<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LEAP WIRELESS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4812 33-0811062
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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CRICKET COMMUNICATIONS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4812 33-0820981
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10307 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
(858) 882-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HARVEY P. WHITE
CHIEF EXECUTIVE OFFICER
LEAP WIRELESS INTERNATIONAL, INC.
10307 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
(858) 882-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
SCOTT N. WOLFE
BARRY M. CLARKSON
LATHAM & WATKINS
701 B STREET, SUITE 2100
SAN DIEGO, CA 92101-8193
(619) 236-1234
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED NOTE(1) PRICE(1) REGISTRATION FEE
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12 1/2% Senior Notes Due 2010.......... $225,000,000 100% $225,000,000 $59,400
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Guarantees of 12 1/2% Senior Notes Due
2010................................. -- -- -- (2)
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14 1/2% Senior Discount Notes Due
2010................................. $668,000,000 50.27% $335,803,551 $88,653(3)
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Guarantees of 14 1/2% Senior
Discount Notes Due 2010.............. -- -- -- (2)
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f).
(2) Pursuant to Rule 457(n), no registration fee is required with respect to the
guarantees.
(3) The 14 1/2 Senior Discount Notes Due 2010 were initially sold at a
substantial discount from their principal amount at maturity. The
registration fee with respect to the 14 1/2 Senior Discount Notes Due 2010
was calculated based on its approximate accreted value as of May 16, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
PROSPECTUS (SUBJECT TO COMPLETION, DATED MAY 17, 2000)
[LEAP WIRELESS LOGO]
LEAP WIRELESS INTERNATIONAL, INC.
OFFER TO EXCHANGE
$225,000,000 OF OUR 12 1/2% SENIOR NOTES DUE 2010
AND
$668,000,000 OF OUR 14 1/2% SENIOR DISCOUNT NOTES DUE 2010
-------------------------
- The notes mature on April 15, 2010.
- The notes are (1) senior, unsecured obligations of ours, (2) rank equal
in right of payment with all of our existing and future unsecured
indebtedness, and (3) rank senior in right of payment to all future
subordinated indebtedness of ours.
- The notes are guaranteed by our subsidiary, Cricket Communications
Holdings, Inc. The guarantee is a senior, unsecured obligation of the
guarantor and ranks equally in right of payment with all existing and
future unsecured indebtedness of the guarantor.
- The senior notes bear interest at the rate of 12 1/2% per year, payable
on April 15 and October 15 of each year. The senior discount notes will
not begin to accrue cash interest until April 15, 2005. Beginning on
April 15, 2005, the senior discount notes will bear interest at the rate
of 14 1/2% per year, payable on April 15 and October 15 of each year.
- The terms of the notes we will issue in the exchange offer will be
substantially identical to the outstanding notes, except that transfer
restrictions and registration rights relating to the outstanding notes
will not apply to the registered notes.
- The exchange offer expires at 5:00 p.m., New York City time, [ ],
2000, unless we extend it.
- All notes that are validly tendered in the exchange offer and not
withdrawn will be exchanged.
- Tenders of notes may be withdrawn at any time prior to the expiration of
the exchange offer.
- There is no public market for the registered notes.
- We will not receive any proceeds from the exchange offer. We will pay the
expenses of the exchange offer.
BEFORE PARTICIPATING IN THIS EXCHANGE OFFER, PLEASE REFER TO THE SECTION IN THIS
PROSPECTUS ENTITLED "RISK FACTORS" BEGINNING ON PAGE 14.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is [ ], 2000.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Summary of the Exchange Offer............................... 5
Summary Consolidated Financial Data and Unaudited Pro Forma
Financial Data............................................ 10
Risk Factors................................................ 14
Special Note Regarding Forward-Looking Statements........... 26
Capitalization.............................................. 27
Selected Consolidated Financial Data and Unaudited Pro Forma
Financial Data............................................ 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
The Exchange Offer.......................................... 48
Business.................................................... 59
Management.................................................. 86
Principal Stockholders...................................... 91
Certain Relationships and Related Transactions.............. 93
Description of Certain Indebtedness......................... 94
Description of the Notes.................................... 97
Certain U.S. Federal Tax Considerations..................... 137
Plan of Distribution........................................ 137
Legal Matters............................................... 139
Experts..................................................... 139
Where to Find Available Information......................... 139
Index to Financial Statements............................... F-1
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-------------------------
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT THE COMPANY THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE TO SECURITY HOLDERS UPON WRITTEN OR ORAL
REQUEST.
-------------------------
Cricket(SM) and SMARTCOM PCS(MR) are service marks of Leap and its
subsidiaries. Pegaso(MR) is a registered service mark of Servicios
Administrativos Pegaso, S.C. All other brand names, trademarks and service marks
appearing in this prospectus are the property of their respective holders.
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PROSPECTUS SUMMARY
The following summary contains basic information from this prospectus. It
likely does not contain all the information that is important to you. For a more
complete understanding of this exchange offer, we encourage you to read the
entire prospectus carefully, including the section entitled "Risk Factors"
beginning on page 14 and the financial statements, including the notes to those
statements, included elsewhere in this prospectus.
The words "Leap," "we," "our," "ours" and "us" refer to Leap Wireless
International, Inc. and, unless the context otherwise requires, its consolidated
subsidiaries.
OUR BUSINESS
Leap is a wireless communications carrier that is deploying unique,
low-cost, simple wireless services designed to accelerate the transformation of
mobile wireless into a mass consumer product. We generally seek to address a
much broader population segment than incumbent wireless operators have addressed
to date. In the United States, we are offering wireless service under the brand
name "Cricket." Our innovative Cricket strategy is to extend the benefits of
mobility to the mass market by offering wireless service that is as simple to
understand and use as, and priced competitively with, traditional landline
service. To expand the Cricket service, we currently have acquired or agreed to
acquire wireless licenses covering approximately 35 million potential customers.
We are also currently involved in developing and operating nationwide digital
wireless networks in Mexico and Chile. In each of our markets, we are deploying
100% digital, Code Division Multiple Access, or CDMA, networks that provide
higher capacity and more efficient deployment of capital than competing
technologies. This, when combined with our efforts to streamline operation and
distribution systems, allows us to be a low-cost provider of wireless services
in each of our markets.
The Cricket vision is different from the typical cellular or PCS provider.
The Cricket service is based on what we believe the mass market wants wireless
service to be: predictable, affordable and as simple to understand and use as
traditional landline telephone service, but with the benefits of mobility.
Approximately 70% of the U.S. population currently does not subscribe to
wireless phone service. We believe that many of these potential customers have
avoided traditional wireless service because they perceive it to be expensive
and complicated. We believe that a large number of consumers make the majority
of their calls within the local areas in which they live, work and play. The
Cricket service allows customers to make and receive virtually unlimited calls
only within a local calling area for a low, flat monthly rate. The fixed price
eliminates consumer cost uncertainty related to higher than expected monthly
bills and the billing and service complexity associated with multiple rate plans
and roaming charges.
We believe that the Cricket service will help transform mobile voice and
data wireless service from a luxury product into a mass consumer product. The
Cricket service was introduced in Chattanooga, Tennessee in March 1999. We
believe the initial results demonstrate the appeal of the Cricket service. As a
part of the Cricket strategy we intend to:
- attract new customers more quickly than other wireless providers that
offer complex pricing plans with peak/off-peak rates, roaming charges and
expensive "extra" minutes;
- maintain lower customer acquisition costs by offering one simple service
plan with a choice of only one or two handsets, and distributing our
product through company stores and multiple points of sale where the mass
market shops;
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- sustain lower operating costs per customer compared to other wireless
providers through streamlined billing procedures, reduced customer care
expenses, lower credit investigation costs and reduced bad debt; and
- deploy our capital more efficiently by building our networks to cover
only the urban and suburban areas of our markets where our potential
customers live, work and play, while avoiding rural areas and corridors
between distant markets.
We originally licensed Cricket in December 1998 to Chase
Telecommunications, Inc., a company that we acquired in March 2000. The Cricket
service was launched under an agreement that required the management of Chase
Telecommunications to control the business until our acquisition received all
necessary governmental approvals. In Chattanooga, the network covers
approximately 315,000 of the approximately 550,000 potential customers in the
license area, concentrated in an area that is similar to Chattanooga's local
calling area for conventional landline telephone service. As of February 29,
2000, there were approximately 24,000 Cricket customers in Chattanooga. This
represents an approximately 7.7% penetration of covered potential customers
after the first ten months of operation. In the quarter ended February 29, 2000,
the cost per gross additional customer was less than $300, which we believe is
significantly lower than other wireless providers. The Cricket service was
launched in Nashville, Tennessee in late January 2000.
We have been designated under FCC rules to be eligible to hold C-Block and
F-Block licenses. As a "designated entity" we can acquire these licenses, which
many large incumbent wireless providers cannot hold, at generally attractive
prices and terms. We recently acquired 36 licenses in the federal government's
1999 re-auction of C-Block licenses, three F-Block PCS licenses from AirGate
Wireless, L.L.C. and 11 C-Block licenses from Chase Telecommunications. We also
have entered into definitive agreements to purchase 11 other wireless licenses,
and we have agreed to divest three licenses covering 376,667 potential customers
in Grand Island and North Platte, Nebraska and Casper, Wyoming. The 58 licenses
retained by us cover approximately 35 million potential customers in 58 local
markets in the U.S. We are considering the purchase of additional licenses in
other U.S. markets. Our target markets generally are self-contained metropolitan
communities in which our potential customers tend to live, work and play within
one local urban and suburban area. These target communities, such as Charlotte,
Salt Lake City and Tucson, are areas where roaming beyond the local area is less
important and the Cricket low-cost, local-only service may be particularly
attractive to potential customers. We intend to complete or commence building
networks in 17 markets during 2000 in our initial phase of construction.
Internationally, we are focusing our efforts in markets in the Americas
where we believe the combination of unfulfilled demand and our attractive
wireless service offerings will fuel rapid growth. We target markets that offer
relatively low penetration of landline and wireless telephony combined with
relatively stable political and economic climates.
In Mexico, we were a founding shareholder and have invested $100 million in
Pegaso Telecomunicaciones, S.A. de C.V., a joint venture with Grupo Pegaso and
Grupo Televisa, the largest media company in the Spanish-speaking world. We
currently own 22.4% of Pegaso, which is deploying the first 100% digital
wireless communications network in Mexico. Pegaso holds wireless licenses
generally in the 1900 MHz band to provide nationwide service covering nearly 100
million potential customers. Pegaso launched commercial service in Tijuana in
February 1999 and extended its coverage area with launches in Mexico's three
largest cities, Mexico City, Guadalajara and Monterrey, in December, September
and August 1999, respectively. As of February 29, 2000, Pegaso had approximately
182,000 customers. In December 1999, Pegaso launched service in Mexico City,
bringing its total covered potential customers in Mexico to approximately 27.7
million. Pegaso is continuing its network expansion and plans to build networks
in up to 63 additional metropolitan areas throughout Mexico. Sprint PCS recently
invested approximately $200 million by purchasing shares from Pegaso and
shareholders other than Leap.
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In Chile, through our subsidiary, Smartcom S.A., we hold a nationwide
wireless license in the 1900 MHz band and operate a nationwide digital wireless
system. In April 1999, we acquired the remaining 50% of Smartcom that we did not
already own. Subsequently, we recruited a new management team, upgraded the
network capabilities and, in November 1999, relaunched service under a new brand
name, SMARTCOM PCS. Smartcom's network is the only CDMA-based network in the
country, and it covers approximately 12 million potential customers representing
80% of Chile's total population. As of February 29, 2000, Smartcom had
approximately 92,000 customers.
In April 2000, we entered into a memorandum of understanding with Endesa,
S.A., a Spanish utility company with interests in energy and telecommunications,
under which Endesa agreed to purchase 100 percent of the capital stock of
Smartcom from our subsidiary, Inversiones Leap Wireless Chile, S.A. Under the
non-binding terms and conditions of the Endesa memorandum of understanding, the
sale of the Smartcom stock is subject to the negotiation and entry into of
definitive agreements documenting the transaction. We believe that the sale of
Smartcom demonstrates our international commitment to capture wireless
opportunities, build networks and operate successful businesses in order to
enhance shareholder value. In the future, we will continue to evaluate
additional international opportunities as they arise.
BUSINESS STRATEGY
Our business strategy is to bring innovative wireless communications
products and services to markets with strong growth potential in the U.S. and
elsewhere in the Americas. Key elements of this strategy include:
- Enhancing the Mass Market Appeal of Wireless Service. We are working to
remove the price and complexity barriers that we believe have prevented
many potential customers from using wireless service. We believe that
large segments of the population do not use wireless service because they
view wireless service as an expensive luxury item, believe they cannot
control the cost of service, or find existing service plans too
confusing. Our service plans are designed to offer appealing value in
simple formats that customers can understand and budget for.
- Offering an Appealing Value Proposition. Specific service plans will
differ among our operations and ventures; however, we strive to provide
service offerings that combine high quality and advanced features with
simplicity and attractive pricing to create a "high value/reasonable
price" proposition and broaden the market for wireless services. These
offerings include, for example, the Cricket flat rate service plan in the
U.S. and such innovative features as a fully-functioning phone
out-of-the-box and per-second billing in our Mexican and Chilean
operations.
- Controlling and Minimizing Costs. To become one of the lowest-cost
providers in the wireless industry, we are deploying advanced network
technology to minimize our capital costs and streamlining marketing,
distribution and back-office procedures.
- Leveraging CDMA Technology. We are deploying state-of-the-art CDMA
networks that provide higher capacity at a lower capital cost and can be
easily upgraded to support enhanced capacity. We believe this enables us
to operate superior networks that support rapid customer growth and high
usage with lower costs per unit than other wireless carriers. In
addition, we believe our CDMA networks will provide a better platform to
expand into data and other services based on advances in second
generation systems and on third generation digital technology in the
future.
- Expanding Our Service Through Acquisitions of Domestic Licenses. As a
designated entity under the FCC rules, we intend to expand the Cricket
service to selected metropolitan areas in the U.S. through the
acquisition of additional wireless licenses. We believe that our
designated entity
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status gives us opportunities that are not available to many of our
larger competitors to acquire additional wireless licenses at generally
attractive prices.
- Investing Selectively in New Foreign Ventures. We plan to pursue wireless
ventures in foreign markets with strong growth potential. When investing
in foreign ventures, we generally seek investment partners that provide
familiarity and marketing know-how in their local markets, financial and
technical resources, or other attributes that can contribute to building
a successful wireless business. We expect to be actively involved in the
operations of each foreign venture in which we participate.
-------------------------
Leap was formed as a Delaware corporation in June 1998 as a subsidiary of
Qualcomm Incorporated. In September 1998, Qualcomm distributed all of the common
stock of Leap to Qualcomm's stockholders as a taxable dividend, and Leap entered
into various agreements with Qualcomm. See "Relationship with Qualcomm." Our
executive offices are located at 10307 Pacific Center Court, San Diego, CA
92121. Our telephone number is (858) 882-6000. Our World Wide Web site address
is http://www.leapwireless.com. The information on our Web site is not part of
this prospectus.
4
<PAGE> 8
SUMMARY OF THE EXCHANGE OFFER
The following summary is provided solely for your convenience. This summary
is not intended to be complete. You should read the full text and more specific
details contained elsewhere in this prospectus. For a more detailed description
of the notes, see "Description of the Notes."
The Exchange Offer......... We are offering to exchange up to $225,000,000 in
aggregate principal amount of our 12 1/2% Senior
Notes and up to $668,000,000 in aggregate principal
amount at maturity of our 14 1/2% Senior Discount
Notes. We issued and sold the notes on February 23,
2000 as part of our units offering, in reliance on
an exemption from registration under the Securities
Act. Each unit sold consisted of (1) one senior
note and one warrant to purchase shares of common
stock, or (2) one senior discount note and one
warrant to purchase shares of common stock. Upon
consummation of the exchange offer, the notes and
warrants will become separately transferable.
We believe that the registered notes may be offered
for resale, resold and otherwise transferred by you
without compliance with the registration or
prospectus delivery provisions of the Securities
Act if:
- you are acquiring the registered notes in the
ordinary course of your business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the registered notes issued
to you; and
- you are not an affiliate, under Rule 405 of the
Securities Act, of ours.
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City time, on [ ], 2000, unless we
decide to extend the expiration date.
Conditions to the Exchange
Offer.................... We may end or amend the exchange offer if:
- any legal proceeding, government action or other
adverse development materially impairs our
ability to complete the exchange offer;
- any SEC rule, regulation or interpretation
materially impairs the exchange offer; or
- we have not obtained all necessary governmental
approvals with respect to the exchange offer.
Please refer to the section in this prospectus
entitled "The Exchange Offer -- Conditions to the
Exchange Offer." We may waive any or all of these
conditions. At this time, there are no adverse
proceedings, actions or developments pending or, to
our knowledge, threatened against us and no
governmental approvals are necessary to complete
the exchange offer.
Withdrawal Rights.......... You may withdraw the tender of your outstanding
notes at any time before 5:00 p.m., New York City
time, on [ ], 2000.
5
<PAGE> 9
Procedures for Tendering
Outstanding Notes........ To participate in the exchange offer, you must:
- complete, sign and date the accompanying letter
of transmittal, or a facsimile copy of the letter
of transmittal; or
- tender outstanding notes following the procedures
for book-entry transfer described on pages 51-52.
You must mail or otherwise deliver the
documentation and your outstanding notes to State
Street Bank and Trust Company, as exchange agent,
at one of the addresses listed on the letter of
transmittal.
Special Procedures for
Beneficial Owners........ If you hold outstanding notes registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee, you should contact that
person promptly if you wish to tender outstanding
notes. Please refer to the section in this
prospectus entitled, "The Exchange
Offer -- Procedures for Tendering Outstanding
Notes."
Guaranteed Delivery
Procedures............... If you wish to tender your outstanding notes and
you cannot get required documents to the exchange
agent on time, or you cannot complete the procedure
for book-entry transfer on time, you may tender
your outstanding notes according to the guaranteed
delivery procedures described in this prospectus
under the heading "The Exchange Offer -- Procedures
for Tendering Outstanding Notes."
Federal Income Tax
Consequences............. The exchange of notes will not be a taxable event
to you for United States federal income tax
purposes. Please refer to the section in this
prospectus entitled "Certain U.S. Federal Tax
Considerations."
Exchange Agent............. State Street Bank and Trust Company is serving as
exchange agent in the exchange offer. Please refer
to the section in this prospectus entitled "The
Exchange Offer -- Exchange Agent."
SUMMARY OF THE REGISTERED NOTES
We use the term "notes" when describing provisions that apply to both the
outstanding notes and the registered notes. The registered notes will evidence
the same debt as the outstanding notes. The same indenture will govern both the
outstanding notes and the registered notes. Please refer to the section in this
prospectus entitled "Description of the Notes."
Issuer..................... The registered notes will be obligations of Leap
Wireless International, Inc.
The Registered Notes....... $225,000,000 in aggregate principal amount of
12 1/2% Senior Notes due 2010 and $668,000,000 in
aggregate principal amount at maturity of 14 1/2%
Senior Discount Notes due 2010. The form and terms
of the registered notes are identical to the form
and terms of the outstanding notes except that the
registered notes will be registered under the
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<PAGE> 10
Securities Act. Therefore, the registered notes
will not bear legends restricting their transfer.
In addition, the registered notes will not be
entitled to registration under the Securities Act.
SENIOR NOTES
Aggregate Amount........... $225,000,000 in aggregate principal amount of
12 1/2% Senior Notes due 2010.
Maturity................... April 15, 2010.
Interest................... Interest will be payable semiannually in cash, at a
rate of 12 1/2% per annum, on each April 15 and
October 15, commencing April 15, 2000.
Security................... We used approximately $78.3 million of the proceeds
from the sale of our units in February 2000 to
purchase a portfolio of U.S. government securities
and pledged this portfolio for the benefit of the
holders of the senior notes to secure and fund the
first seven interest payments on the senior notes.
See "Description of the Notes -- Security."
Optional Redemption........ We may redeem any or all of the senior notes
beginning on April 15, 2005, at the redemption
prices listed in "Description of the Notes --
Optional Redemption." In addition, before April 15,
2003, we may redeem up to 35% of the aggregate
amount of the senior notes originally issued with
the proceeds of certain offerings of our capital
stock at 112.50% of their principal amount. We may
make a redemption only if after that redemption, an
amount equal to at least 65% of the aggregate
principal amount of the senior notes originally
issued remains outstanding after that redemption.
SENIOR DISCOUNT NOTES
Aggregate Amount........... $668,000,000 in aggregate principal amount at
maturity ($325,102,240 initial accreted value) of
14 1/2% Senior Discount Notes due 2010.
Maturity................... April 15, 2010.
Yield and Interest......... The senior discount notes were sold at a
substantial discount from their principal amount at
maturity and there will not be any payment of
interest on the senior discount notes prior to
April 15, 2005, other than additional interest
payable as a result of an increase in the interest
rate as described in "Description of the
Notes -- Registration Rights." For a discussion of
the U.S. federal income tax treatment of the senior
discount notes under the original issue discount
rules, see "Certain U.S. Federal Tax
Considerations." From and after April 15, 2005, the
senior discount notes will bear interest, which
will be payable semiannually in cash, at a rate of
14 1/2% per annum on each April 15 and October 15,
commencing October 15, 2005.
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<PAGE> 11
Optional Redemption........ We may redeem any or all of the senior discount
notes beginning on April 15, 2005, at the
redemption prices listed in "Description of the
Notes -- Optional Redemption."
In addition, before April 15, 2003, we may redeem
up to 35% of the aggregate principal amount at
maturity of the senior discount notes originally
issued with the proceeds of certain public
offerings of our capital stock at 114.50% of their
accreted value. We may make a redemption only if
after that redemption, an amount equal to at least
65% of the aggregate principal amount of the senior
discount notes originally issued remains
outstanding after that redemption.
SENIOR NOTES AND SENIOR
DISCOUNT NOTES
Guarantee.................. The notes are guaranteed on a senior, unsecured
basis by Cricket Communications Holdings, Inc., our
domestic subsidiary holding company. See
"Description of the Notes -- Guarantee."
Mandatory Offers to
Repurchase............... If we experience specific kinds of changes of
control or, under certain circumstances, if we sell
assets, we must offer to repurchase the notes at
the prices listed in the sections "Description of
the Notes -- Covenants -- Limitation on Asset
Sales" and "-- Repurchase of Notes upon a Change of
Control."
Ranking.................... The notes will be senior, unsecured (except to the
extent described under "-- Security" above with
respect to the senior notes) obligations of Leap
and (1) will rank equally in right of payment with
all of our existing and future senior unsecured
indebtedness, (2) will be senior in right of
payment to all future subordinated indebtedness of
Leap, and (3) will be effectively subordinate to
all secured indebtedness of Leap and to all
indebtedness and other liabilities, including trade
payables and lease obligations, of any of our
subsidiaries other than any subsidiary which is a
guarantor. See "Risk Factors -- We Will Have
Substantial Indebtedness, and We May Incur More
Indebtedness," "-- Our Ability to Service the Notes
Depends on Our Ability to Get Cash from Our
Subsidiaries" and "-- The Notes Will Be Effectively
Subordinated to Our Secured Debt."
Certain Covenants.......... The terms of the notes will restrict our ability
and the ability of some of our subsidiaries to,
among other things:
- incur additional indebtedness;
- create liens;
- pay dividends, make distributions in respect of
capital stock or redeem capital stock;
- make investments or certain other restricted
payments;
- sell assets;
- issue or sell stock of restricted subsidiaries;
8
<PAGE> 12
- enter into transactions with stockholders or
affiliates;
- engage in sale-leaseback transactions; and
- effect a consolidation or merger.
However, these limitations will be subject to a
number of important qualifications and exceptions.
See "Description of the Notes -- Covenants."
ABSENCE OF PUBLIC MARKET... There is no public market for the registered notes.
The registered notes will not be listed on any
securities exchange or quotation system. Morgan,
Stanley & Co. has advised us that following the
exchange offer, it intends to make a market in the
registered notes. However, any market-making may be
discontinued at any time without notice. If an
active public market does not develop, the market
price and liquidity of the registered notes may be
adversely affected. Please refer to the section in
this prospectus entitled "Risk Factors -- You May
Find it Difficult to Sell Your Registered Notes
Because No Public Trading Market for the Registered
Notes Exists."
The units containing the outstanding notes
currently trade in the PORTAL Market. Following
completion of the exchange offer, the registered
notes will not be eligible for PORTAL Market
trading.
RISK FACTORS
See "Risk Factors" immediately following this Summary, for a discussion of
certain factors relating to us, our business, and an investment in the notes.
9
<PAGE> 13
SUMMARY CONSOLIDATED FINANCIAL DATA
AND UNAUDITED PRO FORMA FINANCIAL DATA
The following tables contain summary historical consolidated statement of
operations data, consolidated balance sheet data and other financial data for
Leap. The historical consolidated financial data for the fiscal years ended
August 31, 1997, 1998 and 1999 are derived from the audited consolidated
financial statements of Leap, as restated, which are included elsewhere in this
prospectus. The historical consolidated financial data as of February 29, 2000
and for the six months ended February 28, 1999 and February 29, 2000 are derived
from the unaudited consolidated financial statements of Leap, as restated, which
are included elsewhere in this prospectus. The historical consolidated financial
data for the fiscal year ended August 31, 1996 are derived from the audited
consolidated financial statements of Leap, which are not included in this
prospectus. The historical consolidated statement of operations gives effect to
the distribution of Leap common stock as if it had occurred as of September 1,
1995. In addition, other operating data, including unaudited customer and
potential customer data as of February 29, 2000, are presented.
The unaudited pro forma financial data are derived from the unaudited pro
forma financial information that gives effect to:
- Leap's acquisition in April 1999 of the remaining 50% interest in
Smartcom S.A., formerly named Chilesat Telefonia Personal S.A., that it
did not already own;
- the acquisition of substantially all the assets of Chase
Telecommunications Holdings, Inc. in March 2000;
- Leap's acquisition of wireless licenses from AirGate in January 2000; and
- Leap's pending wireless license acquisitions from PCS Devco, Inc.,
Radiofone PCS, L.L.C., Zuma PCS, LLC, Beta Communications, L.L.C., CM
PCS, LLC and Center Point PCS, as if they had already occurred.
The unaudited pro forma financial data are based upon available information
and assumptions that management believes are reasonable. The unaudited pro forma
consolidated balance sheet data give effect to the acquisition of substantially
all the assets of Chase Telecommunications Holdings and the pending acquisitions
of wireless licenses as if they had occurred as of February 29, 2000. The
unaudited pro forma consolidated statement of operations data give effect to the
acquisition of the remaining 50% interest in Smartcom, the acquisition of
substantially all the assets of Chase Telecommunications Holdings, the
acquisition of wireless licenses from AirGate and the pending acquisition of
wireless licenses from PCS Devco, Radiofone, Zuma, Beta, CM PCS and Center Point
PCS, as if they had occurred as of September 1, 1998. The unaudited pro forma
financial data are provided for illustrative purposes only and do not purport to
represent what Leap's results of operations or financial condition actually
would have been had these acquisitions in fact occurred on such dates or to
project Leap's results of operations or financial condition for any future
period or date.
10
<PAGE> 14
These tables should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the audited
consolidated financial statements and unaudited pro forma financial information
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, ------------------------------------------
--------------------------------------------------------- PRO FORMA
PRO FORMA FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1996 1997(1) 1998(1) 1999 1999 1999(1) 2000 2000
------- ---------- ---------- --------- --------- ------------ ------------ ------------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Operating revenues..... $ -- $ -- $ -- $ 3,907 $ 11,966 $ -- $ 14,283 $ 19,572
Operating expenses:
Cost of operating
revenues........... -- -- -- (3,810) (13,226) -- (22,462) (30,002)
Selling, general and
administrative
expenses........... (396) (1,361) (23,888) (28,745) (46,620) (8,284) (33,041) (38,511)
Depreciation and
amortization....... -- -- -- (5,824) (23,678) (265) (10,248) (29,990)
------- ------- -------- --------- --------- -------- --------- ---------
Total operating
expenses....... (396) (1,361) (23,888) (38,379) (83,524) (8,549) (65,751) (98,503)
------- ------- -------- --------- --------- -------- --------- ---------
Operating loss..... (396) (1,361) (23,888) (34,472) (71,558) (8,549) (51,468) (78,931)
Equity in net loss of
unconsolidated
wireless operating
companies............ -- (3,793) (23,118) (100,300) (66,271) (35,408) (50,059) (29,897)
Write-down of
investments in
unconsolidated
wireless operating
companies............ -- -- -- (27,242) (27,242) -- -- --
Interest income........ -- -- 273 2,505 1,464 1,825 1,577 1,609
Interest expense....... -- -- -- (10,356) (37,366) (1,913) (21,120) (31,179)
Foreign currency
transaction losses... -- -- -- (7,211) (11,410) -- (1,396) (1,396)
Gain on sale of wholly
owned subsidiary..... -- -- -- 9,097 9,097 -- -- --
Gain on issuance of
stock by
unconsolidated
wireless operating
company.............. -- -- -- 3,609 3,609 -- -- --
Minority interest...... -- -- -- -- -- -- 518 518
Other income (expense),
net.................. -- -- -- (243) (136) -- (2,868) (3,033)
------- ------- -------- --------- --------- -------- --------- ---------
Loss before
extraordinary item... (396) (5,154) (46,733) (164,613) $(199,813) (44,045) (124,816) $(142,309)
========= =========
Extraordinary loss on
early extinguishment
of debt.............. -- -- -- -- -- (4,422)
------- ------- -------- --------- -------- ---------
Net loss............... $ (396) $(5,154) $(46,733) $(164,613) $(44,045) $(129,238)
======= ======= ======== ========= ======== =========
Basic and diluted net
loss per common
share(3):
Loss before
extraordinary
item............... $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (10.91) $ (2.49) $ (6.31) $ (7.05)
========= =========
Extraordinary loss... -- -- -- -- -- (0.22)
------- ------- -------- --------- -------- ---------
Net loss per common
share................ $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (2.49) $ (6.53)
======= ======= ======== ========= ======== =========
Shares used to
calculate basic and
diluted net loss per
common share(3)...... 17,648 17,648 17,648 17,910 18,314 17,717 19,788 20,196
======= ======= ======== ========= ========= ======== ========= =========
</TABLE>
11
<PAGE> 15
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, ------------------------------------------
--------------------------------------------------------- PRO FORMA
PRO FORMA FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1996 1997(1) 1998(1) 1999 1999 1999(1) 2000 2000
------- ---------- ---------- --------- --------- ------------ ------------ ------------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(4).............. $ (396) $(5,154) $(47,006) $(150,938) $(140,233) $(43,692) $ (99,447) $ (82,749)
Capital expenditures... -- -- -- (6,864) (2,950) (55,298)
Net cash used in
operating
activities........... (285) (1,193) (18,378) (34,105) (13,572) (35,019)
Net cash used in
investing
activities........... -- (46,000) (140,742) (158,333) (97,191) (143,873)
Net cash provided by
financing
activities........... 285 47,193 159,120 216,476 116,835 750,858
Ratio of earnings to
fixed charges(5)..... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF FEBRUARY 29, 2000
------------------------
PRO
ACTUAL FORMA
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA(2):
Cash and cash equivalents................................... $ 559,935 $ 524,569
Working capital............................................. 629,564 549,862
Restricted cash equivalents and investments................. 108,478 108,478
Total assets................................................ 1,053,663 1,209,126
Long-term debt.............................................. 552,876 647,105
Stockholders' equity........................................ 435,681 486,349
</TABLE>
<TABLE>
<CAPTION>
AS OF FEBRUARY 29, 2000
-----------------------------------------------------
U.S.(6) MEXICO(7) CHILE TOTAL
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Potential customers......................................... 30,156,000 99,000,000 14,900,000 144,056,000
Covered potential customers................................. 1,200,000 27,700,000 12,000,000 40,900,000
Customers................................................... 37,000 182,000 92,000 311,000
Proportionate potential customers(8)........................ 29,010,000 28,300,000 14,900,000 72,210,000
</TABLE>
- -------------------------
(1) These amounts have been restated for the adoption during fiscal 1999 of the
equity method retroactive to the initial date of Leap's investment in Chase
Telecommunications Holdings. See Note 2 of the notes to the consolidated
financial statements included elsewhere in this prospectus.
(2) For the fourth quarter of fiscal 1999, the financial statements of Smartcom
are included in the consolidated financial data as a result of Leap's
acquisition of the remaining 50% interest in Smartcom on April 19, 1999.
Before the fourth quarter, Leap's investment in Smartcom was accounted for
using the equity method of accounting.
(3) The basic and diluted net loss per common share for the year ended August
31, 1999 and for the six months ended February 28, 1999 and February 29,
2000 was calculated by dividing the net losses by 17,910,440, 17,717,486 and
19,788,203, respectively, the weighted average number of common shares
outstanding during each of the periods. The basic and diluted net loss per
common share for the pro forma year ended August 31, 1999 and pro forma six
months ended February 29, 2000 was calculated by dividing the net losses by
18,313,568 and 20,195,761, respectively, the weighted average number of
common shares outstanding during each of the periods. Leap was a wholly
owned subsidiary of Qualcomm before September 23, 1998. The basic and
diluted net loss per common share for the fiscal years ended August 31,
1996, 1997 (restated) and 1998 (restated) were calculated by dividing the
net losses by the 17,647,685 shares of Leap common stock issued in the
distribution to Qualcomm's stockholders on September 23, 1998.
12
<PAGE> 16
(4) EBITDA represents net income (loss) before interest, income taxes,
depreciation and amortization. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance and as a measure of debt service ability. It is not a measure of
financial performance under generally accepted accounting principles.
(5) For the years ended August 31, 1996, 1997, 1998 and 1999 and the pro forma
year ended August 31, 1999, our earnings were insufficient to cover fixed
charges by $0.4 million, $1.4 million, $23.6 million, $47.6 million and
$145.2 million, respectively. For the six months ended February 28, 1999 and
February 29, 2000 and the pro forma six months ended February 29, 2000, our
earnings were insufficient to cover fixed charges by $10.6 million, $99.9
million and $144.6 million, respectively. Fixed charges consist of interest
expense, including capitalized interest, amortized discounts related to
indebtedness and that portion of rent expenses deemed to be interest.
(6) These amounts assume that Leap's acquisition of substantially all the assets
of Chase Telecommunications Holdings, including C-Block licenses for
approximately 6.6 million potential customers, was completed as of February
29, 2000. These amounts also assume the acquisition by Leap of wireless
licenses representing approximately 1.2 million potential customers from PCS
Devco, approximately 5.0 million potential customers from Radiofone,
approximately 1.3 million potential customers from Zuma, approximately 3.7
million potential customers from Beta, approximately 1.0 million potential
customers from CM PCS and approximately 0.3 million potential customers from
Center Point PCS. We completed the acquisition of wireless licenses from
AirGate in January 2000. We have signed acquisition agreements with PCS
Devco, Radiofone, Zuma, Beta, CM PCS and Center Point PCS, but the
acquisitions have not been completed and remain subject to closing
conditions, including FCC approval.
(7) As of February 29, 2000, Leap owned 28.6% of the outstanding capital stock
of Pegaso. As of the date of this prospectus, Leap owns 22.4% of the
outstanding capital stock of Pegaso.
(8) Proportionate potential customers information is provided as of February 29,
2000, and represents our present equity share of the potential customers
included in the licenses owned or to be acquired by our subsidiaries and
ventures. As of February 29, 2000, we owned a 96.2% interest in Cricket
Communications Holdings, Inc. and a 28.6% interest in Pegaso in Mexico. We
presently own a 94.89% interest in Cricket Communications Holdings and a
22.4% interest in Pegaso. We own 100% of Smartcom in Chile.
13
<PAGE> 17
RISK FACTORS
In addition to the other information in this prospectus, you should
carefully consider the following risks before making an investment decision.
WE HAVE SUBSTANTIAL INDEBTEDNESS, AND WE MAY INCUR MORE INDEBTEDNESS
The following table shows some important credit statistics.
<TABLE>
<CAPTION>
AT FEBRUARY 29,
2000
---------------
(IN MILLIONS)
<S> <C>
Total debt................................................ $584.9
Shareholders' equity...................................... 435.7
Total debt as a percentage of total capitalization........ 57.3%
</TABLE>
The indenture limits, but does not prohibit, our incurrence of additional
indebtedness. Moreover, the indenture permits us to incur an unlimited amount of
indebtedness to finance the acquisition of equipment, inventory and network
assets.
Our substantial indebtedness will have important consequences to you. For
example:
- The debt service requirements of any additional indebtedness could make
it more difficult for us to make payments on the notes.
- Our ability to borrow additional money for working capital, capital
expenditures, debt service requirements or other purposes will be
limited.
- A substantial portion of our future cash flow from operations, if any,
will be used to pay principal and interest on our indebtedness and other
obligations and will not be available for our business.
- Our flexibility in planning for, or reacting to changes in, our business
and our ability to take advantage of future business opportunities may be
restricted.
- We may have more indebtedness than certain of our competitors, which may
place us at a competitive disadvantage.
- We may be limited in our ability to react to changing market conditions,
changes in our industry, or economic downturns.
Our ability to pay interest on the notes and meet our other debt service
obligations will depend on our future performance, which in turn depends on
successful implementation of our strategy and on financial, competitive,
regulatory, technical and other factors, many of which are beyond our control.
If we cannot generate sufficient cash flow from operations to meet our debt
service requirements, we may be required to refinance our indebtedness,
including the notes. Our ability to obtain that financing will depend on our
financial condition at the time, the restrictions in the agreements governing
our indebtedness and other factors, including general market and economic
conditions. If that refinancing were not possible, we could be forced to dispose
of assets at unfavorable prices. In addition, we could default on our debt
obligations, including our obligation to make payments on the notes.
WE HAVE A LIMITED OPERATING HISTORY
We have only operated as an independent company since September 1998.
Because we are at an early stage of development, we face risks generally
associated with establishing a new business enterprise.
14
<PAGE> 18
When considering our prospects, investors must consider the risks, expenses and
difficulties encountered by companies in their early stages of development.
These risks include possible disruptions and inefficiencies associated with
rapid growth and workplace expansion, the difficulties associated with raising
money to finance new enterprises and the difficulties of establishing a
significant presence in highly competitive markets.
THE CRICKET BUSINESS STRATEGY IS UNPROVEN
Our business strategy in the United States, marketed under the brand name
Cricket, is to offer consumers a service plan that allows them to make and
receive virtually unlimited local calls for a low, flat monthly rate. This
strategy, which has been introduced in only two markets, is a new approach to
marketing wireless services and may not prove to be successful. Our marketing
efforts may not draw the volume of customers necessary to sustain our business
plan, our capital and operating costs may exceed planned levels, and we may be
unable to compete effectively with landline and other wireless service providers
in our markets. In addition, potential customers may perceive the Cricket
service to be less appealing than other wireless plans, which offer more
features and options, including the ability to roam outside of the home service
area. If our business strategy proves to be successful, other wireless providers
are likely to adopt similar pricing plans and marketing approaches. Should our
competitors choose to adopt a strategy similar to the Cricket strategy, some of
them may be able to price their services more aggressively or attract more
customers because of their stronger market presence and geographic reach and
their larger financial resources.
THE FCC'S DECISION THAT WE ARE QUALIFIED TO HOLD C-BLOCK AND F-BLOCK LICENSES IS
SUBJECT TO REVIEW AND APPEAL
Our business plan anticipates and depends on our acquisition and operation
of C-Block and F-Block licenses in the U.S. We believe that currently C-Block
and F-Block licenses are generally more available and are less expensive to
obtain than licenses in other FCC auction blocks, partly because a licensee may
hold these licenses only if it qualifies as a "designated entity" under FCC
rules.
In July 1999, the FCC issued an opinion and order that found that we were
entitled to acquire C-Block and F-Block licenses. The order approved our
acquisition of the 36 C-Block licenses for which we were the highest bidder in
the FCC's 1999 spectrum re-auction, and the transfer of three F-Block licenses
from AirGate to one of our subsidiaries which cover portions of North Carolina,
in each case subject to the fulfillment of certain conditions. In October 1999,
the FCC issued to us the 36 re-auctioned licenses. In addition, in March 1999,
the FCC approved the transfer to us of 11 C-Block licenses from Chase
Telecommunications and one C-Block license from PCS Devco.
Each of the conditions imposed by the FCC has been satisfied. We have a
continuing obligation, during the designated entity holding period for our
C-Block and F-Block licenses, to limit our debt to Qualcomm to 50% or less of
our outstanding debt and to ensure that persons who are or were previously
officers or directors of Qualcomm do not comprise a majority of our board of
directors or a majority of our officers. If we fail to continue to meet any of
the conditions imposed by the FCC or otherwise fail to maintain our
qualification to own C-Block and F-Block licenses, that failure would have a
material adverse effect on our business and financial condition.
Various parties previously challenged our qualification to hold C-Block and
F-Block licenses, which challenges were rejected in the FCC's July 1999 order.
One of these parties, a wireless operating company, has requested that the FCC
review its order, as well as the order consenting to the transfer of licenses to
us from Chase Telecommunications and PCS Devco. In addition, further judicial
review of these orders is possible.
15
<PAGE> 19
We may not prevail in connection with any such appeal and we may not remain
qualified to hold C-Block or F-Block licenses. If the FCC determines that we are
not qualified to hold C-Block or F-Block licenses, it could take the position
that all of our licenses should be divested, cancelled or reauctioned.
OUR ABILITY TO SERVICE THE NOTES DEPENDS ON OUR ABILITY TO GET CASH FROM OUR
SUBSIDIARIES
Leap, the issuer of the notes, is a holding company with no independent
operations or significant assets other than the stock of our subsidiaries and
investments in our joint ventures. The cash flow and consequent ability of Leap
to service its debt obligations, including the notes, are dependent upon the
ability of Leap to receive cash from its subsidiaries. These subsidiaries are
separate legal entities and, except for Cricket Communications Holdings, which
is a guarantor of the notes, have no obligations to pay amounts due under the
notes or to make funds available for such payment. In addition, applicable law
of the jurisdictions in which these subsidiaries are organized or contractual or
other obligations, including vendor financing agreements, to which they are
subject may limit their ability to pay dividends or make payments on
intercompany loans. Claims of creditors of these subsidiaries will generally
have priority as to the assets of such subsidiaries over the claims of the
holders of Leap's debt, including the notes. Accordingly, the notes will
generally be effectively subordinated to the liabilities of these subsidiaries.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT
The notes are not secured by any of our assets except the pledged
securities as described under "Description of the Notes -- Security." We expect
to incur future indebtedness which may be secured, particularly through
equipment, network or working capital financings. If we default on our other
secured indebtedness, or in the event of our bankruptcy, liquidation or
reorganization, our assets would be available to pay our obligations on the
notes only after we had made all payments on that secured debt. To the extent
that the value of the encumbered assets was insufficient to repay our secured
debt, holders of that secured debt would be entitled to share in any of our
remaining assets on parity with you and other unsecured creditors.
OUR DEBT INSTRUMENTS CONTAIN PROVISIONS AND REQUIREMENTS THAT COULD LIMIT OUR
ABILITY TO PURSUE BORROWING OPPORTUNITIES
The restrictions contained in the indenture, and the restrictions contained
in the senior debt of our subsidiaries, may limit our ability to implement our
business plan, finance future operations, respond to changing business and
economic conditions, secure additional financing, if needed, and engage in
opportunistic transactions, such as the acquisition of wireless licenses. Our
senior debt, among other things, restricts our ability and the ability of our
subsidiaries and our future subsidiaries to do the following:
- create liens;
- make certain payments, including payments of dividends and distributions
in respect of capital stock;
- consolidate, merge and sell assets;
- engage in certain transactions with affiliates; and
- fundamentally change our business.
16
<PAGE> 20
In addition, our senior debt requires us to maintain certain ratios,
including:
- leverage ratios;
- interest coverage ratios; and
- fixed charges ratios;
and to satisfy certain tests, including tests relating to:
- minimum covered population in order to incur additional indebtedness; and
- minimum number of subscribers to our services in order to incur
additional indebtedness.
We may not satisfy the financial ratios and tests under our senior debt due
to events that are beyond our control. If we fail to satisfy any of the
financial ratios and tests, we could be in default under our senior debt or may
be limited in our ability to access additional funds under our senior debt,
which could result in our being unable to make payments on the notes.
THE GUARANTEE OF THE NOTES DOES NOT PROVIDE SIGNIFICANT ADDITIONAL ASSURANCE OF
PAYMENT TO THE HOLDERS OF THE NOTES
The notes are guaranteed on a senior, unsecured basis by Cricket
Communications Holdings. Cricket Communications Holdings is a holding company
with no independent operations or significant assets other than the stock of
Cricket Communications, Inc. Cricket Communications Holdings is not expected to
generate income from operations or acquire additional assets in the future.
Accordingly, the guarantee does not provide any significant additional assurance
of payment to the holders of the notes.
Enforcement of the guarantee against Cricket Communications Holdings or any
future guarantors would be subject to some defenses available to guarantors
generally, and would also be subject to some defenses available to Leap
regarding enforcement of the notes, including, without limitation, the right to
force the Trustee to exercise its remedies prior to commencement of any action
on the guarantee. Cricket Communications Holdings will waive, with respect to
the notes, all such defenses to the extent it may legally do so. See
"Description of the Notes -- Guarantee."
FRAUDULENT CONVEYANCE CONSIDERATIONS -- FEDERAL AND STATE COURTS MAY UNDER
SPECIFIC CIRCUMSTANCES VOID GUARANTEES
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the guarantee of Cricket Communications Holdings could
be voided, or claims in respect of the guarantee could be subordinated to all
other debts of Cricket Communications Holdings if, among other things, Cricket
Communications Holdings, at the time it incurred the indebtedness evidenced by
the guarantee: (1) received less than reasonably equivalent value or fair
consideration for the incurrence of the guarantee and was insolvent or rendered
insolvent by reason of such incurrence; (2) was engaged in a business or
transaction for which Cricket Communications Holdings' remaining assets
constituted unreasonably small capital; or (3) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they mature.
In addition, any payment by Cricket Communications Holdings pursuant to the
guarantee could be voided and required to be returned to Cricket Communications
Holdings, or to a fund for the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if: (1) the sum of its debts, including contingent
liabilities, were greater than the fair saleable value of all of its assets; (2)
if the present fair saleable value
17
<PAGE> 21
of its assets were less than the amount that would be required to pay its
probable liability on its existing debts, including contingent liabilities, as
they become absolute and mature; or (3) it could not pay its debts as they
become due.
The indenture requires that certain future domestic subsidiaries guarantee
the notes. These considerations will also apply to these guarantees.
THE BANKRUPTCY LAWS MAY REDUCE YOUR CLAIM IN THE EVENT OF OUR INSOLVENCY
If a bankruptcy case were commenced by or against us under the U.S.
Bankruptcy Code after the issuance of the notes, your claim with respect to the
principal amount of the notes may be limited to an amount equal to the sum of
the initial offering price and that portion of the original issue discount that
is not deemed to constitute unmatured interest for purposes of the U.S.
Bankruptcy Code. Any original issue discount that had not amortized as of the
date of the bankruptcy filing could constitute unmatured interest for purposes
of the U.S. Bankruptcy Code. To the extent that the U.S. Bankruptcy Code differs
from the Internal Revenue Code in determining the method of amortization of
original issue discount, you may recognize taxable gain or loss upon payment of
your claim in bankruptcy.
IF YOU DO NOT EXCHANGE YOUR OUTSTANDING NOTES FOR REGISTERED NOTES, YOUR NOTES
WILL CONTINUE TO HAVE RESTRICTIONS ON TRANSFER
If you do not exchange your outstanding notes for registered notes in the
exchange offer, or if your outstanding notes are tendered but not accepted, your
notes will continue to have restrictions on transfer. In general, you may offer
or sell any outstanding notes only if the notes are registered under the
Securities Act and applicable state laws, or resold under an exemption from
these laws. We do not intend to register the outstanding notes under the
Securities Act, other than in the limited circumstances described in the
registration rights agreement discussed in the section "Description of Notes --
Registration Rights."
THE ISSUANCE OF THE REGISTERED NOTES MAY ADVERSELY AFFECT THE MARKET FOR
OUTSTANDING NOTES
If outstanding notes are tendered for exchange, the trading market for
untendered and tendered but unaccepted outstanding notes could be adversely
affected. Please refer to the section in this prospectus entitled "The Exchange
Offer -- Consequences of Failure to Exchange."
YOU MAY FIND IT DIFFICULT TO SELL YOUR REGISTERED NOTES BECAUSE NO PUBLIC
TRADING MARKET FOR THE REGISTERED NOTES EXISTS
The registered notes will be registered under the Securities Act, but will
constitute a new issue of securities with no established trading market. We do
not intend to list the registered notes on any national securities exchange or
to seek the admission of the registered notes for quotation through the Nasdaq
Stock Market, Inc. Although Morgan Stanley & Co. presently intends to make a
market in the registered notes, Morgan Stanley is not obligated to do so, and
they may discontinue any market-making activity with respect to the notes at any
time without notice. In addition, the registered notes will not be eligible for
trading on the PORTAL Market.
Accordingly,
- a market for the registered notes may not develop;
- you may not be able to sell your registered notes; and
- you may not be able to sell your registered notes at any particular
price.
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<PAGE> 22
WE HAVE HISTORICALLY HAD A DEFICIENCY OF EARNINGS TO FIXED CHARGES AND OUR
EARNINGS IN THE FUTURE MAY NOT BE SUFFICIENT TO COVER THOSE FIXED CHARGES
For the years ended August 31, 1999, 1998, 1997 and 1996, and the pro forma
year ended August 31, 1999, our earnings were insufficient to cover fixed
charges by approximately $47.6 million, $23.6 million, $1.4 million, $0.4
million, and $145.2 million, respectively. For the six months ended February 29,
2000 and February 28, 1999 and the pro forma six months ended February 29, 2000,
our earnings were insufficient to cover fixed charges by $99.9 million, $10.6
million and $144.6 million, respectively. Fixed charges consist of interest
expense, including capitalized interest, amortized discounts and related
indebtedness and that portion of rent expense deemed to be interest. Our
earnings in the future may not be sufficient to cover those fixed charges,
including our obligations on the notes.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
Leap experienced net losses of approximately $83.0 million in the second
quarter of fiscal 2000, $46.3 million in the first quarter of fiscal 2000,
$164.6 million in fiscal 1999, $46.7 million in fiscal 1998 and $5.2 million in
fiscal 1997. According to generally accepted accounting principles, Leap must
recognize some or all of its subsidiaries' losses. These losses are likely to be
significant for the next several years as we launch service in new markets and
seek to increase our customer bases in new and existing markets. We may not
generate profits in the short term or at all. If we fail to achieve
profitability, that failure could have a negative effect on the market value of
our common stock.
LEAP MAY FAIL TO RAISE REQUIRED CAPITAL
We require significant additional capital to build-out and operate planned
networks and for general working capital needs. We also require additional
capital to invest in any new wireless opportunities, including capital for
license acquisition costs. Capital markets have recently been volatile and
uncertain. These markets may not improve, and we may not be able to access these
markets to raise additional capital. Developing companies in emerging markets
such as Latin America have found it particularly difficult to raise capital. If
we fail to obtain required new financing, that failure would have a material
adverse effect on our business and our financial condition. For example, if we
are unable to access capital markets, we may have to restrict our activities or
sell our interests in one or more of our subsidiaries or other ventures earlier
than planned or at a "distressed sale" price.
ADVERSE REGULATORY CHANGES COULD IMPAIR OUR ABILITY TO MAINTAIN EXISTING
LICENSES AND OBTAIN NEW LICENSES
We must maintain our existing telecommunications licenses and those we
acquire in the future to continue offering wireless telecommunications services.
Changes in regulations or failure to comply with the terms of a license or
failure to have the license renewed could result in a loss of the license,
penalties and fines. For example, we could lose a license if we fail to
construct or operate a wireless network as required by the license. If we lose a
license, that loss could have a material adverse effect on our business and
financial condition.
State regulatory agencies, the FCC, the U.S. Congress, the courts and other
governmental bodies regulate the operation of wireless telecommunications
systems and the use of licenses in the U.S. The FCC, Congress, the courts or
other federal, state or local bodies having jurisdiction over our operating
companies may take actions that could have a material adverse effect on our
business and financial condition.
The FCC has announced plans to hold a reauction of C-Block and F-Block
licenses in July 2000. In connection with this reauction, two companies, SBC
Communications, Inc., and Nextel Communica-
19
<PAGE> 23
tions, Inc., have requested that the FCC, via waiver or a rulemaking proceeding,
relax the eligibility rules for acquiring C-Block and F-Block licenses, so that
these and possibly other large companies would be able to compete with us and
other designated entities and small businesses in acquiring C-Block and F-Block
licenses. While we plan to vigorously oppose the requests from SBC and Nextel,
FCC action approving them could have a material adverse effect on our business
and financial condition, including our ability to continue acquiring C-Block and
F-Block licenses.
Foreign governmental authorities regulate the operation of wireless
telecommunications systems and the use of licenses in the foreign countries in
which we operate. In some cases, the regulatory authorities also operate our
competitors. Changes in the current regulatory environment of these markets
could have a negative effect on us. In addition, the regulatory frameworks in
some of these countries are relatively new, and the interpretation of
regulations is uncertain.
We believe that acquiring new telecommunications licenses will be highly
competitive. If we are not able to obtain new licenses, or could not otherwise
participate in companies that obtain new licenses, our ability to expand our
operations would be limited.
WE HAVE ENCOUNTERED RELIABILITY PROBLEMS DURING THE INITIAL DEPLOYMENT OF OUR
NETWORKS
As is typical with newly-constructed networks, we and the companies that we
have agreed to acquire have experienced reliability problems with respect to
network infrastructure equipment in initial years of operation. We are working
with equipment suppliers to address these problems. Chase Telecommunications is
in the process of replacing the majority of its network infrastructure in
Chattanooga with equipment from a different vendor that we believe is better
suited to the high usage patterns of the Cricket service. Smartcom has replaced
some network components in its Chilean network and is currently upgrading some
system software components. Replacing system components requires significant
expenditures and diverts management's attention from other matters. If our
network infrastructure equipment ultimately fails to perform as expected, that
failure could have a material adverse effect on our business and financial
condition.
WE MAY EXPERIENCE DIFFICULTIES IN CONSTRUCTING AND OPERATING OUR
TELECOMMUNICATIONS NETWORKS
We will need to construct new telecommunications networks and expand
existing networks. We will heavily depend on suppliers and contractors to
successfully complete these complex construction projects. We may experience
quality deficiencies, cost overruns and delays on these construction projects,
including deficiencies, overruns and delays not within our control or the
control of our contractors. In addition, the construction of new
telecommunications networks requires the receipt of permits and approvals from
numerous governmental bodies including municipalities and zoning boards. Failure
to receive these approvals in a timely fashion can delay system rollouts and can
raise the costs of completing construction projects. Pegaso's launch of
commercial service in Mexico City was delayed several months due to delays in
obtaining the required permits from local authorities for cell site
construction.
We may not complete construction projects within budget or on a timely
basis. A failure to satisfactorily complete construction projects could
jeopardize wireless licenses and customer contracts. As a result, a failure of
this type could have a material adverse effect on our business and financial
condition.
Even if we complete construction in a timely and cost effective manner, we
will also face challenges in managing and operating our telecommunications
systems. These challenges include operating and maintaining the
telecommunications operating equipment and managing the sales, advertising,
customer support, billing and collection functions of the business. Our failure
in any of these areas could
20
<PAGE> 24
undermine customer satisfaction, increase customer turnover, reduce revenues and
otherwise have a material adverse effect on our business and financial
condition.
IF WE EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER, OUR COSTS COULD INCREASE
Many providers in the U.S. personal communications services, or PCS,
industry have experienced a high rate of customer turnover as compared to
cellular industry averages. The rate of customer turnover may be the result of
several factors, including limited network coverage, reliability issues such as
blocked or dropped calls, handset problems, inability to roam onto cellular
networks, affordability, customer care concerns and other competitive factors.
Our strategy to address customer turnover may not be successful, or the rate of
customer turnover may be unacceptable. If our competitors choose to provide a
service plan with pricing similar to the Cricket service, competitive factors
could also cause increased customer turnover. A high rate of customer turnover
could reduce revenues and increase marketing costs in order to attract the
minimum number of replacement customers required to sustain our business plan,
which, in turn, could have a material adverse effect on our business and
financial condition.
CALL VOLUME UNDER CRICKET FLAT PRICE PLANS COULD EXCEED THE CAPACITY OF OUR
WIRELESS NETWORKS
Our Cricket strategy in the U.S. is to offer consumers a service plan that
allows them to make virtually unlimited local calls for a low, flat monthly
rate. Our business plans for this strategy assume that Cricket customers will
use their wireless phones for substantially more minutes per month than
customers who purchase service from other providers under more traditional
plans. We intend to design our U.S. networks to accommodate the expected high
call volume. Although we believe CDMA-based networks will be well suited to
support high call volumes, if wireless use by Cricket customers exceeds the
capacity of our future networks, service quality may suffer, and we may be
forced to raise the price of Cricket service to reduce volume or otherwise limit
the number of new customers. If our planned networks cannot handle the call
volumes they experience, our competitive position and business prospects in the
U.S. could be materially adversely affected.
RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT OUR
BUSINESS
We face many risks from our international activities. Pegaso in Mexico and
Smartcom in Chile largely depend on the economies in which they operate and
these economies are in various stages of development. These markets are subject
to rapid fluctuations in currency exchange rates, consumer prices, inflation,
employment levels and gross domestic product.
In addition, foreign laws and courts govern many of the agreements of
Pegaso and Smartcom. Other parties may breach or may make it difficult to
enforce these agreements.
We will also face country-specific risks. The country-specific risks that
we face include:
Risks Associated With Doing Business in Mexico: Mexico's currency and
financial markets continue to experience volatility. The impact on the Mexican
economy of the economic crisis that began in Asia and then spread to Eastern
Europe and Brazil has affected the ability of Mexican companies to access the
capital markets. The ability of Mexican companies to access the capital markets
may not improve and may deteriorate further in the future. The economy of Mexico
historically is affected by fluctuations in the price of oil and petroleum
products. Fluctuations in the prices of these products and continuing political
tensions in Mexico could negatively impact our prospects in Mexico.
Risks Associated With Doing Business in Chile: The success of our
subsidiary in Chile depends largely on the economy of that country. Fluctuations
in the prices of natural resources historically affect the economy of Chile. The
economic crisis that began in Asia and spread to Eastern Europe and Brazil
21
<PAGE> 25
has negatively impacted some commodity prices, which could negatively impact our
prospects in Chile. Although Chilean prices and its currency generally have been
stable, maintaining this stability has required continued intervention by the
Chilean government. A decision by the Chilean government to stop this
intervention could negatively impact our prospects in Chile.
OUR RESULTS OF OPERATIONS MAY BE HARMED BY FOREIGN CURRENCY FLUCTUATIONS
We are exposed to risk from fluctuations in foreign currency rates, which
could impact our results of operations and financial condition. Although we
report our financial statements in U.S. dollars, Pegaso and Smartcom report
their results in local currencies. Consequently, fluctuations in currency
exchange rates between the U.S. dollar and the applicable local currency will
affect our results of operations as well as the value of our ownership interests
in Pegaso and Smartcom and future ventures. We do not currently hedge against
foreign currency exchange rate risks.
Generally, our international ventures generate revenues that are paid in
their local currency. However, many of these ventures' major contracts,
including financing agreements and contracts with equipment suppliers, are
denominated in U.S. dollars. As a result, a significant change in the value of
the U.S. dollar against the national currency of an international venture could
significantly increase the venture's expenses and could have a material adverse
effect on our business and financial condition. For example, our international
ventures may be unable to satisfy their obligations under equipment supply
agreements denominated in U.S. dollars in the event of currency devaluations. In
some developing countries, including Chile and Mexico, significant currency
devaluations relative to the U.S. dollar have occurred and may occur again in
the future. In such circumstances, Leap and its international ventures may
experience economic loss with respect to the collectability of payments from
their business partners and customers and the recoverability of their
investments.
WE FACE SIGNIFICANT COMPETITION
The wireless telecommunications industry generally is very competitive and
competition is increasing. Unlike many wireless providers, we also intend to
compete directly with landline service providers in the telecommunications
industry. Many competitors have substantially greater resources than we have,
and we may not be able to compete successfully.
In the U.S., we will compete directly with other wireless providers and
traditional landline carriers in each of our markets, many of whom have greater
resources than we do and entered the market before us. A few of our competitors
operate wireless telecommunications networks covering most of the U.S.
Competitors' earlier entry and broader presence in the U.S. telecommunications
market may have a negative effect on our ability to successfully implement our
strategy. In addition, other wireless providers in the U.S. could attempt to
implement our domestic strategy of providing unlimited local service at a low,
flat monthly rate if our strategy proves successful. The landline services with
which we will compete are already used by some of our potential customers, and
we may not be successful in our efforts to persuade potential customers to adopt
our wireless service in addition to, or in replacement of, their current
landline service.
Although the deployment of advanced telecommunications services is in its
early stages in many developing countries, we believe competition is increasing
as businesses, and foreign governments realize the market potential of
telecommunications services. In Mexico, a number of international
telecommunications companies, including Bell Atlantic, AT&T, MCI, Motorola,
Nextel and SBC, as well as local competitors such as Telmex and other Mexican
telecommunications companies, continue to actively engage in developing
telecommunications services. In Chile, existing competitors include BellSouth,
Telefonica and Entel. Pegaso and Smartcom also compete against landline
carriers, including government-owned telephone companies. The Chilean
telecommunications market historically has been very
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<PAGE> 26
price competitive. We also expect the prices that Smartcom and Pegaso may charge
for their products and services in some regions will decline over the next few
years as competition increases in their markets. Our competitors in Mexico and
Chile have greater financial resources and more established operations than
Pegaso and Smartcom. Pegaso and Smartcom are at an early stage of development
and may not be able to compete successfully.
We compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio
and domestic and global mobile satellite service. These technologies may have
advantages over the technology we use and may ultimately be more attractive to
customers. We may compete in the future with companies who offer new
technologies and market other services, including cable television access,
landline telephone service and Internet access, that we do not currently intend
to market. Some of our competitors offer these other services together with
their wireless communications service, which may make their services more
attractive to customers. In addition, we expect that, over time, providers of
wireless communications services will compete more directly with providers of
traditional landline telephone services as do we, energy companies, utility
companies and cable operators who expand their services to offer communications
services.
THE TECHNOLOGIES THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR ABILITY
TO COMPETE EFFECTIVELY
We have employed digital wireless communications technology based on CDMA
technology. We are required under an agreement entered into with Qualcomm in
connection with our spin-off to use only cdmaOne systems in international
operations through January 2004. Other digital technologies may ultimately prove
to have greater capacity or features and be of higher quality than CDMA. If
another technology becomes the preferred industry standard in any of the
countries in which we operate, we may be at a competitive disadvantage, and
competitive pressures may require us to change our digital technology at
substantial cost. We may not be able to respond to those pressures or implement
new technology on a timely basis, or at an acceptable cost. If CDMA technology
becomes obsolete at some time in the future, and we are unable to effect a
cost-effective migration path, it could materially and adversely affect our
business and financial condition. For a more detailed discussion of CDMA
technology see "Business -- CDMA Technology."
IF WIRELESS HANDSETS POSE HEALTH AND SAFETY RISKS, WE MAY BE SUBJECT TO NEW
REGULATIONS, AND DEMAND FOR OUR SERVICES MAY DECREASE
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health concerns, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may have the effect
of discouraging the use of wireless handsets, which would decrease demand for
our services. In recent years, the FCC has updated the guidelines and methods it
uses for evaluating radio frequency emissions from radio equipment, including
wireless handsets. In addition, interest groups have requested that the FCC
investigate claims that digital technologies pose health concerns and cause
interference with hearing aids and other medical devices. There also are some
safety risks associated with the use of wireless handsets while driving.
Concerns over these safety risks and the effect of any legislation that may be
adopted in response to these risks could limit our ability to market and sell
our wireless service.
IF AN EVENT CONSTITUTING A CHANGE IN CONTROL OF LEAP OCCURS, WE MAY BE UNABLE TO
FULFILL OUR OBLIGATION TO PURCHASE YOUR NOTES
Under the indenture governing the notes we will be permitted to incur
senior debt in the future with terms that could prohibit us from purchasing any
of the notes before their stated maturity. Under the
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<PAGE> 27
indenture, upon a change in control we will, subject to some contractual
limitations, be required to make an offer to repurchase all of the notes. In the
event we become subject to a change in control at a time when we are prohibited
from purchasing the notes, we may be required to seek the consent of the holders
of our other senior debt to purchase the notes or attempt to refinance the debt
that contains the prohibition. If we do not obtain a consent or repay the other
senior debt, our failure to purchase the tendered notes could constitute an
event of default under the indenture, which would in turn result in a default
under the senior debt. Even if we obtain the consent, we may not have sufficient
resources to repurchase the notes following the change in control.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS
We believe our success depends on the contributions of a number of our key
personnel. These key personnel include Harvey P. White, Chairman of the Board
and Chief Executive Officer of Leap, and Susan G. Swenson, President and Chief
Operating Officer of Leap and Chief Executive Officer of our Cricket
Communications subsidiary. If we lose the services of key personnel, that loss
could materially harm our business. We do not maintain "key person" life
insurance on any employee.
BECAUSE THE SENIOR DISCOUNT NOTES WILL, AND THE SENIOR NOTES MAY, BE ISSUED WITH
ORIGINAL ISSUE DISCOUNT, YOU WILL HAVE TO INCLUDE INTEREST IN YOUR TAXABLE
INCOME BEFORE YOU RECEIVE CASH TO THE EXTENT OF THE ORIGINAL ISSUE DISCOUNT
The senior discount notes were issued at a substantial discount from their
principal amount at maturity. The senior notes may be issued at a discount that
exceeds a de minimis amount for tax purposes. Original issue discount, i.e., the
difference between the stated redemption price at maturity of the notes,
including all cash payments of principal and interest, and the issue price of
the notes, unless the amount is considered de minimis, will accrue from the
issue date of the notes and will be included in (other than stated interest on
the senior notes) your gross income for federal income tax purposes before you
receive the cash payment of such interest. U.S. federal income tax law may
postpone or limit our interest deduction for original issue discount. See
"Certain U.S. Federal Tax Considerations."
A DETERMINATION THAT LEAP IS AN INVESTMENT COMPANY COULD ADVERSELY AFFECT OUR
BUSINESS
Our ownership interest in Pegaso was 22.4% as of April 30, 2000, and we
expect that future investments in ventures will include ownership interests of
less than 50% and that our interests will vary over time as the ventures raise
additional capital. As a result, we could be subject to the registration
requirements of the Investment Company Act of 1940. The Investment Company Act
of 1940 requires registration of companies that engage primarily in the business
of investing in stock. Because we intend to actively participate in the business
operations of our subsidiaries and other ventures, we do not believe that we are
primarily engaged in the business of investing in stock. We intend to monitor
and adjust our interests in our ventures to the extent practical to avoid being
subject to the Investment Company Act of 1940. In addition, to clarify our
status under the Investment Company Act of 1940, in September 1998 we filed a
request for an exemptive order from the SEC declaring Leap to be primarily
engaged in a business other than investing in stock. The SEC has not yet ruled
on our application and we are in the process of responding to their comments.
The requested exemptive order may not be granted. If we must register as an
investment company under the Investment Company Act of 1940, compliance with
these regulations will negatively impact our business.
YEAR 2000 RELATED SYSTEM FAILURES OR MALFUNCTIONS COULD HARM OUR BUSINESS
As of the date of this prospectus, our systems have operated without any
apparent Year 2000 related problems and appear to be Year 2000 compliant. We are
not aware that any of our primary vendors or
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<PAGE> 28
systems maintained by third parties, such as landline, long-distance and power
systems, have experienced significant Year 2000 compliance problems. However,
while no such problem has been discovered as of the date of this prospectus,
Year 2000 issues may not become apparent immediately and, therefore, Leap may be
affected in the future. We will continue to monitor the issue and work to
remediate any Year 2000 issues that may arise.
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<PAGE> 29
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this prospectus, including statements under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions about Leap, including, among other things:
- the ability to successfully deploy wireless networks;
- the ability to raise sufficient funds to finance such deployment;
- the ability to control costs relating to constructing, expanding and
operating the networks;
- the ability to close pending asset acquisitions and dispositions;
- the ability to attract new subscribers and the rate of growth of the
subscriber base;
- the usage and revenue generated from subscribers;
- the range of services offered;
- the ability to effectively manage growth and the intense competition in
the wireless communications industry, as well as conditions governing the
use of network licenses set by various government and regulatory
authorities; and
- developments in current or future litigation.
You can identify these forward-looking statements by forward-looking words
such as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions in
this prospectus.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-looking
statements.
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<PAGE> 30
CAPITALIZATION
The following table sets forth the capitalization of Leap as of February
29, 2000. You should read this table together with "Selected Consolidated
Financial Data and Unaudited Pro Forma Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
historical combined and consolidated financial statements and related notes
appearing elsewhere in this prospectus.
The unaudited pro forma financial data are derived from the unaudited pro
forma financial information that gives effect to:
- Leap's acquisition in April 1999 of the remaining 50% interest in
Smartcom S.A., formerly named Chilesat Telefonia Personal S.A., that it
did not already own;
- the acquisition of substantially all the assets of Chase
Telecommunications Holdings in March 2000;
- Leap's acquisition of wireless licenses from AirGate in January 2000; and
- Leap's pending wireless license acquisitions from PCS Devco, Radiofone,
Zuma, Beta, CM PCS and Center Point PCS, as if they had already occurred.
<TABLE>
<CAPTION>
AS OF FEBRUARY 29, 2000
-----------------------
ACTUAL PRO FORMA
--------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and cash equivalents............................... $ 599,935 $ 524,569
========= ==========
Restricted cash equivalents and investments(1).......... $ 108,478 $ 108,478
========= ==========
Short-term debt(2)...................................... $ 32,007 $ 32,007
========= ==========
Long-term debt:
Lucent credit agreement(3)............................ $ 21,027 $ 44,630
Deferred payment and credit agreements(4)............. 119,484 119,484
Note payable to Telex-Chile........................... 17,082 17,082
Debt obligations to the FCC(5)........................ 9,346 79,972
12 1/2% Senior Notes due 2010......................... 156,606 156,606
14 1/2% Senior Discount Notes due 2010................ 229,331 229,331
--------- ----------
Total long-term debt.......................... 552,876 647,105
--------- ----------
Stockholders' equity:
Common stock(6), 75,000,000 shares authorized,
24,841,412 shares issued and outstanding,
25,244,540 shares issued and outstanding on a pro
forma basis(7)..................................... 3 3
Additional paid-in capital(7)......................... 787,887 838,555
Accumulated deficit................................... (346,134) (346,134)
Accumulated other comprehensive loss.................. (6,075) (6,075)
--------- ----------
Total stockholders' equity.................... 435,681 486,349
--------- ----------
Total capitalization.......................... $ 988,557 $1,133,454
========= ==========
</TABLE>
- -------------------------
(1) Restricted cash equivalents and investments reflects $79.5 million of the
proceeds of the units offering, including accrued interest, which have been
pledged to secure the first seven interest
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<PAGE> 31
payments on the Senior Notes and $28.9 million of pledged collateral to
secure Leap's obligations under letters of credit used to secure bank loans
to Smartcom.
(2) Leap has loans payable to banks in Chile of $10.3 million and $7.6 million
which bear interest at rates of 8.2% and 7.85% per annum, respectively, and
are due to be repaid in September 2000. Smartcom has loans payable to a bank
of $14.1 million which bear interest at the weighted-average rate of 7.01%
per annum and are due to be repaid in July 2000.
(3) A subsidiary of Leap has entered into an agreement with Lucent Technologies,
Inc. for the purchase of infrastructure products and services. Lucent agreed
to finance these purchases plus additional working capital under a credit
facility.
(4) Qualcomm and Smartcom have entered into deferred payment and credit
agreements under which Qualcomm agreed to defer collection of amounts
related to Smartcom's purchase of equipment, software and services from
Qualcomm.
(5) As part of the consideration for wireless licenses acquired from AirGate in
January 2000, Leap assumed $11.1 million ($9.6 million, net of discount) of
debt obligations to the FCC. Under the purchase method of accounting, this
obligation, which bears interest at a below-market rate, has been recorded
at its fair value assuming an interest rate of 10.75%. The Pro Forma amount
includes the debt obligations to the FCC in connection with the acquisition
of Chase Telecommunications of $78.8 million, and pending wireless license
acquisitions from PCS Devco, Radiofone and CM PCS of $1.1 million, $1.5
million and $0.6 million, respectively. The fair value of these obligations
included in the Pro Forma amount are $67.7 million, $0.9 million, $1.5
million and $0.5 million, respectively. We completed the acquisition of
Chase Telecommunications in March 2000. The other acquisitions have not yet
been consummated and remain subject to certain conditions, including FCC
approval.
(6) Each share of our common stock includes a right to purchase one
one-thousandth of a share of our Series A Junior Participating preferred
stock issued in connection with our rights plan.
(7) The Pro Forma amount includes 232,754 and 170,374 shares of Leap's common
stock to be issued as consideration for pending wireless license
acquisitions from Radiofone and from three subsidiaries of Zuma,
respectively. These acquisitions have not yet been consummated and remain
subject to certain conditions, including FCC approval.
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SELECTED CONSOLIDATED FINANCIAL DATA
AND UNAUDITED PRO FORMA FINANCIAL DATA
The following tables contain selected historical consolidated statement of
operations data, consolidated balance sheet data and other financial data for
Leap. The historical consolidated financial data for the fiscal years ended
August 31, 1997, 1998 and 1999 are derived from the audited consolidated
financial statements of Leap, as restated, which are included elsewhere in this
prospectus. The historical consolidated financial data as of February 29, 2000
and for the six months ended February 28, 1999 and February 29, 2000 are derived
from the unaudited consolidated financial statements of Leap, as restated, which
are included elsewhere in this prospectus. The historical consolidated financial
data for the fiscal year ended August 31, 1996 are derived from the audited
consolidated financial statements of Leap which are not included in this
prospectus. The historical consolidated statement of operations gives effect to
the distribution of Leap common stock as if it had occurred as of September 1,
1995.
The unaudited pro forma financial data are derived from the unaudited pro
forma financial information that gives effect to:
- Leap's acquisition in April 1999 of the remaining 50% interest in
Smartcom S.A., formerly named Chilesat Telefonia Personal S.A., that it
did not already own;
- the acquisition of substantially all the assets of Chase
Telecommunications Holdings in March 2000;
- Leap's acquisition of wireless licenses from AirGate in January 2000; and
- Leap's pending wireless license acquisitions from PCS Devco, Radiofone,
Zuma, Beta, CM PCS and Center Point PCS, as if they had already occurred.
The unaudited pro forma financial data are based upon available information
and assumptions that management believes are reasonable. The unaudited pro forma
consolidated balance sheet data give effect to the acquisition of substantially
all the assets of Chase Telecommunications Holdings and the pending acquisitions
of wireless licenses as if they had occurred as of February 29, 2000. The
unaudited pro forma consolidated statement of operations data gives effect to
the acquisition of the remaining 50% interest in Smartcom, the acquisition of
substantially all the assets of Chase Telecommunications Holdings, the
acquisition of wireless licenses from AirGate and the pending acquisitions of
wireless licenses from PCS Devco, Radiofone, Zuma, Beta, CM PCS and Center Point
PCS, as if they had occurred as of September 1, 1998. The unaudited pro forma
financial data are provided for illustrative purposes only and do not purport to
represent what Leap's results of operations or financial condition actually
would have been had these acquisitions in fact occurred on such dates or to
project Leap's results of operations or financial condition for any future
period or date.
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<PAGE> 33
These tables should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the audited
consolidated financial statements and unaudited pro forma financial information
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------------------------------- ------------------------------------------
PRO PRO FORMA
FORMA FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1996 1997(1) 1998(1) 1999 1999 1999(1) 2000 2000
------ ---------- ---------- --------- --------- ------------ ------------ ------------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Operating revenues....... $ -- $ -- $ -- $ 3,907 $ 11,966 $ -- $ 14,283 $ 19,572
Operating expenses:
Cost of operating
revenues............. -- -- -- (3,810) (13,226) -- (22,462) (30,002)
Selling, general and
administrative
expenses............. (396) (1,361) (23,888) (28,745) (46,620) (8,284) (33,041) (38,511)
Depreciation and
amortization......... -- -- -- (5,824) (23,678) (265) (10,248) (29,990)
------ -------- --------- --------- --------- -------- --------- ---------
Total operating
expenses......... (396) (1,361) (23,888) (38,379) (83,524) (8,549) (65,751) (98,503)
------ -------- --------- --------- --------- -------- --------- ---------
Operating loss......... (396) (1,361) (23,888) (34,472) (71,558) (8,549) (51,468) (78,931)
Equity in net loss of
unconsolidated wireless
operating companies.... -- (3,793) (23,118) (100,300) (66,271) (35,408) (50,059) (29,897)
Write-down of investments
in unconsolidated
wireless operating
companies.............. -- -- -- (27,242) (27,242) -- -- --
Interest income.......... -- -- 273 2,505 1,464 1,825 1,577 1,609
Interest expense......... -- -- -- (10,356) (37,366) (1,913) (21,120) (31,179)
Foreign currency
transaction losses..... -- -- -- (7,211) (11,410) -- (1,396) (1,396)
Gain on sale of wholly
owned subsidiary....... -- -- -- 9,097 9,097 -- -- --
Gain on issuance of stock
by unconsolidated
wireless operating
company................ -- -- -- 3,609 3,609 -- -- --
Minority interest........ -- -- -- -- -- -- 518 518
Other income (expense),
net.................... -- -- -- (243) (136) -- (2,868) (3,033)
------ -------- --------- --------- --------- -------- --------- ---------
Loss before extraordinary
item................... (396) (5,154) (46,733) (164,613) $(199,813) (44,045) (124,816) $(142,309)
========= =========
Extraordinary loss on
early extinguishment of
debt................... -- -- -- -- -- (4,422)
------ -------- --------- --------- -------- ---------
Net loss................. $ (396) $ (5,154) $ (46,733) $(164,613) $(44,045) $(129,238)
====== ======== ========= ========= ======== =========
Basic and diluted net
loss per common
share(3):
Loss before
extraordinary item... $(0.02) $ (0.29) $ (2.65) $ (9.19) $ (10.91) $ (2.49) $ (6.31) $ (7.05)
========= =========
Extraordinary loss..... -- -- -- -- -- (0.22)
------ -------- --------- --------- -------- ---------
Net loss per common
share.................. $(0.02) $ (0.29) $ (2.65) $ (9.19) $ (2.49) $ (6.53)
------ -------- --------- --------- -------- ---------
Shares used to calculate
basic and diluted net
loss per common
share(3)............... 17,648 17,648 17,648 17,910 18,314 17,717 19,788 20,196
====== ======== ========= ========= ========= ======== ========= =========
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------------------------------- ------------------------------------------
PRO PRO FORMA
FORMA FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1996 1997(1) 1998(1) 1999 1999 1999(1) 2000 2000
------ ---------- ---------- --------- --------- ------------ ------------ ------------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(4)................ $ (396) $ (5,154) $ (47,006) $(150,938) $(140,233) $(43,692) $ (99,447) $ (82,749)
Capital expenditures..... -- -- -- (6,864) (2,950) (55,298)
Net cash used in
operating
activities............. (285) (1,193) (18,378) (34,105) (13,572) (35,019)
Net cash used in
investing activities... -- (46,000) (140,742) (158,333) (97,191) (143,873)
Net cash provided by
financing activities... 285 47,193 159,120 216,476 116,835 750,858
Ratio of earnings to
fixed charges(5)....... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF FEBRUARY 29, 2000,
-------------------------------------------- ------------------------
1996 1997 1998 1999 ACTUAL PRO FORMA
----- ---------- ---------- ------- ---------- ----------
(RESTATED) (RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(2):
Cash and cash equivalents................... $ -- $ -- $ -- $26,215 $ 559,955 $ 524,569
Working capital (deficit)................... (111) (279) (14,789) 6,587 629,564 549,862
Restricted cash equivalents and
investments............................... -- -- -- -- 108,478 108,478
Total assets........................ -- 42,267 157,752 335,331 1,053,663 1,209,126
Long-term debt.............................. -- -- -- 221,812 552,876 647,105
Stockholders' equity (deficit).............. (111) 41,988 142,963 70,900 435,681 486,349
</TABLE>
- -------------------------
(1) These amounts have been restated for the adoption during fiscal 1999 of the
equity method retroactive to the initial date of Leap's investment in Chase
Telecommunications Holdings. See Note 2 of the notes to the consolidated
financial statements included elsewhere in this prospectus.
(2) For the fourth quarter of fiscal 1999, the financial statements of Smartcom
are included in the consolidated financial data as a result of Leap's
acquisition of the remaining 50% interest in Smartcom on April 19, 1999.
Before the fourth quarter, Leap's investment in Smartcom was accounted for
using the equity method of accounting.
(3) The basic and diluted net loss per common share for the year ended August
31, 1999 and for the six months ended February 28, 1999 and February 29,
2000 was calculated by dividing the net losses by 17,910,440, 17,717,486 and
19,788,203, respectively, the weighted average number of common shares
outstanding during each of the periods. The basic and diluted net loss per
common share for the pro forma year ended August 31, 1999 and pro forma six
months ended February 29, 2000 was calculated by dividing the net losses by
18,313,568 and 20,195,761, respectively, the weighted average number of
common shares outstanding during each of the periods. Leap was a wholly
owned subsidiary of Qualcomm before September 23, 1998. The basic and
diluted net loss per common share for the fiscal years ended August 31,
1996, 1997 (restated) and 1998 (restated) were calculated by dividing the
net loss by the 17,647,685 shares of Leap common stock issued in the
distribution to Qualcomm's stockholders on September 23, 1998.
(4) EBITDA represents net income (loss) before interest, income taxes,
depreciation and amortization. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance and as a measure of debt service ability. It is not a measure of
financial performance under generally accepted accounting principles.
31
<PAGE> 35
(5) For the years ended August 31, 1996, 1997, 1998 and 1999 and the Pro Forma
year ended August 31, 1999, our earnings were insufficient to cover fixed
charges by $0.4 million, $1.4 million, $23.6 million, $47.6 million and
$145.2 million, respectively. For the six months ended February 28, 1999 and
February 29, 2000 and the Pro Forma six months ended February 29, 2000, our
earnings were insufficient to cover fixed charges by $10.6 million, $99.9
million and $144.6 million, respectively. Fixed charges consist of interest
expense, including capitalized interest, amortized discounts related to
indebtedness and that portion of rent expenses deemed to be interest.
32
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based upon our financial
statements as of the dates and for the periods presented in this section. You
should read this discussion and analysis in conjunction with our financial
statements and related notes contained in this prospectus.
Except for the historical information contained herein, this document
contains forward-looking statements reflecting management's current forecast of
certain aspects of Leap's future. It is based on current information which we
have assessed but which by its nature is dynamic and subject to rapid and even
abrupt changes. Our actual results could differ materially from those stated or
implied by such forward-looking statements due to risks and uncertainties
associated with our business. Factors that could cause or contribute to such
differences, including factors relating to joint ventures and other entities in
which we have interests, include, but are not limited to: the ability to
successfully deploy wireless networks; the ability to raise sufficient funds to
finance such deployment; the ability to control costs relating to constructing,
expanding and operating the networks; the ability to close pending asset
acquisitions and dispositions; the ability to attract new subscribers and the
rate of growth of the subscriber base; the usage and revenue generated from
subscribers; the range of services offered; the ability to effectively manage
growth and the intense competition in the wireless communications industry, as
well as conditions governing the use of network licenses set by various
government and regulatory authorities; and developments in current or future
litigation. The forward-looking statements should be considered in the context
of these and other risk factors detailed in this prospectus, under the heading
"Risk Factors." Investors and prospective investors are cautioned not to place
undue reliance on such forward-looking statements. We disclaim any obligation to
update the forward-looking statements contained herein to reflect future events
or developments.
OVERVIEW
Leap is a wireless communications carrier with a unique approach to
providing digital wireless service that is designed to appeal to the mass
market. We intend to transform wireless into a mass consumer product by
deploying customer-oriented, low-cost, simple wireless services. We generally
seek to address a much broader population segment than incumbent wireless
operators have addressed to date. In the United States, we are employing a
unique business strategy to extend the benefits of mobility to the mass market
by offering wireless service under the brand name Cricket that is as simple as,
and priced at rates competitive with, traditional landline service. Chase
Telecommunications, Inc., a company we acquired in March 2000, introduced
Cricket service in Chattanooga and Nashville, Tennessee in March 1999 and
January 2000, respectively. To expand the Cricket service, we currently have
acquired or agreed to acquire wireless licenses covering approximately 35
million potential customers.
Internationally, we currently are involved in developing and operating
nationwide digital wireless systems in Mexico and Chile. We plan to focus our
efforts in markets primarily in the Americas where we believe the combination of
unfulfilled demand and our attractive wireless service offerings will fuel rapid
growth. In Mexico, we were a founding shareholder and have invested $100 million
in Pegaso, a joint venture with Grupo Pegaso and Grupo Televisa, the largest
media company in the Spanish-speaking world. We currently own 22.4% of Pegaso,
which is deploying the first 100% digital wireless communications network in
Mexico. Pegaso holds wireless licenses generally in the 1900 MHz band to provide
nationwide service covering all of Mexico, with approximately 99 million
potential customers.
In Chile, in April 1999, we acquired the 50% of our wireless venture that
we did not already own, and in November 1999, we re-launched the venture's
service under a new brand name and corporate identity, SMARTCOM PCS. Smartcom
holds a nationwide wireless license in the 1900 MHz band and
33
<PAGE> 37
operates a nationwide digital wireless system. Smartcom's network is the only
CDMA-based network in the country, and it covers approximately 12 million
potential customers representing 80% of Chile's total population.
In April 2000, we entered into a memorandum of understanding with Endesa, a
Spanish utility company with interests in energy and telecommunications, under
which Endesa agreed to purchase 100 percent of the capital stock of Smartcom
from our subsidiary, Inversiones Leap Wireless Chile, S.A. Under the non-binding
terms and conditions of the Endesa memorandum of understanding, the sale of the
Smartcom stock is subject to the negotiation and entry into of definitive
agreements documenting the transaction. We believe that the sale of Smartcom
demonstrates our international commitment to capture wireless opportunities,
build networks and operate successful businesses in order to enhance shareholder
value. In the future, we will continue to evaluate additional international
opportunities as they arise.
We are in the early stages of development and our financial results
continue to reflect the considerable investment associated with completion of
our network build-outs and the initial launch of commercial service in new
markets. As we continue to expand our operations, our net operating losses and
our proportionate share of the losses in our unconsolidated wireless operating
companies are expected to grow.
The term "operating company" refers to Cricket Communications, Chase
Telecommunications, Pegaso and Smartcom.
RECENT OR PENDING ACQUISITIONS
Chase Telecommunications. In March 2000, we completed the acquisition of
substantially all of the assets of Chase Telecommunications Holdings, including
wireless licenses. The purchase price included approximately $6.3 million in
cash, the assumption of principal amounts of liabilities that totaled
approximately $139.0 million at February 29, 2000, a warrant to purchase 1% of
the common stock of our subsidiary Cricket Communications Holdings at an
exercise price of $1.0 million, and contingent earn-out payments of up to $41.0
million (plus certain expenses) based on the earnings of the business acquired
during the fifth full year following the closing of the acquisition. The
liabilities assumed included approximately $78.8 million in principal amounts
owed to the FCC associated with the wireless licenses that bear interest at the
rate of 7.0% per annum and must be repaid in quarterly installments of principal
and interest through September 2006.
Other Wireless Licenses. In September 1999, we agreed to acquire a wireless
license covering the Dayton, Ohio market from PCS Devco for a purchase price of
approximately $2.4 million in cash and the assumption of principal amounts of
approximately $1.1 million in debt obligations to the FCC. Amounts owed to the
FCC bear interest at the rate of 6.25% per annum and must be repaid in quarterly
installments of principal and interest through July 2007. In addition, Leap has
agreed to transfer to PCS Devco a wireless license that covers 135,000 potential
customers. Until closing, Leap is required to make PCS Devco's payments under
its FCC debt, with any payments made by Leap reducing the cash payment to PCS
Devco. In February 2000, the FCC consented to the transfer of PCS Devco's
license to us, although the decision has not yet become a final order and as a
result of a challenge by a third party, is currently subject to further
administrative review. Because the decision did not become a final order prior
to March 2000, the agreement now may be terminated by either party at its
discretion.
In January 2000, we acquired three wireless licenses covering markets in
North Carolina from AirGate for a purchase price of approximately $13.9 million
in cash and the assumption of principal amounts of approximately $11.1 million
in debt obligations to the FCC. Amounts owed to the FCC bear
34
<PAGE> 38
interest at the rate of 6.25% per annum and must be repaid in quarterly
installments of principal and interest through April 2007.
Also in January 2000, we agreed to acquire two wireless licenses covering
the Pittsburgh, Pennsylvania and Denver, Colorado markets from Radiofone. The
purchase price for the Pittsburgh license is approximately $18.4 million in cash
and the purchase price for the Denver license is 232,754 shares of our common
stock and approximately $3.4 million in cash, less the amount of debt owed by
Radiofone to the FCC associated with the Denver license which will be assumed by
Leap at the closing. As of February 29, 2000, the outstanding principal amount
owed to the FCC associated with the Denver license was approximately $1.5
million. The amounts owed to the FCC must be repaid in quarterly installments of
principal and interest through April 2007. As a condition to closing the
purchase of the Denver license, we must file and have declared effective a
resale shelf registration statement with the SEC covering the shares of our
common stock to be issued to the seller, subject to certain "lock-up"
restrictions on resale. The transaction is subject to FCC approval and other
conditions. Either party may terminate the Radiofone agreement in October 2000
if the transactions are not consummated by that date.
In February 2000, we agreed to acquire all of the outstanding stock of
three subsidiaries of Zuma, which own wireless licenses covering markets in
Albany, Columbus and Macon, Georgia for an aggregate purchase price of 170,374
shares of our common stock. The merger agreement provides that these
corporations will have no indebtedness or other liabilities at the closing. The
merger agreement also provides that we must file and have declared effective a
resale shelf registration statement with the SEC covering the shares of our
common stock issued to the seller as soon as reasonably practicable after the
closing of the transaction, subject to certain "lock-up" restrictions on resale.
The transaction is subject to FCC approval and other conditions. Either party
may terminate the merger agreement in February 2001 if the transaction is not
consummated by that date.
In March 2000, we agreed to acquire three wireless licenses covering the
Phoenix, Arizona, Reno, Nevada and Roswell, New Mexico markets from Beta
Communications, L.L.C. The purchase price for the licenses is $33.3 million in
cash. The transaction is subject to FCC approval and other conditions. Our
agreement with Beta Communications may be terminated by either party in
September 2000 if the transaction is not consummated by that date, subject to
certain rights to extend the agreement to December 2000.
In April 2000, we agreed to acquire a wireless license covering the Omaha,
Nebraska market from CM PCS, Inc. The purchase price for the license is $14.2
million in cash plus the assumption of approximately $0.6 million in
indebtedness to the FCC related to the license. Also in April 2000, we agreed to
acquire a wireless license covering the Lincoln, Nebraska market from Center
Point PCS. The purchase price for the wireless license is $4.3 million in cash.
These agreements may be terminated by either party if the transaction is not
consummated by April 2001.
These transactions are subject to FCC approval and other conditions prior
to closing. Accordingly, the transactions ultimately may not be consummated.
In July 1999, the FCC issued an opinion and order that found that we were
entitled to acquire C-Block and F-Block licenses. The order approved our
acquisition of the 36 C-Block licenses for which we were the highest bidder in
the FCC's 1999 spectrum re-auction, and the transfer of three F-Block licenses
from AirGate to one of our subsidiaries which cover portions of North Carolina,
in each case subject to the fulfillment of certain conditions. In October 1999,
the FCC issued to us the 36 re-auctioned licenses. In January 2000, the FCC
released an order consenting to the transfer of control of wireless licenses
from ChaseTel Licensee Corp. to us and to the mutual assignments of wireless
licenses from us to PCS Devco and vice versa.
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<PAGE> 39
Various parties previously challenged our qualification to hold C-Block and
F-Block licenses, which challenges were rejected in the FCC's July 1999 order.
One of these parties, a wireless operating company, has requested that the FCC
review the July 1999 order. In March 2000, the same party filed an application
for review of the FCC's January 2000 order. In addition, further judicial review
of the FCC's orders is possible.
We may not prevail in connection with any such appeal and we may not remain
qualified to hold C-Block or F-Block licenses. If the FCC determines that we are
not qualified to hold C-Block or F-Block licenses, it could take the position
that all of our licenses should be divested, cancelled or reauctioned.
PRESENTATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the financial condition of the businesses that Qualcomm
transferred to us in September 1998 as if we were a separate entity for all
periods discussed. We adopted the equity method of accounting for our investment
in Chase Telecommunications Holdings, Inc. in the third quarter of fiscal 1999.
Before that, we accounted for our investment in Chase Telecommunications
Holdings under the cost method. Accordingly, all prior periods presented in the
accompanying financial statements have been adjusted retroactively in accordance
with generally accepted accounting principles.
In April 1999, we increased our ownership interest in Smartcom from 50% to
100%. As a result of the reporting lag we have adopted for our foreign operating
companies, we began fully consolidating Smartcom's results of operations in June
1999, the beginning of the fourth quarter of fiscal 1999. Before that, we
accounted for our investment in Smartcom under the equity method of accounting.
We account for our interest in Pegaso under the equity method of accounting. As
of February 29, 2000, we owned 28.6% of Pegaso.
The directors of the Transworld Companies, partially owned subsidiaries of
a company in which we have an indirect interest, recently voted to liquidate the
companies. The decision followed the Transworld Companies' loss of leased
satellite transmission capacity and the companies' failure to develop an
acceptable business plan that did not utilize satellite transmission. As a
result of these developments, we wrote down our indirect investment in the
Transworld Companies in the fourth quarter of fiscal 1999. In addition, we have
ceased funding loans to Metrosvyaz and, as a result, have written-off our
remaining investment in Metrosvyaz.
The term "operating company" refers to Cricket Communications, Chase
Telecommunications, Pegaso, Smartcom, the Transworld Companies, Orrengrove,
Metrosvyaz and OzPhone.
RESULTS OF OPERATIONS
The results of operations discussed below include period-to-period
comparisons that may not reflect the character of our future results of
operations because of the following events:
- the liquidation of the Transworld Companies;
- the initial launch of the Cricket service in the U.S.;
- our acquisition of wireless licenses from AirGate and agreements to
acquire the wireless licenses of PCS Devco, Radiofone, Zuma, Beta
Communications, CM PCS and Center Point PCS;
- the consolidation of Smartcom with Leap after our purchase of the
remaining 50% interest in Smartcom that we did not already own;
- the purchase and consolidation of Chase Telecommunications with Leap in
March 2000; and
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<PAGE> 40
- the decrease in our percentage interest in Pegaso from 28.6% to 22.4%
which resulted from Sprint PCS's investment of $200 million in the
Mexican wireless carrier in April 2000.
THREE AND SIX MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE AND SIX MONTHS
ENDED FEBRUARY 28, 1999
We incurred a net loss of $83.0 million and $129.2 million, respectively,
during the three and six month periods ended February 29, 2000 compared to a net
loss of $23.1 million and $44.0 million, respectively, in the corresponding
periods of the prior fiscal year. The increase relates primarily to the launch
of network service in new markets. Pegaso launched operations in Tijuana,
Guadalajara and Monterrey in February through September 1999 and in Mexico City
in December 1999. Cricket wireless service was launched in Nashville, Tennessee
in late January 2000. In addition, in November 1999 we re-launched service in
Chile under a new brand name and corporate identity. As a result, total
subscribers on our networks reached approximately 311,000 subscribers at
February 29, 2000 (37,000 in the U.S., 92,000 in Chile and 182,000 in Mexico),
compared to a total subscriber base of approximately 32,000 subscribers at
February 29, 1999.
As a direct result of the consolidation of Smartcom, we recorded $8.8
million and $14.2 million of operating revenues, $15.1 million and $22.5 million
of cost of operating revenues, $12.0 million and $19.4 million of additional
selling, general and administrative expenses, $4.9 million and $9.9 million of
additional depreciation and amortization, $2.5 million and $5.4 million of
additional net interest expense, and $1.4 million of foreign currency
transaction gains and $1.4 million of foreign currency transaction losses during
the three and six month periods ended February 29, 2000, respectively.
Smartcom's net loss of $26.4 million and $47.1 million recognized during the
three and six month periods ended February 29, 2000, respectively, before
intercompany eliminations, compared to $4.1 million and $7.5 million that we
recognized under the equity method for our 50% interest in the corresponding
periods of the prior fiscal year. During the first half of fiscal 1999, we did
not report any operating revenues because all of our operating companies were
accounted for under the equity method of accounting. Our operating companies did
not generate material revenues in the first half of fiscal 1999.
We incurred $19.5 million and $33.0 million of selling, general and
administrative expenses during the three and six month periods ended February
29, 2000, respectively, compared to $4.0 million and $8.3 million in the
corresponding periods of the prior fiscal year. The increase included $12.0
million and $19.4 million, respectively, from the consolidation of Smartcom.
Excluding Smartcom, selling, general and administrative expenses increased by
$3.5 million and $5.3 million, respectively, over the corresponding three and
six month periods of the prior fiscal year due to increased staffing and
business development activities related to our domestic subsidiary, Cricket
Communications.
We incurred an operating loss of $30.9 million and $51.5 million during the
three and six month periods ended February 29, 2000, respectively, compared to
operating losses of $4.2 million and $8.5 million in the corresponding periods
of the prior fiscal year. The $26.7 million and $43.0 million respective
increases primarily reflect the consolidation of Smartcom. We expect substantial
growth in subscribers, operating revenues and operating expenses as a result of
our acquisition and consolidation of Chase Telecommunications commencing in the
third quarter of fiscal 2000 and the planned development and launch of Cricket
service in multiple U.S. markets. We also expect substantial growth in Pegaso's
subscribers, operating revenues and operating expenses; however, because Pegaso
is accounted for under the equity method, its operating revenues and expenses
are not fully consolidated.
Equity in net loss of unconsolidated wireless operating companies was $33.9
million and $50.1 million during the three and six month periods ended February
29, 2000, respectively, compared to $19.4 million and $35.4 million in the
corresponding periods of the prior fiscal year. During the first half of the
current fiscal year, our equity share in the net loss of our unconsolidated
wireless operating
37
<PAGE> 41
companies related to Pegaso and Chase Telecommunications. During the
corresponding period of fiscal 1999, our equity share in the net loss of our
unconsolidated wireless operating companies also included Smartcom (prior to
Leap's acquisition of the remaining 50 percent interest) and our Russian
investments which have been subsequently written-down, liquidated or are in the
process of liquidation.
Interest expense was $13.9 million and $21.1 million during the three and
six month periods ended February 29, 2000, respectively, compared to $0.9
million and $1.9 million in the corresponding periods of the prior fiscal year.
Interest expense related primarily to borrowings under our credit agreement with
Qualcomm and Smartcom's financing of its wireless communications network. We
expect interest expense to increase substantially in the future due to senior
notes and senior discount notes borrowings and expected borrowings used to fund
the construction of wireless networks in various markets across the United
States.
Foreign currency transaction gains (losses) of $1.4 million and $(1.4)
million during the three and six month period ended February 29, 2000,
respectively, reflected unrealized foreign exchange gains (losses) recognized by
Smartcom on U.S. dollar denominated loans as a result of changes in the exchange
rate between the U.S. dollar and the Chilean peso.
During the three month period ended February 29, 2000, in connection with
the repayment of the Qualcomm Credit Agreement, we wrote-off and reported as an
extraordinary loss $4.4 million in related unamortized debt issue costs.
FISCAL YEAR ENDED AUGUST 31, 1999 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1998
We incurred a net loss of $164.6 million in fiscal 1999 compared to a net
loss of $46.7 million in fiscal 1998. The increase resulted primarily from
start-up costs associated with our international operating companies. Our share
of these start-up costs, $100.3 million in fiscal 1999, is recorded as equity in
net loss of unconsolidated wireless operating companies. In addition, in fiscal
1999, we recorded a write-down of equity investments of $27.2 million, interest
expense and amortization of debt discount and facility fee of $10.4 million,
foreign currency transaction losses of $7.2 million, a gain on the sale of a
wholly owned subsidiary of $9.1 million and a gain on issuance of stock by an
unconsolidated wireless operating company of $3.6 million.
As a direct result of the consolidation of Smartcom in the fourth quarter
of fiscal 1999, we recorded $3.9 million of operating revenues, $3.8 million of
cost of operating revenues, $4.5 million of additional selling, general and
administrative expenses, $5.3 million of additional depreciation and
amortization, $2.9 million of additional interest expense, and $7.2 million of
foreign currency transaction losses. Smartcom's full consolidation increased our
net loss in fiscal 1999 by $9.9 million. During the prior fiscal year, we did
not report any operating revenues because all of our operating companies were
accounted for under the equity method of accounting. Our operating companies did
not generate material revenues in the prior fiscal year.
We incurred $28.7 million of selling, general and administrative expenses
in fiscal 1999 compared to $23.9 million in fiscal 1998. The increase resulted
from the consolidation of Smartcom in the fourth quarter of fiscal 1999.
Excluding Smartcom, selling, general and administrative expenses remained
relatively flat, despite increased staffing as a result of Leap becoming a
stand-alone entity. We expect that general and administrative expenses will
increase in the future as a result of ongoing development efforts on current and
new projects.
We incurred an operating loss of $34.5 million in fiscal 1999 compared to
an operating loss of $23.9 million in fiscal 1998. The $10.6 million increase
primarily reflects the consolidation of Smartcom in the fourth quarter of fiscal
1999. We expect that fiscal 1999 operating revenues, operating expenses and
operating losses are not representative of future results and believe operating
revenues and expenses
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will increase in the future. We expect substantial growth in customers,
operating revenues and operating expenses as a result of our acquisition and
consolidation of Chase Telecommunications, the planned development and launch of
Cricket service in multiple U.S. markets, and an increase in marketing efforts
in Chile. We also expect substantial growth in Pegaso's number of customers,
operating revenues and operating expenses; however, because Pegaso is accounted
for under the equity method, its operating revenues and expenses are not fully
consolidated.
Equity in net loss of unconsolidated wireless operating companies was
$100.3 million in fiscal 1999 compared to $23.1 million in fiscal 1998. The
significant increase in our share of the net loss of our unconsolidated wireless
operating companies related primarily to the expenditures they incurred in
launching their network services, including marketing and other expenses, and
the amortization of their capitalized network costs. Smartcom, accounted for
under the equity method until the fourth quarter of fiscal 1999, launched
nationwide service in September 1998. Pegaso launched operations in Tijuana,
Guadalajara and Monterrey in February through September 1999. Chase
Telecommunications launched its traditional mobile service in the U.S. in
September 1998 and re-launched service utilizing Leap's Cricket wireless concept
in March 1999. In addition, Petrosvyaz, a Metrosvyaz joint venture, launched
commercial service in St. Petersburg in April 1999.
Equity in net loss of unconsolidated wireless operating companies included
a $16.9 million asset impairment charge in fiscal 1999. Orrengrove, a company in
which we have an indirect ownership interest, recorded the charge when the
satellite that the Transworld Companies relied on to deliver long-distance
service in Russia failed. The Transworld Companies are partially owned
subsidiaries of Orrengrove. As a result of the satellite failure, the Transworld
Companies began using fiber lines to provide long-distance service as a
short-term alternative to the satellite transmission option they previously
used. They also began to explore long-term alternative methods to provide
long-distance services.
After reviewing a series of alternative business plans that did not meet
their minimum financial performance criteria, the directors of the Transworld
Companies voted to liquidate the companies and to distribute their net assets to
their stockholders. As a result, we recorded a $17.6 million write-down in the
fourth quarter of fiscal 1999, reducing our investment in Orrengrove to the
liquidation proceeds we expect to receive.
In September 1999, we declared default under loans to Metrosvyaz, stopped
funding those loans, wrote off our remaining $9.6 million investment in
Metrosvyaz and issued a demand for arbitration against Metrosvyaz and one of its
directors with respect to those loans. In response, on March 21, 2000,
Metrosvyaz filed suit against us and certain of our directors and officers in
the U.S. District Court for the Southern District of California. The Metrosvyaz
suit alleged claims for libel, trade libel, intentional and negligent
interference with prospective advantage and breach of fiduciary duty.
On April 27, 2000, we resolved our differences with Metrosvyaz. As part of
the settlement, Metrosvyaz dismissed its action against Leap and its officers in
the federal court in San Diego, Leap dismissed its demand for arbitration, and
both companies agreed to general releases. Leap surrendered its interest in a
joint venture company that owned an interest in Metrosvyaz, wrote off the
remaining balance of its investments in Russia and received a contractual right
to certain contingent payments from Qualcomm.
We expect our share of the equity losses of our unconsolidated wireless
operating companies to decrease in fiscal 2000 as a result of the consolidation
of Smartcom, the acquisition of Chase Telecommunications, the discontinuance of
funding to Metrosvyaz and the reduction in our percentage equity interest in
Pegaso from 33.3% to 28.6%. We expect the decrease to be offset in part by
increased equity losses from Pegaso's continued build-out in Mexico.
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Interest expense in fiscal 1999 related primarily to borrowings under our
credit agreement with Qualcomm and the consolidation of $2.9 million of Smartcom
interest expense in the fourth quarter of fiscal 1999. Smartcom's interest
expense related primarily to the financing of its wireless communications
network. We expect interest expense to substantially increase in fiscal 2000 as
a result of the consolidation of Smartcom and expected borrowings to fund the
construction of domestic telecommunications networks. Leap did not incur any
interest expense during the prior fiscal year.
Foreign currency transaction losses of $7.2 million in fiscal 1999
reflected unrealized foreign exchange losses recognized by Smartcom on U.S.
dollar denominated loans as a result of changes in the exchange rate between the
U.S. dollar and the Chilean peso during the fourth quarter of fiscal 1999.
Gain on sale of wholly owned subsidiary of $9.1 million in fiscal 1999
resulted from our sale of OzPhone Pty. Ltd., our Australian operating company.
OzPhone held wireless licenses but had not initiated service.
Gain on issuance of stock by unconsolidated wireless operating company of
$3.6 million in fiscal 1999 effectively reflects a reduction in our share of
Pegaso's accumulated losses as a result of a decrease in our percentage
ownership of Pegaso. In July 1999, several other investors increased their
ownership interest in Pegaso by contributing $50 million of capital as
previously planned.
FISCAL YEAR ENDED AUGUST 31, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1997
General and administrative expenses were $23.9 million for fiscal 1998,
compared to $1.4 million for fiscal 1997. The increase was due principally to
increases in business development activities relating to projects to create our
operating companies in Mexico and Russia. These development activities resulted
in significantly higher consulting expenses and an increase in Qualcomm's
corporate overhead allocated to us. We expect that general and administrative
expenses will increase in the future as a result of ongoing development efforts
on current and new projects.
Equity in net loss of unconsolidated wireless operating companies for
fiscal 1998 was $23.1 million, compared to $3.8 million in fiscal 1997. The net
loss for fiscal 1998 represented our share of the net losses of the wireless
operating companies in which we then held an ownership interest accounted for
under the equity method of accounting. These losses consisted of costs incurred
before service launch during the network build-out and testing phases, such as
salary and related benefits, overhead expenses, professional and consulting
fees, and interest on long-term debt. Through August 31, 1998, there was no
depreciation of network equipment and no amortization of licenses as service had
not been launched commercially. Equity in net loss of unconsolidated wireless
operating companies of $3.8 million for fiscal 1997 primarily reflected our
equity share in the net loss of Chase Telecommunications Holdings, which began
network planning and initial build-out activities earlier in the year.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Over the next twelve months, we have budgeted a total of approximately
$670.3 million for the following capital requirements:
- approximately $500.0 million for capital expenditures for the build-out
of our first 17 Cricket networks in our initial phase of development and
to fund operating losses expected to be incurred by Cricket
Communications;
- approximately $75.0 million for capital expenditures for the build-out of
Smartcom's networks in Chile and operating losses expected to be incurred
by Smartcom;
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- approximately $78.3 million in connection with our acquisition of Chase
Telecommunications and pending acquisitions of wireless licenses from
Radiofone, Beta, CM PCS and Center Point PCS; and
- approximately $17.0 million for general corporate overhead and other
expenses.
Our actual expenditures may vary significantly depending upon whether we
purchase additional wireless licenses, the progress of the build-out of our
networks and other factors, including unforeseen delays, cost overruns,
unanticipated expenses, regulatory expenses, engineering design changes and
other technological risks.
As of February 29, 2000, we had a total of approximately $1,229.9 million
in unused capital resources for our future cash needs as follows:
- approximately $599.9 million in consolidated cash and cash equivalents on
hand; and
- approximately $630.0 million in commitments under vendor financing
arrangements with Lucent Technologies and Qualcomm, with availability
subject to the total amounts of equipment purchased.
Accordingly, we believe that if we do not make any additional license
acquisitions or any investments in new ventures, we have adequate capital
resources to fund our operations for the next twelve months.
We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities in the future while we continue to
build-out our networks and build our customer base. Our ability to satisfy our
debt repayment obligations and covenants depends upon our future performance,
which is subject to a number of factors, many of which are beyond our control.
We cannot guarantee that we will generate sufficient cash flow from our
operating activities to meet our debt service and working capital requirements,
and we may need to refinance our indebtedness. However, our ability to refinance
our indebtedness will depend on, among other things, our financial condition,
the state of the public and private debt and equity markets, the restrictions in
the instruments governing our indebtedness and other factors, some of which may
be beyond our control. In addition, if we do not generate sufficient cash flow
to meet our debt service requirements or if we fail to comply with the covenants
governing our indebtedness, we may need additional financing in order to service
or extinguish our indebtedness. We may not be able to obtain financing or
refinancing on terms that are acceptable to us, or at all.
Although we are unable to predict the amount of expenditures that we will
make beyond fiscal 2000, we may need to raise additional capital to fund and
expand our business operations. We also may need to raise additional capital if
we decide to acquire additional licenses or businesses. We are exploring other
debt and equity financing alternatives, including the sale from time to time of
convertible preferred stock, convertible debentures and other debt and equity
securities. However, we may not be able to raise additional capital on terms
that are acceptable to us, or at all.
We expect that we will require $875 million over the next several years to
substantially complete the build-out of our planned wireless networks in the
U.S. and Chile, not including the acquisition of additional licenses and the
build-out of markets related to additional licenses. These capital requirements
include license acquisition costs, capital expenditures for network
construction, operating cash flow losses and other working capital costs, debt
service and closing fees and expenses. As is typical for start-up
telecommunications networks, we expect our networks to incur operating expenses
significantly in excess of revenues in their early years of operations. We
intend to finance the construction and operation of Cricket networks primarily
through the proceeds of existing equipment financing agreements, cash on hand
and additional financings.
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We intend to finance the planned upgrade and expansion and the operation of
Smartcom's network in fiscal 2000 through the proceeds of equipment financing
agreements in connection with planned equipment purchases by Smartcom and
additional financings. Smartcom recently entered into a new equipment purchase
agreement with Ericsson. In addition, Smartcom has engaged an investment banker
to assist it in selling equity and is exploring other capital raising
alternatives. Smartcom may not conclude a sale of equity or other financing
transaction or obtain additional vendor funding. If Smartcom does not obtain
additional financing in fiscal 2000, we expect to delay or reduce the scope of
Smartcom's planned expansion. In addition, we have entered into a non-binding
memorandum of understanding relating to the sale to Endesa of all of our
interests in Smartcom. See "-- Overview."
We have no direct obligation to fund the operations of Pegaso, our venture
in Mexico, and expect Pegaso to be funded independently. Although Pegaso has
raised or obtained commitments for debt and equity capital in excess of $1.2
billion, Pegaso will need to obtain substantial additional capital to complete
the build-out, launch and operation of its planned networks. As a result, Pegaso
is seeking additional debt and equity financing, including additional vendor
financing.
In February 2000, we completed a public equity offering of 4,000,000 shares
of common stock at a price of $88.00 per share. Net of underwriters' discounts
and commissions, we received $82.72 per share, or $330.9 million in the
aggregate. We expect to pay approximately $0.9 million of expenses related to
the equity offering, and these costs have been recorded as reductions to
additional paid-in capital. A portion of the net proceeds from the equity
offering was used for the repayment of the Qualcomm credit agreement. The
remaining proceeds from the equity offering will be used for capital
expenditures, acquisitions of wireless licenses, strategic investments, sales
and marketing activities and working capital and general corporate purposes.
CREDIT FACILITIES AND OTHER FINANCING ARRANGEMENTS
UNITS OFFERING. In February 2000, we completed an offering of 225,000
senior units, each senior unit consisting of one 12.5% senior note due 2010
(Senior Note) and one warrant to purchase our common stock, and 668,000 senior
discount units, each senior discount unit consisting of one 14.5% senior
discount note due 2010 (Senior Discount Note) and one warrant to purchase our
common stock. The total gross proceeds from the sale of the senior units and
senior discount units were $225.0 million and $325.1 million, respectively, and
$164.4 million of the total proceeds were allocated to the fair value of the
warrants, estimated using the Black-Scholes option pricing model. In addition,
we capitalized certain debt issuance costs of $13.5 million, consisting of
underwriting, printing, legal and accounting fees. A portion of the net proceeds
from the units offering was used for the repayment of borrowings under the
Qualcomm credit agreement. The remaining proceeds from the units offering will
be used for capital expenditures, acquisitions of wireless licenses, strategic
investments, sales and marketing activities and working capital and general
corporate purposes.
Interest on the Senior Notes will be payable on April 15 and October 15 of
each year, beginning on April 15, 2000. We used $79.5 million of the proceeds
from the Senior Notes to purchase and pledge, for the benefit of the holders of
the Senior Notes, certain U.S. Government securities to provide for the payment
of the first seven scheduled interest payments on the Senior Notes. The
remaining unpaid portion of such amounts is classified as restricted cash
equivalents and investments in the accompanying condensed consolidated balance
sheet.
Each warrant included as part of the Senior Units is initially exercisable
to purchase 5.146 shares (1,157,850 shares in aggregate) of our common stock at
an exercise price of $96.80 per share. Each warrant included as part of the
Senior Discount Units is initially exercisable to purchase 2.503 shares
(1,672,004 shares in aggregate) of our common stock at an exercise price of
$96.80 per share. The warrants may be exercised at any time on or after February
23, 2001 and prior to April 15, 2010. We are
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obligated to file a shelf registration statement covering the resale of the
warrants and related common stock issuable within 180 days after the closing of
the units offering.
See "Description of the Notes" for a summary of the terms of the notes.
Lucent Equipment Financing. Cricket Communications has agreed to purchase
$330.0 million of infrastructure products and services from Lucent Technologies.
The Lucent Credit Agreement is subject to early termination at Cricket
Communications's convenience subject to payments for equipment purchased. Lucent
agreed to finance these purchases plus additional working capital under a credit
facility. The credit facility permits up to $641.0 million in total borrowings
by Cricket Communications with borrowing availability based on total amounts of
equipment purchased, subject to various covenants and conditions typical for a
loan of this type, including minimum levels of customers and covered potential
customers which must increase over time, limits on annual capital expenditures
and dividend restrictions and other financial ratio tests. Borrowings under the
Lucent credit facility accrue at an interest rate equal to LIBOR plus 3.5% to
4.25% or a bank base rate plus 2.5% to 3.25%, in each case with the specific
rate based on the ratio of total indebtedness to EBITDA. Cricket Communications
must pay a commitment fee equal to 1.25% per annum of the commitments under the
credit facility until the aggregate principal amount of borrowings equals $175
million, at which time the rate decreases to 1.0% until the aggregate principal
amount equals $350 million, at which time the rate further decreases to 0.75%.
Principal payments are scheduled to begin after three years with a final
maturity after eight years. Repayment is weighted to the later years of the
repayment schedule. The obligations under the Lucent credit agreement are
secured by all of the stock of Cricket Communications and its subsidiaries, all
of their respective assets, the assets of Cricket Communications Holdings and
the stock of each special purpose subsidiary of Leap formed to hold wireless
licenses. At February 29, 2000, Cricket Communications had $21.0 million
outstanding under the Lucent Credit Agreement, including $0.3 million in accrued
and capitalized interest.
Ericsson Equipment Financing. Cricket Communications also has agreed to
purchase $330.0 million of next-generation infrastructure products that are
currently in development and related services from Ericsson. Purchases from
Ericsson will be on substantially similar terms to the Lucent agreement,
including a credit facility providing for borrowings up to $495.0 million with
borrowing availability based on a ratio of total amounts of equipment purchased.
The commitment of funds by Ericsson is subject to the development of the next
generation equipment, the negotiation of definitive documentation and the
approval of Ericsson's board of directors.
Obligations to the FCC. We have assumed $11.1 million and $78.8 million in
debt obligations to the FCC as part of the purchase price for the wireless
licenses from AirGate and Chase Telecommunications in January and March 2000,
respectively. We also will assume additional debt obligations to the FCC in the
aggregate principal amount of approximately $3.2 million as part of the purchase
price for the pending acquisitions of wireless licenses from PCS Devco,
Radiofone and CM PCS.
Smartcom Deferred Payment Agreements. Smartcom has entered into a Deferred
Payment Agreement, as amended and restated, with Qualcomm related to Smartcom's
purchase of equipment, software and services from Qualcomm. Under the terms of
the Deferred Payment Agreement, Qualcomm has agreed to defer collection of
principal amounts up to a maximum of $115.7 million including capitalized
interest. The obligations under the Deferred Payment Agreement are secured by
all of the assets of Smartcom. A Leap subsidiary has agreed to pledge its shares
in Smartcom as collateral for its guarantee of Smartcom's obligations to
Qualcomm under the agreement. The Deferred Payment Agreement requires Smartcom
to meet certain financial and operating covenants, including a debt to equity
ratio and restrictions on Smartcom's ability to pay dividends and to distribute
assets. As a result, substantially all the net assets of Smartcom are restricted
from distribution to Leap. The deferred payments bear interest at a rate equal
to LIBOR plus 5.0% to 6.5% or a bank base rate plus 4.0% to 5.5%,
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in each case with the specific rate based on specific financial ratios. Accrued
interest may be added to the outstanding principal amount of the applicable
borrowing until September 2001. Amounts deferred under the agreement must be
repaid by September 2006. At February 29, 2000, the Company had $95.3 million
outstanding under the Deferred Payment Agreement.
In February 2000, Smartcom and Qualcomm entered into an Equipment Credit
Agreement related to Smartcom's equipment supply and service agreements with a
vendor. The Equipment Credit Agreement permits up to $38.5 million in
borrowings, including capitalized interest. The Equipment Credit Agreement
provides for financial and operating covenants similar to the Deferred Payment
Agreement. Borrowings under the Equipment Credit Agreement accrue at an interest
rate equal to LIBOR plus 5.0% to 7.0% or a bank base rate plus 4.0% to 6.0%, in
each case with the specific rate based on certain financial ratios. Principal
payments are scheduled to begin in March 2002 with a final maturity of September
2006. At February 29, 2000, Smartcom had financed amounts totaling $18.6
million, including capitalized interest, under the Equipment Credit Agreement.
In February 2000, Smartcom and Qualcomm entered into a Subscriber Deferred
Payment Agreement related to Smartcom's purchase of handsets and accessories and
test equipment from Qualcomm. Under the terms of the agreement, Qualcomm has
agreed to defer collection of amounts up to a maximum of $11.2 million,
including capitalized interest. The Subscriber Deferred Payment Agreement
provides for certain financial and operating covenants similar to the Deferred
Payment Agreement. Borrowings under the Subscriber Deferred Payment Agreement
accrue at an interest rate equal to LIBOR plus 3.5% to 5.0% or a bank base rate
plus 2.5% to 4.0%, in each case with the specific rate based on certain
financial ratios. Principal outstanding is due at maturity in September 2001. At
February 29, 2000, Smartcom had financed amounts totaling $5.6 million under the
Subscriber Deferred Payment Agreement.
PEGASO FINANCING
Qualcomm and another equipment vendor have agreed to provide approximately
$580.0 million of secured equipment financing to Pegaso, a portion of which has
already been advanced to the venture. The shares of Pegaso Comunicaciones y
Sistemas, S.A. de C.V., Pegaso's subsidiary that holds wireless licenses, serve
as collateral for Pegaso's obligations under the equipment financing.
In addition, in May 1999, Pegaso entered into a loan agreement with several
banks with credit support from Qualcomm. We guaranteed 33% of Pegaso's
obligations under the initial commitment from the lenders of $100 million. In
December 1999, as a condition of the guarantee, Leap received an option to
subscribe for and purchase up to 243,090 limiting voting series "N" treasury
shares of Pegaso. The number of shares to be purchased by Leap under the option
will be calculated to provide a total internal rate of return on the average
outstanding balance of the bridge loan of 20%. The options have an exercise
price of $0.01 per share and expire ten years from the date of issuance. The
options are exercisable at any time after the date on which all amounts under
the loan agreement are paid in full.
In July 1999, several existing investors contributed $50.0 million to
Pegaso as previously planned. On April 26, 2000, Sprint PCS invested $200
million in Pegaso by purchasing shares from Pegaso and shareholders other than
Leap. Pegaso expects to fund a large portion of its development and operating
activities in fiscal 2000 with cash from operations, proceeds of the $50 million
investment from several existing investors and the investment from Sprint PCS,
and borrowings under the $100 million loan agreement. Several other existing
investors are committed to contribute $50.0 million in additional equity capital
to Pegaso by August 2000. In addition, Pegaso is seeking additional debt and
equity financing, including additional vendor financing.
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OPERATING ACTIVITIES
We used $35.0 million in cash for operating activities during the six month
period ended February 29, 2000 compared to $13.6 million in the corresponding
period of the prior fiscal year. The increase is primarily attributable to
increased marketing and other customer acquisition costs associated with
launching new markets, as well as the effect of the full consolidation of
Smartcom. We expect that cash used in operating activities will increase
substantially in the future as a result of our acquisition and consolidation of
Chase Telecommunications and other activities related to the launch of our U.S.
networks.
INVESTING ACTIVITIES
Cash used in investing activities was $143.9 million during the six month
period ended February 29, 2000 compared to $97.2 million in the corresponding
period of the prior fiscal year. Investments during the six month period ended
February 29, 2000 consisted of $108.5 million of restricted cash equivalents and
investments, which have been pledged to provide for the payment of the first
seven scheduled interest payments on the senior notes payable and to secure our
obligations under a letter of credit with a bank, loans to Chase
Telecommunications of $17.0 million, the purchase of wireless licenses totaling
$13.4 million and capital expenditures, primarily by Smartcom, of $13.8 million,
offset by $9.8 million of proceeds received from the liquidation of the
Transworld Companies. Investments in the corresponding period of the prior
fiscal year consisted primarily of a $60.7 million capital contribution to
Pegaso, loans and advances of $32.8 million to our operating companies and a
$17.5 million loan, net of repayments of $7.5 million, provided to a related
party. In the remainder of fiscal 2000, Leap and its subsidiaries expect to make
significant investments in capital assets, including network equipment and
wireless communications licenses.
FINANCING ACTIVITIES
Cash provided by financing activities during the six month period ended
February 29, 2000, primarily from proceeds of our public equity offering, units
offering, borrowings under the credit agreement with Qualcomm and from banks,
was $750.9 million. Cash provided by financing activities in the corresponding
period of the prior fiscal year was $116.8 million, representing $95.3 million
of funding from Qualcomm for our operating and investing activities prior to the
distribution of our common stock to Qualcomm's stockholders in September 1998,
and $21.1 million of net borrowings under the credit agreement and from banks.
CURRENCY FLUCTUATION RISKS
We report our financial statements in U.S. dollars. Our international
operating companies report their results in local currencies. Consequently,
fluctuations in currency exchange rates between the U.S. dollar and the
applicable local currency will affect our results of operations as well as the
value of our ownership interests in our operating companies.
Generally, our international operating companies generate revenues that are
paid in their local currency. However, many of these operating companies' major
contracts, including financing agreements and contracts with equipment
suppliers, are denominated in U.S. dollars. As a result, a significant change in
the value of the U.S. dollar against the national currency of an operating
company could result in a significant increase in the operating company's
expenses and could have a material adverse effect on the operating company and
on us. In some emerging markets, including Mexico, significant devaluations of
the local currency have occurred and may occur again in the future.
We do not currently hedge against foreign currency exchange rate or
interest rate risks.
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INFLATION
Inflation has had and may continue to have negative effects on the
economies and securities markets of emerging market countries and could have
negative effects on our operating companies and any new start-up project in
those countries, including their ability to obtain financing. Chile and Mexico,
for example, have periodically experienced relatively high rates of inflation.
The operating companies, where permitted and subject to competitive pressures,
intend to increase their tariffs to account for the effects of inflation.
However, in those jurisdictions where tariff rates are regulated or specified in
the wireless license, the operating companies may not successfully mitigate the
impact of inflation on their operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our variable rate long-term debt obligations. For a description of our
long-term debt obligations, see Note 6 to the Condensed Consolidated Financial
Statements which are included elsewhere herein. The general level of U.S.
interest rates and/or LIBOR affect the interest expense that we recognize on our
variable rate long-term debt obligations. As of February 29, 2000, the principal
amounts of our variable rate long-term debt obligations amounted to
approximately $140.5 million. An increase of 10% in interest rates would
increase our interest expense for the next twelve months by approximately $1.7
million. This hypothetical amount is only suggestive of the effect of changes in
interest rates on our results of operations for the next twelve months.
FOREIGN EXCHANGE MARKET RISK
The long-term debt obligations of our wholly owned Chilean subsidiary,
Smartcom, which are denominated in U.S. dollars, are subject to the effects of
currency fluctuations and may affect reported earnings and losses. A significant
change in the value of U.S. dollars against the Chilean peso could result in a
significant increase in our consolidated expenses. As of February 29, 2000,
Smartcom's long-term debt obligations that were denominated in U.S. dollars
amounted to approximately $136.6 million. Our results of operations would be
negatively impacted by approximately $12.0 million for the next twelve months if
U.S. dollars were to appreciate against the Chilean peso by 10%. This
hypothetical amount is only suggestive of the effect of currency fluctuations on
our results of operations for the next twelve months.
YEAR 2000 ISSUE
We have recently begun our operations and have designed and built our
wireless communications networks and support systems with the Year 2000 issue in
mind. To date, we have not incurred any material costs in support of the Year
2000 issue. The recent acquisition of network equipment and software does not
guarantee, however, that our equipment and software are Year 2000 compliant
(i.e., able to distinguish 21st century dates from 20th century dates).
As of April 14, 2000, our systems have operated without any apparent Year
2000 related problems and appear to be Year 2000 compliant. All of our financial
and operational systems were available over the millennium changeover and the
integrity of the historical information contained within those systems has not
been affected. Further, we are not aware that any of our primary vendors or
systems maintained by third parties (such as landline, long-distance and power
systems) have experienced significant Year 2000 compliance problems. However,
while no such problem has been discovered as of the date indicated
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above, Year 2000 issues may not become apparent immediately and therefore, we
may be affected in the future. We will continue to monitor the issue and work to
remediate any Year 2000 issues that may arise.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which we must adopt for fiscal year 2001.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as assets
and liabilities and measured at fair value. We do not expect that the adoption
of this new accounting standard will have a material impact on our consolidated
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". SAB
No. 101 summarized certain of the staff's interpretations in applying generally
accepted accounting principles to revenue recognition. The provisions of SAB No.
101 are effective for the Company's quarter ending May 31, 2000. Leap does not
expect that the adoption of SAB No. 101 will have a material impact on its
consolidated financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. Leap does not expect that the adoption of
FIN 44 will have a material impact on its financial position or results of
operations.
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THE EXCHANGE OFFER
GENERAL
We are offering to exchange (i) up to $225,000,000 in aggregate principal
amount of registered senior notes for the same aggregate principal amount of
outstanding senior notes, and (ii) up to $668,000,000 in aggregate principal
amount at maturity of registered senior discount notes for the same aggregate
principal amount at maturity of outstanding senior discount notes, properly
tendered before the expiration date and not withdrawn. We are making the
exchange offer for all of the outstanding notes. Your participation in the
exchange offer is voluntary and you should carefully consider whether to accept
this offer.
On the date of this prospectus, $225,000,000 in aggregate principal amount
of the outstanding senior notes is outstanding and $668,000,000 in aggregate
principal amount at maturity of the outstanding senior discount notes is
outstanding. As of April 30, 2000, the accreted value of the senior discount
notes was $333,748,576 in aggregate principal amount. We are sending this
prospectus, together with the letter of transmittal, on approximately
[ ], 2000, to all holders of outstanding notes that we are aware
of. Our obligations to accept outstanding notes for exchange pursuant to the
exchange offer are limited by the conditions listed under "Conditions to the
Exchange Offer" below.
We currently expect that each of the conditions will be satisfied and that
no waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
We issued and sold $225,000,000 in principal amount of the outstanding
senior notes and $668,000,000 in principal amount at maturity of the outstanding
senior discount notes on February 23, 2000 in a transaction exempt from the
registration requirements of the Securities Act. The notes issued and sold were
part of units consisting of (1) one senior note and one warrant to purchase
shares of common stock, or (2) one senior discount note and one warrant to
purchase shares of common stock. Upon consummation of this exchange offer, the
notes and warrants will become separately transferable. Because the transaction
was exempt under the Securities Act, you may re-offer, resell, or otherwise
transfer the outstanding notes only if registered under the Securities Act or if
an applicable exemption from the registration and prospectus delivery
requirements of the Securities Act is available.
In connection with the issuance and sale of the outstanding notes, we
entered into the registration rights agreement, which requires us to consummate
this exchange offer by August 21, 2000, which is 180 days after the date of the
closing of the offering of the notes.
In addition, there are circumstances where we are required to use our best
efforts to file a shelf registration statement with respect to resales of the
notes. We have filed a copy of the registration rights agreement as an exhibit
to the registration statement that this prospectus forms a part of and that has
been filed with the SEC.
We are making the exchange offer to satisfy our obligations under the
registration rights agreement. Otherwise, we are not required to file any
registration statement to register any outstanding notes. Holders of outstanding
notes that do not tender their outstanding notes or whose outstanding notes are
tendered but not accepted will have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act, if they
wish to sell their outstanding notes.
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TERMS OF THE EXCHANGE
We are offering to exchange, upon the terms of this prospectus and the
letter of transmittal, $1,000 in principal amount at maturity of registered
senior notes and registered senior discount notes for each $1,000 in principal
amount at maturity of the outstanding senior notes and senior discount notes,
respectively. The terms of the registered notes are the same in all material
respects, including principal amount, interest rate, maturity and ranking, as
the terms of the outstanding notes for which they may be exchanged pursuant to
the exchange offer, except that the registered notes have been registered under
the Securities Act and, therefore, will not be subject to restrictions on
transfer applicable to the outstanding notes and will be entitled to
registration rights only under limited circumstances. The registered notes will
evidence the same indebtedness as the outstanding notes and will be entitled to
the benefits of the indenture. Please refer to the section in this prospectus
entitled "Description of the Notes."
The exchange offer is not conditioned upon any minimum aggregate amount of
outstanding notes being tendered for exchange.
We have not requested, and do not intend to request, an interpretation by
the staff of the SEC as to whether the registered notes issued pursuant to the
exchange offer in exchange for the outstanding notes may be offered for sale,
resold or otherwise transferred by any holder without compliance with the
registration and prospectus delivery provisions of the Securities Act. Instead,
based on an interpretation by the Staff in a series of no-action letters issued
to third parties, we believe that registered notes issued pursuant to the
exchange offer in exchange for outstanding notes may be offered for sale, resold
and otherwise transferred by any holder of registered notes, other than any
holder which is:
- an affiliate of ours; or
- a broker-dealer that purchases notes from us to resell pursuant to Rule
144A under the Securities Act or any other available exemption, without
compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the registered notes are acquired in
the ordinary course of the holder's business and the holder has no
arrangement or understanding with any person to participate in the
distribution of the registered notes and neither the holder nor any other
person is participating in or intends to participate in a distribution of
the registered notes.
Since the SEC has not considered our exchange offer in the context of a
no-action letter, we cannot assure you that the staff would make a similar
determination with respect to the exchange offer. Any holder that is an
affiliate of ours or that tenders in the exchange offer for the purpose of
participating in a distribution of the registered notes may be deemed to have
received restricted securities and will not be allowed to rely on this
interpretation by the staff and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
If you participate in the exchange offer, you must acknowledge, among other
things, that you are not participating in, and do not intend to participate in,
a distribution of registered notes. If you are a broker-dealer that receives
registered notes for your own account in exchange for outstanding notes, where
your outstanding notes were acquired by you as a result of your market-making
activities or other trading activities, you must acknowledge that you will
deliver a prospectus in connection with any resale of the registered notes.
Please refer to the section in this prospectus entitled "Plan of Distribution."
You will not be required to pay brokerage commissions or fees or, if you
comply with the instructions in the letter of transmittal, transfer taxes with
respect to the exchange of the outstanding notes pursuant to the exchange offer.
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EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The exchange offer will expire at 5:00 p.m., New York City time, on
[ ], 2000, unless we have extended the period of time that the
exchange offer is open. The expiration date will be at least 20 business days
after the beginning of the exchange offer as required by Rule 14e-1(a) under the
Exchange Act. We reserve the right to extend the period of time that the
exchange offer is open, and delay acceptance for exchange of any outstanding
notes, by giving oral or written notice to the exchange agent and by timely
public announcement no later than 9:00 a.m. New York City time, on the next
business day after the previously scheduled expiration date. During any
extension, all outstanding notes previously tendered will remain subject to the
exchange offer unless properly withdrawn.
We also reserve the right to:
- end or amend the exchange offer and not to accept for exchange any
outstanding notes not previously accepted for exchange upon the
occurrence of any of the events specified below under "-- Conditions to
the Exchange Offer" which have not been waived by us; and
- amend the terms of the exchange offer in any manner which, in our good
faith judgment, is advantageous to you, whether before or after any
tender of the outstanding notes.
If any termination or amendment occurs, we will notify the exchange agent
and will either issue a press release or give oral or written notice to you as
promptly as practicable.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
Your tender to us of your outstanding notes and our acceptance of the notes
will constitute a binding agreement between you and us on the terms contained in
this prospectus and in the letter of transmittal.
You may tender outstanding notes by:
- properly completing and signing the letter of transmittal or a facsimile
copy of the letter; and delivering the letter, together with the
certificate or certificates representing the outstanding notes being
tendered and any required signature guarantees and any other documents
required by the letter of transmittal, to the exchange agent at its
address listed below on or before the expiration date; or
- complying with the procedure for book-entry transfer described below; or
- complying with the guaranteed delivery procedures described below.
If your outstanding notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender the
notes, you should contact the registered holder promptly and instruct the
registered holder to tender on your behalf. If you wish to tender on your own
behalf, you must, before completing and executing the letter of transmittal and
delivering the outstanding notes, either make appropriate arrangements to
register ownership of the outstanding notes in your name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
THE METHOD OF DELIVERING THE OUTSTANDING NOTES, LETTERS OF TRANSMITTAL AND
ALL OF THE REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT YOU USE REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO INSURE TIMELY DELIVERY. NO NOTES OR LETTERS OF TRANSMITTAL SHOULD BE
SENT TO US.
If tendered outstanding notes are registered in the name of the person who
signs the letter of transmittal and the registered notes to be issued in
exchange for the tendered notes are to be issued in the name of the registered
holder, the signature of the signer need not be guaranteed.
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In addition, if any untendered outstanding notes are to be reissued in the
name of the registered holder, the signature need not be guaranteed. A
registered holder shall include any participant in The Depository Trust Company
whose name appears on a security listing as an owner of outstanding notes.
In any other case, the tendered outstanding notes must be endorsed or
accompanied by written instruments of transfer, in form satisfactory to us and
duly executed by the registered holder. The signature on the endorsement or
instrument of transfer must be guaranteed by an eligible institution. The
following are considered eligible institutions:
- a firm which is a member of a registered national securities exchange or
a member of the National Association of Securities Dealers, Inc.;
- a clearing agency;
- an insured credit union;
- a savings association or a commercial bank; or
- a trust company having an office or correspondent in the United States.
If the registered notes and/or outstanding notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the note registrar for the outstanding notes, the signature in the letter of
transmittal must be guaranteed by an eligible institution.
We understand that the exchange agent has confirmed with The Depository
Trust Company that any financial institution that is a participant in The
Depository Trust Company's system may use its Automated Tender Offer Program to
tender outstanding notes. We further understand that the exchange agent will
request, within two business days after the date the exchange offer commences,
that The Depository Trust Company establish an account relating to the
outstanding notes for the purpose of facilitating the exchange offer, and any
participant may make book-entry delivery of outstanding notes by causing The
Depository Trust Company to transfer the outstanding notes into the exchange
agent's account in accordance with the Automated Tender Offer Program procedures
for transfer. However, the exchange of the outstanding notes will only be made
after timely confirmation of the book-entry transfer and timely receipt by the
exchange agent of an agent's message, an appropriate letter of transmittal with
any registered signature guarantee, and any other documents required. The term
agent's message means a message, transmitted by The Depository Trust Company and
received by the exchange agent and forming part of a book-entry confirmation,
stating that The Depository Trust Company has received an express acknowledgment
from a participant tendering outstanding notes which are the subject of the
book-entry confirmation and that the participant has received and agrees to be
bound by the terms of the letter of transmittal and that we may enforce such
agreement against the participant.
If you want to tender outstanding notes in the exchange offer and time will
not permit a letter of transmittal or outstanding notes to reach the exchange
agent before the expiration date or you cannot comply with the procedure for
book-entry transfer on a timely basis, a tender may be effected if the exchange
agent has received at its address listed below before the expiration date, a
letter, telegram or facsimile transmission from an eligible institution listing
your name and address, the names in which the outstanding notes are registered
and, if possible, the certificate number of the outstanding notes to be
tendered, and stating that the tender is being made by the letter, telegram or
facsimile transmission and guaranteeing that within three business days after
the expiration date, the outstanding notes in proper form for transfer, or a
confirmation of book-entry transfer of the outstanding notes into the exchange
agent's account at The Depository Trust Company, will be delivered by the
eligible institution together with a properly completed and duly executed letter
of transmittal, and any other required documents. Unless outstanding notes being
tendered by the method described in the preceding sentence are deposited with
the exchange agent within the time period described in the preceding sentence
and accompanied or preceded by a properly completed letter of transmittal and
any other required
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documents, we may, at our option, reject the tender. You may obtain copies of
the notice of guaranteed delivery from the exchange agent.
Your tender will be deemed to have been received when:
- the exchange agent receives your properly completed and duly signed
letter of transmittal accompanied by the outstanding notes, or a
confirmation of book-entry transfer of such outstanding notes into the
exchange agent's account at The Depository Trust Company; or
- a notice of guaranteed delivery or letter, telegram or facsimile
transmission to similar effect from an eligible institution is received
by the exchange agent.
We will issue registered notes in exchange for outstanding notes tendered
pursuant to a notice of guaranteed delivery or letter, telegram or facsimile
transmission to similar effect by an eligible institution only when the exchange
agent receives (1) the letter of transmittal and any other required documents
and (2) the tendered outstanding notes.
We will determine all questions regarding the validity, form, eligibility,
time of receipt and acceptance of outstanding notes tendered for exchange. You
should be aware that:
- We reserve the absolute right to reject any and all tenders of any
particular outstanding notes not properly tendered or not to accept any
particular outstanding notes which acceptance might, in our judgment or
that of our counsel, be unlawful.
- We reserve the absolute right to waive any defects or irregularities or
conditions of the exchange offer as to any particular outstanding notes
either before or after the expiration date, including the right to waive
the ineligibility of any holder that seeks to tender outstanding notes in
the exchange offer.
- Our interpretation of the terms and conditions of the exchange offer,
including the letter of transmittal and the instructions, shall be final
and binding on all parties.
- Unless waived, any defects or irregularities in connection with tenders
of outstanding notes for exchange must be cured within a reasonable
period of time as we shall determine.
- Neither we, the exchange agent nor any other person shall have any duty
to give notification of any defect or irregularity with respect to any
tender of outstanding notes for exchange.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of outstanding notes, the outstanding notes
must be endorsed or accompanied by appropriate powers of attorney, in either
case signed exactly as the name or names of the registered holder or holders
appear on the outstanding notes.
If the letter of transmittal or any outstanding notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, they should indicate they are acting in that capacity when signing,
and, unless waived by us, you should provide evidence of their authority to act
in that capacity.
If you tender, you will be representing to us that:
- the registered notes you acquire pursuant to the exchange offer are being
acquired in the ordinary course of business of the person receiving
registered notes, whether or not the person is the holder;
- you are not an affiliate of ours;
- you are not participating in, and do not intend to participate in, and
have no arrangement or understanding with any person to participate in, a
distribution of the outstanding notes or the registered notes; and
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- if you are a broker or dealer registered under the Exchange Act, you will
receive the registered notes for your own account in exchange for
outstanding notes that were acquired as a result of market-making
activities or other trading activities. You must acknowledge that you
will deliver a prospectus in connection with any resale of the registered
notes. Please refer to the section in this prospectus entitled "Plan of
Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
By signing and returning the letter of transmittal you will be agreeing to
the following terms and conditions, which are part of the exchange offer.
- You are exchanging, assigning and transferring the outstanding notes to
us and irrevocably constitute and appoint the exchange agent as your
agent and attorney-in-fact to cause the outstanding notes to be assigned,
transferred and exchanged.
- You represent and warrant that you have full power and authority to
tender, exchange, assign and transfer the outstanding notes and acquire
registered notes issuable upon the exchange of tendered outstanding
notes.
- When we accept outstanding notes for exchange, we will acquire good and
unencumbered title to the tendered outstanding notes, free and clear of
all liens, restrictions, charges and encumbrances and not subject to any
adverse claim.
- You will, upon request, execute and deliver any additional documents
deemed by the exchange agent or us to be necessary or desirable to
complete the exchange, assignment and transfer of tendered outstanding
notes or transfer ownership of such outstanding notes on the account
books maintained by The Depository Trust Company.
Your acceptance of any tendered outstanding notes and our issuance of
registered notes in exchange for the outstanding notes will constitute
performance in full by us of our obligations under the registration rights
agreement to complete the exchange offer.
All authority conferred by you will survive your death or incapacity and
every obligation of yours will be binding upon your heirs, legal
representatives, successors, assigns, executors and administrators. You will
also make the representations described above under "Procedures for Tendering
Outstanding Notes."
WITHDRAWAL RIGHTS
You may withdraw your tender of outstanding notes at any time before 5:00
p.m., New York City time, on the expiration date.
For a withdrawal to be effective, the exchange agent must receive a written
notice of withdrawal, sent by telegram, facsimile transmission, receipt
confirmed by telephone, or letter, before the expiration date. Any notice of
withdrawal must:
- specify the name of the person that tendered the outstanding notes to be
withdrawn;
- identify the outstanding notes to be withdrawn, including the certificate
number or numbers and principal amount of such outstanding notes;
- specify the principal amount of outstanding notes to be withdrawn;
- include a statement that the holder is withdrawing its election to have
the outstanding notes exchanged;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the outstanding notes were tendered or
as otherwise described above, including any
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required signature guarantees, or be accompanied by documents of transfer
sufficient to have the trustee under the indenture register the transfer
of the outstanding notes into the name of the person withdrawing the
tender; and
- specify the name in which any of the outstanding notes are to be
registered, if different from that of the person that tendered the
outstanding notes.
The exchange agent will return the properly withdrawn outstanding notes
promptly following receipt of notice of withdrawal. If outstanding notes have
been tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at The Depository
Trust Company to be credited with the withdrawn outstanding notes or otherwise
comply with The Depository Trust Company's procedures.
Any outstanding notes withdrawn will not have been validly tendered for
exchange for purposes of the exchange offer. Any outstanding notes which have
been tendered for exchange but which are not exchanged for any reason will be
returned to the holder without cost to the holder as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. In the
case of outstanding notes tendered by book-entry transfer into the exchange
agent's account at The Depository Trust Company pursuant to its book-entry
transfer procedures, the outstanding notes will be credited to an account with
The Depository Trust Company specified by the holder, as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer.
Properly withdrawn outstanding notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering Outstanding Notes" above
at any time on or before the expiration date.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF REGISTERED NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the exchange date, all outstanding notes properly
tendered and will issue the registered notes promptly after the acceptance.
Please refer to the section in this prospectus entitled "-- Conditions to the
Exchange Offer" below. For purposes of the exchange offer, we will be deemed to
have accepted properly tendered outstanding notes for exchange, when we give
notice of acceptance to the exchange agent.
For each outstanding note accepted for exchange, the holder of the
outstanding note will receive a registered note having a principal amount at
maturity equal to that of the surrendered outstanding note.
In all cases, we will issue registered notes for outstanding notes that are
accepted for exchange pursuant to the exchange offer only after the exchange
agent timely receives certificates for the outstanding notes or a book-entry
confirmation of the outstanding notes into the exchange agent's account at The
Depository Trust Company, a properly completed and duly executed letter of
transmittal and all other required documents.
CONDITIONS TO THE EXCHANGE OFFER
We will not be required to accept for exchange, or to issue registered
notes in exchange for, any outstanding notes and may end or amend the exchange
offer, by notice to the exchange agent or by a timely press release, if at any
time before the acceptance of the outstanding notes for exchange or the exchange
of the registered notes for the outstanding notes, any of the following
conditions exist:
- any action or proceeding is instituted or threatened in any court or by
or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or have a material adverse effect on the
contemplated benefits of the exchange offer to us; or
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- any change, or any development involving a prospective change, shall have
occurred or be threatened in our business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects that is or may be adverse to us, or we become aware of facts
that have or may have adverse significance with respect to the value of
the outstanding notes or the registered notes or that may materially
impair the contemplated benefits of the exchange offer to us; or
- any law, rule or regulation or applicable interpretation of the staff of
the SEC is issued or promulgated which, in our good faith determination,
does not permit us to effect the exchange offer; or
- any governmental approval has not been obtained, which we think is
necessary for the completion of the exchange offer; or
- there shall have been proposed, adopted or enacted any law, statute, rule
or regulation, or an amendment to any existing law, statute, rule or
regulation, which might materially impair our ability to proceed with the
exchange offer or have a material adverse effect on the contemplated
benefits of the exchange offer to us; or
- there shall occur a change in the current interpretation by the staff of
the SEC which permits the registered notes issued pursuant to the
exchange offer in exchange for outstanding notes to be offered for
resale, resold and otherwise transferred by holders, other than any
holder that is a broker-dealer or an affiliate of ours within the meaning
of Rule 405 under the Securities Act, without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the registered notes are acquired in the ordinary course of
the holders' business and the holders have no arrangement with any person
to participate in the distribution of such registered notes.
We reserve the right to end the exchange offer and reject for exchange any
outstanding notes upon the occurrence of any of the preceding conditions. In
addition, we may amend the exchange offer at any time before the expiration date
if any of these conditions exist.
In addition, we will reject for exchange any outstanding notes tendered,
and no registered notes will be issued in exchange for any outstanding notes, if
at the time any stop order is threatened or in effect with respect to the
registration statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of 1939. If any
stop order is in effect we will be required to use our best efforts to obtain
its withdrawal at the earliest possible time.
The exchange offer is not conditioned upon any minimum principal amount of
outstanding notes being tendered for exchange.
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EXCHANGE AGENT
We have appointed State Street Bank and Trust Company as the exchange agent
for the exchange offer. You should direct all executed letters of transmittal to
the exchange agent at the addresses listed below:
BY OVERNIGHT COURIER AND BY
HAND: State Street Bank and Trust Company
Two Avenue de Lafayette
5th Floor, Corporate Trust Window
Boston, MA 02111-1724
Attention: Mackenzie Elijah
BY MAIL: State Street Bank and Trust Company
P.O. Box 778
Boston, MA 02102-0078
Attention: Mackenzie Elijah
BY FACSIMILE: (617) 662-1452
CONFIRM BY TELEPHONE: (617) 662-1525
You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notices of guaranteed delivery to the exchange agent at the address
and telephone number listed above.
DELIVERY TO AN ADDRESS OTHER THAN AS LISTED ABOVE, OR TRANSMISSIONS OF
INSTRUCTIONS BY A FACSIMILE NUMBER OTHER THAN AS LISTED ABOVE, WILL NOT
CONSTITUTE A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection with the exchange offer.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offer. We estimate that those expenses will be, in the aggregate,
approximately $500,000, including fees and expenses of the exchange agent and
trustee, registration fees, accounting, legal and printing expenses and other
related fees and expenses.
Neither the delivery of this prospectus nor any exchange made under this
prospectus shall, under any circumstances, create any implication that there has
been no change in our affairs since the respective dates as of which information
is given in this prospectus. The exchange offer is not being made to, nor will
tenders be accepted from or on behalf of, holders of outstanding notes in any
jurisdiction in which the making of the exchange offer or the acceptance of the
outstanding notes would not be in compliance with the laws of the jurisdiction.
However, we may, at our discretion, take any action as we may deem necessary to
make the exchange offer in any jurisdiction and extend the exchange offer to
holders of outstanding notes in the jurisdiction concerned.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. If, however, certificates
representing registered notes or outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of,
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any person other than the registered holder of the outstanding notes tendered,
or if tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal, or if a transfer tax is
imposed for any reason other than the exchange of outstanding notes pursuant to
the exchange offer, then the amount of the transfer taxes whether imposed on the
registered holder or any other person, will be payable by the tendering holder.
If satisfactory evidence of payment of the taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of the transfer taxes will
be billed directly to the tendering holder.
ACCOUNTING TREATMENT
The registered notes will be recorded at the carrying value of the
outstanding notes as reflected in our accounting records on the date the
exchange offer is completed. Accordingly, we will not recognize any gain or loss
for accounting purposes upon the exchange of registered notes for outstanding
notes. We will amortize the expenses incurred in connection with the issuance of
the registered notes over the term of the registered notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your outstanding notes for registered notes pursuant
to the exchange offer, you will continue to be subject to the restrictions on
transfer of the outstanding notes as described in the legend on the notes. In
general, the outstanding notes may be offered or sold only if registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We do
not currently anticipate that we will register the outstanding notes under the
Securities Act. However, under limited circumstances we may be required to file
with the SEC a shelf registration statement to cover resales of the outstanding
notes by the holders of notes who satisfy conditions relating to the provision
of information in connection with the shelf registration statement. Please refer
to the section in this prospectus entitled "Description of the Notes --
Registration Rights."
Your participation in the exchange offer is voluntary, and you should
carefully consider whether to participate. We urge you to consult your financial
and tax advisors in making a decision whether or not to tender your outstanding
notes. Please refer to the section in this prospectus entitled "Certain U.S.
Federal Tax Considerations."
As a result of the making of, and upon acceptance for exchange of all
validly tendered outstanding notes pursuant to the terms of, this exchange
offer, we will have fulfilled a covenant contained in the registration rights
agreement. If you do not tender your outstanding notes in the exchange offer,
you will be entitled to all the rights and limitations applicable to the
outstanding notes under the indenture, except for any rights under the
registration rights agreement that by their terms end or cease to have further
effectiveness as a result of the making of this exchange offer. To the extent
that outstanding notes are tendered and accepted in the exchange offer, the
trading market for untendered, or tendered but unaccepted, outstanding notes
could be adversely affected. Please refer to the section in this prospectus
entitled "Risk Factors -- If You Do Not Exchange Your Outstanding Notes for
Registered Notes, Your Notes Will Continue to Have Restrictions on Transfer."
We may in the future seek to acquire, subject to the terms of the
indenture, untendered outstanding notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The terms of
these purchases or offers may differ form the terms of the exchange offer.
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RESALE OF REGISTERED NOTES
As noted above, we are making the exchange offer in reliance on the
position of the staff of the SEC in interpretive letters addressed to third
parties in other transactions. However, we have not sought an interpretive
letter from the staff and we cannot assure you that the staff would make a
similar determination with respect to the exchange offer as it has in past
interpretive letters to third parties. Any holder who is an affiliate of ours or
who has an arrangement or understanding with respect to the distribution of the
registered notes to be acquired pursuant to the exchange offer, or any
broker-dealer who purchased outstanding notes from us to resell pursuant to Rule
144A or any other available exemption under the Securities Act:
- cannot rely on the applicable interpretations of the staff; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act.
A broker-dealer who holds outstanding notes that were acquired for its own
account as a result of market-making or other trading activities may be deemed
to be an underwriter within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of registered notes. Each broker-dealer that
receives registered notes for its own account in exchange for outstanding notes,
where the outstanding notes were acquired by a broker-dealer as a result of
market-making activities or other trading activities must acknowledge in the
letter of transmittal that it will deliver a prospectus in connection with any
resale of the registered notes. A secondary resale transaction in the United
States by a holder using the exchange offer to participate in a distribution of
outstanding notes must be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K. Please refer to the section in this prospectus entitled "Plan of
Distribution."
In addition, to comply with the securities laws of some jurisdictions, the
registered notes may be offered or sold only if they have been registered or
qualified for sale in the jurisdiction or an exemption from registration or
qualification is available and is complied with. We have agreed, pursuant to the
registration rights agreement and subject to specified limitations in the
registration rights agreement, to register or qualify the registered notes for
offer or sale under the securities or blue sky laws of these jurisdictions as
any holder of the registered notes reasonably requests. Registration or
qualification may require the imposition of restrictions or conditions,
including suitability requirements for offerees or purchasers, in connection
with the offer or sale of any registered notes.
58
<PAGE> 62
BUSINESS
OVERVIEW
Leap is a wireless communications carrier that is deploying unique,
low-cost, simple wireless services designed to accelerate the transformation of
mobile wireless into a mass consumer product. We generally seek to address a
much broader population segment than incumbent wireless operators have addressed
to date. In the United States, we are offering wireless service under the brand
name "Cricket." Our innovative Cricket strategy is to extend the benefits of
mobility to the mass market by offering wireless service that is as simple to
understand and use as, and priced competitively with, traditional landline
service. To expand the Cricket service, we currently have acquired or agreed to
acquire wireless licenses covering approximately 35 million potential customers.
We are also currently involved in developing and operating nationwide digital
wireless networks in Mexico and Chile. In each of our markets, we are deploying
100% digital, CDMA networks that provide higher capacity and more efficient
deployment of capital than competing technologies. This, when combined with our
efforts to streamline operation and distribution systems, allows us to be a
low-cost provider of wireless services in each of our markets.
BUSINESS STRATEGY
Our business strategy is to bring innovative wireless communications
products and services to markets with strong growth potential in the U.S. and
elsewhere in the Americas. Key elements of this strategy include:
- Enhancing the Mass Market Appeal of Wireless Service. We are working to
remove the price and complexity barriers that we believe have prevented
many potential customers from using wireless service. We believe that
large segments of the population do not use wireless service because they
view wireless service as an expensive luxury item, believe they cannot
control the cost of service, or find existing service plans too
confusing. Our service plans are designed to offer appealing value in
simple formats that customers can understand and budget for.
- Offering an Appealing Value Proposition. Specific service plans will
differ among our operations and ventures; however, we strive to provide
service offerings that combine high quality and advanced features with
simplicity and attractive pricing to create a "high value/reasonable
price" proposition and broaden the market for wireless services. These
offerings include, for example, the Cricket flat rate service plan in the
U.S. and such innovative features as a fully-functioning phone
out-of-the-box and per-second billing in our Mexican and Chilean
operations.
- Controlling and Minimizing Costs. To become one of the lowest-cost
providers in the wireless industry, we are deploying advanced network
technology to minimize our capital costs and streamlining marketing,
distribution and back-office procedures.
- Leveraging CDMA Technology. We are deploying state-of-the-art CDMA
networks that provide higher capacity at a lower capital cost and can be
easily upgraded to support enhanced capacity. We believe this enables us
to operate superior networks that support rapid customer growth and high
usage with lower costs per unit than other wireless carriers. In
addition, we believe our CDMA networks will provide a better platform to
expand into data and other services based on advances in second
generation systems and on third generation digital technology in the
future.
- Expanding Our Service Through Acquisitions of Domestic Licenses. As a
designated entity under the FCC rules, we intend to expand the Cricket
service to selected metropolitan areas in the U.S. through the
acquisition of additional wireless licenses. We believe that our
designated entity status gives us opportunities that are not available to
many of our larger competitors to acquire additional wireless licenses at
generally attractive prices.
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- Investing Selectively in New Foreign Ventures. We plan to pursue wireless
ventures in foreign markets with strong growth potential. When investing
in foreign ventures, we generally seek investment partners that provide
familiarity and marketing know-how in their local markets, financial and
technical resources, or other attributes that can contribute to building
a successful wireless business. We expect to be actively involved in the
operations of each foreign venture in which we participate.
Although each of our subsidiaries and ventures has adopted a strategy
particular to its competitive strengths and market opportunities, they uniformly
strive to offer high-quality, digital CDMA-based services to customers under
simple, value-conscious rate plans.
When making new international investments, we generally expect to seek
investment partners that provide familiarity with local markets, financial and
technical resources, an ability to facilitate development in a particular
market, or other attributes that can contribute to a successful network-
building enterprise. We seek to ensure that our strategic alliances will enable
us to better prepare and equip our subsidiaries and ventures for successful
development.
Although we may not hold a majority ownership in many of the ventures in
which we elect to participate due to, among other things, regulatory
requirements or our investment priorities, we expect to exercise, to varying
degrees, significant management influence and oversight over the businesses in
which we invest. We believe our experience and business relationships enable us
to add value to our subsidiaries and ventures and increase their performance and
likelihood of success.
LEAP OPERATING COMPANIES
CRICKET
General. In the U.S., our business strategy is different from existing
models used by typical cellular or PCS wireless providers. Most of these
providers offer consumers a complex array of rate plans that include additional
charges for minutes above a set maximum as well as fees for roaming and long
distance that may result in monthly service charges that are higher than
expected. Approximately 70% of the U.S. population currently does not subscribe
to wireless service, and we believe that many of these potential customers
perceive wireless service to be too expensive and complicated. The Cricket
service is based on our vision that the mass market wants mobile wireless
service to be: predictable, affordable and as simple to understand and use as
traditional landline telephone service, but with the benefits of mobility.
We have designed the Cricket service to appeal to consumers who make the
majority of their calls within the local areas in which they live, work and
play. The Cricket service allows customers to make and receive virtually
unlimited calls within a local calling area for a low, flat monthly rate of
$29.95 that is competitive with landline service. Because the Cricket service is
provided on a prepaid basis only, there are no long-term contracts or credit
checks, and customers are not obligated to continue to pay for a service that
may not meet their needs. In addition to local calling, long distance minutes
can be purchased on a prepaid basis and direct dialed without the use of a
special code or card by debiting the customer's prepaid long distance balance.
We expect Cricket's simple pricing to attract customers who have been
apprehensive about the more complicated and unpredictable pricing plans offered
by other wireless providers. The simplicity of the Cricket service also allows
us to control costs by eliminating costly features of wireless services, such as
expansive geographic coverage and roaming, that our target customers are likely
to use infrequently. We are therefore able to offer our customers a high quality
mobile service at a compelling price.
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Strategy. We believe that the Cricket service offering will help transform
wireless phone service from a luxury product into a mass consumer product. The
Cricket strategy is to provide digital wireless service to the mass market with
a simple, easy to understand approach. As a part of the Cricket strategy, we
intend to:
- attract new customers more quickly than other wireless providers that
offer complex pricing plans with peak/off-peak rates, roaming charges and
expensive "extra" minutes;
- maintain lower customer acquisition costs by offering one simple service
plan with a choice of only one or two handsets, and distributing our
product through company stores and multiple points of sale where the mass
market shops;
- sustain lower operating costs per customer compared to other wireless
providers through streamlined billing procedures, reduced customer care
expenses, lower credit investigation costs and reduced bad debt; and
- deploy our capital more efficiently by building our networks to cover
only the urban and suburban areas of our markets where our potential
customers live, work and play, while avoiding rural areas and corridors
between distant markets.
Market Opportunity. Wireless penetration was approximately 28% in the U.S.
at the end of June 1999, according to the Cellular Telecommunications Industry
Association. Wireless companies have generally focused their U.S. marketing on
highly mobile customers, including business users, who are likely to generate
the highest revenues. Customers are typically offered multiple service plans
with prices based on the customer's minutes of use during the billing period.
Leap believes that the numerous plans offered by wireless companies have tended
to confuse many potential customers. Market research indicates that many people
are interested in a wireless product but are concerned about the cost and
complexity of wireless pricing plans.
Sales and Distribution. We expect to distinguish the Cricket service
concept and increase our market share through promoting a simplified buying
process and focusing marketing efforts on potential customers in the communities
covered by our local wireless networks. The Cricket approach is to rapidly
penetrate our target markets while minimizing our sales and marketing expenses,
primarily by keeping the customer's purchase decision simple and minimizing the
need for sales agents.
The Cricket service and wireless handsets will be sold through three main
channels:
- Cricket retail stores in high-traffic strip malls and Cricket kiosks
located in major shopping malls;
- the local stores of national retail chains such as Walmart, Staples and
Office Depot; and
- independent third-party dealers who are well positioned through their
principal lines of business to reach our target potential customers, such
as furniture and appliance retailers and rental companies, convenience
stores, beauty shops and other local service businesses.
The Cricket service plan is designed so that a potential customer can make
a purchase decision with little or no sales assistance. Customers can read about
the Cricket service on the retail package for our wireless handsets and learn
virtually all they need to know about the service without consulting a
complicated plan summary or a specialized sales person. We simplify the
customer's decision process by limiting the Cricket handset options to just two
models. Upon opening the box and dialing any telephone number from a new Cricket
handset, the customer is automatically routed to the Cricket customer care
center for immediate activation and any assistance required in using the phone.
We believe the sales costs for the Cricket service are significantly lower than
most other wireless providers because of this streamlined sales approach.
We currently offer just two types of handsets: one is presented as an
economically-priced handset at approximately $100, and the other is positioned
as a premium handset at approximately $130. We expect
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to continue to charge customers a subsidized price for handsets to ensure that
they have made an investment in the equipment related to our wireless service
and provide a moderate economic incentive to maintain the Cricket service rather
than switching to the services of a competitor. We do not, however, require
customers to sign a service contract, a feature which we believe customers find
appealing compared to other wireless providers that require long-term
commitments.
We combine mass marketing strategies and tactics to build awareness of the
Cricket service concept and brand name within the communities we service.
Because the Cricket service is offered in distinct markets with local calling
capacity only, we target our advertising at the community level. We advertise in
local publications, on local radio stations and in local spot television
commercials. In addition to local advertising efforts, we maintain an
informational Web site for the Cricket service, although we currently do not
sell our products or services over the Internet.
Network and Operations. The Cricket service is based on providing customers
with near-landline levels of usage at prices that are competitive with
traditional landline services and substantially lower than our wireless
competitors. We believe our success depends on designing our networks to provide
high, concentrated capacity rather than broad, geographically dispersed
coverage. We plan to build the Cricket networks only in high-use local
population centers of self-contained communities where roaming is not an
important component of service for our target customers. Unlike traditional
wireless providers who build comprehensive networks to permit full-roaming by
their customers, we believe that we can deploy our capital more efficiently by
tailoring our networks only to our target population centers and omitting
underutilized roaming sites between those population centers.
The principal objectives for the build-out of the Cricket networks are to:
- Establish quality wireless networks in targeted markets that enable us to
offer appealing service with full mobility throughout the local
population centers where a high concentration of potential customers
live, work and play.
- Initiate service in new markets on a phased basis. The appeal of our
service in any given market is not dependent on the Cricket service
having ubiquitous coverage in the rest of the country or region
surrounding the market. Because our business model is scalable, we can
roll out our networks on a market-by-market basis.
- Complete or commence building networks in 17 markets in the year 2000, in
our initial phase of construction. We believe we can build each new
market with an average expected time from initiating network construction
to commercial launch of 12 to 15 months. By the end of 2000, we expect
Cricket networks in the U.S. will cover approximately 7.0 million
potential customers.
- Deploy capital efficiently by tailoring the coverage footprint of local
Cricket networks to the urban and suburban areas of our target markets
and purchasing network infrastructure equipment in large volumes and at
correspondingly favorable prices and terms. We also intend to rely on
tower co-locations to minimize cell site costs and to employ third
generation equipment which is less expensive to operate than the existing
technology already installed by many incumbent wireless providers.
We believe that our status as a "designated entity" under FCC rules will
allow us to acquire C-Block and F-Block licenses at attractive prices and terms.
We recently acquired 36 wireless licenses in the federal government's 1999
reauction of wireless licenses, which was open only to designated entities. We
also recently acquired three wireless licenses from Airgate and 11 wireless
licenses from Chase Telecommunications. We also have entered into agreements to
purchase 11 other wireless licenses from various third parties.
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The following table shows the wireless licenses for approximately 35
million potential customers that we have acquired or agreed to acquire.
<TABLE>
<CAPTION>
1998 BTA
POPULATION(1) MHZ
------------- ---
<S> <C> <C>
MARKETS LAUNCHED
Chattanooga, TN(2)....................................... 548,320 15
Nashville, TN(2)......................................... 1,662,927 15
---------
2,211,247
=========
OTHER MARKETS
SOUTH EAST REGION
Florence, AL(2).......................................... 183,960 15
Albany, GA(3)............................................ 343,557 15
Columbus, GA(3).......................................... 357,914 30
Macon, GA(3)............................................. 640,286 30
Middlesboro, KY(2)....................................... 120,774 15
Charlotte, NC(4)......................................... 1,915,210 10
Greensboro, NC(4)........................................ 1,371,782 10
Hickory, NC(4)........................................... 322,521 10
Clarksville, TN(2)....................................... 258,087 15
Cookeville, TN(2)........................................ 131,891 15
Kingsport, TN(2)......................................... 690,437 15
Knoxville, TN(2)......................................... 1,073,640 15
---------
7,410,059
=========
NORTH WEST REGION
Anchorage, AK............................................ 442,324 30
Merced, CA............................................... 211,145 15
Modesto, CA.............................................. 477,212 15
Redding, CA.............................................. 276,425 15
Boise, ID................................................ 534,196 30
Idaho Falls, ID.......................................... 212,301 30
Lewiston, ID............................................. 123,479 30
Twin Falls, ID........................................... 158,946 30
Salem, OR................................................ 512,535 30
Bozeman, MT.............................................. 78,996 30
Reno, NV(8).............................................. 548,661 10
Kenewick, WA............................................. 183,433 15
Spokane, WA.............................................. 725,591 15
Yakima, WA............................................... 253,207 15
---------
4,738,451
=========
NORTH EAST REGION
Dayton, OH(5)............................................ 1,222,446 10
Pittsburgh, PA(6)........................................ 2,503,395 10
---------
3,725,841
=========
</TABLE>
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<TABLE>
<CAPTION>
1998 BTA
POPULATION(1) MHZ
------------- ---
<S> <C> <C>
CENTRAL REGION
Blytheville, AR.......................................... 72,228 30
Fayetteville, AR......................................... 287,594 30
Fort Smith AR............................................ 312,750 30
Hot Springs, AR.......................................... 135,173 15
Little Rock, AR.......................................... 928,467 30
Pine Bluff, AR........................................... 150,421 30
Russellville, AR......................................... 93,530 15
Coffeyville, KS.......................................... 61,901 15
Wichita, KS.............................................. 633,382 30
Lincoln, NB(9)........................................... 333,096 10
Omaha, NB(10)............................................ 970,593 10
Fargo, ND................................................ 310,802 30
Grand Forks, ND.......................................... 212,006 15
Tulsa, OK................................................ 913,095 15
Dyersburg, TN(2)......................................... 118,191 15
Jackson, TN(2)........................................... 275,578 15
Memphis, TN(2)........................................... 1,499,222 15
---------
7,308,029(7)
=========
SOUTH WEST REGION
Nogales, AZ.............................................. 38,020 30
Phoenix, AZ(8)........................................... 3,089,889 10
Tucson, AZ............................................... 790,975 15
Denver, CO(6)............................................ 2,471,889 10
Pueblo, CO............................................... 299,154 30
Albuquerque, NM.......................................... 800,201 15
Roswell, NM(8)........................................... 80,005 15
Gallup, NM............................................... 140,668 15
Santa Fe, NM............................................. 205,922 15
Provo, UT................................................ 341,401 30
Salt Lake City, UT....................................... 1,527,987 30
---------
9,786,111
=========
</TABLE>
- -------------------------
(1) Demographic data related to 1998 population and population growth estimates
provided by Easy Analytic Software Incorporated.
(2) Represents licenses that Leap acquired from Chase Telecommunications
Holdings. The acquisition was completed in March 2000. The Chattanooga
market was launched in March 1999 using the existing infrastructure of
Chase Telecommunications and the Nashville market was launched in late
January 2000.
(3) Represents licenses that Leap has agreed to acquire from Zuma. A merger
agreement has been signed under which Leap will acquire the outstanding
capital stock of three Zuma subsidiaries which own the licenses. The
transaction is subject to FCC approval and other closing conditions.
(4) Represents licenses that Leap acquired from AirGate in January 2000.
(5) Represents a license that Leap has agreed to acquire from PCS Devco. An
acquisition agreement has been signed, but the transaction has not yet been
completed. In February 2000, the FCC consented to the transfer of PCS
Devco's license to us, although the decision has not yet become a
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final order and as a result of a challenge by a third party, is currently
subject to further administrative review. Because the decision did not
become a final order prior to March 2000, the agreement now may be
terminated by either party at its discretion.
(6) Represents licenses that Leap has agreed to acquire from Radiofone. An
acquisition agreement has been signed, but the transaction has not yet been
completed and is subject to FCC approval and other closing conditions.
(7) Leap has agreed to divest three wireless licenses covering 376,667
potential customers in Grand Island and North Platte, Nebraska and Casper,
Wyoming, which, accordingly, are not included in the table above.
(8) Represents licenses that Leap has agreed to acquire from Beta. An
acquisition agreement has been signed, but the transaction has not been
completed and is subject to FCC approval and other closing conditions.
(9) Represents a license that Leap has agreed to acquire from Center Point PCS.
An acquisition agreement has been signed, but the transaction has not been
completed and is subject to FCC approval and other closing conditions.
(10) Represents a license that Leap has agreed to acquire from CM PCS. An
acquisition agreement has been signed, but the transaction has not been
completed and is subject to FCC approval and other closing conditions.
Cricket Communications has entered into an infrastructure equipment
purchase agreement with Lucent Technologies to lead the overall build-out of our
initial phase of Cricket networks. Under the terms of the agreement, Cricket
Communications is responsible for all site acquisition activities and Lucent is
responsible for providing all other products and services associated with site
development. Lucent expects to subcontract many of these services to a number of
different suppliers.
As part of the Cricket strategy, we seek to maintain lower operating costs
than other wireless providers and large landline carriers and pass the savings
on to customers in the form of our low, flat monthly charges. We believe that
our network operating costs are less than those of most other wireless service
providers because of the concentrated coverage footprint of a Cricket network
compared to the broad, geographically dispersed footprints of our wireless
competitors. Based on call traffic patterns in Chattanooga, we believe the
inbound/outbound call ratio of Cricket networks is higher than other wireless
carriers. The Cricket service also does not permit roaming, which allows us to
sustain lower costs than other wireless providers. The technology used in
Cricket networks is designed to permit migration to third generation technology
which costs less to operate than less-advanced wireless platforms.
We also seek to maintain lower operating costs through simplified billing.
Our simple, straight-forward bills show the monthly flat rate of $29.95 and no
per-call itemization. This simple format should result in fewer billing
inquiries to our customer service center. Fewer calls to our customer service
center should, in turn, result in reduced customer service expenses compared to
more traditional wireless providers. In addition, because Cricket customers
prepay each month's service, we minimize our costs of credit checks, bad debt
expenses and customer fraud. We also maintain low operating costs by outsourcing
our customer service center to a third-party in Devil's Lake, North Dakota. By
centralizing nationwide customer service in a single location, we are able to
streamline our customer care operations and gain economies of scale while
maximizing customer service availability.
Leap's Rights and Interests. Cricket Communications Holdings owns Cricket
Communications, which is the operating company that is implementing the Cricket
strategy. As of April 30, 2000, Cricket Communications Holdings had 75,000,000
shares of common stock authorized for issuance under its charter, of which
65,162,433 shares were issued and outstanding. As of the same date, Leap held
94.89% of Cricket Communications Holdings's outstanding common stock and
directors of Cricket Communica-
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tions Holdings and employees of Leap and Cricket held the remaining 5.11% of the
outstanding common stock.
Cricket Communications Holdings has adopted an option plan that provides
for the issuance of options to purchase common stock to its directors and to
employees and consultants of Cricket Communications and its parent and
subsidiary corporations. As of April 30, 2000, 1,305,833 shares of common stock
of Cricket Communications Holdings were reserved for issuance upon the exercise
of options that have been granted under the option plan. The plan permits
Cricket Communications Holdings to grant options to purchase up to an additional
3,438,100 shares of common stock.
As part of the consideration for our acquisition of substantially all the
assets of Chase Telecommunications Holdings, Cricket Communications Holdings
issued to Chase Telecommunications Holdings a warrant to purchase 1% of the
outstanding common stock of Cricket Communications Holdings at an aggregate
exercise price of $1 million.
Leap's current ownership of 94.89% of Cricket Communications Holdings will
be reduced upon the exercise of options granted under the option plan and
exercise of the warrant described above.
Capital Requirements and Projected Investments. We will require substantial
capital to develop and operate wireless networks in the numerous markets in
which we plan to operate the Cricket service in the U.S. The amount of financing
that we will require for these efforts will vary depending on the number of
these networks that are developed, including any markets covered by our future
license acquisitions, and the speed at which we construct and launch these
networks. In fiscal 2000, we expect to finance these development and operation
costs largely through vendor financing, as well as from a portion of the net
proceeds from our units and equity offerings completed in February 2000 and
other financings. We expect, however, that we will also need to raise additional
capital to fund our planned roll-out of domestic networks and acquisitions of
spectrum in fiscal 2000.
Regulatory Environment. Our business plan anticipates and depends on our
acquisition and operation of C-Block and F-Block licenses in the U.S. Although
C-Block and F-Block licenses are generally more available and less expensive to
obtain than licenses in other wireless blocks, a licensee may hold these
licenses only if it qualifies as a "designated entity" under FCC rules. For a
description of the extensive regulation governing our domestic business, see
"-- Government Regulation."
In July 1999, the FCC issued an opinion and order that found that we were
qualified to acquire C-Block and F-Block licenses. The order also approved our
acquisition of the 36 C-Block licenses for which we were the high bidder in the
FCC's 1999 spectrum reauction, and approved the transfer to Leap of three
F-Block licenses covering portions of North Carolina, in each case subject to
the fulfillment of some conditions. In October 1999, the FCC issued the 36
licenses we acquired in the reauction.
Each of the conditions imposed by the FCC has been satisfied. We have a
continuing obligation, during the designated entity holding period for our
C-Block and F-Block licenses, to limit our debt to Qualcomm to 50% or less of
our outstanding debt and to ensure that persons who are or were previously
officers or directors of Qualcomm do not comprise a majority of our board of
directors or a majority of our officers. We anticipate satisfying the debt
reduction condition through additional financing activities and/or refinancing
of our debt to Qualcomm, but we may not be able to reduce our debt to Qualcomm
to the required level. If we fail in the future to meet any of the conditions
imposed by the FCC or otherwise fail to maintain our qualification to own
C-Block and F-Block licenses, that failure would have a material adverse effect
on our financial condition and business prospects.
Various parties, including the U.S. Small Business Administration,
previously challenged our qualification to hold C-Block and F-Block licenses,
and a wireless operating company has requested that
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the FCC review its order, as well as the order consenting to the transfer of
licenses to us from Chase Telecommunications and PCS Devco. In addition, further
judicial review of these orders is possible.
Competition. The U.S. telecommunications industry is very competitive and
competition is increasing. The Cricket service will compete directly with other
wireless providers and traditional landline carriers in each of our markets,
many of whom have greater resources than we do and entered the market before us.
A few of our competitors operate wireless telecommunications networks covering
most of the U.S. Competitors' earlier entry and broader presence in the U.S.
telecommunications market may have a negative effect on our ability to
successfully implement our strategy. In addition, other wireless providers in
the U.S. could attempt to implement our domestic strategy of providing virtually
unlimited local service at a low, flat monthly rate if our strategy proves
successful. The landline services with which we will compete generally are used
already by our potential customers, and we may not be successful in our efforts
to persuade potential customers to adopt our wireless service in addition to, or
in replacement of, their current landline service. Also, some competitors will
likely market other services, including cable television access, landline
telephone service and Internet access, that we do not currently intend to
market. We also expect to compete with new entrants to the U.S. wireless market
as well as other telecommunications technologies, including paging, enhanced
specialized mobile radio and global satellite networks.
CHASE TELECOMMUNICATIONS
The Cricket service was introduced in Chattanooga, Tennessee in March 1999
by Chase Telecommunications, a company that we acquired in March 2000. Chase
Telecommunications owned wireless licenses covering approximately 6.6 million
potential customers in a region that includes approximately 97% of Tennessee.
Chase Telecommunications began offering wireless service in Chattanooga in
October 1998. In March 1999, Chase Telecommunications re-launched its service,
offering the Cricket concept in Chattanooga, Tennessee under a management
agreement that required the management of Chase Telecommunications to control
the business until our acquisition received all necessary governmental approvals
and was completed. In Chattanooga, Chase Telecommunications's network covers
approximately 315,000 of the 550,000 potential customers in the license area,
concentrated in an area that is similar to Chattanooga's local calling area for
landline telephone service. At the time we completed the acquisition, Chase
Telecommunications had begun efforts to expand the Cricket service to other
markets in Tennessee and had launched service in Nashville in late January 2000.
On March 17, 2000, we completed the acquisition of substantially all the
assets of Chase Telecommunications Holdings, Inc. The acquisition was effected
pursuant to an asset purchase agreement entered into on December 1998. We
acquired all of the outstanding common stock of ChaseTel Licensee Corp., and our
indirect subsidiary, Cricket Communications, Inc., acquired substantially all of
the other assets of Chase Telecommunications Holdings, including all of the
outstanding common stock of Chase Telecommunications, Inc. The purchase price
paid included:
- approximately $6.3 million in cash;
- a five-year warrant to purchase 1% of the common stock of our subsidiary
Cricket Communications Holdings at an exercise price of $1.0 million;
- the return to Chase Telecommunications Holdings of shares of Chase
Telecommunications Holdings common stock held by us; and
- contingent earn-out payments of up to $41.0 million based on Chase
Telecommunications's earnings during the fifth full year following the
closing of the acquisition.
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We and Cricket acquired the Chase Telecommunications Holdings assets
subject to outstanding indebtedness:
- to Qualcomm Incorporated in the amount of approximately $29 million;
- to Cricket in the amount of approximately $77 million; and
- to the FCC in the principal amount of approximately $79 million.
Concurrently with the completion of the acquisition, the outstanding
indebtedness to Qualcomm Incorporated was repaid with the proceeds of borrowings
under Cricket's credit facility with Lucent Technologies Inc., and following the
completion of the acquisition, the outstanding indebtedness to Cricket was
forgiven.
PEGASO
General. We were a founding shareholder and currently own 22.4% of Pegaso,
a joint venture formed to construct and operate the first 100% digital wireless
communications network in Mexico. In October 1998, a wholly owned subsidiary of
Pegaso acquired nine regional PCS licenses and a public telecommunications
network license constituting nationwide coverage generally in the 1900 MHz band
in Mexico for approximately $234 million (based on exchange rates in effect on
the dates the license payments were made). Pegaso launched commercial service in
Tijuana in February 1999 and extended its coverage area with launches in
Mexico's three largest cities, Mexico City, Guadalajara and Monterrey, in
December, September and August 1999, respectively. As of February 29, 2000,
Pegaso had approximately 182,000 customers. In December 1999, Pegaso launched
service in Mexico City, bringing its total covered potential customers in Mexico
to approximately 27.7 million. Pegaso is continuing its network expansion and
plans to build networks in up to 63 additional metropolitan areas throughout
Mexico.
Strategy. To implement its goal of becoming a leading provider of wireless
communications services in Mexico, Pegaso's strategy is to:
- compete with other wireless service providers by delivering
higher-quality digital service through Mexico's only all-digital wireless
network;
- offer Pegaso handsets and services through multiple points of sale
targeted to a broad range of consumers;
- simplify the purchase process for wireless phones and service by offering
a fully functional "phone in a box" that is activated in prepaid mode
when initially turned on after purchase, after which a customer service
representative contacts the new customer to determine the most
appropriate rate plans going-forward;
- promote distinct Pegaso brand awareness that focuses on Pegaso's core
philosophy of simplicity, honesty, and commitment to innovation;
- offer service plans that provide superior value, for example by billing
calls per the second, and offer superior prepaid service options,
including Mexico's only digital prepaid plans and the ability of prepaid
customers to obtain value-added features such as voicemail; and
- leverage the strengths of its strategic investors, including Leap, Grupo
Televisa and Grupo Pegaso.
Market Opportunity. In early 1998, Pegaso acquired nine regional PCS
licenses and a public telecommunications network license constituting nationwide
coverage of Mexico's population of approximately 99 million people. Before
Pegaso entered the market, only two wireless carriers operated in each of
Mexico's nine regions. Although other licensees may begin to offer nationwide
coverage, we believe Pegaso currently is well-positioned to obtain a significant
market share because it is one of only three
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nationwide wireless carriers. Mexico's population is approximately 70% urban
with approximately 45% living in the regions containing Mexico City, Guadalajara
and Monterrey. In 1998, Mexico's teledensity was approximately 10.4% and its
cellular penetration was approximately 3.5%.
Sales and Distribution. Pegaso's sales strategy is to offer a simplified
"phone in a box" product which enables broad distribution through multiple
channels and makes it easy for a customer to obtain a wireless handset and begin
service. This sales approach is designed to make the purchase of a wireless
handset and accompanying service as simple as the sale of any consumer
electronics item.
Pegaso's distribution channels include Pegaso-owned stores, grocery store
chains, master distributors, other retail chains and a direct sales force
targeting corporate and other large accounts. The majority of Pegaso's sales
currently occur at grocery stores like Gigante, convenience retail stores like
7-Eleven and Oxxo, and Pegaso-owned stores. In addition, Pegaso has negotiated
distribution agreements with select national and regional merchandisers
specializing in consumer electronics and appliances, including SKY TV, an
electronics retailer.
Similar to the Cricket strategy, Pegaso's "phone in a box" approach permits
potential customers to make a purchase decision with little or no sales
assistance. Pegaso offers a variety of handsets, which are packaged in brightly
colored boxes that are well-suited for in-store displays. Each handset includes
a block of prepaid minutes which permits a new customer to begin making wireless
calls immediately upon purchase. Within hours of a customer's first use of a
Pegaso handset, a customer service representative calls the new customer to
offer assistance with any questions about the service and to explain Pegaso's
postpaid and prepaid plans to determine the package best-suited for that
particular customer. This "Welcome to Pegaso" phone call is a key part of
Pegaso's customer service and follow-on sales strategy.
As part of its dynamic sales strategy, Pegaso seeks to develop innovative
payment options to reduce the barriers to entry to Mexican consumers of
utilizing its wireless service. Pegaso's initial prepaid service from its "phone
in a box" followed by the option to adopt a postpaid plan permits the consumer
ongoing flexibility in payment options. Pegaso offers the same choice of
handsets, national roaming capabilities and access to calling features to
prepaid and postpaid customers. Customers who select the prepaid option may
purchase phone cards for wireless minutes in various denominations at
approximately 1,300 retail outlets in Mexico.
Pegaso seeks to differentiate its wireless service with simplicity,
honesty, and a commitment to innovation. Pegaso's primary marketing message for
its initial launch into the Mexican market is "Pago Justo Por Segundo" which
means "pay just for the second and justly for what you use," referring to
Pegaso's per second billing approach. Also, we believe that other providers
charge from the moment customers press the "send" button on their wireless phone
while Pegaso charges only for connected calls.
Pegaso also offers roaming across the U.S-Mexico border as a result of its
agreement with Sprint PCS. The agreement permits Pegaso customers to use Sprint
PCS's nationwide wireless network in the U.S. and will allow Sprint PCS
customers to roam on Pegaso's network in Mexico. Pegaso believes this feature
will be attractive to the highly-mobile customers in Mexico's border cities.
Pegaso believes that, to achieve long-term success, it must establish a
strong national brand position throughout Mexico. Pegaso builds brand
recognition though national television and print advertising coupled with a
strong local radio presence and sponsorship of local and regional sports teams
and events. Pegaso has sponsored the Mexican national soccer team and other
professional soccer teams in its efforts to increase consumer awareness of the
Pegaso wireless brand. Pegaso also seeks to leverage its relationship with Grupo
Televisa, one of its key investors and the largest media company in the Spanish-
speaking world, to enhance its marketing efforts. Pegaso maintains a Web site
that provides product and service information, although no sales currently are
transacted over the Internet.
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Pegaso operates one central customer care center in Mexico City. Pegaso
distinguishes its customer care from its competitors through "one touch"
service, whereby the customer service representative who answers the initial
call is trained to respond to all of the customer's concerns without
transferring the customer to another department. The center's information
technology systems permit representatives to identify new customers for the
initial "Welcome to Pegaso" call and monitor the status of customer inquiries
from the first call to the customer care center to ultimate resolution of the
question.
Network and Operations. Pegaso's principal objective for the build-out of
its network is to target its capital expenditures to provide full coverage
within targeted geographic areas, rather than building out the widest possible
coverage area. It has successfully launched service in Mexico's four largest
cities -- Mexico City, Guadalajara, Monterrey and Tijuana -- and plans to launch
service in approximately 14 more cities by the end of 2000. In addition, Pegaso
intends to selectively build sites along major highways to connect the cities it
currently services or will service by the end of 2000. Ultimately, Pegaso plans
to construct and operate wireless systems in up to an additional 63 metropolitan
areas in Mexico, subject to the availability of additional capital.
The following table presents the approximate number of potential customers
covered by Pegaso's network in the four cities in which Pegaso launched service
in 1999.
<TABLE>
<CAPTION>
1999
COVERED
POTENTIAL
LICENSED AREAS CUSTOMERS
-------------- ----------
<S> <C>
Mexico City......................................... 19,200,000
Guadalajara......................................... 3,900,000
Monterrey........................................... 3,500,000
Tijuana............................................. 1,100,000
----------
Total............................................. 27,700,000
==========
</TABLE>
In bidding for its wireless licenses, Pegaso agreed to provide coverage to
municipalities containing at least 20% of the total population of most of the
licensed regions by October 2001 and to provide coverage to municipalities
containing at least 50% of the total population of most of the licensed regions
by October 2003.
Because Pegaso's systems are 100% digital, it does not face the operating
difficulties of many of its wireless competitors that are seeking to manage both
analog and digital systems and to transition to all-digital platforms while
maintaining quality analog systems. Pegaso's operations include an advanced
prepaid platform and related systems that administer customers' use of their
prepaid wireless minutes and other features. Pegaso's advanced information
technology systems also support the billing process and the variety of payment
plans offered to Pegaso's customers, and assist the customer care center's
activities, including scheduling "Welcome to Pegaso" calls and monitoring
customer inquiries.
Leap has entered into a management and operations agreement with Pegaso to
provide operator services and, in turn, has subcontracted those services to GTE
Data Services Mexico, a subsidiary of GTE.
Strategic Partners. In addition to Leap, Pegaso Comunicaciones y Servicios,
S.A. de C.V. and an affiliate of Grupo Televisa have interests in Pegaso. Grupo
Televisa is the largest media company in the Spanish-speaking world and a major
participant in the international entertainment business. Pegaso Comunicaciones y
Servicios is 99%-owned by Alejandro Burillo Azcarraga, a member of our board of
directors, and is affiliated with Grupo Pegaso, a private investment group with
investments in various industries including cable television, communications,
retail electronics, real estate, sports and entertain-
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ment. Our management believes that the strong financing resources of Grupo
Televisa and Grupo Pegaso, as well as their political access in Mexico, provide
Pegaso critical resources and relationships for assisting the network build-out
and in marketing and distributing Pegaso's wireless services. Citicorp, the
Latin America Infrastructure Fund and Nissho Iwai have also invested in Pegaso.
On April 26, 2000, Sprint PCS invested $200 million in Pegaso by purchasing
shares from Pegaso and shareholders other than Leap. As a result of this
transaction, our percentage interest in Pegaso was reduced from 28.6% to 22.4%.
Leap's Rights and Interests. We currently own a 22.4% interest in Pegaso
and have invested $100 million of the $496 million of capital that has been
contributed by the members of the joint venture. We expect that our ownership
interest in Pegaso will be reduced in the future. Several other existing
investors are committed to contribute an additional $50 million of financing by
August 2000 and Pegaso is currently seeking additional debt and equity
financing. As noted above, we also provide operator services to Pegaso under a
management and operations agreement.
In December 1999, as a condition of our guarantee of a portion of Pegaso's
obligations under its working capital facility, Leap received an option to
subscribe for and purchase up to 243,090 limiting voting series "N" treasury
shares of Pegaso. The number of shares to be purchased by Leap under the option
will be calculated to provide a total internal rate of return on the average
outstanding balance of the bridge loan of 20%. The options have an exercise
price of $0.01 per share and expire ten years from the date of issuance. The
options are exercisable at any time after the date on which all amounts under
the loan agreement are paid in full.
Capital Requirements and Projected Investments. Pegaso has already raised
or obtained commitments for substantial amounts of capital. To date, the members
of the joint venture have contributed $496 million of equity, and other members
have committed an additional $50 million of equity contributions. In addition,
Qualcomm and another equipment vendor have agreed to provide approximately $580
million of secured equipment financing to the venture, a portion of which has
already been advanced. In May 1999, a Pegaso subsidiary also entered into a
working capital facility with several banks and credit support from Qualcomm. We
guaranteed 33% of Pegaso's obligations under the initial commitment from the
lenders of $100 million. To complete the build-out, launch and operation of its
planned networks, however, Pegaso will need to obtain substantial additional
capital.
As a result, Pegaso is seeking additional debt and equity financing,
including additional vendor financing.
Regulatory Environment. The Mexican Secretariat of Communications and
Transportation, or SCT, and Federal Telecommunications Commission, or COFETEL,
an independent regulatory body within the SCT, regulate the provision and
operation of telecommunications services in Mexico. The principal law governing
the provision of telecommunications services in Mexico is the 1995 Federal
Telecommunications Law and regulations promulgated thereunder; however, other
federal laws and regulations apply.
To provide PCS service in Mexico, the service provider must obtain two
licenses, or concessions, from the SCT: a frequency license and a public
telecommunications network license. A frequency license specifies the type of
service, for example, PCS; allocated spectrum; geographical region; and certain
other rights and obligations. A public telecommunications network license
specifies the licensee's rights and obligations as a provider of telephone
service to the public. Pegaso holds frequency licenses in each of the nine
geographic regions in Mexico allowing it to provide nationwide service. Pegaso
is also licensed as a public telecommunications network provider. The frequency
licenses are for initial terms of 20 years and may be renewed at the discretion
of the SCT. The public telecommunications network license is for an initial term
of 30 years, and may be renewed as long as Pegaso complies with applicable
regulations.
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The SCT may grant licenses only to Mexican individuals and to Mexican
corporations in which non-Mexicans hold no more than 49% of the voting shares.
Cellular and PCS licensees may be more than 49% foreign-owned through a
structure involving limited- or non-voting interests with the prior approval of
the Mexican Foreign Investment Commission. Licenses may be sold or otherwise
transferred only with the prior authorization of the SCT. In addition, any
transfer of the shares of the holder of a license in excess of 10% of the total
equity outstanding requires the prior approval of the SCT and may require
notification to the Federal Competition Commission. A license may be terminated
upon expiration or dissolution of the holder of the license. The SCT may revoke
a license prior to its expiration under certain circumstances, including failure
to comply with the obligations and conditions specified in the license. The
Mexican government may also expropriate or temporarily seize assets related to a
license, but is obligated to compensate at market value the owner of such
assets.
Pegaso is interconnected nationwide with other Mexican wireless and
landline operators. Though interconnection arrangements are negotiated
privately, Telmex is required by law to interconnect with wireless operators,
and COFETEL will intervene where private parties reach an impasse. Wireless
rates are not regulated in Mexico but the rates must be registered with the SCT.
Competition. Although the deployment of advanced telecommunications
services is in its early stages in Mexico, we believe competition is increasing
as a number of international telecommunications companies, including Bell
Atlantic, AT&T, MCI, Motorola, Nextel and SBC, and local competitors such as
Telmex and other Mexican telecommunications companies, actively engage in
developing telecommunications services in Mexico. Following the Mexican
government's recent wireless auctions, there is one existing nationwide wireless
operator, Telmex, which operates through its subsidiaries Telcel and Dipsa; one
carrier, Iusacell, with a large mixed band footprint consisting of four 800 MHz
licenses and two 1900 MHz licenses; and Pegaso, which holds PCS licenses with
nationwide coverage. In addition, Unefon has been granted nationwide licenses,
and recently launched wireless local loop service. There are also several
regional wireless carriers who offer wireless service in one or more of Mexico's
nine regions but who do not have a broad national presence.
SMARTCOM
General. Smartcom, a wholly owned, indirect subsidiary of Leap, acquired a
nationwide license in 1997 in the 1900 MHz band to offer PCS services in Chile.
Smartcom's nationwide system began operation in September 1998. In April 1999,
we increased our ownership of Smartcom from 50% to 100% when our Chilean
subsidiary purchased 50% of Smartcom from Telex-Chile, a Chilean
telecommunications company, and one of its affiliates for $28 million in cash
and a $22 million interest-free note payable in three years. Since the
acquisition, we have recruited a new management team, upgraded the network
capabilities and, in November 1999, relaunched service under a new brand name,
SMARTCOM PCS. As of February 29, 2000, Smartcom had approximately 92,000
customers.
In April 2000, we entered into a memorandum of understanding with Endesa, a
Spanish utility company with interests in energy and telecommunications under
which Endesa agreed to purchase 100 percent of the capital stock of Smartcom
from our subsidiary, Inversiones Leap Wireless Chile, S.A. Under the non-binding
terms and conditions of the Endesa memorandum of understanding, the sale of the
Smartcom stock is subject to the negotiation and entry into of definitive
agreements documenting the transaction. We believe that the sale of Smartcom
demonstrates our international commitment to capture wireless opportunities,
build networks and operate successful businesses in order to enhance shareholder
value. In the future, we will continue to evaluate additional international
opportunities as they arise.
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Strategy. Smartcom's principal strategy is to develop a strong brand image
for SMARTCOM PCS wireless services in Chile and bring its service to the mass
market. Smartcom intends to:
- compete with other wireless service providers by positioning SMARTCOM PCS
wireless service as a high-value, high-quality service with innovative
pricing plans and features, such as nationwide long distance service
without surcharge and per second billing;
- offer SMARTCOM PCS handsets and services through multiple points of sale
targeted to a broad range of consumers;
- promote distinct SMARTCOM PCS brand awareness through a mix of media
advertising that focuses on Smartcom's service as "easy to buy, easy to
use and easy to pay for";
- differentiate the SMARTCOM PCS brand from other wireless competitors by
providing exceptional customer service; and
- leverage Leap's experience in the U.S. wireless communications market.
Market Opportunity. Chile has a population of approximately 15 million
people and a low fixed landline penetration of approximately 21%. Over half of
the population is concentrated in the center of the country in the Santiago and
Valparaiso regions where Smartcom's networks are concentrated. The Chilean
Minister of Communications estimated that total wireless customers in Chile
would exceed 2 million persons by the end of 1999 which represents an increase
of 120% during 1999.
Sales and Distribution. By creating an overall customer experience that is
"easy to buy, easy to use and easy to pay for," Smartcom presents consumers with
a simplified value proposition that differentiates SMARTCOM PCS from other
wireless services in Chile. Smartcom reaches potential customers through a wide
range of distribution points to carry out the "easy to buy" component of its
sales philosophy. As of February 29, 2000, Smartcom distributed its handsets and
wireless service through over 315 points of sale. Smartcom's distribution
channels include SMARTCOM PCS brand retail stores and kiosks, department stores
such as Ripleys, Falabella and Almacenes Paris, specialty stores including
electronics retailers such as Radio Shack, and a direct sales force targeting
corporate and other large accounts. At the end of 1999, Smartcom operated
approximately 20 of its own retail showrooms and an additional 78 kiosks
situated primarily in shopping malls to attract the attention of a broad
customer base.
Smartcom has designed its services to be "easy to use and easy to pay for"
by offering a newly-launched prepaid option and a simple postpaid plan structure
with three strategically priced alternatives. The SMARTCOM PCS wireless service,
whether prepaid or postpaid, is distinguished as a high value proposition by
Smartcom's providing nationwide long distance calls at the same price as local
calls. In addition, we believe that Smartcom was the first wireless provider to
offer per second billing in Chile. These distinctive components of Smartcom's
service help position it as a simple, honest, and innovative provider of
wireless services. Smartcom is currently developing services such as two-way
short message service, circuit switched data and fax options to further
distinguish itself from its competitors.
Smartcom's media advertising includes national television and print
advertisements and regional radio spots, and is complemented with billboard and
other outdoor advertisements targeted to high-traffic areas. In addition to
focusing its marketing efforts on the central region of the country, including
Santiago and Valparaiso, Smartcom intends to market its services locally to
customers in Chile's northern and southern regions where other wireless
providers generally have not been aggressive in marketing their services. In
addition, Smartcom will engage in an initial customer education campaign to
counter a market perception that wireless services include hidden costs and may
be unreliable in some geographic areas.
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Smartcom intends to enhance its competitive position and increase loyalty
and retention of customers by offering high-quality customer service. Smartcom
operates a central customer service center in Santiago, Chile where
representatives are trained to efficiently and thoroughly respond to customer
inquiries 24 hours a day, seven days a week. Customer service representatives
undertake intensive training and education to provide rapid response to customer
inquiries about SMARTCOM PCS services. Through its customer service center,
Smartcom strives to provide "one call" resolution of customer inquiries. In
addition, Smartcom believes it offers uniquely attractive customer service by
offering a customer care specialist in each SMARTCOM PCS brand store to address
customer concerns face-to-face rather than exclusively over the telephone.
Network and Operations. Smartcom already has a nationwide network in place.
However, as part of Leap's acquisition of full control and subsequent rebranding
of SMARTCOM PCS services, Smartcom has begun to significantly enhance its
existing network to increase coverage and capacity. Smartcom intends to add
approximately 20% more cell sites and install new network infrastructure
equipment designed to support high call volumes to accommodate customer growth.
Smartcom has contracted with Ericsson to provide the infrastructure for new site
development which, along with local subcontractors, will install and build each
new site. Smartcom strives to provide the best possible network and product and
service performance in the industry by utilizing its 100% CDMA digital network
to provide high capacity, increased network access and superior voice quality.
Smartcom has experienced reliability problems with respect to its network
infrastructure equipment. Leap and Smartcom are working with equipment vendors
to address these problems. A new switch has been installed in Santiago, Chile
which we expect will significantly improve the network. Smartcom is upgrading
existing equipment and purchasing additional equipment in other areas which it
expects will enhance the quality and reliability of its system and accommodate
expected customer growth. Resolution of these initial problems, however, is
ongoing and may require additional equipment and enhancements.
Capital Requirements and Projected Investments. As discussed above,
Smartcom is in the process of upgrading existing equipment and purchasing
additional equipment to enhance the reliability of its system and to accommodate
expected customer growth. We intend to finance the planned upgrade and expansion
and the operation of Smartcom's network in fiscal 2000 through the proceeds of
equipment financing agreements that we expect to negotiate in connection with
planned equipment purchases by Smartcom and additional financings. Smartcom
recently entered into a new equipment purchase agreement with Ericsson. Smartcom
also has engaged an investment banker to assist it in selling equity and is
exploring other capital raising alternatives. Smartcom may not be able to
conclude a sale of equity or other financing transaction or obtain additional
vendor funding.
Regulatory Environment. The Chilean Telecommunications Law is the principal
law governing the provision and operation of telecommunications services in
Chile. The Telecommunications Law requires that PCS providers obtain a license
from the Secretariat of Transportation and Telecommunications, through the
Subsecretariat of Telecommunications, or SUBTEL. SUBTEL may grant licenses only
to corporate entities organized and resident in Chile, although they may be
foreign-owned. Licenses specify the conditions that the license holder must
fulfill in order to install, operate and exploit the licensed service. SUBTEL
may terminate a license after giving notice of non-compliance if the license
holder has violated the law or the terms and conditions of its license. Grounds
for termination are clearly defined in the regulations. Licenses may be sold,
leased or transferred to a third party only with the authorization of SUBTEL.
In 1997, SUBTEL awarded Smartcom a nationwide PCS license. Smartcom made no
payment for the license, but committed to certain buildout obligations that it
has since met. The license is valid for an initial period of 30 years and may
thereafter be renewed upon request as long as Smartcom complies with applicable
regulations. In order to receive its license, Smartcom was required to file with
SUBTEL a
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technical plan for its system. Since then, Smartcom has filed four applications
to amend the license, each of them to account for technical modifications to its
system. Three of these amendments have been reviewed by SUBTEL, and Smartcom is
operating under related provisional authorizations granted by SUBTEL. The
provisional authorization procedure is customary in Chile. Smartcom believes
that final authorization with respect to these three amendments should be
granted this year. The fourth amendment is currently under review by SUBTEL, no
provisional authorization has been granted and Smartcom has not implemented the
amendment to its license.
Smartcom is interconnected nationwide with all Chilean wireless and
landline operators. Rates to customers for wireless services are not regulated
in Chile, however, providers cannot adopt discriminatory practices in the
application of rates.
Competition. In addition to Smartcom, there are three major operators of
wireless services in Chile, each of which effectively provides nationwide
service. CTC/Startel operates a nationwide cellular system. Bell South operates
in central Chile, but has acquired the cellular license for the regions outside
of Santiago from Entel Cellular. In addition to these cellular services, Entel
Cellular launched a commercial PCS service using GSM technology in March 1998.
The Chilean telecommunications market historically has been very price
competitive. We expect the prices that Smartcom may charge for its products and
services will decline over the next few years as competition increases in the
Chilean market.
DISCONTINUED FOREIGN VENTURES
Through a subsidiary, we own a 35% interest in Orrengrove Investments
Limited, which in turn owns a 60% interest in three related companies referred
to as the Transworld Companies, which are being liquidated. The third party
satellite that the companies used to provide long distance service failed in
April 1999. The directors of the Transworld Companies voted to liquidate the
companies after reviewing a series of alternative business plans that did not
meet their minimum financial performance criteria. As a result, we wrote down
our investment in Orrengrove to the proceeds we expect to receive in connection
with the pending liquidations.
Through another subsidiary, we owned a 35% interest in Metrosvyaz Limited,
a company that is attempting to establish joint ventures in Russia to construct
and operate networks providing wireless local loop service. Metrosvyaz was
funding its activities in part through a working capital facility from us. In
September 1999, we declared default under loans to Metrosvyaz, stopped funding
those loans and wrote off our remaining $9.6 million investment in Metrosvyaz.
See "Legal Proceedings."
In August 1999, we sold our Australian subsidiary, OzPhone Pty. Limited,
for $16.0 million. We had invested approximately $6.9 million in OzPhone before
the sale. We concluded that we could achieve greater stockholder return through
this sale than we could through years of continued investment in and development
of OzPhone. Although OzPhone owned wireless licenses, it had not yet introduced
service.
CDMA TECHNOLOGY
The primary digital technologies available for wireless fixed and mobile
applications are CDMA and Time Division Multiple Access, or TDMA. TDMA includes
several variants, including Digital Advanced Mobile Phone System also known as
D-AMPS which is deployed primarily in North and South America, and Global System
for Mobile Communication, or GSM, which is widely deployed in Europe, where the
technology was developed, and in many other markets around the world.
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We are currently committed to owning and participating in networks that
utilize CDMA technology. We believe that CDMA technology is the best platform to
meet current network requirements as well as the best platform for migration to
third generation, or "3G," based services. We believe CDMA technology is
best-suited to our general business strategy of providing high quality, high
volume wireless service at a low cost. We believe CDMA technology provides
important system performance benefits, including the following:
- Greater Capacity. CDMA technology allows a larger number of calls within
one allocated frequency and reuses the full frequency spectrum in each
cell. CDMA systems are expected to provide capacity gains of at least
seven times over the current analog systems and at least three times
greater than TDMA and GSM systems. Because CDMA networks provide high
capacity using less spectrum and fewer cell site towers, our initial
capital expenditures as well as ongoing operational and maintenance costs
should be less than wireless providers that use analog, TDMA or GSM
technologies.
Additional capacity improvements are expected for CDMA networks over the
next two years as new third generation standards are approved and
implemented that will allow for high-speed data and an even greater
increase in the voice traffic capacity. In addition, "1XRTT," the first
phase of third generation CDMA technology, is expected to provide more
than double the voice capacity of existing CDMA systems and to deliver
high speed data to users.
The capacity advantages of CDMA not only provide the highest available
efficiency of valuable spectrum, but in doing so also permit operators
using CDMA the flexibility of deploying other services, such as data
services, in the spare spectrum.
- Wireless Local Loop. CDMA systems have the unique advantage of providing
even greater capacity in fixed terminal systems known as Wireless Local
Loop, or "WLL." The approximate capacity increase of CDMA systems in
fixed environments is two times the capacity of mobile environments. This
capacity gain permits deployment of WLL systems at competitive costs to
existing copper-based telephony systems.
- Seamless Handoffs. CDMA systems transfer calls throughout the network
using a technique referred to as a soft hand-off, which connects a mobile
customer's call with a new cell site while maintaining a connection with
the cell site currently in use. CDMA networks monitor the quality of the
transmission received by both cell sites simultaneously to select a
better transmission path and to ensure that the network does not
disconnect the call in one cell until it is clearly established in a new
one. As a result, fewer calls are dropped compared to analog, TDMA and
GSM networks which use a "hard hand-off" and disconnect the call from the
current cell site as it connects with a new one.
- Simplified Frequency Planning. Frequency planning is the process used to
analyze and test alternative patterns of frequency use within a wireless
network to minimize interference and maximize capacity. Currently,
cellular service providers spend considerable money and time on frequency
planning. With CDMA technology, the same subset of allocated frequencies
can be reused in every cell, substantially reducing the need for costly
frequency reuse patterning and constant frequency plan management.
Because TDMA and GSM based systems have frequency reuse constraints
similar to present analog systems, frequency reuse planning for TDMA and
GSM based systems is comparable to planning for the current analog
systems.
While we believe CDMA has the inherent benefits discussed above, TDMA
networks are generally less expensive when overlaying existing analog systems
because the TDMA spectrum usage is more compatible with analog spectrum
planning. In addition, the GSM technology standard generally allows multi-vendor
equipment to be used in the same network more easily than CDMA technology. GSM
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technology also is currently more widely deployed throughout the world than
CDMA, which provides economies of scale for handset and equipment purchases for
wireless providers using that standard. A standards process is also underway
which will allow wireless handsets to support analog, TDMA and GSM technologies
in a single unit. Currently, there are no plans to have CDMA handsets that
support either the TDMA or GSM technologies.
GOVERNMENT REGULATION
The spectrum licensing, construction, operation, sale and interconnection
arrangements of wireless communications networks are regulated to varying
degrees by state regulatory agencies, the FCC, Congress, the courts and other
governmental bodies. Proceedings before these bodies, such as the FCC and state
regulatory authorities, could have a significant impact on the competitive
market structure among wireless providers and on the relationships between
wireless providers and other carriers. These mandates may impose significant
financial obligations on us and other wireless providers. We are unable to
predict the scope, pace or financial impact of legal or policy changes that
could be adopted in these proceedings.
Licensing of PCS Systems. A broadband PCS system operates under a protected
geographic service area license granted by the FCC for a particular market on
one of six frequency blocks allocated for broadband PCS. Broadband PCS systems
generally are used for two-way voice applications. Narrowband PCS systems, in
contrast, are for non-voice applications such as paging and data service and are
separately licensed. The FCC has segmented the U.S. PCS markets into 51 large
regions called major trading areas, which are comprised of 493 smaller regions
called basic trading areas. The FCC awards two broadband PCS licenses for each
major trading area and four licenses for each basic trading area. Thus,
generally, six licensees will be authorized to compete in each area. The two
major trading area licenses authorize the use of 30 MHz of spectrum. One of the
basic trading area licenses is for 30 MHz of spectrum, and the other three are
for 10 MHz each. The FCC permits licensees to split their licenses and assign a
portion, on either a geographic or frequency basis or both to a third party. Two
cellular licenses are also available in each market. Cellular markets are
defined as either metropolitan statistical or rural service areas.
The FCC's spectrum allocation for PCS includes two licenses, the 30 MHz
C-Block license and a 10 MHz F-Block license, that are designated as
"Entrepreneur's Blocks." The FCC requires holders of these licenses to meet
certain threshold financial size qualifications. In addition, the FCC has
determined that designated entities who qualify as small businesses or very
small businesses, as defined by a complex set of FCC rules, receive additional
benefits, such as bidding credits in C- or F-Block spectrum auctions or
reauctions, and in some cases, an installment loan from the federal government
for a significant portion of the dollar amount of the winning bids in the FCC's
initial auctions of C- and F-Block licenses. The FCC's rules also allow for
publicly traded corporations with widely dispersed voting power, as defined by
the FCC, to hold C- and F-Block licenses and to qualify as small or very small
businesses. In July 1999, the FCC issued an opinion and order that found that we
were entitled to acquire C-Block and F-Block licenses as a publicly traded
corporation with widely dispersed voting power and a very small business under
FCC rules.
Under the FCC's current rules specifying spectrum aggregation limits
affecting broadband PCS and cellular licensees, no entity may hold attributable
interests, generally 20% or more of the equity of, or an officer or director
position with, the licensee, in licenses for more than 45 MHz of PCS, cellular
and certain specialized mobile radio services where there is significant
overlap, except in rural areas. In rural areas, up to 55 MHz of spectrum may be
held. Passive investors may hold up to a 40% interest. Significant overlap will
occur when at least 10% of the population of the PCS licensed service area is
within the cellular and/or specialized mobile radio service area(s). In a
September 15, 1999 FCC order
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revising the spectrum cap rules, the FCC noted that new broadband wireless
services, such as third generation wireless services, may be included in the cap
when those services are authorized.
All PCS licenses have a 10-year term, at the end of which they must be
renewed. The FCC will award a renewal expectancy to a PCS licensee that has:
- provided substantial service during its past license term; and
- has substantially complied with applicable FCC rules and policies and the
Communications Act.
All PCS licensees must satisfy coverage requirements. Licensees that fail
to meet the coverage requirements may be subject to forfeiture of the license.
For a period of up to five years, subject to extension, after the grant of
a PCS license, a licensee will be required to share spectrum with existing
licensees that operate certain fixed microwave systems within its license area.
In an effort to balance the competing interests of existing microwave users and
newly authorized PCS licensees, the FCC has adopted a transition plan to
relocate such microwave operators to other spectrum blocks and a cost sharing
plan so that if the relocation of an incumbent benefits more than one PCS
licensee, those licensees will share the cost of the relocation. To secure a
sufficient amount of unencumbered spectrum to operate our PCS systems
efficiently and with adequate population coverage, we may need to relocate one
or more of these incumbent fixed microwave licensees.
This transition plan currently allows most microwave users to operate in
the PCS spectrum for a two-year voluntary negotiation period and an additional
one-year mandatory negotiation period. Parties unable to reach agreement within
these time periods may refer the matter to the FCC for resolution, but the
incumbent microwave user is permitted to continue its operations until final FCC
resolution of the matter. The transition and cost sharing plans expire on April
4, 2005, at which time remaining microwave incumbents in the PCS spectrum will
be responsible for the costs of relocating to alternate spectrum locations.
PCS services are subject to certain FAA regulations governing the location,
lighting and construction of transmitter towers and antennas and may be subject
to regulation under Federal environmental laws and the FCC's environmental
regulations. State or local zoning and land use regulations also apply to our
activities. We expect to use common carrier point to point microwave facilities
to connect the transmitter, receiver, and signaling equipment for each PCS or
cellular cell, the cell sites, and to link them to the main switching office.
The FCC licenses these facilities separately and they are subject to regulation
as to technical parameters and service.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service, which includes PCS. The FCC does not regulate
commercial mobile radio service or private mobile radio service rates.
Transfer and Assignments PCS Licenses. The Communications Act and FCC rules
require the FCC's prior approval of the assignment or transfer of control of a
license for a PCS or cellular system. Non-controlling interests in an entity
that holds an FCC license generally may be bought or sold without FCC approval
subject to the FCC's spectrum aggregation limits.
In addition, C- and F-Block licenses are subject to certain other transfer
and assignment restrictions. These licenses cannot be assigned for a period of
at least five years from the initial license grant date to any entity that fails
to satisfy financial qualification requirements for a designated entity. If such
an assignment occurs to an entity that does not qualify for the same level of
bidding credits or installment payments, if any, granted to the licensee, then
the assignment would be conditioned upon a repayment of the bidding credit and
an adjustment of its installment payment, if any, to the FCC to effect the
payment plan applicable to the new entity. After the fifth year, C- and F-Block
licenses may be transferred to non-
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designated entities, subject again to certain costs and reimbursements to the
government of bidding credits and/or outstanding principal and interest payments
owed to the FCC.
Continuation of C- and F-Block Eligibility Rules. The FCC has announced
plans to hold a reauction of C- and F-Block licenses in July 2000. In connection
with this reauction, two companies, SBC Communications, Inc., and Nextel
Communications, Inc., have requested that the FCC, via waiver or a rulemaking
proceeding, relax the eligibility rules for acquiring C- and F-Block licenses,
such that these and possibly other large companies would be able to compete with
us and other designated entities and small businesses in acquiring C- and
F-Block licenses. While we plan to vigorously oppose the requests from SEC and
Nextel, FCC action approving them could have a material adverse effect on our
business and financial condition, including our ability to continue acquiring C-
and F-Block licenses.
Foreign Ownership. Under existing law, no more than 20% of an FCC
licensee's capital stock may be owned, directly or indirectly, or voted by
non-U.S. citizens or their representatives, by a foreign government or its
representatives or by a foreign corporation. If an FCC licensee is controlled by
another entity, as is the case with our ownership structure, up to 25% of that
entity's capital stock may be owned or voted by non-US citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. Foreign ownership above the 25% level may be allowed should the FCC
find such higher levels not inconsistent with the public interest. The FCC has
ruled that higher levels of foreign ownership, even up to 100%, are
presumptively consistent with the public interest with respect to investors from
certain nations. If our foreign ownership were to exceed the permitted level,
the FCC could revoke our wireless licenses, although we could seek a declaratory
ruling from the FCC allowing the foreign ownership or take other actions to
reduce our foreign ownership percentage in order to avoid the loss of our
licenses. We have no knowledge of any present foreign ownership in violation of
these restrictions.
Recent Industry Developments. FCC rules currently require wireless carriers
to make available emergency 911 services, including enhanced emergency 911
services that provide the caller's telephone number. While the FCC's rules
include a requirement that emergency 911 services be made available to users
with speech or hearing disabilities, the FCC has granted waivers of this
requirement to various vendors pending the development of adequate technology.
We may need to acquire such a waiver. Additionally, FCC regulations will require
wireless carriers to identify the location of emergency 911 callers by use of
either network-based or handset-based technologies. In a September 15, 1999
order, the FCC ruled that carriers electing to use handset-based technologies
must:
- begin selling compliant handsets by March 1, 2001;
- ensure that 50% of all newly activated handsets are compliant by October
1, 2001 and that at least 95% of all newly activated digital handsets are
compliant by October 1, 2002; and
- comply with additional requirements relating to passing location
information upon the request of emergency 911 operators.
On November 18, 1999, the FCC made certain modifications to its wireless
emergency 911 requirements, including removal of a requirement that a mechanism
be in place for wireless carriers to recover their costs of emergency 911
implementation before the emergency 911 obligation is triggered. The potential
effect of this development on our business is uncertain.
The Telecommunications Act mandated significant changes in existing
regulation of the telecommunications industry intended to promote the
competitive development of new service offerings, expand the public availability
of telecommunications services and streamline regulation of the industry. The
Telecommunications Act establishes a general duty of all telecommunications
carriers, including PCS licensees, to interconnect with other carriers, directly
or indirectly. The Telecommunications Act also
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contains a detailed list of requirements with respect to the interconnection
obligations of local exchange carriers.
On August 8, 1996, the FCC released its order implementing the
interconnection provisions of the Telecommunications Act. Although many of the
provisions of this order were struck down by the U.S. Court of Appeals for the
Eighth Circuit, on January 25, 1999, the U.S. Supreme Court reversed the Eighth
Circuit and upheld the FCC in all respects material to our operations. On June
10, 1999, the Eighth Circuit issued an order requesting briefs on certain issues
it did not address in its earlier order, including the pricing regime for
interconnection. While appeals have been pending, the rationale of the FCC's
order has been adopted by many states' public utility commissions, with the
result that the charges that PCS operators pay to interconnect their traffic to
the public switched telephone network have declined significantly from pre-1996
levels.
Under the FCC's rules, commercial mobile radio service providers are
potentially eligible to receive universal service subsidies for the first time.
However, they are also required to contribute to both federal and state
universal service funds. Many states are also moving forward to develop state
universal service fund programs, which require contributions from commercial
mobile radio service providers.
The FCC has adopted rules on telephone number portability that will enable
customers to migrate their landline and cellular telephone numbers to cellular
or PCS providers and from a cellular or PCS provider to another service
provider. On February 8, 1999, the FCC extended the deadline for compliance with
this requirement to November 24, 2002, subject to any later determination that
an earlier number portability deadline is necessary to conserve telephone
numbers. The FCC also has adopted rules requiring providers of wireless services
that are interconnected to the public switched telephone network to provide
functions to facilitate electronic surveillance by law enforcement officials. On
August 26, 1999, the FCC adopted an order requiring wireless providers to
provide information that identifies the cell sites at the origin and destination
of a mobile call to law enforcement personnel in response to a lawful court
order or other legal requirement. Providers may petition the FCC for a waiver of
these law enforcement obligations if they can prove under a multi-factor test
that these requirements are not reasonably achievable.
The FCC has determined that commercial mobile radio service providers are
subject to "rate integration" requirements added by the Telecommunications Act
that mandate providers of interstate interexchange, commonly referred to as
"long distance", services to charge the same rates for these services in every
state. However, the implementation and application of these requirements to
various commercial mobile radio service offerings is still subject to pending
FCC proceedings, and neither the outcome of these proceedings nor the impact of
the rate integration requirement generally on our operations can be predicted at
this time.
The FCC recently adopted an order which gives wireless carriers broader
discretion to use customer proprietary network information, without customer
approval, to market their services used in the provision of wireless services.
The FCC's order was issued following a decision by the U.S. Court of Appeals for
the 10th Circuit, which overturned the FCC's rules, but not the underlying
statute, on First Amendment grounds. The FCC has requested a rehearing of the
court's order by the full 10th Circuit. Until further court action, the FCC's
rules remain in effect.
In addition, state commissions have become increasingly aggressive in their
efforts to conserve numbering resources. These efforts may impact wireless
service providers disproportionately by imposing additional costs or limiting
access to numbering resources. On June 2, 1999, the FCC released a notice of
proposed rulemaking soliciting comments on a variety of administrative and
technical measures that would promote more efficient allocation and use of
numbering resources. Adoption of some of the proposed methods could have a
disproportionate impact on commercial mobile radio services providers.
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The FCC has adopted billing rules for landline telecommunications service
providers and is considering whether to extend those rules to commercial mobile
radio services providers. The FCC may require that more billing detail be
provided to consumers, which could add to the expense of the billing process.
Adoption of some of the FCC's proposals could increase the complexity of our
billing processes and restrict our ability to bill customers for services in the
most commercially advantageous way.
The FCC has adopted an order that determines the obligations of
telecommunications carriers to make their services accessible to individuals
with disabilities under Section 255 of the Telecommunications Act. The order
requires telecommunications services providers, including Leap, to offer
equipment and services that are accessible to and usable by persons with
disabilities, if "readily achievable," meaning easily accomplishable and able to
be carried out without much difficulty or expense, as determined by a number of
factors enumerated in the Americans with Disabilities Act. The rules require us
to develop a process to evaluate the accessibility, usability and compatibility
of covered services and equipment. While we expect our vendors to develop
equipment compatible with the rules, we may be required to make material changes
to our network, product line or services, depending upon how the rules are
interpreted and enforced.
In June 1999, the FCC initiated an administrative rulemaking proceeding to
help facilitate the offering of calling party pays as an optional wireless
service. Under the calling party pays service, the party placing the call to a
wireless customer pays the wireless airtime charges. Most wireless customers in
the U.S. now pay both to place calls and to receive them. Adoption of a calling
party pays system on a widespread basis could make commercial mobile radio
service providers more competitive with traditional landline telecommunications
providers for the provision of regular telephone service. The FCC's
implementation of calling party pays may adversely affect our business.
State Regulation and Local Approvals. Congress has given the FCC the
authority to preempt states from regulating rates or entry into commercial
mobile radio service, including PCS. The FCC, to date, has denied all state
petitions to regulate the rates charged by commercial mobile radio service
providers. State and local governments are permitted to manage public rights of
way and can require fair and reasonable compensation from telecommunications
providers, on a competitively neutral and nondiscriminatory basis for the use of
such rights of way by telecommunications carriers, including PCS providers, so
long as the compensation required is publicly disclosed by the government. The
siting of base stations also remains subject to state and local jurisdiction,
although proceedings are pending at the FCC to determine the scope of that
authority. States may also impose competitively neutral requirements that are
necessary for universal service, to protect the public safety and welfare, to
ensure continued service quality and to safeguard the rights of consumers. While
a state may not impose requirements that effectively function as barriers to
entry or create a competitive disadvantage, the scope of state authority to
maintain existing or to adopt new such requirements is unclear.
EMPLOYEES
On February 29, 2000, we employed approximately 88 full time employees,
including the employees of our subsidiary Cricket Communications. In addition,
our subsidiary Smartcom employed approximately 615 employees on that date.
FACILITIES
We have leased approximately 50,000 square feet of office space in San
Diego, California. We currently lease this building for sales, marketing,
product development and administrative purposes. We do not own any real
property.
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Smartcom has leased approximately 50,000 square feet of office space in
Santiago, Chile, excluding a lease which is expiring in the near future and will
not be renewed. Smartcom uses this space for sales, marketing, customer service,
operations and administrative purposes, as well as for its primary
telecommunications switching equipment. In addition, Smartcom owns or leases
space at three sites in Temuco, Antafagasta and Punta Arena, Chile aggregating
approximately 10,000 square feet for additional switching equipment. Smartcom
also leases space for SMARTCOM PCS brand stores and kiosks throughout Chile and
maintains numerous small sites throughout the country for radio transmission
equipment that support its telecommunications network. Most of these radio
transmission sites are leased.
LEGAL PROCEEDINGS
In September 1999, we declared default under loans to Metrosvyaz, stopped
funding those loans, wrote off our remaining $9.6 million investment in
Metrosvyaz and issued a demand for arbitration against Metrosvyaz and one of its
directors with respect to those loans. In response, on March 21, 2000,
Metrosvyaz filed suit against us and certain of our directors and officers in
the U.S. District Court for the Southern District of California. The Metrosvyaz
suit alleged claims for libel, trade libel, intentional and negligent
interference with prospective advantage and breach of fiduciary duty.
On April 27, 2000, we resolved our differences with Metrosvyaz. As part of
the settlement, Metrosvyaz dismissed its action against Leap and its officers in
the federal court in San Diego, Leap dismissed its demand for arbitration, and
both companies agreed to general releases. Leap surrendered its interest in a
joint venture company that owned an interest in Metrosvyaz, wrote off the
remaining balance of its investments in Russia and received a contractual right
to certain contingent payments from Qualcomm.
Various other claims arising in the course of business, seeking monetary
damages and other relief, are pending. The amount of the liability, if any, from
such claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on Leap's consolidated financial position, results of operations
or cash flows.
RELATIONSHIP WITH QUALCOMM
To transfer the Leap business from Qualcomm to us, Qualcomm entered into
various agreements with us that are described below. The agreements have been
amended from time to time, including recent changes required by the FCC as a
condition to allowing us to acquire specific wireless licenses. In May 1999,
Qualcomm sold its network infrastructure division to Ericsson. In connection
with that sale, Qualcomm transferred to Ericsson its rights to sell network
infrastructure equipment to Leap and its subsidiaries and ventures. In February
2000, Qualcomm sold its subscriber division to Kyocera. In connection with that
sale, Qualcomm transferred to Kyocera its rights to sell customer equipment to
Leap and its subsidiaries and ventures.
Qualcomm purchased $150.0 million (original purchase price) of senior
discount units in our units offering in February 2000. We used a portion of the
net proceeds from our February 2000 equity offering to repay all outstanding
borrowings under our credit agreement with Qualcomm and terminated the credit
agreement. As a result of Qualcomm's participation in the units offering,
however, Qualcomm remains a significant lender to us. Our relationship with
Qualcomm may also create conflicts of interest between us and Qualcomm. In
addition, Qualcomm is not restricted from competing with us or directly pursuing
wireless telecommunications businesses or interests which would also be
attractive to us.
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SEPARATION AND DISTRIBUTION AGREEMENT
Immediately before the distribution of Leap common stock to Qualcomm's
stockholders, we entered into the Separation and Distribution Agreement with
Qualcomm. The Separation and Distribution Agreement governed the principal
transactions required to effect the separation of the companies and the
distribution, and other agreements governing the relationship between the
parties.
To effect the separation of the companies, Qualcomm transferred some of its
businesses and ventures to us. Qualcomm also contributed to us the following:
- $10 million in cash;
- Qualcomm's right to receive payment of approximately $113 million of debt
from the operating companies;
- Qualcomm's rights under specific agreements relating to our business and
ventures; and
- other assets.
Qualcomm's performance as an equipment vendor is not a condition of payment
to us under the notes and other debt transferred. We did not receive any
intellectual property in connection with the separation of the companies, and
Qualcomm retained all rights not expressly transferred regarding agreements with
our subsidiaries and ventures.
In connection with the transfer of assets and rights by Qualcomm, we issued
a warrant to Qualcomm to purchase 5,500,000 shares of our common stock for $6.11
per share. In March 1999, in exchange for consideration valued at $5.4 million,
Qualcomm agreed to amend the warrant to reduce the number of shares which may be
acquired upon exercise of the warrant to 4,500,000. The warrant is currently
exercisable and remains exercisable until 2008. Qualcomm has agreed that it will
not exercise the warrant in a manner that would cause Qualcomm and its officers
and directors to collectively hold more than 15% of our outstanding common
stock.
In the Separation and Distribution Agreement, we also assumed some
liabilities of Qualcomm, including:
- funding obligations to our subsidiaries and ventures totaling
approximately $75 million;
- Qualcomm's rights and obligations to manage our subsidiaries and
ventures; and
- $2 million of accrued liabilities regarding our employees.
The Separation and Distribution Agreement provides for:
- releases of claims of each party against the other;
- the allocation of potential liabilities; and
- indemnification rights between the parties.
The Separation and Distribution Agreement also provides that, in
international markets, we will deploy, and will cause our affiliates to deploy,
only systems using cdmaOne until January 1, 2004. CdmaOne is the original
standard for fixed or mobile wireless communications systems based on or derived
from Qualcomm's CDMA technology and successor standards that Qualcomm has
adopted. The Telecommunications Industry Association and other recognized
international standards bodies have adopted cdmaOne as an industry standard. We
also agreed that, in international markets, we would invest only in companies
using cdmaOne systems until January 1, 2004.
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Under the Separation and Distribution Agreement, we also granted Qualcomm a
non-exclusive, royalty-free license to any patent rights developed by us or our
affiliates. In addition, under the Separation and Distribution Agreement, we
granted Qualcomm a right of first refusal for a period of three years with
respect to proposed transfers by us of our investments and joint venture
interests. We further agreed to take an active role in the management of
companies in which we hold stock or joint venture interests. The parties also
generally agreed that, for a period of three years following our spin-off from
Qualcomm, neither party would solicit or hire employees of the other.
MASTER AGREEMENT REGARDING EQUIPMENT ACQUISITION
The Master Agreement Regarding Equipment Acquisition contains our
obligations regarding the purchase and sale of terrestrial-based cdmaOne
infrastructure and customer equipment. As a result of Qualcomm's sale of its
network infrastructure division to Ericsson, we owe some purchase obligations to
Ericsson with respect to network equipment and, as a result of the sale of
Qualcomm's subscriber division to Kyocera, with respect to customer equipment.
Under the Master Agreement Regarding Equipment Acquisition, we generally agreed
that:
- For five years, we will purchase at least 50% of our requirements for
infrastructure equipment from Ericsson and 50% of our requirements for
customer equipment from Kyocera.
- For each initial investment by us made before October 2002 in a wireless
telecommunication entity operating in the U.S., we will require the U.S.
operator to enter into an equipment requirements agreement with Kyocera
and Ericsson. The equipment requirements agreement will require the U.S.
operator to purchase at least 50% of its requirements for infrastructure
equipment from Ericsson and 50% of its requirements for customer
equipment from Kyocera, in each case for a five year period.
- For each investment by us in a U.S. operator of wireless communications
made after October 2002, we will attempt to require the U.S. operator to
provide Ericsson and Kyocera with an opportunity to bid on its
requirements for infrastructure equipment and customer equipment,
respectively. We also will encourage the U.S. operator to acquire
equipment from Ericsson and Kyocera.
Leap and the U.S. companies in which it invests must comply with these
requirements only if Kyocera or Ericsson, as applicable, offers competitive
equipment on competitive terms, and its bid to sell equipment and related
services is less than or equal to the lowest competing bid that Leap or such
companies would accept; provided, however, until Kyocera has received contracts
from us and the companies in which we invest for at least $250 million of
customer equipment for use in the U.S., Leap and U.S. companies in which it
initially invests before 2002 must comply with these requirements if Qualcomm's
bid is 110% or less than the lowest competing bid Leap or such other company
would accept.
Under the terms of the agreement, because we have already received more
than $60 million in financing from parties other than Qualcomm, if we make an
initial investment in a wireless communications company operating outside of the
U.S., we will seek to provide Kyocera and Ericsson with an opportunity to bid on
the foreign operator's infrastructure and customer equipment. We will also
encourage the foreign operator to acquire its equipment from Kyocera and
Ericsson. The obligations of all the foreign operators will depend on Kyocera
and Ericsson offering competitive equipment on competitive terms, including
price.
All the obligations of Leap regarding equipment purchases under the Master
Agreement Regarding Equipment Acquisition will expire in September 2007.
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If Leap attempts to acquire equipment on a "bundled" basis, then Ericsson
and Kyocera are entitled, in some cases, to respond separately to each portion
of the proposed bundled acquisition. If Leap does not attempt to acquire the
equipment on a competitive basis from multiple vendors, but instead decides to
negotiate exclusively with Ericsson or Kyocera, then Ericsson or Kyocera, as
applicable, will offer and sell the equipment to us on a "most favored pricing"
basis.
CONVERSION AGREEMENT
Under the Conversion Agreement, we agreed to issue up to 2,271,060 shares
of our common stock to the holders of the Trust Convertible Preferred Securities
of Qualcomm Financial Trust I, a wholly owned statutory business trust of
Qualcomm, upon the conversion of their securities. We also agreed to reserve and
keep available shares of our common stock for issuance and delivery upon that
conversion. We also filed and must keep effective a registration statement
covering the shares of our common stock issuable upon conversion of the Trust
Convertible Preferred Securities. If we determine that any event requires
changes to the registration statement so that the registration statement and the
prospectus contained therein do not contain a material misstatement or omission,
or if the continued effectiveness of the registration statement would require us
to disclose a material financing, acquisition or other material corporate
transaction or development (and our board of directors has determined that such
disclosure is not in our best interests or the best interests of our
stockholders), then we may suspend the issuance of our common stock issuable
upon conversion of the Trust Convertible Preferred Securities until we have
prepared and filed, and the SEC has declared effective, a post-effective
amendment to the registration statement which contains the required disclosures.
On March 6, 2000, Qualcomm issued a call for the redemption of the
remaining outstanding Trust Convertible Preferred Securities, all of which have
now been converted or redeemed. In sum, we issued an aggregate of 2,268,732
shares of our common stock to the holders of the Trust Convertible Preferred
Securities under the Conversion Agreement. The remaining 2,328 shares reserved
for issuance under the Conversion Agreement were not issued as a result of cash
payments in lieu of fractional shares that would have been issued upon
conversion of the Trust Convertible Preferred Securities and redemptions by
Qualcomm. Upon conversion of the Trust Convertible Preferred Securities,
Qualcomm received a benefit in the form of forgiveness of debt, but we received
no benefit or other consideration.
DEFERRED PAYMENT AGREEMENT OF SMARTCOM
Qualcomm and our Chilean subsidiary, Smartcom, have entered into a Deferred
Payment Agreement under which Qualcomm agreed to defer collection of amounts
related to Smartcom's purchase of equipment, software and services from
Qualcomm. The Deferred Payment Agreement requires Smartcom to meet certain
financial and operating covenants, including a debt to equity ratio and
restrictions on Smartcom's ability to pay dividends and to distribute assets.
For a description of the terms of this agreement, see "Management's Discussion
and Analysis of Financial Condition -- Liquidity and Capital
Resources -- Smartcom Deferred Payment Agreements." Leap and Qualcomm have
entered into a binding letter agreement under which Qualcomm has agreed to
provide to Smartcom an additional $30 million in infrastructure equipment
financing and $10 million in handset financing. The parties are currently
negotiating definitive agreements. In addition, Qualcomm has provided a letter
of credit to guarantee Smartcom's obligations to certain lenders in Chile.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the directors and
executive officers of Leap as of April 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harvey P. White....................... 66 Chairman of the Board, Chief Executive Officer
and Director
Thomas J. Bernard..................... 68 Vice Chairman, President -- International
Business Division and Director
Susan G. Swenson...................... 51 President, Chief Operating Officer and
Director of Leap and Chief Executive Officer
of Cricket Communications
William R. Hinchliff.................. 49 Senior Vice President, International
Operations
James E. Hoffmann..................... 50 Senior Vice President, General Counsel and
Secretary
Stewart Douglas Hutcheson............. 44 Senior Vice President, Business Development
Daniel O. Pegg........................ 54 Senior Vice President, Public Affairs
Leonard C. Stephens................... 43 Senior Vice President, Human Resources
Thomas D. Willardson.................. 49 Senior Vice President, Finance and Treasurer
Alejandro Burillo Azcarraga........... 48 Director
Robert C. Dynes....................... 57 Director
Scot B. Jarvis........................ 39 Director
John J. Moores........................ 55 Director
Michael B. Targoff.................... 55 Director
Jeffrey P. Williams................... 48 Director
</TABLE>
Additional information concerning the directors and executive officers is
set forth below:
HARVEY P. WHITE has served as Chairman of the Board, Chief Executive
Officer and a Director of Leap since its formation in June 1998 and also served
as President of Leap from June 1998 to July 1999. Mr. White is one of the
founders of Qualcomm and served as Vice Chairman of the Board of Qualcomm from
June 1998 to September 1998. From May 1992 until June 1998, he served as
President of Qualcomm and from February 1994 to August 1995, as Chief Operating
Officer of Qualcomm. Before May 1992, he was Executive Vice President and Chief
Operating Officer, and was also a Director of Qualcomm since it began operations
in July 1985 until he resigned in September 1998 when Leap became an
independent, publicly-traded company. From March 1978 to June 1985, Mr. White
was an officer of LINKABIT (M/A-COM LINKABIT after August 1980), where he was
successively Chief Financial Officer, Vice President, Senior Vice President and
Executive Vice President. Mr. White became Chief Operating Officer of LINKABIT
in July 1979 and a Director of LINKABIT in December 1979. Mr. White is currently
a Director of Verance, Inc., a privately-held multimedia technology start-up
company, Applied Micro Circuits Corporation, a supplier of high-bandwidth
silicon connectivity and Cibernet Corp., a company that provides financial
settlement services to telecommunications companies. Mr. White holds a B.A. from
Marshall University.
THOMAS J. BERNARD has served as a Director of Leap since its formation in
June 1998. Mr. Bernard is also the Vice Chairman and President-International
Business Division of Leap. From June 1998 to July 1999, he served as Executive
Vice President of Leap. From April 1996 to June 1998, Mr. Bernard served as a
Senior Vice President of Qualcomm and General Manager of Qualcomm's
Infrastructure Products division. Mr. Bernard had retired in April 1994, but
returned to Qualcomm in August 1995 as
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Executive Consultant and became Senior Vice President, Marketing, in December
1995. Mr. Bernard first joined Qualcomm in September 1986. He served as Vice
President and General Manager for the OmniTRACS division and in September 1992
was promoted to Senior Vice President of Qualcomm. Before joining Qualcomm, Mr.
Bernard was Executive Vice President and General Manager, M/A-COM LINKABIT,
Telecommunications Division, Western Operations. Mr. Bernard also serves as a
Director of AirFiber Inc., a privately-held company that markets high-speed
open-air optical communication systems; Advanced Remote Communications
Solutions, Inc., a provider of remote information technology solutions; and JNI
Corporation, a developer and manufacturer of fibre channel technology products.
SUSAN G. SWENSON has served as President and a Director since July 1999 and
Chief Operating Officer since October 1999. She has also served as Cricket
Communications's Chief Executive Officer since July 1999. From March 1994 to
July 1999, she served as President and Chief Executive Officer of Cellular One,
a joint venture between AirTouch and AT&T Wireless that provided wireless
telecommunications services to regions covering approximately 10 million
potential customers. From 1979 to 1994, Ms. Swenson held various operating
positions with Pacific Telesis Group, including Vice President and General
Manager of Pacific Bell's San Francisco Bay Area operating unit for one year and
President and Chief Operating Officer of PacTel Cellular for two and one-half
years. Ms. Swenson also serves as a Director of Wells Fargo & Company, General
Magic, Inc., Working Assets Funding Service and Palm Computing, Inc., a
subsidiary of 3Com Corporation. Ms. Swenson holds a B.A. from San Diego State
University.
WILLIAM R. HINCHLIFF joined Leap in August 1999 and has served as Senior
Vice President, International Operations since October 1999. From July 1998 to
August 1999, Mr. Hinchliff was President of Nextel del Peru, where he was in
charge of all aspects of start-up, launch and ongoing operations of the Nextel
property in Peru. From May 1994 to June 1998, Mr. Hinchliff held several
management positions with Motorola Network Management Group, where he was most
recently involved with business operations for Motorola's satellite ventures
division and was general director of both Cedetel and Norcel, two Motorola joint
ventures in Mexico. Mr. Hinchliff holds a B.S. from Stetson University and an
M.B.A. from the University of Miami.
JAMES E. HOFFMANN has served as Senior Vice President, General Counsel and
Secretary of Leap since its formation in June 1998. Mr. Hoffmann also served as
a Director of Leap from September 1998 to July 1999. From June 1998 to September
1998, Mr. Hoffmann was Vice President, Legal Counsel of Qualcomm. From February
1995 to June 1998, he served as Vice President of Qualcomm and Division Counsel
for the Infrastructure Products Division, having joined Qualcomm as Senior Legal
Counsel in June 1993. Before joining Qualcomm, Mr. Hoffmann was a partner in the
law firm of Gray, Cary, Ames & Frye, where he practiced transactional corporate
law. Mr. Hoffmann holds a B.S. from the United States Naval Academy, an M.B.A.
from Golden Gate University and a J.D. from University of California, Hastings
College of the Law.
STEWART DOUGLAS HUTCHESON has served as Senior Vice President, Business
Development since April 2000, having previously served as Vice President,
Business Development since Leap's formation in September 1998. From February
1995 to September 1998, Mr. Hutcheson served as Vice President, Marketing in the
Wireless Infrastructure division at Qualcomm. Before joining Qualcomm, Mr.
Hutcheson held operational and technical management positions at Solar Turbines,
Inc. for 13 years. Mr. Hutcheson holds a B.S. in mechanical engineering from
California State Polytechnic University and an M.B.A. from University of
California, Irvine.
DANIEL O. PEGG has served as Senior Vice President, Public Affairs since
September 1998. From March 1997 to September 1998, Mr. Pegg served as Senior
Vice President, Public Affairs of Qualcomm. Before joining Qualcomm, Mr. Pegg
was President and Chief Executive Officer of the San Diego
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Economic Development Corporation for 14 years. Mr. Pegg served on the Board of
Directors of Gensia Pharmaceuticals from 1986 to 1996. Mr. Pegg holds a B.A.
from California State University at Los Angeles.
LEONARD C. STEPHENS has served as Senior Vice President, Human Resources
since September 1998. From December 1995 to September 1998, Mr. Stephens was
Vice President, Human Resources Operations for Qualcomm. Before joining
Qualcomm, Mr. Stephens was employed by Pfizer Inc., where he served in a number
of human resources positions over a 14 year career. Mr. Stephens holds a B.A.
from Howard University.
THOMAS D. WILLARDSON has served as Senior Vice President, Finance and
Treasurer since July 1998. From July 1995 to July 1998, Mr. Willardson was Vice
President and Associate Managing Director of Bechtel Enterprises, Inc., a wholly
owned investment and development subsidiary of Bechtel Group, Inc. From January
1986 to July 1995, Mr. Willardson was a principal at The Fremont Group, an
investment company. Mr. Willardson has served as a Director of Cost Plus, Inc.
since March 1991. Mr. Willardson holds a B.S. in Finance from Brigham Young
University and an M.B.A. from the University of Southern California.
ALEJANDRO BURILLO AZCARRAGA has served as a Director of Leap since
September 1998. Mr. Burillo has more than 30 years experience working for Grupo
Televisa. Mr. Burillo presently serves as Vice-Chairman of the Board of
Directors of Grupo Televisa, a position to which he was appointed in 1991. In
addition, Mr. Burillo served as President of International Affairs of Grupo
Televisa from 1997 to 1999, and before that time served as Chief Operating
Officer of Grupo Televisa. Mr. Burillo also holds a controlling interest in
Grupo Pegaso, a private investment group with interests in various industries
including cable television, communications, retail electronics, real estate,
sports and entertainment. Mr. Burillo also serves as a Director of Grupo Desc,
an NYSE-listed company and one of Mexico's main industrial groups.
ROBERT C. DYNES has served as a Director of Leap since July 1999. He has
served as the Chancellor of the University of California, San Diego since 1996
and as a Professor of Physics at UCSD since 1991 and was Senior Vice
Chancellor -- Academic Affairs of UCSD from 1995 to 1996. Before 1991,
Chancellor Dynes held numerous research science positions at AT&T Bell
Laboratories. Chancellor Dynes holds a B.Sc. in Mathematics and Physics from the
University of Western Ontario and a M.Sc. and Ph.D. in Physics from McMaster
University in Hamilton, Ontario. Chancellor Dynes is a member of the National
Academy of Sciences and a Fellow of the American Academy of Arts and Sciences,
the Canadian Institute of Advanced Research and the American Physical Society.
Chancellor Dynes serves on numerous scientific and educational boards and
committees.
SCOT B. JARVIS has served as a Director of Leap since September 1998. Mr.
Jarvis is a cofounder and managing member of Cedar Grove Partners, LLC, a
privately-owned company formed to make investments in telecommunications
ventures. From 1994 to 1996, Mr. Jarvis was a Vice President of Operations for
Eagle River, Inc., a telecommunications investment company owned by Craig O.
McCaw. While at Eagle River, Mr. Jarvis was the cofounder and acting President
of Nextlink Communications, Inc., now a publicly-traded competitive local
exchange company. Mr. Jarvis was also responsible for certain operations and was
a Director of NEXTEL Communications, a nationwide provider of specialized mobile
radio service. From 1985 to 1994, Mr. Jarvis held a number of executive
positions at McCaw Cellular Communications which was sold to AT&T in August
1994. His responsibilities included Acquisitions and Development, International
Development, and he operated two separate Cellular One Districts in California
from 1990 to 1993. Mr. Jarvis also serves as a Director of Point.com, Metawave
Communications Corp. and Wireless Facilities, Inc. Mr. Jarvis holds a B.A. from
the University of Washington.
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JOHN J. MOORES has served as a Director of Leap since June 1999. Since
December 1994, Mr. Moores has served as owner and Chairman of the Board of the
San Diego Padres Baseball Club, L.P., and since September 1991 as Chairman of
the Board of JMI Services, Inc., a private investment company. In 1980, Mr.
Moores founded BMC Software, Inc. and served as its President and Chief
Executive Officer from 1980 to 1986 and as Chairman of its Board of Directors
from 1980 to 1992. Mr. Moores also serves as a Director of Bindview Development
Corporation, NEON Systems, Inc., Peregrine Systems, Inc. and several
privately-held corporations. Mr. Moores holds a B.S. and a J.D. from the
University of Houston.
MICHAEL B. TARGOFF has served as a Director of Leap since September 1998.
He is founder and CEO of Michael B. Targoff and Co., a company that seeks
controlling investments in telecommunications and related industry companies.
From its formation in January 1996 through January 1998, Mr. Targoff was
President and Chief Operating Officer of Loral Space & Communications Limited.
Before that time, Mr. Targoff was Senior Vice President of Loral Corporation.
From 1991, Mr. Targoff was a Director and a principal Loral executive
responsible for Loral's satellite manufacturing joint venture with Alcatel,
Aerospatiale, Alenia and Daimler Benz Aerospace. Mr. Targoff was also the
President and is a Director of Globalstar Telecommunications Limited, the
company that is the public owner of Globalstar, Loral's global mobile satellite
system. Before joining Loral Corporation in 1981, Mr. Targoff was a Partner in
the New York law firm of Willkie Farr and Gallagher. Mr. Targoff is also a
Director of Foremost Corporation of America. Mr. Targoff holds a B.A. from Brown
University and a J.D. from Columbia University School of Law, where he was a
Hamilton Fisk Scholar and Editor of the Columbia Journal of Law and Social
Problems.
JEFFREY P. WILLIAMS has served as a Director of Leap since September 1998.
He has been a Managing Partner at Greenhill & Co., LLC, an investment banking
firm, since 1998. From September 1996 to January 1998, Mr. Williams was
Executive Vice President, Strategic Development and Global Markets for
McGraw-Hill Companies, and from 1984 through 1996, he was an investment banker
with Morgan Stanley & Co. Incorporated in their Telecommunications and Media
Group. Mr. Williams has a Bachelor of Architecture from the University of
Cincinnati and an M.B.A. from Harvard University Graduate School of Business
Administration.
EMPLOYMENT AGREEMENT
Leap and Ms. Swenson entered into an employment offer letter dated June 11,
1999 which provides that Ms. Swenson will serve as President of Leap. Ms.
Swenson currently serves as President, Chief Operating Officer and Director of
Leap and Chief Executive Officer of Cricket Communications. Under the letter,
Ms. Swenson is entitled to an annual salary of $400,000 and, beginning with
fiscal 1999, an annual bonus of up to 60% of her base salary. In connection with
the letter, Ms. Swenson received an option under Leap's option plan to acquire
250,000 shares of Leap common stock at a price of $19.00 per share. The option
vests at the rate of 20% per year upon each anniversary of the grant date. Under
the letter, Ms. Swenson also received an option to purchase 350,000 shares of
Cricket Communications Holdings, Inc. common stock at a price of $2.00 per
share, that will become fully vested after five years from the grant date. Under
the letter, Ms. Swenson is eligible to participate in Leap's executive
retirement plan and is also entitled to comprehensive benefits. The letter
includes a special termination provision that requires Leap to pay to Ms.
Swenson 12 months base pay if her employment is terminated for other than gross
misconduct or gross neglect of duty within 12 months of her date of hire. If Ms.
Swenson is terminated for other than gross misconduct or gross neglect of duty
within 13 to 24 months of her date of hire, Leap is required to make payment to
Ms. Swenson equal to nine months of her base pay.
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EXECUTIVE OFFICER DEFERRED STOCK PLAN
In December 1999, Leap established an Executive Officer Deferred Stock Plan
that provides for mandatory deferral of 25% and voluntary deferral of up to 75%
of executive officer bonuses. Bonus deferrals are converted into share units
credited to the participant's account, with the number of share units calculated
by dividing the deferred bonus amount by the fair market value of Leap's common
stock on the bonus payday. Share units represent the right to receive shares of
Leap's common stock in accordance with the plan. Leap will also credit to a
matching account that number of shares units equal to 20% of the share units
credited to the participant's accounts. Matching share units vest ratably over
three years on each anniversary date of the applicable bonus payday. Leap has
reserved 25,000 shares of its common stock for issuance under the plan.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 30, 2000, information with
respect to the beneficial holdings of each director, the Chief Executive Officer
and the four most highly-paid executive officers during fiscal 1999, and all of
our executive officers and directors as a group, as well as each of our
stockholders who, based on our records, was known to us to be the beneficial
owner, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, of
more than 5% of our common stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES SHARES BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OWNED
--------------------------------------- --------------------- -------------------
<S> <C> <C>
Qualcomm Incorporated(3)..................... 4,500,000 15.1%
Harvey P. White(4)(5)........................ 554,426 2.2
Thomas J. Bernard(5)(6)...................... 54,607 *
James E. Hoffmann(5)(7)...................... 32,855 *
Daniel O. Pegg(5)(8)......................... 22,296 *
Leonard C. Stephens(5)....................... 20,424 *
Scot B. Jarvis(5)(9)......................... 8,700 *
Alejandro Burillo Azcarraga(5)............... 8,000 *
Jeffrey P. Williams(5)....................... 8,000 *
Robert C. Dynes(5)........................... 6,000 *
John J. Moores(5)............................ 6,000 *
Michael B. Targoff(5)........................ 2,000 *
All executive officers and directors as a
group (15 persons)......................... 723,308 2.8%
</TABLE>
- -------------------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders of Leap and by Schedules 13D and 13G filed with the
SEC. Unless otherwise indicated in the footnotes to this table and subject
to marital property laws where applicable, each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned and has a business address of Leap Wireless
International, Inc., 10307 Pacific Center Court, San Diego, California
92121. Applicable percentages are based on 25,365,391 shares of Leap common
stock outstanding, adjusted as required by rules promulgated by the SEC.
(2) In addition to shares held in the individual's sole name, this column
includes shares held by the spouse and other members of the named person's
immediate household who share that household with the named person, and
shares held in family trusts.
(3) Consists entirely of the right to purchase shares of Leap common stock for
approximately $6.11 per share, or an aggregate purchase price of
approximately $27.5 million, under a warrant. The warrant is fully
exercisable and expires in September 2008. On a fully diluted basis, as of
April 30, 2000, Qualcomm would own approximately 11.3% of our common stock
upon exercise of the warrant. This table does not include warrants to
purchase approximately 771,450 shares of common stock at an exercise price
of $96.80 per share which Qualcomm purchased in our February 2000 units
offering. Such warrants are not exercisable until February 23, 2001.
Qualcomm's business address is 5775 Morehouse Dr., San Diego, California
92121.
(4) Includes 2,500 shares held in a foundation of which Mr. White disclaims
beneficial ownership. Also includes 357,048 shares held in family trusts,
7,500 shares held in a family limited partnership,
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250 shares held in a charitable remainder trust, 62,700 shares held in a
family trust for the benefit of grandchildren and 28,847 shares held in
trusts for the benefit of relatives.
(5) Includes shares issuable upon exercise of options exercisable within 60 days
of April 30, 2000 as follows: Mr. Bernard, 43,150 shares (including 5,650
shares subject to options held by Mr. Bernard's spouse); Mr. Burillo, 8,000
shares; Mr. Dynes, 6,000 shares; Mr. Hoffmann, 21,700 shares; Mr. Jarvis,
8,000 shares; Mr. Moores, 6,000 shares; Mr. Pegg, 15,500 shares; Mr.
Stephens, 15,200 shares; Mr. Targoff, 2,000 shares; Mr. White, 95,200
shares; and Mr. Williams, 8,000 shares.
(6) Includes 60 shares held by Mr. Bernard's spouse.
(7) Includes 2,500 shares held in a custodial account for the benefit of Mr.
Hoffmann's spouse and 8,274 shares held in a family trust.
(8) Includes 5,000 shares held by a family trust, 525 shares held in a custodial
account for the benefit of Mr. Pegg's spouse and 25 shares held for the
benefit of Mr. Pegg's minor son.
(9) Includes 50 shares held in an IRA account and 150 shares held for the
benefit of Mr. Jarvis's children.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH DIRECTORS
Before the spin-off of Leap from Qualcomm, Scot B. Jarvis and Jeffrey P.
Williams, two of our directors, worked with Qualcomm to develop the Cricket
unlimited local calling strategy that Leap has adopted and refined for use in
domestic wireless markets. Messrs. Jarvis and Williams are also directors of
Cricket Communications Holdings, Inc., a subsidiary of Leap that owns the
company that is implementing the Cricket strategy. In June 1999, Cricket
Communications Holdings granted Messrs. Jarvis and Williams options to purchase
795,000 and 410,000 shares, respectively, of its common stock, exercisable at
$1.00 per share. Messrs. Jarvis and Williams have exercised these options in
full, and as a result they own approximately 1.5% and 0.8%, respectively, of the
outstanding common stock of Cricket Communications Holdings.
Mr. Jarvis fully exercised his Cricket Communications Holdings stock
options in July 1999. Upon exercise, Mr. Jarvis paid $346,334 in cash and issued
to Cricket Communications Holdings a promissory note for the remaining balance
of $448,666. The promissory note is secured by 498,666 shares of Cricket
Communications Holdings common stock. The note accrues interest at a rate of 9%
per annum, compounded annually, on the outstanding balance of the loan. The loan
matures on August 31, 2000.
Mr. Williams fully exercised his Cricket Communications Holdings stock
options in July 1999 and paid to Cricket Communications the exercise price of
$410,000 in cash.
In March 2000, Mr. Jarvis and Mr. Williams and Michael B. Targoff, also a
director of Leap, purchased 121,483, 63,700, and 166,667 shares of Cricket
Communications Holdings, respectively, at a price of $6.00 per share. The shares
were acquired in exchange for issuance of demand promissory notes issued to
Cricket Communications Holdings by Messrs. Jarvis, Williams and Targoff in the
amounts of $728,898, $382,200 and $1,000,002, respectively. The promissory notes
are secured by the shares and accrue interest at the rate of 10% per annum.
In late September 1998, we provided a $17.5 million loan to Pegaso
Comunicaciones y Servicios, S.A. de C.V., a Mexican company 99%-owned by
Alejandro Burillo Azcarraga, one of our directors and a member of the board's
compensation committee. The purposes of this loan were to facilitate investment
by Pegaso Comunicaciones in Pegaso, a joint venture in which we have an
interest, and to ensure that the investors in Pegaso made all capital
contributions to Pegaso that were required for the acquisition of certain
Mexican telecommunications licenses on September 30, 1998. This loan was paid in
full, as scheduled, in two payments of $7.5 million and $10 million made in
October 1998 and December 1998, respectively. We earned interest at the rate of
13% per annum on the loan to Pegaso Comunicaciones.
In April 1999, we entered into an agreement with Pegaso to provide it with
network management and operations services for five years, subject to earlier
termination in accordance with the terms of the agreement. We generally
subcontracted these services to a subsidiary of an international
telecommunications company. From the September 23, 1998 spin-off of Leap until
April 1999, we also provided management and operations services to Pegaso
through a subsidiary of the international telecommunications company. In fiscal
1999, Pegaso paid us $28.2 million for services plus related expenses under
these arrangements. Mr. Burillo is a director of Leap and he and his affiliates
own an interest of approximately 14.6% in Pegaso. We own an interest of
approximately 22.4% in Pegaso.
TRANSACTIONS WITH QUALCOMM
For a discussion of Leap's relationship with Qualcomm, see "Relationship
with Qualcomm."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
LUCENT EQUIPMENT FINANCING
Cricket Communications has agreed to purchase $330 million of
infrastructure products and services from Lucent Technologies. The agreement is
subject to early termination at Cricket Communications' convenience subject to
payments for equipment purchased. Lucent agreed to finance these purchases plus
additional working capital under a credit facility. The credit facility permits
up to $641 million in total borrowings by Cricket Communications with borrowing
availability based on total amounts of equipment purchased, subject to various
covenants and conditions typical for a loan of this type.
The Lucent credit agreement contains various financial ratio tests and
other covenants that generally restrict the ability of Cricket Communications
and its subsidiaries to, among other things:
- incur additional indebtedness, except for the notes and certain other
limited indebtedness;
- make guarantees;
- grant liens;
- engage in mergers, acquisitions, investments, consolidations,
liquidations, dissolutions and asset sales other than certain exceptions,
such as the acquisition of assets from Chase Telecommunications Holdings;
- make certain restricted payments and dividends;
- engage in transactions with their affiliates;
- prepay certain indebtedness;
- dispose of wireless licenses or cell site interests; and
- make capital expenditures in excess of annual target amounts.
The Lucent credit agreement also contains operating covenants including,
among other things:
- minimum levels of covered potential customers which must increase over
time; and
- minimum levels of customers which must increase over time.
Borrowings under the Lucent credit facility accrue at an interest rate
equal to LIBOR plus 3.5% to 4.25% or a bank base rate plus 2.5% to 3.25%, in
each case with the specific rate based on the ratio of total indebtedness to
EBITDA. Cricket Communications must pay a commitment fee equal to 1.25% per
annum of the commitments under the credit facility until the aggregate principal
amount of borrowings equals $175 million, at which time the rate decreases to
1.0% until the aggregate principal amount equals $350 million, at which time the
rate further decreases to 0.75%. Principal payments are scheduled to begin after
three years with a final maturity after eight years. Repayment is weighted to
the later years of the repayment schedule.
The obligations under the Lucent credit agreement are guaranteed by Cricket
Communications Holdings, all existing and future subsidiaries of Cricket
Communications and each existing or future special purpose subsidiary of Leap
formed to hold wireless licenses. In addition, Leap guarantees certain loans
under the credit agreement. The obligations under the Lucent credit agreement
are secured by all of the stock of Cricket Communications and its subsidiaries,
all of their respective assets, the assets of
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Cricket Communications Holdings and the stock and assets of each special purpose
subsidiary of Leap formed to hold wireless licenses.
ERICSSON EQUIPMENT FINANCING
Cricket Communications also has agreed to purchase $330 million of
next-generation infrastructure products which are currently in development and
related services from Ericsson. Purchases from Ericsson will be on substantially
similar terms to the Lucent agreement, including a credit facility providing for
borrowings up to $495.0 million with borrowing availability based on a ratio of
total amounts of equipment purchased. The commitment of funds by Ericsson is
subject to the development of the next generation equipment, the negotiation of
definitive documentation and the approval of Ericsson's board of directors.
OBLIGATIONS TO THE FCC
We have assumed $11.1 million in debt obligations to the FCC as part of the
purchase price for the wireless licenses from AirGate in January 2000. We also
have assumed or will assume additional debt obligations to the FCC in the
aggregate principal amount of approximately $81.4 million as part of the
purchase price for the acquisition of Chase Telecommunications Holdings and the
pending acquisitions of wireless licenses from PCS Devco, Radiofone and CM PCS.
The following table presents certain information relating to these debt
obligations:
<TABLE>
<CAPTION>
COMMENCEMENT
DATE OF
PRINCIPAL AMOUNT QUARTERLY
AS OF INTEREST PRINCIPAL MATURITY
RELATED ACQUISITION APRIL 30, 2000 RATE PAYMENTS DATE
------------------- ---------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Chase Telecommunications
Holdings(1)......................... $78.8 million 7.00% January 2003 January 2007
AirGate Licenses(1)................... $10.5 million 6.25% July 1999 April 2007
PCS Devco Dayton License(2)........... $ 1.0 million 6.25% October 1999 July 2007
Radiofone Denver License(2)........... $ 1.5 million 9.75% July 1997 April 2007
CM PCS Omaha License(2)............... $ 0.6 million 6.25% July 1999 April 2007
</TABLE>
- -------------------------
(1) We completed the acquisition of wireless licenses from AirGate in January
2000 and we completed our acquisition of substantially all the assets of
Chase Telecommunications Holdings in March 2000.
(2) We have signed acquisition agreements with PCS Devco, Radiofone and CM PCS
but the acquisitions have not been completed and remain subject to closing
conditions, including FCC approval.
SMARTCOM DEFERRED PAYMENT AND CREDIT AGREEMENTS
Smartcom has entered into a Deferred Payment Agreement, as amended and
restated, with Qualcomm related to Smartcom's purchase of equipment, software
and services from Qualcomm. The obligations under the Deferred Payment Agreement
are secured by all of the assets of Smartcom. A Leap subsidiary has agreed to
pledge its shares in Smartcom as collateral for its guarantee of Smartcom's
obligations to Qualcomm under the agreement. The Deferred Payment Agreement
requires Smartcom to meet certain financial and operating covenants, including a
debt to equity ratio and restrictions on Smartcom's ability to pay dividends and
to distribute assets. As a result, substantially all the net assets of Smartcom
are restricted from distribution to Leap. Under the terms of the agreement,
Qualcomm agreed
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to defer collection of principal amounts up to a maximum of $115.7 million
including capitalized interest. The deferred payments bear interest at either a
prime or LIBOR rate, plus an applicable margin. At February 29, 2000, the
weighted average effective rate of interest was 13.0%. Accrued interest may be
added to the outstanding principal amount of the applicable borrowing until
September 2001. Amounts deferred under the agreement must be repaid by September
2006. At February 29, 2000, Leap had $95.3 million outstanding under the
Deferred Payment Agreement.
In February 2000, Smartcom and Qualcomm entered into an Equipment Credit
Agreement related to Smartcom's equipment supply and service agreements with a
vendor. The Equipment Credit Agreement permits up to $38.5 million in
borrowings, including capitalized interest. The Equipment Credit Agreement
provides for certain financial and operating covenants similar to the Deferred
Payment Agreement. Borrowings under the Equipment Credit Agreement accrue at an
interest rate equal to LIBOR plus 5.0% to 7.0% or a bank base rate plus 4.0% to
6.0%, in each case with the specific rate based on certain financial ratios.
Principal payments are scheduled to begin in March 2002 with a final maturity of
September 2006. At February 29, 2000, Smartcom had financed amounts totaling
$18.6 million, including capitalized interest, under the Equipment Credit
Agreement.
In February 2000, Smartcom and Qualcomm entered into a Subscriber Deferred
Payment Agreement related to Smartcom's purchase of handsets and accessories and
test equipment from Qualcomm. Under the terms of the agreement, Qualcomm has
agreed to defer collection of amounts up to a maximum of $11.2 million,
including capitalized interest. The Subscriber Deferred Payment Agreement
provides for certain financial and operating covenants similar to the Deferred
Payment Agreement. Borrowings under the Subscriber Deferred Payment Agreement
accrue at an interest rate equal to LIBOR plus 3.5% to 5.0% or a bank base rate
plus 2.5% to 4.0%, in each case with the specific rate based on certain
financial ratios. Principal outstanding is due at maturity in September 2001. At
February 29, 2000, Leap had financed amounts totaling $5.6 million under the
Subscriber Deferred Payment Agreement.
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DESCRIPTION OF THE NOTES
The outstanding notes were, and the registered notes will be, issued under
an indenture, dated as of February 23, 2000, between Leap, as Issuer, Cricket
Communications Holdings, Inc., as Guarantor, and State Street Bank and Trust
Company, as Trustee, in a private transaction that was not subject to the
registration requirements of the Securities Act. A copy of the indenture is
available upon request from Leap.
The following summary of certain provisions of the indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the indenture, the notes and the guarantee,
including the definitions of certain terms therein and those terms made a part
thereof by reference to the Trust Indenture Act of 1939, as amended. Whenever
particular defined terms of the indenture not otherwise defined herein are
referred to, such defined terms are incorporated herein by reference. For
definitions of certain capitalized terms used in the following summary, see
"-- Certain Definitions." For purposes of the Description of Notes, the words
"we," "our," "ours" and "us" refer only to Leap Wireless International, Inc. and
do not include subsidiaries of Leap Wireless International, Inc., except for
purposes of financial data determined on a consolidated basis.
GENERAL
The form and terms of the registered notes are substantially identical to
the form and terms of the outstanding notes except that the registered notes
will be registered under the Securities Act. Therefore, the registered notes
will not bear legends restricting their transfer and will not be entitled to
registration under the Securities Act. The registered notes will evidence the
same debt as the outstanding notes. The same indenture will govern both the
outstanding notes and the registered notes.
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR NOTES
The senior notes:
- were initially limited to $225 million in aggregate principal amount at
maturity;
- mature on April 15, 2010; and
- accrue interest at the rate of 12 1/2% per annum.
Interest on the senior notes is payable semiannually in arrears on April 15
and October 15 of each year, commencing April 15, 2000, to Holders of record at
the close of business on the April 1 or October 1 immediately preceding the
Interest Payment Date. Interest payments due on the first seven Interest Payment
Dates for the senior notes are secured by amounts on deposit in the Pledge
Account described below. See "-- Security" below. See "-- Registration Rights"
for a description of the circumstances under which the interest rate on the
notes may be increased.
We may, subject to the covenants described below under "-- Covenants" and
applicable law, issue additional senior notes under the indenture having
identical terms and conditions to the senior notes offered hereby. The senior
notes offered hereby and any additional senior notes subsequently issued would
be treated as a single class for all purposes of the indenture.
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MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR DISCOUNT NOTES
The senior discount notes:
- were initially limited to $668 million in aggregate principal amount at
maturity;
- mature on April 15, 2010; and
- were offered at a discount from their aggregate principal amount at
maturity, with the initial Accreted Value per $1,000 in principal amount
of senior discount notes equal to $486.68 (representing the original
price at which the senior discount notes were offered).
The senior discount notes accrete (representing the amortization of
original issue discount) on a semiannual bond equivalent basis using a 360-day
year comprised of twelve 30-day months such that the Accreted Value shall be
equal to the full principal amount at maturity of the senior discount notes on
April 15, 2005 (the "Full Accretion Date"). See "Certain U.S. Federal Tax
Considerations."
No interest is payable in cash on the senior discount notes prior to the
Full Accretion Date, other than interest payable as a result of an increase in
the interest as described under the caption "-- Registration Rights." Beginning
on the Full Accretion Date, the senior discount notes accrue interest at the
rate of 14 1/2% per annum from the Full Accretion Date or from the most recent
Interest Payment Date to which interest has been paid, payable in cash
semiannually in arrears on April 15 and October 15 of each year, commencing
October 15, 2005, to Holders of record on the close of business on the April 1
or October 1 immediately preceding the Interest Payment Date. See
"-- Registration Rights" for a description of the circumstances under which the
interest rate on the notes may be increased.
We may, subject to the covenants described below under "-- Covenants" and
applicable law, issue additional senior discount notes under the indenture
having identical terms and conditions to the senior discount notes offered
hereby. The senior discount notes offered hereby and any additional senior
discount notes subsequently issued would be treated as a single class for all
purposes of the indenture.
RANKING
The notes (except to the extent described under "-- Security" below with
respect to the senior notes):
- are senior, unsecured obligations of Leap and rank equally in right of
payment with all of our existing and future senior unsecured indebtedness
and will be senior in right of payment to all of our future subordinated
indebtedness; and
- are not secured by any assets and are effectively subordinated to any of
our secured indebtedness to the extent of the value of the assets
securing such indebtedness and to all indebtedness and other liabilities
(including trade payables and lease obligations) of our subsidiaries
other than any Guarantor.
As of February 29, 2000, we and our subsidiaries had approximately $302.7
million of indebtedness to which Holders of the notes would have been
effectively subordinated. See "Capitalization."
Our operations are conducted through our subsidiaries and, therefore, we
are dependent upon cash flow from those entities to meet our obligations. None
of our subsidiaries other than any Guarantor will have any direct obligation to
pay amounts due on the notes and will not guarantee the notes. As of the
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date of this exchange offer, Cricket Communications Holdings is our only
subsidiary which is a Guarantor. The Guarantee:
- is a senior, unsecured obligation of the Guarantor;
- ranks equally in right of payment with all existing and future senior,
unsecured indebtedness of the Guarantor; and
- is subordinate in right of payment to all secured indebtedness of the
Guarantor to the extent of the value of the assets securing such
indebtedness.
See "Risk Factors -- Our Ability to Service the Notes Depends on Our Ability to
Get Cash from Our Subsidiaries" and "-- The Notes Will be Effectively
Subordinated to Our Secured Debt." We and our subsidiaries will be permitted to
incur additional secured and unsecured indebtedness. See "Risk Factors -- We
Will Have Substantial Indebtedness, and We May Incur More Indebtedness." See
"-- Covenants -- Limitation on Indebtedness" for a description of additional
indebtedness that may be incurred.
We granted a security interest to the Trustee for the benefit of the
Holders of the senior notes in the Pledge Account and all amounts on deposit
therein. The Holders of the senior notes have a claim on the amounts on deposit
in the Pledge Account and any investment and reinvestment thereof that is prior
to the claims of our other creditors.
PAYMENT, DENOMINATIONS
If a Holder has given us wire transfer instructions, we will make all
principal, premium, if any, and interest payments on that Holder's notes in
accordance with those instructions. All other payments on the notes will be
payable, and the notes may be exchanged or transferred, at our office or agency
maintained for such purpose in the Borough of Manhattan, the City of New York
(which initially will be the corporate trust office of the Trustee at 61
Broadway, New York, New York 10006); unless we elect to make interest payments
by check mailed to the Holders at their addresses set forth in the register of
Holders.
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity of the notes and
integral multiples thereof. See "-- Book-Entry; Delivery and Form." No service
charge will be made for any registration of transfer or exchange of notes, but
we may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith.
GUARANTEE
Cricket Communications Holdings has jointly and severally with any future
Guarantors, as primary obligor and not merely as surety, unconditionally and
irrevocably guaranteed (the "Guarantee") the due and punctual payment of the
principal of, premium, if any, and interest on the notes, on an unsecured basis,
in accordance with the terms thereof and of the indenture. The Guarantee is
limited so as not to constitute a fraudulent conveyance under applicable law.
See, however, "Risk Factors -- Fraudulent Conveyance Considerations." We will
cause any future domestic Restricted Subsidiary (other than any direct or
indirect Subsidiary of Cricket Communications Holdings or any License
Subsidiary) and any Restricted Subsidiary which guarantees certain Indebtedness
of ours to execute and deliver to the Trustee a Guarantee pursuant to which such
Restricted Subsidiary will jointly and severally with all other Guarantors, as
primary obligor and not merely as surety, unconditionally and irrevocably
guarantee the due and punctual payment of the principal of, premium, if any, and
interest on the notes, on an unsecured basis, in accordance with the terms
thereof and of the indenture. See "-- Covenants -- Limitation on
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Issuances of Guarantees by Restricted Subsidiaries" and "-- Future Subsidiary
Guarantors." If no Event of Default has occurred and is continuing, concurrently
with any sale or disposition of all of the Capital Stock of any Guarantor or all
or substantially all of the assets of any Guarantor to any Person that is not an
Affiliate of ours, which sale or disposition is in compliance with the covenant
entitled "-- Limitation on Asset Sales" described below, or upon the designation
of any Guarantor as an Unrestricted Subsidiary in compliance with the indenture,
such Guarantor will automatically and unconditionally be released from all
obligations under its Guarantee.
SECURITY
The Trustee established the Pledge Account in connection with the issuance
of the senior notes. On the closing date of our units offering, we deposited in
the Pledge Account, for the benefit of the Holders of the senior notes, an
amount from the net proceeds of the units offering of the senior notes
sufficient to acquire Pledged Securities in an amount as will be sufficient upon
receipt of scheduled interest and principal payments on such Pledged Securities
to provide payment in full when due of the first seven scheduled interest
payments due on the senior notes. We used approximately $78.3 million of the net
proceeds from the February 2000 units offering, which included the senior notes,
to acquire the Pledged Securities. The Pledged Securities were deposited in the
Pledge Account on the closing date of the units offering.
All amounts deposited in the Pledge Account and the Pledged Securities were
pledged by us to the Trustee for the benefit of the Holders of the senior notes
pursuant to the Pledge Agreement. Pursuant to the Pledge Agreement, immediately
prior to an Interest Payment Date for the senior notes, we may either deposit
with the Trustee from funds otherwise available to us cash sufficient to pay the
interest scheduled to be paid on such date or we may direct the Trustee to
release from the Pledge Account proceeds sufficient to pay interest then due on
the senior notes. In the event we exercise the former option, we may direct the
Trustee to release a like amount of proceeds from the Pledge Account. The
Pledged Securities and Pledge Account also secure the repayment of the principal
amount and premium on the senior notes.
If an Event of Default shall have occurred and be continuing and the senior
notes shall have been accelerated, the Trustee shall apply the funds in the
Pledge Account in the following order of priority:
- first, to the Trustee for amounts due to the Trustee under the indenture;
- second, to the Holders for amounts due and unpaid on the senior notes for
interest, ratably, without preference or priority of any kind, according
to the amounts due and payable on the senior notes for interest; and
- third, to the Holders for amounts due and unpaid on the senior notes for
principal, ratably, without preference or priority of any kind, according
to the amounts due and payable on the senior notes for principal.
Under the Pledge Agreement, once we make the first six scheduled interest
payments on the senior notes, all of the remaining Pledged Securities, if any,
will be released from the Pledge Account and thereafter the senior notes will be
unsecured.
OPTIONAL REDEMPTION
OPTIONAL REDEMPTION OF SENIOR NOTES
At our option, the senior notes are redeemable, in whole or in part, at any
time or from time to time, on or after April 15, 2005 and prior to maturity,
upon not less than 30 nor more than 60 days' prior notice
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mailed by first class mail to each Holder's last address as it appears in the
Security Register, at the following Redemption Prices (expressed as percentages
of principal amount), plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is prior to the Redemption Date to receive interest due
on an Interest Payment Date), if redeemed during the 12-month period commencing
April 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2005............................................ 106.250%
2006............................................ 104.167%
2007............................................ 102.083%
2008 and thereafter............................. 100.000%
</TABLE>
In addition, at any time prior to April 15, 2003, we may redeem up to 35%
of the aggregate principal amount of the senior notes originally issued with the
Net Cash Proceeds of one or more Qualified Equity Offerings, at any time as a
whole or from time to time in part, at a Redemption Price (expressed as a
percentage of principal amount) of 112.50%, plus accrued and unpaid interest to
the Redemption Date (subject to the rights of Holders of record on the relevant
Regular Record Date that is prior to the Redemption Date to receive interest due
on an Interest Payment Date); provided that at least 65% of the aggregate
principal amount of senior notes originally issued remains outstanding after
each such redemption and notice of such redemption is given to the Holders
within 60 days after consummation of such Qualified Equity Offering.
OPTIONAL REDEMPTION OF SENIOR DISCOUNT NOTES
At our option, the senior discount notes will be redeemable, in whole or in
part, at any time or from time to time, on or after April 15, 2005 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the following Redemption Prices (expressed as percentages of
principal amount at maturity), plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is prior to the Redemption Date to receive interest due
on an Interest Payment Date), if redeemed during the 12-month period commencing
April 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2005............................................ 107.250%
2006............................................ 104.833%
2007............................................ 102.417%
2008 and thereafter............................. 100.000%
</TABLE>
In addition, at any time prior to April 15, 2003, we may redeem up to 35%
of the aggregate principal amount at maturity of the senior discount notes
originally issued with the Net Cash Proceeds of one or more Qualified Equity
Offerings, at any time as a whole or from time to time in part, at a Redemption
Price (expressed as a percentage of Accreted Value on the Redemption Date) of
114.5%, plus accrued and unpaid interest to the Redemption Date (subject to the
rights of Holders of record on the relevant Regular Record Date that is prior to
the Redemption Date to receive interest due on an Interest Payment Date);
provided that 65% of the aggregate principal amount at maturity of the senior
discount notes originally issued remains outstanding after each such redemption
and notice of such redemption is given to the Holders within 60 days after
consummation of such Qualified Equity Offering.
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SELECTION
In the case of any partial redemption, selection of the senior notes or
senior discount notes, as the case may be, to be redeemed will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed or, if the notes are not listed
on a national securities exchange, on a pro rata basis or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate;
provided that no notes of $1,000 or less in principal amount of the senior notes
or Accreted Value of the senior discount notes shall be redeemed in part. If any
note is to be redeemed in part only, the notice of redemption relating to such
note shall state the portion of the principal amount thereof to be redeemed. A
new note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original note.
SINKING FUND
The notes will not have the benefit of any sinking fund.
REGISTRATION RIGHTS
We entered into a registration rights agreement on February 23, 2000 with
Morgan, Stanley & Co. Incorporated and certain other placement agents. Pursuant
to the registration rights agreement, we agreed to use our best efforts, at our
cost, to file and cause to become effective this registration statement with
respect to a registered offer to exchange the senior notes and the senior
discount notes, respectively, for senior notes and senior discount notes,
respectively (the "Exchange Notes"), to be issued under the indenture with terms
identical to the senior notes and senior discount notes, respectively (except
that the Exchange Notes will not be subject to the interest rate step-up
provision applicable to the outstanding notes or bear legends restricting the
transfer thereof).
Upon this registration statement being declared effective, we will offer
the Exchange Notes in return for surrender of the notes. The exchange offer will
remain open for not less than 20 business days after the date notice of the
exchange offer is mailed to Holders. For each senior note or senior discount
note surrendered to us under the exchange offer, the Holder will receive an
Exchange Note of equal principal amount at maturity. Interest on each Exchange
Note issued in exchange for a senior note will accrue from the last Interest
Payment Date on which interest was paid on the senior notes so surrendered. The
Accreted Value of each Exchange Note issued in exchange for a senior discount
note will be identical to, and will be determined in the same manner as, the
Accreted Value of the senior discount notes surrendered and exchanged. Interest
on each Exchange Note issued in exchange for a senior discount note will be
calculated and paid in the same manner as interest on the senior discount notes
surrendered and exchanged.
In the event that applicable interpretations of the staff of the SEC do not
permit us to effect the exchange offer, or under certain other circumstances, we
will, at our cost, use our best efforts to cause to become effective a shelf
registration statement (the "Shelf Registration Statement") with respect to
resales of the notes and to keep such registration statement effective until the
earlier of the expiration of the time period referred to in Rule 144(k) under
the Securities Act and the date upon which all of the notes covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement. We will, in the event of such a shelf registration, provide to each
registered Holder copies of the prospectus, notify each registered Holder when
the Shelf Registration Statement for the notes has
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become effective and take certain other actions as are required to permit
resales of the notes. A Holder that sells its notes pursuant to the Shelf
Registration Statement generally will be:
- required to be named as a selling security holder in the related
prospectus;
- required to deliver a prospectus to purchasers;
- subject to certain of the civil liability provisions under the Securities
Act in connection with such sales; and
- bound by the provisions of the registration rights agreement that are
applicable to such a Holder (including certain indemnification
obligations).
If the exchange offer is not consummated and a Shelf Registration Statement
is not declared effective on or prior to August 21, 2000 (180 days after the
Closing Date):
- the interest rate borne by the senior notes will be increased by .50% per
annum over the rate shown on the cover page of this prospectus; and
- interest in addition to the accrual of original issue discount and in
addition to interest otherwise due for periods after the Full Accretion
Date will accrue on the senior discount notes at a rate per annum equal
to .50% of the Accreted Value thereof,
in each case until the exchange offer is consummated or a Shelf Registration is
declared effective. In the event of such an increase in the per annum interest
rate on the notes, the Trustee will provide notice thereof to the Holders upon
receipt of notice from us of such increase.
We are entitled to close the exchange offer 20 business days after the
commencement thereof, provided that we have accepted all notes validly
surrendered in accordance with the terms of the exchange offer. Notes not
tendered in the exchange offer will bear interest at the rate set forth on the
cover page of this prospectus and be subject to all of the terms and conditions
specified in the indenture, including transfer restrictions. Holders of notes
who do not participate in the exchange offer may thereafter hold a less liquid
security.
We are required to allow participating broker-dealers and other persons, if
any, with similar prospectus delivery requirements to use the prospectus
contained in this registration statement in connection with the resale of
Exchange Notes for a period of 180 days from the issuance of the Exchange Notes.
This summary of certain provisions of the registration rights agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the registration rights
agreement, a copy of which is available from us upon request.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the indenture. Reference is made to the
indenture for the definition of all terms as well as any other capitalized term
used herein for which no definition is provided.
"Accreted Value" means, as of any date prior to April 15, 2005, an amount
per $1,000 principal amount at maturity of the senior discount notes that is
equal to the sum of (a) the initial offering price ($486.68 per $1,000 principal
amount at maturity of the senior discount notes) of such senior discount notes
and (b) the portion of the excess of the principal amount of such senior
discount notes over such initial offering price which shall have been amortized
through such date, such amount to be so amortized on a daily basis and
compounded semiannually on each April 15 and October 15 at the rate of 14 1/2%
per
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annum from the date of original issue of the senior discount notes through the
date of determination computed on the basis of a 360-day year of twelve 30-day
months, and as of any date on or after April 15, 2005, the principal amount of
each senior discount note.
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with an Asset Acquisition by a Restricted Subsidiary and not Incurred in
connection with, or in anticipation of, such Person becoming a Restricted
Subsidiary or such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of Leap and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person that is not a Restricted Subsidiary,
except to the extent of the amount of dividends or other distributions
actually paid to Leap or any of its Restricted Subsidiaries by such other
Person during such period;
(ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
the "Limitation on Restricted Payments" covenant described below (and in
such case, except to the extent includable pursuant to clause (i) above),
the net income (or loss) of any Person accrued prior to the date it becomes
a Restricted Subsidiary or is merged into or consolidated with Leap or any
of its Restricted Subsidiaries or all or substantially all of the property
and assets of such Person are acquired by Leap or any of its Restricted
Subsidiaries;
(iii) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time of
determination permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary;
(iv) any gains or losses (on an after-tax basis) attributable to sales
of assets of Leap or any Restricted Subsidiary other than in the ordinary
course of business;
(v) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
the "Limitation on Restricted Payments" covenant described below, any
amount paid or accrued as dividends on Preferred Stock of Leap or any
Restricted Subsidiary owned by Persons other than Leap and any of its
Restricted Subsidiaries;
(vi) all extraordinary gains and extraordinary losses;
(vii) any compensation expense paid or payable solely with Capital
Stock (other than Disqualified Capital Stock) of Leap or any options,
warrants or other rights to acquire Capital Stock (other than Disqualified
Capital Stock) of Leap; and
(viii) the cumulative effect of a change in accounting principles.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of Leap and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), excluding write-ups of capital
assets (other than write-ups of tangible assets in connection with accounting
for acquisitions made in conformity with GAAP), after deducting therefrom (i)
all current liabilities of Leap and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
copyrights, organizational and developmental expenses, unamortized
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debt discount and expense, unamortized deferred charges and other like
intangibles (other than FCC license acquisition costs), all as set forth on the
most recent quarterly or annual consolidated balance sheet of Leap and its
Restricted Subsidiaries, prepared in conformity with GAAP and filed with the
Trustee pursuant to the "Commission Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by Leap or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with Leap
or any of its Restricted Subsidiaries; provided that such Person's primary
business is related, ancillary or complementary to the businesses of Leap and
its Restricted Subsidiaries on the date of such investment or (ii) an
acquisition by Leap or any of its Restricted Subsidiaries of the property and
assets of any Person other than Leap or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business of such Person;
provided that the property and assets acquired are related, ancillary or
complementary to the businesses of Leap and its Restricted Subsidiaries on the
date of such acquisition.
"Asset Disposition" means the sale or other disposition by Leap or any of
its Restricted Subsidiaries (other than to Leap or another Restricted
Subsidiary) of (i) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of Leap or any of its Restricted
Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by Leap or any of its Restricted
Subsidiaries to any Person other than Leap or any of its Restricted Subsidiaries
of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or
substantially all of the property and assets of an operating unit or business of
Leap or any of its Restricted Subsidiaries or (iii) any other property and
assets of Leap or any of its Restricted Subsidiaries outside the ordinary course
of business of Leap or such Restricted Subsidiary and, in each case, that is not
governed by the provisions of the indenture applicable to mergers,
consolidations and sales of all or substantially all of the assets of Leap;
provided that "Asset Sale" shall not include (a) sales or other dispositions of
inventory, receivables and other current assets, (b) sales, transfers or other
dispositions of assets constituting a Restricted Payment permitted to be made
under the "Limitation on Restricted Payments" covenant, (c) sales or other
dispositions of assets for consideration at least equal to the fair market value
of the assets sold or disposed of (as determined by the Board of Directors whose
good faith determination shall be conclusive and evidenced by a Board
Resolution), provided that the consideration received consists of property or
assets (other than current assets) of a nature or type or that are used in a
business (or a company having property or assets of a nature or type, or engaged
in a business) similar or related to the nature or type of the property and
assets of, or business of, Leap and its Restricted Subsidiaries existing on the
date of such sale or other disposition or (d) sales or other dispositions of
assets with a fair market value not in excess of $1,000,000 per year (as
certified in an Officer's Certificate).
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
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"Board of Directors" means the Board of Directors of Leap or any committee
thereof duly authorized to act on behalf of the Board of Directors.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the Closing Date, including, without limitation, all Common Stock
and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, Personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Section 13(d) or 14(d)(2) under the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 35% of the total voting power of the Voting Stock of Leap on a fully
diluted basis; or (ii) individuals who on the Closing Date constitute the Board
of Directors (together with any new directors whose election by the Board of
Directors or whose nomination for election by Leap's stockholders was approved
by a vote of at least a majority of the members of the Board of Directors then
in office who either were members of the Board of Directors on the Closing Date
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board of Directors
then in office.
"Closing Date" means the date on which the notes were originally issued
under the indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether now outstanding or issued after the Closing Date, including
without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (i) Consolidated Interest Expense,
(ii) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or sales of
assets), (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Adjusted Consolidated Net Income (other than items
that will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for Leap and
its Restricted Subsidiaries in conformity with GAAP; provided that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to (a) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (b) the
percentage ownership interest in the income of such Restricted Subsidiary not
owned on the last day of such period by Leap or any of its Restricted
Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is guaranteed or secured by Leap or any of its Restricted
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Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be
accrued by Leap and its Restricted Subsidiaries during such period; excluding,
however, (i) any amount of such interest of any Restricted Subsidiary if the net
income of such Restricted Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof (but
only in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses
(and any amortization thereof) payable in connection with the offering of the
notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of Leap and its Restricted Subsidiaries
on a consolidated basis outstanding on such Transaction Date to (ii) the
aggregate amount of Consolidated EBITDA for the then most recent four fiscal
quarters for which financial statements of Leap have been filed with the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant described
below (such four fiscal quarter period being the "Reference Period"); provided
that, in making the foregoing calculation, (a) pro forma effect shall be given
to any Indebtedness that is to be Incurred or repaid on the Transaction Date as
if such Incurrence or repayment had occurred on the first day of such Reference
Period; (b) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of proceeds
of any Asset Disposition) that occur during such Reference Period or thereafter
but on or prior to the Transaction Date as if they had occurred and such
proceeds had been applied on the first day of such Reference Period; and (c) pro
forma effect shall be given to asset dispositions and asset acquisitions
(including giving pro forma effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a Restricted
Subsidiary or has been merged with or into Leap or any Restricted Subsidiary
during such Reference Period or thereafter but on or prior to the Transaction
Date and that would have constituted Asset Dispositions or Asset Acquisitions
had such transactions occurred when such Person was a Restricted Subsidiary as
if such asset dispositions or asset acquisitions were Asset Dispositions or
Asset Acquisitions that occurred on the first day of such Reference Period,
provided that to the extent that clause (b) or (c) of this sentence requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line of
business of the Person, that is acquired or disposed for which financial
information is available and shall be prepared in good faith by Leap on a basis
consistent with Regulation S-X under the Securities Act.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of Leap and its Restricted Subsidiaries filed with
the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant
described below (which shall be as of a date not more than 90 days prior to the
date of such computation, and which shall not take into account Unrestricted
Subsidiaries), less any amounts attributable to Disqualified Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of treasury
stock and the principal amount of any promissory notes receivable from the sale
of the Capital Stock of Leap or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Cricket Communications Holdings" means Cricket Communications Holdings,
Inc.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
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"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction, including
an acquisition of FCC wireless licenses, a member of the Board of Directors who
is not an officer or employee of Leap and would not be a party to, or have a
financial interest in, such transaction. For purposes of this definition, no
person would be deemed not to be a Disinterested Director solely because such
person holds Capital Stock of Leap.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the notes, (ii) redeemable at the option of the Holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving Holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the Holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of notes upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to Leap's repurchase of
such notes as are required to be repurchased pursuant to the "Limitation on
Asset Sales" and "Repurchase of notes Upon a Change of Control" covenants
described below.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that the fair market value of any FCC
wireless licenses for purposes of the definition of "Qualified Proceeds" shall
be as determined in good faith by the Board of Directors, including a majority
of the Disinterested Directors, which determination shall be conclusive if
evidenced by a Board Resolution.
"FCC" means the Federal Communications Commission.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the notes and (ii) except as otherwise provided,
the amortization of any amount required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantees" mean any guarantees by the Guarantors of the obligations of
Leap under the indenture and the notes.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly Guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
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advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "guarantee" used as a verb has a corresponding meaning.
"Guarantor" means any Subsidiary of Leap that executes a Guarantee in
accordance with the provisions of the indenture and their respective successors
and assigns.
"Holder" means any record Holder of a Note.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(i) all indebtedness of such Person for borrowed money;
(ii) all obligations of such Person evidenced by bonds, notes, notes
or other similar instruments;
(iii) all obligations of such Person in respect of letters of credit
or other similar instruments (including reimbursement obligations with
respect thereto, but excluding obligations with respect to letters of
credit (including trade letters of credit) securing obligations (other than
obligations described in (i) or (ii) above or (v), (vi) or (vii) below)
entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if drawn upon, to the
extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement);
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
except Trade Payables;
(v) all Capitalized Lease Obligations;
(vi) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided that the amount of such Indebtedness shall be the lesser of (a)
the fair market value of such asset at such date of determination and (b)
the amount of such Indebtedness;
(vii) all Indebtedness of other Persons guaranteed by such Person to
the extent such Indebtedness is guaranteed by such Person; and
(viii) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.
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The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date (or in the case of a revolving credit or other
similar facility, the total amount of funds outstanding and/or available on the
date of determination) of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided (1) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the unamortized
portion of the original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP, (2) money borrowed at the time
of the Incurrence of any Indebtedness in order to pre-fund the payment of
interest on such Indebtedness shall be deemed not to be "Indebtedness" so long
as such money is held to secure the payment of such interest, (3) contingent
obligations arising in connection with the acquisition of any business or
Person, based on the future performance of such business or Person, shall not
constitute Indebtedness except to the extent such obligations are not paid
within seven business days of the date such contingency is resolved under GAAP
and are recorded as a liability on the books of Leap and its Subsidiaries and
(4) liabilities for federal, state, local or other taxes shall not constitute
Indebtedness.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of Leap or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, notes or other similar
instruments issued by, such Person and shall include (i) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market
value of the Capital Stock (or any other Investment), held by Leap or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant. For purposes of the
definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (a) the amount of or a reduction in an
Investment shall be equal to the fair market value thereof at the time such
Investment is made or reduced and (b) in the event Leap or any Restricted
Subsidiary makes an Investment by transferring assets to any Person and as part
of such transaction receives Net Cash Proceeds, the amount of such Investment
shall be the fair market value of the assets less the amount of Net Cash
Proceeds so received, provided that the Net Cash proceeds are applied in
accordance with clause (a) and (b) of the "Limitation on Asset Sales" covenant.
"License Subsidiary" means a Wholly Owned Subsidiary of Leap directly owned
by Leap formed for the purpose of holding wireless licenses granted by the FCC.
"Licensed Domestic POPS" means the number of potential customers in the
geographic areas within the United States covered by wireless licenses granted
by the FCC and owned by Leap or any of its domestic Restricted Subsidiaries
based on population statistics published in a recognized demographic data source
using as a basis for its population estimates the most recent U.S. Census Bureau
Data.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
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"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (i) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to Leap or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of (a) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (b) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of Leap and its Restricted
Subsidiaries, taken as a whole, (c) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (1) is
secured by a Lien on the property or assets sold or (2) is required to be paid
as a result of such sale and (d) appropriate amounts to be provided by Leap or
any Restricted Subsidiary of Leap as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (ii) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to Leap or any Restricted Subsidiary of Leap) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer by Leap to purchase notes from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that
all notes validly tendered will be accepted for payment on a pro rata
basis;
(ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Payment Date");
(iii) that any note not tendered will continue to accrue interest or
original issue discount pursuant to its terms;
(iv) that, unless Leap defaults in the payment of the purchase price,
any note accepted for payment pursuant to the Offer to Purchase shall cease
to accrue interest or original issue discount on and after the Payment
Date;
(v) that Holders electing to have a note purchased pursuant to the
Offer to Purchase will be required to surrender the note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
(vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
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amount of notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such notes purchased; and
(vii) that Holders whose notes are being purchased only in part will
be issued new notes equal in principal amount to the unpurchased portion of
the notes surrendered; provided that each note purchased shall be in an
integral multiple of $1,000 of the principal amount at maturity of the
notes and each new note issued shall be in a principal amount at maturity
of $1,000 or integral multiples thereof.
On the Payment Date, Leap shall (a) accept for payment on a pro rata basis notes
or portions thereof validly tendered pursuant to an Offer to Purchase: (b)
deposit with the Paying Agent money sufficient to pay the purchase price of all
notes or portions thereof so accepted; and (c) deliver, or cause to be
delivered, to the Trustee all notes or portions thereof so accepted together
with an Officer's Certificate specifying the notes or portions thereof accepted
for payment by Leap. The Paying Agent shall promptly mail to the Holders of
notes so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new note equal in
principal amount to any unpurchased portion of the note surrendered; provided
that each note purchased shall be in an integral multiple of $1,000 of the
principal amount at maturity of the notes and each new note issued shall be in a
principal amount at maturity of $1,000 or integral multiples thereof. Leap will
publicly announce the results of an Offer to Purchase as soon as practicable
after the Payment Date. The Trustee shall act as the Paying Agent for an Offer
to Purchase. Leap will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that Leap is required to repurchase
notes pursuant to an Offer to Purchase. To the extent that the provisions of any
applicable federal or state securities laws or regulations conflict with the
provision of the indenture relating to an Offer to Purchase, Leap will comply
with such laws or regulations and will not be deemed to have breached such
provisions of the indenture by virtue thereof.
"Officer's Certificate" of any Person means a certificate signed on behalf
of such Person by the principal executive officer, the principal accounting
officer or the principal financial officer of such Person.
"Permitted Cricket Holdings Shares and Options" means the issuance by
Cricket Communications Holdings, Inc. of (i) shares of its common stock upon the
exercise of that certain warrant to be issued to Chase Telecommunications
Holdings, Inc. for a number of shares not to exceed 1% of its outstanding common
stock and (ii) options for common stock issued pursuant to stock option plans of
Cricket Communications Holdings, which have been approved by the Board of
Directors and shares of common stock issued upon exercise of such options.
"Permitted Investment" means:
(i) an Investment in Leap or a domestic Restricted Subsidiary or a
Person which will, upon the making of such Investment, become a domestic
Restricted Subsidiary or be merged or consolidated with or into or transfer
or convey all or substantially all its assets to, Leap or a domestic
Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of Leap and its
Restricted Subsidiaries on the date of such Investment;
(ii) Temporary Cash Investments;
(iii) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP;
(iv) stock, obligations or securities received in satisfaction of
judgments;
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(v) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility and worker's compensation, performance and
other similar deposits made in the ordinary course of business;
(vi) Interest Rate Agreements and Currency Agreements designed solely
to protect Leap and its Restricted Subsidiaries against fluctuations in
interest rates or foreign currency exchange rates;
(vii) loans or advances to officers or employees of Leap or any
Restricted Subsidiary that do not in the aggregate exceed $3 million at any
time outstanding;
(viii) Investments in Restricted Subsidiaries of Leap in Chile not to
exceed $100 million in the aggregate after the Closing Date;
(ix) Investments existing on the Closing Date;
(x) Investments made as a result of the receipt of non-cash
consideration from an Asset Sale that was made in compliance with the
"Asset Sale" covenant; and
(xi) Investments in securities received in satisfaction of accounts
receivable pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy of the obligor on such accounts receivable.
"Permitted Liens" means:
(i) Liens for taxes, assessments, governmental charges or claims that
are being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(ii) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(iv) Liens incurred or deposits made (including deposits made to the
FCC) to secure the performance of tenders, bids, leases, statutory or
regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money);
(v) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of Leap or
any of its Restricted Subsidiaries;
(vi) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Closing Date; provided that (a) such
Lien is created solely for the purpose of securing Indebtedness Incurred,
in accordance with the "Limitation on Indebtedness" covenant described
below, (1) to finance the cost (including the cost of design, development,
acquisition, construction, installation, integration or improvement) of the
item of property or assets subject thereto and such Lien is created prior
to, at the time of or within six months after the later of the acquisition,
the completion of construction or the commencement of full operation of
such property or (2) to
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refinance any Indebtedness previously so secured, (b) the principal amount
of the Indebtedness secured by such Lien does not exceed 100% of such cost
and (c) any such Lien shall not extend to or cover any property or assets
other than such item of property or assets and any improvements on such
item;
(vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of Leap and its Restricted
Subsidiaries, taken as a whole;
(viii) any interest or title of a lessor in the property subject to
any Capitalized Lease or operating lease;
(ix) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(x) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do
not extend to or cover any property or assets of Leap or any Restricted
Subsidiary other than the property or assets acquired;
(xi) Liens in favor of Leap or any Restricted Subsidiary;
(xii) Liens arising from the rendering of a final judgment or order
against Leap or any Restricted Subsidiary of Leap that does not give rise
to an Event of Default;
(xiii) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to
such letters of credit and the products and proceeds thereof;
(xiv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xv) Liens encumbering customary initial deposits and margin deposit,
and other Liens that are either within the general parameters customary in
the industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Interest Rate Agreements and Currency
Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed solely to protect
Leap or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities;
(xvi) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
Leap or any of its Restricted Subsidiaries in the ordinary course of
business;
(xvii) Liens on or sales of receivables;
(xviii) Liens on wireless licenses issued by the FCC to secure
obligations in favor of the FCC;
(xix) Liens on cash set aside at the time of the Incurrence of any
Indebtedness, or government securities purchased with such cash, in either
case to the extent such cash or government securities prefund the payment
of interest on such Indebtedness and are held in an escrow account or
similar arrangement to be applied for such purpose;
(xx) Liens on the Capital Stock of License Subsidiaries to secure
Indebtedness under credit facilities with any vendor, supplier or
contractor (or any financial institution providing financing arranged by or
on behalf of such vendor, supplier or contractor) permitted to be incurred
under the "Limitation on Indebtedness" covenant;
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(xxi) Liens on promissory notes evidencing intercompany loans from
Leap to Restricted Subsidiaries to secure Indebtedness under credit
facilities with any vendor, supplier or contractor (or any financial
institution providing financing arranged by or on behalf of such vendor,
supplier or contractor) permitted to be Incurred under the "Limitation on
Indebtedness" covenant; and
(xxii) Liens that secure Indebtedness with an aggregate principal
amount not in excess of $10 million at any time outstanding.
"Pledge Account" means an account established with a securities
intermediary for the benefit of the Trustee pursuant to the terms of the Pledge
Agreement for the deposit of certain of the net cash proceeds from the senior
notes and the Pledged Securities to be purchased by Leap with such net cash
proceeds and all proceeds therefrom.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by Leap in favor of the Trustee governing the
security interest in, and the disbursement of funds from, the Pledge Account, as
such agreement may be amended, restated, supplemented or otherwise modified from
time to time.
"Pledged Securities" means the U.S. Government Obligations to be purchased
by Leap with a portion of the proceeds from the issuance and sale of the senior
notes and held by the Trustee in the Pledge Account in accordance with the
Pledge Agreement.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
now outstanding or issued after the Closing Date, including, without limitation,
all series and classes of such preferred stock or preference stock.
"Qualified Equity Offering" means an underwritten primary public offering
or private placement of Capital Stock (other than Disqualified Stock) of Leap
resulting in aggregate Net Cash Proceeds to Leap of $50 million or more;
provided, however, that no public offering or private placement consummated on,
or within 180 days after, the Closing Date shall constitute a Qualified Equity
Offering.
"Qualified Proceeds" means (i) Net Cash Proceeds received by Leap on or
after the Closing Date from the issuance and sale of its Capital Stock (other
than Disqualified Stock) to a Person that is not a Subsidiary of Leap and (ii)
80% of the fair market value on the date of acquisition of FCC wireless licenses
acquired by Leap or its Restricted Subsidiaries after the Closing Date to the
extent the consideration paid therefor is Capital Stock of Leap (other than
Disqualified Stock).
"Restricted Subsidiary" means any Subsidiary of Leap other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group, a division of the McGraw-Hill
Companies.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following:
(i) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof, in each case
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(other than with respect to Pledged Securities) maturing within one year
after the date of acquisition;
(ii) time deposit accounts, certificates of deposit and money market
deposits maturing within 180 days of the date of acquisition thereof issued
by a bank or trust company which is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under
the Securities Act) or any moneymarket fund sponsored by a registered
broker dealer or mutual fund distribution;
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above;
(iv) commercial paper, maturing not more than 270 days after the date
of acquisition, issued by a corporation (other than an Affiliate of Leap)
organized and in existence under the laws of the United States of America,
any state thereof or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is
made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P; and
(v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by Leap or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of Leap that at the time
of determination shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of Leap) to
be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of,
or owns or holds any Lien on any property of, Leap or any Restricted Subsidiary;
provided that (a) any guarantee by Leap or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by Leap or such Restricted
Subsidiary (or both, if applicable) at the time of such designation; (b) either
(1) the Subsidiary to be so designated has total assets of $1,000 or less or (2)
if such Subsidiary has assets greater than $1,000, such designation would be
permitted under the "Limitation on Restricted Payments" covenant described below
and (c) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (a) of this proviso would be permitted under the
"Limitation on Indebtedness" and "Limitation on Restricted Payments" covenants
described below. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary, provided that immediately after giving
effect to such designation (x) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred at
such time, have been permitted to be Incurred (and shall be deemed to have been
Incurred)
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for all purposes of the indenture and (y) no Default or Event of Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which full faith and credit of the United States of America is pledged and which
are not callable at Leap's option.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Warrants" means the Warrants issued on the Closing Date.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person. Notwithstanding the foregoing Cricket Communications Holdings shall be
deemed Wholly Owned by Leap as long as Leap owns not less than 85% of its
outstanding Capital Stock on a fully diluted basis.
COVENANTS
The indenture contains, among others, the following covenants.
LIMITATION ON INDEBTEDNESS
(a) We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Indebtedness (other than the notes issued on the Closing Date and
Indebtedness existing on the Closing Date); provided that we may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness and
the receipt and application of the proceeds therefrom, the Consolidated Leverage
Ratio would be greater than zero and less than 6 to 1.
(b) Notwithstanding the foregoing, we and any Restricted Subsidiary (except
as specified below) may Incur each and all of the following:
(i) Indebtedness under one or more credit facilities in an aggregate
principal amount not to exceed $300 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described below;
(ii) Indebtedness owed (a) by a Restricted Subsidiary to us or (b) by
us or a Restricted Subsidiary to any Restricted Subsidiary; provided that
(1) if Leap or any Guarantor is the obligor on such Indebtedness, such
Indebtedness shall be evidenced by a promissory note expressly subordinated
to the notes and any Guarantees and if any Restricted Subsidiary is the
obligor on any such Indebtedness to us or a Guarantor such Indebtedness
shall be evidenced by a promissory note which is unsubordinated except to
secured Indebtedness permitted under the indenture, and (2) any event which
results in any Restricted Subsidiary which is an obligor on such
Indebtedness ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to us or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of
such Indebtedness not permitted by this clause (ii);
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(iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness (other
than Indebtedness Incurred under clause (i), (ii), (iv), (vi), (viii) or
(x) of this paragraph) and any refinancings thereof in an amount not to
exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the notes or Indebtedness that is
pari passu with, or subordinated in right of payment to, the notes or the
Guarantees shall only be permitted under this clause (iii) if (a) in case
the notes are refinanced in part or the Indebtedness to be refinanced is
pari passu with the notes or any Guarantees, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such
new Indebtedness is outstanding, is expressly made pari passu with, or
subordinate in right of payment to, the remaining notes or such Guarantees,
(b) in case the Indebtedness to be refinanced is subordinated in right of
payment to the notes and the Guarantees, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such
new Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the notes and the Guarantees at least to
the extent that the Indebtedness to be refinanced is subordinated to the
notes and the Guarantees and (c) such new Indebtedness, determined as of
the date of Incurrence of such new Indebtedness, does not mature prior to
the Stated Maturity of the Indebtedness to be refinanced or refunded, and
the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded;
and provided further that in no event may our Indebtedness or that of any
Guarantor's be refinanced by means of any Indebtedness of any Restricted
Subsidiary that is not a Guarantor pursuant to this clause (iii);
(iv) Indebtedness (a) in respect of performance, surety or appeal
bonds provided in the ordinary course of business, (b) under Currency
Agreements and Interest Rate Agreements; provided that such agreements (1)
are designed solely to protect us or our Restricted Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates and (2)
do not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation
payable thereunder; or (c) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from guarantees or letters of credit, surety bonds or performance bonds
securing any of our obligations or those of any of our Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary of Leap (other than guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or Restricted
Subsidiary of Leap for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by us
or any Restricted Subsidiary in connection with such disposition;
(v) Our Indebtedness, to the extent the net proceeds thereof are
promptly (a) used to purchase notes tendered in an Offer to Purchase made
as a result of a Change in Control or (b) deposited to defease the notes as
described below under "Defeasance";
(vi) Guarantees of the notes and guarantees of our Indebtedness by any
Restricted Subsidiary provided the guarantee of such Indebtedness is
permitted by and made in accordance with the "Limitation on Issuance of
Guarantees by Restricted Subsidiaries" covenant described below;
(vii) Indebtedness (including guarantees of such indebtedness)
Incurred to finance the cost (including the cost of design, development,
site acquisition, construction, installation, integration or improvement)
of equipment, inventory or telecommunications network assets acquired
(including by way of Capital Lease and acquisitions of Capital Stock of a
Person that becomes a Restricted Subsidiary to the extent of the fair
market value of the equipment, inventory or network assets so acquired) by
us or any Restricted Subsidiary after the Closing Date;
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(viii) Our Indebtedness not to exceed, at any one time outstanding,
two times Qualified Proceeds received by us to the extent such Qualified
Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph of, or clauses (iii), (iv), (vii), (viii) or (ix) of the second
paragraph of, the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment; provided that such Indebtedness does
not mature prior to the Stated Maturity of the notes and has an Average
Life longer than the notes;
(ix) Acquired Indebtedness of our Restricted Subsidiaries to the
extent that we could have Incurred such Indebtedness in accordance with the
first paragraph of this covenant on the date such Indebtedness becomes
Acquired Indebtedness of such Restricted Subsidiary; and
(x) Indebtedness Incurred by us not otherwise permitted to be Incurred
pursuant to clauses (i) through (ix) above, which together with all other
Indebtedness Incurred pursuant to this clause (x), has an aggregate
principal amount not in excess of $20 million at any time outstanding.
(b) Notwithstanding any other provisions of this "Limitation on
Indebtedness" covenant, (i) we and our domestic Restricted Subsidiaries may not
Incur Indebtedness pursuant to paragraph (a) or clauses (i) through (x) of this
"Limitation on Indebtedness" covenant, if after giving effect to the Incurrence
of such Indebtedness, the aggregate principal amount of our Indebtedness and
that of our domestic Restricted Subsidiaries would exceed the sum of (1) the
product of $75.00 multiplied by Licensed Domestic POPS plus (2) the principal
amount of Indebtedness Incurred on or after the Closing Date, the proceeds of
which are used to make Investments which constitute Permitted Investments
pursuant to clause (viii) of the definition of "Permitted Investments" in an
aggregate principal amount not to exceed $100 million (such sum being the
"Aggregate Limitation"), provided that we and our domestic Restricted
Subsidiaries may Incur Indebtedness pursuant to paragraph (a) or clauses (i)
through (x) of this "Limitation on Indebtedness" covenant in excess of the
Aggregate Limitation in an aggregate principal amount not to exceed the product
of $10.00 multiplied by Licensed Domestic POPS, to the extent the payment of
principal of, premium if any, interest and other payment obligations in respect
of such Indebtedness is expressly subordinate to the prior payment in full in
cash of the notes or any Guarantee, as the case may be, and any other of our
Indebtedness or that of our domestic Restricted Subsidiaries, as the case may
be, permitted to be Incurred under the indenture and designated by us or such
Restricted Subsidiary as senior indebtedness; and (ii) Cricket Communications
Holdings may not Incur any Indebtedness other than the Guarantee of the notes
and guarantees of (1) Indebtedness of Cricket Communications, Inc. and (2) our
Indebtedness to the extent the proceeds of such Indebtedness are contributed to
Cricket Communications Holdings.
(c) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that we or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(d) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (i) guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (ii) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, we, in our sole discretion, will classify and from time to time may
reclassify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
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LIMITATION ON RESTRICTED PAYMENTS
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly:
(i) declare or pay any dividend or make any distribution on or with
respect to our Capital Stock or such Restricted Subsidiary's Capital Stock
(other than (a) dividends or distributions payable solely in shares of our
Capital Stock or such Restricted Subsidiary's Capital Stock of the same
class (other than Disqualified Stock) or in options, warrants or other
rights to acquire shares of such Capital Stock and (b) pro rata dividends
or distributions on Common Stock of any Restricted Subsidiary held by
minority interest Holders) held by Persons other than us or any of our
Restricted Subsidiaries;
(ii) purchase, call for redemption or redeem, retire or otherwise
acquire for value any shares of Capital Stock of (a) Leap or any Guarantor
or any Unrestricted Subsidiary (including options, warrants or other rights
to acquire such shares of Capital Stock) held by any Person or (b) a
Restricted Subsidiary other than a Guarantor (including options, warrants
or other rights to acquire such shares of Capital Stock) held by any
Affiliate of ours (other than a Wholly Owned Restricted Subsidiary) or any
Holder (or any Affiliate of such Holder) of 5% or more of our Capital
Stock;
(iii) make any voluntary or optional principal payment, or voluntary
or optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of our Indebtedness or that of any Guarantor that is
subordinated in right of payment to the notes or any Guarantee; or
(iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through
(iv) being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing, or would result from such Restricted Payment;
(B) after giving pro forma effect to such Restricted Payment as if
such Restricted Payment had been made at the beginning of the applicable
four-fiscal quarter period, we could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant; or
(C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) made after the Closing Date shall exceed the sum of:
(1) 50% of the aggregate amount of the Adjusted Consolidated Net
Income (or, if the Adjusted Consolidated Net Income is a loss, minus
100% of the amount of such loss) (determined by excluding income
resulting from transfers of assets by us or a Restricted Subsidiary
to an Unrestricted Subsidiary) accrued on a cumulative basis during
the period (taken as one accounting period) beginning on the first
day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed with the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant;
plus
(2) the aggregate Qualified Proceeds received by us (except to
the extent such Qualified Proceeds are used to Incur Indebtedness
pursuant to clause (viii) under the "Limitation on Indebtedness"
covenant) or from the issuance to a Person who is not a Subsidiary of
ours of any options, warrants or other rights to acquire our Capital
Stock (in each case, exclusive of any Disqualified Stock or any
options, warrants or other rights that
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are redeemable at the option of the Holder, or are required to be
redeemed, prior to the Stated Maturity of the notes); plus
(3) an amount equal to the net reduction in Investments (other
than reductions in Permitted Investments) in any Person resulting
from payments of interest on Indebtedness, dividends, repayments of
loans or advances, or other transfers of assets, in each case to us
or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment (except, in each case, to the extent any
such payment or proceeds are included in the calculation of Adjusted
Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed, in each
case, the amount of Investments previously made by us or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (iii) of the second paragraph of part (a) of the "Limitation
on Indebtedness" covenant;
(iii) the repurchase, redemption or other acquisition of our Capital
Stock (or options, warrants or other rights to acquire such Capital Stock)
in exchange for, or out of the proceeds of a substantially concurrent
offering of, shares of our Capital Stock (other than Disqualified Stock)
other than to a Subsidiary of Leap;
(iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of our
Indebtedness or that of any Guarantor which is subordinated in right of
payment to the notes or the Guarantees in exchange for, or out of the
proceeds of, a substantially concurrent offering of, shares of our Capital
Stock (other than Disqualified Stock);
(v) payments or distributions to dissenting stockholders that are not
Affiliates of Leap or any of our Subsidiaries pursuant to applicable law
pursuant to or in connection with a consolidation, merger or transfer of
assets that complies with the provisions of the indenture applicable to
mergers, consolidations and transfers of all or substantially all of our
property and assets;
(vi) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of our Capital Stock to the extent necessary
in the good faith judgment of our Board of Directors, to prevent the loss
or secure the renewal or reinstatement of any material license or franchise
held by us or any Restricted Subsidiary from any governmental agency;
(vii) the purchase, redemption, retirement or other acquisition for
value of our Capital Stock or Cricket Communications Holdings, or options
to purchase such shares, held by our directors, employees or former
directors or employees or any Restricted Subsidiary (or their donees,
trusts for their benefit or the benefit of their family members, their
estates or beneficiaries under their estates) upon death, disability,
retirement, termination of employment or pursuant to the terms of any
agreement under which such shares of Capital Stock or options were issued;
provided that the aggregate consideration paid for such purchase,
redemption, acquisition, cancellation or other retirement of such shares of
Capital Stock or options after the Closing Date does not exceed (a) $2
million in any fiscal year or (b) $5 million in the aggregate, plus in the
case of each of clause (a)
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and clause (b), the aggregate of Net Cash Proceeds we received from the
issuance of Capital Stock to our directors, employees or former directors
or employees or any Restricted Subsidiary, provided that the amount of any
such Net Cash Proceeds that are utilized for any such purchase, redemption,
retirement or other acquisition shall be excluded from clause (C)(2) of the
first paragraph of this "Limitation on Restricted Payments" covenant;
(viii) Investments in any Person that is primarily engaged in a
business that is related, ancillary or complementary to our business and
that of our Restricted Subsidiaries on the date of such Investment;
provided that the aggregate amount of such Investments (after taking into
account the amount of all other Investments made pursuant to this subclause
(viii)) does not exceed the sum of (a) $10,000,000 and (b) the amount of
Qualified Proceeds received by us, except to the extent such Qualified
Proceeds are used to Incur Indebtedness pursuant to clause (viii) under the
"Limitation on Indebtedness" covenant or to make Restricted Payments
pursuant to clause (C)(2) of the first paragraph, or clauses (iii) or (iv)
of this paragraph, of this "Limitation on Restricted Payments" covenant;
(ix) Investments acquired in exchange for our Capital Stock (other
than Disqualified Capital Stock);
(x) our redemption of any of the Warrants pursuant to the mandatory
disposition or redemption provisions thereof or any purchase of any
fractional share of Common Stock (or our other Capital Stock issuable upon
exercise of the Warrants) in connection with an exercise of the Warrants;
(xi) repurchases of Capital Stock deemed to occur upon the exercise of
stock options or warrants if such Capital Stock represents a portion of the
exercise price thereof;
(xii) other Restricted Payments in an aggregate amount not to exceed
$10 million;
provided that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof and an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof, or an Investment referred to in clause (ix)
thereof or repurchases of Capital Stock referred to in clause (xi) thereof), and
the Qualified Proceeds from any issuance of Capital Stock referred to in clauses
(iii), (iv) and (viii), shall be included in calculating whether the conditions
of clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of our Capital Stock are used for the
redemption, repurchase or other acquisition of the notes, or Indebtedness that
is pari passu with the notes, then the Qualified Proceeds of such issuance shall
be included in clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant only to the extent such proceeds are not used for
such redemption, repurchase or other acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
We will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by us or
any other Restricted Subsidiary, (ii) pay any Indebtedness owed to us or any
other Restricted Subsidiary, (iii) make loans or advances to us or
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any other Restricted Subsidiary or (iv) transfer any of its property or assets
to us or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date in the indenture, Pledge Agreement or
any other agreements in effect on the Closing Date, and any amendments,
extensions, refinancings, renewals or replacements of such agreements;
provided that the encumbrances and restrictions in any such amendments,
extensions, refinancings, renewals or replacements are no less favorable in
any material respect to the Holders than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced, renewed or
replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or assets of
such Person acquired by us or any Restricted Subsidiary, existing at the
time of such acquisition and not incurred in contemplation thereof, which
encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (a) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract or similar property or asset, (b)
existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any of our property or assets or those
of any Restricted Subsidiary not otherwise prohibited by the indenture or
(c) arising or agreed to in the ordinary course of business, not relating
to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of our property or assets or the value of the
property or assets of any Restricted Subsidiary in any manner material to
the Company or any Restricted Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary; or
(vi) contained in the terms of any Indebtedness of a Restricted
Subsidiary, or any agreement pursuant to which such Indebtedness was
issued, if the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained
in such Indebtedness or agreement, if the encumbrance or restriction is not
materially more disadvantageous to the Holders of the notes than is
customary in comparable financings (as determined by us) and if we
determine that any such encumbrance or restriction will not materially
affect our ability to make principal or interest payments on the notes.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent us or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of our property or assets or those of
any of our Restricted Subsidiaries that secure our Indebtedness or that of any
of our Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
We will not sell, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell, any shares of Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to
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purchase shares of such Capital Stock) except (i) to us or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) Permitted Cricket
Holdings Shares and Options; (iv) if, immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary, provided any Investment in such Person remaining after
giving effect to such issuance or sale would have been permitted to be made
under the "Limitation on Restricted Payments" covenant, if made on the date of
such issuance or sale, or (iv) issuances and sales of Common Stock of any
Restricted Subsidiary, provided that Leap or such Restricted Subsidiary applies
the Net Cash Proceeds of any such sale in accordance with clause (a) or (b) of
the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
We will not permit any Restricted Subsidiary, directly or indirectly, to
guarantee any of our Indebtedness or that of any Guarantor ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary (a) is a Guarantor or (b)
simultaneously executes and delivers a supplemental indenture to the indenture
providing for a Guarantee of payment of the notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against us or any
other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Guarantee; provided that this paragraph shall not be
applicable to (a) any guarantee by a Restricted Subsidiary existing on the
Closing Date or in respect of Indebtedness Incurred pursuant to clause (i) or
(vii) of the second paragraph of the "Limitation on Indebtedness" covenant or
(b) any guarantee of any Restricted Subsidiary that existed at the time such
Person became a Restricted Subsidiary and was not Incurred in connection with,
or in contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (1) pari passu with the notes or any Guaranty, then
the guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Guarantee or (2) subordinated to the notes or any Guaranty,
then the guarantee of such Guaranteed Indebtedness shall be subordinated to the
Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the notes.
Notwithstanding the foregoing, any Guarantee executed by a Restricted
Subsidiary pursuant to this provision shall provide by its terms that it shall
be automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person not an Affiliate of ours, of all of our
Capital Stock and each Restricted Subsidiary's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the indenture) or (ii) the release or
discharge of the guarantee which resulted in the creation of such Guarantee,
except a discharge or release by or as a result of payment under such guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any Holder (or any Affiliate of such Holder) of
5% or more of any class of our Capital Stock or with any Affiliate of ours or
any Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to us or such Restricted Subsidiary than could be obtained, at the
time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a Holder or
an Affiliate.
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The foregoing limitation does not limit, and shall not apply to (i)
transactions (a) approved by a majority of the Disinterested Directors or (b)
for which Leap or a Restricted Subsidiary delivers to the Trustee a written
opinion of a nationally recognized investment banking firm stating that the
transaction is fair to us or such Restricted Subsidiary from a financial point
of view; (ii) any transaction solely between us and any of our Wholly Owned
Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular fees to our directors who
are not employees of Leap; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between us and any other Person with which we file a
consolidated tax return or with which we are part of a consolidated group for
tax purposes; or (v) any Restricted Payments not prohibited by the "Limitation
on Restricted Payments" covenant. Notwithstanding the foregoing, any transaction
covered by the first paragraph of this "Limitation on Transactions with
Stockholders and Affiliates" covenant and not covered by clauses (ii) through
(v) of this paragraph, (1) must be approved in the manner provided for in clause
(i)(a) above and a certified Board Resolution to such effect delivered to the
Trustee, if the aggregate amount of such transaction exceeds $2 million, and (2)
must be determined fair in the manner provided for in clause (i)(b) above, if
the aggregate amount of such transaction exceeds $10 million.
LIMITATION ON LIENS
We will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of our assets or properties or
those of any Restricted Subsidiary of any character, or any shares of Capital
Stock or Indebtedness of any Restricted Subsidiary, without making effective
provision for all of the notes and the Guarantees and all other amounts due
under the indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the notes, prior to) the obligation or liability secured by such
Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or our
Capital Stock or that of our Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to us or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to us or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is permitted to be Incurred
under clause (i) of the "Limitation on Indebtedness" covenant; (v) Liens
securing Indebtedness which is Incurred to refinance secured Indebtedness which
is permitted to be Incurred under clause (iii) of the second paragraph of the
"Limitation on Indebtedness" covenant; provided that such Liens do not extend to
or cover any of our property or assets or those of any Restricted Subsidiary
other than the property or assets securing the Indebtedness being refinanced;
(vi) Liens on the Capital Stock of, or any property or assets of, a Restricted
Subsidiary securing Indebtedness of such Restricted Subsidiary (or obligations
in respect thereof) or Indebtedness of any Restricted Subsidiary guaranteed by
such Restricted Subsidiary permitted under the "Limitation on Indebtedness"
covenant; or (vii) Permitted Liens.
Notwithstanding the foregoing, we will not create, incur or suffer to exist
any Lien on the capital stock of Cricket Communications Holdings.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
We will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of our assets or properties or
those of any Restricted Subsidiary whether now owned or hereafter acquired,
whereby we sell or transfer, or a Restricted Subsidiary sells or transfers, such
assets or properties and then or thereafter leases such assets or properties or
any part thereof or any other assets or properties which we, or such Restricted
Subsidiary, as the case may be, intend to use for substantially the same purpose
or purposes as the assets or properties sold or transferred.
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The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between us and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) Leap or such Restricted Subsidiary, within twelve months
after the sale or transfer of any assets or properties is completed, applies an
amount not less than the net proceeds received from such sale in accordance with
clause (a) or (b) or of the second paragraph of the "Limitation on Asset Sales"
covenant described below.
FUTURE SUBSIDIARY GUARANTORS
We will cause each domestic Restricted Subsidiary other than any direct or
indirect Subsidiary of Cricket Communications Holdings or any License Subsidiary
to execute and deliver a Guarantee pursuant to which each such Subsidiary will,
jointly and severally, Guarantee irrevocably and unconditionally all principal,
premium, if any, and interest on the notes on an unsecured basis.
LIMITATION ON ASSET SALES
We will not, and will not permit any Restricted Subsidiary to, consummate
any Asset Sale, unless (i) the consideration received by us or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of as evidenced by a Board Resolution filed with the Trustee, and (ii)
at least 75% of the consideration received consists of cash or Temporary Cash
Investments, provided that the amount of any (a) of our liabilities (as shown on
our most recent balance sheet or such Restricted Subsidiary's most recent
balance sheet) or those of any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the notes or
any Guarantee) that are assumed by the transferee of any such assets pursuant to
an agreement that irrevocably releases us or such Restricted Subsidiary from
further liability shall be deemed to be cash for purposes of this provision.
In the event and to the extent that the Net Cash Proceeds received by us or
any of our Restricted Subsidiaries from one or more Asset Sales occurring on or
after the Closing Date in any period of 12 consecutive months exceed 10% of
Adjusted Consolidated Net Tangible Assets (determined as of the date closest to
the commencement of such 12-month period for which a consolidated balance sheet
of Leap and our Subsidiaries has been filed with the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant), then we shall or shall
cause the relevant Restricted Subsidiary to (i) within 12 months after the date
Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (a) apply an amount equal to such excess Net Cash Proceeds to permanently
repay our unsubordinated Indebtedness or that of any Guarantor or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
Leap or any of our Restricted Subsidiaries or (b) invest an equal amount, or the
amount not so applied pursuant to clause (a) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, Leap and our
Restricted Subsidiaries existing on the date of such investment and (ii) apply
(no later than the end of the 12-month period referred to in clause (i)) such
excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as
provided in the following paragraph of this "Limitation on Asset Sales"
covenant. The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such twelve-month period as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds."
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If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10,000,000, we must
commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the senior notes or
Accreted Value of the senior discount notes, plus, in each case, accrued
interest (if any) to the Payment Date.
ADDITIONAL HOLDING COMPANIES
We shall not create any subsidiary which directly or indirectly owns (i)
Capital Stock of Cricket Communications Holdings or (ii) Capital Stock of
Cricket Communications, Inc., other than Cricket Communications Holdings.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
We must commence, within 30 days of the occurrence of a Change of Control,
and consummate an Offer to Purchase for all notes then outstanding, at a
purchase price equal to 101% of the principal amount of the senior notes or
Accreted Value of the senior discount notes, plus accrued interest (if any) to
the Payment Date.
There can be no assurance that we will have sufficient funds available at
the time of any Change of Control to make any debt payment (including
repurchases of notes) required by the foregoing covenant (as well as may be
contained in other securities of ours which might be outstanding at the time).
The above covenant requiring us to repurchase the notes will, unless consents
are obtained, require us to repay all indebtedness then outstanding which by its
terms would prohibit such note repurchase, either prior to or concurrently with
such note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
We will furnish to each of the Holders of notes within the time period
specified in the SEC's rules and regulations (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on forms 10-Q and form 10-K as if we were required to file such
financial information, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" that describes our financial
condition and results of operations and any consolidated Subsidiaries and, with
respect to the annual information only, reports thereon by our independent
public accountants (which shall be firms of established national reputation) and
(ii) all information that will be required to be filed with the SEC on form 8-K
as if we were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, we shall file a copy of
all such information and reports with the Commission for public availability
within the time period specified in the Commission's rules and regulations
(unless the Commission will not accept such a filing) and make such information
available to security analysts and prospective investors upon request for so
long as any notes remain outstanding. In addition, we shall furnish to the
Holders and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
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EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
indenture:
(a) default in the payment of principal of (or premium, if any, on)
any note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(b) default in the payment of interest on any note when the same
becomes due and payable, and such default continues for a period of 30
days; provided that a failure to make any of the first six scheduled
interest payments on the senior notes on the applicable Interest Payment
Date will constitute an Event of Default if such default continues for a
period of three days;
(c) our failure or that of any Guarantor to comply with the provisions
of the indenture relating to mergers, consolidations and transfers of all
or substantially all of our assets or the failure to make or consummate an
Offer to Purchase in accordance with the "Limitation on Asset Sales" or
"Repurchase of Notes upon a Change of Control" covenant;
(d) Leap or any Restricted Subsidiary fails to perform or breaches any
other covenant or agreement of ours in the indenture, in the notes or in
the Pledge Agreement (other than a default specified in clause (a), (b) or
(c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25%
or more in aggregate principal amount of the senior notes or the Holders of
25% or more of the aggregate principal amount at maturity of the senior
discount notes, as the case may be;
(e) there occurs with respect to any issue or issues of our
Indebtedness or that of any Restricted Subsidiary having an outstanding
principal amount of $5 million or more in the aggregate for all such issues
of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (1) an event of default that has caused the Holder
thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (2) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall
not have been made, waived or extended within 30 days of such payment
default;
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $5 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against us or any Restricted Subsidiary and shall not be paid or
discharged, and there shall be any period of 60 consecutive days following
entry of the final judgment or order that causes the aggregate amount for
all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of
enforcement of such final judgment or order, by reason of a pending appeal
or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or
order for (1) relief in respect of us or any Restricted Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (2) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of ours or any Restricted Subsidiary or for all or substantially all of our
property and assets or those of any Restricted Subsidiary or (3) the
winding up or liquidation of our affairs or those of any Restricted
Subsidiary and, in each case, such decree or order shall remain unstayed
and in effect for a period of 30 consecutive days;
(h) Leap or any Restricted Subsidiary (1) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (2) consents to the appointment of or
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taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of ours or any Restricted Subsidiary or
for all or substantially all of our property and assets or any Restricted
Subsidiary or (3) effects any general assignment for the benefit of
creditors;
(i) the Pledge Agreement shall cease to be in full force and effect or
enforceable in accordance with its terms, other than in accordance with its
terms;
(j) except upon the release of any Guarantee in accordance with the
indenture, (1) any Guarantee ceases to be in full force and effect or is
declared null and void or (2) any Guarantor denies that it has any further
liability under the Guarantee or gives notice to that effect; or
(k) there shall have occurred any loss, suspension, revocation or
non-renewal of our wireless licenses and those of our Restricted
Subsidiaries covering 50% or more of the total potential customers covered
by all of our wireless licenses and those of our Restricted Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to Leap) occurs and is continuing
under the indenture, the Trustee or the Holders of at least 25% in aggregate
principal amount of the senior notes or the Holders of at least 25% in aggregate
principal amount at maturity of the senior discount notes, as the case may be,
then outstanding, by written notice to us (and to the Trustee if such notice is
given by the Holders), may, and the Trustee at the request of such Holders
shall, declare the principal of all outstanding senior notes or the Accreted
Value of all outstanding senior discount notes, as the case may be, together
with premium, if any, and all accrued and unpaid interest thereon to be
immediately due and payable. Upon a declaration of acceleration, such principal
of, premium, if any, and accrued interest shall be immediately due and payable.
In the event of a declaration of acceleration because an Event of Default set
forth in clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by Leap or the relevant Subsidiary or waived by the Holders of
the relevant Indebtedness within 60 days after the declaration of acceleration
with respect thereto. If an Event of Default specified in clause (g) or (h)
above occurs with respect to Leap, the principal of, premium, if any, and
accrued interest on the notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. At any time after declaration of acceleration, but
before a judgment or decree for the payment of the money due has been obtained
by the Trustee, the Holders of at least a majority in principal amount of the
outstanding senior notes or the Holders of at least a majority in aggregate
principal amount at maturity of the outstanding senior discount notes by written
notice to us and to the Trustee, may waive all past defaults and rescind and
annul a declaration of acceleration and its consequences if (i) all existing
Events of Default, other than the nonpayment of the principal of, premium, if
any, and interest on the notes that have become due solely by such declaration
of acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding senior notes or Holders of at least a majority in aggregate
principal amount at maturity of the outstanding senior discount notes, as the
case may be, may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of notes. A Holder
may not pursue any remedy with respect to the indenture or the notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25%
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in aggregate principal amount of outstanding senior notes or the Holders of at
least a majority in aggregate principal amount at maturity of the outstanding
senior discount notes, as the case may be, make a written request to the Trustee
to pursue the remedy; (iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense; (iv) the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity; and (v) during such 60-day period, the
Holders of a majority in aggregate principal amount of the outstanding notes do
not give the Trustee a direction that is inconsistent with the request. However,
such limitations do not apply to the right of any Holder of a note to receive
payment of the principal of, premium, if any, or interest on, such note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the notes, which right shall not be impaired or affected without
the consent of the Holder.
The indenture requires certain of our officers to certify, on or before a
date not more than 90 days after the end of each fiscal year, that a review has
been conducted of our activities and those of our Restricted Subsidiaries and
our performance under the indenture and our Restricted Subsidiaries' performance
under the indenture and that we have fulfilled all obligations thereunder, or,
if there has been a default in the fulfillment of any such obligation,
specifying each such default and the nature and status thereof. We are also
obligated to notify the Trustee of any default or defaults in the performance of
any covenants or agreements under the indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
We will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of our property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into us unless: (i) we shall be the surviving or continuing Person, or
the Person (if other than Leap) formed by such consolidation or into which we
are merged or that acquired or leased such property and assets of ours shall be
a corporation organized and validly existing under the laws of the United States
of America or any jurisdiction thereof and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, all of our
obligations on all of the notes and under the indenture; (ii) immediately after
giving effect to such transaction on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, Leap or any Person becoming the
successor obligor of the notes shall have a Consolidated Net Worth equal to or
greater than our Consolidated Net Worth immediately prior to such transaction,
provided that this clause (iii) shall only apply to a sale of less than all of
our assets; (iv) immediately after giving effect to such transaction on a pro
forma basis Leap, or any Person becoming the successor obligor of the notes, as
the case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant described above; provided
that this clause (v) shall not apply to a consolidation or merger or sale of all
(but not less than all) of our assets if all Liens and Indebtedness of ours or
any Person becoming the successor obligor on the notes, as the case may be, and
its Restricted Subsidiaries outstanding immediately after such transaction
would, if Incurred at such time, have been permitted to be Incurred (and all
such Liens and Indebtedness, other than Liens and our Indebtedness and that of
our Restricted Subsidiaries outstanding immediately prior to such transaction,
shall be deemed to have been Incurred) for all purposes of the indenture; (vi)
if we are not the surviving or continuing Person, each Guarantor shall have
delivered a written instrument in form satisfactory to the Trustee confirming
its Guarantee; and (vii) we deliver to the Trustee an Officer's Certificate
(attaching the arithmetic computations to demonstrate compliance with clauses
(iii) and (iv)) and an Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture, if any,
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with; provided, however,
that clauses (iii) and (iv) above do not apply if, in the good faith
determination of our Board of
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Directors, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change our state of incorporation;
and provided further that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations.
We will not permit any Guarantor (other than any Guarantor whose Guarantee
is to be released in accordance with the terms of the Guarantee and the
indenture in connection with any transaction complying with the provisions
described in the "Limitation on Assets Sales" covenant described above) to, in a
single transaction or a series of related transactions, (i) consolidate with or
merge with or into any other Person (other than a Guarantor which is a Wholly
Owned Restricted Subsidiary) or (ii) directly or indirectly, transfer, sell,
lease or otherwise dispose of all or substantially all of its assets, unless:
(a) the Guarantor shall be the surviving or continuing Person, or the Person (if
other than the Guarantor) formed by such consolidation or into which the
Guarantor is merged or that acquired or leased such property and assets of the
Guarantor shall be organized under the laws of the United States of America or
any jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the Guarantor's
obligations under the indenture; (b) immediately after giving effect to such
transaction on a pro forma basis, no Default or Event of Default shall have
occurred and be continuing; (c) immediately after giving effect to such
transaction on a pro forma basis, Leap or any Person becoming a successor
obligor on the notes, as the case may be, could Incur at least $1.00 of
additional Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant described above; and (d) we shall have delivered to the
Trustee an Officer's Certificate (attaching the arithmetic computations to
demonstrate compliance with clause (c)) and an Opinion of Counsel, in each case
stating that such consolidation, merger or transfer and such supplemental
indenture, if any, complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with.
DEFEASANCE
DEFEASANCE AND DISCHARGE
The indenture provides that Leap and the Guarantors will be deemed to have
paid and will be discharged from any and all obligations in respect of the
senior notes and/or the senior discount notes on the 123rd day after the deposit
referred to below, and the provisions of the indenture will no longer be in
effect with respect to the notes (except for, among other matters, certain
obligations to register the transfer or exchange of the notes, to replace
stolen, lost or mutilated notes, to maintain paying agencies and to hold monies
for payment in trust) if, among other things, (i) we have deposited with the
Trustee, in trust, money and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the notes on the Stated Maturity of
such payments in accordance with the terms of the indenture and the notes, (ii)
we have delivered to the Trustee (a) either (1) an Opinion of Counsel to the
effect that Holders will not recognize income, gain or loss for federal income
tax purposes as a result of our exercise of our option under this "Defeasance"
provision and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, which Opinion of Counsel
must be based upon (and accompanied by a copy of) a ruling of the Internal
Revenue Service to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is no longer
required or (2) a ruling directed to the Trustee received from the Internal
Revenue Service to the same effect as the aforementioned Opinion of Counsel and
(b) an Opinion of Counsel to the effect that the creation of the defeasance
trust does not violate the Investment Company Act of 1940 and after the passage
of 123 days following the deposit (except with respect to any trust funds for
the account of any Holder who may be deemed an "insider" for purposes of the
United States Bankruptcy Code, after one year following the deposit); the trust
funds will not be
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subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (iii) immediately after
giving effect to such deposit on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which we or our Subsidiaries
are a party or by which we or our Subsidiaries are bound, and (iv) if at such
time the notes are listed on a national securities exchange, we have delivered
to the Trustee an Opinion of Counsel to the effect that the notes will not be
delisted as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT
The indenture further provides that the provisions of the indenture will no
longer be in effect with respect to clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clauses (c) and (d) under "Events of Default" with respect to such
clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets" and such
covenants and clauses (e) and (f) under "Events of Default" shall be deemed not
to be Events of Default, upon, among other things, the deposit with the Trustee,
in trust, of money and/or U.S. Government Obligations that through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the notes on the Stated Maturity of such payments in
accordance with the terms of the indenture and the notes, the satisfaction of
the provisions described in clauses (ii)(b), (iii) and (iv) of the preceding
paragraph and the delivery by us to the Trustee of an Opinion of Counsel to the
effect that, among other things, the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit and defeasance
of certain covenants and Events of Default and will be subject to federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT
In the event we exercise our option to omit compliance with certain
covenants and provisions of the indenture with respect to the notes as described
in the immediately preceding paragraphs and the notes are declared due and
payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on the notes at the time
of their Stated Maturity but may not be sufficient to pay amounts due on the
notes at the time of the acceleration resulting from such Event of Default.
However, we will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the indenture may be made by us and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount of the outstanding senior notes or the Holders of not less than
a majority in aggregate principal amount at maturity of the outstanding senior
discount notes, as the case may be; provided, however, that no such modification
or amendment may, without the consent of each Holder affected thereby, (i)
change the Stated Maturity of the principal of, or any installment of interest
on, any note, (ii) reduce the principal of, or premium, if any, or interest on,
any note, (iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any note, (iv) impair the right to institute
suit for the enforcement of any payment on or after the Stated Maturity (or, in
the case of a redemption, on or after the Redemption Date) of any note, (v)
reduce the above-stated percentage of outstanding notes the consent of whose
Holders is necessary to modify or amend the indenture, (vi) waive a default in
the payment of principal of, premium, if any, or interest on the notes or (vii)
reduce the percentage or aggregate principal amount of
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outstanding notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of ours in the Pledge Agreement, the
indenture, or in any of the notes or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, stockholder,
officer, director, employee or controlling person of ours or of any successor
Person thereof. Each Holder, by accepting the notes, waives and releases all
such liability.
CONCERNING THE TRUSTEE
The indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of ours, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The registered notes will initially be issued in the form of one or more
registered notes in global form without coupons. These registered notes are
referred to in the prospectus as the "global notes." The global notes will be
deposited on the date of the closing of the exchange of the registered notes for
outstanding notes with, or on behalf of, The Depository Trust Company and
registered in the name of The Depository Trust Company or its nominee, in each
case, for credit to an account of a direct or indirect participant as described
below.
Except as set forth below, the global notes may be transferred, in whole
and not in part, only to another nominee of The Depository Trust Company or to a
successor of The Depository Trust Company or its nominee. Beneficial interests
in the global notes may not be exchanged for notes in certificated form except
in the limited circumstances described below. In addition, transfers of
beneficial interests in the global notes will be subject to the applicable rules
and procedures of The Depository Trust Company and its direct or indirect
participants, which may change from time to time.
The notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
DEPOSITARY PROCEDURES
The Depository Trust Company has advised us that it is a limited-purpose
trust company created to hold securities for its participating organizations, or
"direct participants," and to facilitate the clearance and settlement of
transactions in those securities between direct participants through electronic
book-entry changes in accounts of participants. The direct participants include
securities brokers and dealers banks, trust companies, clearing corporations and
certain other organizations. Access to The Depository
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Trust Company's system is also available to other entities that clear through or
maintain a direct or indirect custodial relationship with a direct participant.
These entities are referred to as "indirect participants." The Depository Trust
Company may hold securities beneficially owned by other persons only through the
direct or indirect participants and the other persons' ownership interest and
transfer of ownership interest will be recorded only on the records of the
direct participant and/or indirect participant, and not on the records
maintained by The Depository Trust Company.
The Depository Trust Company has also advised us that, pursuant to The
Depository Trust Company's procedures,
(1) upon deposit of the global notes, The Depository Trust Company
will credit the accounts of the direct participants with an interest in the
global notes, and
(2) The Depository Trust Company will maintain records of the
ownership interests of the direct participants in the global notes and the
transfer of ownership interests by and between direct participants.
The Depository Trust Company will not maintain records of the ownership
interests of, or the transfer of ownership interests by and between, indirect
participants or other owners of beneficial interests in the global notes. Direct
participants and indirect participants must maintain their own records of the
ownership interests of, and the transfer of ownership interests by and between,
indirect participants and other owners of beneficial interests in the global
notes.
Investors in the global notes may hold their interests in the global notes
directly through The Depository Trust Company if they are direct participants in
The Depository Trust Company or indirectly through organizations that are direct
participants in The Depository Trust Company. All ownership interests in any
global notes may be subject to the procedures and requirements of The Depository
Trust Company.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit the
ability to transfer beneficial interests in a global note to these persons.
Because The Depository Trust Company can act only on behalf of direct
participants, which in turn act on behalf of indirect participants and others,
the ability of a person having a beneficial interest in a global note to pledge
the interest to persons or entities that are not direct participants in The
Depository Trust Company, or to otherwise take actions in respect of the
interests, may be affected by the lack of physical certificates evidencing the
interests.
Except as otherwise described in this prospectus, owners of beneficial
interests in the global notes will not have notes registered in their names,
will not receive physical delivery of notes in certificated form and will not be
considered the registered owners or Holders of the notes under the indenture for
any purpose.
Under the indenture, State Street Bank and Trust Company will treat the
persons in whose names the notes are registered, including notes represented by
global notes, as the owners of the notes for the purpose of receiving payments
and for any and all other purposes. Payments in respect of the principal,
premium, Liquidated Damages, if any, and interest on global notes registered in
the name of The Depository Trust Company or its nominee will be payable by the
United States Trust Company to The Depository Trust Company or its nominee as
the registered Holder under the indenture. Consequently, neither we, the United
States Trust Company nor any agent of ours or the United States Trust Company
will have any responsibility or liability for:
(1) any aspect of The Depository Trust Company's records or any direct
participant's or indirect participant's records relating to or payments
made on account of beneficial ownership interests in the global notes or
for maintaining, supervising or reviewing any of The Depository Trust
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Company's records or any direct participant's or indirect participant's
records relating to the beneficial ownership interests in any global note;
or
(2) any other matter relating to the actions and practices of The
Depository Trust Company or any of its direct participants or indirect
participants.
The Depository Trust Company has advised us that its current payment
practice, for payments of principal, interest and the like, with respect to
securities such as the notes is to credit the accounts of the relevant direct
participants with the payment on the payment date in amounts proportionate to
the direct participants' respective ownership interests in the global notes as
shown on The Depository Trust Company's records. Payments by direct participants
and indirect participants to the beneficial owners of the notes will be governed
by standing instructions and customary practices between them and will not be
our responsibility or the responsibility of The Depository Trust Company or the
United States Trust Company. Neither we nor the United States Trust Company will
be liable for any delay by The Depository Trust Company or its direct
participants or indirect participants in identifying the beneficial owners of
the notes, and both we and the United States Trust Company may conclusively rely
on and will be protected in relying on instructions from The Depository Trust
Company or its nominee as the registered owner of the notes for all purposes.
Interests in the global notes are expected to be eligible to trade in The
Depository Trust Company's Same-Day Funds Settlement System. Therefore,
transfers between direct participants in The Depository Trust Company will be
effected in accordance with The Depository Trust Company's procedures, and will
be settled in immediately available funds. Transfers between indirect
participants who hold an interest through a direct participant will be effected
in accordance with the procedures of the direct participant but generally will
settle in immediately available funds. The Depository Trust Company has advised
us that it will take any action permitted to be taken by a Holder of notes only
at the direction of one or more direct participants to whose account interests
in the global notes are credited and only in respect of such portion of the
aggregate principal amount of the notes as to which the direct participant or
direct participants has or have given direction. However, if there is an Event
of Default under the notes, The Depository Trust Company reserves the right to
exchange global notes, without the direction of one or more of its direct
participants, for legended notes in certificated form, and to distribute the
certificated forms of notes to its direct participants. Please refer to the
section in this prospectus entitled "-- Transfers of Interests in Global
Debentures for Certificated Debentures."
Although The Depository Trust Company has agreed to the foregoing
procedures to facilitate transfers of interests in the global notes among direct
participants, it is under no obligation to perform or to continue to perform
these procedures, and the procedures may be discontinued at any time. Neither we
nor the United States Trust Company will have any responsibility for the
performance by The Depository Trust Company, or direct or indirect participants
of their respective obligations under the rules and procedures governing any of
their operations.
We have obtained the information in this section concerning The Depository
Trust Company and its book-entry system from sources that we believe to be
reliable, but we take no responsibility for the accuracy of these statements.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire global note may be exchanged for definitive notes in registered,
certificated form without interest coupons ("certificated notes") if any of the
following events happens:
(1) The Depository Trust Company (x) notifies us that it is unwilling
or unable to continue as depositary for the global notes and we fail to
appoint a successor depositary within 90 days or (y) has ceased to be a
clearing agency registered under the Exchange Act;
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(2) we notify the State Street Bank and Trust Company in writing that
we elect to cause the issuance of certificated notes; or
(3) there shall have occurred and be continuing a Default or an Event
of Default with respect to the notes.
If any of these events occurs, we will notify the State Street Bank and Trust
Company in writing that, upon surrender by the direct and indirect participants
of their interest in the Global Note, Certificated Notes will be issued to each
person that the direct and indirect participants and The Depository Trust
Company identify as being a beneficial owner of the related notes.
Beneficial interests in global notes held by any direct or indirect
participant may be exchanged for certificated notes upon request to The
Depository Trust Company, by the direct participant, for itself or on behalf of
an indirect participant, but only upon at least 20 days' prior written notice
given to the State Street Bank and Trust Company by or on behalf of The
Depository Trust Company in accordance with customary The Depository Trust
Company procedures. Certificated Notes delivered in exchange for any beneficial
interest in any global notes will be registered in the names, and issued in any
approved denominations, requested by The Depository Trust Company on behalf of
these direct or indirect participants, in accordance with The Depository Trust
Company's customary procedures.
Neither we nor the United States Trust Company will be liable for any delay
by the Holder of the global notes or The Depository Trust Company in identifying
the beneficial owners of notes, and both we and the United States Trust Company
may conclusively rely on, and will be protected in relying on, instructions from
the Holder of the Global Note or The Depository Trust Company for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the notes represented by
the global notes, including principal, premium, if any and interest, if any, be
made by wire transfer of immediately available funds to the accounts specified
by the Holder of the Global Notes. With respect to Certificated Notes, we will
make all payments of principal, premium, if any, interest and Liquidated
Damages, if any, by wire transfer of immediately available funds to the accounts
specified by the Holders of the certificated notes or, if no account is
specified by a Holder, by mailing a check to that Holder's registered address.
We expect that secondary trading in the certificated notes will also be settled
in immediately available funds.
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CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following general discussion summarizes the material U.S. federal
income tax aspects of the exchange offer to holders of the notes. This
discussion is a summary for general information only and does not consider all
aspects of the notes in light of such holder's personal circumstances. This
discussion also does not address the U.S. federal income tax consequences to
holders subject to special treatment under the U.S. federal income tax laws,
such as dealers in securities, or foreign currency, tax-exempt entities, banks,
thrifts, insurance companies, persons that hold the notes as part of a
"straddle," a "hedge" against currency risk or a "conversion transaction,"
persons that have a "functional currency" other than the U.S. dollar, and
investors in pass-through entities. In addition, this discussion does not
describe any tax consequences arising out of the tax laws of any state, local or
foreign jurisdiction.
This discussion is based upon the Code, existing and presupposed
regulations thereunder, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change, possibly on a retroactive basis. We have not and will not seek any
rulings or opinions from the IRS or counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the exchange offer which are different from
those discussed herein.
HOLDERS OF THE NOTES SHOULD CONSULT THEIR OWN ADVISORS CONCERNING THE
APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE,
LOCAL OR FOREIGN JURISDICTION, TO THE EXCHANGE OFFER IN LIGHT OF THEIR
PARTICULAR SITUATIONS.
The exchange of notes for registered notes under the terms of the exchange
offer should not constitute a taxable exchange. As a result, a holder (A) should
not recognize taxable gain or loss as a result of exchanging notes for
registered notes under the terms of the exchange offer, (B) the holding period
of the registered notes should include the holding period of the notes exchanged
for the registered notes and (C) the adjusted tax basis of the notes should be
the same as the adjusted tax basis, immediately before the exchange of the notes
exchanged for the registered notes.
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, we believe that a holder, other than a person that is an
affiliate of ours within the meaning of Rule 405 under the Securities Act or a
broker dealer registered under the Exchange Act that purchases notes from us to
resell pursuant to Rule 144A under the Securities Act or any other exemption,
that exchanges outstanding notes for registered notes in the ordinary course of
business and that is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the registered notes will be allowed to resell the registered
notes to the public without further registration under the Securities Act and
without delivering to the purchasers of the registered notes a prospectus that
satisfies the requirements of Section 10 of the Securities Act. However, if any
holder acquires registered notes in the exchange offer for the purpose of
distributing or participating in a distribution of the registered notes, such
holder cannot rely on the position of the Staff enunciated in Exxon Capital
Holdings Corporation or similar no-action or interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, and such
secondary resale transaction must be covered by an effective registration
statement containing the selling security holder information required by Item
507 or 508, as applicable, of Regulation S-K if the resales are of registered
notes obtained by such holder in exchange for outstanding notes acquired by such
holder directly from us or an affiliate thereof, unless an exemption from
registration is otherwise available.
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As contemplated by the above no-action letters and the registration rights
agreement, each holder accepting the exchange offer is required to represent to
us in the letter of transmittal that they:
- are not an affiliate of ours;
- are not participating in, and do not intend to participate in, and have
no arrangement or understanding with any person to participate in, a
distribution of the outstanding notes or the registered notes;
- are acquiring the registered notes in the ordinary course of business;
and
- if they are a broker dealer, they will receive the registered notes for
their own account in exchange for the outstanding notes that were
acquired as a result of market-making activities or other trading
activities. Each broker dealer must acknowledge that it will deliver a
prospectus in connection with any resale of such registered notes.
Any broker dealer registered under the Exchange Act who holds outstanding
notes that were acquired for its own account as a result of market-making
activities or other trading activities, other than outstanding notes acquired
directly from us or any affiliate of ours, may exchange such outstanding notes
for registered notes pursuant to the exchange offer; however, such broker dealer
may be deemed an underwriter within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales of the registered notes received by it in the
exchange offer, which prospectus delivery requirement may be satisfied by the
delivery by such broker dealer of this prospectus, as it may be amended or
supplemented from time to time. We have agreed to use our reasonable best
efforts to cause the registration statement, of which this prospectus is a part,
to remain continuously effective for a period of 180 days from the exchange
date, and to make this prospectus, as amended or supplemented, available to any
such broker dealer for use in connection with resales. Any broker dealer
participating in the exchange offer will be required to acknowledge that it will
deliver a prospectus in connection with any resales of registered notes received
by it in the exchange offer. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act, a broker dealer will not be deemed to admit
that it is an underwriter within the meaning of the Securities Act.
We will not receive any proceeds from any sale of registered notes by a
broker dealer. Registered notes received by broker dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the registered notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker
dealers and/or the purchasers of any such registered notes. Any broker dealer
that resells registered notes that were received by it for its own account
pursuant to the exchange offer and any broker dealer that participates in a
distribution of such registered notes may be deemed to be an underwriter within
the meaning of the Securities Act and any profit on any such resale of
registered notes and any commission or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act.
We have agreed to pay all expenses incident to the exchange offer, other
than commissions and concessions of broker dealers, and will indemnify the
holders of the outstanding notes, including any broker dealers, against certain
liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
Latham & Watkins in San Diego, California will pass upon the validity of
the securities offered under this prospectus and certain other legal matters.
EXPERTS
The consolidated financial statements as of August 31, 1999 and 1998 and
for each of the three years in the period ended August 31, 1999 of Leap Wireless
International, Inc. included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements as of December 31, 1998 and 1997 and for the year
ended December 31, 1998, for the period from March 3, 1997 (inception) to
December 31, 1997 and for the period from March 3, 1997 (inception) to December
31, 1998 of Smartcom S.A., formerly named Chilesat Telefonia Personal S.A.,
included in this prospectus have been so included in reliance on the report of
Price Waterhouse, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The consolidated financial statements as of December 31, 1998 and for the
period from July 28, 1998 (inception) to December 31, 1998 of Orrengrove
Investments Ltd. included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The consolidated financial statements as of December 31, 1998 and for the
period from June 24, 1998 (date of incorporation) to December 31, 1998 of Pegaso
Telecomunicaciones, S.A. de C.V. included in this prospectus have been so
included in reliance on the report (which contains an explanatory paragraph
relating to the Company being in a development stage as discussed in Note 1 to
the consolidated financial statements) of PricewaterhouseCoopers, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements as of August 31, 1999 and 1998 and
for each of the two years in the period ended August 31, 1999, for the period
from December 1, 1996 (inception) to August 31, 1997 and for the period from
December 1, 1996 (inception) to August 31, 1999 of Cricket Communications
Holdings, Inc. included in this prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 of Chase
Telecommunications Holdings, Inc. included in this prospectus have been so
included in reliance on the report (which contains an explanatory paragraph
relating to the Company's sale of substantially all of its assets as described
in Note 1 to the consolidated financial statements) of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE TO FIND ADDITIONAL INFORMATION
Leap is subject to the informational requirements of the Securities
Exchange Act of 1934, and files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, proxy statements and other information we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's regional offices at Seven
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World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call
the SEC at 1-800-SEC-0300 for further information on the public reference rooms.
You may also access filed documents at the SEC's Web site at www.sec.gov.
We are incorporating by reference some information about us that we file
with the SEC. We are disclosing important information to you by referencing
those filed documents. Any information that we reference this way is considered
part of this prospectus.
We incorporate by reference the following documents we have filed, or may
file, with the SEC:
- Our Annual Report on Form 10-K for the fiscal year ended August 31, 1999
filed with the SEC on October 20, 1999 and Amendment No. 1 thereto filed
on Form 10-K/A with the SEC on December 13, 1999;
- Our Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 1999 filed with the SEC on January 14, 2000;
- Our Quarterly Report on Form 10-Q for the fiscal quarter ended February
29, 2000 filed with the SEC on April 14, 2000;
- Our Current Report on Form 8-K dated March 17, 2000 filed with the SEC on
April 3, 2000;
- Our Proxy Statement for the 1999 Annual Meeting of Stockholders filed
with the SEC on November 2, 1999; and
- All documents filed by us with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and before the expiration of the effectiveness of the related
registration statement.
A statement contained in a document incorporated by reference herein shall
be deemed to be modified or superceded for purposes of this prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which is also incorporated herein modifies or replaces such statement.
Any statements so modified or superceded shall not be deemed, except as so
modified or superceded, to constitute a part of this prospectus.
You may request a free copy of any of the documents incorporated by
reference in this prospectus by writing or telephoning us at the following
address:
Leap Wireless International, Inc.
10307 Pacific Center Court
San Diego, California 92121
(858) 882-6000
You should rely only on the information incorporated by reference or
provided in this prospectus and any supplement. We have not authorized anyone
else to provide you with different information. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the dates on the front of these documents.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
LEAP WIRELESS INTERNATIONAL, INC.
Pro Forma Financial Information............................. F-4
Unaudited Pro Forma Consolidated Balance Sheet at February
29, 2000............................................... F-5
Unaudited Pro Forma Consolidated Statement of Operations
for the six months ended February 29, 2000............. F-6
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended August 31, 1999..................... F-7
Notes to the Pro Forma Financial Information
(unaudited)............................................ F-8
LEAP WIRELESS INTERNATIONAL, INC.
Consolidated Financial Statements:
Report of Independent Accountants......................... F-12
Consolidated Balance Sheets at August 31, 1999 and 1998
(restated)............................................. F-13
Consolidated Statements of Operations and Comprehensive
Loss for the fiscal years ended August 31, 1999, 1998
(restated) and 1997 (restated)......................... F-14
Consolidated Statements of Cash Flows for the fiscal years
ended August 31, 1999, 1998 (restated) and 1997
(restated)............................................. F-15
Consolidated Statements of Stockholders' Equity for each
of the fiscal years in the period from September 1,
1996 to August 31, 1999................................ F-16
Notes to Consolidated Financial Statements................ F-17
LEAP WIRELESS INTERNATIONAL, INC.
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at February 29, 2000
(unaudited) and August 31, 1999........................ F-44
Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited) for the three and six
months ended February 29, 2000 and February 28, 1999
(restated)............................................. F-45
Condensed Consolidated Statements of Cash Flows
(unaudited) for the six months ended February 29, 2000
and February 28, 1999 (restated)....................... F-46
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ F-47
SMARTCOM S.A. (COMPANY IN THE DEVELOPMENT STAGE)
Financial Statements:
Report of Independent Accountants......................... F-61
Balance Sheet at March 31, 1999 (unaudited), December 31,
1998 and 1997.......................................... F-62
Statement of Income and Comprehensive Income for the three
months ended March 31, 1999 (unaudited) and March 31,
1998 (unaudited), for the year ended December 31, 1998
and for the periods from inception (March 3, 1997) to
December 31, 1997, to March 31, 1999 (unaudited) and to
December 31, 1998...................................... F-63
Statement of Cash Flows for the three months ended March
31, 1999 (unaudited) and March 31, 1998 (unaudited),
for the year ended December 31, 1998 and for the
periods from inception (March 3, 1997) to December 31,
1997, to March 31, 1999 (unaudited) and to December 31,
1998................................................... F-64
Statement of Shareholders' Equity for the period from
Inception (March 3, 1997) to December 31, 1998 and for
the period from January 1, 1999 to March 31, 1999
(unaudited)............................................ F-66
Notes to the Financial Statements......................... F-67
</TABLE>
F-1
<PAGE> 145
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT
STAGE COMPANY)
Consolidated Financial Statements:
Report of Independent Accountants......................... F-82
Consolidated Balance Sheet at December 31, 1998........... F-83
Consolidated Statement of Operations for the period from
July 27, 1998 (inception) to December 31, 1998......... F-84
Consolidated Statement of Cash Flows for the period from
July 27, 1998 (inception) to December 31, 1998......... F-85
Consolidated Statement of Stockholders' Deficit for the
period from July 27, 1998 (inception) to December 31,
1998................................................... F-86
Notes to the Consolidated Financial Statements............ F-87
PEGASO TELECOMUNICACIONES, S. A. DE C. V. (DEVELOPMENT STAGE
ENTERPRISE)
Consolidated Financial Statements:
Report of Independent Accountants......................... F-95
Consolidated Balance Sheet at September 30, 1999
(unaudited) and December 31, 1999 and 1998............. F-96
Consolidated Statement of Income for the nine-month period
ended September 30, 1999 (unaudited) and for the period
from June 24, 1998 (date of inception) to December 31,
1998................................................... F-97
Consolidated Statement of Cash Flows for the nine-month
period ended September 30, 1999 (unaudited) and for the
period from June 24, 1998 (date of inception) to
December 31, 1998...................................... F-98
Statement of Stockholders' Equity for the period from June
24, 1998 (date of inception) to December 31, 1998 and
for the period from January 1, 1999 to September 30,
1999 (unaudited)....................................... F-99
Notes to the Consolidated Financial Statements............ F-100
CRICKET COMMUNICATIONS HOLDINGS, INC. (A DEVELOPMENT STAGE
COMPANY)
Pro Forma Financial Information........................... F-112
Unaudited Pro Forma Consolidated Balance Sheet at February
29, 2000............................................... F-113
Unaudited Pro Forma Consolidated Statement of Operations
for the six months ended February 29, 2000............. F-114
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended August 31, 1999..................... F-115
Notes to the Pro Forma Financial Information
(unaudited)............................................ F-116
CRICKET COMMUNICATIONS HOLDINGS, INC. (A DEVELOPMENT STAGE
COMPANY)
Consolidated Financial Statements:
Report of Independent Accountants......................... F-118
Consolidated Balance Sheets at February 29, 2000
(unaudited) and August 31, 1999 and 1998............... F-119
Consolidated Statements of Operations for the six months
ended February 29, 2000 and February 28, 1998
(unaudited), for the years ended August 31, 1999 and
1998, for the period from December 1, 1996 (inception)
to August 31, 1997, for the period from December 1,
1996 (inception) to August 31, 1999 and for the period
from December 1, 1996 (inception) to February 29, 2000
(unaudited)............................................ F-120
Consolidated Statements of Cash Flows for the six months
ended February 29, 2000 and February 28, 1999
(unaudited), for the years ended August 31, 1999 and
1998, for the period from December 1, 1996 (inception)
to August 31, 1997, for the period from December 1,
1996 (inception) to August 31, 1999 and for the period
from December 1, 1996 (inception) to February 29, 2000
(unaudited)............................................ F-121
</TABLE>
F-2
<PAGE> 146
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from December 1, 1996 (inception) to
August 31, 1999 and for the six months ended February
29, 2000 (unaudited)................................... F-122
Notes to Consolidated Financial Statements................ F-123
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
Consolidated Financial Statements:
Report of Independent Accountants......................... F-134
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-135
Consolidated Statements of Operations for the fiscal years
ended December 31, 1999, 1998 and 1997................. F-136
Consolidated Statements of Redeemable Stock and
Stockholders' Equity (Deficit) for each of the fiscal
years in the period from January 1, 1996 to December
31, 1999............................................... F-137
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1999, 1998 and 1997................. F-138
Notes to Consolidated Financial Statements................ F-139
</TABLE>
F-3
<PAGE> 147
LEAP WIRELESS INTERNATIONAL, INC.
PRO FORMA FINANCIAL INFORMATION
The Pro Forma Financial Information is based on the historical consolidated
financial statements of Leap Wireless International, Inc. and its subsidiaries
("Leap" or the "Company") at February 29, 2000, for the six months ended
February 29, 2000 and for the year ended August 31, 1999, adjusted to give
effect to: a) the Company's acquisition in April 1999 of the remaining 50% of
Smartcom S.A. ("Smartcom"), formerly named Chilesat Telefonia Personal, S.A.,
that it did not already own; b) the acquisition in March 2000 of substantially
all the assets of Chase Telecommunications Holdings, Inc. ("Chase
Telecommunications Holdings") by the Company and its indirect subsidiary Cricket
Communications, Inc.; c) the Company's wireless license acquisition from AirGate
Wireless, L.L.C. ("AirGate") in January 2000; and d) the Company's pending
wireless license acquisitions from PCS Devco, Inc. ("PCS Devco"), Radiofone PCS,
L.L.C. ("Radiofone"), Zuma PCS, LLC ("Zuma"), Beta Communications, L.L.C.
("Beta"), CM PCS LLC ("CM PCS") and Center Point PCS ("Center Point") as if they
had already occurred. The Unaudited Pro Forma Consolidated Balance Sheet at
February 29, 2000 gives effect to the acquisition of substantially all the
assets of Chase Telecommunications Holdings and the pending acquisitions of
wireless licenses from PCS Devco, Radiofone, Zuma, Beta, CM PCS and Center Point
as if they had occurred as of February 29, 2000. The Unaudited Pro Forma
Consolidated Statement of Operations for the six months ended February 29, 2000
gives effect to the acquisition of substantially all the assets of Chase
Telecommunications Holdings and the acquisition and pending acquisition of
wireless licenses from AirGate, PCS Devco, Radiofone, Zuma, Beta, CM PCS and
Center Point as if they had occurred as of September 1, 1999. The Unaudited Pro
Forma Consolidated Statement of Operations for the year ended August 31, 1999
gives effect to the acquisition of the remaining 50% interest in Smartcom, the
acquisition of substantially all the assets of Chase Telecommunications Holdings
and the acquisition and pending acquisitions of wireless licenses from AirGate,
PCS Devco, Radiofone, Zuma, Beta, CM PCS and Center Point as if they had
occurred as of September 1, 1998. The acquisitions and related adjustments are
described in the accompanying notes. The Pro Forma Financial Information is
based upon available information and certain assumptions that management
believes are reasonable. In our opinion, all adjustments have been made that are
necessary to present fairly the pro forma data. The final recorded amounts could
differ although such differences are not expected to be material.
The Pro Forma Financial Information is provided for illustrative purposes
only and does not purport to represent what the Company's results of operations
or financial condition actually would have been had these acquisitions in fact
occurred on such dates or to project the Company's results of operations or
financial condition for any future period or date. The Pro Forma Financial
Information and accompanying notes should be read in conjunction with the
historical financial statements of the Company, Smartcom and Chase
Telecommunications Holdings.
F-4
<PAGE> 148
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 29, 2000
-----------------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------------- ---------------------------------------
CHASE CHASE LEAP
TELECOMMUNICATIONS TELECOMMUNICATIONS WIRELESS LICENSE CONSOLIDATED
LEAP HOLDINGS HOLDINGS ACQUISITIONS PRO FORMA
---------- ------------------ ------------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents... $ 599,935 $ 5,336 $ (6,300)(1) $(74,402)(9) $ 524,569
Restricted cash equivalents
and short-term
investments............... 58,667 -- -- -- 58,667
Accounts receivable, net.... 6,354 5,925 -- -- 12,279
Inventories................. 5,379 145 -- -- 5,524
Recoverable taxes........... 8,034 -- -- -- 8,034
Other current assets........ 6,181 148 -- -- 6,329
---------- --------- --------- -------- ----------
Total current assets.... 684,550 11,554 (6,300) (74,402) 615,402
---------- --------- --------- -------- ----------
Property and equipment,
net....................... 136,777 35,559 -- -- 172,336
Investments in and loans
receivable from
unconsolidated wireless
operating companies....... 71,676 -- (17,606)(2) -- 54,070
Intangible assets, net...... 94,626 60,456 33,153(4) 112,745(9) 300,980
Restricted investments...... 49,811 -- -- -- 49,811
Deposits and other assets... 16,223 404 -- (100)(9) 16,527
---------- --------- --------- -------- ----------
Total assets............ $1,053,663 $ 107,973 $ 9,247 $ 38,243 $1,209,126
========== ========= ========= ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable and accrued
liabilities............... $ 21,361 $ 8,115 $ -- $ -- $ 29,476
Loans payable to banks...... 32,007 -- -- -- 32,007
Other current liabilities... 1,618 2,439 -- -- 4,057
---------- --------- --------- -------- ----------
Total current
liabilities........... 54,986 10,554 -- -- 65,540
---------- --------- --------- -------- ----------
Long-term debt.............. 552,876 196,985 (105,649)(2)(3)(4) 2,893(9) 647,105
Other long-term
liabilities............... 10,120 12 -- -- 10,132
---------- --------- --------- -------- ----------
Total liabilities....... 617,982 207,551 (105,649) 2,893 722,777
---------- --------- --------- -------- ----------
Redeemable stock............ -- 6,777 (6,777)(3) -- --
---------- --------- --------- -------- ----------
Stockholders' equity
(deficit):
Preferred stock........... -- -- -- -- --
Common stock.............. 3 1 (1)(2) -- 3
Additional paid-in
capital................. 787,887 9,000 6,318(1)(2) 35,350(9) 838,555
Accumulated deficit....... (346,134) (115,356) 115,356(2) -- (346,134)
Accumulated other
comprehensive loss...... (6,075) -- -- -- (6,075)
---------- --------- --------- -------- ----------
Total stockholders'
equity (deficit)...... 435,681 (106,355) 121,673 35,350 486,349
---------- --------- --------- -------- ----------
Total liabilities and
stockholders' equity
(deficit)............. $1,053,663 $ 107,973 $ 9,247 $ 38,243 $1,209,126
========== ========= ========= ======== ==========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-5
<PAGE> 149
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 29, 2000
----------------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------------ --------------------------------------
CHASE CHASE LEAP
TELECOMMUNICATIONS TELECOMMUNICATIONS WIRELESS LICENSE CONSOLIDATED
LEAP HOLDINGS HOLDINGS ACQUISITIONS PRO FORMA
--------- ------------------ ------------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues........... $ 14,283 $ 5,289 $ -- $ -- $ 19,572
--------- -------- ------- ------- ---------
Operating expenses:
Cost of operating
revenues................. (22,462) (7,540) -- -- (30,002)
Selling, general and
administrative........... (33,041) (6,186) 716(5) -- (38,511)
Depreciation and
amortization............. (10,248) (18,546) (1,196)(6) -- (29,990)
--------- -------- ------- ------- ---------
Total operating
expenses............... (65,751) (32,272) (480) -- (98,503)
--------- -------- ------- ------- ---------
Operating loss............. (51,468) (26,983) (480) -- (78,931)
Equity in net loss of
unconsolidated wireless
operating companies........ (50,059) -- 20,162(7) -- (29,897)
Interest income.............. 1,577 32 --(8) -- 1,609
Interest expense............. (21,120) (9,488) 4,840(8) (5,411)(10) (31,179)
Foreign currency transaction
losses..................... (1,396) -- -- -- (1,396)
Minority interest............ 518 -- -- 518
Other income (expense),
net........................ (2,868) (165) -- -- (3,033)
--------- -------- ------- ------- ---------
Loss before extraordinary
item....................... (124,816) (36,604) $24,522 $(5,411) $(142,309)
======= ======= =========
Extraordinary loss on early
extinguishments of debt.... (4,422) --
--------- --------
Net income (loss).......... $(129,238) $(36,604)
========= ========
Basic and diluted net loss
per common share:
Loss before extraordinary
item..................... $ (6.31) $ (7.05)
=========
Extraordinary loss......... (0.22)
---------
Net loss..................... $ (6.53)
=========
Shares used to calculate
basic and diluted net loss
per common share........... 19,788 20,196
========= =========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-6
<PAGE> 150
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
--------------------------------------------
HISTORICAL
--------------------------------------------
CHASE
LEAP TELECOMMUNICATIONS
CONSOLIDATED SMARTCOM HOLDINGS
------------ -------- ------------------
<S> <C> <C> <C>
Operating revenues............... $ 3,907 $ 3,670 $ 4,389
--------- -------- --------
Operating expenses:
Cost of operating revenues..... (3,810) (2,843) (7,513)
Selling, general and
administrative............... (28,745) (10,566) (7,682)
Depreciation and
amortization................. (5,824) (7,895) (5,476)
--------- -------- --------
Total operating expenses... (38,379) (21,304) (20,671)
--------- -------- --------
Operating loss................. (34,472) (17,634) (16,282)
Equity in net loss of
unconsolidated wireless
operating companies............ (100,300) -- --
Write-down of investments in
unconsolidated wireless
operating companies............ (27,242) -- --
Interest income.................. 2,505 383 207
Interest expense................. (10,356) (5,997) (16,129)
Foreign currency transaction
losses......................... (7,211) (4,199) --
Gain on sale of wholly owned
subsidiary..................... 9,097 -- --
Gain on issuance of stock by
unconsolidated wireless
operating company.............. 3,609 -- --
Other income (expense), net...... (243) (272) 379
--------- -------- --------
Net income (loss).............. $(164,613) $(27,719) $(31,825)
========= ======== ========
Basic and diluted net loss per
common share................... $ (9.19)
=========
Shares used to calculate basic
and diluted net loss per common
share.......................... 17,910
=========
<CAPTION>
YEAR ENDED AUGUST 31, 1999
--------------------------------------------------------------
PRO FORMA ADJUSTMENTS
----------------------------------------------
CHASE WIRELESS LEAP
TELECOMMUNICATIONS LICENSE CONSOLIDATED
SMARTCOM HOLDINGS ACQUISITIONS PRO FORMA
-------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues............... $ -- $ -- $ -- $ 11,966
------- ------- ------- ---------
Operating expenses:
Cost of operating revenues..... 940(11) -- -- (13,226)
Selling, general and
administrative............... -- 373(5) -- (46,620)
Depreciation and
amortization................. (2,128)(11) (2,355)(6) (23,678)
------- ------- ------- ---------
Total operating expenses... (1,188) (1,982) -- (83,524)
------- ------- ------- ---------
Operating loss................. (1,188) (1,982) -- (71,558)
Equity in net loss of
unconsolidated wireless
operating companies............ 13,129(12) 20,900(7) -- (66,271)
Write-down of investments in
unconsolidated wireless
operating companies............ -- -- -- (27,242)
Interest income.................. (1,631)(13) --(8) 1,464
Interest expense................. (730)(13) 5,791(8) (9,945)(10) (37,366)
Foreign currency transaction
losses......................... -- -- -- (11,410)
Gain on sale of wholly owned
subsidiary..................... -- -- -- 9,097
Gain on issuance of stock by
unconsolidated wireless
operating company.............. -- -- -- 3,609
Other income (expense), net...... -- -- -- (136)
------- ------- ------- ---------
Net income (loss).............. $ 9,580 $24,709 $(9,945) $(199,813)
======= ======= ======= =========
Basic and diluted net loss per
common share................... $ (10.91)
=========
Shares used to calculate basic
and diluted net loss per common
share.......................... 18,314
=========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-7
<PAGE> 151
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
NOTE 1. DESCRIPTION OF TRANSACTIONS
CHASE TELECOMMUNICATIONS HOLDINGS ACQUISITION
In March 2000, the Company acquired substantially all the assets of Chase
Telecommunications Holdings for: $6.3 million in cash; the assumption of certain
liabilities of Chase Telecommunications Holdings; a warrant to purchase 1% of
the common stock of Cricket Communications Holdings, Inc. ("Cricket
Communications Holdings"), exercisable at $1.0 million; the return of the
Company's existing stock ownership and warrants to purchase stock in Chase
Telecommunications Holdings; and certain contingent earn-outs.
The acquisition will be accounted for under the purchase method of
accounting. Based on the fair value of Chase Telecommunications Holdings'
liabilities assumed in the unaudited pro forma consolidated balance sheet, and
the fair value of approximately $15.3 million has been attributed to the warrant
to purchase 1% of the common stock of Cricket Communications Holdings, the
aggregate purchase price will be approximately $150.6 million ($161.7 million,
excluding discount on Federal Communications Commission ("FCC") debt). The fair
value of the warrant was determined on the date of closing, which was the date
the number of warrant shares first become known, using the Black-Scholes option
pricing model. Of this amount, approximately $47.5 million has been allocated to
property and equipment and other assets and approximately $93.6 million to
intangible assets, primarily wireless licenses. The contingent earn-out
payments, up to a maximum of $41.0 million plus certain costs, are based upon
certain targeted operating results for the Chase Telecommunications Holdings
properties during the fifth full fiscal year following the closing of the
transaction. These payment obligations, if any, will be recorded as additional
purchase price.
WIRELESS LICENSE ACQUISITION
In January 2000, the Company purchased three wireless licenses covering
markets in North Carolina from AirGate for $25.0 million. The purchase price
consisted of the Company assuming $11.1 million ($9.6 million, net of discount),
6.25% per annum notes due in April 2007 to the FCC related to the licenses and
the remainder payable in cash. The Company obtained the $13.9 million for the
cash payment through additional borrowings under the Company's credit agreement
with Qualcomm.
PENDING WIRELESS LICENSE ACQUISITIONS
In September 1999, the Company agreed to purchase a wireless license
covering the Dayton, Ohio market from PCS Devco for $3.5 million. The purchase
price consists of the Company assuming a $1.1 million ($0.9 million, net of
discount), 6.25% per annum note due in June 2007 to the FCC related to the
license and the remainder payable in cash. The Company is required to make PCS
Devco's payments on the FCC note during the period prior to closing of the
transaction, reducing the remaining cash payment to PCS Devco. In addition, the
Company will transfer to PCS Devco one of the 36 wireless licenses it acquired
in the federal government's April 1999 reauction of PCS spectrum.
In January 2000, the Company agreed to purchase two wireless licenses
covering the Pittsburgh, Pennsylvania and Denver, Colorado markets from
Radiofone. The purchase price for the Pittsburgh license is $18.4 million in
cash and the purchase price for the Denver license consists of 232,754 shares of
F-8
<PAGE> 152
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
the Company's common stock (valued at approximately $20.4 million at February
29, 2000) and $3.4 million in cash less a $1.8 million ($1.5 million, net of
discount), 9.75% per annum note due in April 2007 to the FCC related to the
license which will be assumed by the Company at the closing. As of February 29,
2000, the outstanding principal amount of the FCC debt was approximately $1.5
million.
In February 2000, the Company agreed to purchase all the outstanding stock
of three subsidiaries of Zuma that own three wireless licenses covering markets
in Albany, Columbus and Macon, Georgia. The purchase price consists of 170,374
shares of the Company's common stock (valued at approximately $14.9 million at
February 29, 2000).
In March 2000, the Company agreed to acquire three wireless licenses
covering the Phoenix, Arizona, Reno, Nevada and Roswell, New Mexico markets from
Beta. The purchase price for the licenses is $33.3 million in cash.
In April 2000, the Company agreed to acquire a wireless license covering
the Omaha, Nebraska market from CM PCS. The purchase price for the license is
$14.2 million in cash plus the assumption of a $0.7 million ($0.5 million, net
of discount), 6.25% per annum note due in April 2007 to the FCC related to the
license. As of February 29, 2000, the outstanding principal amount of the FCC
debt was approximately $0.6 million.
Also in April 2000, the Company agreed to acquire a wireless license
covering the Lincoln, Nebraska market from Center Point. The purchase price for
the wireless license is $4.3 million in cash.
Each of these transactions is subject to FCC approval and other conditions
prior to closing. Accordingly, there can be no assurance that these transactions
will ultimately be consummated.
SMARTCOM ACQUISITION
In April 1999, a wholly owned subsidiary of Leap acquired all of the shares
of Smartcom that it did not already own. Smartcom, a Chilean corporation that
holds a license to offer wireless telephone services, has deployed and is
operating a nationwide wireless telephone system in Chile. Prior to the
acquisition, the Company's wholly owned subsidiary, Inversiones Leap Wireless
Chile S.A. ("Inversiones"), owned 50% of the shares of Smartcom. The Company had
previously accounted for its interest in Smartcom under the equity method.
Inversiones acquired the remaining 50% of the shares of Smartcom for $28.0
million in cash and a $22.0 million non-interest bearing note payable in May
2002. The present value of the $22.0 million note payable is approximately $15.7
million. Therefore, the purchase price of the acquisition was $43.7 million, of
which approximately $40.8 million has been allocated under the purchase method
of accounting to intangible assets, primarily wireless licenses and rights to
wireless network systems. The Company obtained $28.0 million for the cash
payment in the acquisition through additional borrowings under its credit
agreement with Qualcomm.
The acquisition of Smartcom occurred in April 1999, and accordingly, the
results of operations of Smartcom since April 1, 1999 have been included in
Leap's consolidated financial statements.
F-9
<PAGE> 153
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
NOTE 2. PRO FORMA ADJUSTMENTS RELATED TO ACQUISITION OF SUBSTANTIALLY ALL THE
ASSETS OF CHASE TELECOMMUNICATIONS HOLDINGS
(1) To record (a) purchase consideration of $6.3 million in cash; and (b) fair
value of approximately $15.3 million attributed to the warrant to purchase
1% of the common stock of Cricket Communications Holdings.
(2) (a) Elimination of inter-company working capital loans of $59.4 million and
equipment loans of $17.6 million, including accrued and capitalized
interest, provided by Leap to Chase Telecommunications Holdings; (b)
adjustment to the carrying value of Chase Telecommunications Holdings debt
obligation to the FCC, calculated using an interest rate of 10.75% per
annum; and (c) elimination of stockholder's deficit of Chase
Telecommunications Holdings upon consolidation. The carrying value of
Leap's investment in and working capital loans to Chase Telecommunications
Holdings have previously been reduced to zero.
(3) To eliminate long-term debt totaling $21.8 million and redeemable preferred
stock totaling $6.8 million of Chase Telecommunications Holdings not
assumed by Leap in the acquisition.
(4) To record (a) estimated fair value of non-compete agreements of $0.9
million, customer list of $5.6 million and wireless licenses of $87.2
million; and (b) reduction of $9.5 million in equipment vendor loans to
estimated fair value in connection with the preliminary purchase price
allocation.
(5) To eliminate Leap management and royalty fee expense recorded by Chase
Telecommunications Holdings.
(6) Additional amortization resulting from the preliminary purchase price
allocation of: (a) $0.1 million and $0.3 million for the six months ended
February 29, 2000 and the year ended August 31, 1999, respectively, for
non-compete agreements (amortized on a straight-line basis over the three
year term of the agreements); (b) $1.0 million and $2.0 million for the six
months ended February 29, 2000 and the year ended August 31, 1999,
respectively, for customer list (amortized on a straight-line basis over a
33 month expected useful life for the market where service has commenced);
and (c) $50,000 and $61,000 for the six months ended February 29, 2000 and
the year ended August 31, 1999, respectively, for wireless licenses
(amortized on a straight-line basis over a 40 year expected useful life for
the market where service has commenced).
(7) Elimination of the Company's share of the net loss of Chase
Telecommunications Holdings previously recognized under the equity method
of accounting.
(8) (a) Elimination of interest expense recorded by Chase Telecommunications
Holdings on debt balances not assumed by Leap and inter-company working
capital and equipment loans provided by Leap; and (b) adjustment to
interest expense resulting from the amortization of the discount on the FCC
debt obligations of Chase Telecommunications Holdings. Interest income due
to Leap has previously been eliminated.
F-10
<PAGE> 154
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
NOTE 3. PRO FORMA ADJUSTMENTS RELATED TO ACQUISITION AND PENDING ACQUISITIONS OF
WIRELESS LICENSES
(9) To record pending acquisitions of wireless licenses summarized as follows
(in thousands):
<TABLE>
<CAPTION>
PCS DEVCO RADIOFONE ZUMA BETA CM PCS CENTER POINT TOTAL
--------- --------- ------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.................................... $2,368 $20,285 $ -- $33,250 $14,174 $4,325 $ 74,402
Application of deposits................. 100 -- -- -- -- -- 100
Fair value of FCC debt assumed using an
interest rate of 10.75% per annum..... 886 1,468 -- -- 539 -- 2,893
Issuance of common stock................ -- 20,410 14,940 -- -- -- 35,350
------ ------- ------- ------- ------- ------ --------
Total........................... $3,354 $42,163 $14,940 $33,250 $14,713 $4,325 $112,745
====== ======= ======= ======= ======= ====== ========
</TABLE>
(10) To record interest expense on (a) FCC debt obligations of AirGate, PCS
Devco, Radiofone and CM PCS, calculated using an interest rate of 10.75%
per annum and (b) additional borrowings under credit agreements to fund
license acquisitions.
NOTE 4. PRO FORMA ADJUSTMENTS RELATED TO SMARTCOM
(11) (a) Additional amortization of $1.2 million for the Smartcom
telecommunications licenses (amortized on a straight-line basis over a 28.7
year expected useful life) resulting from the purchase price allocation;
and (b) reclassification of amortization of the rights to wireless network
systems of $0.9 million (amortized on a straight-line basis over a 11.5
year expected useful life) from cost of operating revenues to depreciation
and amortization. Consistent with the application of generally accepted
accounting principles applied to the historical financial statements of
Smartcom, amortization of the wireless licenses and rights to wireless
network systems began in September 1998 when commercial telephone traffic
commenced.
(12) Elimination of the Company's share of the net loss of Smartcom previously
recognized under the equity method of accounting.
(13) (a) Elimination of interest income recorded by Leap on inter-company loans
advanced to Smartcom; (b) elimination of interest expense recorded by
Smartcom on inter-company loans advanced by Leap to Smartcom; (c)
additional interest expense for the period reflecting $28.0 million of
borrowings by the Company under its credit agreement with Qualcomm to fund
the cash portion of the purchase price; and (d) amortization of the
discount on the $22.0 million non-interest bearing three-year note,
calculated using an imputed interest rate of 11.73% per annum commencing
September 1, 1998.
NOTE 5. TAXES
Pro forma adjustments for income tax expense are not required as the
deferred tax assets of Leap, which are reflected net of a full valuation
allowance, would be available to offset any deferred tax liabilities.
* * * *
F-11
<PAGE> 155
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Leap Wireless International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss, of cash
flows and of stockholders' equity present fairly, in all material respects, the
financial position of Leap Wireless International, Inc. and its subsidiaries at
August 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended August 31, 1999 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.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted the equity method of accounting for its investment in Chase
Telecommunications Holdings, Inc. during the year ended August 31, 1999. The
accompanying financial statements have been restated to reflect the adoption of
the equity method retroactive to the initial date of the Company's investment in
Chase Telecommunications Holdings, Inc.
PricewaterhouseCoopers LLP
San Diego, California
October 18, 1999
F-12
<PAGE> 156
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
1999 1998
--------- ----------
(RESTATED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 26,215 $ --
Accounts receivable, net.................................... 2,726 --
Inventories................................................. 5,410 --
Recoverable taxes........................................... 3,907 --
Other current assets........................................ 1,926 --
--------- --------
Total current assets................................... 40,184 --
--------- --------
Property and equipment, net................................. 116,947 --
Investments in and loans receivable from unconsolidated
wireless operating companies.............................. 94,429 150,914
Intangible assets, net...................................... 73,944 6,838
Deposits and other assets................................... 9,827 --
--------- --------
Total assets........................................... $ 335,331 $157,752
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 16,372 $ 5,789
Loans payable to banks...................................... 17,225 9,000
--------- --------
Total current liabilities.............................. 33,597 14,789
--------- --------
Long-term debt.............................................. 221,812 --
Other long-term liabilities................................. 8,504 --
--------- --------
Total liabilities...................................... 263,913 14,789
--------- --------
Commitments and contingencies (Note 12)
Minority interest in consolidated subsidiary................ 518 --
--------- --------
Stockholders' equity:
Preferred stock -- authorized 10,000,000 shares $.0001 par
value, no shares issued and outstanding................ -- --
Common stock -- authorized 75,000,000 shares; $.0001 par
value, 18,370,974 shares issued and outstanding........ 2 --
Additional paid-in capital................................ 291,189 --
Former parent company's investment........................ -- 197,598
Accumulated deficit....................................... (216,896) (52,283)
Accumulated other comprehensive loss...................... (3,395) (2,352)
--------- --------
Total stockholders' equity............................. 70,900 142,963
--------- --------
Total liabilities and stockholders' equity............. $ 335,331 $157,752
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 157
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------
1999 1998 1997
--------- ---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Operating revenues................................... $ 3,907 $ -- $ --
--------- -------- -------
Operating expenses:
Cost of operating revenues........................... (3,810) -- --
Selling, general and administrative expenses......... (28,745) (23,888) (1,361)
Depreciation and amortization........................ (5,824) -- --
--------- -------- -------
Total operating expenses................... (38,379) (23,888) (1,361)
--------- -------- -------
Operating loss..................................... (34,472) (23,888) (1,361)
Equity in net loss of unconsolidated wireless
operating companies................................ (100,300) (23,118) (3,793)
Write-down of investments in unconsolidated wireless
operating companies................................ (27,242) -- --
Interest income...................................... 2,505 273 --
Interest expense and amortization of discount and
facility fee....................................... (10,356) -- --
Foreign currency transaction losses.................. (7,211) -- --
Gain on sale of wholly owned subsidiary.............. 9,097 -- --
Gain on issuance of stock by unconsolidated wireless
operating company.................................. 3,609 -- --
Other income (expense), net.......................... (243) -- --
--------- -------- -------
Net loss........................................... (164,613) (46,733) (5,154)
Other comprehensive income (loss):
Foreign currency translation (losses) gains........ (1,043) (2,412) 60
--------- -------- -------
Comprehensive loss................................. $(165,656) $(49,145) $(5,094)
========= ======== =======
Basic and diluted net loss per common share (Note
2)................................................. $ (9.19) $ (2.65) $ (0.29)
========= ======== =======
Shares used to calculate basic and diluted net loss
per common share (Note 2).......................... 17,910 17,648 17,648
========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 158
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------
1999 1998 1997
--------- ---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $(164,613) $ (46,733) $ (5,154)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 5,824 -- --
Gain on sale of wholly owned subsidiary................. (9,097) -- --
Gain on issuance of stock by unconsolidated wireless
operating company..................................... (3,609) -- --
Equity in net loss of unconsolidated wireless operating
companies............................................. 100,300 23,118 3,793
Write-down of investments in unconsolidated wireless
operating companies................................... 27,242 -- --
Interest accrued to loans receivable and
payable -- net........................................ 8,251 (273) --
Other................................................... (386) -- --
Changes in assets and liabilities, net of effects from
acquisition:
Accounts receivable, net.............................. (1,203) -- --
Inventories........................................... 1,873 -- --
Recoverable taxes..................................... (599) -- --
Deposits and other assets............................. (5,989) -- --
Accounts payable and accrued liabilities.............. 9,671 5,510 168
Other liabilities..................................... (1,770) -- --
--------- --------- --------
Net cash used in operating activities....................... (34,105) (18,378) (1,193)
--------- --------- --------
Investing activities:
Purchase of property and equipment........................ (3,935) -- --
Investments in and loans to unconsolidated wireless
operating companies..................................... (124,471) (133,904) (46,000)
Loan receivable to related party.......................... (17,500) -- --
Repayment of loan receivable from related party........... 17,500 -- --
Acquisitions, net of cash acquired........................ (26,942) (564) --
Purchase of wireless communications licenses.............. (19,009) (6,274) --
Proceeds from sale of wholly owned subsidiary............. 16,024 -- --
--------- --------- --------
Net cash used in investing activities....................... (158,333) (140,742) (46,000)
--------- --------- --------
Financing activities:
Proceeds from loans payable to banks...................... 6,720 9,000 --
Borrowings under credit agreement......................... 128,584 -- --
Repayment of borrowings under credit agreement............ (17,500) -- --
Issuance of common stock.................................. 2,301 -- --
Exercise of subsidiary stock options...................... 1,103 -- --
Former parent company's investment........................ 95,268 150,120 47,193
--------- --------- --------
Net cash provided by financing activities................... 216,476 159,120 47,193
--------- --------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 2,177 -- --
--------- --------- --------
Net increase in cash and cash equivalents................... 26,215 -- --
Cash and cash equivalents at beginning of year.............. -- -- --
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 26,215 $ -- $ --
========= ========= ========
Supplemental disclosure of non-cash investing and financing
activities:
Loans to unconsolidated wireless operating companies
converted to equity investment.......................... $ 50,196 $ -- $ --
Long-term financing to purchase assets.................... $ 8,791 $ -- $ --
Facility fee due on long-term debt........................ $ 5,300 $ -- $ --
Repurchase of warrant..................................... $ 5,355 $ -- $ --
Supplemental disclosure of cash used for acquisitions:
Total purchase value...................................... $ 43,699 $ 564 $ --
Note payable issued, net of discount...................... (15,699) -- --
Cash acquired............................................. (1,058) -- --
--------- --------- --------
Cash used for acquisitions................................ $ 26,942 $ 564 $ --
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 159
LEAP WIRELESS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
FORMER OTHER
COMMON STOCK ADDITIONAL PARENT COMPREHENSIVE
-------------------- PAID-IN COMPANY'S ACCUMULATED INCOME
SHARES AMOUNT CAPITAL INVESTMENT DEFICIT (LOSS) TOTAL
----------- ------ ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996...... -- $-- $ -- $ 285 $ (396) $ -- $ (111)
Transfers from former
parent...................... -- -- -- 47,193 -- -- 47,193
Net loss (restated)........... -- -- -- -- (5,154) -- (5,154)
Foreign currency translation
adjustment.................. -- -- -- -- -- 60 60
----------- -- -------- --------- --------- ------- ---------
Balance at August 31, 1997...... -- -- -- 47,478 (5,550) 60 41,988
Transfers from former
parent...................... -- -- -- 150,120 -- -- 150,120
Net loss (restated)........... -- -- -- -- (46,733) -- (46,733)
Foreign currency translation
adjustment.................. -- -- -- -- -- (2,412) (2,412)
----------- -- -------- --------- --------- ------- ---------
Balance at August 31, 1998...... -- -- -- 197,598 (52,283) (2,352) 142,963
Transfers from former
parent...................... -- -- -- 95,268 -- -- 95,268
Distribution by former
parent...................... 17,647,685 2 292,864 (292,866) -- -- --
Repurchase of warrant......... -- -- (5,355) -- -- -- (5,355)
Issuance of common stock...... 723,289 -- 2,356 -- -- -- 2,356
Effect of subsidiary and
unconsolidated wireless
operating company equity
transactions................ -- -- 1,324 -- -- -- 1,324
Net loss...................... -- -- -- -- (164,613) -- (164,613)
Foreign currency translation
adjustment.................. -- -- -- -- -- (1,043) (1,043)
----------- -- -------- --------- --------- ------- ---------
Balance at August 31, 1999...... 18,370,974 $2 $291,189 $ -- $(216,896) $(3,395) $ 70,900
=========== == ======== ========= ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 160
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
THE COMPANY AND NATURE OF BUSINESS
Leap Wireless International, Inc., a Delaware corporation, and its wholly
owned and majority-owned subsidiaries (the "Company" or "Leap") is a wireless
communications carrier that deploys, owns and operates networks in domestic and
international markets. Through its operating companies, Leap has launched
all-digital wireless networks in the United States, Chile and Mexico. The
Company was incorporated on June 24, 1998 as a wholly owned subsidiary of
Qualcomm Incorporated ("Qualcomm"). On September 23, 1998 (the "Distribution
Date"), Qualcomm distributed all of the outstanding shares of common stock of
the Company to Qualcomm's stockholders as a taxable dividend (the
"Distribution"). In connection with the Distribution, one share of Company
common stock was issued for every four shares of Qualcomm common stock
outstanding on September 11, 1998. Following the Distribution, the Company and
Qualcomm operate as independent companies.
THE DISTRIBUTION
Qualcomm transferred to the Company its equity interests in the following
domestic and international wireless communications operating companies: Chilesat
Telefonia Personal, S.A., recently renamed Smartcom S.A. ("Smartcom"), Pegaso
Telecomunicaciones, S.A. de C.V. ("Pegaso"), Chase Telecommunications Holdings,
Inc. ("Chase Telecommunications Holdings"), Metrosvyaz Limited ("Metrosvyaz"),
Orrengrove Investments Limited ("Orrengrove"), OzPhone Pty. Ltd. ("OzPhone"),
and certain other development stage businesses which are today operating under
the trade name "Cricket" (collectively, the "Leap Operating Companies").
Metrosvyaz, Orrengrove and OzPhone have been subsequently written off, written
down or sold. See Notes 3 and 4. Qualcomm also transferred to the Company cash
and its right to receive payment from working capital and other loans Qualcomm
made to the Leap Operating Companies, as well as certain miscellaneous assets
and liabilities. The aggregate net tangible book value of the assets transferred
by Qualcomm to the Company in connection with the Distribution was approximately
$236 million. The consolidated financial statements reflect the Company as if it
were a separate entity for all periods presented.
ADDITIONAL CAPITAL NEEDS
The Company experienced net losses for the years ended August 31, 1999,
1998 and 1997 of $164.6 million, $46.7 million and $5.2 million, respectively.
Further, the Leap 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 is incurred before
corresponding revenues are generated. In addition, the Company and its operating
companies are expected to be highly leveraged which will lead to significant
interest expense and principal repayment obligations. The Company therefore
expects to incur significant expenses in advance of generating revenues and, as
a result, to incur substantial additional losses in the near term. There can be
no assurance that the Company or any of the Leap Operating Companies will
achieve or sustain profitability in the future. Furthermore, there can be no
assurance that the Company will generate sufficient cash flows to meet its debt
obligations or successfully refinance any of its debt at maturity.
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 Operating Companies are expected to incur substantial losses
for the next several years. These operating companies will require
F-17
<PAGE> 161
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
substantial additional financing to build-out and operate their planned
networks. If the Leap Operating Companies do not obtain additional financing in
fiscal 2000, Leap expects that the scope of the planned network build-outs will
be reduced. If the Company is unable to obtain additional working capital or
financing, the Company may have to restrict its activities or sell its interests
in one or more operating companies.
There can be no assurance that any of the Leap Operating Companies or any
other companies in which Leap may acquire an interest will be able to obtain the
additional financing they require, 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 Company expects to obtain much of its required near-term financing
through borrowings under its secured credit facility with Qualcomm (the "Credit
Agreement"). The Credit Agreement bears interest at a variable rate, exposing
the Company to interest rate risk. The Company expects that it will have
borrowed substantially all of the funds available to it under the Credit
Agreement by the end of calendar year 2000. As one of the conditions to the
Federal Communications Commission's ("FCC") recognition of the Company's
qualification to hold C-Block and F-Block licenses of PCS spectrum, however, the
Company must take steps so that by January 2001, Qualcomm holds no more than 50%
of the Company's debt obligations. There can be no assurance that additional
sources of debt financing will be available to the Company to finance its
operations after the Credit Agreement has been fully drawn or to comply with the
condition imposed by the FCC regarding the Company's debt to Qualcomm. If Leap
fails to meet any of the conditions imposed by the FCC or otherwise fails to
maintain its qualification to own C-Block and F-Block licenses, that failure
would have a material adverse effect on Leap's financial condition and business
prospects.
INTERNATIONAL RISKS
The Company is subject to numerous risks as a result of its international
activities. The Leap 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, some of which are subject to rapid fluctuations
in currency exchange rates, consumer prices, inflation, employment levels and
gross domestic product. As a result, the Company and the Leap Operating
Companies are exposed to market risk from these changes, and are subject to
other economic and political risks, which could impact their results of
operations and financial condition.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Leap and its
wholly owned and majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Investments in entities, which Leap exercises significant influence,
but does not control, are accounted for using the equity method. In fiscal 1999,
to accommodate the different fiscal periods of the Company and its foreign
operating companies, the Company extended the lag for recognition of its share
of net earnings or losses of such foreign companies
F-18
<PAGE> 162
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from one month to two months. The effect of this change on previously reported
amounts was not significant.
For the fourth quarter of fiscal 1999, the financial statements of Smartcom
are included in the consolidated financial statements of the Company as a result
of the Company's acquisition of the remaining 50% of Smartcom that it did not
already own. The accounts of Smartcom have been consolidated using a two-month
lag.
FINANCIAL STATEMENT PREPARATION
The consolidated financial statements are prepared using generally accepted
accounting principles. These principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
RESTATEMENT
The Company adopted the equity method of accounting for its investment in
Chase Telecommunications Holdings in the third quarter of fiscal 1999. Prior to
that time, Leap accounted for its investment in Chase Telecommunications
Holdings under the cost method. Accordingly, all prior periods presented in
these financial statements have been adjusted retroactively in accordance with
generally accepted accounting principles.
ISSUANCE OF STOCK BY SUBSIDIARIES AND EQUITY INVESTEES
The Company recognizes gains and losses on issuance of stock by
subsidiaries and equity investees in its Consolidated Statement of Operations
and Comprehensive Loss, except for those subsidiaries and equity investees that
are in the development stage. For those entities in the development stage, gains
and losses are reflected in "effect of subsidiary and unconsolidated wireless
operating company equity transactions" in the Consolidated Statements of
Stockholders' Equity.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company uses the local currency as the functional currency for all of
its international consolidated and unconsolidated operating companies, except
where such operating companies operate in highly inflationary economies. Assets
and liabilities are translated into U.S. Dollars at the exchange rate in effect
at the balance sheet date. Revenues and expense items are translated at the
average rate prevailing during the period. Resulting unrealized gains and losses
are accumulated and reported as other comprehensive income or loss.
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 re-measured 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.
F-19
<PAGE> 163
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Resulting re-measurement gains or losses of foreign investees are
recognized in the results of operations.
Mexico ceased to be considered a highly inflationary economy as of January
1, 1999 and, as a result, Pegaso changed its functional currency from the U.S.
Dollar to its local currency on that date.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At August 31, 1999, the
Company's cash and cash equivalents consisted of deposits with banks and
investments in money market accounts and mutual funds. The Company has not
experienced any losses on its deposits of cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments,
including cash equivalents, accounts receivable, recoverable taxes and accounts
payable approximate fair value due to their short-term maturities. Loans payable
to banks and other long-term debts approximate fair value due to their risk
adjusted market rates of interest.
ACCOUNTS RECEIVABLE
The Company's trade accounts receivable are derived from revenue earned
from customers located in Chile and are denominated in Chilean pesos. The
Company records an allowance for uncollectable accounts receivable with respect
to those amounts estimated not to be recoverable.
INVENTORIES
Inventories consist of handsets and accessories not yet placed into service
and are stated at the lower of cost or market. The Company uses the first-in,
first-out method of determining inventory cost.
RECOVERABLE TAXES
Recoverable taxes relate to value added taxes (VAT) incurred on the supply
of goods and services which, are eventually borne by the final consumer. VAT
payments made by the Company on the build-out of its wireless communications
networks are recovered in cash from customers as services are provided.
INVESTMENTS IN UNCONSOLIDATED WIRELESS OPERATING COMPANIES
The Company uses the equity method to account for investments in corporate
entities in which it exercises significant influence, but does not control.
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. For those unconsolidated subsidiaries where the Company is the
only contributor
F-20
<PAGE> 164
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of assets, equity in net losses of wireless operating companies includes 100% of
the losses of the equity investee.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Constructed assets are
recorded at cost plus capitalized interest and direct costs incurred during the
construction phase. Depreciation is applied using the straight-line method over
the estimated useful lives of the assets, ranging from two to ten years, once
the assets are placed in service. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the remaining term of the related
lease. Repairs and maintenance costs are expensed as incurred.
INTANGIBLE ASSETS
Intangible assets, primarily wireless licenses and rights to wireless
network systems, are recorded at cost and amortized over their estimated useful
lives upon commencement of commercial service, which currently range from ten to
twenty-eight years.
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 is
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.
DEBT DISCOUNT AND FACILITY FEES
Debt discount and facility fees are amortized and recognized as interest
expense under the interest method.
REVENUE RECOGNITION
Operating revenues are recognized as telecommunications services are
rendered and as handsets and other products are delivered to customers.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee and outside
directors stock-based compensation using the intrinsic value method.
Compensation charges related to non-employee stock-based compensation are
measured using the fair value method.
INCOME TAXES
Current income tax benefit (expense) is the amount expected to be
receivable (payable) 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
F-21
<PAGE> 165
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
REPORTING COMPREHENSIVE INCOME (LOSS)
Effective September 1, 1998, the Company adopted the provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
requires the Company to report in its financial statements, in addition to net
income (loss), comprehensive income (loss) and its components, including foreign
currency translation gains (losses). Prior period financial statements have been
adjusted to conform to the requirements of SFAS No. 130.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the years ended August 31,
1999, 1998 and 1997 was calculated by dividing the net loss for each of the
periods by the weighted average number of common shares outstanding for each of
the periods of 17,910,440, 17,647,685 and 17,647,685, respectively. The weighted
average number of common shares outstanding assumes that the 17,647,685 shares
issued at Distribution were outstanding for the periods prior to Distribution.
Stock options for 5,939,715 common shares, the conversion of Qualcomm's Trust
Convertible Preferred Securities which are convertible into 2,270,573 shares of
the Company's common stock, and the exercise of a warrant issued to Qualcomm for
4,500,000 shares of the Company's common stock have not been considered in
calculating basic and diluted net loss per common share because their effect
would be anti-dilutive. As a result, the Company's basic and diluted net loss
per common share are the same.
SEGMENT REPORTING
Effective September 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 adopts
the management approach which designates internal reporting used by management
for making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect results of operations or the financial position of
the Company but did affect the disclosure of segment information.
FUTURE ACCOUNTING REQUIREMENTS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up
Activities", which the Company will be required to adopt for fiscal year 2000.
This SOP provided guidance on the financial reporting of start-up and
organizational costs. It requires start-up and organizational costs to be
expensed as incurred. The Company does not expect that the adoption of SOP No.
98-5 will have a material impact on its consolidated financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which the Company will be required to adopt
for fiscal year 2001. This statement establishes a new model for accounting for
derivatives and hedging activities. Under SFAS No. 133, all
F-22
<PAGE> 166
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on its consolidated financial position or results of operations.
NOTE 3. ACQUISITIONS AND DISPOSALS
SMARTCOM
In April 1999, Leap acquired the remaining 50% of Smartcom that it did not
already own from Telex-Chile S.A. and its operating affiliate, Chilesat S.A.
(collectively "Telex-Chile"). In exchange, the Company paid $28.0 million in
cash and issued a $22.0 million, non-interest-bearing note payable to
Telex-Chile due in May 2002. The present value of the $22.0 million
non-interest-bearing note payable to Telex-Chile was $15.7 million upon
issuance. Therefore, the total purchase price was $43.7 million. The Company
accounted for the transaction as a purchase and allocated the $40.8 million
excess investment over the fair value of the net assets acquired to intangible
assets, which include wireless licenses and rights to wireless network systems.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on September 1,
1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Revenues.................................................... $ 7,577 $ --
========= ========
Net loss.................................................... $(184,782) $(55,435)
========= ========
Pro forma basic and diluted net loss per common share....... $ (10.32) $ (3.14)
========= ========
</TABLE>
These unaudited pro forma amounts are for comparative purposes only and do
not necessarily represent what actual results of operations would have been had
the acquisition occurred on September 1, 1997, nor do they necessarily indicate
results of future operations.
LICENSES
In September 1998, the Company agreed to purchase three wireless licenses
from AirGate Wireless, L.L.C. ("AirGate") for $19.5 million, paying a deposit of
$0.6 million. The acquisition is subject to certain conditions.
In July 1999, the FCC issued a Memorandum Opinion and Order that found the
Company was qualified to hold C-Block and F-Block PCS licenses in the United
States. The order also approved the Company's $18.7 million cash acquisition of
36 wireless communications licenses in the U.S. government's April 1999
reauction of PCS spectrum and approved the transfer of the three licenses from
AirGate to the Company. The FCC order was subject to several conditions,
including the Company taking steps so that by January 2001, Qualcomm holds no
more than 50% of Leap's outstanding debt obligations.
F-23
<PAGE> 167
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OZPHONE
In June 1998, the Company purchased all the shares of OzPhone, an
Australian company, for $564,000. The entire purchase price was allocated to
goodwill. OzPhone then acquired several wireless licenses to provide mobile and
wireless local loop services in Australia. The total cost of the licenses was
$6.3 million. In August 1999, the Company sold all of the shares of OzPhone for
$16.0 million in cash and recorded a gain of $9.1 million.
NOTE 4. INVESTMENTS AND LOANS TO WIRELESS OPERATING COMPANIES
The Company has equity interests in companies that directly or indirectly
hold wireless communications licenses. Its participation in each company differs
and, except for Smartcom for the fourth quarter of fiscal 1999, the Company does
not have majority interests in such companies. The Company accounts for these
equity interests, except for Smartcom, under the equity method. For the fourth
quarter of fiscal 1999, the financial statements of Smartcom have been
consolidated. 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 lenders and the other participants, over which the Company has no
control. The Company and its consolidated subsidiaries have investments in
wireless operating companies consisting of the following:
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP
AUGUST 31,
-------------
1999 1998
----- ----
<S> <C> <C>
Chase Telecommunications Holdings (United States)........... 7.2% 7.2%
Smartcom (Chile)............................................ 100% 50%
Pegaso (Mexico)............................................. 28.6% 49%
Metrosvyaz (Russia)......................................... 50% 50%
Orrengrove (Russia)......................................... 50% 50%
</TABLE>
F-24
<PAGE> 168
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed combined financial information for the Leap Operating Companies
accounted for under the equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1999 1998
--------- ----------
(RESTATED)
<S> <C> <C>
Current assets.............................................. $ 140,899 $ 82,575
Non-current assets.......................................... 576,765 263,543
Current liabilities......................................... (112,539) (99,134)
Non-current liabilities..................................... (347,590) (178,491)
--------- ---------
Total stockholders' capital....................... 257,535 68,493
Other stockholders' share of capital........................ 146,059 (9,208)
--------- ---------
Company's share of capital.................................. 111,476 77,701
Excess cost of investment................................... -- 20,018
Lag period loans and advances............................... 10,195 53,195
Write-down in investments................................... (27,242) --
--------- ---------
Investments in and loans receivable from unconsolidated
wireless operating companies........................... $ 94,429 $ 150,914
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------
1999 1998 1997
--------- ---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Operating revenues....................................... $ 8,233 $ 22 $ --
--------- -------- --------
Operating expenses....................................... (153,062) (20,739) (5,234)
Other income (expense), net.............................. (22,471) (18,403) (18,108)
Foreign currency transaction loss........................ (1,532) (3,970) --
--------- -------- --------
Net loss............................................... (168,832) (43,090) (23,342)
Other stockholders' share of net loss.................... (62,491) (19,402) (19,549)
--------- -------- --------
Company's share of net loss.............................. (106,341) (23,688) (3,793)
Amortization of excess cost of investment................ (630) -- --
Elimination of intercompany transactions................. 6,671 570 --
--------- -------- --------
Equity in net loss of unconsolidated wireless operating
companies........................................... $(100,300) $(23,118) $ (3,793)
========= ======== ========
</TABLE>
CHASE TELECOMMUNICATIONS HOLDINGS
In December 1996, the Company purchased $4.0 million of Class B Common
Stock of Chase Telecommunications Holdings, representing 7.2% of the outstanding
capital stock of Chase Telecommunications Holdings. The Company has also
provided a working capital facility to Chase Telecommunications Holdings and has
agreed in principle to increase the maximum principal that may be drawn to $45.0
million. Borrowings under the facility are subject to interest at an annual rate
of prime plus 4.5%. Semi-annual principal payments are to be made ratably over a
six-year period commencing June 2000, with accrued interest payable on maturity.
Borrowings are collateralized by substantially all of the assets of Chase
Telecommunications Holdings and are subordinated to Chase Telecommunications
Holdings' equipment vendor loans from Qualcomm. At August 31, 1999, borrowings
under the facility totaled
F-25
<PAGE> 169
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$36.1 million, including $3.3 million of accrued and capitalized interest.
However, because the working capital facility is the only source of working
capital for Chase Telecommunications Holdings, the carrying value of its
investment and the loans under the facility have been reduced to zero as Leap
has recognized 100% of the net losses of Chase Telecommunications Holdings to
the extent of its investment and loans. The Company recorded equity losses from
Chase Telecommunications Holdings of $20.9 million, $11.8 million and $4.0
million during fiscal 1999, 1998 and 1997, respectively.
In December 1998, the Company agreed to purchase substantially all the
assets of Chase Telecommunications Holdings for: $6.3 million; the assumption of
certain liabilities of Chase Telecommunications Holdings (totaling approximately
$114.4 million at August 31, 1999); a warrant to purchase 1% of the common stock
of Cricket Communications, Inc., recently renamed Cricket Communications
Holdings, Inc. ("Cricket Communications Holdings"), a majority-owned subsidiary
of the Company, exercisable at $1.0 million; the Company's existing stock
ownership and warrants to purchase stock in Chase Telecommunications Holdings;
and certain contingent earn-outs. This acquisition involves the transfer of
wireless communications licenses, which is subject to approval by the FCC. The
acquisition will not occur unless the FCC approves the transfer of the licenses.
SMARTCOM
In April 1999, Leap acquired the remaining 50% of Smartcom that it did not
already own. As a result of the reporting lag, the Company began fully
consolidating Smartcom's results of operations commencing June 1, 1999. Prior to
this time, the Company accounted for its investment in Smartcom under the equity
method of accounting. The Company recorded equity (income) losses from Smartcom
of $13.1 million, $3.1 million and $(0.2) million during fiscal 1999, 1998 and
1997, respectively.
PEGASO
The Company has a 28.6% interest in Pegaso, a Mexican corporation. During
fiscal 1998, the Company advanced a portion of Pegaso's working capital
requirements and provided a loan of $27.4 million to Pegaso. The purpose of the
loan was to fund a portion of Pegaso's first PCS license payment. Interest on
the loan accrued at a rate of 10% and was added to the principal amount of the
loan outstanding. In September 1998, the Company provided $60.7 million of
additional funding and converted its advances and loan, with accrued interest,
into capital stock of Pegaso. The Company's total investment in Pegaso after
these transactions was $100.0 million. On the same date, other investors also
subscribed for and purchased capital stock of Pegaso such that, after these
transactions, the total par value of the common equity of Pegaso was $300
million. As a result, the Company's ownership interest in Pegaso was diluted
from 49.0% to 33.3%. In July 1999, several of the other investors subscribed for
and purchased an additional $50.0 million of capital stock of Pegaso. As a
result, the Company's ownership interest was diluted from 33.3% to 28.6%. The
Company recorded equity losses from Pegaso of $23.6 million and $2.1 million
during fiscal 1999 and 1998, respectively. In fiscal 1999, the Company
recognized a gain of $4.4 million on the issuance of stock by Pegaso as
described above. Of this amount, $0.8 million was recognized directly to
additional paid-in capital for the change in interest that occurred during
Pegaso's development stage.
F-26
<PAGE> 170
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
METROSVYAZ
The Company has a 35% interest in Metrosvyaz. The Company agreed to provide
a $72.5 million loan facility to Metrosvyaz to support its business plan and
working capital needs. Metrosvyaz also has a $102.5 million equipment loan
facility from Qualcomm. The Company has pledged its equity interest in
Metrosvyaz as collateral for amounts owed under Qualcomm's loan facility to
Metrosvyaz, and has subordinated its $72.5 million loan facility to Qualcomm's
$102.5 million loan facility. Borrowings under the $72.5 million facility are
subject to interest at 13% and are due in August 2007. Interest is payable
semi-annually beginning August 2000 and, prior to such time, added to the
principal amount outstanding. At August 31, 1999, borrowings under the Company's
loan facility to Metrosvyaz totaled $39.5 million, including $2.7 million of
accrued and capitalized interest and $1.1 million of facility fees.
The Company's investment in Metrosvyaz consists of the outstanding loan
facility, less its share of equity losses. The Company recorded equity losses of
$20.0 million from Metrosvyaz in fiscal 1999. In addition, the Company stopped
funding Metrosvyaz and recorded a write-down of $9.6 million, the Company's
remaining investment in Metrosvyaz, in the fourth quarter. The Company recorded
equity losses from Metrosvyaz of $6.1 million during fiscal 1998.
ORRENGROVE
The Company has a 35% interest in Orrengrove. In August 1998, Orrengrove
acquired a 60% interest in Transworld Telecommunications, Inc., Transworld
Communications Services, Inc., and Transworld Communications (Bermuda), Ltd.
(collectively, the "Transworld Companies").
The Transworld Companies obtained, through a number of agreements, the
rights to utilize the capacity on certain Russian satellites in order to provide
commercial long-distance voice, video and data services to the Russian
Federation. In April 1999, the Transworld Companies were notified by Mercury
Telesat ("Mercury"), provider of the satellite signal transmission capacity,
that the satellite equipment used to provide their long-distance service had
failed. Mercury's prognosis indicated that the satellite's operational status
will not be restored. The Transworld Companies identified and put into operation
a short-term terrestrial transmission solution by leasing fiber capacity and
began exploring long-term alternatives to the lost satellite transmission
capacity. As a result of these events, Orrengrove recognized an impairment loss
of approximately $16.9 million in the third quarter of fiscal 1999 to write off
certain satellite related assets. This loss is included in the Company's equity
in net loss from unconsolidated wireless operating companies.
After reviewing a series of alternative business plans that did not meet
their minimum financial performance criteria, the directors of the Transworld
Companies voted to liquidate those companies and to distribute the net assets to
their stockholders. As a result, the Company recorded a $17.6 million write-
down in the fourth quarter of fiscal 1999, reducing its investment in Orrengrove
to the liquidation proceeds Leap expects to receive. In addition, the Company
recorded equity losses of $22.6 million from Orrengrove during fiscal 1999,
which included the write-off of the satellite related assets and impairment of
the license.
F-27
<PAGE> 171
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1999 1998
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable................................. $ 2,197
Other accounts receivable................................. 1,112
--------
3,309
Allowance for doubtful accounts........................... (583)
--------
$ 2,726
========
Property and equipment, net:
Land...................................................... $ 310
Buildings and infrastructure.............................. 108,958
Machinery and equipment................................... 12,897
Other..................................................... 6,819
--------
128,984
Accumulated depreciation and amortization................. (12,037)
--------
$116,947
========
Intangible assets, net:
Wireless licenses......................................... $ 58,488 $6,274
Rights to wireless network systems........................ 16,225 --
Goodwill.................................................. -- 564
-------- ------
74,713 6,838
Accumulated amortization.................................. (769) --
-------- ------
$ 73,944 $6,838
======== ======
Accounts payable and accrued liabilities:
Trade accounts payable.................................... $ 1,523 $ --
Accrued payroll and related benefits...................... 4,597 --
Accrued loss on handset purchase commitment............... 7,035 --
Other accrued liabilities................................. 3,217 5,789
-------- ------
$ 16,372 $5,789
======== ======
</TABLE>
NOTE 6. LOANS PAYABLE TO BANKS
Between July and November 1998, the Company borrowed $15.7 million under
notes payable to banks in Chile. In February 1999, the Company was granted a
one-year extension for the payment of the loans. The renewed loans of $9.0
million and $6.7 million, along with capitalized interest and fees of $1.5
million at August 31, 1999, bear interest at rates of 8.1% and 8.5% per annum,
respectively, and are due to be repaid in February 2000.
F-28
<PAGE> 172
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT
As of August 31, 1999, long-term debt is summarized as follows (in
thousands):
<TABLE>
<S> <C>
Credit Agreement, net of facility fee....................... $120,161
Deferred Payment Agreement.................................. 85,483
Note payable to Telex-Chile, net of discount (See Note 3)... 16,168
--------
$221,812
========
</TABLE>
CREDIT AGREEMENT
The Company entered into a secured Credit Agreement with Qualcomm on
September 23, 1998. The Credit Agreement consists of two sub-facilities. The
working capital 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 the acquisition of telecommunications licenses. The investment
capital sub-facility enables the Company to borrow up to $229.8 million from
Qualcomm. The proceeds from this second sub-facility may be used by the Company
solely to make certain identified investments. Under the terms of the Credit
Agreement, if Qualcomm assigns 10% or more of the total funding commitments to
other lenders, Leap must pay a commitment fee to the lenders on unused balances.
At August 31, 1999, the Company had borrowed $10.6 million under the
working capital sub-facility, including $5.3 million to pay Qualcomm a 2%
facility fee which is being amortized over the term of the Credit Agreement
($0.6 million of the facility fee was amortized in 1999). At August 31, 1999,
the Company had borrowed $108.8 million under the investment capital
sub-facility to make further loans to and investments in the Leap Operating
Companies.
Amounts borrowed under the Credit Agreement are due September 23, 2006.
Qualcomm has a collateral interest in substantially all of the assets of the
Company as long as any amounts are outstanding under the Credit Agreement. The
Credit Agreement requires the Company to meet certain financial and operating
covenants. Amounts borrowed under the Credit Agreement bear interest at either a
prime or LIBOR rate, plus an applicable margin. At August 31, 1999, the weighted
average effective rate of interest was 11.35%. Interest will be payable
quarterly beginning after September 2001 and, prior to such time, accrued
interest will be added to the principal amount outstanding. At August 31, 1999,
$5.5 million of capitalized and accrued interest had been added to the Credit
Agreement.
DEFERRED PAYMENT AGREEMENT
Smartcom and Qualcomm are parties to a Deferred Payment Agreement related
to Smartcom's purchase of equipment, software and services from Qualcomm. The
assets of Smartcom collateralize its obligations under the Deferred Payment
Agreement. The Company has also pledged its shares in Smartcom as collateral for
the Company's guaranty of Smartcom's obligation to Qualcomm. The Deferred
Payment Agreement requires Smartcom to meet certain financial and operating
covenants, including a debt to equity ratio and restrictions on Smartcom's
ability to pay dividends and to distribute assets. As a result, substantially
all the net assets are restricted from distribution to Leap. Smartcom was in
violation of certain covenants at August 31, 1999, however Qualcomm and Smartcom
amended the
F-29
<PAGE> 173
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred Payment Agreement subsequent to the end of the fiscal year to revise
the covenants that were in default and defer the dates of repayment of the loan.
Under the terms of the amended agreement, Qualcomm has agreed to defer
collection of amounts up to a maximum of $84.5 million. The deferred payments
bear interest at either a prime or LIBOR rate, plus an applicable margin. At
August 31, 1999, the weighted average effective rate of interest was 8.2%.
Accrued interest may be added to the outstanding principal amount of the
applicable borrowing until October 2001.
DEBT REPAYMENT SCHEDULE
The scheduled principal repayments for long-term debt are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31:
----------------------
<S> <C>
2000........................................................ $ --
2001........................................................ --
2002........................................................ 44,732
2003........................................................ 3,218
2004........................................................ 8,045
Thereafter.................................................. 176,333
--------
$232,328
Less unamortized discount and facility fee.................. (10,516)
--------
Total............................................. $221,812
========
</TABLE>
NOTE 8. OTHER LONG-TERM LIABILITIES
Other long-term liabilities at August 31, 1999 consist primarily of
deferred Chilean customs duties of $8.5 million. Under Chilean law, the payment
of customs duties levied on property and equipment can be deferred over a period
of up to seven years. The balance at August 31, 1999 represents amounts owing
including accrued interest.
F-30
<PAGE> 174
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The components of the Company's deferred tax assets (liabilities) are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
U.S. deferred tax assets:
Net operating loss carryovers............................. $ 32,498 $ 8,754
Equity losses in unconsolidated company................... 16,320 6,417
Deferred charges.......................................... 3,502 --
Reserves and allowances................................... 3,402 2,984
-------- --------
55,722 18,155
Foreign deferred tax assets:
Net operating loss carryovers............................. 8,000 --
Reserves and allowances................................... 1,259 --
-------- --------
9,259 --
-------- --------
Gross deferred tax assets................................... 64,981 18,155
Foreign deferred tax liabilities:
Intangible assets......................................... (9,136) --
-------- --------
Net deferred tax asset.................................... 55,845 18,155
Valuation allowance....................................... (55,845) (18,155)
-------- --------
$ -- $ --
======== ========
</TABLE>
Management has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
The net operating losses generated prior to the Distribution were retained
by Qualcomm. At August 31, 1999 the Company had a federal net operating loss
carryover of approximately $86.0 million which will expire in 2019. In addition,
the Company had foreign net operating losses of approximately $52.5 million
which do not expire. Should a substantial change in the Company's ownership
occur as defined under Internal Revenue Code section 382, there will be an
annual limitation on its utilization of net operating loss carryforwards.
A reconciliation of the income tax provision (benefit) to the amount
computed by applying the statutory federal income tax rate to income before
income tax provision is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Amounts computed at statutory federal rate.......... $(57,615) $(16,357) $(1,804)
Non-deductible losses of investees................ 16,649 2,150 --
State income tax, net of federal benefit.......... (5,740) (1,428) (229)
Other............................................. 385 (487) --
Increase in valuation allowance................... 46,321 16,122 2,033
-------- -------- -------
$ -- $ -- $ --
======== ======== =======
</TABLE>
F-31
<PAGE> 175
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN
In September 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, the Board of
Directors declared a dividend, payable on September 16, 1998, of one preferred
purchase right (a "Right") for each share of common stock, $.0001 par value, of
the Company outstanding at the close of business on September 11, 1998. Similar
Rights will generally be issued in respect to common stock subsequently issued.
Each Right entitles the registered holder to purchase from the Company a one
one-thousandth share of Series A Junior Participating Preferred Stock, $.0001
par value per share, at a purchase price of $90 (subject to adjustment). The
Rights are exercisable only if a person or group (an "Acquiring Person"), other
than Qualcomm with respect to its exercise of the warrant granted to it in
connection with the Distribution, acquires beneficial ownership of 15% or more
of the Company's outstanding shares of common stock. Upon exercise, holders
other than an Acquiring Person, will have the right (subject to termination) to
receive the Company's common stock or other securities having a market value (as
defined) equal to twice the purchase price of the Right. The Rights, which
expire on September 10, 2008, are redeemable in whole, but not in part, at the
Company's option at any time for a price of $.01 per Right.
In conjunction with the distribution of the Rights, the Company's Board of
Directors designated 75,000 shares of Preferred Stock as Series A Junior
Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Rights. At August 31, 1999, no shares of Preferred Stock were
outstanding.
WARRANT
In connection with the Distribution, the Company issued Qualcomm a warrant
to purchase 5,500,000 shares of the Company's common stock. In March 1999,
Qualcomm agreed to reduce the number of shares to 4,500,000 for consideration of
$5.4 million, which is the estimated fair value of the warrant repurchase as
determined by an option pricing model. This warrant is currently exercisable and
remains exercisable until September 2008.
TRUST CONVERTIBLE PREFERRED SECURITIES
Under the conversion agreement between the Company and Qualcomm, Leap has
agreed to issue up to 2,271,060 shares of its common stock upon the conversion
of the Trust Convertible Preferred Securities of a wholly owned statutory
business trust of Qualcomm. After conversion of the Trust Convertible Preferred
Securities, Qualcomm will have some of its debt reduced, but Leap will receive
no benefit or other consideration. At August 31, 1999, 487 shares of the
Company's common stock had been issued upon conversion.
NOTE 11. 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. The Company's
contribution expense for fiscal 1999 was $133,000.
F-32
<PAGE> 176
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTION PLANS
In September 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 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. A total of 8,000,000 shares of common stock were
reserved for issuance under the 1998 Plan. The 1998 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 the 1998
Non-Employee Directors Stock Option Plan (the "1998 Non-Employee Directors
Plan"), under which options to purchase common stock are granted to non-
employee directors on an annual basis. A total of 500,000 shares of common stock
were reserved for issuance under the 1998 Non-Employee Directors Plan. 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.
A summary of stock option transactions for the 1998 Plan and the 1998
Non-Employee Directors Plan follows (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
OPTIONS WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Options authorized.............................. 8,500
Options granted at Distribution................. (5,542) 5,542 $ 3.73
Options granted after Distribution.............. (1,768) 1,768 10.52
Options cancelled............................... 513 (720) 4.03
Options exercised............................... -- (650) 3.11
------ -----
August 31, 1999................................. 1,703 5,940 $ 5.78
====== =====
</TABLE>
The following table summarizes information about stock options outstanding
under the 1998 Plan and the 1998 Non-Employee Directors Plan at August 31, 1999
(number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES (IN YEARS) PRICE OF SHARES PRICE
- --------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.78 to $ 3.63 2,707 6.30 $ 2.75 1,240 $2.46
$ 3.67 to $ 5.04 1,799 7.87 4.45 573 4.31
$ 5.06 to $10.38 650 8.38 5.93 112 5.54
$15.63 to $22.00 784 9.83 19.14 -- --
----- -----
5,940 7.47 $ 5.78 1,925 $3.19
===== =====
</TABLE>
F-33
<PAGE> 177
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1999, Cricket Communications adopted its own 1999 Stock Option Plan
(the "1999 Cricket Plan") that allows the Cricket Communications Holdings Board
of Directors to grant options to selected employees, directors and consultants
to purchase shares of Cricket Communications Holdings common stock. A total of
7,600,000 shares of Cricket Communications Holdings common stock were reserved
for issuance under the 1999 Cricket Plan. The 1999 Cricket 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
Cricket Communications Holdings 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 Cricket Communications Holdings 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. In June 1999, a total of 1,205,000 options
to purchase Cricket Communications Holdings common stock were granted to two
directors of the Company, exercisable at $1.00 per share with accelerated
vesting provisions. In July 1999, all of these options vested and were fully
exercised. In addition, 795,000 other options granted in June 1999 were
exercised in July 1999. Cricket Communications Holdings received promissory
notes totaling $0.9 million and cash of $1.1 million in consideration for the
issuance of the shares. Immediately thereafter, the Company owned 96.2% of the
outstanding common stock of Cricket Communications Holdings. As Cricket
Communications Holdings is in the development stage, the effect of the issuance
of the shares of $0.6 million has been recorded to additional paid-in capital.
These transactions in fiscal 1999 have been reflected in minority interest.
A summary of stock option transactions for the 1999 Cricket Plan follows
(number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
OPTIONS WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Options authorized.............................. 7,600
Options granted................................. (3,335) 3,335 $1.16
Options cancelled............................... 2 (2) 1.00
Options exercised............................... -- (2,000) 1.00
------ ------
August 31, 1999................................. 4,267 1,333 $1.41
====== ======
</TABLE>
The following table summarizes information about stock options outstanding
under the 1999 Cricket Plan at August 31, 1999 (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES (IN YEARS) PRICE OF SHARES PRICE
- --------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00 851 9.81 $1.00 123 $1.00
$2.00 458 9.87 2.00 -- --
$4.00 24 9.93 4.00 -- --
----- ---
1,333 9.83 $1.40 123 $1.00
===== ===
</TABLE>
F-34
<PAGE> 178
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In September 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 ESP 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. A total of 200,000 shares of
common stock were reserved for issuance under the 1998 ESP Plan. Employees may
authorize the Company to withhold up to 15% of their compensation during any
offering period, subject to certain limitations. During fiscal 1999, a total of
63,779 shares were issued under the 1998 ESP Plan at $3.83 per share. At August
31, 1999, 136,221 shares were reserved for future issuance.
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 pre tax
basis. On a quarterly basis, participants receive up to a 10% match of their
income 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. The plan authorizes up to 100,000 shares of
common stock to be allocated to participants. During fiscal 1999, 8,718 shares
were allocated under the plan and the Company's matching contribution amounted
to $86,216. At August 31, 1999, 91,282 shares were reserved for future
allocation.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income (loss) and net earnings (loss)
per common share is required by SFAS No. 123, "Accounting for Stock-Based
Compensation". This information is required to be determined as if the Company
had accounted for its stock-based awards to employees and non-employee directors
(including shares issued under stock options and the 1998 ESP Plan, collectively
called "options") granted subsequent to September 30, 1995 under the fair value
method of SFAS No. 123. The fair value of options granted in fiscal 1999
reported below has been estimated at the date of grant using the Black-Scholes
option-pricing model using the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1999 1998
STOCK OPTION PLAN CRICKET PLAN ESP PLAN
----------------- ------------ --------
<S> <C> <C> <C>
Risk-free interest rate........................ 5.0% 5.0% 4.5%
Volatility..................................... 50.0% 0.0% 55.0%
Dividend yield................................. 0.0% 0.0% 0.0%
Expected life (years).......................... 6.0 6.0 0.5
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different than those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options. The weighted average estimated grant date fair values of
stock options granted in fiscal 1999 under the 1998 Plan, the 1999 Cricket Plan
and the 1998 ESP Plan were $2.37, $0.12 and $2.37 per share, respectively.
F-35
<PAGE> 179
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
The Company's pro forma information for the year ended August 31, 1999 is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss................................................ $(164,613) $(171,415)
Basic and diluted net loss per common share............. $ (9.19) $ (9.57)
</TABLE>
The Company did not recognize a tax benefit relating to pro forma
compensation expense under SFAS No. 123 for fiscal 1999 as such benefit did not
meet the "more likely than not" criteria for recognition of deferred tax assets.
NOTE 12. COMMITMENTS AND CONTINGENCIES
In May 1999, Pegaso entered into a $100 million loan agreement. The Company
guaranteed 33% of Pegaso's obligations under this loan agreement in the event of
Pegaso's default.
The Company has entered into non-cancelable operating lease agreements to
lease its facilities, certain equipment and rental of sites for towers and
antennas required for the operation of its mobile PCS telephone system in Chile.
Future minimum rental payments required for all non-cancelable operating leases
at August 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31:
---------------------
<S> <C>
2000........................................................ $ 2,060
2001........................................................ 2,050
2002........................................................ 2,049
2003........................................................ 2,056
2004........................................................ 1,860
Thereafter.................................................. 5,840
-------
Total............................................. $15,915
=======
</TABLE>
Rent expense totaled $1.2 million in fiscal 1999. No rent expense was
incurred by the Company prior to the Distribution.
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 13. SEGMENT DATA
The Company's current reportable segments are countries in which it
manages, supports, operates and otherwise participates in wireless
communications business ventures. These reportable segments are evaluated
separately because each geographic region presents different marketing
strategies and operational issues, as well as distinct economic climates and
regulatory constraints. The Company's reportable segments are comprised of
Cricket Communications Holdings and Chase Telecommunications Holdings in the
United States, and Leap's operating companies in Mexico and Chile.
F-36
<PAGE> 180
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accounting policies of the various segments are the same as those
described in Note 2, "Summary of Significant Accounting Policies". The key
operating performance criteria used by Leap includes revenue growth, operating
income (loss), depreciation and amortization, capital expenditures, and
purchases of wireless licenses. Segment assets exclude corporate assets.
Corporate expenses are comprised primarily of general and administrative
expenses, which are separately managed. The segment results of Chile and Mexico
do not include any corporate allocations of general and administrative expenses
from Leap.
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AUGUST 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
UNITED STATES
Revenues.............................................. $ 3,337 $ 22 $ --
Operating loss........................................ (22,414) (20,017) (4,959)
Depreciation and amortization......................... (2,033) (120) (120)
Capital expenditures.................................. (6,177) (12,852) (9,971)
Purchase of wireless licenses......................... (18,920) -- --
Total assets.......................................... 109,437 88,991
CHILE
Revenues.............................................. 7,444 -- --
Operating loss........................................ (27,479) (4,380) (274)
Depreciation and amortization......................... (9,409) (60) --
Capital expenditures.................................. (26,666) (85,036) (15,058)
Purchase of wireless licenses......................... -- -- --
Total assets.......................................... 186,645 124,614
MEXICO
Revenues.............................................. 1,203 -- --
Operating loss........................................ (68,847) (5,350) --
Depreciation and amortization......................... (2,320) -- --
Capital expenditures.................................. (8,315) (822) --
Purchase of wireless licenses......................... (175,864) (57,666) --
Total assets.......................................... 551,098 71,760
</TABLE>
F-37
<PAGE> 181
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the Company's segment revenues, operating expenses,
depreciation and amortization and total assets to the corresponding consolidated
amounts is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AUGUST 31,
---------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Segment revenues...................................... $ 11,984 $ 22 $ --
Revenues of unconsolidated wireless operating
companies........................................... (8,190) (22) --
Other unallocable revenues............................ 113 -- --
--------- --------- -------
Consolidated revenues............................... $ 3,907 $ -- $ --
========= ========= =======
Segment operating losses.............................. $(118,740) $ (29,747) $(5,233)
Operating losses of unconsolidated wireless operating
companies........................................... 101,528 15,151 5,233
Corporate and eliminations............................ (17,260) (9,292) (1,361)
--------- --------- -------
Consolidated operating loss......................... $ (34,472) $ (23,888) $(1,361)
========= ========= =======
Segment depreciation and amortization................. $ (13,762) $ (180) $ (120)
Depreciation and amortization of unconsolidated
wireless operating companies........................ 8,501 180 120
Corporate depreciation and amortization............... (563) -- --
--------- --------- -------
Consolidated depreciation and amortization.......... $ (5,824) $ -- $ --
========= ========= =======
Segment total assets.................................. $ 847,180 $ 285,365
Total assets of unconsolidated wireless operating
companies........................................... (639,738) (285,365)
Investments in and loans to unconsolidated wireless
operating companies................................. 94,429 150,914
Corporate assets...................................... 33,460 6,838
--------- ---------
Consolidated total assets........................... $ 335,331 $ 157,752
========= =========
</TABLE>
Revenues and long-lived assets related to operations in the United States
and other foreign countries are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AUGUST 31,
---------------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
REVENUES:
United States......................................... $ -- $ -- $ --
Other foreign countries............................... 3,907 -- --
-------- -------- -------
Total consolidated revenues......................... $ 3,907 $ -- $ --
======== ======== =======
LONG-LIVED ASSETS:
United States......................................... $ 23,599 $ -- $ --
Other foreign countries............................... 264,369 104,557 42,267
-------- -------- -------
Total consolidated long-lived assets................ $287,968 $104,557 $42,267
======== ======== =======
</TABLE>
NOTE 14. SUBSEQUENT EVENTS
INFRASTRUCTURE AGREEMENTS
In September 1999, a subsidiary of Leap entered into separate
infrastructure equipment purchase agreements with two major telecommunications
suppliers. Under the agreements, each supplier will sell $330 million in
infrastructure equipment to the subsidiary. In connection with the sales of
infrastructure equipment, the suppliers will provide vendor financing that will
be used for equipment, services and
F-38
<PAGE> 182
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operations needed to deploy the subsidiary's wireless networks in various
markets across the United States. If the Chase Telecommunications acquisition
fails to close by September 20, 2000, the Company has an obligation to repay up
to $60 million of debt plus accrued interest borrowed to finance equipment which
is resold to Chase Telecommunications. One of the purchase agreements is subject
to the approval of the applicable supplier's board of directors.
NOTE 15. SUBSEQUENT EVENTS (UNAUDITED)
PENDING WIRELESS LICENSE ACQUISITIONS
In December 1999, the Company agreed to increase the purchase price of the
AirGate licenses by $5.5 million. In January 2000, the Company completed the
acquisition.
In September 1999, the Company agreed to purchase a wireless license
covering the Dayton, Ohio market from PCS Devco, Inc. ("PCS Devco") for a
purchase price of approximately $2.4 million in cash and the assumption of
approximately $1.1 million in debt obligations to the FCC. In addition, the
Company will transfer to PCS Devco one of the 36 wireless licenses it acquired
in the federal government's April 1999 reauction of PCS spectrum. During the
escrow period Leap is required to make PCS Devco's payments under the FCC debt,
with any payments made by Leap reducing the remaining cash payment to PCS Devco
at closing.
In January 2000, the Company agreed to acquire two wireless licenses
covering the Pittsburgh, Pennsylvania and Denver, Colorado markets from
Radiofone PCS, L.L.C. ("Radiofone"). The purchase price for the Pittsburgh
license is $18.4 million in cash and the purchase price for the Denver license
is 232,754 shares of the Company's common stock and $3.4 million in cash less
the amount of debt owed by Radiofone to the FCC related to the license which
will be assumed by the Company at the closing. As of February 29, 2000, the
outstanding principal amount of the FCC debt was approximately $1.5 million. The
amounts owed to the FCC must be repaid in quarterly installments of principal
and interest through April 2007.
In February 2000, the Company agreed to purchase all of the outstanding
stock of three subsidiaries of Zuma PCS, LLC, which own three wireless licenses
covering markets in Albany, Columbus and Macon, Georgia. The purchase price
consists of 170,374 shares of the Company's common stock.
In March 2000, the Company agreed to acquire three wireless licenses
covering the Phoenix, Arizona, Reno, Nevada and Roswell, New Mexico markets from
Beta Communications, L.L.C. The purchase price for the licenses is $33.3 million
in cash.
In April 2000, the Company agreed to acquire a wireless license covering
the Omaha, Nebraska market from CM PCS, LLC. The purchase price for the license
is $14.2 million in cash plus the assumption of approximately $0.6 million in
indebtedness to the FCC related to the license. Also in April 2000, the Company
agreed to acquire a wireless license covering the Lincoln, Nebraska market from
Center Point PCS. The purchase price for the wireless license is $4.3 million in
cash.
Each of these agreements is subject to customary closing conditions,
including FCC approval, but no assurance can be given that they will be closed
on schedule or at all.
F-39
<PAGE> 183
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EXECUTIVE OFFICER DEFERRED STOCK PLAN
In December 1999, the Company established an Executive Officer Deferred
Stock Plan that provides for mandatory deferral of 25% and voluntary deferral of
up to 75% of executive officer bonuses. Bonus deferrals are converted into share
units credited to the participant's account, with the number of share units
calculated by dividing the deferred bonus amount by the fair market value of the
Company's common stock on the bonus payday. Share units represent the right to
receive shares of the Company's common stock in accordance with the plan. The
Company will also credit to a matching account that number of share units equal
to 20% of the share units credited to the participant's accounts. Matching share
units vest ratably over three years on each anniversary date of the applicable
bonus payday. The Company has reserved 25,000 shares of its common stock for
issuance under the plan.
UNITS OFFERING
In February 2000, the Company completed an offering of 225,000 senior
units, each senior unit consisting of one 12.5% senior note due 2010 ("Senior
Note") and one warrant to purchase the Company's common stock, and 668,000
senior discount units, each senior discount unit consisting of one 14.5% senior
discount note due 2010 ("Senior Discount Note") and one warrant to purchase the
Company's common stock. The total gross proceeds from the sale of the senior
units and senior discount units were $225.0 million and $325.1 million,
respectively, and $164.4 million of the total proceeds were allocated to the
fair value of the warrants, estimated using the Black-Scholes option pricing
model. In addition, the Company capitalized certain debt issuance costs of $13.5
million, consisting of underwriting, printing, legal and accounting fees. A
portion of the net proceeds from the units offering was used for the repayment
of borrowings under the Company's Credit Agreement with Qualcomm. The remaining
proceeds from the units offering will be used for capital expenditures,
acquisitions of wireless licenses, strategic investments, sales and marketing
activities, and working capital and general corporate purposes.
Interest on the Senior Notes will be payable on April 15 and October 15 of
each year, beginning on April 15, 2000. The Company used $79.5 million of the
proceeds from the Senior Notes to purchase and pledge, for the benefit of the
holders of the Senior Notes, certain U.S. Government securities to provide for
the payment of the first seven scheduled interest payments on the Senior Notes.
The remaining unpaid portion of such amounts is classified as restricted cash
equivalents and investments in the accompanying condensed consolidated balance
sheet.
Each Senior Discount Note has an initial accreted value of $486.68 and a
principal amount at maturity of $1,000. The Senior Discount Notes will not begin
to accrue cash interest until April 15, 2005. Interest on the Senior Discount
Notes will be payable on April 15 and October 15 of each year, beginning on
October 15, 2005.
The Company may redeem any of the notes beginning April 15, 2005. The
initial redemption price of the Senior Notes is 106.25% of their principal
amount plus accrued interest. The initial redemption price of the Senior
Discount Notes is 107.25% of their principal amount at maturity plus accrued
interest. In addition, before April 15, 2003, the Company may redeem up to 35%
of both the Senior Notes and the Senior Discount Notes using proceeds from
certain qualified equity offerings of the Company's common stock at 112.5% of
their principal amount and 114.5% of their accreted value, respectively.
The notes rank equally with the Company's other unsecured senior
indebtedness. The notes are effectively subordinate to all of the Company's
secured indebtedness. The notes are guaranteed by the
F-40
<PAGE> 184
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's domestic subsidiary, Cricket Communications Holdings. The terms of the
notes include certain covenants that restrict the Company's ability to, among
other things, incur additional indebtedness, create liens, pay dividends, make
investments, sell assets and effect a consolidation or merger. The Company is
obligated to consummate an exchange offer for the notes pursuant to an effective
registration statement or cause to become effective a shelf registration
statement for resales of the notes. If one of these events does not occur within
180 days after the closing of the units offering, interest on the notes will
increase by 0.5% per annum until the exchange offer is consummated or such shelf
registration statement becomes effective.
Each warrant included as part of the senior units is initially exercisable
to purchase 5.146 shares (1,157,850 shares in aggregate) of the Company's common
stock at an exercise price of $96.80 per share. Each warrant included as part of
the senior discount units is initially exercisable to purchase 2.503 shares
(1,672,004 shares in aggregate) of the Company's common stock at an exercise
price of $96.80 per share. The warrants may be exercised at any time on or after
February 23, 2001 and prior to April 15, 2010. The Company is obligated to file
a shelf registration statement covering the resale of the warrants and related
common stock issuable upon exercise of the warrants within 180 days after the
closing of the units offering.
EQUITY OFFERING
In February 2000, the Company completed a public equity offering of
4,000,000 shares of common stock at a price of $88.00 per share. Net of
underwriters' discounts and commissions, the Company received $82.72 per share,
or $330.9 million in the aggregate. The Company expects to pay approximately
$0.9 million of expenses related to the equity offering, and these costs have
been recorded as reductions to additional paid-in capital. A portion of the net
proceeds from the equity offering was used for the repayment of the Credit
Agreement with Qualcomm. The remaining proceeds from the equity offering will be
used for capital expenditures, acquisitions of wireless licenses, strategic
investments, sales and marketing activities and working capital and general
corporate purposes.
CREDIT AGREEMENT
In February 2000, the Company used a portion of the net proceeds of the
units and equity offerings to repay in full $226.7 million outstanding under the
Credit Agreement with Qualcomm. In connection with the repayment of the Credit
Agreement, the related unamortized debt issue costs of $4.4 million were written
off and reported as an extraordinary loss.
CHASE TELECOMMUNICATIONS HOLDINGS
On February 2000, the Company increased to $65.0 million the maximum amount
of working capital loans that may be drawn by Chase Telecommunications Holdings.
In March 2000, the Company completed its acquisition of substantially all the
assets of Chase Telecommunications Holdings.
LOANS PAYABLE TO BANKS
In February 2000, the Company renewed its loans with banks in Chile,
including capitalized and accrued interest. The renewed loans of $10.3 million
and $7.6 million at February 29, 2000, bear interest at rates of 8.2% and 7.85%
per annum, respectively, and are due to be repaid in September 2000.
F-41
<PAGE> 185
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1999, the Company and Smartcom entered into a loan arrangement
with a bank. Pursuant to the arrangement, Leap acts as account party to cause
the bank to issue letters of credit to secure the loan to Smartcom. At February
29, 2000, Leap has deposited funds with the bank totaling $28.9 million and
pledged such funds as cash collateral to secure its obligation under the letters
of credit. These funds are recorded as restricted cash equivalents in the
condensed consolidated balance sheet. At February 29, 2000, borrowings from the
bank totaled $14.1 million, bear interest at the weighted-average rate of 7.01%
per annum and are due to be repaid in July 2000.
SMARTCOM DEFERRED PAYMENT AND CREDIT AGREEMENTS
Under the amended Deferred Payment Agreement, Qualcomm has agreed to defer
collection of amounts up to a maximum of $115.7 million including capitalized
interest. Amounts deferred under the agreement must be repaid by September 2006.
At February 29, 2000, the Company had $95.3 million outstanding under the
Deferred Payment Agreement.
In February 2000, Smartcom and Qualcomm entered into an agreement (the
"Equipment Credit Agreement") related to Smartcom's equipment supply and service
agreements with a vendor. The Equipment Credit Agreement permits up to $38.5
million in borrowings, including capitalized interest. The Equipment Credit
Agreement provides for certain financial and operating covenants similar to the
Deferred Payment Agreement. Borrowings under the Equipment Credit Agreement
accrue interest at a rate equal to LIBOR plus 5.0% to 7.0% or a bank base rate
plus 4.0% to 6.0%, in each case with the specific rate based on certain
financial ratios. Principal payments are scheduled to begin in March 2002 with a
final maturity of September 2006. At February 29, 2000, Smartcom had financed
amounts totaling $18.6 million under the Equipment Credit Agreement.
In February 2000, Smartcom and Qualcomm entered into an agreement (the
"Subscriber Deferred Payment Agreement") related to Smartcom's purchase of
handsets and accessories and test equipment from Qualcomm. Under the terms of
the agreement, Qualcomm has agreed to defer collection of amounts up to a
maximum of $11.2 million, including capitalized interest. The Subscriber
Deferred Payment Agreement provides for certain financial and operating
covenants similar to the Deferred Payment Agreement. Borrowings under the
Subscriber Deferred Payment Agreement accrue interest at a rate equal to LIBOR
plus 3.5% to 5.0% or a bank base rate plus 2.5% to 4.0%, in each case with the
specific rate based on certain financial ratios. Principal outstanding is due at
maturity in September 2001. At February 29, 2000, the Company had $5.6 million
outstanding under the Subscriber Deferred Payment Agreement.
LITIGATION
In September 1999, the Company declared default under loans to Metrosvyaz,
stopped funding those loans, wrote off its remaining $9.6 million investment in
Metrosvyaz, and issued a demand for arbitration against Metrosvyaz and one of
its directors with respect to those loans. In response, in March 2000,
Metrosvyaz filed suit against the Company and certain of its directors and
officers in the U.S. District Court for the Southern District of California. The
Metrosvyaz suit alleged claims for libel, trade libel, intentional and negligent
interference with prospective advantage and breach of fiduciary duty.
In April 2000, the Company resolved its differences with Metrosvyaz. As
part of the settlement, Metrosvyaz dismissed its action against the Company and
its officers in the federal court in San Diego,
F-42
<PAGE> 186
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Leap dismissed its demand for arbitration, and both companies agreed to general
releases. The Company surrendered its interest in a joint venture company that
owned an interest in Metrosvyaz, wrote off the balance of its investments in
Russia and received a contractual right to certain contingent payments from
Qualcomm.
STOCKHOLDER RIGHTS PLAN
In March 2000, the Company's Board of Directors approved an amendment to
the Company's Stockholder Rights Plan that increases the purchase price from $90
to $350 for each one one-thousandth share of Series A Junior Participating
Preferred Stock.
PEGASO
In April 2000, Sprint PCS invested approximately $200 million in Pegaso by
purchasing shares from Pegaso and shareholders other than Leap. As a result, the
Company's ownership interest in Pegaso was diluted from 28.6% to 22.4%.
SMARTCOM
In April 2000, the Company entered into a memorandum of understanding with
Endesa, S.A. ("Endesa"), a Spanish utility company, whereunder Endesa agreed to
purchase 100 percent of the capital stock of Smartcom. Under the non-binding
terms and conditions of the Endesa memorandum of understanding, the sale of the
Smartcom stock is subject to the negotiation and entry into of definitive
agreements documenting the transaction.
* * * *
F-43
<PAGE> 187
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31,
2000 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 599,935 $ 26,215
Restricted cash equivalents and short-term investments...... 58,667 --
Accounts receivable, net.................................... 6,354 2,726
Inventories................................................. 5,379 5,410
Recoverable taxes........................................... 8,034 3,907
Other current assets........................................ 6,181 1,926
---------- ---------
Total current assets................................... 684,550 40,184
Property and equipment, net................................. 136,777 116,947
Investments in and loans receivable from unconsolidated
wireless operating companies.............................. 71,676 94,429
Wireless licenses and other intangible assets, net.......... 94,626 73,944
Restricted investments...................................... 49,811 --
Deferred financing costs and other assets................... 16,223 9,827
---------- ---------
Total assets........................................... $1,053,663 $ 335,331
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 21,361 $ 16,372
Loans payable to banks...................................... 32,007 17,225
Other current liabilities................................... 1,618 --
---------- ---------
Total current liabilities.............................. 54,986 33,597
Long-term debt.............................................. 552,876 221,812
Other long-term liabilities................................. 10,120 8,504
---------- ---------
Total liabilities...................................... 617,982 263,913
---------- ---------
Commitments and contingencies (Notes 2, 3, 8 and 10)
Minority interest in consolidated subsidiary................ -- 518
---------- ---------
Stockholders' equity:
Preferred stock -- authorized 10,000,000 shares $.0001 par
value, no shares issued and outstanding................ -- --
Common stock -- authorized 75,000,000 shares; $.0001 par
value, 24,841,412 shares issued and outstanding........ 3 2
Additional paid-in capital................................ 787,887 291,189
Accumulated deficit....................................... (346,134) (216,896)
Accumulated other comprehensive loss...................... (6,075) (3,395)
---------- ---------
Total stockholders' equity............................. 435,681 70,900
---------- ---------
Total liabilities and stockholders' equity............. $1,053,663 $ 335,331
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-44
<PAGE> 188
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Operating revenues..................... $ 8,799 $ -- $ 14,283 $ --
-------- -------- --------- --------
Operating expenses:
Cost of operating revenues........... (15,078) -- (22,462) --
Selling, general and
administrative.................... (19,503) (4,044) (33,041) (8,284)
Depreciation and amortization........ (5,073) (141) (10,248) (265)
-------- -------- --------- --------
Total operating expenses.......... (39,654) (4,185) (65,751) (8,549)
-------- -------- --------- --------
Operating loss....................... (30,855) (4,185) (51,468) (8,549)
Equity in net loss of unconsolidated
wireless operating companies......... (33,866) (19,379) (50,059) (35,408)
Interest income........................ 1,180 1,363 1,577 1,825
Interest expense....................... (13,946) (862) (21,120) (1,913)
Foreign currency transaction gains
(losses)............................. 1,398 -- (1,396) --
Minority interest...................... 394 -- 518 --
Other income (expense), net............ (2,860) -- (2,868) --
-------- -------- --------- --------
Loss before extraordinary item.... (78,555) (23,063) (124,816) (44,045)
Extraordinary loss on early
extinguishment of debt............... (4,422) -- (4,422) --
-------- -------- --------- --------
Net loss.......................... $(82,977) $(23,063) $(129,238) $(44,045)
======== ======== ========= ========
Other comprehensive income (loss):
Foreign currency translation gains
(losses).......................... (1,752) 425 (2,680) (162)
-------- -------- --------- --------
Comprehensive loss................... $(84,729) $(22,638) $(131,918) $(44,207)
======== ======== ========= ========
Basic and diluted net loss per common
share:
Loss before extraordinary item....... $ (3.79) $ (1.30) $ (6.31) $ (2.49)
Extraordinary loss................... (0.21) -- (0.22) --
-------- -------- --------- --------
Net loss............................... $ (4.00) $ (1.30) $ (6.53) $ (2.49)
======== ======== ========= ========
Shares used to calculate basic and
diluted net loss per common share.... 20,720 17,770 19,788 17,717
======== ======== ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-45
<PAGE> 189
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ ------------
(RESTATED)
<S> <C> <C>
Operating activities:
Net cash used in operating activities....................... $ (35,019) $(13,572)
--------- --------
Investing activities:
Purchase of property and equipment........................ (14,784) (2,950)
Investments in and loans to unconsolidated wireless
operating companies.................................... (17,009) (93,552)
Proceeds from liquidation of discontinued foreign
venture................................................ 9,794 --
Loan receivable to related party.......................... -- (17,500)
Repayment of loan receivable from related party........... -- 17,500
Restricted cash equivalents and investments............... (108,478) --
Purchase of wireless licenses............................. (13,396) (689)
--------- --------
Net cash used in investing activities....................... (143,873) (97,191)
--------- --------
Financing activities:
Proceeds from issuance of senior discount notes........... 325,102 --
Proceeds from issuance of senior notes.................... 225,000 --
Proceeds from loans payable to banks...................... 14,000 6,720
Borrowings under Qualcomm credit agreement................ 92,672 31,888
Repayment of borrowings under Qualcomm credit agreement... (226,708) (17,500)
Payments of debt financing costs.......................... (13,758) --
Net proceeds from issuance of common stock................ 332,916 459
Other financing for purchase of property and equipment.... 1,634 --
Former parent company's investment........................ -- 95,268
--------- --------
Net cash provided by financing activities................... 750,858 116,835
--------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 1,754 --
--------- --------
Net increase in cash and cash equivalents................... 573,720 6,072
Cash and cash equivalents at beginning of period............ 26,215 --
--------- --------
Cash and cash equivalents at end of period.................. $ 599,935 $ 6,072
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 14,653 $ --
Supplemental disclosure of non-cash investing and financing
activities:
Loans to unconsolidated wireless operating company
converted to equity investment......................... $ -- $ 28,196
Long-term financing for loans to unconsolidated wireless
operating company...................................... $ 20,759 $ --
Long-term financing to purchase assets.................... $ 52,934 $ --
Long-term financing to purchase wireless licenses......... $ 9,601 $ --
Facility fee due on long-term debt........................ $ -- $ 5,300
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-46
<PAGE> 190
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
THE COMPANY AND NATURE OF BUSINESS
Leap Wireless International, Inc., a Delaware corporation, and its wholly
owned and majority-owned subsidiaries (the "Company" or "Leap") is a wireless
communications carrier that deploys, owns and operates networks in domestic and
international markets. Through its operating companies, Leap has launched
all-digital wireless networks in the United States, Chile and Mexico. The
Company was incorporated on June 24, 1998 as a wholly owned subsidiary of
Qualcomm Incorporated ("Qualcomm"). On September 23, 1998, Qualcomm distributed
all of the outstanding shares of common stock of the Company to Qualcomm's
stockholders as a taxable dividend (the "Distribution"). In connection with the
Distribution, one share of Company common stock was issued for every four shares
of Qualcomm common stock outstanding on September 11, 1998. Following the
Distribution, the Company and Qualcomm operate as independent companies. The
condensed consolidated financial statements reflect the Company as if it were a
separate entity for all periods presented.
INTERIM FINANCIAL STATEMENTS
The accompanying interim condensed consolidated financial statements have
been prepared by the Company without audit, in accordance with the instructions
to Form 10-Q and, therefore, do not include all information and footnotes
necessary for a fair presentation of its financial position, results of
operations, cash flows and stockholders' equity in accordance with generally
accepted accounting principles. In the opinion of management, the unaudited
financial information for the interim periods presented reflects all adjustments
(which include only normal, recurring adjustments) necessary for a fair
presentation. These condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report to Shareholders for
the Fiscal Year Ended August 31, 1999 incorporated by reference in the Company's
1999 Annual Report on Form 10-K. Operating results for interim periods are not
necessarily indicative of operating results for an entire fiscal year. The
accounts of Smartcom S.A. ("Smartcom"), the Company's Chilean subsidiary, have
been consolidated using a two-month lag.
The condensed consolidated financial statements are prepared using
generally accepted accounting principles. These principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates. Certain prior period amounts have been reclassified to conform
to the current period presentation.
RESTATEMENT
The Company adopted the equity method of accounting for its investment in
Chase Telecommunications Holdings, Inc. ("Chase Telecommunications Holdings") in
the third quarter of fiscal 1999. Prior to that time, the Company accounted for
its investment in Chase Telecommunications Holdings under the cost method.
Accordingly, all prior periods presented in these condensed consolidated
financial statements have been adjusted retroactively in accordance with
generally accepted accounting principles.
F-47
<PAGE> 191
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
RESTRICTED CASH EQUIVALENTS AND INVESTMENTS
Restricted cash equivalents and investments are debt securities which have
been pledged to provide for the payment of the first seven scheduled interest
payments on long-term notes payable and to secure the Company's obligations
under a letter of credit with a bank. Management determines the appropriate
classification of its investment in debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. At February 29,
2000, the Company's restricted cash equivalents and restricted investments,
consisting of U.S. government securities classified as held-to-maturity and
carried at amortized cost, which approximates fair value, are summarized as
follows (in thousands):
<TABLE>
<S> <C>
Restricted cash equivalents........................... $ 28,942
Restricted short-term investments..................... 29,725
Restricted long-term investments...................... 49,811
--------
$108,478
========
</TABLE>
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the three and six months
ended February 29, 2000 was calculated by dividing the net loss for each of the
periods by the weighted average number of common shares outstanding for each of
the periods of 20,719,751 and 19,788,203, respectively. Basic and diluted net
loss per common share for the three and six months ended February 28, 1999 was
calculated by dividing the net loss for each of the periods by the weighted
average number of common shares outstanding for each of the periods of
17,770,465 and 17,717,486, respectively. The weighted average number of common
shares outstanding assumes that the 17,647,685 shares issued at Distribution
were outstanding for the periods prior to Distribution. Stock options for
5,451,746 common shares and the exercise of a warrant issued to Qualcomm for
4,500,000 shares of the Company's common stock have not been considered in
calculating basic and diluted net loss per common share because their effect
would be anti-dilutive. As a result, the Company's basic and diluted net loss
per common share are the same. The conversion of Qualcomm's Trust Convertible
Preferred Securities into the Company's common stock was completed during the
three months ended February 29, 2000.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which the Company will be required to adopt for fiscal year 2001.
This statement establishes a new model for accounting for derivatives and
hedging activities. Under SFAS No. 133, all derivatives must be recognized as
assets and liabilities and measured at fair value. The Company does not expect
that the adoption of SFAS No. 133 will have a material impact on its
consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarized certain of the staff's interpretations in
applying generally accepted accounting principles to revenue recognition. The
provisions of SAB No. 101 are effective for the Company's quarter ending May 31,
2000. The Company does not expect that the adoption of SAB No. 101 will have a
material impact on its consolidated financial position or results of operations.
F-48
<PAGE> 192
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
In March 2000, the FASB issued FASB interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company does not expect that the
adoption of FIN 44 will have a material effect on its financial position or
results of operations.
NOTE 2. ACQUISITION AND PENDING ACQUISITIONS OF WIRELESS LICENSES
ACQUISITION OF WIRELESS LICENSES
In January 2000, the Company purchased three wireless licenses covering
markets in North Carolina from AirGate Wireless, L.L.C. ("AirGate") for $25.0
million. The purchase price consisted of the Company assuming $11.1 million of
notes due to the Federal Communications Commission ("FCC") related to the
licenses and the remainder in cash.
PENDING ACQUISITIONS OF WIRELESS LICENSES
In September 1999, the Company agreed to purchase a wireless license
covering the Dayton, Ohio market from PCS Devco, Inc. ("PCS Devco") for $3.5
million. The purchase price consists of the Company assuming a $1.1 million,
6.25% per annum note due July 2007 to the FCC related to the license and the
remainder payable in cash. The Company is required to make PCS Devco's payments
on the FCC note during the period prior to the closing of the transaction,
reducing the remaining cash payment to PCS Devco. In addition, the Company will
transfer to PCS Devco one of the 36 wireless licenses it acquired in the federal
government's April 1999 reauction of PCS spectrum. In February 2000, the FCC
consented to the transfer of PCS Devco's license to the Company, although the
decision has not yet become a final order and as a result of a challenge by a
third party, is currently subject to further administrative review. Because the
decision did not become a final order prior to March 2000, the agreement now may
be terminated by either party at its discretion.
In January 2000, the Company agreed to acquire two wireless licenses
covering the Pittsburgh, Pennsylvania and Denver, Colorado markets from
Radiofone PCS, L.L.C ("Radiofone"). The purchase price for the Pittsburgh
license is $18.4 million in cash and the purchase price for the Denver license
is 232,754 shares of the Company's common stock and $3.4 million in cash less
the amount of debt owed by Radiofone to the FCC related to the license which
will be assumed by the Company at the closing. As of February 29, 2000, the
outstanding principal amount of the FCC debt was approximately $1.5 million. The
amounts owed to the FCC must be repaid in quarterly installments of principal
and interest through April 2007.
In February 2000, the Company agreed to purchase all of the outstanding
stock of three subsidiaries of Zuma PCS, LLC, which own three wireless licenses
covering markets in Albany, Columbus and Macon, Georgia. The purchase price
consists of 170,374 shares of the Company's common stock.
F-49
<PAGE> 193
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Each of these transactions is subject to FCC approval and other conditions
prior to closing. Accordingly, there can be no assurance that these transactions
will ultimately be consummated.
NOTE 3. INVESTMENTS AND LOANS TO UNCONSOLIDATED WIRELESS OPERATING COMPANIES
The Company has equity interests in companies that directly or indirectly
operate wireless telecommunications networks. Its participation in each company
differs and the Company does not have majority interests in such companies. The
Company accounts for these equity interests under the equity method. The Company
accounts for its investments in foreign operating companies using a two-month
lag. 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 lenders and the other participants, over which the Company has no
control.
Commencing with the fourth quarter of fiscal 1999, the Company began
accounting for Smartcom as a consolidated entity. Prior to the fourth quarter of
fiscal 1999, Smartcom was accounted for under the equity method. The Company
recorded equity losses from Smartcom of $4.1 million and $7.5 million during the
three months and six months ended February 28, 1999, respectively.
Condensed combined financial information for the Leap operating companies
accounted for under the equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31,
2000 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
Current assets.............................................. $ 58,637 $ 140,899
Non-current assets.......................................... 649,299 576,765
Current liabilities......................................... (227,096) (112,539)
Non-current liabilities..................................... (398,037) (347,590)
--------- ---------
Total stockholders' capital............................... 82,803 257,535
Other stockholders' share of capital........................ 28,733 146,059
--------- ---------
Company's share of capital.................................. 54,070 111,476
Lag period loans and advances............................... 17,606 10,195
Write-down in investments................................... -- (27,242)
--------- ---------
Investments in and loans receivable from unconsolidated
wireless operating companies........................... $ 71,676 $ 94,429
========= =========
</TABLE>
F-50
<PAGE> 194
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED & (UNAUDITED) (UNAUDITED &
RESTATED) RESTATED)
<S> <C> <C> <C> <C>
Operating revenues....................... $ 7,853 $ 1,301 $ 11,354 $ 6,123
-------- -------- --------- --------
Operating losses......................... (77,554) (39,011) (127,873) (52,153)
Other income (expense), net.............. (13,493) 1,055 (22,380) (4,379)
Foreign currency transaction gains
(losses)............................... (4,932) (4,450) 994 (4,024)
-------- -------- --------- --------
Net loss............................... (95,979) (42,406) (149,259) (60,556)
Other stockholders' share of net loss.... (61,364) (20,927) (97,126) (22,604)
-------- -------- --------- --------
Company's share of net loss.............. (34,615) (21,479) (52,133) (37,952)
Amortization of excess cost of
investment............................. -- (65) -- (309)
Elimination of intercompany
transactions........................... 749 2,165 2,074 2,853
-------- -------- --------- --------
Equity in net loss of unconsolidated
wireless operating companies........ $(33,866) $(19,379) $ (50,059) $(35,408)
======== ======== ========= ========
</TABLE>
CHASE TELECOMMUNICATIONS HOLDINGS
In December 1996, the Company purchased $4.0 million of Class B Common
Stock of Chase Telecommunications Holdings, representing 7.2% of the outstanding
capital stock. The Company has also provided a working capital facility to Chase
Telecommunications Holdings, which was increased from $50.0 million to $65.0
million in February 2000. At February 29, 2000, borrowings under the facility
totaled $59.6 million, including $6.1 million of accrued interest. However,
because the facility is the only source of working capital for Chase
Telecommunications Holdings, the carrying value of the Company's investment and
the loans under the facility have been reduced to zero as the Company has
recognized 100% of the net losses of Chase Telecommunications Holdings to the
extent of its investment and loans. The Company recorded equity losses from
Chase Telecommunications Holdings of $14.7 million and $20.2 million during the
three and six months ended February 29, 2000, respectively, and $2.6 million and
$11.2 million during the three and six months ended February 28, 1999,
respectively.
In March 2000, the Company completed its acquisition of substantially all
the assets of Chase Telecommunications Holdings. The purchase price included
approximately $6.3 million in cash, the assumption of principal amounts of
liabilities that totaled approximately $139.0 million at February 29, 2000, a
warrant to purchase 1% of the common stock of the Company's subsidiary Cricket
Communications Holdings, Inc. ("Cricket Communications Holdings") at an exercise
price of $1.0 million (which has a fair value of approximately $15.3 million),
and contingent earn-out payments of up to $41.0 million (plus certain expenses)
based on the earnings of the business acquired during the fifth full year
following the closing of the acquisition. The liabilities to be assumed include
approximately $78.8 million in principal amounts owed to the FCC associated with
the wireless licenses that bear interest at the rate of 7.0% per annum and must
be repaid in quarterly installments of principal and interest through January
2007.
F-51
<PAGE> 195
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
PEGASO
At February 29, 2000, the Company had a 28.6% interest in Pegaso
Telecomunicaciones S.A. de C.V. ("Pegaso"), a Mexican corporation that is
deploying the first 100% digital wireless communications network in Mexico. The
Company invested $100.0 million in Pegaso from June to September 1998 as a
founding shareholder. The Company recorded equity losses from Pegaso of $19.2
million and $29.9 million during the three and six months ended February 29,
2000, respectively, and $8.1 million and $8.7 million during the three and six
months ended February 28, 1999, respectively. In April 2000, Sprint PCS invested
approximately $200 million by purchasing shares from Pegaso and shareholders
other than Leap. As a result, the Company's ownership interest in Pegaso was
diluted from 28.6% to 22.4%.
NOTE 4. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31,
2000 1999
------------ ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Trade accounts receivable............................. $ 5,905 $2,197
Other accounts receivable............................. 1,623 1,112
------- ------
7,528 3,309
Allowance for doubtful accounts....................... (1,174) (583)
------- ------
$ 6,354 $2,726
======= ======
INVENTORIES:
Handsets.............................................. $ 4,381 $4,320
Accessories........................................... 998 1,090
------- ------
$ 5,379 $5,410
======= ======
</TABLE>
NOTE 5. LOANS PAYABLE TO BANKS
In February 2000, the Company renewed its loans with banks in Chile,
including capitalized and accrued interest. The renewed loans of $10.3 million
and $7.6 million at February 29, 2000, bear interest at rates of 8.2% and 7.85%
per annum, respectively, and are due to be repaid in September 2000.
In November 1999, the Company and Smartcom entered into a loan arrangement
with a bank. Pursuant to the arrangement, Leap acts as account party to cause
the bank to issue letters of credit to secure the loan to Smartcom. At February
29, 2000, Leap has deposited funds with the bank totaling $28.9 million and
pledged such funds as cash collateral to secure its obligation under the letters
of credit. These funds are recorded as restricted cash equivalents in the
condensed consolidated balance sheet. At February 29, 2000, borrowings from the
bank totaled $14.1 million, bear interest at the weighted-average rate of 7.01%
per annum and are due to be repaid in July 2000.
F-52
<PAGE> 196
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 6. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 29,
2000
------------
(UNAUDITED)
<S> <C>
12.5% senior notes, due 2010, effective interest rate of
15.8%..................................................... $156,606
14.5% senior discount notes, face amount $668.0 million, due
2010, effective interest rate of 16.3%.................... 229,331
Smartcom deferred payment and credit agreements............. 119,484
Lucent credit agreement..................................... 21,027
U.S. government financing................................... 9,346
Note payable to Telex-Chile, net of discount................ 17,082
--------
$552,876
========
</TABLE>
UNITS OFFERING
In February 2000, the Company completed an offering of 225,000 senior
units, each senior unit consisting of one 12.5% senior note due 2010 ("Senior
Note") and one warrant to purchase the Company's common stock, and 668,000
senior discount units, each senior discount unit consisting of one 14.5% senior
discount note due 2010 ("Senior Discount Note") and one warrant to purchase the
Company's common stock. The total gross proceeds from the sale of the senior
units and senior discount units were $225.0 million and $325.1 million,
respectively, and $164.4 million of the total proceeds were allocated to the
fair value of the warrants, estimated using the Black-Scholes option pricing
model. In addition, the Company capitalized certain debt issuance costs of $13.5
million, consisting of underwriting, printing, legal and accounting fees. A
portion of the net proceeds from the units offering were used for the repayment
of borrowings under the Company's credit agreement with Qualcomm. The remaining
proceeds from the units offering will be used for capital expenditures,
acquisitions of wireless licenses, strategic investments, sales and marketing
activities, and working capital and general corporate purposes.
Interest on the Senior Notes will be payable on April 15 and October 15 of
each year, beginning on April 15, 2000. The Company used $79.5 million of the
proceeds from the Senior Notes to purchase and pledge, for the benefit of the
holders of the Senior Notes, certain U.S. Government securities to provide for
the payment of the first seven scheduled interest payments on the Senior Notes.
The remaining unpaid portion of such amounts is classified as restricted cash
equivalents and investments in the accompanying condensed consolidated balance
sheet.
Each Senior Discount Note has an initial accreted value of $486.68 and a
principal amount at maturity of $1,000. The Senior Discount Notes will not begin
to accrue cash interest until April 15, 2005. Interest on the Senior Discount
Notes will be payable on April 15 and October 15 of each year, beginning on
October 15, 2005.
The Company may redeem any of the notes beginning April 15, 2005. The
initial redemption price of the Senior Notes is 106.25% of their principal
amount plus accrued interest. The initial redemption price of the Senior
Discount Notes is 107.25% of their principal amount at maturity plus accrued
interest.
F-53
<PAGE> 197
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
In addition, before April 15, 2003, the Company may redeem up to 35% of both the
Senior Notes and the Senior Discount Notes using proceeds from certain qualified
equity offerings of the Company's common stock at 112.5% of their principal
amount and 114.5% of their accreted value, respectively.
The notes rank equally with the Company's other unsecured senior
indebtedness. The notes are effectively subordinate to all of the Company's
secured indebtedness. The notes are guaranteed by the Company's domestic
subsidiary, Cricket Communications Holdings. The terms of the notes include
certain covenants that restrict the Company's ability to, among other things,
incur additional indebtedness, create liens, pay dividends, make investments,
sell assets and effect a consolidation or merger. The Company is obligated to
consummate an exchange offer for the notes pursuant to an effective registration
statement or cause to become effective a shelf registration statement for
resales of the notes. If one of these events does not occur within 180 days
after the closing of the units offering, interest on the notes will increase by
0.5% per annum until the exchange offer is consummated or such shelf
registration statement becomes effective.
Each warrant included as part of the senior units is initially exercisable
to purchase 5.146 shares (1,157,850 shares in aggregate) of the Company's common
stock at an exercise price of $96.80 per share. Each warrant included as part of
the senior discount units is initially exercisable to purchase 2.503 shares
(1,672,004 shares in aggregate) of the Company's common stock at an exercise
price of $96.80 per share. The warrants may be exercised at any time on or after
February 23, 2001 and prior to April 15, 2010. The Company is obligated to file
a shelf registration statement covering the resale of the warrants and related
common stock issuable upon exercise of the warrants within 180 days after the
closing of the units offering.
QUALCOMM CREDIT AGREEMENT
The Company entered into a secured credit facility (the "Qualcomm Credit
Agreement") with Qualcomm on September 23, 1998. The Qualcomm Credit Agreement
consisted of two sub-facilities. The working capital sub-facility enabled the
Company to borrow up to $35.2 million from Qualcomm for working capital needs.
The investment capital sub-facility enabled the Company to borrow up to $229.8
million from Qualcomm for strategic capital investments. In February 2000, the
Company used a portion of the net proceeds of the units and equity offerings to
repay in full $226.7 million outstanding under the Qualcomm Credit Agreement. In
connection with the repayment of the Qualcomm Credit Agreement, the related
unamortized debt issue costs of $4.4 million were written off and reported as an
extraordinary loss in the accompanying condensed consolidated statements of
operations.
LUCENT CREDIT AGREEMENT
In September 1999, Cricket Communications, Inc. ("Cricket Communications"),
an indirect subsidiary of the Company, entered into an agreement with Lucent
Technologies, Inc. ("Lucent") for the purchase of $330.0 million of
infrastructure products and services. Lucent agreed to finance these purchases
plus additional working capital under a credit facility (the "Lucent Credit
Agreement"). The Lucent Credit Agreement permits up to $641.0 million in total
borrowings with borrowing availability based on total amounts of equipment
purchased, subject to various covenants and conditions typical for a loan of
this type, including minimum levels of customers and covered potential customers
which must increase over time, limits on annual capital expenditures and
dividend restrictions and other financial ratio tests. The obligations under the
Lucent Credit Agreement are secured by all of the stock of Cricket
F-54
<PAGE> 198
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Communications and its subsidiaries, all of their respective assets, the assets
of Cricket Communications Holdings and the stock of each special purpose
subsidiary of Leap formed to hold wireless licenses. Borrowings under the Lucent
Credit Agreement accrue at an interest rate equal to LIBOR plus 3.5% to 4.25% or
a bank base rate plus 2.5% to 3.25%, in each case with the specific rate based
on certain financial ratios. Cricket Communications must pay Lucent a commitment
fee equal to 1.25% per annum on the unused commitment under the facility,
decreasing to 0.75% per annum. Principal payments are scheduled to begin after
three years with a final maturity after eight years. Repayment is weighted to
the later years of the repayment schedule. At February 29, 2000, the Company had
$21.0 million outstanding under the Lucent Credit Agreement, including $0.3
million in accrued and capitalized interest.
SMARTCOM DEFERRED PAYMENT AND CREDIT AGREEMENTS
Smartcom has entered into a Deferred Payment Agreement, as amended and
restated (the "Deferred Payment Agreement"), with Qualcomm related to Smartcom's
purchase of equipment, software and services from Qualcomm. Under the Deferred
Payment Agreement, Qualcomm has agreed to defer collection of amounts up to a
maximum of $115.7 million including capitalized interest. The obligations under
the Deferred Payment Agreement are secured by all of the assets of Smartcom. A
Leap subsidiary has agreed to pledge its shares in Smartcom as collateral for
its guarantee of Smartcom's obligations to Qualcomm under the agreement. The
Deferred Payment Agreement requires Smartcom to meet certain financial and
operating covenants, including a debt to equity ratio and restrictions on
Smartcom's ability to pay dividends and to distribute assets. As a result,
substantially all the net assets of Smartcom are restricted from distribution to
Leap. The deferred payments bear interest at a rate equal to LIBOR plus 5.0% to
6.5% or a bank base rate plus 4.0% to 5.5%, in each case with the specific rate
based on certain financial ratios. Accrued interest may be added to the
outstanding principal amount of the applicable borrowing until September 2001.
Amounts deferred under the agreement must be repaid by September 2006. At
February 29, 2000, the Company had $95.3 million outstanding under the Deferred
Payment Agreement.
In February 2000, Smartcom and Qualcomm entered into an agreement (the
"Equipment Credit Agreement") related to Smartcom's equipment supply and service
agreements with a vendor. The Equipment Credit Agreement permits up to $38.5
million in borrowings, including capitalized interest. The Equipment Credit
Agreement provides for certain financial and operating covenants similar to the
Deferred Payment Agreement. Borrowings under the Equipment Credit Agreement
accrue at an interest rate equal to LIBOR plus 5.0% to 7.0% or a bank base rate
plus 4.0% to 6.0%, in each case with the specific rate based on certain
financial ratios. Principal payments are scheduled to begin in March 2002 with a
final maturity of September 2006. At February 29, 2000, Smartcom had financed
amounts totaling $18.6 million under the Equipment Credit Agreement.
In February 2000, Smartcom and Qualcomm entered into an agreement (the
"Subscriber Deferred Payment Agreement") related to Smartcom's purchase of
handsets and accessories and test equipment from Qualcomm. Under the terms of
the agreement, Qualcomm has agreed to defer collection of amounts up to a
maximum of $11.2 million, including capitalized interest. The Subscriber
Deferred Payment Agreement provides for certain financial and operating
covenants similar to the Deferred Payment Agreement. Borrowings under the
Subscriber Deferred Payment Agreement accrue at an interest rate equal to LIBOR
plus 3.5% to 5.0% or a bank base rate plus 2.5% to 4.0%, in each case with the
specific rate based on certain financial ratios. Principal outstanding is due at
maturity in September
F-55
<PAGE> 199
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2001. At February 29, 2000, the Company had $5.6 million outstanding under the
Subscriber Deferred Payment Agreement.
U.S. GOVERNMENT FINANCING
As part of the consideration for three wireless licenses acquired from
AirGate, the Company assumed $11.1 million ($9.6 million, net of discount) of
U.S. Government financing with the FCC. The terms of the notes include an
interest rate of 6.25% per annum and quarterly principal and interest payments
until maturity in April 2007. The notes were discounted using management's best
estimate of the prevailing market interest rate to the Company at the time of
purchase of the wireless licenses of 10.75% per annum.
NOTE 7. EQUITY OFFERING
In February 2000, the Company completed a public equity offering of
4,000,000 shares of common stock at a price of $88.00 per share. Net of
underwriters' discounts and commissions, the Company received $82.72 per share,
or $330.9 million in the aggregate. The Company expects to pay approximately
$0.9 million of expenses related to the equity offering, and these costs have
been recorded as reductions to additional paid-in capital. A portion of the net
proceeds from the equity offering was used for the repayment of the Qualcomm
Credit Agreement. The remaining proceeds from the equity offering will be used
for capital expenditures, acquisitions of wireless licenses, strategic
investments, sales and marketing activities and working capital and general
corporate purposes.
NOTE 8. COMMITMENTS AND CONTINGENCIES
PEGASO
In May 1999, Pegaso entered into a $100 million loan agreement with several
banks with credit support from Qualcomm. The Company guaranteed 33% of Pegaso's
obligations under this loan agreement in the event of Pegaso's default. In
December 1999, as a condition of the guarantee, the Company received an option
to subscribe for and purchase up to 243,090 limiting voting series "N" treasury
shares of Pegaso. The number of shares to be purchased by the Company under the
option will be calculated to provide a total internal rate of return on the
average outstanding balance of the bridge loan of 20%. The options have an
exercise price of $0.01 per share and expire 10 years from the date of issuance.
The options are exercisable at any time after the date on which all amounts
under the loan agreement are paid in full.
LITIGATION
In September 1999, the Company declared default under loans to Metrosvyaz,
stopped funding those loans, wrote off its remaining $9.6 million investment in
Metrosvyaz, and issued a demand for arbitration against Metrosvyaz and one of
its directors with respect to those loans. In response, in March 2000,
Metrosvyaz filed suit against the Company and certain of its directors and
officers in the U.S. District Court for the Southern District of California. The
Metrosvyaz suit alleged claims for libel, trade libel, intentional and negligent
interference with prospective advantage and breach of fiduciary duty.
F-56
<PAGE> 200
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
In April 2000, the Company resolved its differences with Metrosvyaz. As
part of the settlement, Metrosvyaz dismissed its action against the Company and
its officers in the federal court in San Diego, Leap dismissed its demand for
arbitration, and both companies agreed to general releases. The Company
surrendered its interest in a joint venture company that owned an interest in
Metrosvyaz, wrote off the balance of its investments in Russia and received a
contractual right to certain contingent payments from Qualcomm.
Various other claims arising in the course of business, seeking monetary
damages and other relief, are pending. The amount of the liability, if any, from
such claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 9. SEGMENT DATA
The Company's current reportable segments are countries in which it
manages, supports, operates and otherwise participates in wireless
communications business ventures. These reportable segments are evaluated
separately because each geographic region presents different marketing
strategies and operational issues, as well as distinct economic climates and
regulatory constraints. The Company's reportable segments are comprised of its
consolidated and unconsolidated United States subsidiaries, and Leap's operating
companies in Mexico and Chile.
F-57
<PAGE> 201
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
UNITED STATES
Revenues.................................. $ 3,201 $ 225 $ 5,288 $ 824
Operating loss............................ (27,420) (4,455) (42,918) (8,887)
Operating loss before depreciation and
amortization............................ (9,889) (3,530) (15,699) (7,087)
Capital expenditures...................... (23,754) (3,497) (27,683) (7,019)
Purchase of wireless licenses............. (23,489) -- (23,489) --
Total assets.............................. 152,636 85,786 152,636 85,786
CHILE
Revenues.................................. 8,763 1,076 14,211 1,284
Operating loss............................ (23,176) (5,559) (37,501) (10,983)
Operating loss before depreciation and
amortization............................ (18,313) (2,340) (27,622) (5,922)
Capital expenditures...................... (27,287) (22,302) (30,186) (39,397)
Total assets.............................. 214,574 139,283 214,574 139,283
MEXICO
Revenues.................................. 4,652 -- 6,066 --
Operating loss............................ (53,509) (24,284) (91,533) (24,818)
Operating loss before depreciation and
amortization............................ (48,482) (24,222) (84,134) (24,740)
Capital expenditures...................... (66,067) (71,208) (102,346) (131,552)
Purchase of wireless licenses............. -- -- -- (175,864)
Total assets.............................. 597,566 412,489 597,566 412,489
</TABLE>
F-58
<PAGE> 202
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
A reconciliation of the total of the Company's segment revenues, operating
losses and operating losses before depreciation and amortization to the
corresponding consolidated amounts is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total segment revenues.................... $ 16,616 $ 1,301 $ 25,565 $ 2,108
Revenues of unconsolidated wireless
operating companies..................... (7,853) (1,301) (11,354) (2,108)
Other revenues............................ 36 -- 72 --
--------- -------- --------- --------
Consolidated revenues................... $ 8,799 $ -- $ 14,283 $ --
========= ======== ========= ========
Total segment operating losses............ $(104,105) $(34,298) $(171,952) $(44,688)
Operating losses of unconsolidated
wireless operating companies............ 77,554 39,011 127,873 52,153
Discontinued foreign ventures............. -- (6,146) -- (9,898)
Corporate and eliminations................ (4,304) (2,752) (7,389) (6,116)
--------- -------- --------- --------
Consolidated operating loss............. $ (30,855) $ (4,185) $ (51,468) $ (8,549)
========= ======== ========= ========
Total segment operating losses before
depreciation and amortization........... $ (76,684) $(30,092) $(127,455) $(37,749)
Operating losses before depreciation and
amortization of unconsolidated wireless
operating companies..................... 55,045 34,805 93,304 45,214
Discontinued foreign ventures............. -- (6,146) -- (9,898)
Corporate and eliminations................ (4,143) (2,611) (7,069) (5,851)
--------- -------- --------- --------
Consolidated operating losses before
depreciation and amortization........... $ (25,782) $ (4,044) $ (41,220) $ (8,284)
========= ======== ========= ========
</TABLE>
Revenues and long-lived assets related to operations in the United States
and other foreign countries are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
United States............................. $ 36 $-- $ 72 $--
Other foreign countries................... 8,763 -- 14,211 --
------ --- ------- ---
Total consolidated revenues............. $8,799 $-- $14,283 $--
====== === ======= ===
</TABLE>
F-59
<PAGE> 203
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31,
2000 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
LONG-LIVED ASSETS:
United States............................................... $ 64,638 $ 23,599
Other foreign countries..................................... 240,411 264,369
-------- --------
Total consolidated long-lived assets...................... $305,049 $287,968
======== ========
</TABLE>
NOTE 10. SUBSEQUENT EVENTS
STOCKHOLDER RIGHTS PLAN
In March 2000, the Company's Board of Directors approved an amendment to
the Company's Stockholder Rights Plan that increases the purchase price from $90
to $350 for each one one-thousandth share of Series A Junior Participating
Preferred Stock.
PENDING WIRELESS LICENSE ACQUISITIONS
In March 2000, the Company agreed to acquire three wireless licenses
covering the Phoenix, Arizona, Reno, Nevada and Roswell, New Mexico markets from
Beta Communications, L.L.C. The purchase price for the licenses is $33.3 million
in cash. In April 2000, the Company agreed to acquire a wireless license
covering the Omaha, Nebraska market from CM PCS, LLC. The purchase price for the
license is $14.2 million in cash plus the assumption of approximately $0.6
million in indebtedness to the FCC related to the license. Also in April 2000,
the Company agreed to acquire a wireless license covering the Lincoln, Nebraska
market from Center Point PCS. The purchase price for the wireless license is
$4.3 million in cash. These transactions are subject to FCC approval and other
conditions prior to closing. Accordingly, there can be no assurance that the
transactions will ultimately be consummated.
SMARTCOM
In April 2000, the Company entered into a memorandum of understanding with
Endesa, S.A., a Spanish utility company ("Endesa"), whereunder Endesa agreed to
purchase 100 percent of the capital stock of Smartcom. Under the non-binding
terms and conditions of the Endesa memorandum of understanding, the sale of the
Smartcom stock is subject to the negotiation and entry into of definitive
agreements documenting the transaction.
* * * *
F-60
<PAGE> 204
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Smartcom 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 Smartcom S.A., formerly named Chilesat Telefonia Personal S.A.,
(Company in the development stage) at December 31, 1998 and 1997, and the
results of its operations and cash flows for year ended December 31, 1998, for
the period from inception (March 3, 1997) to December 31, 1997, and for the
period from inception (March 3, 1997) to December 31, 1998, in conformity with
generally accepted accounting principles of the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards of the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
At December 31, 1998, the Company had negative working capital of US$49.7
million. At that date, US$36.6 million of the current liabilities relate to debt
payable to related parties who have the option to convert such debt into shares
should Smartcom S.A. be unable to meet its obligations. As a result of its
negative working capital, the Company had not complied with certain financial
conditions of the credit agreement described in Note 8. As described in Note 14,
the Company has entered into a Second Amended and Restated Deferred Payment
Agreement which substantially revised the Deferred Payment Agreement covenants,
including covenants that were in default, and deferred the dates of repayment of
the loan, subject to certain conditions.
Price Waterhouse
Santiago, Chile,
February 25, 1999 except as to Note 14(b) which is as of March 16, 1999; Note
14(c) which is as of April 19, 1999; and Note 14(d) which is as of October 12,
1999.
F-61
<PAGE> 205
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEET
EXPRESSED IN THOUSANDS OF US DOLLARS
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, ------------------
1999 1998 1997
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,058 $ 942 $24,875
Accounts receivable -- trade.............................. 1,404 1,017 --
Accounts receivable from related company.................. -- -- 10
Other accounts receivable................................. 119 134 133
Recoverable taxes......................................... 3,308 6,480 6,228
Inventories............................................... 1,421 4,419 --
Other current assets...................................... 1,348 779 695
-------- -------- -------
Total current assets.............................. 8,658 13,771 31,941
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 123,061 124,800 40,093
OTHER ASSETS................................................ 641 712 4
-------- -------- -------
Total assets...................................... $132,360 $139,283 $72,038
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Interest payable.......................................... $ 6,962 $ -- $ --
Interest payable to related companies..................... 2,603 6,957 543
Accounts and note payable................................. 27,033 1,804 380
Accounts and notes payable to related companies........... 37,167 52,572 247
Accrued liabilities and withholdings...................... 911 2,160 960
-------- -------- -------
Total current liabilities......................... 74,676 63,493 2,130
-------- -------- -------
LONG-TERM LIABILITIES
Note payable.............................................. 43,326 -- --
Note payable to related company........................... -- 49,807 23,655
Other long-term liabilities............................... 8,491 8,496 4,579
-------- -------- -------
Total long-term liabilities....................... 51,817 58,303 28,234
-------- -------- -------
COMMITMENTS AND CONTINGENCIES............................... -- -- --
SHAREHOLDERS' EQUITY
Preferred stock (8,400,000 shares authorized, issued and
outstanding, with no par value; liquidation preference
up to stated value).................................... 42,000 42,000 42,000
Common stock (8,400,000 shares authorized, issued and
outstanding, with no par value)........................ 1,964 1,964 1,964
Other capital contributions............................... 940 493 --
(Deficit) surplus accumulated during the development
stage.................................................. (33,601) (21,943) 55
Accumulated other comprehensive losses.................... (5,436) (5,027) (2,345)
-------- -------- -------
Total shareholders' equity........................ 5,867 17,487 41,674
-------- -------- -------
Total liabilities and shareholders' equity........ $132,360 $139,283 $72,038
======== ======== =======
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-62
<PAGE> 206
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
EXPRESSED IN THOUSANDS OF US DOLLARS
<TABLE>
<CAPTION>
FOR THE THREE MONTH FOR THE PERIOD FOR THE PERIOD FROM
PERIOD ENDED FOR THE FROM INCEPTION INCEPTION (MARCH 3, 1997) TO
--------------------- YEAR ENDED (MARCH 3, 1997) ----------------------------
MARCH 31, MARCH 31, DECEMBER 31, TO DECEMBER 31, MARCH 31, DECEMBER 31,
1999 1998 1998 1997 1999 1998
--------- --------- ------------ --------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales....................... $ 2,386 $ -- $ 1,284 $ -- $ 3,670 $ 1,284
Cost of sales............... (1,273) -- (1,570) -- (2,843) (1,570)
-------- ------- -------- ------- -------- --------
Gross margin............. 1,113 -- (286) -- 827 (286)
Remunerations and other
staff costs.............. (1,408) (735) (3,916) -- (5,324) (3,916)
Sales commissions........... (600) -- (882) -- (1,482) (882)
Marketing expenses.......... (196) (352) (3,619) -- (3,815) (3,619)
General and administrative
expenses.................... (1,204) (81) (2,736) (659) (4,599) (3,395)
Depreciation and
amortization............. (4,148) (14) (3,743) (4) (7,895) (3,747)
-------- ------- -------- ------- -------- --------
Net operating loss....... (6,443) (1,182) (15,182) (663) (22,288) (15,845)
-------- ------- -------- ------- -------- --------
NON-OPERATING RESULTS
Interest income............. 46 623 1,058 2,022 3,126 3,080
Interest expense............ (2,702) (7) (3,295) -- (5,997) (3,295)
Currency exchange losses.... (2,649) (1,242) (4,186) (1,280) (8,115) (5,466)
Other income (expenses)..... 90 (4) (393) (24) (327) (417)
-------- ------- -------- ------- -------- --------
Non-operating (loss)
income................. (5,215) (630) (6,816) 718 (11,313) (6,098)
-------- ------- -------- ------- -------- --------
Net (loss) income........ (11,658) (1,812) (21,998) 55 (33,601) (21,943)
OTHER COMPREHENSIVE INCOME
Currency translation
adjustment............... (409) (1,390) (2,682) (2,345) (5,436) (5,027)
-------- ------- -------- ------- -------- --------
Comprehensive loss.......... $(12,067) $(3,202) $(24,680) $(2,290) $(39,037) $(26,970)
======== ======= ======== ======= ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-63
<PAGE> 207
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
EXPRESSED IN THOUSANDS OF US DOLLARS
<TABLE>
<CAPTION>
FOR THE THREE MONTH FOR THE PERIOD FOR THE PERIOD FROM
PERIOD ENDED FOR THE FROM INCEPTION INCEPTION (MARCH 3, 1997) TO
---------------------- YEAR ENDED (MARCH 3, 1997) -----------------------------
MARCH 31, MARCH 31, DECEMBER 31, TO DECEMBER 31, MARCH 31, DECEMBER 31,
1999 1998 1998 1997 1999 1998
--------- --------- ------------ --------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING
ACTIVITIES
Net (loss) income.............. $(11,658) $ (1,812) $(21,998) $ 55 $(33,601) $(21,943)
Adjustments to reconcile to
net cash used in operating
activities:
Depreciation and
amortization............. 4,148 14 3,743 4 7,895 3,747
Use of the network and
signal distribution
services................. 447 -- 493 -- 940 493
Changes in working capital:
Accounts
receivable -- trade...... (387) (880) (1,017) -- (1,404) (1,017)
Accounts receivable from
related companies........ -- -- 10 (10) -- --
Other accounts
receivable............... 15 -- (1) (133) (119) (134)
Recoverable taxes.......... 3,172 1,520 (252) (6,171) (3,251) (6,423)
Inventories................ 3,161 -- -- -- 3,161 --
Other current assets....... (569) (5,269) (118) (695) (1,382) (813)
Accounts and note
payable.................. 3,403 494 1,424 380 5,207 1,804
Accrued interest and
accounts payable to
related
companies................ 972 -- 7,168 511 8,651 7,679
Accrued liabilities and
withholdings............. (1,249) (890) 1,200 957 908 2,157
-------- -------- -------- -------- -------- --------
Cash flow used in
operating
activities............ 1,455 (6,823) (9,348) (5,102) (12,995) (14,450)
-------- -------- -------- -------- -------- --------
CASH FLOW FROM INVESTING
ACTIVITIES
Acquisitions of property,
plant and equipment........ (4,033) (22,349) (37,766) (14,383) (56,182) (52,149)
Other........................ 71 4 (708) (4) (641) (712)
-------- -------- -------- -------- -------- --------
Cash flow used in
investing
activities............ (3,962) (22,345) (38,474) (14,387) (56,823) (52,861)
-------- -------- -------- -------- -------- --------
CASH FLOW FROM FINANCING
ACTIVITIES
Notes payable to related
companies.................. -- 13,207 20,271 -- 20,271 20,271
Capital increase............. -- -- -- 42,000 42,000 42,000
Other long-term
liabilities................ -- 1,377 3,917 4,579 8,496 8,496
-------- -------- -------- -------- -------- --------
Cash flow provided by
financing
activities............ -- 14,584 24,188 46,579 70,767 70,767
-------- -------- -------- -------- -------- --------
Net (decrease) increase in
cash......................... (2,507) (14,584) (23,634) 27,090 949 3,456
Effect of exchange rate changes
on cash...................... 2,623 (52) (299) (2,215) 109 (2,514)
-------- -------- -------- -------- -------- --------
(Decrease) increase in cash and
cash equivalents............. 116 (14,636) (23,933) 24,875 1,058 942
Cash and cash equivalents at
the beginning of the
period....................... 942 24,875 24,875 -- -- --
-------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
THE END OF THE PERIOD........ $ 1,058 $ 10,239 $ 942 $ 24,875 $ 1,058 $ 942
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-64
<PAGE> 208
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
STATEMENT OF CASH FLOWS
EXPRESSED IN THOUSANDS OF US DOLLARS
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE THREE MONTH FOR THE PERIOD FOR THE PERIOD FROM
PERIOD ENDED FOR THE FROM INCEPTION INCEPTION (MARCH 3, 1997) TO
--------------------- YEAR ENDED (MARCH 3, 1997) -----------------------------
MARCH 31, MARCH 31, DECEMBER 31, TO DECEMBER 31, MARCH 31, DECEMBER 31,
1999 1998 1998 1997 1999 1998
--------- --------- ------------ --------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest paid....................... $4 $-- $695 $923 $1,622 $1,618
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
The following non-cash transactions occurred during the periods presented:
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD FROM
FOR THE THREE MONTH FOR THE FROM INCEPTION INCEPTION (MARCH 3, 1997) TO
PERIOD ENDED YEAR ENDED (MARCH 3, 1997) -----------------------------
MARCH 31, DECEMBER 31, TO DECEMBER 31, MARCH 31, DECEMBER 31,
1999 1998 1997 1999 1998
------------------- ------------ --------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Long-term financing received
from related company to
purchase fixed assets and
inventories................. $ -- $ 14,745 $ 23,655 $ 38,400 $ 38,400
Short-term financing received
from related company to
purchase fixed assets and
inventories................. -- 42,707 -- 42,707 42,707
Long-term financing to
purchase fixed assets and
inventories................. 1,578 -- -- 1,578 --
Purchase of fixed assets from
party providing financing... (1,415) (53,067) (23,655) (78,137) (76,722)
Purchase of inventories from
party providing financing... (163) (4,385) -- (4,548) (4,385)
------- -------- -------- -------- --------
$ -- $ -- $ -- $ -- $ --
======= ======== ======== ======== ========
</TABLE>
As indicated in Note 1, Chilesat S.A. contributed non-cash assets and
liabilities to the joint venture on March 3, 1997. The net assets contributed at
that date are summarized as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 57
Property, plant and equipment............................... 2,189
Current liabilities......................................... (282)
------
Net assets contributed............................. $1,964
======
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-65
<PAGE> 209
SMARTCOM 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
========= ========= ======== ====== ==== ======== ======= ========
Balance at January 1,
1999...................... 8,400,000 8,400,000 $ 42,000 $1,964 $493 $(21,943) $(5,027) $ 17,487
Other contributed capital
(unaudited)............... -- -- -- -- 447 -- -- 447
Net loss for the period
(unaudited)............... -- -- -- -- -- (11,658) -- (11,658)
Currency translation
adjustment (unaudited).... -- -- -- -- -- -- (409) (409)
--------- --------- -------- ------ ---- -------- ------- --------
Balance at March 31, 1999
(unaudited)............... 8,400,00 8,400,000 $ 42,000 $1,964 $940 $(33,601) $(5,436) $ 5,867
========= ========= ======== ====== ==== ======== ======= ========
</TABLE>
The accompanying Notes 1 to 14 form an integral part of these financial
statements.
F-66
<PAGE> 210
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. THE COMPANY
Smartcom S.A., formerly named Chilesat Telefonia Personal S.A., (the
"Company" or "Smartcom") 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
Smartcom, among whose assets was the PCS license to operate in Chile.
The Company is the holder of one of three national licenses to provide PCS
services in Chile. These services were required to be ready for operations under
the conditions of the license by June 23, 1998 in the case of the geographical
area covered by Chile's Fourth to Tenth regions and by December 23, 1998 for the
remainder of the country. The Company completed construction of its mobile PCS
telephone system infrastructure by the required dates. The Company entered into
a System Equipment Purchase Agreement with Qualcomm Incorporated whereby
Qualcomm Incorporated will provide manufacturing, engineering, equipping,
integrating, installing, testing and technical assistance for the mobile PCS
telephone system.
Under the terms of the Shareholders' Agreement, the Company will purchase
from Qualcomm Incorporated all network hardware and software marketed by
Qualcomm Incorporated and at least 50% of all mobile and fixed handsets
purchased by the Company for a period expiring in September 2000. Similarly,
until the later of five years following the formation of the joint venture or
the date on which
F-67
<PAGE> 211
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
Smartcom is a development stage company as defined in accordance with
Statement of Financial Accounting Standards No. 7 due to the fact that the
Company has not yet generated significant revenues from commercial operations.
As indicated in Note 1, the Company has completed the construction of its mobile
PCS telephone system infrastructure and testing of the installations between
Chile's Fourth and Tenth regions with friendly users commenced in July, 1998.
The mobile PCS telephone system began operations in September, 1998. The
infrastructure necessary to cover the remainder of Chile was operational in
December 1998.
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("US GAAP"). The preparation
of financial statements in accordance with US GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
(b) PERIOD OF FINANCIAL STATEMENTS
The financial statements for the Company are presented for the year ended
December 31, 1998 with comparative amounts for the period from the date of
formation of the joint venture on March 3, 1997 through December 31, 1997. The
unaudited financial statements for three months ended March 31, 1999 are
presented.
(c) TRANSLATION OF THE CHILEAN PESO FINANCIAL STATEMENTS
The financial statements give effect to the translation of the Chilean peso
financial statements of the Company (not submitted herewith) to United States
dollars. All asset and liability accounts have been translated (after
eliminating the effects of accounting for inflation in Chile) at the Observed
Exchange Rates determined by the Central Bank of Chile at March 31, 1999,
December 31, 1998 and 1997 of Ch$484.08, Ch$472.41 and Ch$439.18 per US$1,
respectively. Capital stock has been translated at historic Observed Exchange
Rates. Income and expense accounts have been translated at average monthly
Observed Exchange Rates. The net effects of translation are recorded in the
cumulative translation adjustment account as a component of Accumulated other
comprehensive losses in the Company's equity.
(d) MONETARY ASSETS AND LIABILITIES IN OTHER CURRENCIES
Monetary assets and liabilities denominated in foreign currency have been
translated at year-end exchange rates. The effects of such translation have been
recorded as exchange gains or losses in the statement of income. Certain assets
and liabilities are denominated in UFs (Unidades de Fomento). The UF is a
Chilean inflation-indexed, peso-denominated monetary unit which is set daily in
advance based
F-68
<PAGE> 212
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
(e) REVENUE RECOGNITION
Revenue has been accrued at year end for the portion of fixed charge
services earned to date. The Company also recognizes revenues for traffic in
excess of the amounts attributable to the fixed charge contracts in the month
such revenues are billed. The effects of the unbilled revenues at period end not
recognized are not significant.
(f) UNCOLLECTABLE ACCOUNTS
The Company records an allowance for uncollectable accounts receivable with
respect to those amounts estimated not to be recoverable.
(g) INVENTORY
Inventory is comprised of handsets and accessories not yet placed into
service which are stated at the lower of historical cost, determined under a
first-in, first-out unit flow assumption, or market.
(h) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at acquisition cost plus
capitalized interest and direct costs incurred during the construction phase of
the mobile PCS telephone system. Depreciation is applied using the straight-line
method over the estimated useful lives of the assets once the assets are placed
in service. Depreciation with respect to the infrastructure of the mobile PCS
telephone system was applied beginning in September 1998.
(i) ADVERTISING
It is the Company's policy to record the cost of advertising as it is
incurred. For the year ended December 31, 1998, the Company recorded
US$3,619,000 (US$338,000 in 1997) as advertising expense. For the three months
ended March 31, 1999 (unaudited), the Company recorded US$197,000 as advertising
expense.
(j) INCOME TAXES
Income taxes have been recorded in accordance with Statement of Financial
Accounting Standards No. 109 (FAS 109). Income taxes payable for the current
year are recorded in current liabilities, if applicable. Future taxes arising
from differences between the amounts shown for assets and liabilities in the
balance sheet and the tax basis of those assets and liabilities at the balance
sheet date have been recorded as deferred income taxes. Deferred income tax
assets are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
F-69
<PAGE> 213
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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.
(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 11c).
(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 AS OF DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
----------- ------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash and bank deposits..................................... $ 586 $452 $ 899
Time deposits.............................................. -- 490 10,195
Securities purchased under agreements to resell............ -- -- 13,736
Other...................................................... 472 -- 45
------ ---- -------
$1,058 $942 $24,875
====== ==== =======
</TABLE>
(n) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting
for Derivative Instruments and Hedging Activities, is effective for fiscal years
beginning after June 15, 1999. This standard establishes accounting and
reporting standards for derivatives instruments, and for hedging activities. It
requires that an entity recognize all derivatives on the balance sheet at fair
value. Generally, changes in the fair value of derivatives must be recognized in
income when they occur, the only exception being derivatives that qualify as
hedges in accordance with the Standards. If a derivative qualifies as a hedge, a
company can elect to use "hedge accounting" to eliminate or reduce the
income-statement volatility that would arise from reporting changes in a
derivative's fair value in income. The type of accounting to be applied varies
depending on the nature of the exposure that is being hedged. In some cases,
income-statement volatility is avoided by an entity's recording changes in the
fair value of the derivative directly in shareholders' equity. In other cases,
changes in the fair value of the derivative continue to be reported in earnings
as they occur, but the impact is counterbalanced by the entity
F-70
<PAGE> 214
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
adjusting the carrying value of the asset or liability that is being hedged.
This standard is not expected to have an effect on the reporting of the Company
for the three months ended March 31, 1999 (unaudited), the year ended December
31, 1998 and period ended December 31, 1997 as it did not hold derivative
instruments during such periods. The effects of FAS 133 in future periods will
depend upon whether the Company enters into transactions in such periods
involving derivative instruments.
NOTE 3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
At December 31, 1998 and March 31, 1999 (unaudited), the Company held no
securities purchased under agreements to resell. Securities purchased under
agreements to resell at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
FINANCIAL INSTITUTION UNDERLYING FINANCIAL INSTRUMENT AMOUNT MATURITY DATE
--------------------- ------------------------------- ------- -------------
<S> <C> <C> <C>
Banco de A. Edwards........... Central Bank of Chile Debentures $ 6,417 February 10, 1998
Banco de A. Edwards........... Central Bank of Chile Debentures 6,491 February 12, 1998
Banco de A. Edwards........... Central Bank of Chile Debentures 828 February 19, 1998
-------
Total.................... $13,736
=======
</TABLE>
At December 31, 1997, the underlying financial instruments were in the
custody of the counter party to the agreements. Central Bank of Chile Debentures
are generally considered to be low-risk securities and are generally not subject
to significant market volatility.
NOTE 4. RECOVERABLE TAXES
Recoverable taxes at December 31, 1998 relate to value added taxes (VAT) of
US$6,480,000 (US$6,228,000 in 1997), incurred on the purchases of property,
plant and equipment required for the Company's mobile PCS telephone system and
goods and services. Recoverable taxes at March 31, 1999 (unaudited) were
US$3,308,000. VAT relating to the purchases of capital goods may be recovered in
cash by the Company in accordance with Chilean law. Other VAT is recovered by
offset against VAT raised on services rendered.
NOTE 5. INVENTORY
Inventory is summarized as follows:
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Handsets............................................... $ 749 $3,137
Accessories............................................ 672 1,282
------ ------
$1,421 $4,419
====== ======
</TABLE>
F-71
<PAGE> 215
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, -------------------
1999 1998 1997
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................... $ 332 $ 340 $ 140
Buildings and infrastructure........................... 113,849 114,926 39,771
Machinery and equipment................................ 13,033 10,138 88
Other.................................................. 3,637 3,100 98
Less: Accumulated depreciation......................... (7,790) (3,704) (4)
-------- -------- -------
Total net.................................... $123,061 $124,800 $40,093
======== ======== =======
</TABLE>
Estimated useful lives of assets are:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment..................................... 10
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. There was no interest capitalized for the three
month period ended March 31, 1999.
NOTE 7. ACCRUED LIABILITIES AND WITHHOLDINGS
Accrued liabilities and withholdings are summarized as follows:
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31,
MARCH 31, --------------
1999 1998 1997
----------- ------ ----
(UNAUDITED)
<S> <C> <C> <C>
Construction in progress................................... $ -- $1,365 $597
Advertising and marketing expenses......................... 167 321 278
Employee vacations......................................... 152 203 33
Other...................................................... 592 271 52
---- ------ ----
Total............................................ $911 $2,160 $960
==== ====== ====
</TABLE>
F-72
<PAGE> 216
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8. RELATED COMPANY TRANSACTIONS
a) BALANCES WITH RELATED COMPANIES AND QUALCOMM INCORPORATED
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF MARCH 31, -------------------
COMPANY RELATIONSHIP 1999 1998 1997
------- ------------ --------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accounts receivable from related company:
Chilesat Servicios Empresariales S.A.................... Affiliate $ -- $ -- $ 10
======== ======== ========
Interest payable to related companies:
Qualcomm Incorporated(1)................................ -- $ -- $ (5,326) $ (543)
Leap Wireless International, Inc........................ Affiliate (1,042) (528) --
Inversiones Leap Wireless Chile S.A..................... Shareholder (1,561) (1,103) --
-------- -------- --------
$ (2,603) $ (6,957) $ (543)
======== ======== ========
Accounts and notes payable to related companies:
Chilesat Servicios Empresariales S.A.................... Affiliate (170) $ (134) $ --
Chilesat S.A............................................ Shareholder (1,869) (733) (196)
Qualcomm Incorporated(1)................................ -- -- (16,555) --
Leap Wireless International, Inc........................ Affiliate (14,745) (14,745) --
Inversiones Leap Wireless Chile S.A..................... Shareholder (20,271) (20,271) --
Telex-Chile S.A......................................... Shareholder (35) (29) (12)
Telsys S.A.............................................. Affiliate (77) (105) (39)
-------- -------- --------
$(37,167) $(52,572) $ (247)
======== ======== ========
Note payable to related company -- long-term:
Qualcomm Incorporated(1)................................ -- $ -- $(49,807) $(23,655)
=========== ======== ======== ========
</TABLE>
- -------------------------
(1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998.
b) RELATED COMPANY TRANSACTIONS
<TABLE>
<CAPTION>
FOR THE
THREE MONTH AMOUNT OF
PERIOD ENDED TRANSACTIONS
MARCH 31, -----------------
COMPANY RELATIONSHIP TRANSACTION 1999 1998 1997
------- ------------ ----------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Chilesat Servicios Affiliate Reimbursement of costs $ -- $ -- $ 47
Empresariales S.A. incurred on their behalf
Reimbursement of costs 42 130 --
incurred in connection with
construction
Chilesat S.A. Shareholder Reimbursement of costs 646 586 589
incurred in connection with
construction
Rental of office space 533 171 30
Leap Wireless International, Affiliate Financing of purchases from -- 14,745 --
Inc. Qualcomm Inc.
Accrued interest on note 514 528 --
payable
Inversiones Leap Wireless Shareholder Financing -- 20,271 --
Chile S.A. Accrued interest on note 458 1,103 --
payable
</TABLE>
F-73
<PAGE> 217
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR THE
THREE MONTH AMOUNT OF
PERIOD ENDED TRANSACTIONS
MARCH 31, -----------------
COMPANY RELATIONSHIP TRANSACTION 1999 1998 1997
------- ------------ ----------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Telex-Chile S.A. Shareholder Reimbursement of costs $ 9 $ 29 $ 49
incurred in connection with
construction
Telsys S.A. Affiliate Computer services 15 965 39
</TABLE>
c) TRANSACTIONS WITH QUALCOMM INCORPORATED
<TABLE>
<S> <C> <C> <C> <C> <C>
Qualcomm Incorporated(1) Purchase of equipment and $ -- $57,452 $23,655
inventory
Financing of purchases -- 42,707 23,655
Accrued interest on note -- 4,783 543
payable
</TABLE>
- -------------------------
(1) Qualcomm Incorporated ceased to be an affiliate on September 23, 1998.
d) NOTES PAYABLE TO QUALCOMM INCORPORATED AND RELATED COMPANIES
As a means of financing the purchase of infrastructure equipment from
Qualcomm Incorporated, the Company entered into a Deferred Payment Agreement
whereby Qualcomm Incorporated defers collection for the equipment subject to the
terms and conditions set forth in the Agreement. The assets of the Company
collateralize the obligation. The shares of the Company have also been pledged
by Telex-Chile and Chilesat in guaranty of the note payable to Qualcomm
Incorporated.
Under the terms of the agreement, Qualcomm Incorporated will make loans for
the equipment, software and services it provides to the Company up to a maximum
of US$59.5 million. The original Deferred Payment Agreement was amended on June
24, 1998 to allow for an additional commitment of US$14.7 million of principal
as a means of financing of goods and services relating to the PCS system and
US$25.0 million of principal as a means of financing the acquisition of
subscriber equipment. The rest of the terms and conditions outlined in the
original Deferred Payment Agreement remain unchanged. Loans bear interest based
either upon a LIBOR or Base Rate or the Eurodollar. The obligation to repay
these loans and interest is evidenced by promissory notes. Interest accrues on
the principal but remains unpaid, with accrued interest added monthly to the
outstanding principal amount of the applicable loan until the first principal
payment, at which time interest is payable on the same dates as the principal
payments.
Principal and interest on the US$14.7 million is due in full on January 31,
1999. In addition, a conversion right, discussed below, was added to the
agreement relating to this amount. This commitment was subsequently transferred
by Qualcomm Incorporated, as allowed by the Deferred Payment Agreement, to Leap
Wireless International, Inc.
In addition, a Working Capital Loan agreement was entered into on June 24,
1998 with Inversiones for US$20.3 million of principal for the purpose of
financing the final phase of construction, working capital requirements and
operating expenses during the start-up and early operation phase of the PCS
system. Principal and accrued interest is due in full on January 31, 1999 (Note
14). Interest rates and
F-74
<PAGE> 218
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
The notes payable at December 31, 1998 are comprised of LIBOR loans and
bear interest at LIBOR + 3%. The scheduled principal repayments are as follows:
<TABLE>
<CAPTION>
DEFERRED PAYMENT ADDITIONAL WORKING CAPITAL
AGREEMENT COMMITMENT LOAN 1998
---------------- ---------- --------------- --------
<S> <C> <C> <C> <C>
1999.................................. $16,555 $14,745 $20,271 $ 51,571
2000.................................. 18,361 18,361
2001.................................. 16,646 -- -- 16,646
2002.................................. 14,199 -- -- 14,199
2003.................................. 601 -- -- 601
------- ------- ------- --------
Total............................... $66,362 $14,745 $20,271 $101,378
======= ======= ======= ========
</TABLE>
At March 31, 1999 (unaudited), the scheduled repayments for the deferred
payment agreement increased by US$1,578,000. There was no change in the
additional commitment and working capital loan.
The terms of the financing arrangements with Qualcomm Incorporated,
Inversiones and Leap Wireless International, Inc. include certain positive and
negative covenants, the most significant of which are as follows:
The Company shall not
(i) Incur any additional encumbrances or liens
(ii) Create any indebtedness other than indebtedness incurred for the
purposes of partial or full repayment of the notes payable.
(iii) Incur operating lease obligations greater than one year and
exceeding US$1 million for any twelve month period.
(iv) Consolidate or merge with another entity.
(v) Guarantee any indebtedness.
(vi) Acquire stock or the assets of any other person.
(vii) Advance funds.
F-75
<PAGE> 219
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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).
NOTE 9. OTHER LONG-TERM LIABILITIES
This balance is mainly comprised of deferred customs duties of US$8.4
million at December 31, 1998 (US$4.6 million at December 31, 1997).
Under Chilean law, the payment of customs duties levied on machinery and
equipment can be deferred over a period of up to seven years. The balance at
December 31, 1998 represents amounts owing at maturity including accrued
interest. The scheduled repayments are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,337
2001........................................................ 1,081
2002........................................................ 1,555
2003........................................................ 1,266
2004 and thereafter......................................... 3,206
------
Total..................................................... 8,445
Other....................................................... 51
------
Total other long-term liabilities......................... $8,496
======
</TABLE>
At March 31, 1999 (unaudited), the deferred customs duties and other
long-term liabilities were US$8,454,000 and US$37,000, respectively.
F-76
<PAGE> 220
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 10. INCOME TAXES
The Company has not made a provision for current income taxes payable as it
incurred tax losses for the year ended December 31, 1998.
At December 31, 1998, income tax loss carryforwards of approximately
US$24.3 million (US$5.2 million at December 31, 1997), were available to apply
against income tax liabilities in future years. Under Chilean law, such income
tax loss carryforwards never expire.
At March 31, 1999 (unaudited), income tax loss carryforwards were
approximately US$35.1 million.
Deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF MARCH 31, ------------------
1999 1998 1997
--------------- -------- ------
(UNAUDITED)
<S> <C> <C> <C>
Assets:
Provisions............................................ $ 132 $ 71 $ --
Tax loss carryforwards................................ 5,259 3,649 785
Allowance for income tax loss carryforwards........... (5,391) (3,720) (655)
------- ------- -----
Deferred income tax assets.......................... -- -- 130
------- ------- -----
Liabilities:
Other................................................. -- -- (130)
------- ------- -----
Deferred income tax liabilities..................... -- -- (130)
------- ------- -----
Net deferred income taxes........................... $ -- $ -- $ --
======= ======= =====
</TABLE>
Because the Company has only recently begun commercial operations and has
no history of generating taxable income against which tax loss carryforwards
would be applied, an allowance was recorded at December 31, 1998 with respect to
those tax loss carryforwards which, based on the weight of available evidence,
are not likely to be realized.
NOTE 11. SHAREHOLDERS' EQUITY
(a) AUTHORIZED CAPITAL
Authorized capital stock of the Company is comprised of 8,400,000 Series A
preferred shares and 8,400,000 Series B ordinary shares. Inversiones holds all
the outstanding preferred shares whereas Chilesat holds all the ordinary shares.
The preference with respect to the preferred shares consists of the right to be
paid before any other series of shares in the event of liquidation of the
Company up to the amount of the stated value of the preferred shares. The
preference has a duration of 6 years as from April 10, 1997, after which all
shareholders shall have equal rights with respect to the liquidation of the
Company.
F-77
<PAGE> 221
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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.
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".
F-78
<PAGE> 222
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(d) CALL AND PUT OPTIONS
As part of an amendment to the Shareholders' Agreement, Chilesat and
Inversiones, each have an option to require the issuance by the Company of
shares of common stock at the Exercise Price to be subscribed by Chilesat and
Inversiones in proportion to their holdings in the capital stock of the Company.
This option may be exercised for common stock with an aggregate value at the
Exercise Price of up to US$35 million. The Exercise Price shall be determined as
of the exercise date and shall be the sum of (i) $5.00 per share plus (ii) 10%
per annum plus an increasing premium on the original $5.00 price thereof equal
to 5% additional for each quarter after the calendar quarter ending June 30,
1997. The option expires upon the exercise of the conversion rights (Note 8c).
If either Chilesat or Inversiones do not subscribe the shares of stock to
which it is entitled as a result of the exercise of the capital call option, it
shall be subject to dilution. Such shares of common stock as are not exercised
by Chilesat or Inversiones shall be subject to subscription at the Exercise
Price by the other party (or such third party investor as a party may propose),
subject to the non-subscribing party's written consent, which may not be
unreasonably withheld and which may not be withheld with the purpose of
preventing the capital increase.
If Chilesat answers such capital call by making a cash capital contribution
to the Company of not less than fifty percent of the balance due on the
convertible loans on or before January 31, 1999, Inversiones will make its
portion of the capital call by converting fifty percent of the balance due on
the convertible loans into capital equity of the Company at the same price as
paid by Chilesat for equity in the capital call.
Inversiones has an option to sell its preferred shares to Chilesat in the
event that the Company is no longer using Qualcomm technology in its mobile PCS
telephone system.
NOTE 12. FAIR VALUE
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at December 31, 1998 and 1997, when the
estimate of such value is practicable:
- Cash and cash equivalents, recoverable taxes and accrued liabilities and
withholdings have been stated at carrying value which is equivalent to
fair value.
- The fair values of the note payable to related company and other
long-term liabilities were based on interest rates currently available to
the Company for debt with similar terms and remaining maturities. The
carrying value of the note payable to related company approximates fair
value because the terms of the loan agreement require that the stated
rate of interest be periodically adjusted to the market rate.
F-79
<PAGE> 223
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The estimated fair value of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
--------------------- --------------------- ---------------------
CARRYING CARRYING CARRYING
AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............ $ 1,058 $ 1,058 $ 942 $ 942 $24,875 $24,875
Recoverable taxes.................... 3,308 3,308 6,480 6,480 6,228 6,228
------- ------- ------- ------- ------- -------
Total........................... $ 4,366 $ 4,366 $ 7,422 $ 7,422 $31,103 $31,103
======= ======= ======= ======= ======= =======
Liabilities:
Accrued liabilities and
withholdings....................... $ 911 $ 911 $ 2,160 $ 2,160 $ 960 $ 960
Note payable......................... 43,326 43,326 -- -- -- --
Note payable to related company...... -- -- 49,807 49,807 23,655 23,655
Other long-term liabilities.......... 8,491 6,121 8,496 6,013 4,579 3,117
------- ------- ------- ------- ------- -------
Total........................... $52,728 $50,358 $60,463 $57,980 $29,194 $27,732
======= ======= ======= ======= ======= =======
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
At December 31, 1998, the Company had entered into operating leases
relating to the rental of sites for towers and antennas required for the
operation of its mobile PCS telephone system. The following is a schedule by
year of future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year at December
31, 1998:
<TABLE>
<S> <C>
1999........................................................ $1,068
2000........................................................ 1,066
2001........................................................ 1,082
2002........................................................ 1,063
2003........................................................ 1,040
2004 to 2008................................................ 3,457
2009........................................................ 526
------
Total..................................................... $9,302
======
</TABLE>
Rental expense for the year ended December 31, 1998 was US$602,000
(US$91,000 in 1997). Rental expense for the three months ended March 31, 1999
(unaudited) was US$267,000.
(b) SECURITY FOR DEBT
The Company has pledged it PCS license as security against the notes
payable to Qualcomm Incorporated.
Telex-Chile S.A. and Chilesat S.A. have pledged 83,920 and 8,316,080 Series
B common shares of the Company, respectively, as security for 50% of the notes
payable to Qualcomm Incorporated.
F-80
<PAGE> 224
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 14. SUBSEQUENT EVENTS
(a) On February 15, 1999, Inversiones communicated to the Company that it
had incurred an Event of Default as a result of its failure to repay a US$20.3
million short-term Working Capital Loan plus interest accrued thereon granted on
June 24, 1998 (Note 8) and noncompliance with certain loan covenants. At the
time of granting the loan, Inversiones subscribed to a capital increase and
reserved its right to capitalize the loan, an option that, in addition to other
potential actions to obtain repayment, is still open.
Similarly, on February 15, 1999, Leap Wireless International, Inc. informed
both the Company and Telex-Chile S.A. that the former has incurred an Event of
Default with respect to the Deferred Payment Agreement, as a result of which the
amount of US$14.7 million plus interest accrued thereon is due and payable.
Telex-Chile S.A. is guarantor of 50% of this amount. As in the previous case,
the creditor has an option to capitalize this debt or to pursue payment through
other means.
(b) Subsequently on March 2, 1999, Leap Wireless International, Inc. and
Inversiones indicated their withdrawal of the above-mentioned communications
reserving the right to notify the defaults again in the future. On March 16,
1999, Leap Wireless International, Inc. and Inversiones communicated defaults on
the short-term Working Capital Loan of US$20.3 million plus interest accrued
thereon and the Deferred Payment Agreement of US$14.7 million plus interest
accrued thereon on the same terms as expressed above.
(c) On April 12, 1999, an agreement was entered into between the
shareholders whereby Chilesat sold its ownership interest in the Company to
Inversiones for US$28 million in cash and US$22 million, three year,
non-interest bearing debt. On April 19, 1999, the Company agreed to pay
Inversiones' obligation to Chilesat S.A. and, in return, the Company was
relieved of the obligation to pay certain amounts to Inversiones.
(d) On October 12, 1999, the Company entered into a Second Amended and
Restated Deferred Payment Agreement with Qualcomm Incorporated. The new
agreement substantially revised the Deferred Payment Agreement covenants,
including covenants that were in default, and deferred the dates of repayment of
the loan, subject to certain conditions.
(e) (Unaudited) On October 29, 1999, the Company amended the System
Equipment Purchase Agreement to provide for the purchase of additional
infrastructure equipment. The agreement, which originally provided for the
purchase of equipment from Qualcomm Incorporated, was assigned by Qualcomm
Incorporated to a subsidiary of Telefonaktiebolaget LM Ericsson (publ)
("Ericsson") in connection with Qualcomm Incorporated's sale of its
infrastructure division to Ericsson.
(f) (Unaudited) In November 1999, the Company entered into a Line of Credit
Agreement with ABN Amro Bank to obtain financing of US$20 million fully secured
by a Stand by Letter of Credit from Leap Wireless International, Inc. On
November 10 and 24, 1999 and December 7, 1999, Smartcom drew down US$5 million,
US$3 million and US$3 million, respectively, which will carry an annual interest
rate of 7.3%, 6.35% and 7.2%, respectively. The accrued interest can be paid or
capitalized quarterly and principal matures in July 2000.
* * * *
F-81
<PAGE> 225
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Orrengrove Investments Ltd.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, of cash flows and of stockholders' deficit
present fairly, in all material respects, the financial position of Orrengrove
Investments Ltd. and its subsidiaries (the Company) (a development stage
company) at December 31, 1998, and the results of their operations and their
cash flows for the period from July 27, 1998 (inception) to December 31, 1998,
in conformity with generally accepted accounting principles in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Board
of Directors of three of the Company's subsidiaries voted in September 1999 to
liquidate. The planned liquidation commenced in October 1999. The accompanying
consolidated financial statements do not include any adjustments to give effect
to the planned liquidation as the decision to liquidate the subsidiaries was
made subsequent to the period presented herein.
PricewaterhouseCoopers LLP
McLean, Virginia
April 30, 1999, except for Note 1, as to which the date is October 15, 1999
F-82
<PAGE> 226
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $35,659
Other current assets...................................... 202
-------
Total current assets.............................. 35,861
Property and equipment, net................................. 5,279
Intangible assets, net...................................... 14,402
Other assets................................................ 8
-------
Total assets...................................... $55,550
-------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 5,389
-------
Total current liabilities......................... 5,389
Note payable to related party............................... 54,758
-------
Total liabilities................................. 60,147
-------
Commitments and contingencies (Note 8)
Minority interest........................................... 679
-------
Stockholders' deficit:
Common stock, no par value per share; authorized, issued
and outstanding 1,000 shares........................... 2
Deficit accumulated during the development stage.......... (5,278)
-------
Total stockholders' deficit....................... (5,276)
-------
Total liabilities and stockholders' deficit....... $55,550
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-83
<PAGE> 227
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 27, 1998
(INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Loss on investment in joint venture......................... $ (670)
General and administrative expenses......................... (3,624)
Interest expense............................................ (2,958)
Interest income............................................. 791
-------
Loss before minority interest............................. (6,461)
Minority interest........................................... (1,183)
-------
Net loss.................................................. $(5,278)
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-84
<PAGE> 228
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 27, 1998
(INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Development activities:
Net loss.................................................. $(5,278)
Adjustments to reconcile net loss to net cash used in
development activities:
Depreciation and amortization.......................... 1,145
Minority interest...................................... (1,183)
Loss on investment in joint venture.................... 670
Changes in assets and liabilities:
Increase in current and other assets................. (228)
Decrease in accounts payable and accrued
liabilities......................................... (2,483)
Increase in accrued interest -- note payable to
related party....................................... 2,958
-------
Net cash used in development activities..................... (4,399)
-------
Investing activities:
Purchases of property and equipment....................... (2,741)
Acquisition of Transworld Companies, net of cash
acquired............................................... 5,997
-------
Net cash provided by investing activities................... 3,256
-------
Financing activities:
Issuance of note payable to related party................. 36,800
Issuance of common stock.................................. 2
-------
Net cash provided by financing activities................... 36,802
-------
Net increase in cash and cash equivalents................... 35,659
Cash and cash equivalents, beginning of period.............. --
-------
Cash and cash equivalents, end of period.................... $35,659
=======
Supplemental disclosure of non-cash investing and financing
activities:
Note payable to related party issued in connection with
acquisition of Transworld Companies.................... $15,000
=======
</TABLE>
See accompanying notes to consolidated financial statements
F-85
<PAGE> 229
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE
--------------- DEVELOPMENT
SHARES AMOUNT STAGE TOTALS
------ ------ ------------- -------
<S> <C> <C> <C> <C>
Balance at July 27, 1998 (inception)............. -- $-- $ -- $ --
Issuance of common stock for cash.............. 1,000 2 2
Net loss....................................... (5,278) (5,278)
----- --- ------- -------
Balance at December 31, 1998..................... 1,000 $ 2 $(5,278) $(5,276)
===== === ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-86
<PAGE> 230
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Orrengrove Investments Ltd. ("Orrengrove"), was incorporated in the
Republic of Cyprus on July 27, 1998 as a wholly owned subsidiary of Qualcomm
Telecommunications Ltd. ("QualcommTel"), an Isle of Man company. In August 1998,
Orrengrove acquired a 60% interest in Transworld Telecommunications, Inc.,
Transworld Communications Services, Inc. and Transworld Communications
(Bermuda), Ltd. (collectively the "Transworld Companies"). The Transworld
Companies were created to build and operate a modern long distance
telecommunications business that provides domestic long distance, backhaul, and
broadband services such as high speed internet access to the Commonwealth of
Independent States ("CIS"), formerly known as the Soviet Union. In October 1998,
QualcommTel, a majority owned subsidiary of Leap Wireless International, Inc.
("Leap") entered into an agreement with Teletal Limited ("Teletal"), a company
affiliated with ITAR-TASS, the Russian government's prime news agency and a
party with certain rights granted to it by the Russian government to assist in
the privatization and expansion of telecommunications in Russia. QualcommTel
transferred to Teletal a 50% ownership in Orrengrove under the terms of the
agreement to the joint venture in exchange for Teletal's commitment to assist in
the development of the Transworld Companies long distance telecommunications
business.
PLANNED LIQUIDATION OF THE TRANSWORLD COMPANIES
In April 1999, the Company was notified by Mercury Telesat ("Mercury"),
provider of the satellite signal transmission capacity, that there was an
operational failure of all transponders on the Loutch II satellite. Mercury's
prognosis indicated that the transponders' operational status would not be
restored.
In June 1999, as a result of the failure of the transponders, Orrengrove
and the Transworld Companies determined and recognized an impairment loss of
approximately $19.9 million to write-off certain satellite related assets and
write-down to fair value the book value of certain other satellite related
assets and the license to carry long-distance traffic. In September 1999, after
reviewing a series of alternative business plans that did not meet a minimum
financial performance criteria, the directors of the Transworld Companies voted
to liquidate those companies and to distribute the net assets to their
stockholders. In October 1999, the Company entered into a Memorandum of
Agreement to facilitate the liquidation of the Transworld Companies. In
accordance with the terms of the agreement, the Company transferred all of its
shares of Transworld Communications Services, Inc. ("TWS") plus $3.3 million to
Teletal in exchange for: (i) TWS's assumption of certain rights, obligations and
claims of the remaining Transworld Companies, (ii) the assignment by TWS of
certain contractual obligations to the remaining Transworld Companies and (iii)
the cancellation of shares of the Company held by Teletal. The Company's share
of the remaining net assets of Transworld Telecommunications, Inc. and
Transworld Communications (Bermuda), Ltd. upon final distribution is expected to
total approximately $11.1 million, all of which will be used to pay the note
payable to related party and the Company will have no remaining net assets or
operations. The liquidation of the subsidiaries is expected to be substantially
completed by December 1999.
As a result of the failure of the transponders, management intends to
assign or terminate the agreement with Mercury (see Note 8) and, due to
Mercury's lack of performance, does not believe that the Company will be
required to pay any of the remaining $1.7 million commitment.
F-87
<PAGE> 231
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The Company's consolidated financial statements for the period presented
herein do not give effect to the planned liquidation as the decision to
liquidate the subsidiaries was made subsequent to the period presented.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company is a development stage enterprise, which has incurred operating
losses and negative cash flows from operations since inception. The Company's
consolidated financial statements reflect the financial position, results of
operations, cash flows and changes in stockholders' deficit of Orrengrove and
its majority-owned subsidiaries prepared in accordance with generally accepted
accounting principles in the United States of America. The ownership of the
other interest holder is reflected as minority interest. All significant
inter-company accounts and transactions have been eliminated. The financial
statements of the Company have been presented for the period since its inception
on July 27, 1998.
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENT IN JOINT VENTURE
The Company has a 50% equity investment in Tass Loutch Telecom (TLT), a
joint venture. The Company uses the equity method to account for investments in
corporate entities in which it has voting interest of 20% to 50% or in which it
otherwise exercises significant influence. Under the equity method, the
investment is originally recorded at cost and adjusted to recognize the
Company's share of net earnings or losses of TLT, limited to the extent of the
Company's investment in, advances to and financial guarantees for TLT. The
Company is the only contributor of assets, and therefore loss on investment in
joint venture included in the statement of operations includes 100% of the
losses of TLT. To date, TLT has incurred recurring losses which have reduced the
Company's investment in TLT to zero.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the lesser of the estimated useful lives, generally
ranging from five to ten years for telecommunications equipment and three to
seven years for furniture, fixtures and equipment and other property. Construc-
F-88
<PAGE> 232
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
tion in process reflects amounts incurred for the configuration and build-out of
telecommunications equipment not yet placed in service.
INTANGIBLE ASSETS
Intangible assets, resulting primarily from the acquisition of the
Transworld Companies (see Note 3), comprising of telecommunications licenses of
$8.0 million and rights to satellite signal transmission capacity of $7.3
million are being amortized on a straight-line basis over their estimated
remaining useful lives ranging from three to five years. The telecommunications
licenses began amortizing upon commencement of service. For the period ended
December 31, 1998, amortization expense of $1.0 million was recorded on the
rights to satellite capacity.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount. No such impairment losses have been
recognized to December 31, 1998.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce net deferred tax assets to the amount expected to be
realized. The provision for income taxes consists of the current tax provision
and the change during the period in deferred tax assets and liabilities.
FOREIGN CURRENCY
The functional currency of the Company's foreign operations is United
States dollars. The Company maintains most of the cash balances in dollar
denominated bank accounts and has no significant foreign currency monetary
assets and liabilities at December 31, 1998. Gains and losses resulting from the
Company's foreign currency transactions are included in the consolidated
statement of operations, and to date have been minimal.
The Company does not currently hedge against foreign currency fluctuations
although the Company may take such steps in the future. Under current practices,
the Company's results of operations could be adversely affected by fluctuations
in exchange rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998, the carrying amount of the Company's cash and cash
equivalents, accounts payable, and notes payable approximate fair value due to
the short-term maturities of these balances.
F-89
<PAGE> 233
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
As of December 31, 1998, Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, has been adopted by the
Company. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income (loss) and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. "Comprehensive
income (loss)" is defined in this statement as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period (including net income (loss)) except those resulting from investments by
owners and distributions to owners. The adoption of this new standard did not
impact the Company's financial statements because there were no differences
between net loss and comprehensive loss.
In addition, during 1998, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities was issued. This statement establishes a new
model for accounting for derivatives and hedging activities. Under SFAS No. 133,
all derivatives must be recognized as assets and liabilities and measured at
fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect that the adoption of
SFAS No. 133 will have a material impact on its consolidated financial position
or results of operations.
NOTE 3. ACQUISITION OF THE TRANSWORLD COMPANIES
On August 4, 1998, the Company acquired a 60% common ownership interest in
the Transworld Companies for an aggregate purchase price of $51.8 million,
consisting of a $36.8 million cash payment to the Transworld Companies and the
conversion to equity of a $15.0 million short-term loan payable to Leap, which
was previously issued by the former parent of the Transworld Companies. The
acquisition was recorded under the purchase method of accounting, and
accordingly, the results of operations of the Transworld Companies are included
in the consolidated financial statements since the date of acquisition. The sum
of the fair values of the identifiable assets acquired, which include
telecommunications licenses and rights to satellite signal transmission
capacity, less liabilities assumed, exceeded the cost of the acquisition. The
fair values of those identifiable assets acquired were reduced by a
proportionate part of the excess to determine their assigned values.
The purchase price has been allocated to the assets acquired and the
liabilities assumed based upon the fair values on the date of acquisition as
follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $36,841
Property and equipment...................................... 2,697
Intangible assets........................................... 15,388
Other assets................................................ 611
Accounts payable and other expenses......................... (7,872)
Minority interest........................................... (1,862)
-------
Purchase price allocation................................... 45,803
Net cash received from acquisition.......................... 5,997
-------
Cash and note paid for acquisition.......................... $51,800
=======
</TABLE>
F-90
<PAGE> 234
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Telecommunications equipment................................ $1,448
Construction-in-progress.................................... 3,524
Leasehold improvements...................................... 81
Furniture, fixtures and office equipment.................... 385
------
5,438
Accumulated depreciation.................................... (159)
------
$5,279
======
</TABLE>
The Company's telecommunications equipment and construction-in-progress are
primarily maintained in a foreign country. Construction in progress consists of
earth stations, not yet completed and operational as of December 31, 1998.
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Accounts payable and other.................................. $ 299
Consulting fee-related party (Note 6)....................... 2,500
Consulting fee-third party.................................. 2,590
------
$5,389
======
</TABLE>
NOTE 6. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE FROM A RELATED PARTY
Since inception, the Company has advanced certain amounts to another
investor in TLT for the investor's share of TLT's expenses in exchange for a
note receivable. The Company has advanced approximately $0.4 million to the
related party through December 31, 1998. The note receivable was written off
prior to December 31, 1998 since the related party was unable to fund its share
of the losses in the joint venture.
PAYABLE TO RELATED PARTY
The Company was required to pay a consulting fee, bonus, and severance
totaling $2.5 million to the majority shareholder of the former parent of the
Transworld Companies. The $2.5 million was paid in March 1999.
F-91
<PAGE> 235
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE PAYABLE TO RELATED PARTY
On July 29, 1998, the Company entered into a $51.8 million collateralized
Promissory Note agreement with Leap, for the purpose of purchasing the
Transworld Companies. Terms of the Promissory Note provide for repayment of
principal and accrued interest by paying Leap the greater of 1) 70% of the cash
or other assets received by the Company from any sources, including the
Transworld Companies, 2) 70% of the cash or other assets available for
distribution to the Company's stockholders or 3) in the event of a final
distribution from the Transworld Companies, 100% of the cash or other assets
available for distribution to the Company's stockholders until principal and
accrued interest is paid in full. Interest accrues quarterly in arrears at the
rate of 13%, per annum, with any unpaid interest being added to the outstanding
principal. For the period ended December 31, 1998, interest of $3.0 million has
been accrued, but not paid. This amount is included in note payable to related
party on the consolidated balance sheet as of December 31, 1998. The Promissory
Note provides for certain restrictions related to dividends, redemptions and
merger, and is collateralized by substantially all the assets of the Company.
NOTE 7. INCOME TAXES
The Company has not recorded provisions for income taxes for the period
from July 27, 1998 (inception) to December 31, 1998 due to net operating losses
during the period.
The following is a reconciliation from the statutory Cyprus income tax rate
to the Company's effective rate of income tax expense for the period ended:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 27, 1998
(INCEPTION ) TO
DECEMBER 31,
1998
---------------
<S> <C>
Cyprus tax at statutory rate................................ 25%
Minority interest........................................... (4)
Net change in valuation allowance........................... (24)
Effect of foreign operations................................ 3
---
Effective tax rate.......................................... --%
===
</TABLE>
The tax effect of temporary differences which gives rise to significant
portions of the deferred tax assets as of December 31, 1998, are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Net operating loss carryforwards............................ $ 2,968
Net capitalized start-up costs.............................. 717
-------
3,685
Less: valuation allowance................................... (3,685)
-------
$ --
=======
</TABLE>
F-92
<PAGE> 236
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Realization of net deferred tax assets is dependent on the Company's
ability to generate taxable income, which is uncertain. Accordingly, a full
valuation allowance was recorded against these assets as of December 31, 1998.
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $8.5 million for income tax purposes that begin to expire in
various years between 2003 and 2017.
There may be limitations on the annual utilization amount of these net
operating losses as a result of certain changes in ownership that have occurred
since the Company's inception.
NOTE 8. COMMITMENTS AND CONTINGENCIES
TRANSPONDER AGREEMENTS
The Company obtained, through a number of agreements, the rights to utilize
certain Russian Loutch I and Loutch II program satellite signal transmission
capacity for up to 20 years.
The Company has an agreement with Commercial Company Mercury Ltd.
("Mercury"), the commercial subsidiary of a Russian satellite provider, for the
sole and exclusive use of two transponders on each of the first two Loutch II
satellites. At December 31, 1998, approximately $5.3 million had been paid to
Mercury to modify the transponders on the first Loutch II satellite for
commercial use. A remaining commitment of approximately $1.7 million due under
this contract is contingent upon Mercury completing certain milestones related
to the launch of the second satellite.
CONSTRUCTION-IN-PROGRESS
The Company has ordered the construction of six earth stations, plus
certain upgrades and spares, under an agreement with a third party. The
agreement established a price guarantee until September 1999 at approximately
$1.0 million per earth station. In accordance with this agreement, approximately
$3.5 million has been paid to December 31, 1998.
LEASE COMMITMENTS
The Company leases certain office space in the United States and
internationally under non-cancelable operating lease agreements. Rent expense
for the period July 27, 1998 (inception) to December 31, 1998 was approximately
$200,000. Future minimum lease payments under all non-cancelable operating lease
arrangements as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 404
2000........................................................ 414
2001........................................................ 327
2002........................................................ 1
2003........................................................ --
------
Total............................................. $1,146
======
</TABLE>
F-93
<PAGE> 237
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
LEGAL MATTERS
The Company is party to various legal actions and administrative
proceedings arising in the normal course of business. In the opinion of the
Company's management, disposition of these matters is not expected to have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
* * * *
F-94
<PAGE> 238
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 15, 1999
To the Board of Directors and Shareholders of
Pegaso Telecomunicaciones, S. A. de C. V.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Pegaso
Telecomunicaciones, S. A. de C. V. and its subsidiaries at December 31, 1998 and
the results of their operations, their cash flows and the changes in their
stockholders' equity for the period from June 24, 1998 (date of incorporation)
to December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As stated in Note 1 to the consolidated financial statements, Pegaso
Telecomunicaciones, S. A. de C. V. was incorporated on June 24, 1998, and at the
date of issuance of this report, was in the development stage.
PricewaterhouseCoopers
Guillermo Pineda M.
F-95
<PAGE> 239
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,792 $ 30,313
Recoverable value added tax............................... 8,324 9,531
Accounts receivable from clients.......................... 331 --
Other accounts receivable................................. 2,930 344
Inventories............................................... 2,230 --
Advances to suppliers and others.......................... 4,636 219
Prepaid advertising....................................... 5,369 6,256
--------- --------
Total current assets.............................. 25,612 46,663
PROPERTY, FURNITURE AND TELECOMMUNICATIONS
EQUIPMENT -- Net.......................................... 238,134 132,296
PUBLIC TELECOMMUNICATIONS NETWORK CONCESSIONS -- Net........ 244,735 233,530
--------- --------
Total assets...................................... $ 508,481 $412,489
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans................................................ $ 34,601 $ --
Vendor financing of equipment............................. 12,790 113,209
Accounts payable for equipment............................ 10,122 --
Accounts payable for inventory............................ 4,476 --
Leap Wireless Mexico, S. A. de C. V., affiliated
company................................................ 5,207 --
Notes payable to affiliated company....................... 428 5,941
Other accounts payable and accrued expenses............... 17,196 5,256
Income tax payable........................................ -- 321
--------- --------
Total current liabilities......................... 84,820 124,727
--------- --------
LONG-TERM LIABILITIES:
Bank loans................................................ 60,805 19,090
Vendor financing of equipment............................. 114,306 --
--------- --------
Total long-term liabilities....................... 175,111 19,090
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock............................................. 350,000 300,000
Accumulated deficit....................................... (119,870) (31,328)
Accumulated other comprehensive loss...................... 18,420 --
--------- --------
248,550 268,672
--------- --------
Total liabilities and stockholders' equity........ $ 508,481 $412,489
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE> 240
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE NINE- FROM JUNE 24 (DATE
MONTH PERIOD ENDED OF INCEPTION) TO
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Operating revenues..................................... $ 2,617 $ --
-------- --------
Operating expenses:
Cost of operating revenues........................... (8,471) --
Selling, general and administrative expenses......... (71,417) (30,090)
Depreciation and amortization........................ (11,129) (78)
-------- --------
Total operating expenses..................... (91,017) (30,168)
-------- --------
Operating loss......................................... (88,400) (30,168)
Interest (expense) income.............................. (7,119) 1,194
Foreign currency exchange gain -- Net.................. 5,926 --
Other income........................................... 1,051 441
Foreign currency exchange loss on remeasurement of
financial statements................................. -- (2,474)
-------- --------
Loss before income tax................................. (88,542) (31,007)
Provision for income tax............................... -- (321)
-------- --------
Net loss for the period................................ (88,542) (31,328)
Other comprehensive income:
Foreign currency translation adjustment.............. 18,420 --
-------- --------
Comprehensive loss..................................... $(70,122) $(31,328)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE> 241
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE NINE- FROM JUNE 24 (DATE
MONTH PERIOD ENDED OF INCEPTION) TO
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period................................ $(88,542) $(31,328)
-------- --------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 3,957 78
Amortization of public telecommunications network
concession........................................ 7,172 --
Other provisions..................................... 1,269 --
Unrealized foreign exchange gain..................... (12,458) --
Foreign exchange loss on remeasurement of financial
statements........................................ -- 2,474
Changes in assets and liabilities:
Recoverable value added tax.......................... 1,916 (9,443)
Accounts receivable from clients..................... (323) --
Other accounts receivable............................ (2,496) (341)
Advances to suppliers and others..................... (4,186) (217)
Prepaid advertising.................................. (4,488) (67)
Leap Wireless Mexico, S. A. de C. V., affiliated
company........................................... 5,079
Other accounts payable and accrued expenses.......... 7,689 5,432
Income tax payable................................... (338) 321
-------- --------
Total adjustments............................ 2,793 (1,763)
-------- --------
Net cash used in operating activities.................. (85,749) (33,091)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, furniture and
telecommunications equipment......................... (35,012) (77)
Public telecommunications network concessions.......... -- (233,530)
-------- --------
Net cash used in investing activities.................. (35,012) (233,607)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loans............................................. 33,753 --
Capital stock issued................................... 50,000 300,000
-------- --------
Net cash provided by financing activities.............. 83,753 300,000
-------- --------
Effect of exchange rate change on cash................. 8,487 (2,989)
-------- --------
Net (decrease) increase in cash and cash equivalents... (28,521) 30,313
Cash and cash equivalents at beginning of period....... 30,313 --
-------- --------
Cash and cash equivalents at end of period............. $ 1,792 $ 30,313
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax paid........................................ $ 321 $ --
Interest paid.......................................... 5,345 14
Prepaid advertising contracted with notes payable...... -- 5,941
Property, furniture and telecommunications equipment
acquired through financing........................... 58,331 132,297
Inventories acquired through financing................. 2,175 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE> 242
PEGASO TELECOMUNICACIONES, S. A. DE C. V.
STATEMENT OF STOCKHOLDERS' EQUITY
THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
ACCUMULATED OTHER
CAPITAL ACCUMULATED COMPREHENSIVE
STOCK DEFICIT LOSS TOTAL
-------- ----------- ----------------- --------
<S> <C> <C> <C> <C>
Issuance of capital stock at inception on
June 24, 1998.......................... $ 11 $ -- $ -- $ 11
Additional capital stock issued on June
30 and September 28, 1998.............. 299,989 -- -- 299,989
Loss for the period...................... -- (31,328) -- (31,328)
-------- --------- ------- --------
Balances at December 31, 1998............ 300,000 (31,328) -- 268,672
Issuance of capital stock (unaudited).... 50,000 -- -- 50,000
Loss for the period (unaudited).......... -- (88,542) -- (88,542)
Foreign currency translation adjustment
(unaudited)............................ -- -- 18,420 18,420
-------- --------- ------- --------
Balances at September 30, 1999
(unaudited)............................ $350,000 $(119,870) $18,420 $248,550
======== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE> 243
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
NOTE 1. OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES:
Pegaso Telecomunicaciones, S. A. de C. V. (Telecomunicaciones) a Mexican
holding company, was incorporated on June 24, 1998, for a duration of 99 years.
At September 30, 1999 and December 31, 1998, the stockholders and their
participation in Telecomunicaciones were as follows:
<TABLE>
<CAPTION>
PARTICIPATION(%)
-----------------------------
SEPTEMBER 30, DECEMBER 31,
STOCKHOLDER 1999 1998
----------- ------------- ------------
(UNAUDITED)
<S> <C> <C>
Mexican stockholders:
Corporativo del Valle de Mexico, S. A. de C. V. ..... 17.14 10.00
Pegaso Comunicaciones y Servicios, S. A. de C. V. ... 8.28 9.66
Alejandro Burillo Azcarraga.......................... 7.44 5.34
Carmela Azcarraga Milmo.............................. 2.86
Foreign stockholders:
Leap PCS Mexico, Inc.
(formerly Qualcomm PCS Mexico, Inc.)................. 28.57 33.33
International Equity Investments, Inc. .............. 15.71 18.33
LAIF X, Ltd. ........................................ 14.29 16.67
NI Media Equity, LLC................................. 5.71 6.67
------ ------
100.00 100.00
====== ======
</TABLE>
Up to September 23, 1998, Qualcomm PCS Mexico, Inc. was a wholly-owned
subsidiary of Qualcomm Incorporated (Qualcomm). On that date, as a consequence
of Qualcomm's spin-off of Leap Wireless International, Inc. (Leap Wireless),
Qualcomm transferred the Qualcomm PCS Mexico, Inc. shares to Leap Wireless.
At September 30, 1999 (unaudited) and December 31, 1998, Telecomunicaciones
indirectly held 100% of the capital stock of the following Mexican subsidiaries.
<TABLE>
<CAPTION>
COMPANY BUSINESS
------- --------
<S> <C>
Pegaso PCS, S. A. de C. V. (PCS)........... Provides telephone services to the general
public.
Pegaso Recursos Humanos, S. A. de C. V. Provides administrative services to
(Recursos Humanos)....................... affiliated companies.
Pegaso Comunicaciones y Sistemas, S. A. de Holds the concessions and the
C. V. (Comunicaciones y Sistemas)........ telecommunications equipment for telephone
services to be provided by PCS.
</TABLE>
Telecomunicaciones and the above subsidiaries, collectively "the Company",
is engaged in providing nationwide telephone services in Mexico. Comunicaciones
y Sistemas holds the concessions granted by the Mexican Ministry of
Communications (Secretaria de Comunicaciones y Transportes) (SCT) on October 7,
1998.
The concessions include the rights to install, operate and exploit a
nationwide public telecommunications network for a period of up to 20 years,
with an option for the Company to extend the concessions at the end of the
20-year period. See Note 5.
F-100
<PAGE> 244
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's development from the date of inception has been financed by
capital contributions made by the stockholders and through two lines of credit
with a limit of $590,000. See Note 6. These lines of credit are collateralized
by all Company properties, rights and assets. The recoverability of the
Company's investment is dependent upon future events, including, but not limited
to, the stability of the Mexican economic environment, obtaining adequate
financing for the Company's development program and the achievement of a level
of operating revenues that is sufficient to support the Company's cost
structure. Additionally, the company has contracted a bridge loan for a total
amount of $115,000. See Note 6.
The Company launched telecommunications operations in the city of Tijuana,
B. C. in February, Guadalajara, Jal. in August, Monterrey in September and
limited testing in Mexico City in August 1999. Prior to those dates, the
Company's business consisted of the installation and construction of its network
and other start up activities. Accordingly, the Company was a "development stage
enterprise" as set forth in the Statement of Financial Accounting Standards No.
7 "Accounting an Reporting by Development Stage Enterprises" in 1998.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements include the adjustment
and translation/ remeasurement of the Mexican peso consolidated financial
statements prepared in conformity with accounting principles generally accepted
in Mexico. Such financial statements constitute a suitable basis for adjustment
and translation/remeasurement into U.S. Dollars for purposes of expressing them
in conformity with accounting principles generally accepted in the United States
of America.
The significant accounting policies, as adjusted are shown below.
a. NINE MONTHS ENDED SEPTEMBER 30, 1999 HAVE BEEN PREPARED WITHOUT AUDIT:
In the opinion of Company's management, all necessary adjustments, which
are of a normal recurring nature and necessary for a fair presentation of the
interim consolidated financial statements, have been included in the interim
consolidated financial statements as of September 30, 1999 and for the
nine-month period then ended. The results of this interim period are not
necessarily indicative of the results for the entire year.
b. CONSOLIDATION:
The accompanying financial statements include the accounts of
Telecomunicaciones and its wholly-owned subsidiaries prepared in accordance with
accounting principles generally accepted in the United States of America. All
significant intercompany balances and transactions have been eliminated in the
consolidation.
c. CASH EQUIVALENTS:
Cash equivalents are recorded at cost, which approximates market value, and
include all investments purchased with original maturities of three months or
less.
F-101
<PAGE> 245
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
d. PROPERTY, FURNITURE AND TELECOMMUNICATIONS EQUIPMENT:
Property, furniture and telecommunications equipment are recorded at cost.
Depreciation is calculated by the straight-line method, based on the
estimated useful lives of said items, ranging from three to ten years. See Note
4.
Leasehold improvements are capitalized at cost and are amortizated using
the straight-line method, over the shorter of the assets' useful lives or the
related lease terms.
e. PUBLIC TELECOMMUNICATIONS NETWORK CONCESSIONS:
The public telecommunications network concessions include the cost of the
radio-electric frequency band concession, and is recorded at cost.
Amortization is calculated by the straight-line method, based on the
estimated useful life (concession period, twenty years).
f. INCOME TAXES:
Current income tax is the amount of income tax expected to be payable for
the current period. A deferred tax asset or liability is computed for both the
expected future impact of differences between the financial statement and tax
basis of assets and liabilities and for the expected future tax benefit to be
derived from tax loss carryforwards. A valuation allowance is established for
deferred tax assets not expected to be realized.
g. EMPLOYEE BENEFITS:
Seniority premiums, to which employees are entitled upon termination of
employment after fifteen years of service, are recognized as expenses of the
years in which the services are rendered. As the Company was incorporated on
June 24, 1998, this effect is not significant, and therefore no liability has
been recognized, for each of the periods presented.
Severance obligations to personnel for dismissal or death are charged to
income in the period incurred.
h. TRANSLATION:
As of December 31, 1998, for the purposes of translating its Mexican peso
financial statements to U.S. dollars in accordance with Statement of Financial
Accounting Standard No. 52, the Company considered its functional currency to be
the U.S. dollar, since Mexico was considered a hyperinflationary economy.
Consequently, monetary assets and liabilities were translated into U.S. dollars
at the exchange rate in effect at the balance sheet date. Revenues, expenses,
gains and losses were translated at the average exchange rate for the period,
and non-monetary assets were translated at historical rates. The resulting
remeasurement gains or losses were included in the consolidated statement of
income.
As of January 1, 1999, Mexico is no longer considered a hyperinflationary
economy. Therefore, the Company changed the functional currency from the U.S.
dollar to the Mexican peso. Accordingly, monetary and non-monetary assets and
liabilities are translated into U.S. dollars at the exchange rate in
F-102
<PAGE> 246
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect at the balance sheet date. Capital stock has been translated at historic
observed exchange rates. Revenues, expenses, gains and losses are translated at
the average exchange rate for the period. The net equity effects of translation
are recorded in the cumulative foreign currency translation adjustment account
as a part of accumulated other comprehensive income.
i. CAPITALIZED INTEREST COST:
Property, furniture and telecommunications equipment, as well as the public
telecommunications network concessions, include the capitalization of the
interest costs related to their acquisition.
j. ADVERTISING COSTS:
Television advertising time purchased in advance is initially deferred and
expensed when the advertising time is used. All other advertising costs are
expensed as incurred. Advertising expense amounted to $6,739 for the nine-month
period ended September 30, 1999 (unaudited). No advertising expenses were
incurred for the period ended December 31, 1998.
k. LONG-LIVED ASSETS:
The Company assesses potential impairments of its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future net undiscounted cash flows, grouped at the
lowest identifiable level where the cash flows are independent of cash flows
generated by other groups, is less than the carrying amount of the asset. No
such impairment losses have been recorded by the Company.
l. ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
m. REVENUE RECOGNITION:
Revenues are recorded as service is provided. Sales of equipment and
related services are recorded when goods and services are delivered.
n. NEW ACCOUNTING REQUIREMENTS:
The Company adopted the provision of Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities", issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AcSEC). In accordance with this pronouncement, all start-up activities and
organization costs incurred in 1998 were expensed and are included within
general and administrative expenses in the consolidated statement of income.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) issued by the
Financial Accounting Standards Board
F-103
<PAGE> 247
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(FASB). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements.
The Company adopted the Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1)
issued by the AcSEC. The statement provides authoritative guidance for the
capitalization of external direct costs of materials and services, payroll costs
for employees devoting time to software projects, and interest costs. The
adoption of this statement did not have material effect in the financial
statements of the Company.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", (SFAS 133). This statement establishes a
new model for accounting for derivatives and hedging activities and supercedes
and amends a number of existing standards. SFAS 133 is effective for fiscal
years beginning after June 15, 2000, but earlier application is permitted as of
the beginning of any fiscal quarter subsequent to June 15, 1998. Upon the
statement's initial application, all derivatives are required to be recognized
in the balance sheet as either assets or liabilities, and measured at fair
value. In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. Management does not believe
that the adoption of this statement will significantly impact the financial
statements of the Company.
NOTE 3. TRANSACTIONS AND BALANCES WITH AFFILIATED COMPANIES AND OTHER RELATED
PARTIES:
Following is a summary of the main transactions and balances with
affiliated companies and other related parties:
<TABLE>
<CAPTION>
TRANSACTIONS FOR
THE PERIOD ENDED BALANCE AT
---------------------------- ----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1998 1999 1998
------------- ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Equipment purchases from Qualcomm...... $ -- $80,100(1) $ -- $ --
Interest on advances from
stockholders......................... -- 1,697 -- --
Professional fees charged by
stockholders......................... -- 586 -- --
Professional fees charged by affiliated
company.............................. 24,390(4) -- 5,207(3) --
Advertising services from
stockholder.......................... 4,692 6,256 428 5,941(2)
Rent payments to stockholders.......... -- 40 -- --
</TABLE>
- -------------------------
(1) Qualcomm ceased being an affiliated company on September 23, 1998 (see Note
1).
(2) This amount is reflected as notes payable to affiliated company in the
consolidated balance sheet. Equal principal amounts are payable on a
quarterly basis up to September 15, 1999. These notes are non-interest
bearing.
(3) Account payable to Leap Wireless Mexico, S. A. de C. V.
(4) This amount represents mainly the advisory services paid in connection with
the Company's organization and start up activities.
F-104
<PAGE> 248
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PROPERTY, FURNITURE AND TELECOMMUNICATIONS EQUIPMENT:
<TABLE>
<CAPTION>
ANNUAL
DECEMBER 31, DEPRECIATION RATE
1998 (%)
------------ -----------------
<S> <C> <C>
Furniture and equipment.............................. $ 630 10
Computer equipment................................... 156 25
Transportation equipment............................. 248 25
Leasehold improvements............................... 969 5
--------
2,003
Accumulated depreciation............................. (78)
--------
1,925
Land................................................. 85
Telecommunications equipment in the process of
installation....................................... 104,874
Construction in progress............................. 2,234
Advance payments to Alcatel Indetel Industria de
Telecomunicaciones, S. A. de C. V. (Alcatel)....... 11,478
Advance payments to Qualcomm......................... 9,023
Advance payments to other suppliers.................. 2,677
--------
$132,296
========
</TABLE>
At September 30, 1999, property, furniture and telecommunications equipment
increased from the amounts as of December 31, 1998 principally due to the
continued development of the telecommunication network as well as the software
implementation.
Telecommunications equipment in the process of installation at September
30, 1999 and December 31, 1998 includes $10,013 (unaudited) and $3,114,
respectively, of capitalized interest.
NOTE 5. PUBLIC TELECOMMUNICATIONS NETWORK CONCESSIONS:
On October 7, 1998, the Company obtained the concessions to frequency bands
of the radio-electric spectrum to provide nationwide wireless fixed and mobile
access telecommunication services. Balances are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cost of concession..................................... $251,907 $233,530
Accumulated amortization............................... (7,172) --
-------- --------
$244,735 $233,530
======== ========
</TABLE>
The cost of the concessions include $1,278 of capitalized interest at
September 30, 1999 (unaudited) and December 31, 1998.
F-105
<PAGE> 249
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concessions include the rights to provide the following:
- Fixed or mobile wireless telephone service.
- Transmission or reception of signals, images, voices, sounds or
information of any nature through the network, and additional services
authorized by the SCT.
- Access to data networks, videos, audio and videoconferences.
The concession agreements contain the following financial covenants:
- The minimum capital stock must be $120,000.
- The ratio of total liabilities to stockholders' equity should not exceed
2.78 during the first five years of operations.
At September 30, 1999 (unaudited) and December 31, 1998, these financial
covenants were satisfactorily complied with.
NOTE 6. FINANCING CONTRACTS:
The Company has entered into certain agreements for the acquisition of
telecommunications equipment, services, and installation consultancy. These
commitments will be financed through the financing contracts which are
summarized as follows:
<TABLE>
<CAPTION>
EQUIPMENT SUPPLIER FINANCING AGENT MAXIMUM AMOUNT
- ------------------ --------------- --------------
<S> <C> <C>
Qualcomm Qualcomm managed by ABN AMRO Bank N. V.......... $310,000(1)
Alcatel Syndicated loan managed by Citibank
International, Plc.............................. 280,000(2)
--------
$590,000
========
</TABLE>
- -------------------------
(1) This line of credit is to be utilized as follows:
<TABLE>
<CAPTION>
CREDIT TERM MAXIMUM AMOUNT
------ ---- --------------
<S> <C> <C>
Credit 1 From the date of authorization to December 31, $200,000
2000.............................................
Credit 2 From January 1, 2001 to December 31, 2002........ 90,000
Additional credit From the date of authorization to December 31, 20,000
2002.............................................
--------
$310,000
========
</TABLE>
Advances under credits 1 and 2 are composed of "A" and "B" tranches.
Tranche "A", which is for the financing of equipment purchases, is being
provided by the Export Import Bank of the United States (EXIM Bank) and is
subject to interest at the LIBOR plus 1.5 points. Tranche "B" is for the
financing of customs duties (excluding value added taxes) and
transportation costs and is subject to interest at the LIBOR plus 4.5
points. Interest is to be paid at various intervals ranging from monthly to
biannually, depending upon which credit and tranche the amount has been
disbursed from.
At September 30, 1999 (unaudited) and December 31, 1998, no advances have
been made under this line of credit. The short and long term vendor
financing of equipment balances shown in the
F-106
<PAGE> 250
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consolidated balance sheet includes liabilities of $91,365 and $35,731,
respectively, as of September 30, 1999 (unaudited), and of $72,521 and
$32,868, respectively, as of December 31, 1998, payable to Qualcomm and
Qualcomm Wireless Services (Mexico), S. A. de C. V., respectively. These
dollar-denominated amounts are expected to be paid through advances on the
line-of-credit facilities.
(2) This line of credit is to be utilized as follows:
<TABLE>
<CAPTION>
MAXIMUM
CREDIT TERM AMOUNT
------ ---- --------
<S> <C> <C>
Credit 1 From the date of authorization to December 31, 2000..... $170,000
Credit 2 From January 1, 2001 to December 31, 2002............... 100,000
Additional Credit From the date of authorization to December 31, 2000..... 10,000
--------
$280,000
========
</TABLE>
These loans are subject to interest at the Eurodollar rate (9.7 % at
September 30, 1999 (unaudited) and 5.2 % at December 31, 1998) plus 4.5
points, adjusted monthly. The interest is to be paid on a quarterly basis.
At September 30, 1999 and December 31, 1998, $60,805 (unaudited) and
$19,090, respectively, was outstanding under this line of credit (Credit 1)
and is included in long-term bank loans. Schedule maturities of the amounts
outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
------------ -------
<S> <C>
2002..................................................... $ 3,818
2003..................................................... 5,727
2004..................................................... 9,545
-------
$19,090
=======
</TABLE>
Principal payments of "A" and "B" tranches of credit managed by ABM AMRO
Bank N. V. will be negotiated in good faith and must be agreed upon by both the
parties prior to disbursement. Principal payments for other lines of credit will
be made on the dates and in the proportions shown below:
<TABLE>
<CAPTION>
PORTION PAYABLE ON DECEMBER 31,
YEAR IN WHICH THE --------------------------------------------
DISBURSEMENT WAS MADE 2002 2003 2004 2005 2006 2007
--------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1998 and 1999.............................. 20% 30% 50%
2000.................................. 20% 30% 50%
2001.................................. 20% 30% 50%
2002.................................. 20% 30% 50%
</TABLE>
In order to collateralize the obligations derived from the financing
contracts, the Company has pledged all properties, rights and assets, as
described in Note 1.
The lines of credit establish the following obligations and restrictions
for the Company:
a. Disbursements from the lines of credit should be utilized only for
the acquisition of telecommunication equipment from Qualcomm and Alcatel.
b. The capital stock should be increased by two contributions of
$50,000 each, by July 31, 1999 and on August 30, 2000, respectively.
c. Neither dividend payments nor capital distributions should be made
during the loan periods.
F-107
<PAGE> 251
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
On May 27, 1999, the shareholders contracted a bridge loan for a total
amount of $115,000 with a group of syndicated banks. This bridge loan is granted
by Qualcomm (Qualcomm guaranty) as the lead lender, Citibank N. A. as
administrative agent for the lenders, Societe Generale as syndication agent and
ABN AMRO Bank N. V. as documentation agent. This loan is subject to interest at
the Eurodollar rate plus 6% or a base rate plus 5%, provided that in each case,
applicable margin shall increase by 0.5% on each interest adjusted date. As of
September 30, 1999, $34,601 is outstanding on such loans (unaudited). The final
maturity date of the bridge loan is November 28, 2000.
On May 27, 1999, the Company entered into stock option agreements with
Qualcomm, Leap Wireless International, Inc. and Alejandro Burillo Azcarraga (the
Grantees). As a condition to execute the bridge loan agreement and to issue the
Qualcomm guaranty, the Company granted the Grantees options to subscribe and
purchase up to 353,585, 243,090 and 110,495, respectively, limited voting series
"N" treasury shares of the Company's capital stock with no par value, which
represent 2.4% of the aggregate capital stock.
In accordance with the stock option agreements, in the event the bridge
loan facility is repaid in full and the commitment thereunder is terminated on
or before December 1, 1999, the options shall be terminated. After such date,
the Grantees may receive an additional fee in the form of a stock option, if the
total internal rate of return on the average outstanding balance of the bridge
loan is less than 20%.
The said options shall have customary antidilution protection for stock
dividends, stock splits, stock combinations, mergers and other similar events,
but not for issuances below any particular price per share. The options will
have an exercise price of US$.01 per share and an expiration date of 10 years
from date of issuance. The options shall be exercisable at any time after the
date on which all amounts under the bridge loan agreement are paid in full and
the commitments there under are terminated.
Also, on May 27, 1999, an irrevocable administration and guarantee trust
was constituted by Leap Wireless International, Inc. and Alejandro Burillo
Azcarraga as trustors, Qualcomm as beneficiary, and Banco INVEX, S. A.,
Institucion de Banca Multiple, (INVEX) as trustee. The agreement establishes
that INVEX may exercise the option for the series "N" treasury shares mentioned
above to counter-guarantee the payment of obligations arising from the bridge
loan agreement for $115,000.
On June 18, 1999, Telecomunicaciones, as trustor, established an
irrevocable administration and guarantee trust with Citibank Mexico, S. A. de C.
V., Grupo Financiero Citibank as representative of the beneficiaries of the
guarantees and as agent of the guarantees, as well as with INVEX as trustee. The
purpose of this trust agreement is to guarantee payment of obligations arising
from the financing vendor agreements signed with Qualcomm and Alcatel.
Telecomunicaciones has transferred to the trust its shares in Comunicaciones and
Sistemas, PCS and Recursos Humanos.
NOTE 7. STOCKHOLDERS' EQUITY:
Telecomunicaciones was incorporated on June 24, 1998, with a contribution
of $11 for the subscription of 100,000 common shares, each with a par value of
one Mexican peso.
On June 30, 1998, the Company exchanged the original 100,000 common shares
for 1,000 shares with no par value. On the same date, the Company received from
its stockholders $1 in exchange for the issuance of an additional 200 common
shares.
F-108
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PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 28, 1998, the Company received $299,988 in exchange for the
issuance of 7,499,388 Series "A", Class II shares, 7,199,412 Series "B", Class
II shares, and 15,300,000 Series "N", Class II shares. On this same date, the
stockholders decided to increase the capital stock by two contributions of
$50,000 each, before July 31, 1999 and August 31, 2000, respectively.
On July 27 and 30, 1999, the stockholders increased the capital stock by
$50,000 through the issuance of 5,000,000 series "N" common shares with no par
value (unaudited).
At September 30, 1999, the authorized capital stock is 35,000,000
no-par-value shares, all of which are issued and outstanding, as follows
(unaudited):
<TABLE>
<CAPTION>
NUMBER OF SHARES DESCRIPTION AMOUNT
- ---------------- ----------- --------
<C> <S> <C>
Class I (fixed minimum portion):
612 Series A................................................... $ 6
588 Series B................................................... 6
Class II (variable portion):
7,499,388 Series A................................................... 74,994
7,199,412 Series B................................................... 71,994
20,300,000 Series N................................................... 203,000
---------- --------
35,000,000 $350,000
========== ========
</TABLE>
Series "N", Class "II" shares have limited voting rights.
In the event of a capital stock reduction, the portion of capital stock
exceeding contributions made is subject to income tax, payable by the Company,
equivalent to 53.85% of such excess.
NOTE 8. INCOME TAX, ASSET TAX AND EMPLOYEES' STATUTORY PROFIT SHARING:
For the periods ended September 30, 1999 and December 31, 1998,
Telecomunicaciones generated a net tax loss of $4,053 (unaudited) and $4,976 and
two of its subsidiaries generated a combined net tax loss of $94,511 (unaudited)
and $8,394, respectively. The company's other subsidiary, Recursos Humanos, had
a net tax loss of $873 (unaudited) and taxable income of $944 for the periods
ended September 30, 1999 and December 31, 1998, respectively. For the period
ended December 31, 1998 the Company recognized a current tax provision of $321,
in the consolidated financial statements. There was no tax provision for the
nine-month period ended September 30, 1999 (unaudited).
The Company obtained authorization from the Treasury Ministry (Secretaria
de Hacienda y Credito Publico) (SHCP) to determine its income tax (IT) and asset
tax (AT) on a consolidated basis starting in 1999.
The tax loss carryforwards of $93,013 (unaudited) and of $13,370, incurred
for the periods ended September 30,1999 and December 31, 1998, respectively, can
be inflation indexed by applying the Mexican National Consumer Price Index from
the date on which losses arise through the date of their utilization. Such
restated tax loss carryforwards can be offset against future taxable income, and
expire in the years 2009 and 2008, respectively.
F-109
<PAGE> 253
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effect of temporary differences that gives rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Interest and consultancy fees capitalized............ $ (4,157) $(1,692)
Preoperating expenses................................ 4,510 4,660
Tax loss carryforwards............................... 37,234 4,546
Valuation allowance.................................. (37,587) (7,514)
-------- -------
$ -- $ --
======== =======
</TABLE>
The statutory IT rate was 35% and 34% for 1999 and 1998, respectively. The
following items represent the principal differences between income taxes
computed at the statutory tax rate and the Company's provision for income taxes
for the periods ended September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Tax at statutory rate................................ (35)% (34)%
Foreign exchange loss on remeasurement of financial
statements......................................... -- 3%
Permanent items, including inflationary effects...... 5% 7%
Interest and consultancy fees........................ 3% (5)%
Preoperating expenses................................ -- 15%
Valuation allowance.................................. 27% 15%
--- ---
Effective IT rate.................................... --% 1%
=== ===
</TABLE>
AT is determined by applying the rate of 1.8% to the net amount of certain
assets and liabilities, and is payable only when AT exceeds IT due. For the
periods ended September 30, 1999 and December 31, 1998, the Company was not
subject to the payment of AT.
For the periods ended September 30, 1999 and December 31, 1998, the Company
was not subject to the payment of employees' statutory profit sharing.
F-110
<PAGE> 254
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS:
The Company leases offices and other spaces related to its activity, under
operating agreements expiring through 2003. At December 31, 1998 future minimum
lease payments under such leases amount to approximately $8,158, as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999........................................................ $2,490
2000........................................................ 1,743
2001........................................................ 1,429
2002........................................................ 1,407
2003........................................................ 1,089
------
$8,158
======
</TABLE>
As of September 30, 1999 future minimum lease payments on the above
obligations and agreements expiring through 2007 amounted to $11,464
(unaudited).
Lease payments for the period ended September 30, 1999 and December 31,1998
recorded in the consolidated statement of income amounted to $1,891 (unaudited)
and $824, respectively.
Additionally, the Company has site operating leases for the network which
amount $4,995, on annual basis (unaudited). This amount is recorded in the
consolidated statement of income.
NOTE 10. FINANCIAL INSTRUMENTS:
The fair value of the Company's cash and cash equivalents, recoverable
taxes, other accounts receivable, trade payables, income taxes and other
accounts payable and accrued expenses approximate the carrying value due to the
short-maturity of these instruments.
The estimated fair value and carrying value of other financial instruments
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -------
<S> <C> <C>
Notes payable to affiliated company......................... $ 5,941 $ 5,823
Long-term bank loans........................................ 19,090 19,090
</TABLE>
* * * *
F-111
<PAGE> 255
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
PRO FORMA FINANCIAL INFORMATION
The Pro Forma Financial Information is based on the historical consolidated
financial statements of Cricket Communications Holdings, Inc. and its
subsidiaries ("Cricket Communications Holdings" or the "Company"), a development
stage company, at February 29, 2000, for the six months ended February 29, 2000
and for the year ended August 31, 1999, adjusted to give effect to the Company's
acquisition in March 2000 of substantially all the assets of Chase
Telecommunications Holdings, Inc. ("Chase Telecommunications Holdings"),
excluding wireless licenses which were acquired by the Company's parent, Leap
Wireless International, Inc. ("Leap"). The Unaudited Pro Forma Consolidated
Balance Sheet at February 29, 2000 gives effect to the acquisition as if it had
occurred as of February 29, 2000. The Unaudited Pro Forma Statement of
Operations for the six months ended February 29, 2000 and the year ended August
31, 1999 gives effects to the acquisition as if it had occurred as of September
1, 1998. The acquisition and related adjustments are described in the
accompanying notes. The Pro Forma Financial Information is based upon available
information and certain assumptions that management believes are reasonable. In
our opinion, all adjustments have been made that are necessary to present fairly
the pro forma data. The final recorded amounts could differ.
The Pro Forma Financial Information is provided for illustrative purposes
only and does not purport to represent what the Company's results of operations
or financial condition actually would have been had the pending acquisition in
fact occurred on such dates or to project the Company's results of operations or
financial condition for any future period or date. The Pro Forma Financial
Information and accompanying notes should be read in conjunction with the
historical financial statements of the Company and Chase Telecommunications
Holdings.
F-112
<PAGE> 256
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 29, 2000
-------------------------------------------------------------------------
HISTORICAL CRICKET
----------------------------------- COMMUNICATIONS
CRICKET CHASE HOLDINGS
COMMUNICATIONS TELECOMMUNICATIONS PRO FORMA CONSOLIDATED
HOLDINGS HOLDINGS ADJUSTMENTS PRO FORMA
-------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..... $ 405 $ 5,336 $ -- $ 5,741
Accounts receivable, net...... -- 5,925 -- 5,925
Inventories................... -- 145 -- 145
Other current assets.......... -- 148 -- 148
-------- --------- --------- --------
Total current assets..... 405 11,554 -- 11,959
-------- --------- --------- --------
Property and equipment, net... 625 35,559 -- 36,184
Investment in and loans
receivable from
unconsolidated wireless
operating company........... 17,606 -- (17,606)(2) --
PCS licenses, net............. -- 60,456 (35,651)(3)(4) 24,805
Deposits and other assets..... 284 404 -- 688
-------- --------- --------- --------
Total assets............. $ 18,920 $ 107,973 $ (53,257) $ 73,636
======== ========= ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable and accrued
liabilities................. $ 1,622 $ 8,115 $ -- $ 9,737
Other current liabilities..... -- 2,439 (1,072)(3) 1,367
-------- --------- --------- --------
Total current
liabilities............ 1,622 10,554 (1,072) 11,104
-------- --------- --------- --------
Long-term debt................ 21,027 196,985 (173,381)(2)(3)(4) 44,631
Other long-term liabilities... -- 12 -- 12
-------- --------- --------- --------
Total liabilities........ 22,649 207,551 (174,453) 55,747
-------- --------- --------- --------
Redeemable stock.............. -- 6,777 (6,777)(3) --
-------- --------- --------- --------
Stockholders' equity
(deficit):
Preferred stock............. -- -- -- --
Common stock................ 6 1 (1)(2) 6
Additional paid-in
capital.................. 125,868 9,000 6,318(1)(2) 141,186
Notes receivable from
stockholders............. (38,815) -- 6,300(1) (32,515)
Deferred compensation....... (26) -- -- (26)
Accumulated deficit......... (90,762) (115,356) 115,356(2) (90,762)
-------- --------- --------- --------
Total stockholders'
equity (deficit)....... (3,729) (106,355) 127,973 17,889
-------- --------- --------- --------
Total liabilities and
stockholders' equity
(deficit).............. $ 18,920 $ 107,973 $ (53,257) $ 73,636
======== ========= ========= ========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-113
<PAGE> 257
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 29, 2000
-------------------------------------------------------------------
HISTORICAL CRICKET
----------------------------------- COMMUNICATIONS
CRICKET CHASE HOLDINGS
COMMUNICATIONS TELECOMMUNICATIONS PRO FORMA CONSOLIDATED
HOLDINGS HOLDINGS ADJUSTMENTS PRO FORMA
-------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C>
Operating revenues............ $ -- $ 5,289 $ -- $ 5,289
-------- -------- ------- --------
Operating expenses:
Cost of operating
revenues................. -- (7,540) (107)(5) (7,647)
Selling, general and
administrative........... (6,578) (6,186) 716(5) (12,048)
Depreciation and
amortization............. -- (18,546) (1,606)(6) (20,152)
-------- -------- ------- --------
Total operating
expenses............... (6,578) (32,272) (997) (39,847)
-------- -------- ------- --------
Operating loss.............. (6,578) (26,983) (997) (34,558)
Equity in net loss of
unconsolidated wireless
operating company........... (20,162) -- 20,162(7) --
Interest income............... 1,031 32 --(8) 1,063
Interest expense.............. (2,920) (9,488) 7,057(8) (5,351)
Other income (expense), net... -- (165) (165)
-------- -------- ------- --------
Net loss.................... $(28,629) $(36,604) $26,222 $(39,011)
======== ======== ======= ========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-114
<PAGE> 258
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1999
-------------------------------------------------------------------
HISTORICAL CRICKET
----------------------------------- COMMUNICATIONS
CRICKET CHASE HOLDINGS
COMMUNICATIONS TELECOMMUNICATIONS PRO FORMA CONSOLIDATED
HOLDINGS HOLDINGS ADJUSTMENTS PRO FORMA
-------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C>
Operating revenues............. $ -- $ 4,389 $ -- $ 4,389
-------- -------- ------- --------
Operating expenses:
Cost of operating revenues... -- (7,513) (124)(5) (7,637)
Selling, general and
administrative............ (16,545) (7,682) 373(5) (23,854)
Depreciation and
amortization.............. -- (5,476) (3,212)(6) (8,688)
-------- -------- ------- --------
Total operating
expenses................ (16,545) (20,671) (2,963) (40,179)
-------- -------- ------- --------
Operating loss............... (16,545) (16,282) (2,963) (35,790)
Equity in net loss of
unconsolidated wireless
operating company............ (20,900) -- 20,900(7) --
Interest income................ 9 207 -- 216
Interest expense............... -- (16,129) 15,442(8) (687)
Other income (expense), net.... -- 379 379
-------- -------- ------- --------
Net loss..................... $(37,436) $(31,825) $33,379 $(35,882)
======== ======== ======= ========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-115
<PAGE> 259
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
NOTE 1. DESCRIPTION OF TRANSACTION
In March 2000, the Company and Leap acquired substantially all the assets
of Chase Telecommunications Holdings for: $6.3 million in cash; the assumption
of certain liabilities of Chase Telecommunications Holdings; a warrant to
purchase 1% of the common stock of the Company exercisable at $1.0 million; the
return of the Company's existing stock ownership and warrants to purchase stock
in Chase Telecommunications Holdings; and certain contingent earn-outs.
The acquisition will be accounted for under the purchase method of
accounting. Based on the fair value of Chase Telecommunications Holdings'
liabilities assumed in the unaudited pro forma consolidated balance sheet and
the fair value of approximately $15.3 million attributed to the warrant to
purchase 1% of the common stock of the Company, the aggregate purchase price
will be approximately $81.8 million. The fair value of the warrant was
determined on the date of closing, which was the date the number of warrant
shares first became known, using the Black-Scholes option pricing model. Of this
amount, approximately $47.6 million has been allocated to property and equipment
and other assets and approximately $24.8 million to intangible assets, including
$18.4 million to goodwill. The contingent earn-out payments, up to a maximum of
$41.0 million plus certain costs, are based upon certain targeted operating
results for the Chase Telecommunications properties during the fifth full fiscal
year following the closing of the transaction. These payment obligations, if
any, will be recorded as additional purchase price.
NOTE 2. PRO FORMA ADJUSTMENTS RELATED TO PENDING ACQUISITION OF CHASE
TELECOMMUNICATIONS
(1) To record (a) purchase consideration of $6.3 million in cash funded by
Leap and recorded as a reduction to note receivable from Leap; and (b)
fair value of approximately $15.3 million attributed to the warrant to
purchase 1% of the common stock of Cricket Communications Holdings.
(2) (a) Elimination of inter-company working capital loans of $59.4 million
and equipment loans of $17.6 million, including accrued and capitalized
interest, provided by the Company to Chase Telecommunications Holdings;
and (b) elimination of stockholders' deficit of Chase
Telecommunications Holdings upon consolidation. The carrying value of
Cricket Communications Holdings' investment in and working capital
loans to Chase Telecommunications Holdings have previously been reduced
to zero.
(3) To eliminate wireless licenses of $60.5 million, interest payable of
$1.1 million, long-term debt of $86.9 million and redeemable preferred
stock of $6.8 million of Chase Telecommunications Holdings not acquired
or assumed by Cricket Communications Holdings in the acquisition.
(4) To record (a) estimated fair value of non-compete agreements and
acquired customer list of $0.9 million and $5.6 million, respectively;
(b) $18.4 million of goodwill for excess purchase price over the net
assets acquired; and (c) a reduction of $9.5 million in equipment
vendor loans to estimated fair value in connection with the preliminary
purchase price allocation.
(5) To record (a) elimination of Cricket Communications Holdings'
management and royalty fee expense recorded by Chase Telecommunications
Holdings, and (b) estimated license fee
F-116
<PAGE> 260
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
expense related to the Company's plan to enter into a licensing
arrangement with a subsidiary of Leap that acquired the Chase
Telecommunications Holdings wireless licenses.
(6) Additional amortization resulting from the preliminary purchase price
allocation of: (a) $0.1 million and $0.3 million for the six months
ended February 29, 2000 and the year ended August 31, 1999,
respectively, for non-compete agreements (amortized on a straight-line
basis over the 3 year term of the agreements); (b) $1.0 million and
$2.0 million for the six months ended February 29, 2000 and the year
ended August 31, 1999, respectively, for customer list (amortized on a
straight-line basis over a 33 month expected useful life for the market
where service has commenced); and (c) $0.5 million and $0.9 million for
the six months ended February 29, 2000 and the year ended August 31,
1999, respectively, for purchased goodwill (amortized on a
straight-line basis over a 20 year life).
(7) Elimination of the Company's share of the net loss of Chase
Telecommunications Holdings previously recognized under the equity
method of accounting.
(8) Elimination of interest expense recorded by Chase Telecommunications
Holdings on debt balances not assumed by the Company and inter-company
working capital and equipment loans provided by the Company. Interest
income due to the Company on inter-company working capital and
equipment loans has previously been eliminated.
* * * *
F-117
<PAGE> 261
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Cricket Communications Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity (deficit) present fairly, in all material respects, the
financial position of Cricket Communications Holdings, Inc. and its subsidiary
(a development stage company) at August 31, 1999 and 1998, and the results of
their operations and their cash flows for the years ended August 31, 1999 and
1998, for the period from December 1, 1996 (inception) to August 31, 1997 and
for the period from December 1, 1996 (inception) to August 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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
February 15, 2000
F-118
<PAGE> 262
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, --------------------
2000 1999 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 405 $ -- $ --
-------- -------- --------
Total current assets............................ 405 -- --
Property and equipment, net.......................... 625 -- --
Investment in and loans receivable from
unconsolidated wireless operating company.......... 17,606 -- --
Other assets......................................... 284 -- --
-------- -------- --------
Total assets.................................... $ 18,920 $ -- $ --
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued liabilities............. $ 1,622 $ 6,924 $ 4,551
-------- -------- --------
Total current liabilities....................... 1,622 6,924 4,551
Lucent credit agreement.............................. 21,027 -- --
-------- -------- --------
Total liabilities............................... 22,649 -- --
-------- -------- --------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Preferred stock -- authorized 200,000 shares $.0001
par value, no shares issued and outstanding..... -- -- --
Common stock -- authorized 75,000,000 shares $.0001
par value, 64,306,766, 52,000,100 and 100 shares
issued and outstanding at February 29, 2000
(unaudited) and August 31, 1999 and 1998,
respectively.................................... 6 5 --
Additional paid-in capital......................... 125,868 52,029 --
Parent's investment and advances................... -- 4,115 20,146
Notes receivable from stockholders................. (38,815) (906) --
Deferred compensation.............................. (26) (34) --
Deficit accumulated during the development stage... (90,762) (62,133) (24,697)
-------- -------- --------
Total stockholders' deficit..................... (3,729) (6,924) (4,551)
-------- -------- --------
Total liabilities and stockholders' deficit..... $ 18,920 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-119
<PAGE> 263
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
SIX MONTHS ENDED DECEMBER 1, DECEMBER 1, DECEMBER 1,
--------------------------- YEAR ENDED 1996 1996 1996
AUGUST 31, (INCEPTION) TO (INCEPTION) TO (INCEPTION) TO
FEBRUARY 29, FEBRUARY 28, ------------------- AUGUST 31, AUGUST 31, FEBRUARY 29,
2000 1999 1999 1998 1997 1999 2000
------------ ------------ -------- -------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
General and administrative
expenses................. $ (6,578) $ (2,432) $(16,545) $ (8,896) $ -- $(25,441) $(32,019)
Equity in net loss of
unconsolidated wireless
operating company........ (20,162) (11,201) (20,900) (11,801) (4,000) (36,701) (56,863)
Interest income............ 1,031 -- 9 -- -- 9 1,040
Interest expense........... (2,920) -- -- -- -- -- (2,920)
-------- -------- -------- -------- ------- -------- --------
Net loss................. $(28,629) $(13,633) $(37,436) $(20,697) $(4,000) $(62,133) $(90,762)
======== ======== ======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-120
<PAGE> 264
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
SIX MONTHS ENDED DECEMBER 1, DECEMBER 1,
--------------------------- YEAR ENDED 1996 1996
AUGUST 31, (INCEPTION) TO (INCEPTION) TO
FEBRUARY 29, FEBRUARY 28, ------------------- AUGUST 31, AUGUST 31,
2000 1999 1999 1998 1997 1999
------------ ------------ -------- -------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net loss................ $(28,629) $(13,633) $(37,436) $(20,697) $(4,000) $(62,133)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........ 49 -- -- -- -- --
Equity in net loss of
unconsolidated
wireless operating
company............. 20,162 11,201 20,900 11,801 4,000 36,701
Interest accrued to
loans receivable and
payable -- net...... (762) -- (9) -- -- (9)
Compensation expense
related to stock
options............. 8 -- -- -- -- --
Changes in assets and
liabilities:
Deposits and other
assets.......... (284) -- -- -- -- --
Accounts payable
and accrued
liabilities..... (5,302) -- 2,373 4,551 -- 6,924
-------- -------- -------- -------- ------- --------
Net cash used in operating
activities.............. (14,758) (2,432) (14,172) (4,345) -- (18,517)
-------- -------- -------- -------- ------- --------
Investing activities:
Purchase of property and
equipment............. (674) -- -- -- -- --
Investment in and loans
to unconsolidated
wireless operating
company............... (17,009) (11,201) (20,900) (11,801) (4,000) (36,701)
-------- -------- -------- -------- ------- --------
Net cash used in investing
activities.............. (17,683) (11,201) (20,900) (11,801) (4,000) (36,701)
-------- -------- -------- -------- ------- --------
Financing activities:
Exercise of stock
options............... -- -- 1,103 -- -- 1,103
Parent's investment and
advances.............. 32,846 13,633 33,969 16,146 4,000 54,115
-------- -------- -------- -------- ------- --------
Net cash provided by
financing activities.... 32,846 13,633 35,072 16,146 4,000 55,218
-------- -------- -------- -------- ------- --------
Net change in cash........ 405 -- -- -- -- --
Cash at beginning of
period.................. -- -- -- -- -- --
-------- -------- -------- -------- ------- --------
Cash at end of period..... $ 405 $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ======= ========
Supplemental disclosure of
non-cash investing and
financing activities:
Issuance of common
stock for parent's
advances............ $ 15,202 $ -- $ -- $ -- $ --
$ ----
Issuance of common
stock for notes
receivable.......... $ 58,638 $ -- $ 897 $ -- $ -- $ 897
Long-term financing
for loans to
unconsolidated
wireless operating
company............. $ 20,759 $ -- $ -- $ -- $ --
$ ----
<CAPTION>
PERIOD FROM
DECEMBER 1,
1996
(INCEPTION) TO
FEBRUARY 29,
2000
----------------
(UNAUDITED)
<S> <C>
Operating activities:
Net loss................ $(90,762)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........ 49
Equity in net loss of
unconsolidated
wireless operating
company............. 56,863
Interest accrued to
loans receivable and
payable -- net...... (771)
Compensation expense
related to stock
options............. 8
Changes in assets and
liabilities:
Deposits and other
assets.......... (284)
Accounts payable
and accrued
liabilities..... 1,622
--------
Net cash used in operating
activities.............. (33,275)
--------
Investing activities:
Purchase of property and
equipment............. (674)
Investment in and loans
to unconsolidated
wireless operating
company............... (53,710)
--------
Net cash used in investing
activities.............. (54,384)
--------
Financing activities:
Exercise of stock
options............... 1,103
Parent's investment and
advances.............. 86,961
--------
Net cash provided by
financing activities.... 88,064
--------
Net change in cash........ 405
Cash at beginning of
period.................. --
--------
Cash at end of period..... $ 405
========
Supplemental disclosure of
non-cash investing and
financing activities:
Issuance of common
stock for parent's
advances............ $ 15,202
Issuance of common
stock for notes
receivable.......... $ 58,638
Long-term financing
for loans to
unconsolidated
wireless operating
company............. $ 20,759
</TABLE>
See accompanying notes to consolidated financial statements.
F-121
<PAGE> 265
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT'S NOTES ACCUMULATED
COMMON STOCK ADDITIONAL INVESTMENT RECEIVABLE DURING THE
--------------- PAID-IN AND FROM DEVELOPMENT DEFERRED
SHARES AMOUNT CAPITAL ADVANCES STOCKHOLDERS STAGE COMPENSATION TOTALS
------ ------ ---------- ---------- ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1996
(inception).................. -- $-- $ -- $ -- $ -- $ -- $ -- $ --
Parent's investment and
advances................... -- -- -- 4,000 -- -- -- 4,000
Net loss..................... -- -- -- -- -- (4,000) -- (4,000)
------ -- -------- -------- -------- -------- ---- --------
Balance at August 31, 1997..... -- -- -- 4,000 -- (4,000) -- --
Parent's investment and
advances................... -- -- 16,146 -- -- -- 16,146
Net loss..................... -- -- -- -- -- (20,697) -- (20,697)
------ -- -------- -------- -------- -------- ---- --------
Balance at August 31, 1998..... -- -- -- 20,146 -- (24,697) -- (4,551)
Parent's investment and
advances................... -- -- 33,969 -- -- -- 33,969
Issuance of common stock to
parent..................... 50,000 5 49,995 (50,000) -- -- -- --
Exercise of stock options.... 2,000 -- 2,000 -- (897) -- -- 1,103
Interest accrued on notes
receivable from
Stockholders............... -- -- -- -- (9) -- -- (9)
Deferred compensation........ -- -- 34 -- -- -- (34) --
Net loss..................... -- -- -- -- -- (37,436) -- (37,436)
------ -- -------- -------- -------- -------- ---- --------
Balance at August 31, 1999..... 52,000 5 52,029 4,115 (906) (62,133) (34) (6,924)
September 1, 1999 to February
29, 2000 (unaudited):
Parent's investment and
advances................... -- -- 11,087 -- -- -- 11,087
Issuance of common stock to
parent..................... 11,833 1 70,999 (15,202) (34,038) -- -- 21,760
Issuance of common stock to
related parties............ 473 -- 2,840 -- (2,840) -- -- --
Interest accrued on notes
receivable from
stockholders............... -- -- -- -- (1,031) -- -- (1,031)
Amortization of deferred
compensation............... -- -- -- -- -- -- 8 8
Net loss..................... -- -- -- -- -- (28,629) -- (28,629)
------ -- -------- -------- -------- -------- ---- --------
Balance at February 29, 2000
(unaudited).................. 64,306 $6 $125,868 $ -- $(38,815) $(90,762) $(26) $ (3,729)
====== == ======== ======== ======== ======== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-122
<PAGE> 266
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY AND NATURE OF BUSINESS
On August 24, 1998, Leap Wireless International, Inc. ("Leap") created a
wholly owned subsidiary, Cricket Communications Holdings, Inc. (the "Company" or
"Cricket Communications Holdings"), a Delaware corporation. On June 22, 1999,
Leap transferred to Cricket Communications Holdings its equity interest in Chase
Telecommunications Holdings, Inc. ("Chase Telecommunications Holdings") and
loans to Chase Telecommunications, Inc. ("Chase Telecommunications"), a
subsidiary of Chase Telecommunications Holdings, as well as certain additional
assets and liabilities.
The Company is a wireless communications carrier that is deploying a
low-cost, simple wireless service. The Company's business strategy, marketed
under the brand name "Cricket", is to offer consumers a service plan that allows
them to make and receive virtually unlimited local calls for a low, flat monthly
rate. The Cricket service was introduced in Chattanooga, Tennessee in March 1999
by Chase Telecommunications, a company that Leap and the Company acquired in
March 2000. The Cricket service was launched under an agreement that required
the management of Chase Telecommunications to control the business until the
acquisition was completed.
BASIS OF PRESENTATION
The financial statements reflect the financial position, results of
operations, cash flows and changes in stockholders' equity (deficit) of the
business that was transferred to the Company from Leap as if: (i) the Company
was a separate entity for all periods presented, and (ii) the investment in
Chase Telecommunications Holdings and loans to Chase Telecommunications prior to
June 22, 1999 were entered into by the Company. 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 Company
maintained no cash balances from December 1, 1996 (inception) through December
15, 1999 (unaudited). During this period, when Company purchases were made,
liabilities paid or investments and advances made, the cash used by the Company
was provided by Leap. Changes in stockholders' equity (deficit) includes the
conversion of Leap's investment and advances into common stock of the Company.
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.
DEVELOPMENTAL STAGE ACTIVITIES AND ADDITIONAL CAPITAL NEEDS
The Company is in the early stages of developing and deploying its
telecommunications systems. Through February 29, 2000, the Company had not
generated any revenues from its planned principal operations and was therefore
considered to be a development stage company in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by
Development Stage Enterprises." The Company's telecommunications systems require
significant expenditures, a substantial portion of which is incurred before
corresponding revenues are generated. In
F-123
<PAGE> 267
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
addition, the Company expects to be highly leveraged which will lead to
significant interest expense and principal repayment obligations. The Company
therefore expects to incur significant expenses in advance of generating
revenues and, as a result, to incur substantial additional losses in the near
term. The Company experienced net losses totaling $90.8 million for the period
from December 1, 1996 (inception) to February 29, 2000 (unaudited).
The Company expects to obtain much of its required near-term financing
primarily through proceeds from vendor financing arrangements and from capital
contributions from Leap. In February 2000, Leap completed an underwritten public
offering (the "Equity Offering") of 4,000,000 shares of its common stock,
receiving net proceeds of approximately $330.9 million. Also in February 2000,
Leap issued units (the "Units Offering") consisting of notes and warrants,
receiving net proceeds of approximately $537.2 million. Leap has announced that
it intends to use a substantial portion of the net proceeds of the Equity
Offering and the Units Offering for capital expenditures for the build-out of
Cricket networks in the initial phase of development, to fund operating losses
expected to be incurred by the Company, for the completed acquisition of
substantially all of the assets of Chase Telecommunications Holdings in March
2000 and to acquire additional wireless licenses to be used by the Company to
offer Cricket service and for repayment of debt.
There can be no assurance that the Company will be able to obtain the
additional financing it requires, or become profitable. The failure of the
Company to build-out its systems, meet its payment obligations or become
profitable would adversely affect the value of the Company's assets and its
future profitability.
WIRELESS LICENSES
The Company plans to deploy the Cricket wireless service to additional
markets. Management intends to enter into long-term licensing agreements with
affiliates who hold wireless licenses and pay these affiliates for the use of
the licenses.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of February 29, 2000 and
consolidated statements of operations and related statements of cash flows for
the six months ended February 29, 2000 and February 28, 1999 are unaudited. In
the opinion of management, these consolidated statements have been prepared on
the same basis as the audited consolidated financial statements included herein
and include all adjustments, consisting of only normal recurring adjustments,
necessary for the fair statement of the financial position and results of the
interim periods. The data disclosed in these notes to consolidated financial
statements for these periods is also unaudited.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cricket
Communications Holdings and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
F-124
<PAGE> 268
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT AND NETWORK UNDER DEVELOPMENT
Property and equipment are recorded at cost. Network development costs will
be amortized on a straight-line method over their estimated useful life,
estimated to be 3 to 7 years upon commencement of service. Office equipment is
depreciated on a straight-line method over its estimated useful life, ranging
from 3 to 7 years, once the asset is placed in service. Repairs and maintenance
costs are expensed as incurred.
Network development costs are capitalized as incurred and include all costs
related to engineering, site development, interest expense and other development
costs being incurred to ready the Company's networks for use.
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 is 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.
START-UP AND ADVERTISING COSTS
Start-up costs are expensed as incurred. The Company expenses production
costs of print, radio and television advertisements and other advertising costs
as they are incurred.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee and outside
directors stock-based compensation using the intrinsic value method.
Compensation charges related to non-employee stock-based compensation are
measured using the fair value method.
INCOME TAXES
Current income tax benefit (expense) is the amount expected to be
receivable (payable) 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.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which the
Company will be required to adopt for fiscal year 2001. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under SFAS No. 133, all derivatives must be recognized as assets and liabilities
and measured at fair
F-125
<PAGE> 269
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value. The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on its consolidated financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company does not expect that the
adoption of FIN 44 will have a material effect on its financial position or
results of operations.
NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, ----------------
2000 1999 1998
------------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Property and equipment:
Network under development.............................. $ 95 $ -- $ --
Office equipment....................................... 579 -- --
------ ------ ------
674 -- --
Accumulated depreciation............................... (49) -- --
------ ------ ------
$ 625 $ -- $ --
====== ====== ======
Other assets:
Deferred financing costs............................... $ 276 $ -- $ --
Other.................................................. 8 -- --
------ ------ ------
$ 284 $ -- $ --
====== ====== ======
Accounts payable and accrued liabilities:
Trade accounts payable................................. $ 58 $ 32 $4,551
Accrued loss on handset purchase commitment............ -- 6,274 --
Accrued payroll and related benefits................... 1,564 618 --
------ ------ ------
$1,622 $6,924 $4,551
====== ====== ======
</TABLE>
NOTE 4. INVESTMENT AND LOANS TO CHASE TELECOMMUNICATIONS
The Company owns 7.2% of the outstanding capital stock of Chase
Telecommunications Holdings. The Company has also provided a working capital
facility to Chase Telecommunications Holdings, which was increased from $50.0
million to $65.0 million in February 2000. Borrowings under the working capital
facility are subject to interest at an annual rate of prime plus 4.5%. Principal
and capitalized interest amounts outstanding at March 31, 2000 are to be repaid
in semi-annual payments ratably over a six-year period commencing June 2000.
Accrued and capitalized interest amounts subsequent to March 31, 2000 are
payable on maturity in January 2008. Borrowings are collateralized by
substantially
F-126
<PAGE> 270
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
all of the assets of Chase Telecommunications Holdings and are subordinated to
Chase Telecommunication's equipment vendor loans. At February 29, 2000
(unaudited) and August 31, 1999, borrowings under the working capital facility
totaled $59.6 million and $36.1 million, including $6.1 million and $3.3 million
of accrued and capitalized interest, respectively. Because the facility is the
only source of working capital for Chase Telecommunications Holdings and its
subsidiaries, the carrying value of the Company's investment in Chase
Telecommunications Holdings and loans to Chase Telecommunications under the
working capital facility have been reduced to zero as the Company has recognized
100% of the consolidated net losses of Chase Telecommunications Holdings to the
extent of its investment and loans.
In March 2000, Leap and the Company acquired substantially all the assets
of Chase Telecommunications Holdings for: $6.3 million in cash; the assumption
of principal amounts of liabilities that totaled approximately $139.0 million at
February 29, 2000 (unaudited); a warrant to purchase 1% of the common stock of
the Company exercisable at $1.0 million (which has a fair value of approximately
$15.3 million); the Company's existing stock ownership and warrants to purchase
stock in Chase Telecommunications Holdings; and certain contingent earn-out
payments of up to $41.0 million (plus certain expenses) based on the earnings of
the business acquired during the fifth full year following the closing of the
acquisition.
During the six months ended February 29, 2000, the Company purchased
equipment and services required by Chase Telecommunications and then resold the
equipment and services to Chase Telecommunications on substantially similar
terms (see Note 5). As of February 29, 2000 (unaudited), a total of $20.8
million of equipment had been purchased and resold to Chase Telecommunications.
Unaudited condensed financial information for Chase Telecommunications
Holdings is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, ---------------------
2000 1999 1998
------------ --------- ---------
<S> <C> <C> <C>
Current assets......................................... $ 11,554 $ 5,963 $ 7,776
Non-current assets..................................... 96,419 87,282 83,528
Current liabilities.................................... (10,554) (4,063) (2,925)
Non-current liabilities................................ (196,997) (148,501) (119,976)
--------- --------- ---------
Total stockholders' deficit.......................... (105,771) (59,319) (31,597)
Other stockholders' share of deficit................... (98,156) (55,048) (29,322)
--------- --------- ---------
Company's share of deficit............................. (7,615) (4,271) (2,275)
--------- --------- ---------
Investment in and loans receivable from Chase
Telecommunications Holdings....................... $ -- $ -- $ --
========= ========= =========
</TABLE>
F-127
<PAGE> 271
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
SIX MONTHS ENDED DECEMBER 1, DECEMBER 1, DECEMBER 1,
--------------------------- YEAR ENDED 1996 1996 1996
AUGUST 31, (INCEPTION) TO (INCEPTION) TO (INCEPTION) TO
FEBRUARY 29, FEBRUARY 28, ------------------- AUGUST 31, AUGUST 31, FEBRUARY 29,
2000 1999 1999 1998 1997 1999 2000
------------ ------------ -------- -------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues......... $ 5,289 $ 824 $ 4,389 $ 21 $ -- $ 3,358 $ 8,647
-------- -------- -------- -------- -------- -------- ---------
Operating losses........... (26,983) (6,454) (16,282) (4,915) (4,960) (25,192) (52,175)
Other income (expense),
net...................... (9,621) (2,836) (15,543) (18,088) (18,796) (51,918) (61,539)
-------- -------- -------- -------- -------- -------- ---------
Net loss................. (36,604) (9,290) (31,825) (23,003) (23,756) (77,110) (113,714)
Other stockholders' share
of net loss.............. (13,544) 3,126 (7,429) (11,202) (19,756) (36,913) (50,457)
-------- -------- -------- -------- -------- -------- ---------
Company's share of net
loss..................... (23,060) (12,416) (24,396) (11,801) (4,000) (40,197) (63,257)
Elimination of intercompany
transactions............. (2,898) (1,215) (3,496) -- -- (3,496) (6,394)
-------- -------- -------- -------- -------- -------- ---------
Equity in net loss of
Chase
Telecommunications
Holdings............... $(20,162) $(11,201) $(20,900) $(11,801) $ (4,000) $(36,701) $ (56,863)
-------- -------- -------- -------- -------- -------- ---------
</TABLE>
NOTE 5. LUCENT CREDIT AGREEMENT
In September 1999, Cricket Communications, Inc. ("Cricket Communications"),
a wholly owned subsidiary of the Company, entered into an agreement with Lucent
Technologies, Inc. ("Lucent") for the purchase of $330.0 million of
infrastructure products and services. Lucent agreed to finance these purchases
plus additional working capital under a credit facility (the "Lucent Credit
Agreement"). The Lucent Credit Agreement permits up to $641.0 million in total
borrowings with borrowing availability based on total amounts of equipment
purchased, subject to various covenants and conditions typical for a loan of
this type, including minimum levels of customers and covered potential customers
which must increase over time, limits on annual capital expenditures and
dividend restrictions and other financial ratio tests. The obligations under the
Lucent Credit Agreement are secured by all of the stock of Cricket
Communications and its subsidiaries, all of their respective assets, the assets
of Cricket Communications Holdings and the stock of each special purpose
subsidiary of Leap formed to hold wireless licenses. Borrowings under the Lucent
Credit Agreement accrue at an interest rate equal to LIBOR plus 3.5% to 4.25% or
a bank base rate plus 2.5% to 3.25%, in each case with the specific rate based
on certain financial ratios. Cricket Communications must pay Lucent a commitment
fee equal to 1.25% per annum on the unused commitment under the facility,
decreasing to 0.75% per annum. Principal payments are scheduled to begin after
three years with a final maturity after eight years. Repayment is weighted to
the later years of the repayment schedule. At February 29, 2000, the Company had
$21.0 million outstanding under the Lucent Credit Agreement, including $0.3
million in accrued and capitalized interest, related to the Company's purchase
of equipment and services required by Chase Telecommunications and the resale of
the equipment and services to Chase Telecommunications on substantially similar
terms.
Following the closing of the Chase Telecommunications acquisition in March
2000, amounts owed by Chase Telecommunications under an existing equipment
financing agreement were repaid from borrowings under the Lucent Credit
Agreement. As of February 29, 2000, Chase Telecommunications Holdings owed
approximately $33.2 million under its existing equipment financing agreement.
F-128
<PAGE> 272
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. RELATED PARTY TRANSACTIONS
LEAP WIRELESS INTERNATIONAL, INC.
The consolidated financial statements include the allocation of shared
general and administrative costs with Leap. Labor and other direct costs of Leap
have been allocated to the Company based on estimates of incremental efforts
expended and incremental costs incurred related to the Company's business. The
Company's share of these costs were $0.4 million for the year ended August 31,
1999 and $1.3 million for the six months ended February 29, 2000 (unaudited).
Management believes these allocations reasonably approximate costs incurred by
Leap on behalf of the Company's operations. However, the costs as allocated to
the Company are not necessarily indicative of the costs that would have been
incurred if the Company had performed these functions as a stand-alone entity.
In November and December 1999, the Company issued 2,533,641 and 9,299,592
shares of its common stock to Leap related to the conversion of investments and
advances totaling $15.2 million (unaudited) provided to the Company from June
22, 1999 to December 15, 1999, and a promissory note of $55.8 million,
respectively. The promissory note bears interest at the rate of 10.0% per annum
and is payable on demand. At February 29, 2000 the outstanding balance of the
promissory note totaled $35.0 million, including $0.9 million of accrued
interest. In March and April 2000, the Company received payments from Leap that
repaid the promissory note in full.
OTHER RELATED PARTIES
In December 1999, the Company received promissory notes totaling $2.8
million from three directors of the Company and a director of Leap in
consideration for the issuance of 473,333 shares of the Company's common stock.
The promissory notes bear interest at the rate of 10.0% per annum and are
payable on demand. At February 29, 2000 the outstanding balance of the
promissory notes totaled $2.9 million, including approximately $59,000 of
accrued interest. In April and May 2000, the Company received payments from the
three directors that repaid the promissory notes in full.
NOTE 7. BENEFIT PLANS
EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company's employees are eligible to participate in Leap's 401(k) plan
established in September 1998 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 on earnings.
Matching contributions were approximately $36,000 and $42,000 for the year
ended August 31, 1999 and the six months ended February 29, 2000 (unaudited),
respectively.
EXECUTIVE RETIREMENT PLAN
The Company's employees are eligible to participate in Leap's voluntary
retirement plan that allows eligible executives to defer up to 100% of their
income on a pre tax basis. On a quarterly basis, participants receive up to a
50% match up to 10% of their income, in the form of Leap'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 the general
F-129
<PAGE> 273
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
creditors of Leap. For the year ended August 31, 1999 and the six months ended
February 29, 2000 (unaudited), 111 shares and 357 shares, respectively, of Leap
common stock were allocated under the plan for the Company's employees and the
Company's matching contribution amounted to approximately $2,000 and $37,000,
respectively.
STOCK OPTION PLANS
In June 1999, the Company adopted the Cricket Communications 1999 Stock
Option Plan (the "1999 Cricket Plan") that allows the Board of Directors to
grant options to selected employees, directors and consultants to purchase
shares of the Company. A total of 7,600,000 shares of common stock were reserved
for issuance under the 1999 Cricket Plan. The 1999 Cricket 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
Company's 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
Company's 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. In
July 1999, the Company received promissory notes totaling $0.9 million and cash
of $1.1 million by three of the Company's directors in consideration for the
issuance of 2,000,000 shares upon exercise of stock options under the 1999
Cricket Plan.
A summary of stock option transactions for the 1999 Cricket Plan follows
(number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OPTIONS OUTSTANDING
AVAILABLE -----------------------------
FOR NUMBER OF WEIGHTED AVERAGE
GRANT SHARES EXERCISE PRICE
--------- --------- ----------------
<S> <C> <C> <C>
Options authorized............... 7,600
Options granted.................. (3,335) 3,335 $1.16
Options cancelled................ 2 (2) 1.00
Options exercised................ -- (2,000) 1.00
------ ------
August 31, 1999.................. 4,267 1,333 $1.41
====== ======
</TABLE>
The following table summarizes information about stock options outstanding
under the 1999 Cricket Plan at August 31, 1999 (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES (IN YEARS) PRICE OF SHARES PRICE
- --------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00 851 9.81 $1.00 123 $1.00
$2.00 458 9.87 2.00 -- --
$4.00 24 9.93 4.00 -- --
----- ---
1,333 9.83 $1.40 123 $1.00
===== ===
</TABLE>
In September 1998, Leap adopted the 1998 Stock Option Plan (the "1998 Leap
Plan") that allows the board of directors of Leap to grant options to selected
employees, directors and consultants of Leap
F-130
<PAGE> 274
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and its affiliates, including Cricket Communications Holdings, to purchase
shares of the Leap common stock. A total of 8,000,000 shares of common stock
were reserved for issuance under the 1998 Leap Plan. The 1998 Leap 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 of Leap 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. Leap also
adopted the 1998 Non-Employee Directors Stock Option Plan (the "1998 Leap
Non-Employee Directors Plan"), under which options to purchase common stock of
Leap are granted to non-employee directors on an annual basis. A total of
500,000 shares of common stock were reserved for issuance under the 1998 Leap
Non-Employee Directors Plan. The options are exercisable at a price equal to the
fair market value of the common stock of Leap on the date of grant, vest over a
five-year period and are exercisable for up to ten years from the grant date.
A summary of Leap stock option transactions related to employees, directors
and consultants of the Company for the 1998 Leap Plan and the 1998 Leap
Non-Employee Directors Plan follows (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options granted............................. 222,860 $7.99
Options cancelled........................... (9,750) 3.12
Options exercised........................... (2,555) 2.37
-------
August 31, 1999............................. 210,555 8.28
=======
</TABLE>
The following table summarizes information about Leap stock options
outstanding related to employees, directors and consultants of the Company under
the 1998 Leap Plan and the 1998 Leap Non-Employee Directors Plan at August 31,
1999 (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES (IN YEARS) PRICE OF SHARES PRICE
- ---------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 1.81 to $ 3.03 77,425 8.86 $3.00 3,275 $2.38
$ 3.44 to $ 6.75 70,130 9.00 5.79 3,480 4.28
$10.38 to $22.00 63,000 9.73 17.55 -- --
------- -----
210,555 $8.28 6,755 $3.36
======= =====
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company's employees are eligible to participate in Leap's 1998 Employee
Stock Purchase Plan (the "1998 Leap ESP Plan") that allows eligible employees to
purchase shares of Leap's common stock at 85% of the lower of the fair market
value of such stock on the first or last day of each offering period.
F-131
<PAGE> 275
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employees may authorize the Company to withhold up to 15% of their compensation
during any offering period, subject to certain limitations. For the year ended
August 31, 1999 and the six months ended February 29, 2000 (unaudited), a total
of 11,209 shares and 3,905 shares, respectively, of Leap common stock were
issued to the Company's employees at $3.83 and $15.51 per share, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income (loss) and net earnings (loss)
per common share is required by SFAS No. 123, "Accounting for Stock-Based
Compensation". This information is required to be determined as if the Company
had accounted for its stock-based awards and stock-based awards made by Leap to
the Company's employees and non-employee directors (including shares issued
under stock options) under the fair value method of SFAS No. 123. The fair value
of options granted in fiscal 1999 reported below has been estimated at the date
of grant using the Black-Scholes option-pricing model using the following
weighted average assumptions:
<TABLE>
<CAPTION>
1998 1998
1999 LEAP STOCK LEAP ESP
CRICKET PLAN OPTION PLANS PLAN
------------ ------------ --------
<S> <C> <C> <C>
Risk-free interest rate............ 5.0% 5.0% 4.5%
Volatility......................... 0.0% 50.0% 55.0%
Dividend yield..................... 0.0% 0.0% 0.0%
Expected life (years).............. 6.0 6.0 0.5
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different than those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options. The weighted average estimated grant date fair values of
stock options granted in fiscal 1999 under the 1999 Cricket Plan, the 1998 Leap
Plan and the 1998 Leap ESP Plan were $0.12, $1.57 and $2.37 per share,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
The Company's pro forma information for the year ended August 31, 1999 is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss................................ $(37,436) $(38,308)
</TABLE>
The Company did not recognize a tax benefit relating to pro forma
compensation expense under SFAS No. 123 for fiscal 1999 as such benefit did not
meet the "more likely than not" criteria for recognition of deferred tax assets.
F-132
<PAGE> 276
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES
The Company had not recorded provisions for federal and state income taxes
due to net operating losses ("NOL"). The Company will not be able to utilize NOL
carryforwards generated prior to June 22, 1999.
NOTE 9. COMMITMENTS AND CONTINGENCIES
INFRASTRUCTURE EQUIPMENT PURCHASE AND FINANCING AGREEMENTS
In September 1999, the Company entered into separate agreements providing
for the purchase of infrastructure equipment and the financing of such purchases
with two major telecommunications suppliers (see Note 5). Under the agreements,
the Company has agreed to purchase $330 million in infrastructure equipment from
each supplier. In connection with the sales of infrastructure equipment, the
suppliers will provide vendor financing that will be used for equipment,
services and operations needed to deploy the Company's wireless networks in
various markets across the United States. One of the finance agreements is
subject to the approval of the applicable supplier's board of directors.
LITIGATION
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
* * * *
F-133
<PAGE> 277
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Chase Telecommunications Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of redeemable
stock and stockholders' deficit present fairly, in all material respects, the
financial position of Chase Telecommunications Holdings, Inc. and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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.
As discussed in Note 1 to the financial statements, in March 2000 the
Company sold substantially all of its assets and, as a result, has no continuing
operations.
PricewaterhouseCoopers LLP
San Diego, California
May 16, 2000
F-134
<PAGE> 278
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 1,783 $ 5,912
Accounts receivable, net.................................. 716 218
Inventory................................................. 781 89
Prepaids and other current assets......................... 585 305
--------- --------
Total current assets.................................... 3,865 6,524
Property and equipment, net............................... 28,290 25,090
PCS licenses, net......................................... 60,299 58,436
Deferred financing costs and other assets, net............ 431 593
--------- --------
Total assets............................................ $ 92,885 $ 90,643
========= ========
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' DEFICIT
Accounts payable and accrued liabilities.................. $ 3,589 $ 1,154
Unearned revenue.......................................... 663 12
Interest payable.......................................... 2,145 4,611
--------- --------
Total current liabilities............................... 6,397 5,777
--------- --------
Government financing...................................... 64,780 62,575
Qualcomm credit facility.................................. 31,696 23,648
Cricket Communications credit facilities.................. 56,294 22,152
Senior subordinated notes................................. 18,457 16,458
Notes payable to related parties.......................... 2,924 2,658
--------- --------
Total long-term liabilities............................. 174,151 127,491
--------- --------
Commitments and contingencies (Notes 4, 5 and 9)
Redeemable stock:
Series A preferred stock, $0.01 par value, 4,500 shares
authorized; 2,000 shares issued and outstanding,
liquidation preference of $2,240 at December 31,
1999.................................................... 2,240 2,080
Class B common stock (with put feature), $0.01 par value;
4,298 shares issued and outstanding..................... 2,018 2,018
Class C common stock, $0.01 par value; 20,000 shares
authorized; 9,327 shares issued and outstanding......... 2,492 2,492
--------- --------
Total redeemable stock.................................. 6,750 6,590
--------- --------
Stockholders' deficit:
Class A common stock, $0.01 par value; 30,000 shares
authorized; 6,218 shares issued and outstanding......... -- --
Class B common stock, $.01 par value; 200,000 shares
authorized; 42,339 shares issued and outstanding........ -- --
Additional paid-in capital................................ 9,000 9,000
Accumulated deficit....................................... (103,413) (58,215)
--------- --------
Total stockholders' deficit............................. (94,413) (49,215)
--------- --------
Total liabilities, redeemable stock and stockholders'
deficit................................................ $ 92,885 $ 90,643
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-135
<PAGE> 279
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Service revenue...................................... $ 3,460 $ 360 $ --
Equipment sales revenue.............................. 2,648 485 --
-------- -------- --------
Total revenues............................... 6,108 845 --
Operating expenses:
Cost of services..................................... (2,747) (592) --
Cost of equipment sold............................... (6,551) (1,692) --
Selling, general and administrative.................. (9,455) (7,194) (3,729)
Depreciation and amortization........................ (16,546) (1,271) (119)
-------- -------- --------
Operating loss.................................... (29,191) (9,904) (3,849)
Interest expense....................................... (15,893) (17,241) (18,085)
Interest income........................................ 117 189 80
Other income (expense)................................. (71) 449 --
-------- -------- --------
Net loss.......................................... (45,038) (26,507) (21,853)
Preferred stock dividend and accretion................. (160) (759) --
-------- -------- --------
Net loss applicable to common stockholders........ $(45,198) $(27,266) $(21,853)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-136
<PAGE> 280
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE STOCK STOCKHOLDERS' DEFICIT
---------------------------------------------------- -------------------------------
SERIES A CLASS B COMMON COMMON STOCK
PREFERRED STOCK (WITH PUT CLASS C -------------------------------
STOCK FEATURE) COMMON STOCK CLASS A CLASS B
--------------- ---------------- --------------- -------------- --------------
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
------ ------ ------ ------- ------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................. -- $ -- 8,042 $ 6,018 8,609 $2,492 5,141 $-- 32,229 $--
Accretion of Class B
common stock (with
put feature) to put
value................ -- -- -- 600 -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- --
----- ------ ------ ------- ----- ------ ----- --- ------ ---
Balance at December 31,
1997................. -- -- 8,042 6,618 8,609 2,492 5,141 -- 32,229 --
Issuance of Class B
common stock......... -- -- -- -- -- -- -- -- 5,617 --
Issuance of Class B
common stock as
dilution
protection........... -- -- -- -- -- -- -- -- 749 --
Removal of Class B
common stock put
feature by
Qualcomm............. -- -- (3,744) (4,600) -- -- -- -- 3,744 --
Issuance of Class A and
Class C common stock
as dilution
protection........... -- -- -- -- 718 -- 1,077 -- -- --
Issuance of Series A
preferred stock to
Senior Subordinated
Notes investors...... 2,000 1,321 -- -- -- -- -- -- -- --
Preferred stock
dividend and
accretion............ -- 759 -- -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- -- -- -- --
----- ------ ------ ------- ----- ------ ----- --- ------ ---
Balance at December 31,
1998................. 2,000 2,080 4,298 2,018 9,327 2,492 6,218 -- 42,339 --
Preferred stock
dividend and
accretion............ -- 160 -- -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- -- -- -- --
----- ------ ------ ------- ----- ------ ----- --- ------ ---
Balance at December 31,
1999................. 2,000 $2,240 4,298 $ 2,018 9,327 $2,492 6,218 $-- 42,339 $--
===== ====== ====== ======= ===== ====== ===== === ====== ===
<CAPTION>
STOCKHOLDERS' DEFICIT
------------------------
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT
---------- -----------
<S> <C> <C>
Balance at December 31,
1996................. $ -- $ (9,096)
Accretion of Class B
common stock (with
put feature) to put
value................ -- (600)
Net loss............... -- (21,853)
------ ---------
Balance at December 31,
1997................. -- (31,549)
Issuance of Class B
common stock......... 5,000 --
Issuance of Class B
common stock as
dilution
protection........... -- --
Removal of Class B
common stock put
feature by
Qualcomm............. 4,000 600
Issuance of Class A and
Class C common stock
as dilution
protection........... -- --
Issuance of Series A
preferred stock to
Senior Subordinated
Notes investors...... -- --
Preferred stock
dividend and
accretion............ -- (759)
Net loss............... -- (26,507)
------ ---------
Balance at December 31,
1998................. 9,000 (58,215)
Preferred stock
dividend and
accretion............ -- (160)
Net loss............... -- (45,038)
------ ---------
Balance at December 31,
1999................. $9,000 $(103,413)
====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-137
<PAGE> 281
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net loss............................................. $(45,038) $(26,507) $(21,853)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................... 16,546 1,271 119
Noncash interest charges and amortization of debt
discount........................................ 12,381 8,439 6,616
Management fees accrued under Cricket credit
facility........................................ 737 -- --
Changes in assets and liabilities:
Accounts receivable............................... (498) (218) --
Inventory......................................... (692) (89) --
Prepaids and other assets......................... (280) (295) 644
Accounts payable and accrued liabilities.......... 2,435 (1,081) 738
Unearned revenue.................................. 651 12 --
Interest payable.................................. (2,466) 4,117 10,916
-------- -------- --------
Net cash used in operating activities.................. (16,224) (14,351) (2,820)
-------- -------- --------
Investing activities:
Purchases of property and equipment.................. (21,609) (23,784) (2,391)
-------- -------- --------
Net cash used in investing activities.................. (21,609) (23,784) (2,391)
-------- -------- --------
Financing activities:
Issuance of common stock............................. -- 5,000 --
Borrowings under Qualcomm credit facility............ 4,688 20,133 2,177
Borrowings under Cricket credit facility............. 29,016 20,492 --
Repayment of other long-term liabilities............. -- (2,000) --
Debt issuance and related costs...................... -- (20) --
-------- -------- --------
Net cash provided by financing activities.............. 33,704 43,605 2,177
-------- -------- --------
Net increase (decrease) in cash and cash equivalents... (4,129) 5,470 (3,034)
Cash and cash equivalents at beginning of year......... 5,912 442 3,476
-------- -------- --------
Cash and cash equivalents at end of year............... $ 1,783 $ 5,912 $ 442
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............. $ 7,966 $ 4,685 $ 553
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-138
<PAGE> 282
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
THE COMPANY AND NATURE OF BUSINESS
Chase Telecommunications Holdings, Inc. and its wholly owned subsidiaries
(the "Company"), formerly Chase Telecommunications, Inc., was incorporated in
Delaware on April 25, 1996. The Company was formed to provide broadband personal
communications services ("PCS") in the state of Tennessee and surrounding areas.
The Company originally bid for and was granted Federal Communication Commission
("FCC") licenses to provide PCS services to approximately 6.3 million POPs (the
population covered by a license or a group of licenses) in its service area,
including the Nashville, Memphis, Knoxville and Chattanooga metropolitan areas.
In September 1996, the Company acquired 30 MHz PCS licenses in the FCC's
block PCS auction ("C Block") for a total price of approximately $175.0 million.
The Company had originally exercised its right as a "small business" to pay
approximately $157.6 million of its total purchase price by issuing to the U.S.
government a ten-year 7% note payable (the "Government Financing"). In June
1998, the Company exercised its right, under FCC order #98-46, to disaggregate
its PCS licenses (the "Spectrum Disaggregation"), whereby the Company only
retained 15 MHz of the original 30 MHz PCS licenses. The offer to disaggregate
the PCS licenses was extended to all C Block license holders in order to
alleviate many of the financial difficulties that most C Block license holders
were facing as a result of the significant economic burden required to build out
a PCS network. In conjunction with this Spectrum Disaggregation, the U.S.
government forgave one-half of the Company's original debt obligation associated
with its PCS licenses, and more than half of the accrued interest through the
date of disaggregation.
In June 1998, the Company entered into investment, equipment credit and
working capital facility agreements with Qualcomm Incorporated ("Qualcomm"). In
September 1998, Qualcomm transferred to Leap Wireless International, Inc.
("Leap") its investment in and working capital facility to the Company in
conjunction with the spin-off of Leap from Qualcomm. In June 1999, Leap
contributed its investment in and working capital facility to the Company to
Leap's majority-owned subsidiary, Cricket Communications, Inc. ("Cricket
Communications").
In September 1998, the Company completed the build-out of its PCS network
in the Chattanooga metropolitan area financed by borrowings under the Qualcomm
and Cricket Communications credit facilities and began selling services under
the "ChaseTel" brand.
ASSET PURCHASE AGREEMENT
In December 1998, the Company entered into an asset purchase agreement (the
"Asset Purchase Agreement"), as amended, with Leap and Cricket Communications,
whereby Leap and Cricket Communications agreed to acquire substantially all of
the assets of the Company. The purchase was subject to FCC approval and was
completed in March 2000. The total purchase price was equal to (a) $6.3 million
in cash; (b) a warrant to purchase 1% of the common stock of Cricket
Communications Holdings, Inc. ("Cricket Communications Holdings"), a
majority-owned subsidiary of Leap, at an exercise price of $1.0 million; (c)
certain earn-out payments of up to $41.0 million (plus certain expenses) based
on the earnings of the business acquired during the fifth full fiscal year
following closing; (d) all of Leap's outstanding shares of common stock of the
Company and outstanding warrants to purchase shares of common stock of the
Company, and (e) the assumption of debt obligations of the Company's
subsidiaries. The liabilities assumed include approximately $78.8 million in
principal
F-139
<PAGE> 283
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amounts owed to the FCC associated with the PCS licenses and the amounts owed
under the Qualcomm equipment credit facility of approximately $31.7 million at
December 31, 1999.
As a result of the purchase, the Company has no continuing operations
except for the potential exercise of the warrant to purchase shares of common
stock of Cricket Communications and the receipt of any earn-out payments
pursuant to the Asset Purchase Agreement. As discussed in Note 4, payments on
the senior subordinated notes are not due until 2008 and payments on the notes
payable to related parties are not due until all senior debt of the Company is
repaid. The remaining assets of the Company, including any amounts realized from
contingent earnout payments and the exercise of the warrant, will ultimately be
distributed to the noteholders and shareholders, when realized, pursuant to the
Company's plan of liquidation.
The following unaudited pro forma condensed balance sheet gives effect to
the sale of substantially all the assets of the Company and reflects the
remaining assets and liabilities of the Company at December 31, 1999 (in
thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 6,427
Noncurrent assets........................................... --
--------
$ 6,427
========
Senior subordinated notes................................... $ 18,457
Notes payable to related parties............................ 2,924
Redeemable stock............................................ 6,750
Stockholders' deficit....................................... (21,703)
--------
$ 6,427
========
</TABLE>
Concurrently with the execution of the Asset Purchase Agreement, as
amended, the Company and Cricket Communications entered into a management
agreement and a trademark license agreement whereby Cricket Communications began
managing a significant component of the Company's day-to-day operations and the
Company agreed to begin marketing its wireless services under the "Cricket"
brand. In March 1999, the Company began offering new flat-rate wireless local
service plans under the "Cricket" brand. In January 2000, the Company launched
Cricket service in Nashville, Tennessee.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
FINANCIAL STATEMENT PREPARATION
The consolidated financial statements are prepared using generally accepted
accounting principles. These principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
F-140
<PAGE> 284
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized on monthly airtime fees ratably over the fee period.
Revenue is recognized on long-distance or other special charges when incurred by
the customer. Revenue is recognized on sales of merchandise held for resale when
the product is delivered to customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At December 31, 1999,
the Company's cash and cash equivalents consisted of deposits with banks and
investments in money market accounts. The Company has not experienced any losses
on its deposits of cash and cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying value of its long-term debt
instruments approximate fair value due to their risk adjusted market rates of
interest.
INVENTORY
Inventory consists of merchandise held for resale, principally phones and
phone accessories, and is stated at the lower of cost or market. The Company
uses the first-in, first-out method of determining cost of inventory.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Constructed assets are
recorded at cost plus capitalized interest and direct costs incurred during the
construction phase. Depreciation is provided based on the straight-line method
over the estimated useful lives of the respective assets, generally five to
seven years for the PCS network and three to seven years for computer and office
equipment. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful lives of the improvements. Repair and maintenance
costs are expensed as incurred.
In conjunction with the Company's replacement of certain network equipment
in January 2000, an increase in depreciation expense of approximately $12.5
million was recorded in the year ended December 31, 1999.
PCS LICENSES
The Company recorded an intangible asset for the acquired PCS licenses at
cost, with cost determined as (a) the present value of the deferred payment
obligation provided by the Government Financing based upon prevailing rates of
interest which the Company believes would have resulted if an independent
borrower and an independent lender had negotiated a similar transaction under
comparable terms and conditions (estimated to be 15%) and (b) the down payments.
In June 1998, in connection with the Spectrum Disaggregation (Note 4), the
carrying amount of the Company's PCS licenses was reduced.
F-141
<PAGE> 285
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capitalization of interest on Government Financing begins when the
activities necessary to get the Company's PCS network ready for its intended use
are initiated and concludes when the PCS network is ready for its intended use.
The Company amortizes the operational portion of its licenses, including
capitalized interest, based on the straight line method over 40 years. The
Company capitalized interest of $2.0 million, $197,000 and $0 for the years
ended December 31, 1999, 1998 and 1997, respectively.
DEBT DISCOUNT AND DEFERRED FINANCING FEES
Debt discount and deferred financing fees are amortized and recognized as
interest expense under the effective interest method.
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 is
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition are less than its carrying amount. No
such impairment losses have been recorded by the Company.
INCOME TAXES
Current income tax benefit (expense) is the amount expected to be
receivable (payable) 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.
ADVERTISING AND PROMOTIONAL COSTS
Costs of advertising and promotions are expensed as incurred. Advertising
and promotional expenses were $1.7 million, $1.0 million and $0 for the years
ended December 31, 1999, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee and outside
director's stock-based compensation using the intrinsic value method.
Compensation charges related to non-employee stock-based compensation are
measured using the fair value method.
CONCENTRATIONS
The Company purchases a substantial portion of its PCS network
infrastructure from two major suppliers. Furthermore, the Company relies on one
vendor to provide substantially all of its billing services. Loss of any of
these suppliers could adversely impact operations temporarily until a comparable
substitute could be found. The Company does not have a concentration of
available sources of labor or
F-142
<PAGE> 286
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
services, nor does the Company have any significant concentration of business
transacted with a particular customer, that could, if suddenly eliminated,
severely impact operations.
STOCK SPLIT
In December 1998, the stockholders of the Company approved (a) a 1:100
reverse stock split of the Company's Class A common stock, par value $0.01 per
share, (b) a 1:100 reverse stock split of the Company's Class B common stock,
par value $0.01 per share, and (c) a 1:100 reverse stock split of the Company's
Class C common stock, par value $0.01 per share. In May 1997, the stockholders
of the Company approved (a) a 2.435536:1 stock split of the Company's Class A
common stock, (b) a 4.898706:1 stock split of the Company's Class B common stock
and (c) a 2.435536:1 stock split of the Company's Class C common stock.
Retroactive effect has been given to the stock splits in stockholders' deficit
in the accompanying consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which the Company will be
required to adopt for fiscal year 2001. This statement establishes a new model
for accounting for derivatives and hedging activities. Under SFAS No. 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company does not expect that the adoption of SFAS No. 133 will have a
material impact on its consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarized certain of the staff's interpretations in
applying generally accepted accounting principles to revenue recognition. The
provisions of SAB No. 101 are effective for the Company's quarter ending June
30, 2000. The Company does not expect that the adoption of SAB No. 101 will have
a material impact on its consolidated financial position or results of
operations.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25." FIN 44 clarifies the application of Opinion 25 for
(a) the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company does not expect that the
adoption of FIN 44 will have a material effect on its consolidated financial
position or results of operations.
F-143
<PAGE> 287
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net:
Trade accounts receivable................................ $ 724 $ 258
Other accounts receivable................................ 50 18
-------- -------
774 276
Allowance for doubtful accounts.......................... (58) (58)
-------- -------
$ 716 $ 218
======== =======
Property and equipment, net:
PCS network.............................................. $ 25,313 $25,247
Computer and office equipment............................ 731 713
Leasehold improvements................................... 195 240
Construction in progress................................. 19,582 --
-------- -------
45,821 26,200
Accumulated depreciation and amortization................ (17,531) (1,110)
-------- -------
$ 28,290 $25,090
======== =======
PCS licenses, net:
PCS licenses............................................. $ 60,455 $58,467
Accumulated depreciation and amortization................ (156) (31)
-------- -------
$ 60,299 $58,436
======== =======
Accounts payable and accrued liabilities:
Accounts payable......................................... $ 462 $ 486
Accrued payroll and related benefits..................... 99 138
Other accrued liabilities................................ 3,028 530
-------- -------
$ 3,589 $ 1,154
======== =======
</TABLE>
NOTE 4. DEBT
Amounts due on long-term debt are $4.2 million in 2000, $10.4 million in
2001, $12.4 million in 2002, $31.5 million in 2003, $34.3 million in 2004 and
$89.6 million thereafter.
GOVERNMENT FINANCING
In September 1996, in connection with the grant to the Company of its PCS
licenses, Government Financing was issued for a ten-year term at an annual
interest rate of 7%. The Government Financing originally was recorded at its
estimated fair market value of $99.0 million. In June 1998, in conjunction with
the FCC's limited debt relief, the Company elected Spectrum Disaggregation and
returned one-half of its spectrum (15 MHz of its originally granted 30 MHz) in
each market in return for a 50% reduction of its original debt obligation and
accrued interest thereon and a partial credit on its original license down
payment. As a result of this election, the Company's aggregate carrying value of
its PCS licenses was reduced from $116.9 million to $58.4 million, the face
value of the Government Financing was reduced
F-144
<PAGE> 288
CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from $157.6 million to $78.8 million, the related interest payable was reduced
from $18.3 million to $6.3 million, and the effective interest rate was reduced
from 15% to 11.6%. The Government Financing is collateralized by a first
priority security interest in the PCS licenses.
Under the terms of the Government Financing, the Company is required to
make quarterly installment payments of interest only for the first four years
after Spectrum Disaggregation and quarterly installment payments of interest and
principal over the remaining four years of the original ten-year term.
The original issuance discount of the Government Financing is being
amortized, using the effective interest method, over the term of the debt and is
included as a component of interest expense. The unamortized discount at
December 31, 1999 was approximately $14.0 million.
QUALCOMM CREDIT FACILITY
The Company and Qualcomm are parties to a credit agreement (the "Qualcomm
Credit Facility"), as amended, for the Company's purchase of PCS network
infrastructure and other costs associated with the development and construction
of its PCS network. At December 31, 1999, $31.7 million was outstanding under
the Qualcomm Credit Agreement, including $3.6 million of accrued interest.
The aggregate principal amount of all loans made under the Qualcomm Credit
Facility during any calendar year amortize quarterly over a five-year period
commencing at the end of the first calendar quarter occurring in the third
calendar year following the year in which such loans were made. Amortization of
the aggregate principal amount of all loans made in a given year consist of
quarterly payments of 2.50% of such aggregate principal amount in the third
calendar year following the year such loans were made and 3.75%, 5.00%, 6.25%
and 7.50% of such aggregate principal amount in the fourth, fifth, sixth and
seventh calendar years, respectively, following the year such loans were made.
Borrowings under the Qualcomm Credit Facility bear interest at a rate per
annum equal to, at the Company's option, either (a) LIBOR plus 5.25% or (b) a
base rate plus 4.00% (11.75% at December 31, 1999). The base rate is the higher
of (a) the prime rate as publicly announced by The Bank of New York and (b) the
federal funds rate plus 0.5%. Until the earlier of (a) the interest payment date
applicable to such loan that is nearest to December 31, 1999, and (b) the date
on which the loans are converted to a fixed rate high-yield structure, as
described below, interest due on the loans is not payable but will be
automatically added to the aggregate principal amount outstanding as a new base
rate loan on the interest payment date applicable to such loan (unless the
Company pays the interest on such loans on or prior to such applicable interest
payment date). Thereafter, interest is payable, in the case of base rate loans,
quarterly or in the case of Eurodollar loans, at the end of the one-, three- or
six-month interest payment period selected by the Company for such Eurodollar
loan. The Qualcomm Credit Facility also requires the payment of certain
commitment, facility and administrative agent fees.
Borrowings under the Qualcomm Credit Facility are collateralized (to the
extent permitted by applicable law) by a perfected first priority lien on all of
the assets of the Company, including all of the capital stock of the Company and
its subsidiaries, except that the lien with respect to the PCS licenses is
junior to that of the FCC under the Government Financing and is limited to the
proceeds of an authorized sale or transfer of such PCS Licenses (and subject to
the terms and conditions of the FCC security agreements).
The Qualcomm Credit Facility contains a number of restrictive covenants
which, among other things, limit the ability of the Company and its subsidiaries
to, subject to specified exceptions, (a) incur
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
additional indebtedness, create liens and other encumbrances, enter into capital
leases and guarantee obligations, (b) merge or consolidate with another entity,
(c) sell or otherwise dispose of assets, (d) declare dividends, make
distributions to stockholders and repurchase its stock, (e) make investments,
capital expenditures, loans and advances, (f) enter into transactions with
affiliates, (g) change its line of business, (h) prepay other indebtedness and
(i) amend other material agreements. In addition, the vendor financing requires
the maintenance of certain specified financial and operating covenants. The
Company is currently in compliance with all covenants.
Qualcomm has the right, at any time, to cause all or any specified portion
of the loans under the vendor financing to be converted to collateralized fixed
rate obligations which shall otherwise have terms, covenants and conditions
substantially similar to those of high-yield debt issuance of wireless
communications companies at the time of such proposed conversion provided,
however, that Qualcomm may not cause such a conversion if (a) the yield to
maturity for such obligations is anticipated to exceed 13.0% per annum or (b)
the final maturity of such obligations would be prior to the final maturity of
the notes.
CRICKET COMMUNICATIONS CREDIT FACILITIES
The Company and Cricket Communications are parties to a credit facility
(the "Working Capital Facility") that provides working capital funds to the
Company. At December 31, 1999 a total of $56.3 million was outstanding under the
Working Capital Facility, including $5.0 million of accrued interest, and a
total of $50.0 million was available to the Company. In February 2000, the
Working Capital Facility was increased from $50.0 million to $65.0 million.
Borrowings under the facility are subject to interest at an annual rate of prime
plus 4.5%. Principal and capitalized interest amounts outstanding at March 31,
2000 are to be repaid in semi-annual payments ratably over a six-year period
commencing June 2000. Accrued and capitalized interest amounts subsequent to
March 31, 2000 are payable at maturity in January 2008. Borrowings are
collateralized by substantially all of the assets of the Company and are
subordinated to the Qualcomm Credit Agreement.
Borrowings under the Working Capital Facility bear interest at a rate equal
to a base rate (as defined) plus 4.5% (12.25% at December 31, 1999). Until the
earlier of (a) the interest payment date applicable to such loan that is nearest
to October 31, 1999, and (b) the date on which the loans are converted to a
fixed rate high-yield structure, as described below, interest due on the loans
is not payable but will be automatically added to the aggregate principal amount
of the working capital loans. Thereafter, interest is payable quarterly.
In October 1999, the Company entered into an equipment financing agreement
(the "Equipment Credit Facility") with Cricket Communications related to the
Company's purchase of infrastructure from Cricket Communications until
completion of the purchase of substantially all the assets of the Company
pursuant to the Asset Purchase Agreement. Cricket Communications purchased the
equipment and services from a major telecommunications supplier and resold the
equipment and services to the Company on substantially similar terms.
SENIOR SUBORDINATED NOTES
In 1996, the Company entered into a securities purchase agreement with
certain institutional and other accredited investors (the "1996 Investors"). The
securities purchase agreement, as amended (the "1996 Purchase Agreement"),
provided for the issuance and sale of senior subordinated notes (the "12% Senior
Subordinated Notes") in an aggregate principal amount not to exceed $15,000,000,
and shares of
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Class B common stock and Class C common stock (Note 5). The 12% Senior
Subordinated Notes bore interest at the rate of 12% per annum during the first
year outstanding and 16% per annum thereafter. Interest was payable quarterly in
arrears commencing on June 30, 1996.
In connection with the 1996 Purchase Agreement, the Company simultaneously
entered into a registration rights agreement, security agreement and security
holders agreement granting the 1996 Investors certain registration rights, a
secondary security interest in certain of the PCS Licenses, restricting certain
stock transfers and other transactions to ensure compliance with FCC rules.
The proceeds from the 1996 Purchase Agreement were allocated between the
12% Senior Subordinated Notes, Class B common stock and Class C common stock
based on the relative fair market value of each security, resulting in an
original issuance discount of approximately $1.9 million on the 12% Senior
Subordinated Notes. This discount was being amortized using the effective
interest method over the term of the loan resulting in an effective interest
rate of 17.8%.
In April 1998, the Company amended and restated the 1996 Purchase
Agreement. The amended and restated purchase agreement (the "Amended and
Restated Purchase Agreement"), resulted in the exchange of the 12% Senior
Subordinated Notes in the amount of $18.2 million, which includes accrued
interest of $3.2 million, for 10% senior subordinated unsecured notes in the
same amount ("10% Senior Subordinated Unsecured Notes"). In addition, the
Company issued 2,000 shares of redeemable Series A preferred stock to the 1996
Investors (Note 5). The 10% Senior Subordinated Unsecured Notes bear interest at
10% per annum. Interest is payable quarterly at the option of the Company. To
the extent interest is not paid, such interest shall compound quarterly and be
added to the principal balance of the 10% Senior Subordinated Unsecured Notes.
The 10% Senior Subordinated Unsecured Notes, along with accrued and unpaid
interest, are due and payable on the later of their tenth anniversary or the
date which is six months after the maturity of senior debt, as defined. Under
the terms of the Qualcomm Credit Facility, the Company is prohibited from paying
any interest on subordinated indebtedness.
The 10% Senior Subordinated Unsecured Notes and the Series A preferred
stock were each recorded at their respective fair value resulting in an original
issuance discount of approximately $2.7 million and $678,000, respectively. The
discount on the 10% Senior Subordinated Unsecured Notes is being amortized to
interest expense under the effective interest method over the term of the loan
resulting in an effective interest rate of 11.6%. The discount on the Series A
preferred stock is being accreted over the term of the preferred stock. The
unamortized discount on the 10% Senior Subordinated Unsecured Notes and the
Series A preferred stock at December 31, 1999 was approximately $2.7 million and
$594,000 million, respectively.
NOTES PAYABLE TO RELATED PARTIES
The Company has a note payable to the current holders of the shares of
Class A common stock (note payable to related parties) in the amount of $2.0
million plus accrued interest. The note payable to related parties bears
interest at 10% per annum. The principal and interest balances are payable
following full repayment of all senior debt of the Company, including amounts
owed under the Qualcomm Credit Facility and 10% Senior Subordinated Unsecured
Notes.
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. STOCKHOLDERS' EQUITY
SERIES A PREFERRED STOCK
In connection with the Amended and Restated Purchase Agreement, the Company
issued 2,000 shares of non-voting Series A preferred stock to the 1996
Investors. The holders of the outstanding shares of Series A preferred stock
shall be entitled to receive fully cumulative dividends, as may be declared by
the Company's Board of Directors, at a rate per share of $80 per annum. Declared
but unpaid dividends accrue interest from the applicable payment date at a rate
of 8% per annum. No dividends have been declared on the preferred stock.
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the preferred stockholders are entitled to receive an amount in
cash equal to the aggregate liquidation preference of $1,000 per share plus all
accumulated and unpaid dividends to the date fixed for liquidation.
The Company has the right to redeem, in whole or in part, the Series A
preferred stock outstanding at any time at a price per share equal to the
aggregate liquidation preference plus all accumulated and unpaid dividends to
the date of redemption. The Series A preferred stock is subject to mandatory
redemption on the earlier of a change in control, as defined, or June 30, 2008.
The sale of substantially all of the assets of the Company pursuant to the Asset
Purchase Agreement constitutes a change in control. Therefore, the Series A
preferred stock is reflected at its redemption price at each balance sheet date.
COMMON STOCK
The authorized capital stock of the Company consists of three voting
classes of common stock: Class A common stock, Class B common stock and Class C
common stock. The Class A common stock is held solely by the Qualifying
Investors in the Company's Control Group under FCC rules. All economic, voting
and conversion rights of the Company's capital stock, stock options and warrants
as described herein are subject to legal and administrative requirements of the
FCC.
So long as any shares of Class A common stock are outstanding, except as
provided by law, the holders of Class A common stock are the only holders of
common stock entitled to vote on matters submitted to a vote of the
stockholders, and such vote will be by a simple majority in number of votes cast
by the holders of Class A common stock. In addition, so long as any shares of
Class A common stock are outstanding, the affirmative vote of a majority of the
holders of Class A common stock, voting separately as a class, and a majority of
the holders of Class B common stock and Class C common stock, voting together as
a single class, will be required to approve certain specified matters other than
the election of directors. At such time as no shares of Class A common stock are
outstanding, each holder of Class B common stock will be entitled to one vote
for each share of Class B common stock held on all matters submitted to the vote
of the Company's stockholders.
The holders of Class A common stock have the right to elect a majority of
the Company's Board of Directors. The holders of the Class C common stock have
the right to elect one director. The holders of the Class B common stock have
the right to elect the remaining members of the Company's Board of Directors.
The number of members of the Company's Board of Directors will at all times
consist of the minimum number necessary to permit the holders of Class B common
stock to elect at least one director.
In accordance with FCC regulations and the Company's certificate of
incorporation (Certificate of Incorporation), holders of Class A common stock
and Class C common stock will hold a 15 percent and 10 percent interest,
respectively, in the Company' equity on a fully diluted basis, in compliance
with
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
applicable FCC regulations. In the event that the Company issues additional
shares of Class B common stock or other equity securities which would otherwise
dilute the interest of holders of Class A common stock or Class C common stock
below the applicable required percentage ownership interest or otherwise result
in a position inconsistent with FCC policy (Adverse FCC Consequence), the
Certificate of Incorporation requires the Company to issue control group
warrants to holders of Class A common stock or Class C common stock, as the case
may be, entitling such holders to purchase such number of shares of Class B
common stock at an exercise price equal to the fair market value of such Class B
common stock at the time of issuance of such warrants so that such holders of
Class A common stock or Class C common stock, as the case may be, will maintain
(after the issuance of such additional securities) the applicable required
percentage ownership interest or so that such Adverse FCC Consequence will not
occur. Under current FCC rules, Additional Control Group Shares and Control
Group Warrants will only be issued until the earlier of (a) September 17, 2006,
in the case of shares or warrants issued to holders of Class A common stock, and
September 17, 1999, in the case of shares or warrants issued to holders of Class
C common stock, and (b) the date on which such termination would not otherwise
result in an Adverse FCC Consequence. The Certificate of Incorporation provides
that the exercise price, the expiration date and any other terms of any such
warrants issued to members of the Control Group may be adjusted by the Company's
board of directors as necessary to comply with FCC rules. The FCC required
percentage ownership interest is (a) for holders of Class A common stock, 15
percent for the initial three-year period following the License Grant Date and
10 percent for the next seven-year period, and (b) for holders of Class C common
stock, 10 percent for the initial three-year period following the License Grant
Date and zero thereafter.
In certain circumstances, shares of Class A common stock and Class C common
stock outstanding are convertible into shares of Class B common stock on a
share-for-share basis. The Company's Certificate of Incorporation requires the
conversion of shares of Class A common stock and Class C common stock into
shares of Class B common stock on the day following the first day that any such
conversion would not result in an Adverse FCC Consequence. Under FCC rules and
regulations currently in effect, on September 17, 1999, one-third of the
outstanding shares of Class A common stock and all the shares of Class C common
stock may be converted into shares of Class B common stock and the remaining
shares of Class A common stock and Class C common stock may be converted into
shares of Class B common stock on September 17, 2006. Upon any such partial
mandatory conversion of Class A common stock (or Class C common stock) into
shares of Class B common stock, shares will be converted on a pro rata basis
among all holders of Class A common stock (or, if applicable, Class C common
stock).
Holders of common stock are subject to certain restrictions on ownership
pursuant to the terms of the Company's Certificate of Incorporation to ensure
compliance with certain regulatory requirements regarding ownership of C Block
licenses. Under the Company's Certificate of Incorporation, if any person or
entity holds shares of capital stock of the Company or is otherwise attributed
with ownership of any shares and such ownership is likely, in the judgment of
the Board of Directors, to cause an Adverse FCC Consequence or otherwise violate
the rules and regulations of the FCC, the Company may (a) require such person or
entity to divest itself of such shares in a transaction that does not result in
such an Adverse FCC Consequence or FCC rule violation or (b) redeem such
holders' shares to the extent necessary to prevent such Adverse FCC Consequence
or FCC rule violation for a redemption price equal to the lower of the fair
market value of such shares (as determined in good faith by the Company's Board
of Directors) and such holders' purchase price for such shares.
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1998, pursuant to a securities purchase agreement (the SBC Purchase
Agreement), SBC Wireless purchased 5,617 shares of Class B common stock of the
Company for $5.0 million. Pursuant to the SBC Purchase Agreement, SBC Wireless
has agreed to use good faith efforts to negotiate mutual roaming arrangements
with Chase Telecommunications Holdings and to provide Chase Telecommunications
Holdings, free of charge, strategic and operational reviews, assistance with
annual budget analysis and consultation with key management regarding customer
service, marketing, distribution strategies and human resources. SBC Wireless'
obligation to provide such strategic services shall continue until the earlier
to occur of (a) November 2000 or (b) such time as SBC Wireless holds less than a
2 percent interest in the Company.
Upon a change in control of the Company, as defined in the 1996 Purchase
Agreement (Note 4), the 1996 Investors shall have the right to require the
Company to redeem any or all of the Class B common stock and Class C common
stock issued to the 1996 Investors. Accordingly, such shares are not classified
as a component of stockholders' deficit in the accompanying balance sheets. The
shares of Class B common stock subject to this put feature are included in the
caption "Class B common stock (with put feature)" in the accompanying balance
sheets. The redemption price for the Class B common stock (with put feature) and
Class C common stock is the greater of (a) the fair market value at the time of
the put relating to the Class B common stock and the Class B common stock into
which the shares of Class C common stock are convertible, (b) the change of
control value of the Class B common stock and the Class B common stock into
which such shares of Class C common stock are convertible determined by applying
to such Class B common stock the valuation derived from the purchase price paid
by the acquiring person(s) in the change of control and (c) $4.5 million (the
amount equal to the product of .30 times the aggregate principal amount of the
12% Senior Subordinated Notes purchased). The sale of substantially all of the
assets of the Company pursuant to the Asset Purchase Agreement constitutes a
change in control. Therefore, the Class B common stock (with put feature) and
Class C common stock are reflected at their applicable redemption prices at each
balance sheet date.
In December 1996, pursuant to a stock purchase agreement, Qualcomm
purchased 374,374 shares of Class B common stock of the Company for $4.0
million. In connection with the investment, Qualcomm was granted certain
anti-dilution, registration and redemption rights and the right of first refusal
under certain circumstances. In September 1998, Qualcomm distributed to Leap its
equity investment in the Company, which was in turn contributed to Cricket
Communications. Under the terms of the stock purchase agreement, Leap had the
option to require the Company, under certain circumstances, to redeem the shares
of Class B common stock held by Leap at a defined redemption price. The shares
of Class B common stock subject to this redemption feature were included in the
caption "Class B common stock (with put feature)" at their redemption value in
the Company's balance sheet at December 31, 1997. During 1998, the put feature
associated with the Class B common stock (with put feature) terminated. As such,
the amount associated with these securities was reclassified to the
stockholders' deficit section in the accompanying balance sheets.
WARRANTS
In connection with the Qualcomm Credit Facility, Qualcomm received warrants
to purchase additional shares of Class B common stock representing a 9% equity
interest in the Company at a nominal price. In September 1998, a portion of
these warrants was assigned to Leap. Pursuant to the Asset Purchase Agreement,
both Leap and Qualcomm agreed to relinquish their warrants at the closing of the
purchase. Additionally, at closing, Qualcomm agreed to relinquish its shares of
Class B common
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock for no consideration. The warrants were recorded at zero in the
accompanying financial statements as the value as of the date of issuance was
deemed to be de minimis.
In November 1995, the Company issued a warrant to a stockholder for the
purchase of 980 shares of Class B common stock at an exercise price of $122.50
per share. The warrant expires on the fifth anniversary of the date of issuance.
The warrant was recorded at zero in the accompanying financial statements as the
value at of the date of issuance was deemed to be de minimis.
NOTE 6. BENEFIT PLAN
In November 1996, the Company adopted an incentive compensation plan (the
"1996 Long-Term Incentive Plan") which provides the ability to grant
nonqualified stock options, restricted stock, incentive stock options, stock
appreciation rights and other long-term incentive awards. The 1996 Long-Term
Incentive Plan is administered by the Board of Directors of the Company, which
has the authority to determine the option recipients, the number of shares
subject to each option grant, the term of the grants, the exercise price and the
vesting schedule.
Stock option activity during the year ended December 31, 1998 includes the
grant of options to purchase 3,754 shares of Class B common stock at an exercise
price of $200 per share to three employees of the Company and includes the grant
of options to purchase 520 shares of Class B common stock at an exercise price
of $890 per share to six employees of the Company. The options granted to these
individuals vest over a period of two years. Of those options granted, no
options were canceled during 1998 and 1,564 options were exercisable at December
31, 1998. During the year ended December 31, 1999, all of the outstanding
options were cancelled in conjunction with the Asset Purchase Agreement.
The Company measures compensation expense for its stock-based employee
compensation plan using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been applied in
measuring compensation expense. Had compensation cost for the Company's stock-
based compensation plans been determined based on the fair value method at the
grant dates for awards under this plan, the effect on the Company's net loss for
the year ended December 31, 1998 would have been de minimis.
The weighted average fair value of options granted during the year ended
December 31, 1998 was approximately $91.54 per option. The fair value of each
option was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants during
1998: dividend yield of 0.0%; volatility of 0.0%; risk-free interest rate of
5.56%; and an expected life of seven years.
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
The components of the Company's deferred tax assets (liabilities) are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Capitalized start-up costs for tax purposes............. $ 3,449 $ 4,369
Organizational costs.................................... (38)
Capitalized network development and license cost........ 66 70
Accruals and reserves................................... 44 156
Deferred network amortization........................... 5,125 5,183
Depreciation............................................ 5,134 (108)
Net operating loss carryforward......................... 26,091 13,148
-------- --------
Total deferred tax assets............................ 39,909 22,780
Less -- Valuation allowance............................... (39,909) (22,780)
-------- --------
Deferred tax assets, net............................. $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the realization of these assets, a
valuation allowance has been provided for the full amount of the deferred tax
assets. As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $68.7 million, which can be used to offset
taxable income in future years. The federal net operating loss will begin to
expire in 2011. The state net operating loss will begin to expire in 2018. A
change in control, as defined by federal income tax regulations, could
significantly limit the Company' ability to utilize its carryforwards.
A reconciliation of the income tax provision (benefit) to the amount
computed by applying the statutory federal income tax rate to income before
income tax provision is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts computed at statutory federal rate....... $(15,313) $(9,012) $(7,430)
State income taxes, net of federal benefit..... (1,816) (1,188) (907)
Increase in valuation allowance................ 17,129 10,200 8,337
Other..........................................
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>
NOTE 8. RELATED PARTY TRANSACTIONS
The president and chairman of the Board of Directors of the Company is a
stockholder and member of the Board of Directors of a company from which the
Company subleases certain office space. During the years ended December 31,
1999, 1998 and 1997, rental payments totaled approximately $21,000 $19,000 and
$22,000 respectively.
The Company paid a holder of Class A common stock approximately $0,
$137,000 and $78,000 during the years ended December 31, 1999, 1998 and 1997,
respectively, for consulting services.
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CHASE TELECOMMUNICATIONS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additionally, the Company paid a holder of Class B common stock approximately
$200,000 during the year ended December 31, 1998, for consulting services.
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASES
The aggregate amount charged to expense for the years ended December 31,
1999, 1998 and 1997, pursuant to non-cancelable and month-to-month operating
leases totaled approximately $958,000, $373,000 and $52,000, respectively.
The Company has entered into various leases for its offices, cell-site
facilities and equipment used in its operations. Future minimum lease payments
relating to these non-cancelable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
For the year ended December 31, 1999
2000.................................................... $1,497
2001.................................................... 1,542
2002.................................................... 1,588
2003.................................................... 1,635
2004 and thereafter..................................... 3,420
------
$9,682
======
</TABLE>
401(K) PLAN
Effective April 1, 1998, the Company established a defined contribution
401(k) plan. The Company's matching contribution is discretionary in its
entirety and is determined on a quarterly basis by the Company's board of
directors. The Company can also make additional discretionary profit-sharing
contributions. To date, the Company has not made any matching contributions.
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<PAGE> 297
[LEAP WIRELESS LOGO]
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL [ ], ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 298
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Officers and directors of Leap are covered by certain provisions of the
DGCL, the charter, the bylaws and insurance policies which serve to limit, and,
in certain instances, to indemnify them against, certain liabilities which they
may incur in such capacities. None of these provisions would have retroactive
effect for periods before the distribution of Leap, and Leap is not aware of any
claim or proceeding in the last three years, or any threatened claim, which
would have been or would be covered by these provisions. These various
provisions are described below.
Elimination of Liability in Certain Circumstances. In June 1986, Delaware
enacted legislation which authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. This duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all significant information
reasonably available to them. Absent the limitations now authorized by such
legislation, directors are accountable to corporations and their stockholders
for monetary damages for conduct constituting negligence or gross negligence in
the exercise of their duty of care. Although the statute does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The charter limits the
liability of Directors to Leap or its stockholders (in their capacity as
directors but not in their capacity as officers) to the fullest extent permitted
by such legislation. Specifically, the directors of Leap will not be personally
liable for monetary damages for breach of a director's fiduciary duty as
director, except for liability: (1) for any breach of the director's duty of
loyalty to Leap or its stockholders; (2) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (3) for
unlawful payments of dividends or unlawful share repurchases or redemptions as
provided in Section 174 of the DGCL; or (4) for any transaction from which the
director derived an improper personal benefit.
Indemnification and Insurance. As a Delaware corporation, Leap has the
power, under specified circumstances generally requiring the director or officer
to act in good faith and in a manner he reasonably believes to be in or not
opposed to Leap's best interests, to indemnify its directors and officers in
connection with actions, suits or proceedings brought against them by a third
party or in the name of Leap, by reason of the fact that they were or are such
directors or officers, against expenses, judgments, fines and amounts paid in
settlement in connection with any such action, suit or proceeding. The bylaws
generally provide for mandatory indemnification of Leap's directors and officers
to the full extent provided by Delaware corporate law. In addition, Leap has
entered into indemnification agreements with its directors and officers which
generally provide for mandatory indemnification under circumstances for which
indemnification would otherwise be discretionary under Delaware law.
Leap intends to purchase and maintain insurance on behalf of any person who
is or was a director or officer of Leap, or is or was a director or officer of
Leap serving at the request of Leap as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not Leap
would have the power or obligation to indemnify him against such liability under
the provisions of the bylaws.
II-1
<PAGE> 299
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
1.1(1) Placement Agreement, dated as of February 16, 2000, by and
among the Registrant, Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., ABN AMRO Incorporated and Credit Suisse
First Boston Corporation.
3.1(2) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(2) Amended and Restated Bylaws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Registrant.
4.1(1) Trust Indenture, dated as of February 23, 2000, by and among
the Registrant, Cricket Communications Holdings, Inc. and
State Street Bank and Trust Company (including Forms of
Notes).
4.2(1) Pledge Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company.
4.3(1) Registration Rights Agreement, dated February 23, 2000, by
and among the Registrant, Cricket Communications Holdings,
Inc. and Morgan Stanley & Co. Incorporated.
4.4(1) Warrant Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company (including Form of Warrant Certificate).
4.5(1) Warrant Registration Rights Agreement, dated as of February
23, 2000, by and between the Registrant and Morgan Stanley &
Co. Incorporated.
5.1* Opinion of Latham & Watkins as to validity of the notes.
10.1(6) Separation and Distribution Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant.
10.1.1(5) First Amendment to Separation and Distribution Agreement,
dated as of August 6, 1999, between the Registrant and
Qualcomm.
10.2(6) Credit Agreement, dated as of September 23, 1998, between
Qualcomm and the Registrant.
10.3(6) Tax Matters Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.4(6) Interim Services Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.5(6) Master Agreement Regarding Equipment Acquisition, dated as
of September 23, 1998, between Qualcomm and the Registrant.
10.5.1(5) First Amendment to Master Agreement Regarding Equipment
Procurement, dated as of August 6, 1999, between the
Registrant and Qualcomm.
10.6(6) Employee Benefits Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.7(6) Conversion Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.8(6) Assignment and Assumption Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant.
10.9(7) 1998 Stock Option Plan, as amended through April 13, 1999.
10.10(2) Form of non-qualified/incentive stock option under the 1998
Stock Option Plan.
10.11(2) Form of non-qualified stock option under the 1998 Stock
Option Plan granted to Qualcomm option holders in connection
with the distribution of the Registrant's common stock.
</TABLE>
II-2
<PAGE> 300
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.12(2) Form of the Registrant's 1998 Non-Employee Directors' Stock
Option Plan.
10.13(2) Form of non-qualified stock option under the 1998
Non-Employee Directors' Stock Option Plan.
10.14(2) Form of the Registrant's Employee Stock Purchase Plan.
10.15(2) Assignment and Assumption of Lease dated August 11, 1998
between Qualcomm and Vaxa International, Inc.
10.16(2) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers.
10.17(8) Loan Agreement, dated as of September 28, 1998, between
Pegaso Comunicaciones y Servicios, S.A. de C.V. and the
Registrant.
10.18(8) Promissory Note, executed September 25, 1998, payable to the
Registrant by Pegaso Comunicaciones y Servicios, S.A. de
C.V.
10.19(8) Pledge Agreement, dated September 28, 1998, by and among the
Guarantors, the Issuers and the Registrant.
10.20(9) Asset Purchase Agreement, dated December 24, 1998, by and
among Chase Telecommunications Holdings, Inc., Anthony
Chase, Richard McDugald and the Registrant.
10.21.1(10) Stock Purchase Agreement, dated April 12, 1999, by and among
Inversiones Leap Chile S.A., Telex -- Chile S.A., and
Chilesat S.A.
10.21.2(7) Novation and Assumption of Payment Obligation Agreement,
dated May 11, 1999, by and among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A. and Chilesat S.A. (In
Spanish and accompanied by a translation in English).
10.22(5) Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.22.1(1) Amendment No. 1 to 1999 Stock Option Plan of Cricket
Communications, Inc. (now known as Cricket Communications
Holdings, Inc.).
10.23(5) Form of non-qualified/incentive stock option under the
Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.24(5) Employment offer letter to Susan G. Swenson from Registrant,
dated July 9, 1999.
10.25(11) System Equipment Purchase Agreement, dated September 20,
1999, by and between Cricket Wireless Communications, Inc.
and Lucent Technologies, Inc. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 406
under the Securities Act of 1933 and Rule 24b-2 under the
Securities Exchange Act of 1934.
10.26(11) Credit Agreement, dated as of September 29, 1999, among
Cricket Communications, Inc., Cricket Wireless
Communications, Inc., the Lenders party thereto, and Lucent
Technologies, Inc., as Administrative Agent. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933 and Rule 24b-2
under the Securities Exchange Act of 1934.
10.26.1(11) Exhibit A -- Form of Borrower Pledge Agreement.
10.26.2(11) Exhibit B -- Form of Collateral Agency and Intercreditor
Agreement.
10.26.3(11) Exhibit C -- Form of Guarantee Agreement.
10.26.4(11) Exhibit D -- Form of Indemnity, Subrogation and Contribution
Agreement.
10.26.5(11) Exhibit E -- Form of Parent Agreement.
10.26.6(11) Exhibit F -- Form of Parent Pledge Agreement.
10.26.7(11) Exhibit G -- Form of Perfection Certificate.
</TABLE>
II-3
<PAGE> 301
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.26.8(11) Exhibit H -- Form of Security Agreement.
10.26.9(11) Exhibit I -- Form of Subordination Agreement.
10.26.10(1) First Amendment, dated as of November 24, 1999, to the
Credit Agreement, dated as of September 20, 1999, among
Cricket Communications, Inc., Cricket Wireless
Communications, Inc., and Lucent Technologies, Inc., as
Administrative Agent. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.26.11(1) Second Amendment, dated as of January 27, 2000, to the
Credit Agreement, dated as of September 20, 1999, among
Cricket Communications Holdings, Inc., Cricket
Communications, Inc., the lenders party thereto and Lucent
Technologies, Inc., as Administrative Agent. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.26.12(1) First Amendment dated as of January 27, 2000, to the Parent
Agreement, dated as of September 17, 1999, between the
Registrant and Lucent Technologies, Inc., as Administrative
Agent.
10.27(12) Memorandum of Agreement, dated September 20 1999, by and
between Ericsson Wireless Communications Inc., the
Registrant and Cricket Wireless Communications, Inc.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and
Rule 24b-2 under the Securities Exchange Act of 1934.
10.28(11) Second Amended and Restated Deferred Payment Agreement,
dated October 12, 1999, among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A., and Qualcomm
Incorporated, as Vendor, Administrative Agent and Collateral
Agent Subsidiaries of the Registrant.
10.29(13) Executive Officer Deferred Stock Plan.
10.30(14) License Purchase Agreement, dated September 11, 1998, by and
between the Registrant and Airgate Wireless, L.L.C.
10.31(14) First Amendment to License Purchase Agreement, dated
December 17, 1999, by and between Cricket Holdings, Inc. and
Airgate Wireless, L.L.C.
10.32(14) Agreement for Purchase and Sale of Licenses, dated January
7, 2000, by and between Radiofone PCS, L.L.C. and the
Registrant.
12.1 Statement of Computation of Ratios of Earnings to Fixed
Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Price Waterhouse, independent accountants.
23.3 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.4 Consent of PricewaterhouseCoopers, independent accountants.
23.5 Consent of Latham & Watkins. Reference is made to Exhibit
5.1.
24.1 Power of Attorney (included in signature page).
25.1 Form T-1 Statement of Eligibility of State Street Bank and
Trust Company to act as Trustee under the Indenture.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees Letter.
</TABLE>
II-4
<PAGE> 302
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
99.4 Form of Client Letter.
</TABLE>
- -------------------------
* To be filed by amendment.
(1) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 29, 2000, as filed with the SEC on April 14, 2000, and
incorporated herein by reference.
(2) Filed as an exhibit to Leap's Registration Statement on Form 10, as amended
(File No. 0-29752), and incorporated herein by reference.
(3) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
14, 1998, and incorporated herein by reference.
(4) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1999, as filed with the SEC on April 14, 1999, and
incorporated herein by reference.
(5) Filed as an exhibit to Leap's Post-Effective Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-64459) dated August 10,
1999, and incorporated herein by reference.
(6) Filed as an exhibit to Leap's Amendment No. 1 to Registration Statement on
Form S-1 (File No. 333-64459) dated October 13, 1998, and incorporated
herein by reference.
(7) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1999, as filed with the SEC on July 15, 1999, and
incorporated herein by reference.
(8) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal
year ended August 31, 1998, as filed with the SEC on November 30, 1998, as
amended, and incorporated herein by reference.
(9) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1998, as filed with the SEC on January 14, 1999, and
incorporated herein by reference.
(10) Filed as an exhibit to Leap's Current Report on Form 8-K dated May 4, 1999,
and incorporated herein by reference.
(11) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal
year ended August 31, 1999, as filed with the SEC on October 20, 1999, as
amended, and incorporated herein by reference.
(12) Filed as an exhibit to Leap's Amendment No. 1 to Annual Report on Form
10-K/A for the fiscal year ended August 31, 1999, as filed with the SEC on
December 13, 1999, and incorporated herein by reference.
(13) Filed as an exhibit to Leap's Registration Statement on Form S-8 (File No.
333-94389) dated January 11, 2000, and incorporated herein by reference.
(14) Filed as an exhibit to Leap's Registration Statement on Form S-3 (File No.
333-93073) dated February 16, 2000, and incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 303
(b)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE> 304
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, County of San Diego, State of California, on May 16, 2000.
By: /s/ THOMAS D. WILLARDSON
------------------------------------
Thomas D. Willardson
Senior Vice President, Finance and
Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Harvey P. White and James E. Hoffmann and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments, exhibits thereto and other documents in connection
therewith) to this Registration Statement and any subsequent registration
statement filed by the registrant pursuant to Rule 462(b) of the Securities Act
of 1933, as amended, which relates to this Registration Statement, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Under the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HARVEY P. WHITE Chief Executive Officer and May 16, 2000
- ----------------------------------------------------- Director
Harvey P. White
/s/ THOMAS D. WILLARDSON Senior Vice President, Finance May 16, 2000
- ----------------------------------------------------- and Treasurer
Thomas D. Willardson
/s/ THOMAS J. BERNARD Vice Chairman, President -- May 16, 2000
- ----------------------------------------------------- International Business Division
Thomas J. Bernard and Director
/s/ SUSAN G. SWENSON President, Chief Operating May 16, 2000
- ----------------------------------------------------- Officer and Director
Susan G. Swenson
/s/ ALEJANDRO BURILLO AZCARRAGA Director May 16, 2000
- -----------------------------------------------------
Alejandro Burillo Azcarraga
</TABLE>
II-7
<PAGE> 305
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT C. DYNES Director May 16, 2000
- -----------------------------------------------------
Robert C. Dynes
/s/ SCOT B. JARVIS Director May 16, 2000
- -----------------------------------------------------
Scot B. Jarvis
/s/ JOHN J. MOORES Director May 16, 2000
- -----------------------------------------------------
John J. Moores
/s/ MICHAEL B. TARGOFF Director May 16, 2000
- -----------------------------------------------------
Michael B. Targoff
/s/ JEFFREY P. WILLIAMS Director May 16, 2000
- -----------------------------------------------------
Jeffrey P. Williams
</TABLE>
II-8
<PAGE> 306
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
1.1(1) Placement Agreement, dated as of February 16, 2000, by and
among the Registrant, Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., ABN AMRO Incorporated and Credit Suisse
First Boston Corporation.
3.1(2) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(2) Amended and Restated Bylaws of the Registrant.
3.3(3) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Registrant.
4.1(1) Trust Indenture, dated as of February 23, 2000, by and among
the Registrant, Cricket Communications Holdings, Inc. and
State Street Bank and Trust Company (including Forms of
Notes).
4.2(1) Pledge Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company.
4.3(1) Registration Rights Agreement, dated February 23, 2000, by
and among the Registrant, Cricket Communications Holdings,
Inc. and Morgan Stanley & Co. Incorporated.
4.4(1) Warrant Agreement, dated as of February 23, 2000, by and
between the Registrant and State Street Bank and Trust
Company (including Form of Warrant Certificate).
4.5(1) Warrant Registration Rights Agreement, dated as of February
23, 2000, by and between the Registrant and Morgan Stanley &
Co. Incorporated.
5.1* Opinion of Latham & Watkins as to validity of the notes.
10.1(6) Separation and Distribution Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant.
10.1.1(5) First Amendment to Separation and Distribution Agreement,
dated as of August 6, 1999, between the Registrant and
Qualcomm.
10.2(6) Credit Agreement, dated as of September 23, 1998, between
Qualcomm and the Registrant.
10.3(6) Tax Matters Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.4(6) Interim Services Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.5(6) Master Agreement Regarding Equipment Acquisition, dated as
of September 23, 1998, between Qualcomm and the Registrant.
10.5.1(5) First Amendment to Master Agreement Regarding Equipment
Procurement, dated as of August 6, 1999, between the
Registrant and Qualcomm.
10.6(6) Employee Benefits Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.7(6) Conversion Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant.
10.8(6) Assignment and Assumption Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant.
10.9(7) 1998 Stock Option Plan, as amended through April 13, 1999.
10.10(2) Form of non-qualified/incentive stock option under the 1998
Stock Option Plan.
10.11(2) Form of non-qualified stock option under the 1998 Stock
Option Plan granted to Qualcomm option holders in connection
with the distribution of the Registrant's common stock.
10.12(2) Form of the Registrant's 1998 Non-Employee Directors' Stock
Option Plan.
</TABLE>
<PAGE> 307
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.13(2) Form of non-qualified stock option under the 1998
Non-Employee Directors' Stock Option Plan.
10.14(2) Form of the Registrant's Employee Stock Purchase Plan.
10.15(2) Assignment and Assumption of Lease dated August 11, 1998
between Qualcomm and Vaxa International, Inc.
10.16(2) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers.
10.17(8) Loan Agreement, dated as of September 28, 1998, between
Pegaso Comunicaciones y Servicios, S.A. de C.V. and the
Registrant.
10.18(8) Promissory Note, executed September 25, 1998, payable to the
Registrant by Pegaso Comunicaciones y Servicios, S.A. de
C.V.
10.19(8) Pledge Agreement, dated September 28, 1998, by and among the
Guarantors, the Issuers and the Registrant.
10.20(9) Asset Purchase Agreement, dated December 24, 1998, by and
among Chase Telecommunications Holdings, Inc., Anthony
Chase, Richard McDugald and the Registrant.
10.21.1(10) Stock Purchase Agreement, dated April 12, 1999, by and among
Inversiones Leap Chile S.A., Telex -- Chile S.A., and
Chilesat S.A.
10.21.2(7) Novation and Assumption of Payment Obligation Agreement,
dated May 11, 1999, by and among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A. and Chilesat S.A. (In
Spanish and accompanied by a translation in English).
10.22(5) Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.22.1(1) Amendment No. 1 to 1999 Stock Option Plan of Cricket
Communications, Inc. (now known as Cricket Communications
Holdings, Inc.).
10.23(5) Form of non-qualified/incentive stock option under the
Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.).
10.24(5) Employment offer letter to Susan G. Swenson from Registrant,
dated July 9, 1999.
10.25(11) System Equipment Purchase Agreement, dated September 20,
1999, by and between Cricket Wireless Communications, Inc.
and Lucent Technologies, Inc. Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 406
under the Securities Act of 1933 and Rule 24b-2 under the
Securities Exchange Act of 1934.
10.26(11) Credit Agreement, dated as of September 29, 1999, among
Cricket Communications, Inc., Cricket Wireless
Communications, Inc., the Lenders party thereto, and Lucent
Technologies, Inc., as Administrative Agent. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933 and Rule 24b-2
under the Securities Exchange Act of 1934.
10.26.1(11) Exhibit A -- Form of Borrower Pledge Agreement.
10.26.2(11) Exhibit B -- Form of Collateral Agency and Intercreditor
Agreement.
10.26.3(11) Exhibit C -- Form of Guarantee Agreement.
10.26.4(11) Exhibit D -- Form of Indemnity, Subrogation and Contribution
Agreement.
10.26.5(11) Exhibit E -- Form of Parent Agreement.
10.26.6(11) Exhibit F -- Form of Parent Pledge Agreement.
10.26.7(11) Exhibit G -- Form of Perfection Certificate.
10.26.8(11) Exhibit H -- Form of Security Agreement.
10.26.9(11) Exhibit I -- Form of Subordination Agreement.
</TABLE>
<PAGE> 308
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.26.10(1) First Amendment, dated as of November 24, 1999, to the
Credit Agreement, dated as of September 20, 1999, among
Cricket Communications, Inc., Cricket Wireless
Communications, Inc., and Lucent Technologies, Inc., as
Administrative Agent. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
10.26.11(1) Second Amendment, dated as of January 27, 2000, to the
Credit Agreement, dated as of September 20, 1999, among
Cricket Communications Holdings, Inc., Cricket
Communications, Inc., the lenders party thereto and Lucent
Technologies, Inc., as Administrative Agent. Portions of
this exhibit (indicated by asterisks) have been omitted
pursuant to a request for confidential treatment pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934.
10.26.12(1) First Amendment dated as of January 27, 2000, to the Parent
Agreement, dated as of September 17, 1999, between the
Registrant and Lucent Technologies, Inc., as Administrative
Agent.
10.27(12) Memorandum of Agreement, dated September 20 1999, by and
between Ericsson Wireless Communications Inc., the
Registrant and Cricket Wireless Communications, Inc.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and
Rule 24b-2 under the Securities Exchange Act of 1934.
10.28(11) Second Amended and Restated Deferred Payment Agreement,
dated October 12, 1999, among Chilesat Telefonia Personal
S.A., Inversiones Leap Chile S.A., and Qualcomm
Incorporated, as Vendor, Administrative Agent and Collateral
Agent Subsidiaries of the Registrant.
10.29(13) Executive Officer Deferred Stock Plan.
10.30(14) License Purchase Agreement, dated September 11, 1998, by and
between the Registrant and Airgate Wireless, L.L.C.
10.31(14) First Amendment to License Purchase Agreement, dated
December 17, 1999, by and between Cricket Holdings, Inc. and
Airgate Wireless, L.L.C.
10.32(14) Agreement for Purchase and Sale of Licenses, dated January
7, 2000, by and between Radiofone PCS, L.L.C. and the
Registrant.
12.1 Statement of Computation of Ratios of Earnings to Fixed
Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of Price Waterhouse, independent accountants.
23.3 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.4 Consent of PricewaterhouseCoopers, independent accountants.
23.5 Consent of Latham & Watkins. Reference is made to Exhibit
5.1.
24.1 Power of Attorney (included in signature page).
25.1 Form T-1 Statement of Eligibility of State Street Bank and
Trust Company to act as Trustee under the Indenture.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Securities Dealers, Commercial Banks, Trust
Companies and Other Nominees Letter.
</TABLE>
<PAGE> 309
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
99.4 Form of Client Letter.
</TABLE>
- -------------------------
* To be filed by amendment.
(1) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 29, 2000, as filed with the SEC on April 14, 2000, and
incorporated herein by reference.
(2) Filed as an exhibit to Leap's Registration Statement on Form 10, as amended
(File No. 0-29752), and incorporated herein by reference.
(3) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
14, 1998, and incorporated herein by reference.
(4) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1999, as filed with the SEC on April 14, 1999, and
incorporated herein by reference.
(5) Filed as an exhibit to Leap's Post-Effective Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-64459) dated August 10,
1999, and incorporated herein by reference.
(6) Filed as an exhibit to Leap's Amendment No. 1 to Registration Statement on
Form S-1 (File No. 333-64459) dated October 13, 1998, and incorporated
herein by reference.
(7) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1999, as filed with the SEC on July 15, 1999, and
incorporated herein by reference.
(8) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal
year ended August 31, 1998, as filed with the SEC on November 30, 1998, as
amended, and incorporated herein by reference.
(9) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1998, as filed with the SEC on January 14, 1999, and
incorporated herein by reference.
(10) Filed as an exhibit to Leap's Current Report on Form 8-K dated May 4, 1999,
and incorporated herein by reference.
(11) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal
year ended August 31, 1999, as filed with the SEC on October 20, 1999, as
amended, and incorporated herein by reference.
(12) Filed as an exhibit to Leap's Amendment No. 1 to Annual Report on Form
10-K/A for the fiscal year ended August 31, 1999, as filed with the SEC on
December 13, 1999, and incorporated herein by reference.
(13) Filed as an exhibit to Leap's Registration Statement on Form S-8 (File No.
333-94389) dated January 11, 2000, and incorporated herein by reference.
(14) Filed as an exhibit to Leap's Registration Statement on Form S-3 (File No.
333-93073) dated February 16, 2000, and incorporated herein by reference.
<PAGE> 1
EXHIBIT 12.1
LEAP WIRELESS INTERNATIONAL, INC.
STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
RATIO OF EARNINGS TO FIXED CHARGES SIX MONTHS ENDED
YEAR ENDED AUGUST 31, -----------------------------------------
------------------------------------------------- PRO FORMA
PRO FORMA FEBRUARY 28, FEBRUARY 29, FEBRUARY 29,
1996 1997 1998 1999 1999 1999 1999 2000
----- ------- -------- -------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings (Loss):
Loss from continuing
operations before
adjustment for minority
interest in consolidated
subsidiaries and equity
in net loss and write-down
of unconsolidated wireless
operating companies......... $(396) $(1,361) $(23,615) $(37,089) $(106,318) $(8,637) $(78,661) $(111,894)
Fixed charges:
Interest expensed and
capitalized................. -- -- -- 10,356 38,433 1,913 21,120 32,273
Rental expense interest
factor(1)................... -- -- -- 199 472 88 153 397
----- ------ -------- -------- --------- ------- -------- ---------
Total fixed charges....... -- -- -- 10,555 38,905 2,001 21,273 32,670
----- ------ -------- -------- --------- ------- -------- ---------
Earnings (loss) available to
cover fixed charges........... $(396) $(1,361) $(23,615) $(26,534) $(67,413) $(6,636) $(57,388) $(79,224)
===== ======= ======== ======== ======== ======= ======== ========
Ratio of earnings (loss) to
fixed charges(2).............. -- -- -- -- -- -- -- --
===== ======= ======== ======== ======== ======= ======== ========
</TABLE>
- -----------
(1) The portion of operating lease rental expense that is
representative of the interest factor is deemed to be one-third of total
operating lease rental expense.
(2) For the years ended August 31, 1996, 1997, 1998 and 1999 and the pro forma
year ended August 31, 1999, our earnings were insufficient to cover fixed
charges by $0.4 million, $1.4 million, $23.6, $47.6 and $145.2 million,
respectively. For the six months ended February 28, 1999 and February 29,
2000 and the pro forma six months ended February 29, 2000, our earnings were
insufficient to cover fixed charges by $10.6 million, $99.9 million and
$144.6 million, respectively.
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF LEAP WIRELESS INTERNATIONAL, INC.
<TABLE>
<CAPTION>
Name Jurisdiction of
Formation
- -------------------------------------------------------------------------
<S> <C>
QUALCOMM Telecommunications Limited Isle of Man
Orrengrove Investments Limited Cyprus
Transworld Telecommunications (Bermuda) Ltd. Bermuda
Transworld Telecommunications, Inc. Delaware
Inversiones Leap Wireless Chile S.A. Chile
Smartcom S.A. Chile
Leap PCS Mexico, Inc. California
Leap Wireless Mexico, S.A. de C.V. Mexico
Pegaso Telecomunicaciones, S.A. de C.V. Mexico
Pegaso PCS, S.A. de C.V. Mexico
Pegaso Recursos Humanos, S.A. de C.V. Mexico
Chase Telecommunications, Inc. Delaware
ChaseTel Licensee Corp. Delaware
ChaseTel Operating Company, Inc. Delaware
ChaseTel Real Estate Holding Company, Inc. Tennessee
Cricket Communications Holdings, Inc. Delaware
Cricket Communications, Inc. Delaware
Cricket Licensee (North Carolina) Inc. Delaware
Cricket Licensee (Reauction), Inc. Delaware
Cricket Licensee (Denver) Inc. Delaware
Cricket Licensee (Pittsburgh) Inc. Delaware
Cricket Holdings Dayton, Inc. Delaware
Albany Merger Sub, Inc. Delaware
Columbus Merger Sub, Inc. Delaware
Macon Merger Sub, Inc. Delaware
Cricket Arizona Property Company Delaware
Cricket Arkansas Property Company Delaware
Cricket Colorado Property Company Delaware
Cricket Kansas Property Company Delaware
Cricket New Mexico Property Company Delaware
Cricket North Carolina Property Company Delaware
Cricket Oklahoma Property Company Delaware
Cricket Pennsylvania Property Company Delaware
Cricket Utah Property Company Delaware
Cricket Washington Property Company Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of Leap
Wireless International, Inc. of our report dated October 18, 1999 relating to
the consolidated financial statements of Leap Wireless International, Inc. and
our report dated February 15, 2000 relating to the consolidated financial
statements of Cricket Communications Holdings, Inc., which appears in such
Registration Statement. We also consent to the incorporation by reference of
our report dated October 18, 1999 relating to the financial statement
schedules, which appears in the Annual Report on Form 10-K for the year ended
August 31, 1999 of Leap Wireless International, Inc. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
San Diego, California
May 16, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 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; Note 14 c) which is as of April 19,
1999; and Note 14 d) which is as of October 12, 1999, relating to the financial
statements of Smartcom S.A., formerly named Chilesat Telefonia Personal S.A.,
which appears in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
Price Waterhouse
Santiago, Chile
May 16, 2000
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of Leap
Wireless International, Inc. of our report dated April 30, 1999 except for Note
1, as to which the date is October 15, 1999, relating to the consolidated
financial statements of Orrengrove Investments Ltd. and Subsidiaries (a
Development Stage Company), which appears in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
PricewaterhouseCoopers LLP
McLean, Virginia
May 16, 2000
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of our
report dated February 15, 1999 relating to the consolidated financial statements
of Pegaso Telecomunicaciones, S.A. de C.V., which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
PricewaterhouseCoopers
Mexico City, Mexico
May 16, 2000
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
---------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
LEAP WIRELESS INTERNATIONAL, INC. / CRICKET COMMUNICATIONS HOLDINGS, INC.
(Exact name of obligor as specified in its charter)
DELAWARE / DELAWARE 33-0811062 / 33-0820981
(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)
12.5% SENIOR NOTES
14.5% SENIOR DISCOUNT NOTES
(Title of indenture securities)
<PAGE> 2
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH
IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington,
D.C., Federal Deposit Insurance Corporation, Washington, D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its parent,
State Street Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as Exhibit 1 to
Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee to commence
business was necessary or issued is on file with the Securities and Exchange
Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration Statement of
Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference
thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED
IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise corporate
trust powers is on file with the Securities and Exchange Commission as Exhibit 3
to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibit 4 to the Statement
of Eligibility and Qualification of Trustee (Form T-1) filed with the
Registration Statement of Eastern Edison Company (File No. 33-37823) and is
incorporated herein by reference thereto.
1
<PAGE> 3
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN
DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(b) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority is
annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Hartford and The
State of Connecticut, on the 12th of May 2000.
STATE STREET BANK AND TRUST COMPANY
By: /s/ MICHAEL M. HOPKINS
-----------------------------------
NAME Michael M. Hopkins
TITLE Vice President
2
<PAGE> 4
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by LEAP
WIRELESS INTERNATIONAL, INC. / CRICKET COMMUNICATIONS HOLDINGS, INC. of its
12.5% Senior Notes and 14.5% Senior Discount Notes, we hereby consent that
reports of examination by Federal, State, Territorial or District authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ MICHAEL M. HOPKINS
-----------------------------------
NAME Michael M. Hopkins
TITLE Vice President
Dated: May 12, 2000
3
<PAGE> 5
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business December 31, 1999,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act and in accordance
with a call made by the Commissioner of Banks under General Laws, Chapter 172,
Section 22(a).
<TABLE>
<CAPTION>
Thousands of
ASSETS Dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin .................................... 2,922,127
Interest-bearing balances ............................................................. 16,902,058
Securities .................................................................................... 14,692,727
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary ................................................... 13,319,510
Loans and lease financing receivables:
Loans and leases, net of unearned income .............................................. 4,801,770
Allowance for loan and lease losses ................................................... 48,021
Allocated transfer risk reserve ....................................................... 0
Loans and leases, net of unearned income and allowances ............................... 4,753,749
Assets held in trading accounts ............................................................... 1,643,584
Premises and fixed assets ..................................................................... 532,542
Other real estate owned ....................................................................... 0
Investments in unconsolidated subsidiaries .................................................... 527
Customers' liability to this bank on acceptances outstanding .................................. 127,283
Intangible assets ............................................................................. 219,272
Other assets .................................................................................. 1,112,818
-----------
Total assets .................................................................................. 56,226,197
===========
LIABILITIES
Deposits:
In domestic offices ................................................................... 10,909,616
Noninterest-bearing ............................................................ 8,992,474
Interest-bearing ............................................................... 1,917,142
In foreign offices and Edge subsidiary ................................................ 23,406,386
Noninterest-bearing ............................................................ 34,806
Interest-bearing ............................................................... 23,371,580
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary ................................................... 15,243,285
Demand notes issued to the U.S. Treasury ...................................................... 1,000,000
Trading liabilities .......................................................... 1,129,038
Other borrowed money .......................................................................... 2,727
Subordinated notes and debentures ............................................................. 0
Bank's liability on acceptances executed and outstanding ...................................... 127,283
Other liabilities ............................................................................. 1,398,313
Total liabilities ............................................................................. 53,216,648
-----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus ................................................. 0
Common stock .................................................................................. 29,931
Surplus ....................................................................................... 495,993
Undivided profits and capital reserves/Net unrealized holding gains (losses) .................. 2,541,108
Net unrealized holding gains (losses) on available-for-sale securities ....... (47,977)
Cumulative foreign currency translation adjustments ........................................... (9,506)
Total equity capital .......................................................................... 3,009,549
-----------
Total liabilities and equity capital .......................................................... 56,226,197
===========
</TABLE>
4
<PAGE> 6
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
5
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
LEAP WIRELESS INTERNATIONAL, INC.
OFFER TO EXCHANGE THEIR
12 1/2% SENIOR NOTES DUE 2010 AND 14 1/2% SENIOR DISCOUNT NOTES DUE 2010,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF THEIR
OUTSTANDING 12 1/2% SENIOR NOTES DUE 2010 AND
14 1/2% SENIOR DISCOUNT NOTES DUE 2010
PURSUANT TO THE PROSPECTUS, DATED , 2000
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
, 2000, UNLESS
EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
The Exchange Agent for the Exchange Offer is:
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Express Delivery:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two Avenue de Lafayette
Boston, MA 02102-0078 5th Floor, Corporate Trust Window
Attention: Mackenzie Elijah Boston, MA 02111-1724
Attention: Mackenzie Elijah
</TABLE>
Facsimile Transmission:
(617) 662-1452
Confirm by Telephone:
(617) 662-1525
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 2000 (the "Prospectus"), of Leap
Wireless International, Inc., a Delaware corporation (the "Issuer"), and this
Letter of Transmittal (the "Letter"), which together constitute the Issuer's
offer (the "Exchange Offer") to exchange up to $225,000,000 in aggregate
principal amount of their 12 1/2% Senior Notes due 2010 and up to $668,000,000
in aggregate principal amount at maturity of their 14 1/2% Senior Discount Notes
due 2010 (together, the "Exchange Notes"), for a like principal amount of their
outstanding 12 1/2% Senior Notes due 2010 (the "Senior Notes") and their
outstanding 14 1/2% Senior Discount Notes due 2010 (the "Senior Discount Notes,"
and together with the Senior Notes, the "Notes") that were issued and sold in
reliance upon an exemption from registration under the Securities Act of 1933,
as amended (the "Securities Act").
For each Note accepted for exchange, the holder of such Note will receive
an Exchange Note having a principal amount equal to that of the surrendered
Note.
This Letter is to be completed by a holder of Notes either if certificates
are to be forwarded herewith or if a tender of certificates for Notes, if
available, is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in "The Exchange Offer --
Procedures for Tendering Notes" section of the Prospectus and an Agent's Message
(as defined herein) is not delivered. Holders of Notes whose certificates are
not immediately
<PAGE> 2
available, or who are unable to deliver their certificates or confirmation of
the book-entry tender of their Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer -- Procedures for Tendering Notes"
section of the Prospectus. See Instruction 1. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Notes to which this Letter relates. If the space provided
below is inadequate, the certificate numbers and principal amount of Notes
should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF SENIOR NOTES TENDERED
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON DESCRIPTION OF SENIOR NOTES TENDERED
CERTIFICATE(S)) (ATTACH ADDITIONAL SIGNED LIST IF NECESSARY)
- --------------------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL
AMOUNT OF SENIOR NOTES AGGREGATE PRINCIPAL
CERTIFICATE EVIDENCED BY AMOUNT OF SENIOR
NUMBER(S)* CERTIFICATE(S) NOTES TENDERED**
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
TOTAL SENIOR
NOTES
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* DOES NOT need to be completed by shareholders tendering shares by
book-entry transfer.
** Unless otherwise indicated, it will be assumed that all shares evidenced
by each certificate delivered to the Exchange Agent are being tendered
hereby. See Instruction 4.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF SENIOR DISCOUNT NOTES TENDERED
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON DESCRIPTION OF SENIOR NOTES TENDERED
CERTIFICATE(S)) (ATTACH ADDITIONAL SIGNED LIST IF NECESSARY)
- --------------------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL
AMOUNT OF SENIOR NOTES AGGREGATE PRINCIPAL
CERTIFICATE EVIDENCED BY AMOUNT OF SENIOR
NUMBER(S)* CERTIFICATE(S) NOTES TENDERED**
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
TOTAL SENIOR
NOTES
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* DOES NOT need to be completed by shareholders tendering shares by
book-entry transfer.
** Unless otherwise indicated, it will be assumed that all shares evidenced
by each certificate delivered to the Exchange Agent are being tendered
hereby. See Instruction 4.
- --------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
---------------------------------------------------------------------------
Account Number Transaction Code Number
-------------- --------------------
By crediting Notes to the Exchange Agent's Account at the Book-Entry
Transfer Facility in accordance with the Book-Entry Transfer Facility's
Automated Tender Offer Program ("ATOP") and by complying with applicable
ATOP procedures with respect to the Exchange Offer, including transmitting
an Agent's Message to the Exchange Agent in which the holder of Notes
acknowledges and agrees to be bound by the terms of this Letter, the
participant in ATOP confirms on behalf of itself and the beneficial owners
of such Notes all
<PAGE> 3
provisions of this Letter applicable to it and such beneficial owners as if
it had completed the information required herein and executed and
transmitted this Letter to the Exchange Agent.
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s)
---------------------------------------------------------------------------
Window Ticket Number (if any)
---------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
------------------------------------------------------------------
Name of Eligible Institution that guaranteed delivery
------------------------------------------------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
-----------------------------------------------------------
Account Number Transaction Code Number
-------------- --------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
---------------------------------------------------------------------------
Address:
---------------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not participating in, and does not intend to participate in, a
distribution of the Exchange Notes. If the undersigned is a broker-dealer that
will receive Exchange Notes for its own account in exchange for Notes, it
represents that the Notes to be exchanged for Exchange Notes were acquired by it
as a result of market-making or other trading activities and acknowledges that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes; however, by so acknowledging
and by delivering a prospectus, the undersigned will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Issuer the aggregate principal amount at
maturity of Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of the Notes tendered hereby, the undersigned hereby
sells, assigns and transfers to, or upon the order of, the Issuer all right,
title and interest in and to such Notes as are being tendered hereby, and
irrevocably constitutes and appoints the Exchange Agent as agent and
attorney-in-fact to cause the Notes to be assigned, transferred and exchanged.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Notes tendered
hereby and to acquire Exchange Notes issuable upon the exchange of such tendered
Notes, and that the Issuer will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are accepted by the Issuer. The
undersigned hereby further represents that (A) any Exchange Notes acquired
pursuant to the Exchange Offer are being acquired in the ordinary course of
business of the person receiving such Exchange Notes, whether or not such person
is the holder; (B) it is not an "affiliate" of the Issuer as defined in Rule 405
under the Securities Act of 1933, as amended (the "Securities Act"); (C) it is
not participating in, and does not intend to participate in, and has no
arrangement or understanding with any Person to participate in, a distribution
of the Notes or the Exchange Notes; and (D) if such holder is a broker or dealer
registered under the Exchange Act, it will receive the Exchange Notes for its
own account in exchange for Notes that were acquired as a result of market-
making activities or other trading activities. Each broker-dealer referred to in
clause (D) of the preceding sentence must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The undersigned
also warrants that acceptance of any tendered Notes by the Issuer and the
issuance of Exchange Notes in exchange therefor shall constitute performance in
full by the Issuer of certain of its obligations under the Registration Rights
Agreement.
<PAGE> 4
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the Exchange Notes issued in exchange for the Notes pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by holders thereof (other than (i) any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act and (ii) any
broker-dealer that purchases Notes from the Issuer to resell pursuant to Rule
144A under the Securities Act ("Rule 144A") or any other available exemption),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
with any person to participate in the distribution of such Exchange Notes and
are not participating in, and do not intend to participate in, the distribution
of the Exchange Notes. However, the Issuer does not intend to request the SEC to
consider, and the SEC has not considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the SEC would
make a similar determination with respect to the Exchange Offer as in other
circumstances. The undersigned acknowledges that any holder that is an affiliate
of the Company, or is participating in or intends to participate in or has any
arrangement or understanding with respect to the distribution of the Exchange
Notes to be acquired pursuant to the Exchange Offer, (i) could not rely on the
applicable interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is not a
broker-dealer, the undersigned represents that it is not engaging in, and does
not intend to engage in, a distribution of Exchange Notes. If the undersigned is
a broker-dealer that will receive Exchange Notes for its own account in exchange
for Notes, it represents that the Notes to be exchanged for the Exchange Notes
were acquired by it as a result of market-making or other trading activities and
acknowledges that it will deliver a prospectus in connection with any resale of
such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned, if a California resident, hereby further represents and
warrants that the undersigned (or the beneficial owner of the Notes tendered
hereby, if not the undersigned) (i) is a bank, savings and loan association,
trust company, insurance company, investment company registered under the
Investment Company Act of 1940, pension or profit-sharing trust (other than a
pension or profit-sharing trust of the Company, a self-employed individual
retirement plan or individual retirement account), or a corporation which has a
net worth on a consolidated basis according to its most recent audited financial
statement of not less than $14,000,000, and (ii) is acquiring the Exchange Notes
for its own account for investment purposes (or for the account of the
beneficial owner of such Exchange Notes for investment purposes).
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Issuer to be necessary or desirable to complete the
sale, assignment and transfer of the Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer -- Withdrawal Rights"
section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Notes for any Notes not exchanged) in the
name of the undersigned or, in the case of a book-entry delivery of Notes,
please credit the account indicated above maintained at the Book Entry Transfer
Facility. Similarly, unless otherwise indicated under the box entitled "Special
Delivery Instructions" below, please send the Exchange Notes (and, if
applicable, substitute certificates representing Notes for any Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF SENIOR
NOTES" OR "DESCRIPTION OF SENIOR DISCOUNT NOTES" ABOVE AND SIGNING THIS LETTER,
WILL BE DEEMED TO HAVE TENDERED THE SENIOR NOTES OR SENIOR DISCOUNT NOTES AS SET
FORTH IN SUCH BOX ABOVE.
<PAGE> 5
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Notes not exchanged and/or
Exchange Notes are to be issued in the name of and sent to someone other than
the person or persons whose signature(s) appear(s) on this Letter above, or if
Notes delivered by book-entry transfer which are not accepted for exchange are
to be returned by credit to an account maintained at the Book-Entry Transfer
Facility other than the account indicated above.
Issue: Exchange Notes and/or Notes to:
Name(s)
(Please Type or Print)
(Please Type or Print)
Address
(Zip Code)
Taxpayer Identification or
Social Security Number
(Complete Substitute Form W-9)
* Credit unexchanged Notes delivered by book-entry transfer to the Book-Entry
Transfer Facility account set forth below.
(Book-Entry Transfer Facility Account Number, if applicable)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Notes not exchanged and/or
Exchange Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter above or to such person or persons at an
address other than shown in the box entitled "Description of Senior Notes" or
"Description of Senior Discount Notes" on this Letter above.
Mail: Exchange Notes and/or Notes to:
Name(s)
(Please Type or Print)
(Please Type or Print)
Address
(Zip Code)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF OR AN AGENT'S MESSAGE IN LIEU
HEREOF (TOGETHER WITH THE CERTIFICATES FOR NOTES OR A BOOK-ENTRY CONFIRMATION
AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
<PAGE> 6
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
Signature(s) of Owner:__________________________________________________________
________________________________________________________________________________
Area Code and Telephone Number:_________________________________________________
Date: _____________________________________________
If a holder is tendering any Notes, this Letter must be signed by the
registered holder(s) as the name(s) appear(s) on the certificate(s) for the
Notes or by any person(s) authorized to become registered holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, please set forth full title. See Instruction 3.
Name(s):________________________________________________________________________
(Please Type or Print)
Capacity:_______________________________________________________________________
Address:________________________________________________________________________
(Including Zip Code)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:________________________________________________________
(Authorized Signature)
________________________________________________________________________________
(Title)
________________________________________________________________________________
(Name and Firm)
Date: ________________________________________________
<PAGE> 7
INSTRUCTIONS
OF
LEAP WIRELESS INTERNATIONAL, INC.
FORMING PART OF THE TERMS AND CONDITIONS OF THE
OFFER TO EXCHANGE THEIR 12 1/2% SENIOR NOTES DUE 2010 AND THEIR
14 1/2% SENIOR DISCOUNT NOTES DUE 2010,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OUTSTANDING
12 1/2% SENIOR NOTES DUE 2010 AND 14 1/2% SENIOR DISCOUNT NOTES DUE 2010.
1. Delivery of this Letter and Notes; Guaranteed Delivery Procedures. This
Letter is to be completed by Note holders either if certificates are to be
forwarded herewith or if tenders are to be made pursuant to the procedures for
delivery by book-entry transfer set forth in "The Exchange Offer -- Procedures
for Tendering Notes" section of the Prospectus and an Agent's Message is not
delivered. Certificates for all physically tendered Notes, or Book-Entry
Confirmation, as the case may be, as well as a properly completed and duly
executed Letter (or manually signed facsimile hereof) and any other documents
required by this Letter, must be received by the Exchange Agent at the address
set forth herein on or prior to the Expiration Date, or the tendering holder
must comply with the guaranteed delivery procedures set forth below. Notes
tendered hereby must be in denominations of principal amount of $1,000 and any
integral multiple thereof. The term "Agent's Message" means a message,
transmitted by The Depository Trust Company (the "Book-Entry Transfer Facility")
and received by the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that the Book-Entry Transfer Facility has received an
express acknowledgment from a participant tendering Notes which are subject to
the Book-Entry Confirmation and that such participant has received and agrees to
be bound by this Letter and that the Issuer may enforce this Letter against such
participant.
Note holders whose certificates for Notes are not immediately available or
who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may tender their Notes
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer -- Procedures for Tendering Notes" section of the Prospectus. Pursuant to
such procedures, (i) such tender must be made through an Eligible Institution,
(ii) prior to the Expiration Date, the Exchange Agent must receive from such
Eligible Institution a properly completed and duly executed Letter (or a
facsimile thereof or an Agent's Message in lieu hereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Issuer (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Notes and the amount of Notes tendered, stating that
the tender is being made thereby and guaranteeing that within three New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Notes, or a
Book-Entry Confirmation, and any other documents required by the Letter will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Notes, in proper form for transfer, or
Book-Entry Confirmation, as the case may be, and all other documents required by
this Letter, are received by the Exchange Agent within three NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Notes and all other required
documents is at the election and risk of the tendering holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If Notes are sent by mail, it is suggested that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
2. Partial Tenders (Not Applicable to Note holders Who Tender by Book-Entry
Transfer). If less than all of the Notes evidenced by a submitted certificate
are to be tendered, the tendering holder(s) should fill in the aggregate
principal amount of Senior Notes or Senior Discount Notes to be tendered in the
box above entitled "Description of Senior Notes -- Principal Amount Tendered" or
"Description of Senior Discount Notes -- Principal Amount Tendered." A reissued
certificate representing the balance of untendered Notes will be sent to such
tendering holder, unless otherwise provided in the appropriate box on this
Letter, promptly after the Expiration Date. All of the Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
<PAGE> 8
3. Signatures on this Letter; Bond Powers and Endorsements; Guarantee of
Signatures. If this Letter is signed by the registered holder of the Notes
tendered hereby, the signature must correspond exactly with the name as written
on the face of the certificates without any change whatsoever.
If any tendered Notes are owned of record by two or more joint owners, all
of such owners must sign this Letter.
If any tendered Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered holder or holders of the Notes
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the Exchange Notes are to be
issued, or any untendered Notes are to be reissued, to a person other than the
registered holder, then endorsements of any certificates transmitted hereby or
separate bond powers are required. Signatures on such certificate(s) must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder or
holders of any certificate(s) specified herein, such certificate(s) must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name or names of the registered holder or holders appear(s) on
the certificate(s) and signatures on such certificate(s) must be guaranteed by
an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Issuer,
proper evidence satisfactory to the Issuer of their authority to so act must be
submitted.
Endorsements on certificates for Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or a clearing agency, insured credit
union, a savings association or a commercial bank or trust company having an
office or correspondent in the United States (each an "Eligible Institution").
Signatures on this Letter need not be guaranteed by an Eligible
Institution, provided the Notes are tendered: (i) by a registered holder of
Notes (which term, for purposes of the Exchange Offer, includes any participant
in the Book-Entry Transfer Facility system whose name appears on a security
position listing as the holder of such Notes) who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter, or (ii) for the account of an Eligible Institution.
4. Special Issuance and Delivery Instructions. Tendering holders of Notes
should indicate in the applicable box the name and address to which Exchange
Notes issued pursuant to the Exchange Offer and/or substitute certificates
evidencing Notes not exchanged are to be issued or sent, if different from the
name or address of the person signing this Letter. In the case of issuance in a
different name, the employer identification or social security number of the
person named must also be indicated. Holders tendering Notes by book-entry
transfer may request that Notes not exchanged be credited to such account
maintained at the Book-Entry Transfer Facility as such Note holder may designate
hereon. If no such instructions are given, such Notes not exchanged will be
returned to the name or address of the person signing this Letter.
5. Tax Identification Number. Federal income tax law generally requires
that a tendering holder whose Notes are accepted for exchange must provide the
Issuer (as payor) with such holder's correct Taxpayer Identification Number
("TIN") on Substitute Form W-9 below, which in the case of a tendering holder
who is an individual, is his or her social security number. If the Issuer is not
provided with the current TIN or an adequate basis for an exemption, such
tendering holder may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, delivery to such tendering holder of Exchange Notes may be
subject to backup withholding in an amount equal to 31% of all reportable
payments made after the exchange. If withholding results in an overpayment of
taxes, a refund may be obtained.
Exempt holders of Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
<PAGE> 9
To prevent backup withholding, each tendering holder of Notes must provide
its correct TIN by completing the Substitute Form W-9 set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, or (ii) the
holder has not been notified by the Internal Revenue Service that such holder is
subject to backup withholding as a result of a failure to report all interest or
dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Issuer a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Notes are in more than one name or are not in the name of the actual owner, such
holder should consult the W -9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
Checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Issuer within 60
days, backup withholding will begin and continue until such holder furnishes its
TIN to the Issuer.
6. Transfer Taxes. The Issuer will pay all transfer taxes, if any,
applicable to the transfer of Notes to it or its order pursuant to the Exchange
Offer. If, however, Exchange Notes and/or substitute Notes not exchanged are to
be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Notes tendered hereby, or if tendered
Notes are registered in the name of any person other than the person signing
this Letter, or if a transfer tax is imposed for any reason other than the
transfer of Notes to the Issuer or its order pursuant to the Exchange Offer, the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted
herewith, the amount of such transfer taxes will be billed directly to such
tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Notes specified in this Letter.
7. Waiver of Conditions. The Issuer reserves the absolute right to waive
satisfaction of any or all conditions enumerated in the Prospectus.
8. No Conditional Tenders. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Notes, by
execution of this Letter, shall waive any right to receive notice of the
acceptance of their Notes for exchange.
Neither the Issuer, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Notes
nor shall any of them incur any liability for failure to give any such notice.
9. Mutilated, Lost, Stolen or Destroyed Notes. Any holder whose Notes have
been mutilated, lost, stolen or destroyed should contact the Exchange Agent at
the address indicated above for further instructions.
10. Requests for Assistance or Additional Copies. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus and this Letter, may be directed to the Exchange Agent, at the
address and telephone number indicated above.
11. Incorporation of Letter of Transmittal. This Letter shall be deemed to
be incorporated in and acknowledged and accepted by any tender through the
Book-Entry Transfer Facility's ATOP procedures by any participant on behalf of
itself and the beneficial owners of any Notes so tendered.
<PAGE> 10
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYER: STATE STREET BANK AND TRUST COMPANY
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
PART 1 -- Taxpayer Identification Number -- for
all accounts, enter taxpayer identification ------------------------------------------
SUBSTITUTE number in the box at right and certify by Social Security Number
FORM W-9 signing and dating below
OR
NOTE: If the account is in more than one name,
see the chart in the enclosed Guidelines to ------------------------------------------
determine which number to give the payer. Employer Identification
Number TIN
-------------------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY PART 2 -- For payees exempt from backup withholding, please write "EXEMPT" here (see the
INTERNAL REVENUE SERVICE enclosed Guidelines):
-------------------------------------------------------------------------------------------
PART 3 -- Certification -- UNDER PENALTIES OF PERJURY. I CERTIFY THAT (1) The number shown
on this form is my correct Taxpayer Identification Number (or I am waiting for a number to
be issued to me), and (2) I am not subject to backup withholding because: (a) I am exempt
from backup withholding, or (b) I have not been notified by the Internal Revenue Service
(the "IRS") that I am subject to backup withholding as a result of a failure to report all
interest or dividends or (c) the IRS has notified me that I am no longer subject to backup
withholding.
PAYER'S REQUEST FOR
TAXPAYER IDENTIFICATION
NUMBER (TIN)
-------------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified
by the IRS that you are currently subject to backup withholding because of underreporting
interest or dividends on your tax return and you have not been notified by the IRS that
you are no longer subject to backup withholding, (also see instructions in the enclosed
Guidelines.)
Signature Date _____________ , 2000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE
THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING (OR WILL SOON APPLY FOR) A
TAXPAYER IDENTIFICATION NUMBER.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and that I mailed or delivered an application to
receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office (or I intend to mail or
deliver an application in the near future). I understand that, notwithstanding
the information I provided in Part 3 of the Substitute Form W-9 above (and the
fact that I have completed this Certificate of Awaiting Taxpayer Identification
Number), if I do not provide a taxpayer identification number to the Depositary
within sixty (60) days, the Depositary is required to withhold 31% of all cash
payments made to me thereafter until I provide a number.
Signature Date: _____________ , 2000
Name (Please Print)
Address (Please Print)
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
LEAP WIRELESS INTERNATIONAL, INC.
OFFER TO EXCHANGE THEIR
12 1/2% SENIOR NOTES DUE 2010 AND 14 1/2% SENIOR DISCOUNT NOTES DUE 2010,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF THEIR
OUTSTANDING 12 1/2% SENIOR NOTES DUE 2010 AND
OUTSTANDING 14 1/2% SENIOR DISCOUNT NOTES DUE 2010
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Leap Wireless International, Inc., a Delaware corporation (the
"Issuer"), made pursuant to the Prospectus dated , 2000
(the "Prospectus"), if certificates for the outstanding 12 1/2% Senior Notes due
2010 of the Issuer (the "Senior Notes") and 14 1/2% Senior Discount Notes due
2010 of the Issuer (the "Senior Discount Notes," and together with the Senior
Notes, the "Notes") are not immediately available or if the procedure for
book-entry transfer cannot be completed on a timely basis or time will not
permit all required documents to reach the Issuer prior to 5:00 p.m., New York
City time, on the Expiration Date of the Exchange Offer. Such form may be
delivered or transmitted by telegram, telex, facsimile transmission, mail or
hand delivery to State Street Bank and Trust Company (the "Exchange Agent") as
set forth below. In addition, in order to utilize the guaranteed delivery
procedure to tender Notes pursuant to the Exchange Offer, a completed, signed
and dated Letter of Transmittal (or facsimile thereof) must also be received by
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. Capitalized terms not defined herein are defined in the Prospectus.
The Exchange Agent for the Exchange Offer is:
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Express Delivery:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two Avenue de Lafayette
Boston, MA 02102-0078 5th Floor, Corporate Trust Window
Attention: Mackenzie Elijah Boston, MA 02111-1724
Attention: Mackenzie Elijah
</TABLE>
Facsimile Transmission:
(617) 662-1452
Confirm by Telephone:
(617) 662-1525
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE> 2
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the Issuer
the principal amount of Senior Notes and/or Senior Discount Notes set forth
below, pursuant to the guaranteed delivery procedure described in "The Exchange
Offer -- Procedures for Tendering Notes" section of the Prospectus.
------------------------------
Principal Amount of Senior Notes Tendered:* $
----------------------------------
If Senior Notes will be delivered by book-entry transfer to The Depository
Company, provide account number.
Account Number:
----------------------------------------------------------------
Certificate Nos. (if available):
-----------------------------------------------
Total Principal Amount Represented by Senior Notes Certificate(s): $
-----------
------------------------------
Principal Amount of Senior Discount Notes Tendered:* $
-------------------------
If Senior Discount Notes will be delivered by book-entry transfer to The
Depository Company, provide account number.
Account Number:
----------------------------------------------------------------
Certificate Nos. (if available):
----------------------------------------------
Total Principal Amount Represented by Senior Discount Notes Certificate(s):
$
-----------------------
------------------------------
ANY AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
* Must be in denominations of principal amount at maturity of $1,000 and any
integral multiple thereof.
<PAGE> 3
PLEASE SIGN HERE
- --------------------------------------------------------------------------------
Signature(s) of Owner(s) or Authorized Signatory
Date
- ------------------------------------
Area Code and Telephone Number:
Must be signed by the holder(s) of Notes as their name(s) appear(s) on
certificate(s) for Notes or on a security position listing, or by person(s)
authorized to become registered holder(s) by endorsement and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below.
Please Print Name(s) and Address(es)
Name(s):
- --------------------------------------------------------------------------------
Capacity:
- --------------------------------------------------------------------------------
Address(es):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a clearing
agency, insured credit union, a savings association or a commercial bank or
trust company having an office or correspondent in the United States, hereby
guarantees that the certificates representing the principal amount of Notes
tendered hereby in proper form for transfer, or timely confirmation of the
book-entry transfer of such Notes into the Exchange Agent's account at The
Depository Trust Company pursuant to the procedures set forth in "The Exchange
Offer -- Procedures for Tendering Notes" section of the Prospectus, together
with a properly completed and duly executed Letter of Transmittal (or a manually
signed facsimile thereof) with any required signature guarantee and any other
documents required by the Letter of Transmittal, will be received by the
Exchange Agent at the address set forth above, no later than three New York
Stock Exchange trading days after the date of execution hereof.
Name of Firm:
Address:
- --------------------------------------------------------------------------------
Zip Code
Area Code and Telephone No.:
Authorized Signature
Name:
Please Print
Title:
Date:
- ------------------------------------------------------------ , 2000
NOTE: DO NOT SEND SHARE CERTIFICATES WITH THIS FORM. CERTIFICATES FOR SHARES
SHOULD BE SENT WITH THE LETTER OF TRANSMITTAL.
<PAGE> 1
EXHIBIT 99.3
LEAP WIRELESS INTERNATIONAL, INC.
OFFER TO EXCHANGE THEIR
12 1/2% SENIOR NOTES DUE 2010 AND 14 1/2% SENIOR DISCOUNT NOTES DUE 2010,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF THEIR
OUTSTANDING 12 1/2% SENIOR NOTES DUE 2010 AND
OUTSTANDING 14 1/2% SENIOR DISCOUNT NOTES DUE 2010
To Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Enclosed for your consideration is a Prospectus dated
, 2000 (as the same may be amended or supplemented from
time to time, the "Prospectus") and a form of Letter of Transmittal (the "Letter
of Transmittal") relating to the offer (the "Exchange Offer") by Leap Wireless
International, Inc., a Delaware corporation (the "Issuer"), to exchange up to
$225,000,000 in aggregate principal amount of their 12 1/2% Senior Notes due
2010 and up to $668,000,000 in aggregate principal amount at maturity of their
Senior Discount Notes due 2010 (together, the "Exchange Notes") for up to
$225,000,000 in aggregate principal amount of their outstanding 12 1/2% Senior
Notes due 2010 and up to $668,000,000 in aggregate principal amount at maturity
of their outstanding 14 1/2% Senior Discount Notes due 2010 (together, the
"Notes") that were issued and sold in a transaction exempt from registration
under the Securities Act of 1933, as amended.
We are asking you to contact your clients for whom you hold Notes
registered in your name or in the name of your nominee. In addition, we ask you
to contact your clients who, to your knowledge, hold Notes registered in their
old name. The Issuer will not pay any fees or commissions to any broker, dealer
or other person in connection with the solicitation of tenders pursuant to the
Exchange Offer. You will, however, be reimbursed by the Issuer for customary
mailing and handling expenses incurred by you for forwarding any of the enclosed
materials to your clients. The Issuer will pay all transfer taxes, if any,
applicable to the tender of Notes to it or its order, except as otherwise
provided in the Prospectus and the Letter of Transmittal.
Enclosed are copies of the following documents:
1. the Prospectus;
2. a Letter of Transmittal for your use in connection with the exchange of
Notes and for the information of your clients (facsimile copies of the
Letter of Transmittal may be used to exchange Notes);
3. a form of letter that may be sent to your clients for whose accounts you
hold Notes registered in your name or the name of your nominee, with
space provided for obtaining the clients' instructions with regard to
the Exchange Offer;
4. a Notice of Guaranteed Delivery;
5. guidelines of the Internal Revenue Service for Certification of Taxpayer
Identification Number on Substitute Form W-9; and
6. a return envelope addressed to State Street Bank and Trust Company.
<PAGE> 2
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M. NEW YORK CITY TIME ON , 2000, UNLESS EXTENDED (THE "EXPIRATION
DATE"). NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT
TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS, AT ANY TIME PRIOR TO THE
EXPIRATION DATE.
To tender Notes, certificates for Notes or a Book-Entry Confirmation (as
defined in the Letter of Transmittal), a duly executed and properly completed
Letter of Transmittal or a facsimile thereof, and any other required documents,
must be received by the Exchange Agent as provided in the Prospectus and the
Letter of Transmittal.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Notes to reach the Exchange Agent before the Expiration
Date or the procedure for book-entry transfer cannot be completed on a timely
basis, a tender may be effected by delivery of a Notice of Guaranteed Delivery
by an Eligible Institution (as defined in the Letter of Transmittal).
Any inquiries you may have with respect to the Exchange Offer or requests
for additional copies of the enclosed material may be directed to the Exchange
Agent at its address or telephone number set forth in the Prospectus.
Very truly yours,
Leap Wireless International, Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY PERSON AS AN AGENT OF THE ISSUER OR THE EXCHANGE AGENT, OR ANY AFFILIATE
THEREOF, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY
DOCUMENT ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR
THE ENCLOSED DOCUMENTS AND THE STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS AND
THE LETTER OF TRANSMITTAL.
<PAGE> 1
EXHIBIT 99.4
LEAP WIRELESS INTERNATIONAL, INC.
OFFER TO EXCHANGE THEIR
12 1/2% SENIOR NOTES DUE 2010 AND 14 1/2% SENIOR DISCOUNT NOTES DUE 2010,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OF THEIR
OUTSTANDING 12 1/2% SENIOR NOTES DUE 2010 AND
OUTSTANDING 14 1/2% SENIOR DISCOUNT NOTES DUE 2010
To Our Clients:
Enclosed for your consideration is a Prospectus dated
, 2000 (as the same may be amended or supplemented from
time to time, the "Prospectus") and a form of Letter of Transmittal (the "Letter
of Transmittal") relating to the offer (the "Exchange Offer") by Leap Wireless
International, Inc. (the "Issuer"), to exchange up to $225,000,000 in aggregate
principal amount of their 12 1/2% Senior Notes due 2010 and up to $668,000,000
in aggregate principal amount at maturity of their 14 1/2 % Senior Discount
Notes due 2010 (together, the "Exchange Notes") for up to $225,000,000 in
aggregate principal amount of their outstanding 12 1/2% Senior Notes due 2010
and up to $668,000,000 in aggregate principal amount at maturity of their
outstanding 14 1/2% Senior Discount Notes due 2010 (together, the "Notes") that
were issued and sold in a transaction exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act").
The material is being forwarded to you as the beneficial owner of Notes
carried by us for your account or benefit but not registered in your name. A
tender of any Notes may be made only by us as the registered holder and pursuant
to your instructions. Therefore, the Issuer urges beneficial owners of Notes
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee to contact such registered holder promptly if they wish to tender
Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to tender
any or all of the Notes held by us for your account, pursuant to the terms and
conditions set forth in the Prospectus and Letter of Transmittal. We urge you to
read carefully the Prospectus and Letter of Transmittal before instructing us to
tender your Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Notes on your behalf in accordance with the
provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 2000, UNLESS EXTENDED (THE "EXPIRATION
DATE"). Notes tendered pursuant to the Exchange Offer may be withdrawn, subject
to the procedures described in the Prospectus, at any time prior to the
Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount at
maturity of the Exchange Notes for each $1,000 principal amount at
maturity of the Notes. $225,000,000 aggregate principal amount of the
Senior Notes was outstanding as of , 2000 and $668,000,000
aggregate principal amount at maturity of the Senior Discount Notes was
outstanding as of , 2000. The terms of the Exchange Notes
are substantially identical (including principal amount, interest rate,
maturity and ranking) to the terms of the Notes, except that the
Exchange Notes (i) are not subject to certain restrictions on transfer
applicable to the Notes and (ii) are not entitled to certain
registration rights which are applicable to the Notes under a
registration rights agreement among the Issuer, Morgan Stanley & Co.
Incorporated and certain other placement agents.
<PAGE> 2
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS, SEE "THE EXCHANGE
OFFER -- CERTAIN CONDITIONS TO THE EXCHANGE OFFER" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New
York City time, on , 2000, unless extended.
4. The Issuer has agreed to pay the expenses of the Exchange Offer except
as provided in the Prospectus and the Letter of Transmittal.
5. Any transfer taxes incident to the transfer of Notes from the tendering
Holder to the Issuer will be paid by the Issuer, except as provided in
the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to nor will exchange be accepted from
or on behalf of holders of Notes in any jurisdiction in which the making of the
Exchange Offer or the acceptance thereof would not be in compliance with the
laws of such jurisdiction.
If you wish to have us tender any or all of your Notes held by us for your
account or benefit, please so instruct us by completing, executing and returning
to us the instruction form that appears below. THE ACCOMPANYING LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATIONAL PURPOSES ONLY AND MAY NOT BE
USED BY YOU TO TENDER NOTES HELD BY US AND REGISTERED IN OUR NAME FOR YOUR
ACCOUNT OR BENEFIT.
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein in connection with the Exchange Offer of the Issuer
relating to the Notes, including the Prospectus and the Letter of Transmittal.
This form will instruct you to exchange the aggregate principal amount of
Notes indicated below (or, if no aggregate principal amount is indicated below,
all Notes) held by you for the account or benefit of the undersigned, pursuant
to the terms and conditions set forth in the Prospectus and Letter of
Transmittal.
Aggregate Principal Amount of Senior Notes to be exchanged $______.*
Aggregate Principal Amount of Senior Discount Notes to be exchanged $____.*
*I (we) understand that if I (we) sign these instruction forms without
indicating an aggregate principal amount of Note(s) in the space above, all
Notes held by you for my (our) account will be exchanged.
Signature:_____________________________________________________________________
(Please Type or Print)
Capacity:______________________________________________________________________
(Full Title)
Name:__________________________________________________________________________
Address:_______________________________________________________________________
(Including Zip Code)
Area Code and Telephone Number:________________________________________________
Taxpayer Identification or
Social Security Number_________________________________________________________
Date:__________________________________________________________________________
