUALCOMMTel
Cayman makes a capital call on its stockholders to provide equity contributions,
at the request of Tiller, the Company is required to fund 100% of Tiller's share
of the equity contributions. Such advances by the Company for Tiller are
collateralized by Tiller's shares in QUALCOMMTel Cayman and carry an interest
rate of LIBOR plus 3% with principal and interest to be repayable from 80% of
future net earnings of QUALCOMMTel Cayman. QUALCOMMTel Cayman is intended to be
an intermediate holding company to facilitate the Company's business prospects
for wireless local loop (fixed) telephone service in the Russian Federation.
In August 1998, QUALCOMMTel Cayman became a 50% owner and partner in
Metrosvyaz Limited ("Metrosvyaz"), a newly-formed joint venture with Teletal
Limited ("Teletal"). As of the
F-16
<PAGE> 21
formation, Metrosvyaz had no assets or liabilities and no historical operating
activity. Concurrent with the formation of Metrosvyaz, QUALCOMM entered into a
$175 million, eight year, multiple drawdown loan facility under which Metrosvyaz
would be able to borrow funds, subject to certain terms and conditions, to
support its business plan, including equipment purchases, and working capital
needs. The $175 million facility is related to a $500 million financing
commitment entered into by QUALCOMM in February 1998. As of the Distribution
Date, QUALCOMMTel Cayman has assumed $72.4 million of the $175 million financing
obligation from QUALCOMM. Furthermore, of the original $500 million commitment,
the Company expects that $150 million of financing will be provided by
QUALCOMMTel Cayman, with the remaining $350 million to be provided by QUALCOMM
as vendor financing.
The $175 million facility carries a 13% interest rate and borrowings are
generally repayable approximately four years from the date of the draw subject
to a final repayment in August 2006 of any outstanding draws then outstanding.
Borrowings under the facility are collateralized by substantially all the assets
of Metrosvyaz. During 1998, QUALCOMMTel Cayman paid $6.6 million of start-up
related costs on behalf of Metrosvyaz. These advances were later converted to a
draw under the $72.4 million loan facility. Because the loan facility from
QUALCOMMTel Cayman is the only source of working capital for Metrosvyaz at this
time, and because the equity of QUALCOMMTel Cayman is 100% funded by the
Company, the Company will fully consolidate the net earnings and losses of
Metrosvyaz until such time the Company recoups its investment. Accordingly, and
as a direct result of these start-up costs, the Company recorded $6.1 million in
equity losses resulting from its investment during fiscal 1998.
QUALCOMM Telecommunications Ltd., Isle of Man
In August 1998, the Company became a 70% common owner in a start-up
joint venture, QUALCOMM Telecommunications Ltd. ("QUALCOMMTel Isle of Man"), an
Isle of Man corporation. QUALCOMMTel Isle of Man holds a 50% investment in
Orrengrove Investments Limited ("Orrengrove"). The 30% minority interest of
QUALCOMMTel Isle of Man not owned by the Company is held by Tiller and the 50%
of Orrengrove not held by QUALCOMMTel Isle of Man is held by Teletal.
In August 1998, Orrengrove purchased 60% of the common stock of
Transworld Telecommunications, Inc., Transworld Communications Services, Inc.,
and Transworld Communications (Bermuda), Ltd. (the "Transworld Companies") for
an aggregate purchase price of $51.8 million. The Transworld Companies together
are telecommunications companies in the development stage formed in part to help
create a modern telecommunications infrastructure for the Russian Federation and
the countries of the former East Bloc. The Transworld Companies have developed
and are completing the installation of a satellite-based communications system
for long-distance voice, video and data services using their exclusive rights to
Russian Loutch II satellite capacity. Orrengrove will account for the
acquisition under the purchase method of accounting. Because the Company funded
the acquisition of the Transworld Companies in the form of a promissory note
with Orrengrove, and because the equity of QUALCOMMTel Isle of Man is 100%
funded by the Company, the Company will fully consolidate the net earnings and
losses of Orrengrove until such time the Company recoups its investment.
NOTE 3. OTHER ASSETS
In June 1998, the Company purchased all the shares of OzPhone Pty
Limited ("OzPhone"), an Australian company, for $564,000. OzPhone then acquired
several wireless communication licenses to provide digital mobile and wireless
local loop services in Australia. The total cost of the licenses was
approximately $6.2 million.
F-17
<PAGE> 22
NOTE 4. EMPLOYEE BENEFIT PLANS
Prior to August 31, 1998, the Company did not have any employees
dedicated solely to its affairs. QUALCOMM employees who expended efforts on
behalf of the Company participated in QUALCOMM employee benefit plans. The
Company has formed employee benefit plans including an equity incentive plan
which will provide for the grant of various types of equity-based compensation
to employees of the Company, an incentive stock option plan, a non-qualified
stock option plan and a non-employee directors' stock option plan to provide for
the grant of options to purchase shares of the Company's Common Stock to
non-employee directors of the Company (See Note 9).
NOTE 5. INCOME TAXES
The Company has not recorded provisions for federal and state income
taxes for fiscal 1998, 1997 and 1996 due to net operating losses ("NOL") during
those years. The Company will not be able to utilize NOL carryforwards generated
prior to the Distribution, as such NOLs will remain with QUALCOMM.
At August 31, 1998, 1997 and 1996, the Company had total deferred tax
assets of approximately $14.5 million, $0.6 million and $0.2 million,
respectively, which consisted of NOL carryforwards. Due to the uncertainty
surrounding the ultimate realization of such deferred tax assets, the Company
has provided a valuation allowance for the entire balance.
At August 31, 1998, the Company had NOL carryforwards available to
offset future income for federal income tax reporting purposes of approximately
$10.7 million, $0.4 million and $0.1 million, which expire in years 2017, 2011
and 2010, respectively. State NOL carryforwards of approximately $3.2 million
and $0.1 million at August 31, 1998 expire in years 2002 and 2001, respectively.
NOTE 6. LOAN PAYABLE TO BANK
In July 1998, Inversiones QUALCOMM borrowed $9.0 million under a note
payable to a bank in Chile. The note bears interest at a rate of 8.56% per annum
and all amounts borrowed are due to be repaid by February 1999.
NOTE 7. COMMITMENTS
The Company has made guarantees and commitments to invest additional
equity and working capital into certain of the Leap Wireless Operating
Companies. As of August 31, 1998, these commitments totaled approximately $150.3
million. Prior to the Distribution, these commitments were funded by QUALCOMM.
Upon Distribution, the Company expects to fund its commitments with borrowings
under the Credit Facility.
The Company has entered into an agreement to lease its facility and
certain equipment under non-cancelable operating leases, with terms ranging from
five to seven years. Future minimum lease payments in each of the next five
years from fiscal 1999 through 2003 are approximately $700,000 each year, and
$1.3 million cumulative thereafter.
F-18
<PAGE> 23
NOTE 8. SUBSEQUENT EVENTS, PRIOR TO THE DISTRIBUTION
In September 1998, Inversiones QUALCOMM funded an additional $3.4
million under its loan agreement with Chilesat PCS utilizing additional bank
debt. As of the Distribution Date, the Company and Inversiones QUALCOMM had
loans totaling $28.6 million to Chilesat PCS, with remaining commitments to fund
$6.4 million.
In September 1998, the Company provided $60.7 million of funding and
converted its advances and loan, with accrued interest, into common stock of
PEGASO. The Company's total investment in PEGASO after these transactions was
$100 million. On the same date, other investors also subscribed for and
purchased common stock of PEGASO such that, after these transactions, the total
par value of the common equity of PEGASO was $300 million. As a result, the
Company's ownership interest in PEGASO has been diluted from 49% to 33%.
In September 1998, the Company provided a $17.5 million loan (the
"Pegaso Loan") to Pegaso Comunicaciones y Servicios, S.A. de C.V., a Mexican
company 96%-owned by Mr. Alejandro Burillo Azcarraga, a member of the Company's
Board of Directors. The Pegaso Loan bears interest at the rate of 13% per annum.
The first principal installment of $7.5 million, plus accrued interest, was
repaid on October 29, 1998 as scheduled, and the second principal installment of
$10 million, plus accrued interest, is due on or before December 31, 1998. The
purpose of the Pegaso Loan was to facilitate investment by Pegaso Comunicaciones
y Servicios, S.A. de C.V. in PEGASO, the joint venture in which the Company has
an interest, and to ensure that the investors in PEGASO made all capital
contributions to PEGASO that were required for the acquisition of the Mexican
licenses on September 30, 1998. The Pegaso Loan is guaranteed by Mr. Burillo and
is secured by a pledge of all of the shares of Pegaso Comunicaciones y
Servicios, S.A. de C.V. and Mr. Burillo's interest in an unrelated joint venture
with QUALCOMM to operate a satellite tracking, management and two-way
communications systems for the trucking industry in Mexico.
In September 1998, QUALCOMTel Cayman invested $3.1 million of equity in
Metrosvyaz. In addition, the Company made an additional loan of $10.7 million
under its loan facility with Metrosvyaz. As of the Distribution Date,
QUALCOMMTel Cayman had loans totaling $17.3 million to Metrosvyaz, with a
remaining commitment of $55.1 million.
NOTE 9. SUBSEQUENT EVENTS, POST DISTRIBUTION
During October and November 1998, Chase borrowed an additional $8.6
million under the working capital facility it has with the Company. Borrowings
by Chase to date total $20.4 million, with a remaining loan commitment of $4.6
million.
In November 1998, Inversiones QUALCOMM funded the remaining $3.3 million
under its loan agreement with Chilesat PCS utilizing additional bank debt. The
Company has a remaining commitment of $3.1 million under its loan agreement with
Chilesat PCS.
The Company has made borrowings under the Credit Facility with QUALCOMM
subsequent to the Distribution Date. In September 1998, the Company borrowed
$5.3 million under the working capital sub-facility to pay QUALCOMM the 2% fee
on the $265 million facility. The Company also borrowed a net total of $15.8
million under the investment capital sub-facility to make further investment and
loans to certain of the Leap Wireless Operating Companies.
F-19
<PAGE> 24
Adoption of Employee Benefit Plans
Employee Savings and Retirement Plan. In September 1998, the Company
adopted a 401(k) plan that allows eligible employees to contribute up to 15% of
their salary, subject to annual limits. The Company matches a portion of the
employee contributions and may, at its discretion, make additional contributions
based upon earnings.
Stock Option Plans. In September 1998, the Company adopted the 1998
Stock Option Plan ("the Plan") that allows the Board of Directors to grant
options to selected employees, directors and consultants to the Company to
purchase shares of the Company's common stock. The Plan provides for the grant
of both incentive and non-qualified stock options. Incentive stock options are
exercisable at a price not less than 100% of the fair market value of the common
stock on the date of grant. Non-qualified stock options are exercisable at a
price not less than 85% of the fair market value of the common stock on the date
of grant. Generally, options vest over a five year period and are exercisable
for up to ten years from the grant date. The Company also adopted a Non-Employee
Directors Stock Option Plan, under which options to purchase common stock are
granted to non-employee directors on an annual basis. The options are
exercisable at a price equal to the fair market value of the common stock on the
date of grant, vest over a five year period and are exercisable for up to ten
years from the grant date.
Employee Stock Purchase Plan. In September 1998, the Company adopted an
employee stock purchase plan for all eligible employees to purchase shares of
common stock at 85% of the lower of the fair market value of such stock on the
first or the last day of each offering period. Employees may authorize the
Company to withhold up to 15% of their compensation during any offering period,
subject to certain limitations.
Executive Retirement Plan. In September 1998, the Company adopted a
voluntary retirement plan that allows eligible executives to defer up to 100% of
their income on a pretax basis. On a quarterly basis, participants receive up to
a 10% match of their deferral in the form of the Company's common stock based on
the then current market price, to be issued to the participant upon eligible
retirement. The income deferred and the Company match are unsecured and subject
to the claims of general creditors of the Company.
F-20
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Chilesat Telefonia Personal S.A.
(Company in the development stage)
In our opinion, the accompanying balance sheets and the related statements of
income and comprehensive income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Chilesat Telefonia Personal S.A. (Company in the development stage) at December
31, 1998 and 1997, and the results of its operations and cash flows for year
ended December 31, 1998 and for the period from inception (March 3, 1997) to
December 31, 1997, in conformity with generally accepted accounting principles
of the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards of the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
At December 31, 1998, the Company had negative working capital of US$ 49.7
million. At that date, US$ 36.6 million of the current liabilities relate to
debt to creditors who have the option to convert such debt into shares should
Chilesat Telefonia Personal S.A. be unable to meet its obligations. As a result
of its negative working capital, the Company has not complied with certain
financial conditions of the credit agreement described in Note 8.
PRICE WATERHOUSE
Santiago, Chile,
February 25, 1999 except as to Note 14 b) which is as of March 16, 1999
F-21
<PAGE> 26
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
BALANCE SHEET
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
As of December 31,
-------------------------
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 942 $ 24,875
Accounts receivable --trade 1,017 --
Accounts receivable from related company -- 10
Other accounts receivable 134 133
Recoverable taxes 6,480 6,228
Inventories 4,419 --
Other current assets 779 695
--------- ---------
Total current assets 13,771 31,941
PROPERTY, PLANT AND EQUIPMENT, NET 124,800 40,093
OTHER ASSETS 712 4
--------- ---------
Total assets $ 139,283 $ 72,038
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,804 $ 380
Accounts and notes payable to related companies 59,529 247
Accrued liabilities and withholdings 2,160 960
--------- ---------
Total current liabilities 63,493 1,587
--------- ---------
LONG --TERM LIABILITIES
Note payable to related company 49,807 24,198
Other long-term liabilities 8,496 4,579
--------- ---------
Total long-term liabilities 58,303 28,777
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred stock (8,400,000 shares authorized,
issued and outstanding, with no par value) 42,000 42,000
Common stock (8,400,000 shares authorized,
issued and outstanding, with no par value) 1,964 1,964
Other capital contributions 493 --
(Deficit) surplus accumulated during the development stage (21,943) 55
Accumulated other comprehensive losses (5,027) (2,345)
--------- ---------
Total shareholders' equity 17,487 41,674
--------- ---------
Total liabilities and shareholders' equity $ 139,283 $ 72,038
========= =========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-22
<PAGE> 27
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
For the period For the period
from inception from inception
For the year ended (March 3, 1997) (March 3, 1997)
December 31, to December 31, to December 31,
1998 1997 1998
------------------ --------------- ---------------
<S> <C> <C> <C>
OPERATING RESULTS
Sales $ 1,284 $ -- $ 1,284
Cost of sales (1,570) -- (1,570)
-------- -------- --------
Gross margin (286) -- (286)
-------- -------- --------
Remunerations and other staff costs (3,916) -- (3,916)
Sales commissions (882) -- (882)
Marketing expenses (3,619) -- (3,619)
General and administrative expenses (2,736) (659) (3,395)
Depreciation and amortization (3,743) (4) (3,747)
-------- -------- --------
Net operating loss (15,182) (663) (15,845)
-------- -------- --------
NON-OPERATING RESULTS
Interest income 1,058 2,022 3,080
Interest expense (3,295) -- (3,295)
Currency exchange losses (4,186) (1,280) (5,466)
Other expenses (393) (24) (417)
-------- -------- --------
Non-operating (loss) income (6,816) 718 (6,098)
-------- -------- --------
Net (loss) income (21,998) 55 (21,943)
OTHER COMPREHENSIVE INCOME
Currency translation adjustment (2,682) (2,345) (5,027)
-------- -------- --------
Comprehensive loss $(24,680) $ (2,290) $(26,970)
======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-23
<PAGE> 28
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF CASH FLOWS
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
For the period For the period
from inception from inception
For the year ended (March 3, 1997) (March 3, 1997)
December 31, to December 31, to December 31,
1998 1997 1998
------------------ --------------- ---------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income $(21,998) $ 55 $(21,943)
Adjustments to reconcile to net cash used in
operating activities:
Depreciation and amortization 3,743 4 3,747
Use of the network and signal distribution services 493 -- 493
Changes in working capital:
Accounts receivable --trade (1,017) -- (1,017)
Accounts receivable from related companies 10 (10) --
Other accounts receivable (1) (133) (134)
Recoverable taxes (252) (6,171) (6,423)
Other current assets (118) (695) (813)
Accounts payable 1,424 380 1,804
Accrued interest and accounts payable to
related companies 7,168 511 7,679
Accrued liabilities and withholdings 1,200 957 2,157
-------- -------- --------
Cash flow used in operating activities (9,348) (5,102) (14,450)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisitions of property, plant and equipment (37,766) (14,383) (52,149)
Other (708) (4) (712)
-------- -------- --------
Cash flow used in investing activities (38,474) (14,387) (52,861)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable to related companies 20,271 -- 20,271
Capital increase -- 42,000 42,000
Other long-term liabilities 3,917 4,579 8,496
-------- -------- --------
Cash flow provided by financing activities 24,188 46,579 70,767
-------- -------- --------
Net (decrease) increase in cash (23,634) 27,090 3,456
Effect of exchange rate changes on cash (299) (2,215) (2,514)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (23,933) 24,875 942
Cash and cash equivalents at the beginning of the period 24,875 -- --
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 942 $ 24,875 $ 942
======== ======== ========
</TABLE>
F-24
<PAGE> 29
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF CASH FLOWS
Expressed in thousands of US Dollars
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
Interest paid 695 923 1,618
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES
The following non-cash transactions occurred during the periods presented:
<TABLE>
<CAPTION>
For the period from
inception
For the year ended (March 3, 1997)
December 31, to December 31,
1998 1997
------------------ -------------------
<S> <C> <C>
Long-term financing received from related company
to purchase fixed assets and inventories $ 14,745 $ 23,655
Short-term financing received from related company
to purchase fixed assets and inventories 42,707 --
Purchase of fixed assets (53,067) (23,655)
Purchase of inventories (4,385) --
-------- --------
$ -- $ --
======== ========
</TABLE>
As indicated in Note 1, Chilesat S.A. contributed non-cash assets and
liabilities to the joint venture on March 3, 1997. The net assets contributed at
that date are summarized as follows:
<TABLE>
<S> <C>
Current assets $ 57
Property, plant and equipment 2,189
Current liabilities (282)
-------
Net assets contributed $ 1,964
=======
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-25
<PAGE> 30
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
STATEMENT OF SHAREHOLDERS' EQUITY
Expressed in thousands of US Dollars
<TABLE>
<CAPTION>
(Deficit)
surplus
accumulated Accumulated
Number of Number of Other during the other
preferred common Preferred Common capital development comprehensive
shares shares stock stock contributions stage losses Total
--------- ---------- ------- ------ ------------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital increase at inception on
March 3, 1997 8,400,000 8,400,000 $42,000 $1,964 -- -- -- $ 43,964
Share subscriptions receivable- -- -- (42,000) -- -- -- -- (42,000)
Payment of share subscriptions
receivable -- -- 42,000 -- -- -- -- 42,000
Net income for the period -- -- -- -- -- $ 55 -- 55
Currency translation adjustment -- -- -- -- -- -- $ (2,345) (2,345)
--------- ---------- ------- ------ ---- -------- -------- --------
Balance at December 31, 1997 8,400,000 8,400,000 $42,000 $1,964 -- $ 55 $ (2,345) $ 41,674
========= ========== ======= ====== ==== ======== ======== ========
Balance at January 1, 1998 8,400,000 8,400,000 $42,000 $1,964 -- $ 55 $ (2,345) $ 41,674
Other contributed capital -- -- -- -- $493 -- -- 493
Net loss for the period -- -- -- -- -- (21,998) -- (21,998)
Currency translation adjustment -- -- -- -- -- -- (2,682) (2,682)
--------- ---------- ------- ------ ---- -------- -------- --------
Balance at December 31, 1998 8,400,000 8,400,000 $42,000 $1,964 $493 $(21,943) $ (5,027) $ 17,487
========= ========== ======= ====== ==== ======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-26
<PAGE> 31
CHILESAT TELEFONIA PERSONAL S.A.
(Company in the development stage)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. THE COMPANY
Chilesat Telefonia Personal S.A. (the "Company") is a joint venture created on
March 3, 1997 by Telex-Chile S.A. and its subsidiary Chilesat S.A. (together
"Chilesat") and Inversiones Leap Wireless Chile S.A. ("Inversiones", formerly
Inversiones Qualcomm S.A.) for the purpose of building and operating a mobile
PCS telephone system (personal communication system) in Chile. Inversiones is a
wholly-owned subsidiary of Leap Wireless International, Inc.
Pursuant to the terms of the Subscription and Shareholders' Agreement
("Shareholders' Agreement"), Chilesat and Inversiones hold all of the
outstanding common and preferred shares of the Company, respectively. Each
partner has a 50% ownership in the joint venture. Each partner has the right to
elect two representatives to the Board of Directors and a fifth independent
director is elected by a vote of at least 75% of the shareholders. Approval of
4/5 of the directors is required for a number of significant operating and
management decisions. The common directors are entitled to nominate the general
manager, and the preferred directors are entitled to nominate the CFO. However,
approval of the nominations requires approval by 4/5 of the directors.
During 1998, an amendment was made to the Shareholders' Agreement and Qualcomm
Incorporated transferred and assigned its interest in Inversiones to Leap
Wireless International, Inc. All terms and conditions of the shareholders
agreement are now binding on Leap Wireless International Inc.
Because Chilesat's contributions to the joint venture were non-cash assets and
liabilities whose fair values were not readily determinable, the non-cash assets
and liabilities contributed were recorded at their predecessor basis.
As one of the non-cash assets contributed, Chilesat provided a contract
entitling the Company to the right to use a part of Chilesat's network for a
period of 11.5 years and the right to receive signal distribution services for
the same period. The contract is for the Company's sole and exclusive use of
signal transmissions. Chilesat is responsible for meeting the Company's
transmission requirements as well as the supervision, control, maintenance and
repair of the network. Chilesat also contributed the already existing entity
Chilesat Telefonia Personal S.A., among whose assets was the PCS license to
operate in Chile.
The Company is the holder of one of three national licenses to provide PCS
services in Chile. These services were required to be ready for operations under
the conditions of the license by June 23, 1998 in the case of the geographical
area covered by Chile's Fourth to Tenth regions and by December 23, 1998 for the
remainder of the country. The Company completed construction of its mobile PCS
telephone system infrastructure by the required dates. The Company entered into
a System Equipment Purchase Agreement with Qualcomm Incorporated whereby
Qualcomm Incorporated will provide manufacturing, engineering, equipping,
integrating, installing, testing and technical assistance for the mobile PCS
telephone system.
Under the terms of the Shareholders' Agreement, the Company will purchase from
Qualcomm Incorporated all network hardware and software manufactured by Qualcomm
Incorporated and at least 50% of all mobile and fixed handsets purchased by the
Company for a period expiring in
F-27
<PAGE> 32
September 2000. Similarly, until the later of five years following the formation
of the joint venture or the date on which Inversiones ceases to hold preferred
shares representing more than 24% of the capital stock of the Company, the
Shareholders agree to cause the Company to use only IS95 CDMA technology.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) General
Chilesat Telefonia Personal S.A. is a development stage company as defined in
accordance with Statement of Financial Accounting Standards No. 7 due to the
fact that the Company has not yet generated significant revenues from commercial
operations. As indicated in Note 1, the Company has completed the construction
of its mobile PCS telephone system infrastructure and testing of the
installations between Chile's Fourth and Tenth regions with friendly users
commenced in July, 1998. The mobile PCS telephone system began operations in
September, 1998. The infrastructure necessary to cover the remainder of Chile
was operational in December 1998.
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("US GAAP"). The preparation
of financial statements in accordance with US GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
b) Period of financial statements
The financial statements for the Company are presented for the year ended
December 31, 1998 with comparative amounts for the period from the date of
formation of the joint venture on March 3, 1997 through December 31, 1997.
c) Translation of the Chilean peso financial statements
The financial statements give effect to the translation of the Chilean peso
financial statements of the Company (not submitted herewith) to United States
dollars. All asset and liability accounts have been translated (after
eliminating the effects of accounting for inflation in Chile) at the Observed
Exchange Rates determined by the Central Bank of Chile at December 31, 1998 and
1997 of Ch$ 472.41 and Ch$ 439.18 per US$ 1, respectively. Capital stock has
been translated at historic Observed Exchange Rates. Income and expense accounts
have been translated at average monthly Observed Exchange Rates. The net effects
of translation are recorded in the cumulative translation adjustment account as
a component of Accumulated other comprehensive losses in the Company's
equity.
d) Monetary assets and liabilities in other currencies
Monetary assets and liabilities denominated in foreign currency have been
translated at year-end exchange rates. The effects of such translation have been
recorded as exchange gains or losses in the statement of income. Certain assets
and liabilities are denominated in UFs (Unidades de Fomento). The UF is a
Chilean inflation-indexed, peso-denominated monetary unit which is set daily in
advance based on changes in the Consumer Price Index. The adjustment to the
closing value of UF-denominated assets and liabilities have also been recorded
as part of Currency exchange losses in the statement of income.
F-28
<PAGE> 33
e) Revenue recognition
Revenue has been accrued at year end for the portion of fixed charge services
earned to date. The Company also recognizes revenues for traffic in excess of
the amounts attributable to the fixed charge contracts in the month such
revenues are billed.
f) Uncollectable accounts
The Company records an allowance for uncollectable accounts receivable with
respect to those amounts estimated not to be recoverable.
g) Inventory
Inventory is comprised of handsets and accessories not yet placed into service
which are stated at the lower of historical cost, determined under a first-in,
first-out unit flow assumption, or market.
h) Property, plant and equipment
Property, plant and equipment are recorded at acquisition cost plus capitalized
interest and direct costs incurred during the construction phase of the mobile
PCS telephone system. Depreciation is applied using the straight-line method
over the estimated useful lives of the assets once the assets are placed in
service. Depreciation with respect to the infrastructure of the mobile PCS
telephone system was applied beginning in September 1998.
i) Advertising
It is the Company's policy to record the cost of advertising as it is incurred.
For the year ended December 31, 1998, the Company recorded US$ 3,619,000
(US$338,000 in 1997) as advertising expense.
j) Income taxes
Income taxes have been recorded in accordance with Statement of Financial
Accounting Standards No. 109 (FAS 109). Income taxes payable for the current
year are recorded in current liabilities, if applicable. Future taxes arising
from differences between the amounts shown for assets and liabilities in the
balance sheet and the tax basis of those assets and liabilities at the balance
sheet date have been recorded as deferred income taxes. Deferred income tax
assets are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
k) Long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
F-29
<PAGE> 34
l) Network use and signal distribution services
It is the Company's policy to systematically recognize expense for the use of
the network and signal distribution services provided by a related party as per
an independent valuation on a straight-line basis over the remaining life of the
contract as other capital contributions (Note 11 c).
m) Cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents, including securities
purchased under resale agreements. Securities purchased under agreements to
resell include investments in instruments issued by the Central Bank of Chile
acquired under resale agreements, and are stated at cost plus accrued interest.
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Cash and bank deposits $ 452 $ 899
Time deposits 490 10,195
Securities purchased under agreements to resell (Note 3) -- 13,736
Other -- 45
------- -------
$ 942 $24,875
======= =======
</TABLE>
l) Recent accounting pronouncements
Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting for
Derivative Instruments and Hedging Activities, is effective for fiscal years
beginning after June 15, 1999. This standard establishes accounting and
reporting standards for derivatives instruments, and for hedging activities. It
requires that an entity recognize all derivatives on the balance sheet at fair
value. Generally, changes in the fair value of derivatives must be recognized in
income when they occur, the only exception being derivatives that qualify as
hedges in accordance with the Standards. If a derivative qualifies as a hedge, a
company can elect to use "hedge accounting" to eliminate or reduce the
income-statement volatility that would arise from reporting changes in a
derivative'S fair value in income. The type of accounting to be applied
varies depending on the nature of the exposure that is being hedged. In some
cases, income-statement volatility is avoided by an entity's recording changes
in the fair value of the derivative directly in shareholders' equity. In other
cases, changes in the fair value of the derivative continue to be reported in
earnings as they occur, but the impact is counterbalanced by the entity
adjusting the carrying value of the asset or liability that is being hedged.
This standard is not expected to have an effect on the reporting of the Company
for the year ended December 31, 1998 and period ended December 31, 1997 as it
did not hold derivative instruments during such periods.
F-30
<PAGE> 35
NOTE 3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
At December 31, 1998, the Company held no securities purchased under agreements
to resell. Securities purchased under agreements to resell at December 31, 1997
are summarized as follows:
<TABLE>
<CAPTION>
Underlying
Financial institution financial instrument Amount Maturity date
- --------------------- -------------------- ------ -------------
<S> <C> <C> <C>
Banco de A. Edwards Central Bank of Chile Debentures $ 6,417 February 10, 1998
Banco de A. Edwards Central Bank of Chile Debentures 6,491 February 12, 1998
Banco de A. Edwards Central Bank of Chile Debentures 828 February 19, 1998
-------
Total $13,736
=======
</TABLE>
At December 31, 1997, the underlying financial instruments were in the custody
of the counter party to the agreements. Central Bank of Chile Debentures are
generally considered to be low-risk securities and are generally not subject to
significant market volatility.
NOTE 4. RECOVERABLE TAXES
Recoverable taxes at December 31, 1998 relate to value added taxes (VAT) of
US$6,480,000 (US$ 6,228,000 in 1997), incurred on the purchases of property,
plant and equipment required for the Company's mobile PCS telephone system and
goods and services. VAT relating to the purchases of capital goods may be
recovered in cash by the Company in accordance with Chilean law. Other VAT is
recovered by offset against VAT raised on services rendered.
NOTE 5. INVENTORY
Inventory as of December 31, 1998 is summarized as follows:
<TABLE>
<S> <C>
Handsets $3,137
Accessories 1,282
------
$4,419
======
</TABLE>
F-31
<PAGE> 36
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
As of December 31,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Land $ 340 $ 140
Buildings and infrastructure 114,926 39,771
Machinery and equipment 1,555 88
Handsets 8,583 --
Other 3,100 98
Less: Accumulated depreciation (3,704) (4)
--------- --------
Total net $ 124,800 $ 40,093
========= ========
</TABLE>
Estimated useful lives of assets are:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Machinery and equipment 10
Handsets 2
Other 5-10
</TABLE>
For the year ended December 31, 1998, the Company capitalized US$ 4,830,000
(US$1,508,000 in 1997) of interest as part of the cost of construction of the
mobile PCS Telephone System.
NOTE 7. ACCRUED LIABILITIES AND WITHHOLDINGS
Accrued liabilities and withholdings are summarized as follows:
<TABLE>
<CAPTION>
As of December 31,
----------------
1998 1997
------ ----
<S> <C> <C>
Construction in progress $1,365 $597
Advertising and marketing expenses 321 278
Employee vacations 203 33
Other 271 52
------ ----
Total $2,160 $960
====== ====
</TABLE>
F-32
<PAGE> 37
NOTE 8. RELATED COMPANY TRANSACTIONS
a) Balances with related companies and Qualcomm Incorporated
<TABLE>
<CAPTION>
Company Relationship 1998 1997
------- ------------ --------- ----------
<S> <C> <C> <C>
Accounts receivable from related company:
Chilesat Servicios
Empresariales S.A. Affiliate $ -- $ 10
========= ==========
Accounts and notes payable to
related companies:
Chilesat servicios
Empresariales S.A. Affiliate $ (134) $ --
Chilesat S.A. Shareholder (733) (196)
Qualcomm Incorporated(1) -- (21,881) --
Leap Wireless
International, Inc. Affiliate (15,273) --
Inversiones Leap
Wireless Chile S.A. Shareholder (21,374) --
Telex-Chile S.A. Shareholder (29) (12)
Telsys S.A. Affiliate (105) (39)
--------- ----------
$(59,529) $ (247)
======== =========
Note payable to related company - long-term:
Qualcomm Incorporated(1) -- $(49,807) $ (24,198)
======== =========
</TABLE>
(1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998.
F-33
<PAGE> 38
b) Related company transactions
<TABLE>
<CAPTION>
Amount of transactions
Company Relationship Transaction 1998 1997
------- ------------ ----------- ------- -------
<S> <C> <C> <C>
Chilesat Servicios
Empresariales S.A. Affiliate Reimbursement of
costs incurred on
their behalf $ -- $ 47
Reimbursement of
costs incurred in
connection with
construction 130 --
Chilesat S.A. Shareholder Reimbursement of
costs incurred in
connection with
construction 586 589
Rental of office space 171 30
Leap Wireless
International, Inc. Affiliate Financing of purchases
from Qualcomm Inc. 14,745 --
Accrued interest on
note payable 528 --
Inversiones Leap
Wireless Chile S.A. Affiliate Financing 20,271 --
Accrued interest on
note payable 1,103 --
Telex-Chile S.A. Shareholder Reimbursement of costs
incurred in connection
with construction 29 49
Telsys S.A. Affiliate Computer services 965 39
c) Transactions with
Qualcomm Incorporated
Qualcomm
Incorporated(1) Purchase of equipment
and inventory $57,452 $23,655
Financing of purchases 42,707 23,655
Accrued interest on
note payable 4,783 543
</TABLE>
(1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998.
F-34
<PAGE> 39
d) Notes payable to Qualcomm Incorporated and related companies
As a means of financing the purchase of infrastructure equipment from Qualcomm
Incorporated, the Company entered into a Deferred Payment Agreement whereby
Qualcomm Incorporated defers collection for the equipment subject to the terms
and conditions set forth in the Agreement. The assets of the Company secure the
obligation. The shares of the Company have also been pledged by Telex-Chile and
Chilesat in guaranty of the note payable to Qualcomm Incorporated.
Under the terms of the agreement, Qualcomm Incorporated will make loans for the
equipment, software and services it provides to the Company up to a maximum of
US$ 59.5 million. The original Deferred Payment Agreement was amended on June
24, 1998 to allow for an additional commitment of US$ 14.7 million of principal
as a means of financing of goods and services relating to the PCS system and US$
25.0 million of principal as a means of financing the acquisition of subscriber
equipment. The rest of the terms and conditions outlined in the original
Deferred Payment Agreement remain unchanged. Loans bear interest based either
upon a LIBOR or Base Rate or the Eurodollar. The obligation to repay these loans
and interest is evidenced by promissory notes. Interest accrues on the principal
but remains unpaid, with accrued interest added monthly to the outstanding
principal amount of the applicable loan until the first principal payment, at
which time interest is payable on the same dates as the principal payments.
Principal and interest on the US$ 14.7 million is due in full on January 31,
1999. In addition, a conversion right, discussed below, was added to the
agreement relating to this amount. This commitment was subsequently transferred
by Qualcomm Incorporated, as allowed by the Deferred Payment Agreement, to Leap
Wireless International, Inc.
In addition, a Working Capital Loan agreement was entered into on June 24, 1998
with Inversiones for US$ 20.3 million of principal for the purpose of financing
the final phase of construction, working capital requirements and operating
expenses during the start-up and early operation phase of the PCS system.
Principal and accrued interest is due in full on January 31, 1999 (Note 14).
Interest rates and other terms and conditions of this agreement match those of
the Deferred Payment Agreement, including the conversion right described below.
In the event that the Company fails to pay the outstanding principal balance
plus any accrued interest thereon, or Chilesat fails to contribute to the
Company an aggregate amount of not less than fifty percent of the aggregate
outstanding balance of the additional commitment and the Working Capital Loan on
or before January 31, 1999 pursuant to a capital call by the Company, then, at
any time after January 31, 1999 and on or before July 31, 1999, at Leap Wireless
International, Inc.'s sole option in the case of the additional commitment and
Inversiones' sole option in the case of the Working Capital Loan, the
outstanding balance shall be convertible into shares of the Company's common
stock (Note 14). This option expires in the event that the outstanding balance
is paid in full prior to the conversion date.
F-35
<PAGE> 40
The notes payable at December 31, 1998 are comprised of LIBOR loans and bear
interest at LIBOR + 3%. The scheduled principal repayments, are as follows:
<TABLE>
<CAPTION>
Deferred payment Additional Working capital
agreement commitment loan 1998
---------------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
1999 $ 21,881 $ 15,273 $ 21,374 $ 58,528
2000 18,361 - - 18,361
2001 16,646 - - 16,646
2002 14,199 - - 14,199
2003 601 - - 601
-------- --------- --------- ---------
Total $ 71,688 $ 15,273 $ 21,374 $ 108,335
======== ========= ========= =========
</TABLE>
The terms of the financing arrangements with Qualcomm Incorporated, Inversiones
and Leap Wireless International, Inc. include certain positive and negative
covenants, the most significant of which are as follows:
The Company shall not
i) Incur any additional encumbrances or liens
ii) Create any indebtedness other than indebtedness incurred for the
purposes of partial or full repayment of the notes payable.
iii) Incur operating lease obligations greater than one year and exceeding
US$ 1 million for any twelve month period.
iv) Consolidate or merge with another entity.
v) Guarantee any indebtedness.
vi) Acquire stock or the assets of any other person.
vii) Advance funds.
viii) Become liable for a capital lease obligation exceeding US$ 1 million.
ix) Enter into transactions with affiliates, except arm's length
transactions in the ordinary course of business.
x) Invest in other than investment grade instruments.
xi) Declare or pay cash dividends or make distributions in excess of 30% of
excess cash flows during the third and fourth annual periods of
operations of the Company, increasing to 50% after period 4.
xii) Maintain funded debt to total capitalization greater than 0.65, 0.71 and
0.75 in annual periods 1, 2 and 3 and thereafter, respectively.
xiii) Permit Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") to be less than US$ 1.
xiv) Permit funded debt to EBITDA to exceed 23.91, 4.74, 3.32 and 2.4 in
annual periods 2, 3, 4 and 5, respectively.
xv) Permit EBITDA to interest expense to be less than 0.47, 2.38, 3.00 and
3.00 in annual periods 2, 3, 4 and 5, respectively.
xvi) Incur capital expenditures greater than US$ 116 million until the
Company has more than 50,000 subscribers, at which time the threshold
increases.
The Company is not in compliance with some of these covenants (Note 14).
F-36
<PAGE> 41
NOTE 9. OTHER LONG-TERM LIABILITIES
This balance is mainly comprised of deferred customs duties of US$ 8.4 million
at December 31, 1998 (US$ 4.6 million at December 31, 1997).
Under Chilean law, the payment of customs duties levied on machinery and
equipment can be deferred over a period of up to seven years. The balance at
December 31, 1998 represents amounts owing at maturity including accrued
interest. The scheduled repayments are as follows:
<TABLE>
<S> <C>
2000 $ 1,337
2001 1,081
2002 1,555
2003 1,266
2004 and thereafter 3,206
--------
Total 8,445
Other 51
--------
Total other long-term liabilities $ 8,496
========
</TABLE>
NOTE 10. INCOME TAXES
The Company has not made a provision for current income taxes payable as it
incurred tax losses for the year ended December 31, 1998.
At December 31, 1998, income tax loss carryforwards of approximately US$ 24.3
million (US$ 5.2 million at December 31, 1997), were available to apply against
income tax liabilities in future years. Under Chilean law, such income tax loss
carryforwards never expire.
Deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
As of December 31,
Assets: 1998 1997
------- ----
<S> <C> <C>
Provisions $ 71 $ --
Tax loss carryforwards 3,649 785
Allowance for income tax loss carryforwards (3,720) (655)
------- ----
Deferred income tax assets -- 130
------- ----
Liabilities:
Other -- (130)
------- ----
Deferred income tax liabilities -- (130)
------- ----
Net deferred income taxes $ -- $ --
======= ====
</TABLE>
F-37
<PAGE> 42
Because the Company has only recently begun commercial operations and has no
history of generating taxable income against which tax loss carryforwards would
be applied, an allowance was recorded at December 31, 1998 with respect to those
tax loss carryforwards which, based on the weight of available evidence, are not
likely be realized.
NOTE 11. SHAREHOLDERS' EQUITY
a) Authorized capital
Authorized capital stock of the Company is comprised of 8,400,000 Series A
preferred shares and 8,400,000 Series B ordinary shares. Inversiones holds all
the outstanding preferred shares whereas Chilesat holds all the ordinary shares.
The preference with respect to the preferred shares consists of the right to be
paid before any other series of shares in the event of liquidation of the
Company up to the amount of the stated value of the preferred shares. The
preference has a duration of 6 years as from April 10, 1997, after which all
shareholders shall have equal rights with respect to the liquidation of the
Company.
b) Dividends
Chilean law permits the payment of dividends only in Chilean pesos and these are
limited to the retained earnings balances in the Company's statutory financial
statements at each calendar year end. As the Company has an accumulated deficit
at December 31, 1998 and 1997 in its statutory financial statements, it is
prohibited from declaring and paying dividends until such time that it generates
sufficient retained earnings.
c) Capital increase
Pursuant to the terms of the Shareholders' Agreement, Inversiones agreed to
subscribE for 8,400,000 Series A preferred shares in exchange for its cash
contribution of US$ 42 million and Chilesat agreed to subscribe for 8,400,000
Series B ordinary shares for its contribution of a contract for the right to use
a part of Chilesat's network and signaL distribution services, the PCS
license and certain net assets. Inversiones contributed the funds into an escrow
account on March 3, 1997 and a receivable balance for share subscriptions was
recorded. With the exception of US$ 1.5 million of funds made available to the
Company, the funds were not to be distributed to it until official publication
of the awarding of the PCS license. The awarding of the PCS license was
published and the Company received the funds in June, 1997, at which time the
share subscription receivable was settled. An independent valuation of the
contract for the right to use a part of Chilesat's network and signal
distribution services was undertaken and the appraised valued is being
systematically recognized as capital contributions on a straight-line basis over
the remaining life of the contract commencing on September 20, 1998, the date
operations began. Other capital contributions in 1998 amounted to US$ 493,000
(none in 1997).
At the Extraordinary Meeting held on June 24, 1998, the shareholders agreed to
an increase in the Company's capital from Ch$ 26.638 million (US$ 56.4 million)
divided into 8,400,000 Series A preferred shares and 8,400,000 Series B common
shares, to Ch$ 44.498 million (US$ 94.2 million) divided into 8,400,000 Series A
preferred shares and 16,000,000 Series B common shares, with no par value, which
will be offered to existing shareholders in proportion to their shareholdings,
and which must be totally subscribed and paid within a period of three years
from the date of the meeting.
Should Telex-Chile S.A. and Chilesat S.A. not subscribe their proportion of the
new issue, they will cede their subscription rights to Inversiones.
F-38
<PAGE> 43
At their Extraordinary meeting held on December 30, 1998, the shareholders
agreed to increase the company's capital by the equivalent in Chilean pesos of
US$ 254 million by the issue of 32,987,013 Series B common shares to be
subscribed and paid, within a maximum period of three years, at a price
equivalent to US$ 7.70 per share on the date of payment . On agreeing to issue
the shares, the Board of Directors must set the price for their subscription and
payment at an amount equivalent to the US$ 7.70 per share mentioned previously
plus a restatement of 10% per annum, or 5% per quarter, for the period elapsed
between this date and the date of payment. The excess over the US$ 7.70 per
share is to be credited to the "Share Premium Account".
d) Call and put options
As part of an amendment to the Shareholders' Agreement, Chilesat and
Inversiones, each have an option to require the issuance by the Company of
shares of common stock at the Exercise Price to be subscribed by Chilesat and
Inversiones in proportion to their holdings in the capital stock of the Company.
This option may be exercised for common stock with an aggregate value at the
Exercise Price of up to US$ 35 million. The Exercise Price shall be determined
as of the exercise date and shall be the sum of (i) $ 5.00 per share plus (ii)
10% per annum plus an increasing premium on the original $ 5.00 price thereof
equal to 5% additional for each quarter after the calendar quarter ending June
30, 1997. The option expires upon the exercise of the conversion rights (Note 8
c).
If either Chilesat or Inversiones do not subscribe the shares of stock to which
it is entitled as a result of the exercise of the capital call option, it shall
be subject to dilution. Such shares of common stock as are not exercised by
Chilesat or Inversiones shall be subject to subscription at the Exercise Price
by the other party (or such third party investor as a party may propose),
subject to the non-subscribing party's written consent, which may not be
unreasonably withheld and which may not be withheld with the purpose of
preventing the capital increase.
If Chilesat answers such capital call by making a cash capital contribution to
the Company of not less than fifty percent of the balance due on the convertible
loans on or before January 31, 1999, Inversiones will make its portion of the
capital call by converting fifty percent of the balance due on the convertible
loans into capital equity of the Company at the same price as paid by Chilesat
for equity in the capital call.
Inversiones has an option to sell its preferred shares to Chilesat in the event
that the Company is no longer using Qualcomm technology in its mobile PCS
telephone system
NOTE 12. FAIR VALUE
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments at December 31, 1998 and 1997, when the
estimate of such value is practicable:
- - Cash and cash equivalents, recoverable taxes and accrued liabilities and
withholdings have been stated at carrying value which is equivalent to
fair value.
- - The fair values of the note payable to related company and other
long-term liabilities were based on interest rates currently available
to the Company for debt with similar terms and remaining maturities. The
carrying value of the note payable to related company approximates fair
value because the terms of the loan agreement require that the stated
rate of interest be periodically adjusted to the market rate.
F-39
<PAGE> 44
The estimated fair value of the Company's financial instruments are summarized
as follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
------------------------- -------------------------
Carrying Carrying
amounts Fair value amounts Fair value
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 942 $ 942 $24,875 $24,875
Recoverable taxes 6,480 6,480 6,228 6,228
------- ------- ------- -------
Total assets $ 7,422 $ 7,422 $31,103 $31,103
======= ======= ======= =======
Liabilities:
Accrued liabilities and withholdings $ 2,160 $ 2,160 $ 960 $ 960
Note payable to related company 49,807 49,807 24,198 24,198
Other long-term liabilities 8,496 6,013 4,579 3,117
------- ------- ------- -------
Total liabilities $60,463 $57,980 $29,737 $28,275
======= ======= ======= =======
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
a) Operating leases
At December 31, 1998, the Company had entered into operating leases relating to
the rental of sites for towers and antennas required for the operation of its
mobile PCS telephone system. The following is a schedule by year of future
minimum rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 1,068
2000 1,066
2001 1,082
2002 1,063
2003 1,040
2004 to 2008 3,457
2009 526
--------
Total $ 9,302
========
</TABLE>
Rental expense for the year ended December 31, 1998 was US$ 602,000.
b) Security for debt
The Company has pledged it PCS license as security against the notes payable to
Qualcomm Incorporated.
Telex-Chile S.A. and Chilesat S.A. have pledged 83,920 and 8,316,080 Series B
common shares of the Company, respectively, as security for 50% of the notes
payable to Qualcomm Incorporated.
F-40
<PAGE> 45
NOTE 14. SUBSEQUENT EVENTS
a) On February 15, 1999, Inversiones communicated to the Company that it had
incurred an Event of Default as a result of its failure to repay a US$ 20.3
million short-term Working Capital Loan plus interest accrued thereon granted on
June 24, 1998 (Note 8) and noncompliance with certain loan covenants. At the
time of granting the loan, Inversiones subscribed to a capital increase and
reserved its right to capitalize the loan, an option that, in addition to other
potential actions to obtain repayment, is still open.
Similarly, on February 15, 1999, Leap Wireless International, Inc. informed both
the Company and Telex-Chile S.A. that the former has incurred an Event of
Default with respect to the Deferred Payment Agreement, as a result of which the
amount of US$ 14.7 million plus interest accrued thereon is due and payable.
Telex-Chile S.A. is guarantor of 50% of this amount. As in the previous case,
the creditor has an option to capitalize this debt or to pursue payment through
other means.
b) Subsequently on March 2, 1999, Leap Wireless International, Inc. and
Inversiones indicated their withdrawal of the above-mentioned communications
reserving the right to notify the defaults again in the future. On March 16,
1999, Leap Wireless International, Inc. and Inversiones communicated defaults on
the short-term Working Capital Loan of US$ 20.3 million plus interest accrued
thereon and the Deferred Payment Agreement of US$ 14.7 million plus interest
accrued thereon on the same terms as expressed above.
F-41
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION NUMBERED PAGES
- ------- ----------- --------------
<S> <C> <C>
3.1(1) Form of Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Form of Amended and Restated Bylaws of the Registrant
3.3(2) Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of the Registrant
4.1(1) Form of Common Stock Certificate
4.2(3) Warrant, dated as of September 23, 1998, issued to QUALCOMM
Incorporated ("QUALCOMM")
4.3(2) Rights Agreement, dated as of September 14, 1998, between the
Registrant and Harris Trust Company of California
10.1(3) Separation and Distribution Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.2(3) Credit Agreement, dated as of September 23, 1998, between QUALCOMM and
the Registrant
10.3(3) Tax Matters Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant
10.4(3) Interim Services Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant
10.5(3) Master Agreement Regarding Equipment Procurement, dated as of
September 23, 1998, between QUALCOMM and the Registrant
10.6(3) Employee Benefits Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant
10.7(3) Conversion Agreement, dated as of September 23, 1998, between QUALCOMM
and the Registrant
10.8(3) Assignment and Assumption Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.9(1) Form of Registrant's 1998 Stock Option Plan (the "Option Plan")
10.10(1) Form of non-qualified/incentive stock option under the Option Plan
10.11(1) Form of non-qualified stock option under the Option Plan to be granted
to QUALCOMM option holders in connection with the Distribution
10.12(1) Form of Registrant's 1998 Non-Employee Directors' Stock Option Plan
(the "Directors' Plan")
10.13(1) Form of non-qualified stock option under the Directors' Plan
10.14(1) Form of Registrant's Employee Stock Purchase Plan 10.15(1) Assignment
and Assumption of Lease dated August 11, 1998 between QUALCOMM and
Vaxa International, Inc.
10.16(1) Form of Indemnity Agreement to be entered into between the Registrant
and its directors and officers
10.17(4) Loan Agreement, dated as of September 28, 1998, between Pegaso
Comunicaciones y Servicios, S.A. de C.V. and the Registrant
10.18(4) Promissory Note, executed September 25, 1998, by Pegaso Comunicaciones
y Servicios, S.A. de C.V. in favor of the Registrant
10.19(4) Pledge Agreement, dated as of September 28, 1998, by and between
Pegaso
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION NUMBERED PAGES
- ------- ----------- --------------
<S> <C> <C>
Comunicaciones y Servicios, S.A. de C.V., the Registrant and the other
parties thereto
21.1(1) Subsidiaries of the Registrant
23.1(5) Consent of Independent Accountants relating to report dated November
19, 1998 (United States)
23.2(5) Consent of Independent Accountants relating to report dated February
25, 1999 except as to Note 14 b) which is as of March 16, 1999 (Chile)
27.1(4) Financial Data Schedule
</TABLE>
- ----------
(1) Filed as an exhibit to the Company's Registration Statement on Form 10,
as amended (File No. 0-29752), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 14, 1998, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (File No. 333-64459) dated October 13, 1998, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1998..
(5) Filed with this Amendment No. 1.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-63823) of Leap Wireless International, Inc. of
our report dated November 19, 1998 appearing on Page F-2 of this Annual Report
on Form 10-K/A.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
March 29, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-63823) of Leap Wireless International, Inc. of
our report dated February 25, 1999, except as to Note 14 b) which is as of March
16, 1999 appearing on Page F-21 of this Annual Report on Form 10-K/A.
PRICE WATERHOUSE
Santiago, Chile
March 29, 1999
