<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(AMENDMENT NO. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
COMMISSION FILE NUMBER 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0811062
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(858) 882-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE
(TITLE OF CLASS)
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of October 1, 1999, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$421,641,000, based on the closing price of the Company's Common Stock on the
Nasdaq National Market on October 1, 1999 of $23.50 per share.
As of October 1, 1999, 18,428,411 shares of registrant's Common Stock,
$.0001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated into this report by
reference:
1. Part II Registrant's Annual Report to Shareholders for the fiscal
year ended August 31, 1999.
2. Part III Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission within 120 days after the close of
the fiscal year.
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<PAGE> 2
This Amendment No. 2 to the registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999 is being filed to amend Item 14(a) to add the
audited financial statements of Pegaso Telecomunicaciones, S.A. de C.V. in
accordance with Rule 3-09 of Regulation S-X.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS:
PEGASO TELECOMUNICACIONES, S.A. DE C. V.
Consolidated Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the year ended December 31, 1999
and for the period from June 24, 1998 (date of inception) to December
31, 1998
Consolidated Statements of Cash Flows for the year ended December 31,
1999, and for the period from June 24, 1998 (date of inception) to
December 31, 1998
Consolidated Statements 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 December 31, 1999
Notes to the Consolidated Financial Statements
The financial statements of Leap listed below are incorporated in this
report by reference to Leap's Annual Report to Shareholders for the fiscal
year ended August 31, 1999:
Consolidated Balance Sheets at August 31, 1999 and 1998
Consolidated Statements of Operations and Comprehensive Loss for each of
the three years in the period ended August 31, 1999
Consolidated Statements of Cash Flows for each of the three years in the
period ended August 31, 1999
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended August 31, 1999
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedule
Schedule I -- Condensed Financial Information at August 31, 1999 and
1998, and for each of the three years in the period ended
August 31, 1999
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
2
<PAGE> 3
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(1) Form of Amended and Restated Charter of the Registrant
3.2(1) Form of Amended and Restated Bylaws of the Registrant
3.3(2) Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Registrant
4.1(1) Form of Common Stock Certificate
4.2.1(3) Letter, dated as of May 5, 1999, from QUALCOMM Incorporated
("QUALCOMM") to the Registrant
4.2.2(9) Superceding Warrant, dated as of August 9, 1999, issued to
QUALCOMM
4.2.3(9) Form of Voting Agreement, dated as of April 1, 1999, between
the Registrant and various officers and directors of
QUALCOMM Incorporated
4.2.4(9) Amended and Restated Agreement Concerning Share Ownership,
dated as of August 4, 1999, between Registrant and QUALCOMM
Incorporated
4.3(2) Rights Agreement, dated as of September 14, 1998, between
the Registrant and Harris Trust Company of California
10.1(8) Separation and Distribution Agreement, dated as of September
23, 1998, between QUALCOMM and the Registrant
10.1.1(9) First Amendment to Separation and Distribution Agreement,
dated as of August 6, 1999, between Registrant and QUALCOMM
10.2(8) Credit Agreement, dated as of September 23, 1998, between
QUALCOMM and the Registrant
10.3(8) Tax Matters Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.4(8) Interim Services Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.5(8) Master Agreement Regarding Equipment Acquisition, dated as
of September 23, 1998, between QUALCOMM and the Registrant
10.5.1(9) First Amendment to Master Agreement Regarding Equipment
Procurement, dated as of August 6, 1999, between Registrant
and QUALCOMM
10.6(8) Employee Benefits Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.7(8) Conversion Agreement, dated as of September 23, 1998,
between QUALCOMM and the Registrant
10.8(8) 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(1) Form of non-qualified/incentive stock option under the 1998
Stock Option Plan
10.11(1) Form of non-qualified stock option under the 1998 Stock
Option Plan granted to QUALCOMM option holders in connection
with the distribution of Registrant's common stock
10.12(1) Form of Registrant's 1998 Non-Employee Directors' Stock
Option Plan
10.13(1) Form of non-qualified stock option under the 1998
Non-Employee Directors' Stock Option Plan
10.14(1) Form of Registrant's Employee Stock Purchase Plan
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15(1) Assignment and Assumption of Lease dated August 11, 1998
between QUALCOMM and Vaxa International, Inc.
10.16(1) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers
10.17(4) Loan Agreement, dated as of September 28, 1998, between
Pegaso
Comunicaciones y Servicios, S.A. de C.V. and the Registrant
10.18(4) Promissory Note, executed September 25, 1998, payable to
Registrant by Pegaso Comunicaciones y Servicios, S.A. de
C.V.
10.19(4) Pledge Agreement, dated September 28, 1998, by and among the
Guarantors, the Issuers and Registrant
10.20(5) Asset Purchase Agreement, dated December 24, 1998, by and
among Chase Telecommunications Holdings, Inc., Anthony
Chase, Richard McDugald and Registrant
10.21.1(6) Stock Purchase Agreement, dated April 12, 1999, by and among
Inversiones Leap Wireless Chile S.A., Telex -- Chile S.A.,
and Chilesat S.A.
10.21.2(7) Novation and Assumption of Payment Obligation Agreement,
dated May 11, 1999, by and among Chilesat Telefonia Personal
S.A., Inversiones Leap Wireless Chile S.A. and Chilesat S.A.
(In Spanish and accompanied by a translation in English)
10.22(9) Cricket Communications, Inc. 1999 Stock Option Plan
10.23(9) Form of non-qualified/incentive stock option under the
Cricket Communications, Inc. 1999 Stock Option Plan
10.24(9) Employment offer letter to Susan G. Swenson from Registrant,
dated July 9, 1999
10.25(10) 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 24b-2.
10.26(10) 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 24b-2.
10.26.1(10) Exhibit A -- Form of Borrower Pledge Agreement
10.26.2(10) Exhibit B -- Form of Collateral Agency and Intercreditor
Agreement
10.26.3(10) Exhibit C -- Form of Guarantee Agreement
10.26.4(10) Exhibit D -- Form of Indemnity, Subrogation and Contribution
Agreement
10.26.5(10) Exhibit E -- Form of Parent Agreement
10.26.6(10) Exhibit F -- Form of Parent Pledge Agreement
10.26.7(10) Exhibit G -- Form of Perfection Certificate
10.26.8(10) Exhibit H -- Form of Security Agreement
10.26.9(10) Exhibit I -- Form of Subordination Agreement
10.27(11) Memorandum of Agreement, dated September 20 1999, by and
between Ericsson Wireless Communications Inc., Leap Wireless
International, Inc., 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 24b-2.
</TABLE>
4
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.28(10) Second Amended and Restated Deferred Payment Agreement,
dated October 12, 1999, among Chilesat Telefonia Personal
S.A., Inversiones Leap Wireless Chile S.A., and QUALCOMM
Incorporated, as Vendor, Administrative Agent and Collateral
Agent
13.1(10) Portions of Registrant's Annual Report to Shareholders for
the Fiscal Year Ended August 31, 1999
21.1(10) Subsidiaries of the Registrant
23.1(12) Consent of PricewaterhouseCoopers, independent accountants
27.1(10) Financial Data Schedule
</TABLE>
---------------
(1) Filed as an exhibit to Leap's Registration Statement on Form 10, as amended
(File No. 0-29752), and incorporated herein by reference.
(2) Filed as an exhibit to Leap's Current Report on Form 8-K dated September
14, 1998, and incorporated herein by reference.
(3) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended February 28, 1999, as filed with the Securities and Exchange
Commission on April 14, 1999, and incorporated herein by reference.
(4) 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 Securities and Exchange
Commission on November 30, 1998, as amended, and incorporated herein by
reference.
(5) Filed as an exhibit to Leap's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1998, as filed with the Securities and Exchange
Commission on January 14, 1999, and incorporated herein by reference.
(6) Filed as an exhibit to Leap's Current Report on Form 8-K dated May 4, 1999,
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 Securities and Exchange Commission on
July 15, 1999, and incorporated herein by reference.
(8) 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.
(9) 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.
(10) Filed as an exhibit to Leap's Annual Report on Form 10-K for the fiscal
year ended August 31, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to Amendment No. 1 to Leap's Annual Report on Form 10-K
for the fiscal year ended August 31, 1999 and incorporated herein by
reference.
(12) Filed herewith.
5
<PAGE> 6
(b) REPORTS ON FORM 8-K
On July 6, 1999, Leap filed Amendment No. 1 to its previously filed Form
8-K dated April 19, 1999. Leap's April 19, 1999 Form 8-K reported the
acquisition by a wholly owned subsidiary of Leap of all of the shares of
Chilesat Telefonia Personal, S.A. that the Leap subsidiary did not already own.
Amendment No. 1 to the Form 8-K was filed to add pro forma financial statements
to the Form 8-K and also updated the Chilesat Telefonia Personal S.A. financial
statements contained in the Form 8-K to include unaudited financial information
with respect to the three month period ended March 31, 1999. The following
financial statements were included in the July 6, 1999 Amendment No. 1 to Form
8-K:
(1) Financial Statements of Business Acquired (i.e., Chilesat Telefonia
Personal S.A.)
Report of Independent Accountants
Balance Sheet at March 31, 1999 (unaudited) and December 31, 1998 and
1997
Statement of Income and Comprehensive Income for the three month period
ended March 31, 1999 and 1998 (unaudited), for the year ended December
31, 1998, and for the periods from inception (March 3, 1997) to
December 31, 1997, March 31, 1999 (unaudited), and December 31, 1998
Statement of Cash Flows for the three month period ended March 31, 1999
and 1998 (unaudited), for the year ended December 31, 1998 and for the
periods from inception (March 3, 1997) to December 31, 1997, March 31,
1999 (unaudited), and December 31, 1998
Statement of Shareholders' Equity for the period from inception (March
3, 1997) to December 31, 1998, and for the period January 1, 1999 to
March 31, 1999 (unaudited)
Notes to the Financial Statements
(2) Pro Forma Financial Information of Leap Wireless International, Inc.
Unaudited Pro Forma Statement of Operations for the six months ended
February 28, 1999
Unaudited Pro Forma Statement of Operations for year ended August 31,
1998
Unaudited Pro Forma Balance Sheet as of February 28, 1999
Notes to the Pro Forma Financial Statements
6
<PAGE> 7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LEAP WIRELESS INTERNATIONAL, INC.
June 28, 2000 By: /s/ HARVEY P. WHITE
------------------------------------
Harvey P. White,
Chief Executive Officer and Director
7
<PAGE> 8
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 25, 2000
To the Stockholders of
Pegaso Telecomunicaciones, S.A. de C.V.
In our opinion, the accompanying consolidated balance sheets 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,
1999 and 1998, and the results of their operations, their cash flows and the
changes in their stockholders' equity for the year ended December 31, 1999 and
for the period from June 24, 1998 (date of inception) 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 audits. We conducted our audits 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
misstatements. 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
Guillermo Pineda M.
8
<PAGE> 9
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,138 $ 30,313
Recoverable value added tax............................... 21,298 9,531
Trade receivables......................................... 3,401 --
Other accounts receivable................................. 2,115 344
Inventories............................................... 1,615 --
Prepaid advertising....................................... 4,274 6,256
Other current assets...................................... 547 219
--------- --------
Total current assets.............................. 45,388 46,663
PROPERTY, FURNITURE AND TELECOMMUNICATIONS
EQUIPMENT -- Net.......................................... 306,805 132,296
PUBLIC TELECOMMUNICATIONS NETWORK CONCESSIONS -- Net........ 237,380 233,530
--------- --------
Total assets...................................... $ 589,573 $412,489
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bridge loan............................................... $ 94,430 $ --
Handsets suppliers........................................ 20,831 --
Vendor financing of equipment............................. 40,933 105,389
Accounts payable for equipment............................ 24,103 --
Payable to affiliated..................................... 5,494 13,761
Other accounts payable and accrued expenses............... 30,751 5,577
--------- --------
Total current liabilities......................... 216,542 124,727
--------- --------
LONG-TERM LIABILITIES:
Bank loans of credit...................................... 88,951 19,090
Vendor financing of equipment............................. 109,024 --
--------- --------
Total long-term liabilities....................... 197,975 19,090
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock............................................. 350,000 300,000
Accumulated losses........................................ (188,691) (31,328)
Accumulated other comprehensive income.................... 13,747 --
--------- --------
Total stockholders' equity........................ 175,056 268,672
--------- --------
Total liabilities and stockholders' equity........ $ 589,573 $412,489
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 10
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 24 (DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ----------------
<S> <C> <C>
Revenues:
Services.................................................. $ 3,919 $ --
Sales of handsets and accessories......................... 3,350 --
--------- --------
7,269 --
--------- --------
Operating costs and expenses:
Cost of services.......................................... (5,543) --
Cost of handsets and accessories.......................... (25,139) --
Selling, general and administrative expenses.............. (102,340) (30,090)
Depreciation and amortization............................. (17,712) (78)
--------- --------
(150,734) (30,168)
--------- --------
Operating loss.............................................. (143,465) (30,168)
--------- --------
Comprehensive financing result:
Interest expense.......................................... (16,511) 1,194
Interest income........................................... 1,314 --
Foreign exchange gain -- Net.............................. 994 --
Foreign exchange loss on remeasurement of financial
statements............................................. -- (2,474)
--------- --------
(14,203) (1,280)
--------- --------
Other income -- Net......................................... 899 441
--------- --------
Loss before income tax and employees' statutory profit
sharing................................................... (156,769) (31,007)
Provision for:
Income tax................................................ (411) (321)
Employees' statutory profit sharing....................... (183) --
--------- --------
Net loss.................................................... (157,363) (31,328)
Other comprehensive income:
Foreign currency translation adjustment................... 13,747 --
--------- --------
Comprehensive loss.......................................... $(143,616) $(31,328)
--------- --------
Basic and diluted loss per share............................ $ (4.90) $ (2.09)
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 11
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 24 (DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(157,363) $ (31,328)
--------- ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 17,712 78
Other provisions.......................................... 4,412 --
Foreign exchange loss on remeasurement of financial
statements............................................. -- 2,474
Changes in assets and liabilities:
Recoverable value added tax............................... (11,040) (9,443)
Trade receivables......................................... (3,356) --
Other accounts receivable................................. (1,727) (341)
Prepaid advertising....................................... (4,013) (67)
Other current assets...................................... 229 (217)
Other accounts payable and accrued expenses............... 49,145 5,753
--------- ---------
Total adjustments................................. 51,362 (1,763)
--------- ---------
Net cash used in operating activities....................... (106,001) (33,091)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, furniture and telecommunications
equipment................................................. (38,356) (77)
Public telecommunications network concession................ -- (233,530)
--------- ---------
Net cash used in investing activities....................... (38,356) (233,607)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital stock issuance........................ 50,000 300,000
Bridge loan................................................. 90,000 --
--------- ---------
Net cash provided by financing activities................... 140,000 300,000
--------- ---------
Effect of exchange rate fluctuations on cash................ (13,818) (2,989)
--------- ---------
Net (decrease) increase in cash and cash equivalents........ (18,175) 30,313
Cash and cash equivalents at beginning of period............ 30,313 --
--------- ---------
Cash and cash equivalents at end of period.................. $ 12,138 $ 30,313
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax paid............................................. $ 536 $ --
Interest paid (net of amount capitalized)................... 8,922 14
Prepaid advertising contracted with notes payable........... 420 5,941
Property, furniture and telecommunications equipment
acquired through financing................................ 121,054 132,297
Inventories acquired through financing...................... 1,615 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 12
PEGASO TELECOMUNICACIONES, S. A. DE C. V.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
CAPITAL ACCUMULATED COMPREHENSIVE
STOCK LOSSES INCOME TOTAL
-------- ----------- ----------------- ---------
<S> <C> <C> <C> <C>
Issuance of stock at inception on June 24,
1998........................................ $ 11 $ -- $ -- $ 11
Capital stock issuance........................ 299,989 -- -- 299,989
Net loss for the period....................... -- (31,328) -- (31,328)
-------- --------- ------- ---------
Balances at December 31, 1998................. 300,000 (31,328) -- 268,672
Capital stock issuance........................ 50,000 -- -- 50,000
Net loss for the period....................... -- (157,363) -- (157,363)
Foreign currency translation adjustment....... -- -- 13,747 13,747
-------- --------- ------- ---------
Balances at December 31, 1999................. $350,000 $(188,691) $13,747 $ 175,056
======== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 13
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
NOTE 1 -- OPERATIONS OF THE COMPANY AND 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 December 31, 1999 and 1998, the stockholders of Telecomunicaciones were Grupo
Televisa, S. A. (through its subsidiary Corporativo del Valle de Mexico, S. A.
de C. V.), Mr. Alejandro Burillo Azcarraga, Leap Wireless International, Inc.
(through its subsidiary Leap PCS Mexico, Inc.) and other investments funds.
Sprint PCS (Sprint), a U.S. telecommunications corporation, has entered
into a memorandum of understanding to make an investment in Telecomunicaciones.
The proposed agreement, if consummated, would result in Sprint obtaining a 30.5%
interest in Telecomunicaciones.
At December 31, 1999 and 1998, Telecomunicaciones and its subsidiaries
(collectively, the "Company") held 100% of the capital stock of the following
Mexican subsidiaries:
<TABLE>
<CAPTION>
SUBSIDIARY ACTIVITY
---------- --------
<S> <C>
Pegaso PCS, S. A. de C. V. (PCS) Provides telephone services to the
general public through an agency
agreement with Comunicaciones y Sistemas.
Pegaso Recursos Humanos, S. A. de C. V. Provides administrative services to
(Recursos Humanos) companies in the Group.
Pegaso Comunicaciones y Sistemas, S. A. Holds the concessions and the
de C. V. (Comunicaciones y Sistemas) telecommunications equipment for
telephone services to be provided by PCS.
</TABLE>
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).
The concessions include the rights to install, operate and exploit a
nationwide public telecommunications network for a period 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).
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, a bridge loan with a limit of $115,000 and a backstop
financing offered by Qualcomm. See Notes 6, 7 and 8. 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 costs
structure.
The Company launched telecommunications operations in the cities of
Tijuana, Baja California in February, Guadalajara, Jalisco in August, Monterrey,
Nuevo Leon in September and Mexico, Federal District in December 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 and Reporting by
Development-Stage Enterprises" in 1998.
13
<PAGE> 14
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
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 following is a summary of the Company's significant accounting
policies:
a. 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 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 year. The net equity effects of translation are
recorded in the cumulative foreign currency translation adjustment account as a
part of accumulated other comprehensive income.
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
includes all investments purchased with original maturities of three months or
less.
d. Inventories and cost of sales:
Inventories (handsets and accessories) are recorded at average cost. The
resulting amounts are not in excess of market value.
Cost of handsets and accessories is recorded following the average cost
method.
e. 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 $15,890 for the year ended December 31,
1999. No advertising expenses were incurred for the period ended December 31,
1998.
14
<PAGE> 15
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
f. Property, furniture and telecommunications equipment:
Property, furniture and telecommunications equipment are recorded at cost.
Depreciation is calculated by the straight-line method, based on Company's
estimate of the useful lives, ranging from four to twenty years.
Leasehold improvements are capitalized at cost and are amortized using the
straight-line method, applying the annual rate of 5%. If leases conclude prior
this amortization period, the balance of such leasehold improvements are
expensed.
g. Public telecommunications network concessions:
The public telecommunications network concessions include the cost of the
radio-electric frequency band concession and other related costs, and are
recorded at cost.
Amortization is calculated by the straight-line method, based on the
estimated useful life (concession period, twenty years).
h. 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
net deferred tax assets not expected to be realized.
i. 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, seniority premium obligations were not significant, and,
therefore no liability has been recognized for each of the periods presented.
Other compensation based on length of service to which employees may be
entitled in the event of dismissal or death, in accordance with the Federal
Labor Law, is charged to income in the year in which it becomes payable.
j. 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.
k. Revenue recognition:
Revenues from air time are recorded when service is provided. Sales of
handsets and accessories are recorded when goods are delivered. Other revenues,
mainly calling party pays and long distance services, are recognized when the
related services are provided.
l. Long-lived assets:
The Company evaluates potential impairment loss relating to long-lived
assets, by assessing whether the unamortized carrying amount can be recovered
over the remaining life of the assets through undiscounted future expected cash
flows generated by the assets and without interest charges. If the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset, a loss is recognized for the differences between the fair value and
carrying value of the asset. Assets to be disposed of are recorded at the lower
of carrying amount of fair value less cost to sell. Testing whether an asset is
impaired and for measuring
15
<PAGE> 16
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
the impairment loss is performed for assets groupings at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows generated by other asset groups.
Long-live assets will be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. No
impairment losses have been recorded by the Company.
m. Loss per share:
Loss per share is computed by dividing consolidated net loss by the
weighted average number of shares outstanding. At December 31, 1998 and 1999,
the Company did not have any potentially dilutive instruments.
n. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires Company's 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.
o. Fair value of financial instruments:
The estimated fair value of the company's financial instruments has been
determined using available market information and appropriate valuation
methodologies. The carrying value of cash and cash equivalents, accounts
receivable and accounts payable approximate their fair values because of the
short-term maturity of these instruments. The Company's bank loans and other
debt are subject to interest at variable rates, and as a result, the book value
of said liabilities approximates their fair values.
p. New accounting requirements:
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 30, 2000. 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:
Accounts payable to affiliated companies are integrated as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------ -------
<S> <C> <C>
Leap Wireless International, Inc. and subsidiaries........ $5,074 $ 7,820
Grupo Televisa, S. A. and subsidiaries.................... 420 5,941
------ -------
$5,494 $13,761
====== =======
</TABLE>
16
<PAGE> 17
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
Following is a summary of the main transactions with affiliated companies
and other related parties:
<TABLE>
<CAPTION>
PERIOD FROM JUNE 24
YEAR ENDED (DATE OF INCEPTION TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ---------------------
<S> <C> <C>
Expenses:
Equipment purchases from Qualcomm Inc.(1)... $ -- $80,100
Interest on advances from stockholders...... -- 1,697
Professional services(2).................... 34,484 8,671
Advertising services........................ 3,530 6,256
Rent payments to stockholders(3)............ 1,547 40
</TABLE>
-------------------------
(1) Qualcomm Inc. (Qualcomm) ceased being an affiliated company on September 23,
1998.
(2) Provided by Leap Wireless Services Mexico, S. A. de C. V., a subsidiary of
Leap Wireless International, Inc. and represents mainly advisory services
paid in connection with the Company's organization, start-up activities and
supervision of the design and implementation of the network. These services
are subcontracted to GTE Services Mexico, S. A. de C. V.
(3) Includes $1,415 paid to Grupo Televisa, S. A. and subsidiaries for the rent
of two offices. The lease agreements expire in May and September 2003. Also
includes $132 paid to Mr. Alejandro Burillo Azcarraga for the rent of two
offices. The leases for these offices are each for a period of one year,
from July 1999 to July 2000.
NOTE 4 -- PROPERTY, FURNITURE AND TELECOMMUNICATIONS EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, ANNUAL
-------------------- DEPRECIATION RATE
1999 1998 (%)
-------- -------- -----------------
<S> <C> <C> <C>
Telecommunications equipment................... $282,901 $ -- 12, 10 and 5
Furniture and equipment........................ 6,633 630 10
Computer equipment............................. 16,311 156 25
Transportation equipment....................... 1,439 248 25
Leasehold improvements......................... 2,999 969 5
Maintenance equipment.......................... 141 -- 10
-------- --------
310,424 2,003
Accumulated depreciation....................... (7,798) (78)
-------- --------
302,626 1,925
Land........................................... 90 85
Telecommunications equipment in the process of
installation................................. 3,134 104,874
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............ 955 2,677
-------- --------
$306,805 $132,296
======== ========
</TABLE>
17
<PAGE> 18
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
Telecommunications equipment includes $9,775 and $3,114 of capitalized
interest at December 31, 1999 and December 31, 1998, respectively.
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
inducement access telecommunications services. Balances are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cost of concession (includes $1,356 and $1,278 of
capitalized interest at December 31, 1999 and
December 31, 1998, respectively)..................... $247,700 $233,530
Accumulated amortization............................... (10,320) --
-------- --------
$237,380 $233,530
======== ========
</TABLE>
Concessions include the rights to provide the following:
- Fixed or mobile wireless telephone service.
- Transmission or reception of signals, images, voice, sounds or
information of any nature through the network, and additional services
authorized by the SCT.
- Access to data networks, video, 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 December 31, 1999, these financial covenants were satisfactorily
complied with.
NOTE 6 -- BRIDGE LOAN:
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% (12.6% in 1999), provided
that in each case, the applicable margin shall increase by 0.5% on each interest
adjustment date. As of December 31, 1999, $94,430 is outstanding on such loans.
Interest expense in 1999 amounted to $3,729. The original maturity date of the
bridge loan is November 27, 2000.
On May 27, 1999, Telecomunicaciones entered into stock option agreements
with Qualcomm, Leap Wireless International, Inc. and Mr. Alejandro Burillo
Azcarraga (the Grantees). As a condition to execute the bridge loan agreement
and to issue the Qualcomm guaranty, Telecomunicaciones granted each of 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 represented 2.4% of the aggregate capital stock.
18
<PAGE> 19
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
In accordance with the stock option agreements, the Grantees may execute
the above mentioned stock options, if the total internal rate of return on the
average outstanding balance of the bridge loan is less than 20%.
The 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 $.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 created by Leap Wireless International, Inc. and Mr. 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.
SUBSEQUENT EVENT:
On February 8, 2000, with the stockholders' authorization, the Company
signed an amendment to the bridge loan agreement, increasing the total amount
from $115,000 to $190,000. On the additional $75,000, Qualcomm agreed to change
the conditions as follows:
a. There is no up-front fee. Only the funding bank's administration
fee for $93.75 is paid.
b. The requirement to guarantee a 20% internal rate of return is
waived.
c. The right to receive stock options from the Company is waived.
All other conditions remain the same as in the original bridge loan
agreement.
NOTE 7 -- PROPOSED FINANCINGS TO BE UNDERWRITTEN BY QUALCOMM:
On December 22, 1999, Qualcomm committed to, and the Company accepted, the
underwriting of $250,000 senior secured loan facility (the "Loan Facility") with
the proceeds to be used by the Company for capital expenditures, working capital
and operating expenses. On the Loan Facility closing date, the initial advance
will be used to repay the existing bridge loan (mentioned in Note 6). Qualcomm
will underwrite the new $250,000 loan in the event that the Company fails to
obtain a bank loan facility of at least $250,000 prior to April 1, 2000.
As compensation to Qualcomm for the commitment made, the Company agreed to
pay Qualcomm an underwriting fee equal to 1% of the maximum principal amount of
the loan facility, payable to within five business days after Qualcomm and
Telecomunicaciones execute the documentation agreed. There will also be other
fee expenses, covenants, limitations and commitments related to this kind of
transaction.
In addition to the $250,000 loan facility mentioned above, Qualcomm
committed to, and the Company accepted, the underwriting of a high yield bond
offering of $250,000 with the proceeds of the offering to be used by the Company
for capital expenditures, working capital and operating expenses. Qualcomm will
underwrite this bond offering promptly after January 1, 2001; however, the
amount of such offering will be reduced depending on the Company's success in
obtaining any debt financing (excluding the bridge loan, the vendor financing
and the $250,000 loan facility described above) and any equity financing in
excess of $100,000 on a cumulative aggregate basis (excluding $50,000 of equity
currently committed by the Company's existing shareholders, as explained in Note
9).
19
<PAGE> 20
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
The Company agreed to pay Qualcomm a commitment fee equal to 2% of the
maximum principal amount of the notes, payable on the date the notes are issued.
See Note 11b. for commitment to purchase handsets from Qualcomm.
NOTE 8 -- VENDOR FINANCING AND BANK LINES OF CREDIT:
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 CREDIT LINE
------------------ --------------- -----------
<S> <C> <C>
Qualcomm............................... Qualcomm loan 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 credit line is to be utilized as follows:
<TABLE>
<CAPTION>
CREDIT VALIDITY AUTHORIZED LINE
------ -------- ---------------
<S> <C> <C>
Loan 1................................. From the date of authorization to
December 31, 2000 $200,000
Loan 2................................. From January 1, 2001 to December 31,
2002 90,000
Additional loan........................ From the date of authorization to
December 31, 2002 20,000
--------
$310,000
========
</TABLE>
Advances under loans 1 and 2 are composed of "A" and "B" tranches. Tranche
"A", will be for the financing of equipment purchases and is subject to
interest at the LIBOR plus 1.5 points. Tranche "B" is for the financing of
customs duties (excluding value added tax) 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
loan and tranche the amount has been disbursed from.
As of December 31, 1999, $109,024 was outstanding under this line of
credit, which is shown in the consolidated balance sheet as long-term
vendor financing of equipment. The short-term vendor financing of equipment
balances shown in the consolidated balance sheet include liabilities of
$40,933 and $105,389, as of December 31, 1999 and 1998, respectively,
payable to Qualcomm and Qualcomm Wireless Services (Mexico), S. A. de C. V.
which are expected to be paid through advances from the line of credit
facilities.
Principal payments of "A" and "B" tranches of credit management by ABN AMRO
BANK, N.V. will be negotiated in good faith and must be agreed upon by both
parties prior to disbursement.
20
<PAGE> 21
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
(2) This credit line is to be utilized as follows:
<TABLE>
<CAPTION>
CREDIT VALIDITY AUTHORIZED LINE
------ -------- ---------------
<S> <C> <C>
Loan 1................................. From the date of authorization to
December 31, 2000 $170,000
Loan 2................................. From January 1, 2001 to December 31, 2002 100,000
Additional loan........................ From the date of authorization to
December 31, 2002 10,000
--------
$280,000
========
</TABLE>
These loans are subject to interest at the Eurodollar rate plus 4.5 points
per year, and an adjustable margin (10.1 % and 9.75% at December 31, 1999
and 1998, respectively).
At December 31, 1999 $88,951 was outstanding under this line of credit
(credit 1) and is included in long-term bank lines of credit. The schedule
of maturities of the amounts outstanding are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
------------ -------
<S> <C>
2002..................................................... $17,790
2003..................................................... 26,685
2004..................................................... 44,476
-------
$88,951
=======
</TABLE>
Principal payment for this credit line 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>
The Company has pledged all properties, rights and assets, as described in
Note 1, to collateralize the obligations derived from the financing contracts.
Additionally, 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 the 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 y
Sistemas, PCS and Recursos Humanos.
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 telecommunications equipment from Qualcomm and Alcatel.
b. The capital stock should be increased by two contributions of $50,000
each, by July 31, 1999 (already completed) and on August 31, 2000, respectively.
c. Neither dividend payments nor capital distributions should be made
during the loan periods.
21
<PAGE> 22
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
NOTE 9 -- STOCKHOLDERS' EQUITY:
Telecomunicaciones was incorporated on June 24, 1998, through the
contribution of $11 for the subscription of 100,000 common shares, with a par
value of one Mexican peso each.
On June 30, 1998, Telecomunicaciones exchanged the original 100,000 common
shares for 1,000 shares with no par value. On that same date, the Company
received $1 from its stockholders in exchange for the issuance of 200 common
shares with no par value.
On September 28, 1998, Telecomunicaciones 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 that same date, the
stockholders agreed to increase the capital stock by means of two contributions
of $50,000 each, before July 31, 1999 and August 31, 2000.
On July 27 and 30, 1999, the Company received $50,000 in exchange for the
issuance of 5,000,000 common series N shares with no par value.
At December 31, 1999, the authorized capital stock is 35,000,000
no-par-value shares, all of which are issued and outstanding, as follows:
<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 10 -- INCOME TAX (IT), ASSET TAX (AT) AND EMPLOYEES' STATUTORY PROFIT
SHARING (ESPS):
Telecomunicaciones and its subsidiaries pay the IT and AT on individual
company basis.
For the periods ended December 31, 1999 and 1998, Telecomunicaciones
generated a net tax loss of $5,218 and $4,976 and two of its subsidiaries a
combined net tax loss of $173,518 and $8,394, respectively. The other
subsidiary, Recursos Humanos, had net taxable income of $1,186 and $944,
respectively. Therefore, for the periods ended December 31, 1999 and 1998, the
Company recognized a tax provision of $594 and $321 in the consolidated
financial statements.
22
<PAGE> 23
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
Tax loss carryforwards 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 as follows:
<TABLE>
<CAPTION>
EXPIRATION YEAR AMOUNT
--------------- ----------
<S> <C>
2008................................................. $ 16,628
2009................................................. 186,100
----------
$ 202,728
==========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Inventories............................................. $ (565) $ --
Fixed assets............................................ (10,867) --
Concession.............................................. (3,838) --
Interest and consultancy fees capitalized............... -- (8,692)
Preoperating expenses................................... 4,960 4,660
Other temporary items................................... (836) --
Tax loss carryforwards.................................. 70,955 4,546
Valuation allowance..................................... (59,809) (514)
-------- -------
$ -- $ --
======== =======
</TABLE>
The statutory IT rates for 1999 and 1998 were 35% and 34%, 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 December 31, 1999 and 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Tax at statutory rate....................................... (35)% (34)%
Foreign exchange loss on remeasurement of financial
statements................................................ -- 3%
Permanent items, including inflationary effects............. 6% 7%
Interest and consultancy fees............................... (3)% (5)%
Preoperating expenses....................................... -- 15%
Other temporary items....................................... (1)% --
Amortization of concession.................................. (7)% --
Valuation allowance......................................... 40% 15%
--- ---
Effective income tax 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. For the periods
ended at December 31, 1999 and 1998, the Company was not subject to the payment
of AT.
For the period ended December 31, 1998, the Company was not subject to the
payment of ESPS. For the year ended December 31, 1999, the Company generated
ESPS amounting to $183.
23
<PAGE> 24
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
NOTE 11 -- COMMITMENTS AND CONTINGENCIES:
a. The Company leases offices and other spaces related to its activity,
under operating agreements expiring through 2006, which annual minimum
lease payments under such leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
2000........................................................ $ 2,917
2001........................................................ 2,595
2002........................................................ 2,401
2003........................................................ 1,946
Thereafter.................................................. 807
-------
$10,666
=======
</TABLE>
Additionally, the Company has site-operating leases for the network
which annual amount is approximately $5,742, payable on a monthly,
bimonthly and quarterly basis. These lease contracts are renovated
mainly on annual basis.
Lease payments for the periods ended December 31, 1999 and December
31,1998 recorded in the statement of income amounted to $11,697 and
$824, respectively.
b. The Company is committed to purchase 50% of its handsets under the
existing handset supply agreement between the Company and Qualcomm and
to use the "cdmaOne" and the "multi-carrier mode" of the ITU proposed
third generation CDMA standard exclusively as the primary technology for
its wireless telecommunications systems, during the period of Qualcomm
financing support described in Note 7 above.
c. The Company has issued purchase orders for the acquisition of
telecommunications equipment, services, and installation consultancy, to
be received in 2000, totaling $53,400.
It is expected that these purchases will be covered through the vendor
financing and bank lines of credit described in Note 8.
24
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Leap Wireless International, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated October 18, 1999 appearing in the Leap Wireless International, Inc.
1999 Annual Report to Shareholders (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects the information set forth therein when
read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Diego, California
October 18, 1999
25
<PAGE> 26
SCHEDULE I
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED INFORMATION AS TO THE
FINANCIAL CONDITION OF THE REGISTRANT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 17,502 $
Accounts receivable......................................... 825 --
Other current assets........................................ 55 --
--------- --------
Total current assets.............................. 18,382 --
--------- --------
Property and equipment, net................................. 2,630 --
Investments in and loans receivable from subsidiaries....... 180,270 141,805
Intangible assets........................................... -- 6,838
Deposits and other assets................................... 1,449 --
--------- --------
Total assets...................................... $ 202,731 $148,643
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 11,620 $ 5,680
--------- --------
Total current liabilities......................... 11,620 5,680
--------- --------
Long-term debt.............................................. 120,161 --
Other long-term liabilities................................. 50 --
--------- --------
Total liabilities................................. 131,831 5,680
--------- --------
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........ $ 202,731 $148,643
========= ========
</TABLE>
See accompanying notes to condensed financial statements.
26
<PAGE> 27
SCHEDULE I
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED INFORMATION AS TO THE
RESULTS OF OPERATIONS AND COMPREHENSIVE LOSS
OF THE REGISTRANT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
General and administrative expenses........................ $ (17,567) $ (9,292) $(1,361)
--------- -------- -------
Operating loss............................................. (17,567) (9,292) (1,361)
Equity in net loss of subsidiaries......................... (123,655) (38,284) (3,793)
Write-down of investments in subsidiaries.................. (27,242) -- --
Interest income............................................ 960 843 --
Interest expense and amortization of discount and facility
fee...................................................... (6,102) -- --
Gain on sale of subsidiary................................. 9,097 -- --
Other income (expense), net................................ (104) -- --
--------- -------- -------
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................ $ (9.19) $ (2.65) $ (0.29)
--------- -------- -------
Shares used to calculate basic and diluted net loss per
common share............................................. 17,910 17,648 17,648
========= ======== =======
</TABLE>
See accompanying notes to condensed financial statements.
27
<PAGE> 28
SCHEDULE I
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED INFORMATION AS TO THE
CASH FLOWS OF THE REGISTRANT
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net cash used in operating activities.................... $ (17,286) $ (9,322) $ (1,193)
--------- --------- --------
Investing activities:
Purchase of property and equipment..................... (3,182) -- --
Investments in and loans to subsidiaries............... (186,707) (140,234) (46,000)
Loan receivable to related party....................... (17,500) -- --
Repayment of loan receivable from related party........ 17,500 -- --
Acquisition of subsidiary.............................. -- (564) --
Proceeds from sale of subsidiary....................... 16,024 -- --
--------- --------- --------
Net cash used in investing activities.................... (173,865) (140,798) (46,000)
--------- --------- --------
Financing activities:
Borrowings under credit agreement...................... 128,584 -- --
Repayment of borrowings under credit agreement......... (17,500) -- --
Issuance of common stock............................... 2,301 -- --
Former parent company's investment..................... 95,268 150,120 47,193
--------- --------- --------
Net cash provided by financing activities................ 208,653 150,120 47,193
--------- --------- --------
Net increase in cash and cash equivalents................ 17,502 -- --
Cash and cash equivalents at beginning of year........... -- -- --
--------- --------- --------
Cash and cash equivalents at end of year................. $ 17,502 $ -- $ --
Supplemental disclosure of non-cash investing and
financing activities:
Facility fee due on long-term debt..................... $ 5,300 $ -- $ --
Repurchase of warrant.................................. $ 5,355 $ -- $ --
</TABLE>
See accompanying notes to condensed financial statements.
28
<PAGE> 29
SCHEDULE I
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Leap Wireless International, Inc. ("Leap"), a Delaware corporation, is the
parent company of all Leap subsidiaries. The accompanying condensed financial
statements reflect the financial position, results of operations and
comprehensive loss and cash flows of Leap on a separate basis. All subsidiaries
of Leap are reflected as investments accounted for under the equity method of
accounting.
No cash dividends were paid to Leap by its subsidiaries during the years
ended August 31, 1999, 1998 or 1997.
For accounting policies and other information, see the Notes to
Consolidated Financial Statements included in Leap's Annual Report to
Shareholders for the fiscal year ended August 31, 1999, which is incorporated by
reference in this Annual Report on Form 10-K.
29
