<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 2000
REGISTRATION NO. 333-93073
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LEAP WIRELESS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4812 33-0811062
(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:
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<S> <C>
SCOTT N. WOLFE STEPHANIE I. SPLANE
BARRY M. CLARKSON ROBERT E. BENFIELD
LATHAM & WATKINS O'MELVENY & MYERS LLP
701 B STREET, SUITE 2100 EMBARCADERO CENTER WEST
SAN DIEGO, CA 92101-8193 275 BATTERY STREET
(619) 236-1234 SAN FRANCISCO, CA 94111-3305
(415) 984-8700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, 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(c)
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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectuses: one to be
used in connection with an offering in the United States and Canada and one to
be used in a concurrent offering outside the United States and Canada. The two
forms of prospectuses are identical except for the front cover page. The
U.S./Canadian prospectus is included in this registration statement. The
prospectus is followed by the alternate front cover page to be used in the
international prospectus. The alternate front cover page is labeled "Alternate
Page for International Prospectus."
<PAGE> 3
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 WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued February 16, 2000
4,000,000 Shares
[LEAP WIRELESS LOGO]
COMMON STOCK
------------------------
LEAP WIRELESS INTERNATIONAL, INC. IS OFFERING SHARES OF ITS COMMON STOCK.
INITIALLY, THE U.S. UNDERWRITERS ARE OFFERING 3,200,000 SHARES IN THE UNITED
STATES AND CANADA, AND THE INTERNATIONAL UNDERWRITERS ARE OFFERING 800,000
SHARES OUTSIDE THE UNITED STATES AND CANADA.
------------------------
LEAP WIRELESS INTERNATIONAL, INC.'S COMMON STOCK IS QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "LWIN." ON FEBRUARY 14, 2000, THE REPORTED LAST
SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET SYSTEM WAS $90 3/16
PER SHARE
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 13.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Leap
-------- ------------- -----------
<S> <C> <C> <C>
Per Share................................................... $ $ $
Total.......................................................
</TABLE>
Leap Wireless International, Inc. has granted the underwriters the right to
purchase up to an additional 600,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
ABN AMRO ROTHSCHILD
a division of ABN AMRO
Incorporated
, 2000
<PAGE> 4
[Inside Front Cover]
The inside front cover consists of a two page foldout. The outside page
contains the Cricket logo at the top of the page with large text stating
"Making Wireless Comfortable for 30 Million Potential Customers in 53 U.S.
Markets* Including..." followed by a list of licensed markets. The bottom of the
page contains a disclaimer stating "*Includes licenses acquired or agreed to be
acquired." The inside two page foldout consists of a picture showing people on
an extra-long couch holding wireless handsets with the following quotes: "The
whole neighborhood thinks I'm nuts? Everyone says she'll run up huge phone
bills on me, but with Cricket you can't;" "I just got something you never
thought a guy like me could get--a wireless phone. It's new, it's simple and
it's called Cricket;" "Finally, no nonsense wireless for no nonsense people. No
contract and they didn't even bother checking my credit;" and "I know two
things about wireless phones. First I need one, and second, I don't have time
to figure out those ridiculous rate plans." Below the people on the couch is
the phrase "They're Comfortable with Virtually All Their Local Calls for One
Low, Flat Rate." The Cricket logo is displayed at the bottom of the page.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 13
Special Note Regarding Forward-Looking Statements........... 23
Use of Proceeds............................................. 24
Price Range of Common Stock and Dividends................... 25
Capitalization.............................................. 26
Selected Consolidated Financial Data and Unaudited Pro Forma
Financial Data............................................ 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 31
Business.................................................... 45
Relationship with Qualcomm.................................. 68
Management.................................................. 73
Principal Stockholders...................................... 77
Certain Relationships and Related Transactions.............. 79
Description of Leap Capital Stock........................... 80
Description of the Units.................................... 84
Certain U.S. Federal Tax Considerations for Non-U.S. Holders
of Common Stock........................................... 88
Underwriters................................................ 91
Legal Matters............................................... 93
Experts..................................................... 94
Where to Find Additional Information........................ 94
Index to Financial Statements............................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus and
incorporated by reference into this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
We are offering to sell, and seeking offers to buy, shares of common stock only
in jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
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.
2
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(This page intentionally left blank)
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information about Leap and the common stock offered
by this prospectus. It does not contain all the information that is important to
you. You should read this summary together with the more detailed information
and our financial statements and notes appearing elsewhere in this prospectus.
You should carefully consider, among other factors, the matters set forth in
"Risk Factors." The terms "we," "our," "us" and "Leap" refer to Leap Wireless
International, Inc. and its subsidiaries unless the context suggests otherwise.
LEAP
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 30 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 (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;
- 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.
3
<PAGE> 8
We licensed Cricket to Chase Telecommunications, Inc., a company that we
have agreed to acquire. The Cricket service was launched under an agreement that
requires the management of Chase Telecommunications to control the business
until our proposed acquisition receives all necessary governmental approvals.
The acquisition is anticipated to be completed in the first calendar quarter of
2000. 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 December 31, 1999, there were approximately
22,000 Cricket customers in Chattanooga, including approximately 6,100 customers
added in December 1999. This represents an approximately 5.0% penetration of
covered potential customers after the first eight months of operation. In the
quarter ended November 30, 1999, 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. We also have entered into agreements to
purchase 19 other wireless licenses, including those of Chase
Telecommunications, and we have agreed to sell two licenses covering 234,000
potential customers. These 53 licenses cover approximately 30 million potential
customers in 53 local markets in the U.S. We are considering the purchase of
additional licenses in additional 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 28.6% 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 December 31, 1999, Pegaso had approximately
110,000 customers, including approximately 83,000 customers added in December
1999. 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. Pegaso recently announced
that it has signed a non-binding memorandum of understanding with Sprint PCS
under which Sprint PCS would invest up to $250 million by purchasing shares from
Pegaso and shareholders other than Leap. If the contemplated transaction is
consummated, Sprint PCS will acquire a 30.5% interest in Pegaso and our
percentage interest in Pegaso will decrease to 20.5%.
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 December 31, 1999,
4
<PAGE> 9
Smartcom had approximately 78,000 customers, including approximately 16,400
customers added in December 1999.
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.
- 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.
5
<PAGE> 10
THE OFFERING
Common stock offered............ 4,000,000 shares
Common stock to be outstanding
after the offering.............. 24,472,953 shares
Over-allotment option........... 600,000 shares
Use of proceeds................. We intend to use the net proceeds from the
offering for capital expenditures, acquisitions
of wireless licenses, strategic investments,
repayment of debt (if the unit offering is
consummated) and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol... LWIN
- -------------------------
Unless we specifically state otherwise, information in this prospectus
about the number of shares of our common stock to be outstanding upon the
closing of the offering excludes 600,000 shares of common stock which the
underwriters have the option to purchase to cover over-allotments,
shares of common stock issuable upon exercise of the Warrants to be issued in
the units offering and the following shares reserved for issuance as of February
11, 2000:
- 609,659 shares issuable upon conversion of outstanding Qualcomm Trust
Convertible Preferred Securities;
- 4,500,000 shares issuable upon exercise of a warrant issued to Qualcomm;
- 3,728,506 shares issuable upon exercise of options to purchase Leap
common stock granted to holders of existing Qualcomm options at the time
of the distribution of Leap's common stock to the stockholders of
Qualcomm;
- 3,685,086 shares issuable to employees, officers, directors and
consultants under Leap's equity incentive plans; and
- 403,128 shares issuable upon consummation of our pending acquisitions of
a wireless license in Denver and three wireless licenses in Albany,
Columbus and Macon, Georgia, which acquisitions are subject to FCC
approval and other conditions.
THE UNITS OFFERING
Securities Offered.............. Senior Units, each consisting of
one % Senior Note due 2010 and one Warrant
to purchase common stock, and Senior
Discount Units, each consisting of one %
Senior Discount Note due 2010 and one Warrant
to purchase common stock.
Issue Prices.................... $ per Senior Unit and $ per Senior
Discount Unit.
Closing......................... We anticipate that the units offering will be
concurrent with this offering. The consummation
of the units offering is conditioned upon the
closing of this offering; however, the closing
of this offering is not conditioned upon the
closing of the units offering.
6
<PAGE> 11
THE NOTES
SENIOR NOTES
Aggregate Amount................ $ aggregate principal amount of %
Senior Notes due 2010.
Maturity........................ , 2010.
SENIOR DISCOUNT NOTES
Aggregate Amount................ $ aggregate principal amount at
maturity ($ initial accreted value) of
% Senior Discount Notes due 2010.
Maturity........................ $ , 2010.
SENIOR NOTES AND SENIOR DISCOUNT NOTES
Guarantee....................... The Notes will be guaranteed on a senior,
unsecured basis by Cricket Communications
Holdings, Inc., our domestic subsidiary holding
company.
Ranking......................... The Notes will be senior, unsecured obligations
of Leap and (i) will rank equally in right of
payment with all of our existing and future
senior unsecured indebtedness, (ii) will be
senior in right of payment to all future
subordinated indebtedness of Leap and (iii)
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.
Certain Covenants............... The terms of the Notes will restrict our
ability and the ability of certain 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 some of our
subsidiaries;
- 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.
Registration Rights............. We are 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
7
<PAGE> 12
of the units offering, interest on the Notes
will increase by 0.50% per annum until the
exchange offer is consummated or such shelf
registration statement becomes effective.
Holders who do not participate in the exchange
offer or in the registration may thereafter
hold a less liquid security.
THE WARRANTS
Warrants Offered................ Warrants included as part of the
Senior Units to purchase an aggregate of
shares of our common stock and
Warrants included as part of the
Senior Discount Units to purchase an aggregate
of shares of our common stock,
which together represent an indirect interest
in approximately % of our common stock on
a fully diluted basis, subject to adjustment.
Exercise Price.................. Each Warrant will entitle the holder thereof to
purchase shares of our common
stock at a price of $ per
share, subject to adjustment.
Exercise........................ The Warrants may be exercised at any time on or
after February , 2001 and before February ,
2010. Warrants that are not exercised by the
expiration date will expire.
Registration Rights............. We are required to file a shelf registration
statement covering the resale of the Warrants,
the issuance of the common stock issuable upon
exercise of the Warrants and the resale of the
common stock issuable upon exercise of the
Warrants, and to use our best efforts to cause
such registration statement to be declared
effective, subject to certain exceptions, on or
before 180 days after the closing of the units
offering. We will be required to maintain the
effectiveness of such shelf registration
statement until all of the Warrants have
expired or been exercised. We will be able to
suspend the effectiveness of such registration
statement under certain circumstances.
8
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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 November 30, 1999
and for the three months ended November 30, 1998 and 1999 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 were 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 December 31, 1999, are presented.
The unaudited pro forma financial data are derived from the unaudited pro
forma financial information that gives effect to Leap's acquisition of the
remaining 50% interest in Smartcom S.A., formerly named Chilesat Telefonia
Personal S.A., that it did not already own, the pending acquisition of
substantially all the assets of Chase Telecommunications Holdings, Inc., Leap's
acquisition of wireless licenses from AirGate Wireless, L.L.C. in January 2000
and Leap's pending wireless license acquisitions from PCS Devco, Inc., Radiofone
PCS, L.L.C. and Zuma PCS, LLC 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 pending acquisitions of substantially all the
assets of Chase Telecommunications Holdings and the wireless licenses as if they
had occurred as of November 30, 1999. The unaudited pro forma consolidated
statement of operations gives effect to the acquisition of the remaining 50%
interest in Smartcom, the pending 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 and Zuma 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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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>
THREE MONTHS ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
-------------------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
1996 1997(1) 1998(1) 1999 1999(2) 1998 1999 1999(2)
------ ---------- ---------- --------- --------- ---------- -------- ---------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(3):
Operating revenues................. $ -- $ -- $ -- $ 3,907 $ 11,966 $ -- $ 5,484 $ 7,821
Operating expenses:
Cost of operating revenues....... -- -- -- (3,810) (13,285) -- (7,384) (10,650)
Selling, general and
administrative expenses........ (396) (1,361) (23,888) (28,745) (48,839) (4,240) (13,538) (15,805)
Depreciation and amortization.... -- -- -- (5,824) (22,480) (124) (5,175) (17,960)
------ -------- --------- --------- --------- --------- -------- --------
Total operating expenses....... (396) (1,361) (23,888) (38,379) (84,604) (4,364) (26,097) (44,415)
------ -------- --------- --------- --------- --------- -------- --------
Operating loss................... (396) (1,361) (23,888) (34,472) (72,638) (4,364) (20,613) (36,594)
Equity in net loss of
unconsolidated wireless operating
companies........................ -- (3,793) (23,118) (100,300) (66,271) (16,029) (16,193) (10,693)
Write-down of investments in
unconsolidated wireless operating
companies........................ -- -- -- (27,242) (27,242) -- -- --
Interest income.................... -- -- 273 2,505 1,460 462 397 409
Interest expense and amortization
of discount and facility fee..... -- -- -- (10,356) (28,225) (1,051) (7,174) (8,511)
Foreign currency transaction
losses........................... -- -- -- (7,211) (11,410) -- (2,794) (2,794)
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 -- -- --
Other income (expense), net........ -- -- -- (243) (584) -- 116 114
------ -------- --------- --------- --------- --------- -------- --------
Net loss......................... $ (396) $ (5,154) $ (46,733) $(164,613) $(192,204) $ (20,982) $(46,261) $(58,069)
====== ======== ========= ========= ========= ========= ======== ========
Basic and diluted net loss per
common share(4).................. $(0.02) $ (0.29) $ (2.65) $ (9.19) $ (10.50) $ (1.19) $ (2.45) $ (3.01)
====== ======== ========= ========= ========= ========= ======== ========
Shares used to calculate basic and
diluted net loss per common
share(4)......................... 17,648 17,648 17,648 17,910 18,313 17,663 18,857 19,264
====== ======== ========= ========= ========= ========= ======== ========
OTHER FINANCIAL DATA:
EBITDA(5).......................... $ (396) $ (5,154) $ (47,006) $(150,938) $(142,959) $ (20,269) $(34,309) $(32,007)
Capital expenditures............... -- -- -- (6,864) (2,876) (6,268)
Net cash used in operating
activities....................... (285) (1,193) (18,378) (34,105) (10,054) (17,934)
Net cash used in investing
activities....................... -- (46,000) (140,742) (158,333) (100,356) (3,534)
Net cash provided by financing
activities....................... 285 47,193 159,120 216,476 117,906 33,156
Ratio of earnings to fixed
charges(6)....................... -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1999
-------------------------------------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
FOR THIS FOR BOTH
ACTUAL PRO FORMA(2) OFFERING(2)(7) OFFERINGS(2)(8)
-------- ------------ -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA(3):
Cash and cash equivalents................................... $ 40,249 $ 12,742 $350,947 $ 691,147
Working capital (deficit)................................... 22,945 (7,911) 330,294 670,494
Total assets................................................ 333,341 489,407 827,612 1,180,412
Long-term debt.............................................. 260,818 391,134 391,134 748,452
Stockholders' equity........................................ 25,173 45,784 383,989 379,472
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------------
U.S.(9) MEXICO(10) CHILE TOTAL
OTHER OPERATING DATA: ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Potential customers......................................... 30,156,000 99,000,000 14,900,000 138,100,000
Covered potential customers................................. 315,000 27,700,000 12,000,000 40,015,000
Customers................................................... 22,000 110,000 78,000 210,000
Proportionate potential customers(11)....................... 29,010,000 28,300,000 14,900,000 66,480,000
</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.
10
<PAGE> 15
(2) Amounts for Chase Telecommunications included in the pro forma and pro
forma as adjusted amounts are as of and for the year ended September 30,
1999 and as of and for the three months ended December 31, 1999.
(3) For the fourth quarter of fiscal 1999, the financial statements of Smartcom
are included in the unaudited pro forma financial data as a result of
Leap's acquisition of the remaining 50% interest in Smartcom in April 1999.
Before the fourth quarter, Leap's investment in Smartcom was accounted for
using the equity method of accounting.
(4) The basic and diluted net loss per common share for the year ended August
31, 1999 and for the three months ended November 30, 1998 and 1999 was
calculated by dividing the net losses by 17,910,440, 17,662,760 and
18,856,656, 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
three months ended November 30, 1999 was calculated by dividing the net
losses by 18,313,568 and 19,264,214, 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.
(5) 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.
(6) 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, $26.5 million and
$70.0 million, respectively. For the three months ended November 30, 1998
and 1999 and the pro forma three months ended November 30, 1999, our
earnings were insufficient to cover fixed charges by $3.9 million, $23.0
million and $38.8 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.
(7) The pro forma as adjusted for this offering balance sheet data have been
adjusted to give effect to the sale of 4,000,000 shares of common stock in
this offering, assuming a public offering price of $90 3/16 per share, and
the application of the estimated net proceeds therefrom.
(8) The pro forma as adjusted for both offerings balance sheet data have been
adjusted to give effect to the sale of shares of common stock in this
offering, the sale of the Units in the units offering and the application
of the estimated net proceeds from both offerings. The consummation of the
units offering is conditioned upon the closing of this offering; however,
the closing of this offering is not conditioned upon the closing of the
units offering. We intend to use a portion of the net proceeds of this
offering to repay all outstanding borrowings under our credit agreement
with Qualcomm and we intend to terminate the credit agreement which will
result in a $4.5 million loss on the early extinguishment of the debt. If
the units offering is not consummated, we will not repay any of our
outstanding borrowings under the credit agreement. No value has been
assigned to the Warrants issuable in connection with the sale of Units in
the units offering. Pro forma as adjusted for both offerings cash and cash
equivalents amount does not include an adjustment for cash equivalents to
be pledged to secure the first six interest payments on the Senior Notes.
(9) These amounts assume the completion of Leap's pending acquisition of
substantially all the assets of Chase Telecommunications Holdings,
including C-Block licenses for approximately 6.6 million potential
customers, which has not been completed and remains subject to customary
closing conditions. Leap currently owns 7.2% of Chase Telecommunications
Holdings. These amounts also assume the acquisition by Leap of wireless
licenses representing approximately 3.6 million potential customers from
11
<PAGE> 16
AirGate, approximately 1.2 million potential customers from PCS Devco,
approximately 5.0 million potential customers from Radiofone and
approximately 1.3 million customers from Zuma. We completed the acquisition
of wireless licenses from AirGate in January 2000. We have signed
acquisition agreements with PCS Devco, Radiofone and Zuma but the
acquisitions have not been completed and remain subject to closing
conditions, including FCC approval.
(10) As of December 31, 1999, Leap owned 28.6% of the outstanding capital stock
of Pegaso.
(11) Proportionate potential customers information is provided as of December
31, 1999, and represents our present equity share of the potential
customers included in the licenses owned or to be acquired by our operating
companies. We presently own a 96.2% interest in Cricket Communications
Holdings, Inc. and a 28.6% interest in Pegaso in Mexico. If the proposed
transaction between Sprint PCS and Pegaso is consummated, our percentage
interest in Pegaso will decrease to 20.5%. We own 100% of Smartcom in
Chile.
12
<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. The
trading price of our common stock could decline due to any of these risks, and
you could lose all or a part of your investment.
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. 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 one market, 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 FAILURE TO COMPLETE OUR ACQUISITION OF CHASE TELECOMMUNICATIONS COULD DELAY
THE EXPANSION OF THE CRICKET SERVICE AND RESULT IN SIGNIFICANT COSTS
We have agreed to acquire substantially all of the assets of Chase
Telecommunications Holdings, which owns C-Block licenses covering approximately
6.6 million potential customers in a region that includes approximately 97% of
Tennessee. Because the pending acquisition involves the transfer of licenses, we
sought, and recently received, approval of the transfer by the FCC. However, one
party formally challenged the license transfer and may seek further judicial or
administrative review of the FCC's decision. In addition, the acquisition could
fail to close for other reasons beyond our control. Under the terms of a
management agreement and trademark license agreement, Chase Telecommunications
has already introduced the Cricket service in Chattanooga, Tennessee and
Nashville, Tennessee. If we fail to close the acquisition of Chase
Telecommunications, our expansion of the Cricket service according to our
roll-out plan will be delayed. Any delay in the expansion of Cricket service
could make it easier for competitors to duplicate our strategy and enter our
target markets before we do. In addition, if we fail to close the acquisition of
Chase Telecommunications by September 20, 2000, Leap will be required to pay in
full up to $60 million of debt plus accrued interest incurred for the purchase
and sale of equipment and services to Chase Telecommunications under Cricket
Communications's credit agreement with Lucent Technologies.
13
<PAGE> 18
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 we have an
application pending to acquire a C-Block license from PCS Devco.
Each of the conditions imposed by the FCC has been satisfied except for the
condition that we reduce our debt to Qualcomm to 50% or less of our total
outstanding debt by January 2001 and our continuing obligation, during the
designated entity holding period for our C-Block and F-Block licenses, 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 the 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 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. In addition, further judicial review of this order 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.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
Leap experienced net losses of $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
14
<PAGE> 19
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.
YOUR OWNERSHIP INTEREST IN LEAP WILL BE DILUTED UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE
On February 11, 2000, 20,472,953 shares of our common stock were
outstanding, and 12,926,379 additional shares of our common stock were reserved
for issuance. The issuance of these additional shares will reduce your
percentage ownership in Leap.
Of the shares reserved for issuance, 609,659 shares are issuable upon
conversion of outstanding Qualcomm Trust Convertible Preferred Securities. We
agreed to issue shares of our common stock upon the conversion of these
securities in connection with the spin-off of Leap from Qualcomm. The holders
may convert the Qualcomm securities at any time into shares of Qualcomm common
stock and Leap common stock. We will receive no additional consideration upon
the issuance of the Leap common stock, and such shares generally will be freely
tradeable by their holders. Qualcomm has announced that it has issued a call for
redemption of these securities on March 6, 2000. Given the recent trading prices
of Qualcomm and Leap stock, it is likely that the holders will convert the Trust
Convertible Preferred Securities, and we would issue all 609,659 shares reserved
for issuance.
In addition to the shares of Leap common stock issuable upon conversion of
outstanding Qualcomm Trust Convertible Preferred Securities, the following
shares were reserved for issuance as of February 11, 2000:
- 4,500,000 shares reserved for issuance upon exercise of a warrant issued
to Qualcomm in connection with the spin-off of Leap, which is
exerciseable in whole or in part at any time between now and September
2008;
- 3,728,506 shares reserved for issuance upon exercise of options to
purchase Leap common stock granted to holders of Qualcomm options in
connection with the distribution of Leap's common stock to the
stockholders of Qualcomm;
- 3,685,086 shares reserved for issuance to employees, officers, directors
and consultants under Leap's equity incentive plans; and
- 403,128 shares issuable upon consummation of our pending acquisitions of
a wireless license in Denver and three wireless licenses in Albany,
Columbus and Macon, Georgia, which acquisitions are subject to FCC
approval and other conditions.
In addition, if the units offering is consummated, shares of
common stock will be reserved for issuance upon exercise of the Warrants to be
issued in the units offering.
Dilution of the outstanding number of shares of our common stock could
adversely affect prevailing market prices for our common stock and our ability
to raise capital through an offering of equity securities.
HIGH LEVELS OF DEBT COULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION
We expect to obtain much of our required capital through debt financing. A
substantial portion of the debt financing, including all of our vendor
financing, bears or is likely to bear interest at a variable rate, exposing us
to interest rate risk.
15
<PAGE> 20
Our high leverage could have important consequences, including the
following:
- our ability to obtain additional financing may be impaired;
- a substantial portion of our future cash flows from operations must be
dedicated to the servicing of our debt, thus reducing the funds available
for operations and investments;
- our leverage may reduce our ability to adjust rapidly to changing market
conditions and may make us more vulnerable to future downturns in the
general economy; and
- high levels of debt may reduce the value of stockholders' investments in
Leap because debt holders have priority regarding our assets in the event
of a bankruptcy or liquidation.
We may not have sufficient future cash flows to meet our debt payments or
may not be able to refinance any of our debt at maturity. We also face
additional risks with respect to our financing arrangements with vendors. These
equipment financings depend on meeting planned levels of performance such as
meeting specific target levels for potential and actual customers. If we fail to
meet performance requirements, our equipment financing may be restricted or
cancelled.
Qualcomm has provided significant financing to Leap and has also agreed to
provide significant additional financing. We may experience disputes or
difficulties with Qualcomm with respect to these agreements. Our inability to
draw funds under our financing agreements with Qualcomm and other equipment
suppliers or obtain other sources of financing on similar terms would have a
material adverse effect on our business and financial condition.
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 Communications, Inc., have requested that the
FCC, via waiver or a rulemaking proceeding, relax the eligibility rules for
acquiring C-Block 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-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.
16
<PAGE> 21
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
certain network components in its Chilean network and is currently upgrading
certain 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 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 (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.
17
<PAGE> 22
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 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
18
<PAGE> 23
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 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.
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<PAGE> 24
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 spinoff 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.
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.
OUR STOCK PRICE IS VOLATILE
The stock market in general, and the stock prices of telecommunications
companies and other technology-based companies in particular, have experienced
significant volatility that often has been unrelated to the operating
performance of any specific public companies. The market price of Leap common
stock has fluctuated widely in the past quarter and is likely to continue to
fluctuate in the future. See "Price Range of Common Stock and Dividends."
Factors that may have a significant impact on the market price of Leap common
stock include:
- future announcements concerning Leap or its competitors, including the
announcement of joint development efforts;
- changes in the prospects of our business partners or equipment suppliers;
- quality deficiencies in our networks;
- results of technological innovations;
20
<PAGE> 25
- government regulation, including the FCC's review of our acquisition of
wireless licenses;
- changes in recommendations of securities analysts and rumors that may be
circulated about Leap or its competitors; and
- public perception of risks associated with our international operations.
Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Shortfalls in our revenues or
earnings in any given period relative to the levels expected by securities
analysts could immediately, significantly and adversely affect the trading price
of Leap common stock. In the past, following periods of volatility in the market
price of a company's securities, class action litigation has often been
instituted against the subject company. Litigation of this type could result in
substantial costs and a diversion of our management's attention and resources
which could, in turn, have a material adverse effect on our business and
financial condition.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We have been, and if the units offering is not consummated
will continue to be, restricted from declaring or paying dividends by the terms
of our credit agreement with Qualcomm. If the units offering is consummated, the
terms of the indenture governing the Notes will restrict our ability to declare
or pay dividends. We intend to retain future earnings to fund our growth.
Accordingly, you will not receive a return on your investment in our common
stock through the payment of dividends in the foreseeable future and may not
realize a return on your investment even if you sell your shares. Any future
payment of dividends to our stockholders will depend on decisions that will be
made by our board of directors and will depend on then existing conditions,
including our financial condition, contractual restrictions, capital
requirements and business prospects.
A DETERMINATION THAT LEAP IS AN INVESTMENT COMPANY COULD ADVERSELY AFFECT OUR
BUSINESS
Our ownership interest in Pegaso was 28.6% as of December 31, 1999, 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.
WE HAVE IMPLEMENTED OR ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD
PREVENT OR DELAY AN ACQUISITION OF LEAP THAT IS BENEFICIAL TO ITS STOCKHOLDERS
Leap's charter and bylaws could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. Our charter and
bylaw provisions could diminish the opportunities for a stockholder to
participate in tender offers. The charter and bylaws may also restrain
volatility in the market price of Leap common stock resulting from takeover
attempts. In addition, our board of directors may issue preferred stock that
could have the effect of delaying or preventing a change in control of Leap. The
issuance of preferred stock could also negatively affect the voting power of
holders of Leap common
21
<PAGE> 26
stock. The provisions of the charter and bylaws may have the effect of
discouraging or preventing an acquisition of Leap or a sale of its businesses.
In addition, Section 203 of the Delaware General Corporation Law imposes
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our common stock.
We have adopted a rights plan that could discourage, delay or prevent an
acquisition of Leap at a premium price. The rights plan provides for preferred
stock purchase rights attached to each share of Leap common stock which will
cause substantial dilution to a person or group acquiring 15% or more of Leap's
stock if the acquisition is not approved by our board of directors. For a more
detailed discussion of the rights plan see "Description of Leap Capital
Stock -- Rights Plan."
The transfer restrictions imposed on the U.S. wireless licenses we own also
adversely affect the ability of third parties to acquire us. Our licenses may
only be transferred with prior approval by the FCC. In addition, we are
prohibited from voluntarily assigning or transferring control of our C-Block and
F-Block licenses for five years after grant date except to assignees or
transferees that satisfy the financial criteria established by the FCC for
designated entities. Accordingly, the number of potential transferees of our
licenses is limited, and any acquisition, merger or other business combination
involving Leap would be subject to regulatory approval.
In addition, the documents governing our indebtedness contain limitations
on our ability to enter into a change of control transaction. Under these
documents, the occurrence of a change of control transaction, in some cases
after notice and grace periods, would constitute an event of default permitting
acceleration of the indebtedness.
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 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> 27
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:
- general economic and business conditions, both nationally and in our
international markets;
- our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business;
- our ability to obtain additional debt and equity financing to fund
capital expenditures and working capital deficits;
- our ability to complete acquisitions; and
- other risk factors described in the section entitled "Risk Factors" in
this prospectus.
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> 28
USE OF PROCEEDS
The net proceeds we receive from the sale of 4,000,000 shares of our common
stock in this offering are estimated to be $338.2 million, or $389.1 million, if
the underwriters exercise their over-allotment option in full, assuming a public
offering price of $90 3/16 per share and after deducting underwriting discounts
and commissions and estimated offering expenses of $900,000 payable by us. If
the units offering is consummated, the net proceeds from the sale of the Units,
consisting of Senior Notes and Warrants and Senior Discount Notes and Warrants,
after deducting underwriting discounts and commissions and estimated offering
expenses of $600,000, would be approximately $512.4 million.
We expect to use the net proceeds of this offering and the sale of the
Units in the units offering for:
- the repayment of borrowings under our credit agreement with Qualcomm;
- capital expenditures in connection with the expansion of our domestic and
international networks, including the purchase of additional wireless
licenses;
- sales and marketing activities; and
- working capital and general corporate purposes.
Under our credit agreement with Qualcomm, Qualcomm has agreed to provide up
to $35.2 million for working capital and $229.8 million for investment capital
purposes. As of January 31, 2000, Leap had $52.9 million available to it under
the credit agreement, with $14.1 million available under the working capital
sub-facility and $38.8 million available under the investment sub-facility.
Amounts borrowed under the credit agreement are due and payable in September
2006, unless the maturity of the loans is accelerated pursuant to the provisions
of the credit agreement. Amounts borrowed under the credit agreement bear
interest at a variable rate equal to the prime rate plus 4.25% per annum or
LIBOR plus 5.25% per annum. The consummation of the units offering is
conditioned upon the closing of this offering; however, the closing of this
offering is not conditioned upon the closing of the units offering. If the units
offering is not consummated, we will not repay any of our outstanding borrowings
under the credit agreement. See "Relationship with Qualcomm."
In addition, if the units offering is consummated, Leap will use a portion
of the net proceeds from the sale of the Senior Notes to purchase U.S.
government securities and will pledge such government securities for the benefit
of the holders of the Senior Notes to secure the first six interest payments on
the Senior Notes. The precise amount of proceeds to be used to purchase such
government securities will depend on interest rates on such government
securities prevailing at the closing date.
We anticipate spending $620.8 million during the next 12 months to continue
our network build-out, the substantial majority of which we expect to invest in
Cricket wireless networks in the U.S. These capital expenditures will be funded
primarily through the proceeds of vendor financing agreements, together with the
proceeds of this offering, the sale of Units in the units offering and other
sources. A portion of the net proceeds from this offering and the sale of Units
in the units offering may also be used to invest in complementary businesses or
new business ventures. Pending these uses, the net proceeds of this offering and
the sale of Units in the units offering will be invested in short term,
interest-bearing, investment grade securities.
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<PAGE> 29
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Leap's common stock is quoted on the Nasdaq National Market under the
symbol "LWIN." The following table sets forth the high and low sale prices from
Leap's common stock for the periods indicated as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal Year ended August 31, 1999
First Quarter (from September 24, 1998)................... $ 9.00 $ 2.69
Second Quarter............................................ 7.88 4.75
Third Quarter............................................. 25.50 5.88
Fourth Quarter............................................ 21.75 16.00
Fiscal Year ended August 31, 2000
First Quarter............................................. 94.06 14.56
Second Quarter (through February 14, 2000)................ 102.38 47.00
</TABLE>
A recent reported last sale price per share for Leap's common stock as
reported on the Nasdaq National Market is set forth on the cover page of this
prospectus. At February 14, 2000, there were approximately 1,840 holders of
record of Leap's common stock.
As of the date of this prospectus, we have never declared or paid any cash
dividends on shares of Leap common stock. The terms of our credit agreement with
Qualcomm have prohibited, and if the units offering is not consummated, will
continue to prohibit, us from declaring or paying cash dividends. For a more
detailed discussion, see "Relationship with Qualcomm." If the units offering is
consummated, the terms of the indenture governing the Notes will restrict our
ability to declare or pay dividends. We currently intend to retain our earnings
for future growth and do not anticipate paying any cash dividends in the
foreseeable future.
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<PAGE> 30
CAPITALIZATION
The following table sets forth the capitalization of Leap as of November
30, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the acquisition in January 2000 of
wireless licenses from AirGate and the pending acquisitions of Chase
Telecommunications and wireless licenses from PCS Devco, Radiofone and
Zuma;
- on a pro forma as adjusted basis to reflect the sale of 4,000,000 shares
of common stock in this offering, assuming a public offering price of
$90 3/16 per share, and the application of the net proceeds therefrom;
and
- on a pro forma as adjusted basis to reflect the sale of shares of common
stock in this offering, the sale of the Units in the units offering and
the application of the estimated net proceeds from both offerings. The
table does not reflect a value for the warrants to be issued in
connection with the Units. The consummation of the units offering is
conditioned upon the closing of this offering; however, the closing of
this offering is not conditioned upon the closing of the units offering.
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1999
-----------------------------------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
PRO FOR THIS FOR BOTH
ACTUAL FORMA(1) OFFERING(1) OFFERINGS(2)
--------- --------- ----------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $ 40,249 $ 12,742 $ 350,947 $ 691,147
========= ========= ========= ==========
Short-term debt(3).................. $ 17,566 $ 17,566 $ 17,566 $ 17,566
========= ========= ========= ==========
Long-term debt:
Credit agreements(4).............. $ 154,991 $ 207,638 $ 207,638 39,956
Deferred payment agreement(5)..... 89,220 89,220 89,220 89,220
Note payable to Telex-Chile....... 16,607 16,607 16,607 16,607
Debt obligations to the FCC(6).... -- 77,669 77,669 77,669
Senior Notes and Senior Discount
Notes(7)....................... -- -- -- 525,000
--------- --------- --------- ----------
Total long-term debt...... 260,818 391,134 391,134 748,452
--------- --------- --------- ----------
Stockholders' equity:
Common stock(9), 75,000,000 shares
authorized, 18,954,636 shares
issued and outstanding,
23,187,390 shares issued and
outstanding on a pro forma as
adjusted basis................. 2 2 2 2
Additional paid-in capital........ 292,651 313,262 651,467 651,467
Accumulated deficit............... (263,157) (263,157) (263,157) (267,674)
Accumulated other comprehensive
loss........................... (4,323) (4,323) (4,323) (4,323)
--------- --------- --------- ----------
Total stockholders'
equity................. 25,173 45,784 383,989 379,472
--------- --------- --------- ----------
Total capitalization... $ 285,991 $ 436,918 $ 775,123 $1,127,924
========= ========= ========= ==========
</TABLE>
- -------------------------
(1) Amounts for Chase Telecommunications included in the pro forma and pro forma
as adjusted amounts are as of December 31, 1999.
(2) Pro forma as adjusted for both offerings cash and cash equivalents amount
does not include an adjustment for cash equivalents to be pledged to secure
the first six interest payments on the Senior Notes.
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<PAGE> 31
(3) Leap has loans payable to banks in Chile of $9.0 million and $6.7 million
which, along with capitalized interest and fees of $1.9 million at November
30, 1999, bear interest at rates of 8.1% and 8.5% per annum, respectively.
In February 2000, we were granted extensions which require amounts to be
repaid in September 2000.
(4) Qualcomm and Leap have entered into a credit agreement in which Qualcomm has
agreed to provide up to $35.2 million for working capital and $229.8 million
for investment capital purposes. As of November 30, 1999, Leap had $114.7
million available to it under the credit agreement, with $20.2 million
available under the working capital sub-facility and $94.5 million available
under the investment sub-facility. In January 2000, we borrowed an
additional $12.7 million under the investment sub-facility to purchase
wireless licenses from AirGate. Pro forma and pro forma as adjusted amounts
include $31.4 million of borrowings by Chase Telecommunications under its
vendor financing agreement with Qualcomm and $8.6 million of borrowings by
Chase Telecommunications for equipment and services purchased from Cricket
Communications under Cricket Communications's infrastructure equipment
purchase and financing agreement. We intend to use a portion of the net
proceeds of this offering to repay all outstanding borrowings under the
Qualcomm credit agreement and we intend to terminate the Qualcomm credit
agreement. However, if the units offering is not consummated, we will not
repay any of our outstanding borrowings under the Qualcomm credit agreement.
Amount shown under pro forma as adjusted for both offerings reflects the
repayment of $172.2 million of borrowings and accrued interest under the
Qualcomm credit agreement as of November 30, 1999 (including the $12.7
million borrowed to purchase wireless licenses from AirGate) and a $4.5
million loss on the early extinguishment of debt under the Qualcomm credit
agreement. As of January 31, 2000, outstanding borrowings and accrued
interest under the credit agreement totaled $225.0 million and Leap had
$52.9 million available to it under the credit agreement, with $14.1 million
available under the working capital sub-facility and $38.8 million available
under the investment sub-facility. See "Relationship with Qualcomm."
(5) Qualcomm and 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.
(6) In connection with the acquisitions of Chase Telecommunications and wireless
licenses from AirGate, PCS Devco and Radiofone, Leap will assume principal
amounts of debt obligations to the FCC of approximately $78.8 million, $11.1
million, $1.1 million and $1.5 million, respectively. Under the purchase
method of accounting, these obligations, which bear interest at a
below-market rate, will be recorded in Leap's accounts at their fair value
assuming an interest rate of 11.36%. The fair value of these obligations
included in the pro forma and pro forma as adjusted amounts are $65.8
million, $9.5 million and $0.9 million and $1.5 million, respectively. We
completed the acquisition of wireless licenses from AirGate in January 2000.
The other acquisitions have not yet been consummated and remain subject to
certain conditions, including FCC approval.
(7) Qualcomm has agreed to purchase $150 million (original purchase price) of
Units in the units offering. Pro forma as adjusted amount does not reflect
any adjustment for the discount associated with the value of the Warrants to
be issued in connection with the Units.
(8) 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. For a description of the
rights plan, see "Description of Leap Capital Stock -- Rights Plan."
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<PAGE> 32
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 November 30, 1999
and for the three months ended November 30, 1998 and 1999 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 were 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 of the
remaining 50% interest in Smartcom S.A., formerly named Chilesat Telefonia
Personal S.A., that it did not already own, the pending acquisition of
substantially all the assets of Chase Telecommunications Holdings, Leap's
acquisition of wireless licenses from AirGate in January 2000 and Leap's pending
wireless license acquisitions from PCS Devco, Radiofone and Zuma 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
pending acquisitions of substantially all the assets of Chase Telecommunications
Holdings and the wireless licenses as if they had occurred as of November 30,
1999. The unaudited pro forma consolidated statement of operations gives effect
to the acquisition of the remaining 50% interest in Smartcom, the pending
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 and Zuma 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, THREE MONTHS ENDED NOVEMBER 30,
--------------------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
1996 1997(1) 1998(1) 1999 1999(2) 1998 1999 1999(2)
------- ---------- ---------- --------- --------- ---------- -------- ---------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(3):
Operating revenues.............. $ -- $ -- $ -- $ 3,907 $ 11,966 $ -- $ 5,484 $ 7,821
Operating expenses:
Cost of operating revenues.... -- -- -- (3,810) (13,285) -- (7,384) (10,650)
Selling, general and
administrative expenses..... (396) (1,361) (23,888) (28,745) (48,839) (4,240) (13,538) (15,805)
Depreciation and
amortization................ -- -- -- (5,824) (22,480) (124) (5,175) (17,960)
------- ------- -------- --------- --------- -------- -------- --------
Total operating
expenses............... (396) (1,361) (23,888) (38,379) (84,604) (4,364) (26,097) (44,415)
------- ------- -------- --------- --------- -------- -------- --------
Operating loss................ (396) (1,361) (23,888) (34,472) (72,638) (4,364) (20,613) (36,594)
Equity in net loss of
unconsolidated wireless
operating companies........... -- (3,793) (23,118) (100,300) (66,271) (16,029) (16,193) (10,693)
Write-down of investments in
unconsolidated wireless
operating companies........... -- -- -- (27,242) (27,242) -- -- --
Interest income................. -- -- 273 2,505 1,460 462 397 409
Interest expense and
amortization of discount and
facility fee.................. -- -- -- (10,356) (28,225) (1,051) (7,174) (8,511)
Foreign currency transaction
losses........................ -- -- -- (7,211) (11,410) -- (2,794) (2,794)
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 -- -- --
Other income (expense), net..... -- -- -- (243) (584) -- 116 114
------- ------- -------- --------- --------- -------- -------- --------
Net loss........................ $ (396) $(5,154) $(46,733) $(164,613) $(192,204) $(20,982) $(46,261) $(58,069)
======= ======= ======== ========= ========= ======== ======== ========
Basic and diluted net loss per
common share(4)................. $ (0.02) $ (0.29) $ (2.65) $ (9.19) $ (10.50) $ (1.19) $ (2.45) $ (3.01)
======= ======= ======== ========= ========= ======== ======== ========
Shares used to calculate basic and
diluted net loss per common
share(4)........................ 17,648 17,648 17,648 17,910 18,313 17,663 18,857 19,264
======= ======= ======== ========= ========= ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(5)......................... $ (396) $(5,154) $(47,006) $(150,938) $(142,959) $(20.269) $(34,309) $(32,007)
Capital expenditures.............. -- -- -- (6,864) (2,876) (6,268)
Net cash used in operating
activities...................... (285) (1,193) (18,378) (34,105) (10,054) (17,934)
Net cash used in investing
activities...................... -- (46,000) (140,742) (158,333) (100,356) (3,534)
Net cash provided by financing
activities...................... 285 47,193 159,120 216,476 117,906 33,156
Ratio of earnings to fixed
charges(6)...................... -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF NOVEMBER 30, 1999
------------------------------------------ ---------------------------
1996 1997 1998 1999 ACTUAL PRO FORMA(2)
----- ---------- ---------- -------- ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(3):
Cash and cash equivalents......................... $ -- $ -- $ -- $ 26,215 $ 40,249 $ 12,742
Working capital (deficit)......................... (111) (279) (14,789) 6,587 22,945 (7,911)
Total assets...................................... -- 42,267 157,752 335,331 333,341 489,407
Long-term debt.................................... -- -- -- 221,812 260,818 391,134
Stockholders' equity (deficit).................... (111) 41,988 142,963 70,900 25,173 45,784
</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, Inc. See Note 2 of the notes to the
consolidated financial statements included elsewhere in this prospectus.
(2) Amounts for Chase Telecommunications included in the pro forma and pro forma
as adjusted amounts are as of and for the year ended September 30, 1999 and
as of and for the three months ended November 30, 1999.
29
<PAGE> 34
(3) For the fourth quarter of fiscal 1999, the financial statements of Smartcom
are included in the unaudited pro forma financial data as a result of Leap's
acquisition of the remaining 50% interest in Smartcom in April 1999. Before
the fourth quarter, Leap's investment in Smartcom was accounted for using
the equity method of accounting.
(4) The basic and diluted net loss per common share for the year ended August
31, 1999 and for the three months ended November 30, 1998 and 1999 was
calculated by dividing the net losses by 17,910,440, 17,662,760 and
18,856,656, 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
three months ended November 30, 1999 was calculated by dividing the net
losses by 18,313,568 and 19,264,214, 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.
(5) 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.
(6) 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, $26.5 million and
$70.0 million, respectively. For the three months ended November 30, 1998
and 1999 and the pro forma three months ended November 30, 1999, our
earnings were insufficient to cover fixed charges by $3.9 million, $23.0
million and $38.8 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.
30
<PAGE> 35
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.
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. Cricket
service was introduced in Chattanooga, Tennessee in March 1999 by Chase
Telecommunications, Inc., a company that we have agreed to acquire, under a
management agreement that requires the management of Chase Telecommunications to
control the business until our proposed acquisition is completed. Cricket
service was launched in Nashville, Tennessee in late January 2000. To expand the
Cricket service, we currently have acquired or agreed to acquire wireless
licenses covering approximately 30 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 28.6% 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. Pegaso recently announced that it has signed a non-binding
memorandum of understanding with Sprint PCS under which Sprint PCS would invest
up to $250 million by purchasing shares from Pegaso and shareholders other than
Leap. If the contemplated transaction is consummated, Sprint PCS will acquire a
30.5% interest in Pegaso and our percentage interest in Pegaso will decrease to
20.5%.
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. We acquired
the remaining 50% interest for $28 million in cash and a $22 million
interest-free note due in May 2002. Smartcom holds a nationwide wireless license
in the 1900 MHz band and operates a nationwide digital wireless system in Chile.
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.
We are in the early stages of development. Start-up wireless communications
companies typically require substantial capital expenditures for the
construction of their networks and license acquisition costs. In addition, these
companies typically incur significant marketing and other expenses as they begin
commercial operations. Accordingly, as we continue to build-out our networks,
expand our operations, and amortize our capitalized costs, our net operating
losses and our proportionate share of the losses in our unconsolidated wireless
operating companies is expected to grow.
RECENT OR PENDING ACQUISITIONS
Chase Telecommunications. In December 1998, we agreed to acquire
substantially all the assets of Chase Telecommunications Holdings, including
wireless licenses, subject to customary closing condi-
31
<PAGE> 36
tions. The purchase price includes approximately $6.3 million in cash, the
assumption of principal amounts of liabilities that totaled approximately $121.7
million at December 31, 1999, 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 based on Chase
Telecommunications's earnings 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 September 2006. In
February 2000, the FCC consented to the transfer of Chase Telecommunications's
licenses to us, although the decision could be subject to further judicial or
administrative review. An acquisition agreement has been signed, but the
transaction has not yet been completed and is subject to customary closing
conditions.
Following the closing of the acquisition, amounts owed by Chase
Telecommunications to Qualcomm under an equipment financing agreement become due
and payable within five days and will be repaid from borrowings under Cricket
Communications's credit facility with Lucent. As of November 30, 1999, Chase
Telecommunications owed approximately $31.0 million to Qualcomm under the
equipment financing agreement.
Our subsidiary, Cricket Communications, has entered into a credit facility
with Chase Telecommunications under which Cricket Communications agreed, at its
discretion, to provide working capital loans to Chase Telecommunications. The
maximum principal amount of working capital loans that may be drawn under the
facility is $50 million. Borrowings under the facility bear interest at the
prime rate plus 4.5%. The borrowings are collateralized by substantially all of
the assets of Chase Telecommunications and are subordinated in right of payment
to amounts Chase Telecommunications owes to Qualcomm under its equipment
financing agreement. As of November 30, 1999, Chase Telecommunications's
borrowings under its working capital facility with Cricket Communications
totaled $43.4 million, including $4.5 million of accrued and capitalized
interest.
Until our pending acquisition of Chase Telecommunications is completed,
Cricket Communications plans to purchase the equipment and services required by
Chase Telecommunications under its existing equipment purchase and financing
agreements and then resell the equipment and services to Chase
Telecommunications on substantially similar terms, including financing. If we
fail to close the acquisition of Chase Telecommunications by September 20, 2000,
we will be required to pay in full up to $60 million of debt incurred for the
purchase and sale of equipment and services to Chase Telecommunications under
Cricket Communications's credit agreement with Lucent Technologies.
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 June 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. An acquisition agreement has been signed, but the transaction has not yet
been completed and is subject to a final order from the FCC and other
conditions. 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 could
be subject to further judicial or administrative review. Our agreement with PCS
Devco expires in March 2000 if the transaction is not consummated by such date.
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
32
<PAGE> 37
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 November 30, 1999, 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. Our agreement with Radiofone expires in October 2000 if the
transaction is not consummated by such 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. The merger
agreement may be terminated by either party in February 2001 if the transaction
is not consummated by such date.
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 November 30, 1999, 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. For additional information on these
discontinued foreign ventures see "Business -- Discontinued Foreign Ventures."
33
<PAGE> 38
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 that took place during our most
recent fiscal year:
- the decision to liquidate the Transworld Companies and the sale of our
interest in OzPhone;
- the initial launch of the Cricket service in the U.S.;
- our agreements to acquire the wireless licenses and other assets of Chase
Telecommunications Holdings and the wireless licenses of AirGate, PCS
Devco and Radiofone; and
- the consolidation of Smartcom with Leap after our purchase of the
remaining 50% interest in Smartcom that we did not already own.
THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1998
We incurred a net loss of $46.3 million during the three month period ended
November 30, 1999 compared to a net loss of $21.0 million in the corresponding
period of the prior fiscal year. The increase resulted primarily from start-up
costs associated with our operating companies. Net losses for our consolidated
and unconsolidated wireless operating companies relate primarily to the
expenditures incurred in launching network services, including marketing and
other expenses, and the amortization of 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 and in
Mexico City in December 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.
As a direct result of the consolidation of Smartcom, we recorded $5.4
million of operating revenues, $7.4 million of cost of operating revenues, $7.4
million of additional selling, general and administrative expenses, $5.0 million
of additional depreciation and amortization, $2.9 million of additional net
interest expense, and $2.8 million of foreign currency transaction losses during
the fiscal quarter ended November 30, 1999. Smartcom's net loss of $20.7 million
recognized during the three month period ended November 30, 1999, before
intercompany eliminations, compares to $3.4 million that we recognized under the
equity method for our 50% interest in the corresponding period of the prior
fiscal year. During the first quarter 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 quarter of fiscal 1999.
We incurred $13.5 million of selling, general and administrative expenses
during the three month period ended November 30, 1999 compared to $4.2 million
in the corresponding period of the prior fiscal year. The increase includes $7.4
million from the consolidation of Smartcom. Excluding Smartcom, selling, general
and administrative expenses remained relatively flat, despite increased staffing
and business development activities related to our domestic subsidiary, Cricket
Communications.
We incurred an operating loss of $20.6 million during the three month
period ended November 30, 1999 compared to an operating loss of $4.4 million in
the corresponding period of the prior fiscal year. The $16.2 million increase
primarily reflects the consolidation of Smartcom. We expect that the results of
operations for the quarter ended November 30, 1999 may not reflect the character
of our future results of operations and believe operating revenues and expenses
will increase in the future. We expect substantial growth in subscribers,
operating revenues and operating expenses as a result of our pending
34
<PAGE> 39
acquisition and consolidation of Chase Telecommunications, the planned
development and launch of Cricket service in multiple U.S. markets, and an
increase in Smartcom's marketing efforts. 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 $16.2
million during the three month period ended November 30, 1999 compared to $16.0
million in the corresponding period of the prior fiscal year. During the first
fiscal quarter, our equity share in the net loss of our unconsolidated wireless
operating companies related to Pegaso, which launched service in Tijuana,
Guadalajara and Monterrey in February through September 1999, and Chase
Telecommunications, which re-launched service utilizing Leap's Cricket wireless
concept in March 1999. During the corresponding quarter of fiscal 1999, our
equity share in the net loss of our unconsolidated wireless operating companies
related primarily to Smartcom (prior to Leap's acquisition of the remaining 50
percent interest), Chase Telecommunications (for which Leap adopted the equity
method of accounting in the third quarter of fiscal 1999 and retroactively
adjusted prior periods) and our Russian investments which have been subsequently
written-down, liquidated or are in the process of liquidation.
Interest expense was $7.2 million during the three month period ended
November 30, 1999 compared to $1.1 million in the corresponding period of the
prior fiscal year. Interest expense related primarily to borrowings under our
credit agreement with Qualcomm, and Smartcom's interest expense related
primarily to the financing of its wireless communications network. We expect
interest expense to increase substantially in the future due to expected
borrowings used to fund the construction of wireless networks in various markets
across the United States.
Foreign currency transaction losses of $2.8 million during the three month
period ended November 30, 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.
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
35
<PAGE> 40
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 will increase in the future. We expect substantial growth
in customers, operating revenues and operating expenses as a result of our
pending 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.
We also wrote off our remaining $9.6 million investment in Metrosvyaz in
fiscal 1999 as a result of our decision to stop funding loans to Metrosvyaz.
Metrosvyaz, a joint venture attempting to enter the Russian wireless
communications market, had not satisfied certain funding conditions under its
loan agreement with Leap and was in default of that agreement. In addition, we
had been prevented from securing full reporting and documentation of
performance, results and expenditures of Metrosvyaz in spite of repeated efforts
to obtain that information. Preliminary results of a special investigation of
Metrosvyaz also disclosed serious irregularities, including unaccounted for
funds and questionable contracts and payments.
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 expected acquisition of Chase Telecommunications, the
discontinuance of funding to Metrosvyaz and the reduction in our percentage
36
<PAGE> 41
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.
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
$847.6 million for the following capital requirements, assuming completion of
the units offering:
- approximately $226.8 million to repay outstanding borrowings and accrued
interest under our credit agreement with Qualcomm;
- 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;
37
<PAGE> 42
- 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;
- approximately $28.8 million to complete our pending acquisitions,
including the acquisitions of Chase Telecommunications and wireless
licenses from PCS Devco, Radiofone and Zuma;
- approximately $17.0 million for general corporate overhead and other
expenses; and
- approximately $ to purchase a portfolio of U.S. government
securities to secure and fund the first six interest payments on the
Senior Notes.
Our actual expenditures may vary significantly depending upon whether we
purchase additional wireless licenses and 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.
Together with the estimated net proceeds of this offering, the sale of
Units in the units offering and vendor financing, as of November 30, 1999 and
assuming the closing of the units offering, we will have a total of
approximately $1,571.8 million in unused capital resources for our future cash
needs as follows:
- approximately $338.2 million in estimated net proceeds of this offering;
- approximately $512.4 million in estimated net proceeds from the units
offering;
- approximately $40.2 million in consolidated cash on hand (including $28.6
million held by Leap); and
- approximately $681.0 million in commitments under vendor financing
arrangements with Lucent Technologies and Qualcomm, with availability
subject to the total amounts of equipment purchased.
The consummation of the units offering is conditioned upon the closing of this
offering; however, the closing of this offering is not conditioned upon the
closing of the units offering. If the units offering is not consummated, we will
not repay any of our outstanding borrowings under the Qualcomm credit agreement
or be required to purchase U.S. government securities to secure the first six
interest payments on the Senior Notes. In addition, we will have approximately
$52.9 million available for future borrowings under the Qualcomm credit
agreement. Consequently, if we do not complete the units offering, we will have
available approximately $1,112.3 million in unused capital resources in place
for our future cash needs. 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 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 in fiscal 2000 on terms which are acceptable to us, or
at all. If we do not obtain sufficient financing, we believe we can reduce our
capital needs sufficiently to meet our liquidity requirements through fiscal
2000, by slowing or reducing the scope of our planned deployments in the U.S.
and by reducing or deferring additional license acquisitions.
As of the date of this prospectus, 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
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finance the construction and operation of Cricket networks primarily through the
proceeds of equipment financing agreements and additional financings.
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. 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.
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 $1.0
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. See "Business -- Pegaso -- Strategic Partners."
CREDIT FACILITIES AND OTHER FINANCING ARRANGEMENTS
Qualcomm Credit Agreement. The credit agreement consists of two
sub-facilities. We may use the working capital sub-facility to borrow up to
$35.2 million to fund the corporate operating expenses of Leap at the parent
level. The investment capital sub-facility enables us to borrow up to $229.8
million to make identified portfolio investments. As of January 31, 2000, Leap
had $52.9 million available to it under the credit agreement, with $14.1 million
available under the working capital sub-facility and $38.8 million available
under the investment sub-facility. Amounts available under the investment
sub-facility are allocated to specific projects and may not be reallocated to
other projects without Qualcomm's written consent. As a condition to the FCC's
recognition of Leap's qualification to hold C-Block and F-Block licenses, we
must take steps so that by January 2001, Qualcomm holds no more than 50% of our
outstanding debt obligations. We expect that we will have borrowed substantially
all of the funds available to us under our credit agreement with Qualcomm by the
end of calendar year 2000. Leap may not be able to reduce its debt to Qualcomm
to 50% or less of its outstanding debt obligations.
Amounts borrowed under the credit agreement are due and payable in
September 2006, unless the maturity of the loans is accelerated pursuant to the
provisions of the credit agreement. Qualcomm has a security interest in
substantially all of the assets of Leap, other than the stock of special purpose
subsidiaries formed to hold wireless licenses, for so long as any amounts are
outstanding under the credit agreement. Amounts borrowed under the credit
agreement bear interest at a variable rate equal to the prime rate plus 4.25%
per annum or LIBOR plus 5.25% per annum. Interest is payable quarterly beginning
September 30, 2001. Before this time, accrued interest is added to the principal
amount outstanding. If Qualcomm assigns more than 10% of the total funding
commitments to other lenders, we must pay a commitment fee of 0.5% to the
lenders on unused balances under the credit agreement.
If the units offering is consummated, we intend to use a portion of the net
proceeds of this offering to repay all outstanding borrowings under the credit
agreement, and we intend to terminate the credit agreement. If the units
offering is not consummated, we will not repay any of our outstanding borrowings
under the credit agreement.
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's
convenience subject to payments for equipment purchased. Lucent agreed to
finance these purchases plus additional working capital under a credit facility.
The
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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, 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, Inc.
and the stock 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 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 pending acquisitions of Chase Telecommunications and
wireless licenses from PCS Devco and Radiofone. For a discussion of the terms of
these debt obligations to the FCC, see "-- Recent and Pending Acquisitions."
Smartcom Deferred Payment Agreements. Smartcom has entered into a Deferred
Payment Agreement 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 to defer collection of principal amounts up to a
maximum of $84.5 million. The agreement was amended in October 1999 to
capitalize interest payments as part of Smartcom's capital restructuring. As of
that date, the deferred payment balance was approximately $90.7 million and the
capitalized interest commitment was $14.6 million. The deferred payments bear
interest at either a prime or LIBOR rate, plus an applicable margin. At November
30, 1999, the weighted average effective rate of interest was 12.6%. Accrued
interest may be added to the outstanding principal amount of the applicable
borrowing until October 2001. Amounts deferred under the agreement must be
repaid by September 2006. 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.
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PEGASO FINANCING
Qualcomm and another equipment vendor have agreed to provide approximately
$580 million of secured equipment financing to Pegaso, a portion of which has
already been advanced to the venture. The shares of Pegaso Communicaciones y
Sistemas, S.A. de C.V., Pegaso's subsidiary which 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 which, as amended, permits borrowings of
up to $190 million. 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 million to Pegaso
as previously planned. In addition, Pegaso recently announced that it has signed
a non-binding memorandum of understanding with Sprint PCS under which Sprint PCS
would invest up to $250 million 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 and the pending investment from Sprint
PCS, and borrowings under the $100 million loan agreement. Several other
existing investors are committed to contribute $50 million in additional equity
capital to Pegaso by August 2000. In addition, Pegaso is seeking additional debt
and equity financing, including additional vendor financing.
OPERATING ACTIVITIES
We used $34.1 million in cash for operating activities in fiscal 1999,
compared to $18.4 million in fiscal 1998. Cash used in operating activities in
fiscal 1999 included $8.5 million attributable to the consolidation of Smartcom
during the fourth quarter. We expect that cash used in operating activities will
increase further as we expand our project development efforts. In addition, we
expect that cash used in operating activities will increase substantially in the
future as a result of our acquisition and consolidation of Smartcom, our pending
acquisition of Chase Telecommunications, and other activities related to the
launch of our networks in additional U.S. markets.
We used $17.9 million in cash for operating activities during the three
month period ended November 30, 1999 compared to $10.1 million in the
corresponding period of the prior fiscal year. The increase is primarily
attributable to the full consolidation of Smartcom. We expect that cash used in
operating activities will increase substantially in the future as a result of
our pending acquisitions and other activities related to the launch of our U.S.
network.
INVESTING ACTIVITIES
Cash used in investing activities was $158.3 million in fiscal 1999
compared to $140.7 million in fiscal 1998. Significant investments in fiscal
1999 consisted of $124.5 million of investments in and loans to our operating
companies ($71.4 million made before we began to operate as an independent
company), $28.0 million for our acquisition of the remaining shares of Smartcom,
and $18.7 million on U.S. license acquisitions. Cash used in investing
activities was offset by $16.0 million provided from the sale of our OzPhone
subsidiary. In fiscal 2000, Leap and its subsidiaries expect to make significant
investments in capital assets, including network equipment and wireless
licenses.
Cash used in investing activities was $3.5 million during the three month
period ended November 30, 1999 compared to $100.4 million in the corresponding
period of the prior fiscal year.
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Investments during the three month period ended November 30, 1999 consisted of
loans to Chase Telecommunications of $5.5 million and capital expenditures,
primarily by Smartcom, of $5.0 million offset by $7.0 million of proceeds
received from the liquidation of the Transworld Companies. We expect to receive
an additional $4.5 million of liquidation proceeds during the remainder of the
fiscal year. 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 $26.1 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 fiscal 1999 amounted to $216.5
million, representing $95.3 million of funding from Qualcomm for our operating
and investing activities before the distribution of our common stock to
Qualcomm's stockholders in September 1998 and $111.1 million of net borrowings
under the credit agreement with Qualcomm after the distribution.
Cash provided by financing activities during the three month period ended
November 30, 1999, primarily from borrowings under the credit agreement with
Qualcomm, was $33.2 million. Cash provided by financing activities in the
corresponding period of the prior fiscal year was $117.9 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 $22.6 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 which
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.
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.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 7 to the Consolidated Financial Statements which
are included elsewhere in this prospectus. 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 August 31, 1999, the principal amounts of
our variable rate long-term debt obligations amounted to $210.3 million. An
increase of 10% in interest rates would increase our interest expense for fiscal
year 2000 by approximately $2.3 million. This hypothetical amount is only
suggestive of the effect of changes in interest rates on our results of
operations in fiscal year 2000.
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 August 31, 1999,
Smartcom's long-term debt obligations that were denominated in U.S. dollars
amounted to $101.7 million. Our results of operations would be negatively
impacted by approximately $11.9 million for fiscal year 2000 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 in fiscal year 2000.
HEDGING POLICY
We do not currently hedge against foreign currency exchange rate or
interest rate risks.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that many computer software
programs use two digits rather than four to represent a specific year. Any
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
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. The recent acquisition of network equipment and software does not
guarantee, however, that such equipment and software are Year 2000 compliant.
We conducted an inventory to identify our critical systems that may have
been subject to Year 2000 problems. We worked with our primary
telecommunications and business software systems vendors on Year 2000 readiness
issues. Those vendors had informed us that their products would be Year 2000
ready. To date, we have not incurred any material costs in support of the Year
2000 issue.
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 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, 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.
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FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 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.
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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 30 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 low 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 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
47
<PAGE> 52
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 have entered into agreements to purchase 19 other wireless licenses,
including those of Chase Telecommunications.
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<PAGE> 53
The following table shows the wireless licenses for approximately 30
million potential customers that we have acquired or agreed to acquire.
<TABLE>
<S> <C> <C>
1998 BTA
POPULATION(1) MHZ
------------- ---
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)..... 357,594 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
-------------
7,409,739
=============
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
Kenewick, WA........ 183,433 15
Spokane, WA......... 725,591 15
Yakima, WA.......... 253,207 15
-------------
4,189,790
=============
NORTH EAST REGION
Dayton, OH(5)....... 1,222,446 10
Pittsburgh, PA(6)... 2,503,000 10
-------------
3,725,446
=============
1998 BTA
POPULATION(1) MHZ
------------- ---
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 30
Coffeyville, KS..... 61,901 15
Wichita, KS......... 633,382 30
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
-------------
6,004,340(7)
=============
SOUTH WEST REGION
Nogales, AZ......... 38,020 15
Tucson, AZ.......... 790,975 30
Denver, CO(6)....... 2,471,000 10
Pueblo, CO.......... 299,154 30
Albuquerque, NM..... 800,201 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
-------------
6,615,328
=============
</TABLE>
- -------------------------
(1) Demographic data related to 1998 population and population growth estimates
provided by Easy Analytic Software Incorporated.
(2) Represents licenses that Leap has agreed to acquire from Chase
Telecommunications Holdings. An acquisition agreement has been signed, but
the transaction has not yet been completed and is subject to customary
closing conditions. The acquisition is expected to be completed in the first
calendar quarter of 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
49
<PAGE> 54
2000. Both markets are operated under a management agreement that requires
the management of Chase Telecommunications to control the business until our
proposed acquisition receives all necessary governmental approvals and is
completed.
(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 and is subject to a final order from the FCC and other closing
conditions. 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 could be subject to further judicial or administrative review. Our
agreement with PCS Devco expires in March 2000 if the transaction is not
consummated by such date. As part of the consideration to acquire the
wireless license from PCS Devco, Leap has agreed to transfer to PCS Devco a
license that covers 135,000 potential customers, which, accordingly, is not
included in the table above.
(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 sell two wireless licenses covering approximately 234,000
potential customers in Grand Island and North Platte, Nebraska, which,
accordingly, are not included in the table above.
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 December 31, 1999, Cricket Communications Holdings had
75,000,000 shares of common stock authorized for issuance
50
<PAGE> 55
under its charter, of which 52,000,100 shares were issued and outstanding. As of
the same date, Leap held 96.2% of Cricket Communications Holdings's outstanding
common stock and directors of Cricket Communications Holdings held the remaining
3.8% 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 February 11, 2000, 1,916,000 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 3,684,000 shares of common stock.
As part of the consideration for our acquisition of substantially all the
assets of Chase Telecommunications Holdings, we have agreed to cause Cricket
Communications Holdings to issue a warrant to purchase 1% of the outstanding
common stock of Cricket Communications Holdings at an exercise price of $1
million.
Leap's current ownership of 96.2% 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 this offering, the units offering, if consummated, 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
"Business -- 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 certain 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 except for the
condition that we reduce our debt to Qualcomm to 50% or less of our outstanding
debt by January 2001 and except for our continuing obligation, during the
designated entity holding period for our C-Block and F-Block licenses, 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, 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
51
<PAGE> 56
the FCC review its order. In addition, one or more of these parties may appeal
the FCC's order approving our acquisition of C-Block and F-Block licenses.
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 have agreed to acquire. Chase
Telecommunications owns 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 requires the management of Chase Telecommunications to control
the business until our proposed acquisition receives all necessary governmental
approvals and is 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. Chase Telecommunications has begun efforts
to expand the Cricket service to other markets in Tennessee and launched service
in Nashville in late January 2000.
We currently own 7.2% of Chase Telecommunications Holdings and, in December
1998, we agreed to purchase substantially all the assets of Chase
Telecommunications Holdings, including the stock of the company that holds its
wireless licenses and all of the stock of its operating company, Chase
Telecommunications. Because the pending acquisition involves the transfer of
wireless licenses, we sought, and recently received, approval of the transfer by
the FCC. However, one party formally challenged the license transfers and may
seek further judicial or administrative review of the FCC's decision. In
consideration for substantially all the assets of Chase Telecommunications
Holdings we have agreed to pay $6.3 million in cash, assume principal amounts of
liabilities that totaled approximately $121.7 million at December 31, 1999,
issue a warrant to purchase 1% of the common stock of our subsidiary, Cricket
Communications Holdings, with an exercise price of $1 million, and make
contingent earn-out payments of up to $41 million based on Chase
Telecommunications's earnings during the fifth full fiscal year following the
closing of the acquisition. The acquisition is anticipated to be completed in
the first calendar quarter of 2000.
Until the completion of our pending acquisition, Chase Telecommunications
plans to finance the construction and operation of its networks in Tennessee
through borrowings from our subsidiary, Cricket Communications. Cricket
Communications has entered into a credit facility with Chase Telecommunications
under which Cricket Communications agreed, at its discretion, to provide working
capital loans to
52
<PAGE> 57
Chase Telecommunications. The maximum principal amount of working capital loans
that may be drawn under the facility is $50 million. Borrowings under the
facility bear interest at the prime rate plus 4.5%. The borrowings are
collateralized by substantially all of the assets of Chase Telecommunications
and are subordinated in right of payment to amounts Chase Telecommunications
owes to Qualcomm under an equipment financing agreement. As of November 30,
1999, Chase Telecommunications's borrowings under its working capital facility
with Cricket Communications totaled $43.4 million, including $4.5 million of
accrued and capitalized interest. In addition, until the completion of our
pending acquisition, Cricket Communications plans to purchase equipment and
services required by Chase Telecommunications under Cricket Communications's
existing equipment purchase and financing agreements and then resell the
equipment and services to Chase Telecommunications on substantially similar
terms, including financing. If our acquisition of Chase Telecommunications is
not completed, we have the right to continue in our role as manager under the
management agreement until December 2005. In addition, if we fail to close the
acquisition by September 20, 2000, Leap will be required to purchase up to $60
million of debt plus accrued interest which may be incurred by Cricket
Communications under its credit agreement with Lucent Technologies. Such debt
would be incurred to purchase equipment from Lucent to be resold to Chase
Telecommunications.
PEGASO
General. We were a founding shareholder and currently own 28.6% 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 December 31, 1999,
Pegaso had approximately 110,000 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.
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<PAGE> 58
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 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
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<PAGE> 59
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.
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
55
<PAGE> 60
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 entertainment. 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.
Pegaso recently announced that it has signed a non-binding memorandum of
understanding with Sprint PCS under which Sprint PCS would invest up to $250
million by purchasing shares from Pegaso and shareholders other than Leap. If
the contemplated transaction is consummated, Sprint PCS will acquire a 30.5%
interest in Pegaso.
Leap's Rights and Interests. We currently own a 28.6% interest in Pegaso
and have invested $100 million of the $350 million of capital that has been
contributed by the members of the joint venture. If the pending transaction with
Sprint PCS is consummated, our percentage interest in Pegaso will decrease to
20.5%. 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 $350 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
which, as amended, provides for borrowings of up to $190 million. 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 (SCT) and Federal Telecommunications Commission (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 (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
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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.
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 (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 December 31, 1999, Smartcom had approximately 78,000
customers.
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;
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- 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 estimates that total wireless customers in Chile will
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 November 30, 1999, Smartcom distributed its handsets and
wireless service through over 170 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.
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.
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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 (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 technical plan for its system. Since then, Smartcom has filed four
applications to amend the license, each to account for technical modifications
to its system. Three of these amendments have been reviewed by SUBTEL, and
Smartcom is operating under 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 other 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.
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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 also own 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 through vendor financing from an equipment supplier
and through a working capital facility from us. We have ceased funding loans to
Metrosvyaz and, as a result, have written-off our remaining investment in
Metrosvyaz. As described in greater detail in "Legal Proceedings," we have
initiated an arbitration against Metrosvyaz and one of its directors, and
Metrosvyaz has subsequently filed a lawsuit against Leap and certain of its
executive officers.
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 (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 (GSM), which is widely deployed in Europe, where the
technology was developed, and in many other markets around the world.
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
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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
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
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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 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
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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-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 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-
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
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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 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.
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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.
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 useable 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.
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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 November 30, 1999, we employed approximately 85 full time employees,
including the employees of our subsidiary Cricket Communications. In addition,
our subsidiary Smartcom employed approximately 590 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.
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 announced that we had stopped funding loans to
Metrosvyaz and had written-off our remaining $9.6 million investment in
Metrosvyaz. Metrosvyaz had not satisfied certain conditions required for funding
and was in default under its loan agreement with us. In addition, we had been
prevented from securing full reporting and documentation of performance, results
and expenditures of Metrosvyaz despite repeated efforts to obtain that
information. Preliminary results of a special investigation of Metrosvyaz also
disclosed serious irregularities, including unaccounted for funds and
questionable contracts and payments. On September 29, 1999, we issued a demand
for arbitration
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seeking a full accounting and damages from Metrosvyaz and one of its directors
with respect to these matters. It is too early to evaluate the likely outcome of
the arbitration.
In response to our demand for arbitration, on December 2, 1999, Metrosvyaz
filed suit against us and certain of our officers in the U.S. District Court for
the Central District of California. The Metrosvyaz suit alleges claims for
libel, trade libel, intentional and negligent interference with prospective
advantage and breach of fiduciary duty. The suit seeks compensatory damages in
excess of $100 million as well as punitive damages and injunctive relief. We
believe the Metrosvyaz claims are without merit, and we will vigorously defend
against them. We cannot, however, be certain of the outcome of this litigation.
If Metrosvyaz prevails in its claims it could have a material adverse effect on
our business and financial condition.
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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.
Qualcomm has agreed to purchase $150.0 million (original purchase price) of
Units in the units offering. We intend to use a portion of the net proceeds of
this offering to repay all outstanding borrowings under our credit agreement
with Qualcomm, and we intend to terminate the credit agreement. The consummation
of the units offering is conditioned upon the closing of this offering; however,
the closing of this offering is not conditioned upon the closing of the units
offering. If the units offering is not consummated, we will not repay any of our
outstanding borrowings under the credit agreement. As a result of Qualcomm's
participation in the units offering, however, Qualcomm would remain a
significant lender to us even if we terminate the credit agreement. 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.
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.
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In the Separation and Distribution Agreement, we also assumed some
liabilities of Qualcomm, including: (1) funding obligations to our subsidiaries
and ventures totaling approximately $75 million; (2) Qualcomm's rights and
obligations to manage our subsidiaries and ventures; and (3) $2 million of
accrued liabilities regarding our employees.
The Separation and Distribution Agreement provides for: (1) releases of
claims of each party against the other; (2) the allocation of potential
liabilities; and (3) 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.
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.
CREDIT AGREEMENT
Immediately before the distribution of Leap common stock to Qualcomm's
stockholders, we entered into a credit agreement with Qualcomm. The credit
agreement consists of two sub-facilities. We may use the working capital
sub-facility to borrow up to $35.2 million from Qualcomm. We may only use the
proceeds from the working capital sub-facility to meet our normal working
capital and operating expenses. These normal expenses include salaries and
overhead, but exclude strategic investments, substantial acquisitions of capital
equipment and the acquisition of telecommunications licenses. The investment
capital sub-facility enables us to borrow up to $229.8 million from Qualcomm. We
may only use the proceeds from the investment capital sub-facility to make
identified portfolio investments. Amounts available under the investment
sub-facility are allocated to specific projects and may not be reallocated to
other projects without Qualcomm's written consent. As one of the conditions to
the FCC's recognition of us as a designated entity qualified to hold C-Block and
F-Block licenses, we must take steps so that by January 2001, Qualcomm holds no
more than 50% of our outstanding debt obligations.
Amounts borrowed under the credit agreement are due and payable in
September 2006, unless the maturity of the loans is accelerated pursuant to the
provisions of the credit agreement. The credit agreement required a 2%
origination fee. Qualcomm has a security interest in substantially all of the
assets of Leap, other than the stock of special purpose subsidiaries formed to
hold wireless licenses, for so long as any amounts are outstanding under the
credit agreement. Amounts borrowed under the credit agreement bear interest at a
variable rate equal to the prime rate plus 4.25% per annum or LIBOR plus 5.25%
per annum. Interest is payable quarterly beginning September 30, 2001. Before
this time, accrued interest is added to the principal amount outstanding. If
Qualcomm assigns more than 10% of the total funding commitments to other
lenders, we must pay a commitment fee of 0.5% to the lenders on unused balances
under the credit agreement.
The credit agreement contains operating covenants, including restrictions
on our ability to incur debt, merge, consolidate or transfer substantially all
of our assets, create, incur or permit the existence of
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liens or pay dividends. Under the credit agreement, we agreed that we will not
permit the quotient obtained by dividing our total debt by total capitalization
to exceed the following level during the indicated period:
<TABLE>
<CAPTION>
PERIOD LEVEL
- ------ -----
<S> <C>
Through February 23, 2002................................... 70%
After February 23, 2002..................................... 50%
</TABLE>
The terms total debt and total capitalization are each defined in the
credit agreement.
We were in compliance with the financial covenant as of November 30, 1999.
In addition, the credit agreement limits our use of borrowed funds, restricts
our joint venture and stock ownership, and imposes other restrictions on the
operation of our business. Further, if we sell some of our assets, we must
prepay the credit agreement with a percentage of the proceeds.
We intend to use a portion of the net proceeds of this offering to repay
all outstanding borrowings under the credit agreement, and we intend to
terminate the credit agreement. If the units offering is not consummated, we
will not repay any of our outstanding borrowings under the credit agreement and
our maximum permitted ratio of total debt to total capitalization under the
credit agreement through February 23, 2002 will be reduced to 65%.
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 to Qualcomm 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 Qualcomm.
- 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 Qualcomm
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 Qualcomm, 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 Qualcomm 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 Qualcomm.
Leap and the U.S. companies in which it invests must comply with these
requirements only if Qualcomm 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 Qualcomm 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.
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Until the earlier of (1) October 2002 and (2) the date on which we receive
an aggregate of $60 million of financing from parties other than Qualcomm, we
must require each wireless telecommunication entity operating outside the U.S.
in which we initially invest to enter into an equipment requirements agreement
with Qualcomm and Ericsson. The equipment requirements agreement will provide
that the foreign operator of wireless communications will purchase at least 50%
of its requirements for infrastructure equipment from Ericsson and 50% of its
requirements for customer equipment from Qualcomm, in each case for a five year
period. The equipment requirements agreement will also require the foreign
operator to notify Qualcomm if its bid is not competitive, to explain how
Qualcomm must modify its bid to make it competitive, and to give Qualcomm the
opportunity to submit a modified bid. If we make an initial investment in a
wireless communications company operating outside of the U.S. after the date
described above, we will seek to provide Qualcomm 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 Qualcomm and Ericsson. The obligations of all the foreign operators will
depend on Qualcomm 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.
If Leap attempts to acquire equipment on a "bundled" basis, then Ericsson
and Qualcomm 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 Qualcomm, then Ericsson or Qualcomm, 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.
We anticipate that all of the shares reserved for issuance under the
Conversion Agreement will be issued. Upon conversion of the Trust Convertible
Preferred Securities, Qualcomm will receive a benefit in the form of forgiveness
of debt, but we will receive no benefit or other consideration. Qualcomm has
announced that it has issued a call for the redemption of these securities on
March 6, 2000. Given the recent trading prices of Qualcomm and Leap stock, it is
likely that the holders will convert the Trust Convertible Preferred Securities
and we would issue all shares reserved for issuance, which as of February 11,
2000 was 609,659.
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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 February 11, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harvey P. White............... 65 Chairman of the Board, Chief Executive Officer and
Director
Thomas J. Bernard............. 67 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............. 49 Senior Vice President, General Counsel and Secretary
Daniel O. Pegg................ 54 Senior Vice President, Public Affairs
Leonard C. Stephens........... 42 Senior Vice President, Human Resources
Thomas D. Willardson.......... 49 Senior Vice President, Finance and Treasurer
Alejandro Burillo Azcarraga... 47 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 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
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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.
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 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.
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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.
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,
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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.
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 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. 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 February 11, 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
SHARES
BENEFICIALLY
OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OFFERING OFFERING
--------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Qualcomm Incorporated(3)............................. 4,500,000 18.0% 15.5%
Harvey P. White(4)(5)................................ 519,795 2.5 2.1
Thomas J. Bernard(5)(6).............................. 34,526 * *
James E. Hoffmann(5)(7).............................. 26,474 * *
Daniel O. Pegg(5)(8)................................. 17,415 * *
Leonard C. Stephens(5)............................... 14,074 * *
Scot B. Jarvis(5)(9)................................. 8,700 * *
Alejandro Burillo Azcarraga(5)....................... 8,000 * *
Jeffrey P. Williams(5)............................... 8,000 * *
Robert C. Dynes(5)................................... 2,000 * *
John J. Moores(5).................................... 2,000 * *
Michael B. Targoff(5)................................ 2,000 * *
All executive officers and directors as a group
(14 persons)....................................... 655,883 3.2 2.7
</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 20,472,953 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
February 11, 2000, Qualcomm would own approximately 13.7% of our common
stock upon exercise of the warrant. This table does not include Warrants to
purchase shares of common stock which Qualcomm may purchase in the
units offering, which Warrants will not be exercisable until February ,
2001. Qualcomm's business address is 5775 Morehouse Dr., San Diego,
California 92121.
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(4) Includes 2,500 shares held in a foundation of which Mr. White disclaims
beneficial ownership. Also includes 359,148 shares held in family trusts,
7,500 shares held in a family limited partnership, 250 shares held in a
charitable remainder trust, 61,500 shares held in a family trust for the
benefit of grandchildren and 27,947 shares held in trusts for the benefit
of relatives.
(5) Includes shares issuable upon exercise of options exercisable within 60
days of February 11, 2000 as follows: Mr. Bernard, 23,450 shares (including
5,450 shares subject to options held by Mr. Bernard's spouse); Mr. Burillo,
8,000 shares; Mr. Dynes, 2,000 shares; Mr. Hoffmann, 15,700 shares; Mr.
Jarvis, 8,000 shares; Mr. Moores, 2,000 shares; Mr. Pegg, 11,000 shares;
Mr. Stephens, 9,200 shares; Mr. Targoff, 2,000 shares; Mr. White, 60,950
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 late September 1998, we provided a $17.5 million loan to Pegaso
Comunicaciones y Servicios, S.A. de C.V., a Mexican company 96%-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 18.6% in Pegaso. We own an interest of
approximately 28.6% in Pegaso.
TRANSACTIONS WITH QUALCOMM
For a discussion of Leap's relationship with Qualcomm, see "Relationship
with Qualcomm."
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DESCRIPTION OF LEAP CAPITAL STOCK
Under the charter, the total number of shares of all classes of stock that
we have authority to issue is 85,000,000, consisting of 10,000,000 shares of
preferred stock and 75,000,000 shares of common stock.
COMMON STOCK
As of February 11, 2000, we had 20,472,953 shares of common stock
outstanding. The holders of our common stock are entitled to one vote for each
share on all matters voted on by stockholders. The holders of our common stock
possess all voting power, except as otherwise required by law or provided in any
resolution adopted by our board of directors regarding any series of preferred
stock. Subject to any preferential or other rights of any outstanding series of
our preferred stock that may be designated by our board, the holders of our
common stock will be entitled to such dividends as may be declared from time to
time by our board from available funds and upon liquidation will be entitled to
receive pro rata all of our assets available for distribution to the holders.
The terms of our credit agreement with Qualcomm prohibit us from declaring or
paying cash dividends. If the units offering is consummated, the terms of the
indenture governing the Notes will restrict our ability to declare or pay
dividends. For a more detailed discussion see "Dividend Policy" and
"Relationship with Qualcomm."
PREFERRED STOCK
Our board of directors is authorized to issue shares of preferred stock, in
one or more series, and to determine, regarding any series, the terms and rights
of the series, including the following: (1) the designation of the series; (2)
the rate and time of, and conditions and preferences regarding, dividends, and
whether the dividends are cumulative; (3) the voting rights, if any, of shares
of the series; (4) the price, timing and conditions regarding the redemption of
shares of the series and whether a sinking fund should be established for the
series; (5) the rights and preferences of shares of the series in the event of
our voluntary or involuntary dissolution, liquidation or winding up of our
affairs; and (6) the right, if any, to convert or exchange shares of the series
into or for stock or securities of any other series or class.
We believe that the availability of the preferred stock will provide us
with increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs which might arise. Having
authorized shares available for issuance will allow us to issue shares of
preferred stock without the expense and delay of a special stockholders'
meeting. The authorized shares of preferred stock, as well as shares of our
common stock, will be available for issuance without further action by our
stockholders, unless action is required by applicable law or the rules of any
stock exchange on which our securities may be listed or unless we are restricted
by the preferred stock.
WARRANTS
In connection with the spin-off of Leap from Qualcomm, we issued a warrant
to purchase 5,500,000 shares of our common stock to Qualcomm at an exercise
price of approximately $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 to 4,500,000.
The warrant is exercisable during the 10 years following the spin-off of Leap.
Upon exercise in full of this warrant, Qualcomm would hold approximately 14% of
our outstanding common stock, assuming exercise of all outstanding options and
convertible securities. The warrant provides that Qualcomm may not exercise the
warrant if, as a result, Qualcomm, together with its officers and directors,
would own equity securities of Leap in an amount that would disqualify Leap from
being a "designated entity" under FCC rules.
The warrant issued to Qualcomm includes three types of registration rights
which require Leap to register the shares of Leap common stock issuable upon
exercise of the warrant. First, the warrant provides
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for a one-time "demand" registration right which permits Qualcomm to require
Leap to register a minimum of $5 million of Leap common stock issuable upon
exercise of the warrant. Second, the warrant provides for "piggy-back"
registration rights which require Leap to notify Qualcomm of its intention to
register shares of Leap common stock with the SEC and, upon request, to include
Qualcomm's shares issuable upon exercise of the warrant in the registration. If
Qualcomm exercises its piggy-back or demand registration rights and the offering
is underwritten, the shares to be registered may be reduced by the underwriters
based on market conditions. However, after Leap's first firm commitment
underwritten public offering of common stock, the shares to be registered may be
reduced to no less than 30% of the shares requested to be registered. The
registration rights in the warrant may be assigned by Qualcomm with any transfer
of the warrant. Third, the warrant provides for "Form S-3" registration rights
which generally permit Qualcomm to require Leap to register a minimum of $5
million of shares issuable upon exercise of the warrant if Form S-3, a
short-form registration statement, is available for the proposed registration.
Qualcomm has agreed to waive its piggy-back registration rights with respect to
this offering and with respect to any shelf registration statement filed with
respect to the warrants issued in the units offering. We will be able to suspend
the effectiveness of such registration statement under certain circumstances.
If our units offering is consummated, we will be offering Warrants to
purchase an aggregate of shares of our common stock, or approximately
% of our common stock on a fully diluted basis assuming exercise of all
outstanding Warrants. The terms and conditions of the Warrants to be issued in
the units offering are described in the prospectus under "Description of
Units -- Warrants."
LEAP COMMON STOCK RESERVED FOR ISSUANCE
Future sales of substantial amounts of our common stock in the public
market could adversely affect the trading price of our common stock. As of
February 11, 2000, we had 20,472,953 shares of common stock outstanding, the
large majority of which were freely tradable without restriction or further
registration under the Securities Act of 1933. Also, as of February 11, 2000, in
addition to the 609,659 shares of common stock reserved for issuance upon
conversion of outstanding Trust Convertible Preferred Securities, 12,926,379
shares of common stock were reserved for issuance as follows: 4,500,000 shares
reserved for issuance upon exercise of a warrant held by Qualcomm; 3,685,086
shares of common stock reserved for issuance to employees, officers, directors
and consultants under Leap equity incentive plans; 3,728,506 shares of common
stock reserved for issuance upon exercise of options granted in connection with
the spin-off of Leap to holders of options for Qualcomm common stock (including
our employees who were former employees of Qualcomm; and 403,128 shares issuable
upon consummation of our pending acquisitions of a wireless license in Denver
and three wireless licenses in Albany, Columbus and Macon, Georgia, which
acquisitions are subject to FCC approval and other conditions). In addition,
shares of common stock will be reserved for issuance upon exercise of
Warrants to be issued in the units offering.
NO PREEMPTIVE RIGHTS
No holder of any stock of Leap has any preemptive right to subscribe for
any securities of Leap of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Harris Trust
Company of California.
DELAWARE LAW AND CHARTER PROVISIONS
We must comply with the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in
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a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns at the time of
the business combination (or within three years prior, did own) 15% or more of
the corporation's voting stock.
Our charter also requires that any required or permitted action by our
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing. In addition,
special meetings of our stockholders may be called only by a majority of the
authorized number of directors, the Chairman of the Board or the President of
Leap. The charter also provides for a classified board of directors consisting
of three classes as nearly equal in number as possible with the directors in
each class serving staggered three-year terms. In addition, the charter provides
that the authorized number of directors may be changed only by resolution of our
board of directors. Our bylaws require advance notice by a stockholder of a
proposal or director nomination which such stockholder desires to present at the
annual meeting of stockholders. Our charter and bylaws also require that the
holders of at least 66 2/3% of our voting stock must approve any amendment to
either the charter or bylaws affecting certain provisions. These provisions may
have the effect of deterring hostile takeovers or delaying changes in control or
management of Leap.
RIGHTS PLAN
On September 9, 1998, our board of directors adopted a shareholder rights
plan. Under the rights plan, a dividend of one preferred share purchase right
was declared for each outstanding share of our common stock. The common stock
currently trades with a right to purchase Series A Junior Participating
preferred stock. A preferred share purchase right will be attached to each share
of common stock issued during the term of the rights plan, including shares
issued in this offering. Each right entitles shareholders to buy one
one-thousandth of a share of our Series A preferred stock at an exercise price
of $90.00, subject to anti-dilution adjustments, upon the triggering event of a
person acquiring, or making a tender or exchange offer for, 15% or more of our
outstanding common stock. Each right entitles its holder, other than the person
acquiring 15% or more of the outstanding common stock, to purchase shares of our
common stock with a market value of twice the right's exercise price. Ownership
of our common stock in excess of the 15% threshold by Qualcomm as a result of
its warrant to purchase 4,500,000 shares of our common stock or the Warrants to
purchase shares of common stock which Qualcomm may purchase in the
units offering, however, will not trigger the rights plan, unless and until
Qualcomm acquires one or more additional shares of our common stock. In
addition, if a company acquires us in a merger or other business combination, or
if we sell more than 50% of our consolidated assets or earning power, these
rights will entitle our shareholders, other than the acquirer, to purchase, for
the exercise price, shares of the common stock of the acquiring company having a
market value of two times the exercise price. At any time prior to these events,
the board of directors may redeem the rights at one cent per right.
The rights plan is intended to protect shareholders in the event of an
unsolicited attempt to acquire. The right is transferred automatically with the
transfer of the common stock until separate rights certificates are distributed
upon the occurrence of certain events. The right could have the effect of
delaying, deferring or preventing a person from acquiring us or accomplishing a
change in control of the board of directors. This description of the rights plan
is intended as a summary only and is qualified in its entirety by reference to
the Rights Agreement dated as of September 14, 1998 between Leap and Harris
Trust Company of California, a form of which is incorporated by reference as an
exhibit to our registration statement on Form S-3, of which this prospectus is a
part.
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LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our officers and directors are covered by the provisions of the Delaware
General Corporation Law (DGCL), the charter, the bylaws, individual
indemnification agreements with us and insurance policies which serve to limit,
and, in some instances, to indemnify them against, liabilities which they may
incur in such capacities. None of such provisions would have retroactive effect
for periods before the distribution of Leap, and we are 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. The DGCL 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 authorized by the DGCL, 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. Our charter limits the liability of directors to Leap or our
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by the Delaware statute. Specifically,
our directors will not be personally liable for monetary damages for breach of a
director's fiduciary duty as director, except for liability:
- for any breach of the director's duty of loyalty to Leap or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful share repurchases or
redemptions as provided in Section 174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit.
Indemnification and Insurance. Under the DGCL, we have the power, under
specified circumstances generally requiring the directors or officers to have
acted in good faith and in a manner they reasonably believe to be in or not
opposed to our best interests, to indemnify our directors and officers in
connection with actions, suits or proceedings brought against them by a third
party or in our name, by reason of the fact that they were or are such directors
or officers; and 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 our directors and officers to
the full extent provided by Delaware corporate law. In addition, we have entered
into indemnification agreements with our directors and officers which generally
provide for indemnification of the officers and directors to the fullest extent
permitted under the DGCL, including under circumstances for which
indemnification would otherwise be discretionary under Delaware law.
We have purchased and intend to 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 our request 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 we
would have the power or obligation to indemnify him against such liability under
the provisions of our charter or bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling pursuant
to the foregoing provisions, those provisions are, in the
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opinion of the SEC, against public policy as expressed in the Securities Act of
1933 and are therefore unenforceable.
DESCRIPTION OF THE UNITS
If the units offering is consummated, each Senior Unit that we will offer
consists of one Senior Note and one Warrant to purchase shares of
common stock at a price of $ per share, subject to adjustment. Each Senior
Discount Unit consists of one Senior Discount Note and one Warrant to purchase
shares of common stock at a price of $ per share,
subject to adjustment. The Notes and Warrants will become separately
transferable upon the occurrence of certain events but not later than six months
after the closing of the units offering. The consummation of the units offering
is conditioned upon the closing of this offering; however, the closing of this
offering is not conditioned upon the closing of the units offering.
SENIOR NOTES AND SENIOR DISCOUNT NOTES
The Senior Notes will initially be limited to $225 million aggregate
principal amount, and will mature on , 2010. Each Senior Note will
initially bear interest at the rate of % per annum from the most recent
interest payment date or, if no interest has been paid or duly provided for,
from the closing date for the units offering. Interest on the Senior Notes will
be payable semiannually in arrears on each April 1 and October 1, beginning
October 1, 2000. A portion of the proceeds of the offering of the Senior Notes
will be used to purchase a portfolio of U.S. government securities and this
portfolio will be pledged to secure and fund the first six interest payments on
the Senior Notes.
The Senior Discount Notes will be initially limited to $ million
aggregate principal amount at maturity, and will mature on , 2010.
The Senior Discount Notes are being 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 $
(representing the original price at which the Senior Discount Notes are being
offered). The Senior Discount Notes will accrete to their full principal amount
at maturity on April 1, 2005. No interest is payable on the Senior Discount
Notes before April 1, 2005, other than interest payable if a registration
statement with respect to the Senior Discount Notes is not filed and declared
effective by the SEC within 180 days after the closing date of the units
offering. Beginning on April 1, 2005, the Senior Discount Notes will accrue
interest at the rate of % per annum payable semiannually in arrears on each
April 1 and October 1, commencing October 1, 2005.
We will have the right to redeem all or part of the Senior Notes on or
after , 2005, at redemption prices (expressed as percentages of
principal amount) beginning at % in 2005, and decreasing gradually to
100% in 2008 and thereafter, in each case together with accrued and unpaid
interest, if any.
In addition, before , 2003, we may use the net proceeds from
certain equity offerings to redeem up to 35% of the aggregate principal amount
of the Senior Notes originally issued at a redemption price of %
plus accrued and unpaid interest, provided that at least 65% of the aggregate
principal amount of Senior Notes originally issued remains outstanding
immediately after the redemption.
We will have the right to redeem all or part of the Senior Discount Notes
on or after , 2005, at redemption prices (expressed as
percentages of principal amount at maturity) beginning at % in
2005 and decreasing gradually to 100% in 2008 and thereafter, in each case
together with accrued and unpaid interest, if any. In addition, before
, 2003, we may use the net
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<PAGE> 89
proceeds from certain equity offerings to redeem up to 35% of the aggregate
principal amount at maturity of the Senior Discount Notes originally issued at a
redemption price of % of the accreted value plus accrued and unpaid
interest, provided that at least 65% of the aggregate principal amount at
maturity of the Senior Discount Notes originally issued remains outstanding
immediately after the redemption.
The Notes are guaranteed by Cricket Communications Holdings. The Notes are
not subject to any sinking fund.
Holders of Notes will have the right to require us to repurchase all or
part of the Notes at a premium upon the occurrence of events constituting a
change in control of Leap. Any such repurchases would be for cash at an
aggregate price of 101% of the principal amount of the Senior Notes or accreted
value of the Senior Discount Notes to be repurchased plus accrued and unpaid
interest thereon. Under the indenture governing the Notes, a change of control
includes:
- consummation of a transaction in which a person becomes the beneficial
owner of more than 35% of our voting stock; or
- continuing directors ceasing to comprise a majority of our board of
directors.
In addition, under certain circumstances, if we sell assets, we must offer
to repurchase the Notes at a purchase price equal to 100% of the principal
amount of the Senior Notes or accreted value of the Senior Discount Notes, plus
accrued and unpaid interest thereon. The indenture governing the Notes will
contain covenants that, among other things, will limit our ability and the
ability of some of our subsidiaries to:
- pay dividends, make distributions in respect of capital stock or redeem
capital stock;
- make investments or other restricted payments;
- incur additional indebtedness;
- create liens on assets;
- merge, consolidate or dispose of assets;
- issue or sell stock of some of our subsidiaries;
- enter into transactions with stockholders or affiliates; and
- engage in sale-leaseback transactions.
These limitations are subject to a number of important qualifications and
exceptions contained in the indenture.
Events of default under the Notes include:
- default for 30 days in the payment when due of interest on the Notes;
- default in payment when due of the principal of or premium, if any, on
the Notes;
- our failure, or the failure of some of our subsidiaries, to comply with
provisions of the Notes indenture relating to change of control and with
limitations on asset sales;
- our failure, or the failure of some of our subsidiaries, to comply with
any other provisions of the Indenture or the pledge agreement relating to
the Senior Notes;
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<PAGE> 90
- our default, or default by some of our subsidiaries, with respect to
other debt of $5.0 million or more, which default either is caused by
failure to pay the principal or premium thereof or results in
acceleration of the other debt;
- our failure, or the failure of some of our subsidiaries, to pay within 60
days a final judgment exceeding $5.0 million;
- failure of the pledge agreement to be in full force and effect or
enforceable, other than in accordance with its terms;
- a judicial determination rendering the guarantee unenforceable or the
guarantor's denial or disaffirmance of its obligations under the
guarantee; and
- bankruptcy or insolvency of Leap or some of our subsidiaries.
In the case of an event of default arising from certain events of
bankruptcy or insolvency, all outstanding Notes would become due and payable
immediately. If any other event of default occurs and is continuing, the trustee
or the holders of at least 25% in aggregate principal amount of the Senior Notes
or the holders of at least 25% of the aggregate principal amount at maturity of
the Senior Discount Notes, as the case may be, then outstanding may declare the
Senior Notes or the Senior Discount Notes, as the case may be, to be due and
payable immediately.
WARRANTS
The warrants issued in the units offering will be issued pursuant to a
warrant agreement between Leap and State Street Bank and Trust Company, as the
warrant agent.
At the completion of the units offering, the holders of the Warrants will
be entitled, in the aggregate, to purchase shares of our common stock,
representing approximately % of the issued and outstanding shares of
our common stock on a fully diluted basis, assuming exercise of all outstanding
warrants. Each Warrant, when exercised, will entitle the holder to receive
fully paid and non-assessable shares of our common stock, at an
exercise price of $ per share, subject to adjustment from time to time
upon the occurrence of the following:
(1) the payment by us of dividends and other distributions on our
common stock other than in our common stock;
(2) subdivision, combinations and reclassifications of our common
stock;
(3) the issuance to all holders of common stock of such rights,
options or warrants entitling them to subscribe for our common stock or
securities convertible into, or exchangeable or exercisable for, our common
stock at a price which is less than the fair market value per share of our
common stock;
(4) the distribution to all holders of our common stock or any of our
assets or debt securities or any rights or warrants to purchase any such
securities, excluding those rights and warrants referred to in clause (3)
above;
(5) the issuance of shares of our common stock for consideration per
share less than the then fair market value per share of our common stock;
and
(6) the issuance of securities convertible into or exercisable or
exchangeable for our common stock for a conversion, exercise or exchange
price that is less than the then current market value per share of our
common stock.
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<PAGE> 91
The warrants cannot be exercised until one year after the closing date of
the units offering. The shares of common stock underlying the Warrants will not
be initially registered under the Securities Act. Until such time, if any, as a
registration statement with respect to resale of the warrant shares is declared
effective, the warrant shares will be subject to certain restrictions on
transfer. Pursuant to the terms of a warrant agreement, we will use our best
efforts to have a shelf registration statement covering the Warrants declared
effective by the SEC within 180 days of the closing date of the units offering.
We will be required to maintain the effectiveness of such shelf registration
until all of the Warrants have expired or been exercised. We will be able to
suspend the effectiveness of such registration statement under certain
circumstances.
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CERTAIN U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by a
beneficial owner thereof that is a non-U.S. holder. A non-U.S. holder is a
person or entity that, for U.S. federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership, or a foreign
estate or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended,
and administrative interpretations as of the date hereof, all of which are
subject to change, including changes with retroactive effect. This discussion
does not address all aspects of U.S. federal income and estate taxation that may
be relevant to non-U.S. Holders in light of their particular circumstances and
does not address any tax consequences arising under the laws of any state, local
or foreign jurisdiction. You should consult your own tax advisor with respect to
the particular tax consequences to you of owning and disposing of common stock,
including the consequences under the laws of any state, local or foreign
jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends paid to a non-U.S. holder of
common stock generally will be subject to withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. For purposes
of determining whether tax is to be withheld at a 30% rate or at a reduced rate
as specified by an income tax treaty, we ordinarily will presume that dividends
paid on or before December 31, 2000 to an address in a foreign country are paid
to a resident of such country absent knowledge that such presumption is not
warranted.
Under United States Treasury Regulations issued on October 6, 1997, which
are applicable to dividends paid after December 31, 2000, to obtain a reduced
rate of withholding under a treaty, a non-U.S. holder will generally be required
to provide an Internal Revenue Service Form W-8 certifying such non-U.S.
holder's entitlement to benefits under a treaty. The new regulations also
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends paid to a non-U.S. holder that is an
entity should be treated as paid to the entity or those holding an interest in
that entity.
There will be no withholding tax on dividends paid to a non-U.S. holder
that are effectively connected with the non-U.S. holder's conduct of a trade or
business within the United States if an Internal Revenue Service Form 4224
stating that the dividends are so connected is filed with us. Instead, the
effectively connected dividends will be subject to regular U.S. income tax in
the same manner as if the non-U.S. holder were a U.S. resident. A non-U.S.
corporation receiving effectively connected dividends may also be subject to an
additional branch profits tax that is imposed, under certain circumstances, at a
rate of 30%, or such lower rate as may be specified by an applicable treaty, on
the non-U.S. corporation's effectively connected earnings and profits, subject
to certain adjustments. Under the new regulations, Internal Revenue Service Form
W-8 will replace Internal Revenue Form 4224.
Generally, we must report to the U.S. Internal Revenue Service the amount
of dividends paid, the name and address of the recipient, and the amount, if
any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or certain other agreements, the U.S. Internal Revenue Service may make
such reports available to tax authorities in the recipient's country of
residence.
Dividends paid to a non-U.S. holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the non-U.S.
holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and certain other information.
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<PAGE> 93
Under current United States federal income tax law, backup withholding
imposed at a rate of 31% generally will not apply to dividends paid on or before
December 31, 2000 to a non-U.S. holder at an address outside the United States
unless the payer has knowledge that the payee is a U.S. person. Under the new
regulations, however, a non-U.S. holder will be subject to backup withholding
unless applicable certification requirements are met.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of common stock
unless:
- the gain is effectively connected with a trade or business of such holder
in the United States;
- in the case of certain non-U.S. holders who are non-resident alien
individuals and hold the common stock as a capital asset, such
individuals are present in the United States for 183 or more days in the
taxable year of the disposition and certain other conditions are met;
- the non-U.S. holder is subject to a tax pursuant to the provisions of the
Internal Revenue Code regarding the taxation of U.S. expatriates; or
- we are or have been a U.S. real property holding corporation within the
meaning of Section 897(c)(2) of the Internal Revenue Code at any time
within the shorter of the five-year period preceding such disposition or
such holder's holding period. We are not, and do not anticipate becoming,
a U.S. real property holding corporation.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK
Under current U.S. federal income tax law, information reporting and backup
withholding imposed at a rate of 31% will apply to the proceeds of a disposition
of common stock by a non-corporate holder through a U.S. office of a broker
unless the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds where the
transaction is effected outside the United States through a non-U.S. office of a
non-U.S. broker. However, unless such broker has documentary evidence in its
files of the holder's non-U.S. status and has no actual knowledge to the
contrary or unless the holder establishes an exemption, U.S. information
reporting requirements, but not backup withholding, will apply to a payment of
disposition proceeds where the transaction is effected outside the United States
by or through an office outside the United States of a broker that is either:
- a U.S. person;
- a foreign person which derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United
States;
- a controlled foreign corporation for U.S. federal income tax purposes; or
- in the case of payments made after December 31, 2000, a foreign
partnership with connections to the United States.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
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<PAGE> 94
FEDERAL ESTATE TAX
An individual non-U.S. holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the common stock will be required
to include the value thereof in his gross estate for U.S. federal estate tax
purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
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<PAGE> 95
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Credit Suisse First Boston Corporation and ABN AMRO
Incorporated are acting as U.S. representatives, and the international
underwriters named below for whom Morgan Stanley & Co. International Limited,
Donaldson, Lufkin & Jenrette International, Credit Suisse First Boston (Europe)
Limited and ABN AMRO Incorporated are acting as international representatives,
have severally agreed to purchase, and Leap has agreed to sell to them,
severally, the number of shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
Donaldson, Lufkin & Jenrette Securities Corporation.......
Credit Suisse First Boston Corporation....................
ABN AMRO Incorporated.....................................
---------
Subtotal............................................... 3,200,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited................
Donaldson, Lufkin & Jenrette International................
Credit Suisse First Boston (Europe) Limited...............
ABN AMRO Incorporated.....................................
---------
Subtotal............................................... 800,000
---------
Total............................................. 4,000,000
=========
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively referred
to as the "underwriters" and the "representatives," respectively. The
underwriters are offering the shares of common stock subject to their acceptance
of the shares from Leap and subject to prior sale. The underwriting agreement
provides that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered by this prospectus are subject to
the approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters' over-allotment option described below.
In the agreement between the U.S. and international underwriters, sales may
be made between U.S. underwriters and international underwriters of any number
of shares as may be mutually agreed. The per share price of any shares sold by
the underwriters shall be the public offering price listed on the cover
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<PAGE> 96
page of this prospectus, in United States dollars, less an amount not greater
than the per share amount of the concession to dealers described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain dealers. After
the initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
Leap has granted to the U.S. underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of 600,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
U.S. underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each U.S. underwriter will become obligated, subject to certain conditions, to
purchase about the same percentage of the additional shares of common stock as
the number listed next to the U.S. underwriter's name in the preceding table
bears to the total number of shares of common stock listed next to the names of
all U.S. underwriters in the preceding table. If the U.S. underwriters' option
is exercised in full, the total price to the public would be $ , the
total underwriters' discounts and commissions would be $ and total
proceeds to Leap would be $ .
The underwriters have informed Leap that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them. In addition, the underwriters have informed us
that they will not confirm sales to any accounts over which they exercise
discretionary authority without prior approval of the transaction by the
customer.
The common stock is quoted on the Nasdaq National Market under the symbol
"LWIN."
Each of Leap and its directors, executive officers and certain other
stockholders that in the aggregate hold approximately shares of common
stock has agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, it will not, during the period
ending 90 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of our
common stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. In addition, those
directors, executive officers and stockholders have agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, they will not, during the period ending 90 days after the date of
this prospectus, make any demand for, or exercise any right with respect to, the
filing of a registration statement with respect to any shares of our common
stock or any securities convertible into or exercisable or exchangeable for our
common stock.
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The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- the registration of and issuance by us of shares of common stock in
connection with acquisitions of wireless licenses provided that such
shares may not be sold by the seller until 90 days after the date of this
prospectus;
- transactions by any person other than Leap relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares;
- the grant of options or stock under our equity and incentive plans as in
effect on the date of this prospectus; and
- the transfer of shares by any person other than Leap to a member of that
person's immediate family or any affiliate of that person if the
transferee agrees to be subject to the restrictions described above.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
Leap and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933.
Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, Credit Suisse First Boston Corporation and ABN AMRO Incorporated
are also acting as placement agents under our units offering for which they will
receive discounts and commissions customary for performing such services. An
affiliate of ABN AMRO Incorporated serves as administrative agent under our
credit facility with Qualcomm and as a lender to Smartcom. This affiliate and
ABN AMRO Incorporated are also providing financial advisory services for
Smartcom. ABN AMRO Incorporated and its affiliate have received fees customary
for performing such services in the past and expect to continue to receive such
fees in the future.
LEGAL MATTERS
Latham & Watkins in San Diego, California will pass upon the validity of
the shares of common stock offered under this prospectus and certain other legal
matters. O'Melveny & Myers LLP in San Francisco, California will pass upon
certain legal matters relating to the offering for the underwriters.
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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 (which contains an explanatory paragraph relating to the
Company's adoption of the equity method of accounting for its investment in
Chase Telecommunications Holdings, Inc. as discussed in Note 2 to the
consolidated financial statements) 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. included in this prospectus have been so included in
reliance on the report (which contains an explanatory paragraph relating to
Smartcom S.A.'s negative working capital, lack of compliance with certain
financial conditions of the credit agreement and the revised credit agreement as
discussed in Note 8 and 14 to the financial statements) 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 (which contains an explanatory paragraph relating to the Board of
Directors of three of the Orrengrove Investments Ltd.'s subsidiaries voting to
liquidate as discussed 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.
The 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 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
Pricewaterhouse 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 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 Website at www.sec.gov.
We have filed a registration statement on Form S-3 and related exhibits
with the SEC under the Securities Act of 1933. The registration statement
contains additional information about Leap and the securities. You may inspect
the registration statement and exhibits without charge and obtain copies from
the SEC at prescribed rates at the locations above.
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<PAGE> 99
The SEC allows us to incorporate by reference the information we file with
it, which means that we can disclose important information to you by referring
to those documents. The information incorporated by reference is an important
part of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. 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;
- The description of our common stock contained in our Registration
Statement on Form 10 filed with the SEC on July 1, 1998, as amended;
- 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 termination of this offering.
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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<PAGE> 100
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
LEAP WIRELESS INTERNATIONAL, INC.
Pro Forma Financial Information............................. F-3
Unaudited Pro Forma Consolidated Balance Sheet at November
30, 1999............................................... F-4
Unaudited Pro Forma Consolidated Statement of Operations
for the three months ended November 30, 1999........... F-5
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended August 31, 1999..................... F-6
Notes to the Pro Forma Financial Information
(unaudited)............................................ F-7
LEAP WIRELESS INTERNATIONAL, INC.
Consolidated Financial Statements:
Report of Independent Accountants......................... F-11
Consolidated Balance Sheets at August 31, 1999 and 1998
(restated)............................................. F-12
Consolidated Statements of Operations and Comprehensive
Loss for the fiscal years ended August 31, 1999, 1998
(restated) and 1997 (restated)......................... F-13
Consolidated Statements of Cash Flows for the fiscal years
ended August 31, 1999, 1998 (restated) and 1997
(restated)............................................. F-14
Consolidated Statements of Stockholders' Equity for each
of the fiscal years in the period from September 1,
1996 to August 31, 1999................................ F-15
Notes to Consolidated Financial Statements................ F-16
LEAP WIRELESS INTERNATIONAL, INC.
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at November 30, 1999
(unaudited) and August 31, 1999........................ F-39
Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited) for the three months
ended November 30, 1999 and 1998 (restated)............ F-40
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended November 30,
1999 and 1998 (restated)............................... F-41
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ F-42
SMARTCOM S.A. (COMPANY IN THE DEVELOPMENT STAGE)
Financial Statements:
Report of Independent Accountants......................... F-52
Balance Sheet at March 31, 1999 (unaudited), December 31,
1998 and 1997.......................................... F-53
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-54
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-55
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-57
Notes to the Financial Statements......................... F-58
</TABLE>
F-1
<PAGE> 101
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES (A DEVELOPMENT
STAGE COMPANY)
Consolidated Financial Statements:
Report of Independent Accountants......................... F-73
Consolidated Balance Sheet at December 31, 1998........... F-74
Consolidated Statement of Operations for the period from
July 27, 1998 (inception) to December 31, 1998......... F-75
Consolidated Statement of Cash Flows for the period from
July 27, 1998 (inception) to December 31, 1998......... F-76
Consolidated Statement of Stockholders' Deficit for the
period from July 27, 1998 (inception) to December 31,
1998................................................... F-77
Notes to the Consolidated Financial Statements............ F-78
PEGASO TELECOMUNICACIONES, S. A. DE C. V. (DEVELOPMENT STAGE
ENTERPRISE)
Consolidated Financial Statements:
Report of Independent Accountants......................... F-85
Consolidated Balance Sheet at September 30, 1999
(unaudited) and December 31, 1998...................... F-86
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-87
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-88
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-89
Notes to the Consolidated Financial Statements............ F-90
CRICKET COMMUNICATIONS HOLDINGS, INC. (A DEVELOPMENT STAGE
COMPANY)
Consolidated Financial Statements:
Report of Independent Accountants........................... F-102
Consolidated Balance Sheets at November 30, 1999
(unaudited) and August 31, 1999 and 1998............... F-103
Consolidated Statements of Operations for the three months
ended November 30, 1999 and 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 November 30, 1999 (unaudited)...... F-104
Consolidated Statements of Cash Flows for the three months
ended November 30, 1999 and 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 November 30, 1999 (unaudited)...... F-105
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from December 1, 1996 (inception) to
August 31, 1999 and for the three months ended November
30, 1999 (unaudited)................................... F-106
Notes to Consolidated Financial Statements................ F-107
</TABLE>
F-2
<PAGE> 102
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 November 30, 1999, for the three months ended
November 30, 1999 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 Company's pending acquisition of
substantially all the assets of Chase Telecommunications Holdings, Inc. ("Chase
Telecommunications Holdings") as if it had occurred; 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") and Zuma PCS, LLC ("Zuma") as
if they had already occurred. The Unaudited Pro Forma Consolidated Balance Sheet
at November 30, 1999 gives effect to the pending acquisition of substantially
all the assets of Chase Telecommunications Holdings and the acquisition and
pending acquisitions of wireless licenses from AirGate, PCS Devco, Radiofone and
Zuma as if they had occurred as of November 30, 1999. The Unaudited Pro Forma
Statement of Operations for the three months ended November 30, 1999 gives
effects to the pending acquisition of substantially all the assets of Chase
Telecommunications Holdings and the acquisition and pending acquisition of
wireless licenses from AirGate, PCS Devco, Radiofone and Zuma as if they had
occurred as of September 1, 1998. 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 pending acquisition of
substantially all the assets of Chase Telecommunications Holdings and the
acquisition and pending acquisitions of wireless licenses from AirGate, PCS
Devco, Radiofone and Zuma 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 and Smartcom.
F-3
<PAGE> 103
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
-------------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------------ ------------------------------------- LEAP
CHASE CHASE WIRELESS LICENSE CONSOLIDATED
LEAP TELECOMMUNICATIONS TELECOMMUNICATIONS ACQUISITIONS PRO FORMA
--------- ------------------ ------------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 40,249 $ 1,960 $ (6,300)(8) $(23,167)(11) $ 12,742
Accounts receivable, net................ 3,980 716 -- -- 4,696
Inventories............................. 4,329 781 -- -- 5,110
Recoverable taxes....................... 6,592 -- -- -- 6,592
Other current assets.................... 5,500 281 -- -- 5,781
--------- -------- -------- -------- ---------
Total current assets.............. 60,650 3,738 (6,300) (23,167) 34,921
--------- -------- -------- -------- ---------
Property and equipment, net............. 112,841 27,148 -- -- 139,989
Investments in and loans receivable from
unconsolidated wireless operating
companies............................. 77,398 -- --(10) -- 77,398
Intangible assets, net.................. 71,475 60,102 25,755(9) 69,059(11) 226,391
Deposits and other assets............... 10,977 431 -- (700)(11) 10,708
--------- -------- -------- -------- ---------
Total assets...................... $ 333,341 $ 91,419 $ 19,455 $ 45,192 $ 489,407
========= ======== ======== ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities........................... $ 20,139 $ 2,319 $ -- $ -- $ 22,458
Unearned revenue........................ -- 663 -- -- 663
Loans payable to banks.................. 17,566 -- -- -- 17,566
Interest payable........................ -- 2,145 -- -- 2,145
--------- -------- -------- -------- ---------
Total current liabilities......... 37,705 5,127 -- -- 42,832
--------- -------- -------- -------- ---------
Long-term debt.......................... 260,818 152,468 (46,733)(10) 24,581(11) 391,134
Other long-term liabilities............. 9,272 12 -- -- 9,284
--------- -------- -------- -------- ---------
Total liabilities................. 307,795 157,607 (46,733) 24,581 443,250
--------- -------- -------- -------- ---------
Minority interest in consolidated
subsidiary............................ 373 -- -- -- 373
--------- -------- -------- -------- ---------
Stockholders' equity:
Preferred stock....................... -- -- -- -- --
Common stock.......................... 2 -- -- 2
Additional paid-in capital............ 292,651 (9,965) 9,965(10) 20,611(11) 313,262
Accumulated deficit................... (263,157) (56,223) 56,223(10) -- (263,157)
Accumulated other comprehensive
loss................................ (4,323) -- -- -- (4,323)
--------- -------- -------- -------- ---------
Total stockholders' equity
(deficit)...................... 25,173 (66,188) 66,188 20,611 45,784
--------- -------- -------- -------- ---------
Total liabilities and
stockholders' equity
(deficit)...................... $ 333,341 $ 91,419 $ 19,455 $ 45,192 $ 489,407
========= ======== ======== ======== =========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-4
<PAGE> 104
LEAP WIRELESS INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30, 1999
------------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
----------------------------- ------------------------------------- LEAP
CHASE CHASE WIRELESS LICENSE CONSOLIDATED
LEAP TELECOMMUNICATIONS TELECOMMUNICATIONS ACQUISITIONS PRO FORMA
-------- ------------------ ------------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues....................... $ 5,484 $ 2,337 $ -- $ -- $ 7,821
-------- -------- ------ ----- --------
Operating expenses:
Cost of operating revenues............... (7,384) (3,266) -- -- (10,650)
Selling, general and administrative
expense................................ (13,538) (2,632) 365(4) -- (15,805)
Depreciation and amortization............ (5,175) (12,400) (385)(5) -- (17,960)
-------- -------- ------ ----- --------
Total operating expenses........ (26,097) (18,298) (20) -- (44,415)
-------- -------- ------ ----- --------
Operating loss......................... (20,613) (15,961) (20) -- (36,594)
Equity in net loss of unconsolidated
wireless operating companies........... (16,193) -- 5,500(6) -- (10,693)
Interest income.......................... 397 12 --(7) -- 409
Interest expense and amortization of
discount and facility fee.............. (7,174) (2,485) 1,487(7) (339)(12) (8,511)
Foreign currency transaction losses...... (2,794) -- -- -- (2,794)
Other income (expense), net.............. 116 (2) -- -- 114
-------- -------- ------ ----- --------
Net income (loss)...................... $(46,261) $(18,436) $6,967 $(339) $(58,069)
======== ======== ====== ===== ========
Basic and diluted net loss per common
share.................................. $ (2.45) $ (3.01)
======== ========
Shares used to calculate basic and
diluted net loss per common share...... 18,857 19,264
======== ========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-5
<PAGE> 105
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
--------------------------------------------
LEAP CHASE
CONSOLIDATED SMARTCOM TELECOMMUNICATIONS
------------ -------- ------------------
<S> <C> <C> <C>
Operating revenues......... $ 3,907 $ 3,670 $ 4,389
--------- -------- --------
Operating expenses:
Cost of operating
revenues............... (3,810) (2,843) (7,572)
Selling, general and
administrative
expenses............... (28,745) (10,566) (9,901)
Depreciation and
amortization........... (5,824) (7,895) (5,093)
--------- -------- --------
Total operating
expenses......... (38,379) (21,304) (22,566)
--------- -------- --------
Operating loss........... (34,472) (17,634) (18,177)
Equity in net loss of
unconsolidated wireless
operating companies...... (100,300) -- --
Write-down of investments
in unconsolidated
wireless operating
companies................ (27,242) -- --
Interest income............ 2,505 383 203
Interest expense and
amortization of discount
and facility fee......... (10,356) (5,997) (13,432)
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) (69)
--------- -------- --------
Net loss................. $(164,613) $(27,719) $(31,475)
--------- -------- --------
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
--------------------------------------------
WIRELESS LEAP
CHASE LICENSE CONSOLIDATED
SMARTCOM TELECOMMUNICATIONS ACQUISITIONS PRO FORMA
-------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues......... $ -- $ -- $ -- $ 11,966
------- ------- ------- ---------
Operating expenses:
Cost of operating
revenues............... 940(1) -- -- (13,285)
Selling, general and
administrative
expenses............... -- 373(4) -- (48,839)
Depreciation and
amortization........... (2,128)(1) (1,540)(5) (22,480)
------- ------- ------- ---------
Total operating
expenses......... (1,188) (1,167) -- (84,604)
------- ------- ------- ---------
Operating loss........... (1,188) (1,167) -- (72,638)
Equity in net loss of
unconsolidated wireless
operating companies...... 13,129(2) 20,900(6) -- (66,271)
Write-down of investments
in unconsolidated
wireless operating
companies................ -- -- (27,242)
Interest income............ (1,631)(3) --(7) 1,460
Interest expense and
amortization of discount
and facility fee......... (730)(3) 3,657(7) (1,367)(12) (28,225)(2)
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...................... -- -- -- (584)
------- ------- ------- ---------
Net loss................. $ 9,580 $23,390 $(1,367) $(192,204)
------- ------- ------- =========
Basic and diluted net loss
per common share......... $ (10.50)
=========
Shares used to calculate
basic and diluted net
loss per common share.... 18,313
=========
</TABLE>
See Notes to the Pro Forma Financial Information.
F-6
<PAGE> 106
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
NOTE 1. DESCRIPTION OF TRANSACTIONS
SMARTCOM ACQUISITION
In April 1999, a wholly owned subsidiary of Leap Wireless International,
Inc. 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 due on
May 11, 2002. The present value of the $22.0 million note payable is
approximately $15.7 million. Therefore, the total estimated fair value 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.
PENDING ACQUISITION OF SUBSTANTIALLY ALL THE ASSETS OF CHASE TELECOMMUNICATIONS
HOLDINGS
In December 1998, the Company agreed to purchase 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., 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
is subject to customary closing conditions.
The acquisition of substantially all the assets of Chase Telecommunications
Holdings will be accounted for under the purchase method of accounting. Based on
the fair value of Chase Telecommunications Holdings' liabilities in the
unaudited pro forma consolidated balance sheet, the aggregate purchase price
will be approximately $117.2 million ($130.2 million, excluding discount on
Federal Communications Commission ("FCC") debt). Of this amount approximately
$31.3 million has been allocated to property and equipment and other assets,
consistent with the historical carrying values, and approximately $85.9 million
to intangible assets, primarily the wireless licenses. No value has been
attributed to the warrant to purchase 1% of the common stock of Cricket
Communications Holdings, Inc. as the exercise price exceeds the estimated fair
value of the related stock. 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 ($9.5 million, net of discount),
6.25% per annum notes due in April 2007 to the FCC related to the licenses and
the remainder in cash and borrowings under the Company's credit agreement.
F-7
<PAGE> 107
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
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
the Company's common stock (valued at approximately $11.9 million at November
30, 1999) 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 November 30,
1999, the outstanding principal amount of the FCC debt was approximately $1.6
million.
In February 2000, the Company agreed to purchase all the outstanding stock
of three subsidiaries of Zuma 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 (valued at approximately $8.7 million at
November 30, 1999).
Each of these agreements is subject to customary closing conditions,
including FCC approval.
NOTE 2. PRO FORMA ADJUSTMENTS RELATED TO SMARTCOM
(1) (a) Additional amortization of $1.2 million for the Smartcom
telecommunications licenses (amortized on a straight-line basis over a
28.7 year remaining 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.
(2) Elimination of the Company's share of the net loss of Smartcom
previously recognized under the equity method of accounting.
(3) (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.
F-8
<PAGE> 108
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
NOTE 3. PRO FORMA ADJUSTMENTS RELATED TO PENDING ACQUISITION OF SUBSTANTIALLY
ALL THE ASSETS OF CHASE TELECOMMUNICATIONS HOLDINGS
(4) Elimination of Leap management fee expense recorded by Chase
Telecommunications Holdings.
(5) Additional amortization resulting from the preliminary purchase price
allocation of: (a) $0.1 million and $0.3 million for the three months
ended November 30, 1999 and the year ended August 31, 1999,
respectively, for non-compete agreement (amortized on a straight-line
basis over the 3 year term of the non-compete); (b) $0.3 million and
$1.2 million for the three months ended November 30, 1999 and the year
ended August 31, 1999, respectively, for customer list (amortized on a
straight-line basis over a 33 month remaining expected useful life for
the market where service has commenced); and (c) $12,000 and $49,000
for the three months ended November 30, 1999 and the year ended August
31, 1999, respectively, for wireless licenses (amortized on a
straight-line basis over a 40 year remaining expected useful life for
the market where service has commenced).
(6) Elimination of the Company's share of the net loss of Chase
Telecommunications Holdings previously recognized under the equity
method of accounting.
(7) (a) Elimination of interest expense recorded by Chase
Telecommunications Holdings on inter-company working capital 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.
(8) To record purchase consideration of $6.3 million in cash.
(9) To record estimated fair value of non-compete agreement of $0.9
million, customer list of $3.3 million and wireless licenses of $81.7
million in connection with the preliminary purchase price allocation
for Chase Telecommunications Holdings.
(10) (a) Elimination of inter-company working capital loans of $47.7
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 11.36% per annum; and (c)
elimination of stockholder's deficit of Chase Telecommunications
Holdings upon consolidation. The carrying value of Leap's investment
and working capital loans to Chase Telecommunications Holdings have
previously been reduced to zero.
F-9
<PAGE> 109
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO THE PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
NOTE 4. PRO FORMA ADJUSTMENTS RELATED TO ACQUISITION AND PENDING ACQUISITIONS OF
WIRELESS LICENSES
(11) To record acquisitions and pending acquisitions of wireless licenses
summarized as follows (in thousands):
<TABLE>
<CAPTION>
AIRGATE PCS DEVCO RADIOFONE ZUMA TOTAL
------- --------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Cash............................... $ 599 $2,335 $20,233 $ -- $23,167
Application of deposits............ 600 100 -- -- 700
Borrowings under credit
agreement........................ 12,691 -- -- -- 12,691
Fair value of FCC debt assumed
using an interest rate of 11.36%
per annum........................ 9,509 893 1,488 -- 11,890
Issuance of common stock........... -- -- 11,900 8,711 20,611
------- ------ ------- ------ -------
Total.................... $23,399 $3,328 $33,621 $8,711 $69,059
======= ====== ======= ====== =======
</TABLE>
(12) To record interest expense on FCC debt obligations of AirGate, PCS
Devco and Radiofone, calculated using an interest rate of 11.36% per
annum.
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 the current tax obligations.
* * * *
F-10
<PAGE> 110
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-11
<PAGE> 111
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-12
<PAGE> 112
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-13
<PAGE> 113
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-14
<PAGE> 114
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-15
<PAGE> 115
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 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
F-16
<PAGE> 116
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-17
<PAGE> 117
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-18
<PAGE> 118
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-19
<PAGE> 119
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-20
<PAGE> 120
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-21
<PAGE> 121
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-22
<PAGE> 122
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-23
<PAGE> 123
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $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
F-24
<PAGE> 124
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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-25
<PAGE> 125
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-26
<PAGE> 126
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-27
<PAGE> 127
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-28
<PAGE> 128
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-29
<PAGE> 129
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-30
<PAGE> 130
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>
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
F-31
<PAGE> 131
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-32
<PAGE> 132
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-33
<PAGE> 133
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.
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
F-34
<PAGE> 134
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-35
<PAGE> 135
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 operations needed to deploy the subsidiary's
wireless networks in various markets across the United States.
F-36
<PAGE> 136
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
On December 17, 1999, the Company agreed to increase the purchase price of
the Airgate Wireless licenses by $5.5 million. On January 18, 2000, the Company
completed the acquisition.
On September 10, 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.
On January 7, 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 November 30, 1999, 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.
On February 9, 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.
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.
CHASE TELECOMMUNICATIONS HOLDINGS
On November 15, 1999, the Company increased to $50.0 million the maximum
amount of working capital loans that may be drawn by Chase Telecommunications
Holdings.
LITIGATION
On December 2, 1999, Metrosvyaz filed suit against the Company and certain
of its officers in the U.S. District Court for the Central District of
California. The Metrosvyaz suit alleges claims for libel, trade libel,
intentional and negligent interference with prospective advantage and breach of
fiduciary duty. The suit seeks compensatory damages in excess of $100 million as
well as punitive damages and injunctive relief. The Company believes the
Metrosvyaz claims are without merit and will vigorously defend against them. The
Company cannot, however, be certain of the outcome of this litigation. If
Metrosvyaz prevails in its claims it could have a material adverse effect on the
Company's business and financial condition.
F-37
<PAGE> 137
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 3 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.
* * * *
F-38
<PAGE> 138
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1999 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 40,249 $ 26,215
Accounts receivable, net.................................... 3,980 2,726
Inventories................................................. 4,329 5,410
Recoverable taxes........................................... 6,592 3,907
Other current assets........................................ 5,500 1,926
--------- ---------
Total current assets................................... 60,650 40,184
Property and equipment, net................................. 112,841 116,947
Investments in and loans receivable from unconsolidated
wireless operating companies.............................. 77,398 94,429
Intangible assets, net...................................... 71,475 73,944
Deposits and other assets................................... 10,977 9,827
--------- ---------
Total assets........................................... $ 333,341 $ 335,331
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 20,139 $ 16,372
Loans payable to banks...................................... 17,566 17,225
--------- ---------
Total current liabilities.............................. 37,705 33,597
Long-term debt.............................................. 260,818 221,812
Other long-term liabilities................................. 9,272 8,504
--------- ---------
Total liabilities...................................... 307,795 263,913
--------- ---------
Commitments and contingencies (Notes 2, 6 and 8)
Minority interest in consolidated subsidiary................ 373 518
--------- ---------
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, 18,954,636 shares issued and outstanding........ 2 2
Additional paid-in capital................................ 292,651 291,189
Accumulated deficit....................................... (263,157) (216,896)
Accumulated other comprehensive loss...................... (4,323) (3,395)
--------- ---------
Total stockholders' equity............................. 25,173 70,900
--------- ---------
Total liabilities and stockholders' equity............. $ 333,341 $ 335,331
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-39
<PAGE> 139
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
1999 1998
-------- ----------
(RESTATED)
<S> <C> <C>
Operating revenues.......................................... $ 5,484 $ --
-------- --------
Operating expenses:
Cost of operating revenues................................ (7,384) --
Selling, general and administrative expenses.............. (13,538) (4,240)
Depreciation and amortization............................. (5,175) (124)
-------- --------
Total operating expenses............................. (26,097) (4,364)
-------- --------
Operating loss......................................... (20,613) (4,364)
Equity in net loss of unconsolidated wireless operating
companies................................................. (16,193) (16,029)
Interest income............................................. 397 462
Interest expense and amortization of discount and facility
fee....................................................... (7,174) (1,051)
Foreign currency transaction losses......................... (2,794) --
Other income (expense), net................................. 116 --
-------- --------
Net loss............................................... (46,261) (20,982)
Other comprehensive income (loss):
Foreign currency translation losses....................... (928) (587)
-------- --------
Comprehensive loss..................................... $(47,189) $(21,569)
======== ========
Basic and diluted net loss per common share................. $ (2.45) $ (1.19)
======== ========
Shares used to calculate basic and diluted net loss per
common share.............................................. 18,857 17,663
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-40
<PAGE> 140
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
1999 1998
-------- ----------
(RESTATED)
<S> <C> <C>
Operating activities:
Net cash used in operating activities..................... $(17,934) $ (10,054)
-------- ---------
Investing activities:
Purchase of property and equipment........................ (5,040) (2,876)
Investments in and loans to unconsolidated wireless
operating companies.................................... (5,500) (86,791)
Proceeds from liquidation of discontinued foreign
venture................................................ 7,006 --
Loan receivable to related party.......................... -- (17,500)
Repayment of loan receivable from related party........... -- 7,500
Acquisition of wireless licenses.......................... -- (689)
-------- ---------
Net cash used in investing activities....................... (3,534) (100,356)
-------- ---------
Financing activities:
Proceeds from loans payable to banks...................... -- 6,720
Borrowings under credit agreement......................... 30,905 23,315
Repayment of borrowings under credit agreement............ -- (7,500)
Issuance of common stock.................................. 1,439 103
Deferred customs duties and other......................... 812 --
Former parent company's investment........................ -- 95,268
-------- ---------
Net cash provided by financing activities................... 33,156 117,906
-------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 2,346 --
-------- ---------
Net increase in cash and cash equivalents................... 14,034 7,496
Cash and cash equivalents at beginning of period............ 26,215 --
-------- ---------
Cash and cash equivalents at end of period.................. $ 40,249 $ 7,496
======== =========
Supplemental disclosure of non-cash investing and financing
activities:
Loans to unconsolidated wireless operating company
converted to equity investment......................... $ -- $ 28,196
Long-term financing to purchase property and equipment.... $ 4,739 $ --
Facility fee due on long-term debt........................ $ -- $ 5,300
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-41
<PAGE> 141
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 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.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the three months ended
November 30, 1999 and 1998 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 18,856,656 and 17,662,760, respectively. The weighted average
number of common shares outstanding assumes that the 17,647,685 shares issued at
F-42
<PAGE> 142
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Distribution were outstanding for the periods prior to Distribution. Stock
options for 5,705,485 common shares, the conversion of Qualcomm's Trust
Convertible Preferred Securities which are convertible into 1,959,053 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.
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.
NOTE 2. PENDING WIRELESS LICENSE ACQUISITIONS
In September 1998, the Company entered into an agreement, as amended in
December 1999, to purchase three wireless licenses covering markets in North
Carolina from AirGate Wireless, L.L.C. ("AirGate") for $25.0 million. The
purchase price consists of the Company assuming $11.7 million of 6.25% per annum
notes due April 2007 to the Federal Communications Commission ("FCC") related to
the licenses and the remainder payable in cash. The remaining cash payment is
increased for any principal payments made by AirGate on the notes during the
period prior to the closing of the transaction.
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 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 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.
Each of these agreements is subject to FCC approval and other conditions to
closing, and no assurance can be given that they will be closed on schedule or
at all. See Note 8.
NOTE 3. INVESTMENTS AND LOANS TO UNCONSOLIDATED WIRELESS OPERATING COMPANIES
The Company has equity interests in companies that directly or indirectly
hold telecommunications licenses. 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 S.A. ("Smartcom") as a consolidated entity. Prior to the
fourth quarter of fiscal 1999,
F-43
<PAGE> 143
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Smartcom was accounted for under the equity method. The Company recorded equity
losses from Smartcom of $3.4 million during the three months ended November 30,
1998.
Condensed combined financial information for the Leap operating companies
accounted for under the equity method is summarized as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1999 1999
------------ ----------
(UNAUDITED)
<S> <C> <C>
Current assets.............................................. $ 33,109 $ 140,899
Non-current assets.......................................... 561,395 576,765
Current liabilities......................................... (89,899) (112,539)
Non-current liabilities..................................... (331,549) (347,590)
--------- ---------
Total stockholders' capital............................ 173,056 257,535
Other stockholders' share of capital........................ 95,658 146,059
--------- ---------
Company's share of capital.................................. 77,398 111,476
Lag period loans and advances............................... -- 10,195
Write-down in investments................................... -- (27,242)
--------- ---------
Investments in and loans receivable from unconsolidated
wireless operating companies........................... $ 77,398 $ 94,429
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
1999 1998
----------- ------------
(UNAUDITED) (UNAUDITED &
RESTATED)
<S> <C> <C>
Operating revenues.......................................... $ 3,501 $ 807
-------- --------
Operating losses............................................ (50,319) (13,142)
Other income (expense), net................................. (8,887) (5,434)
Foreign currency transaction gains.......................... 5,926 426
-------- --------
Net loss.................................................. (53,280) (18,150)
Other stockholders' share of net loss....................... (35,761) (1,677)
-------- --------
Company's share of net loss................................. (17,519) (16,473)
Amortization of excess cost of investment................... -- (244)
Elimination of intercompany transactions.................... 1,326 688
-------- --------
Equity in net loss of unconsolidated wireless operating
companies.............................................. $(16,193) $(16,029)
======== ========
</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 $50.0 million working capital
facility to Chase Telecommunications Holdings. At November 30, 1999, borrowings
under the facility totaled $43.4 million, including $4.5 million of accrued and
capitalized 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
F-44
<PAGE> 144
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Telecommunications Holdings to the extent of its investment and loans. The
Company recorded equity losses from Chase Telecommunications Holdings of $5.5
million and $8.6 million during the three months ended November 30, 1999 and
1998, respectively.
In December 1998, the Company agreed to acquire substantially all the
assets of Chase Telecommunications Holdings, including wireless licenses,
subject to FCC approval and other conditions. The purchase price includes
approximately $6.3 million in cash, the assumption of principal amounts of
liabilities that totaled approximately $109.8 million at November 30, 1999, 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, the Company's existing stock ownership and warrants to
purchase stock in Chase Telecommunications Holdings, and contingent earn-out
payments of up to $41.0 million 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 September 2006.
PEGASO
At November 30, 1999, the Company has a 28.6% interest in Pegaso, a Mexican
corporation which 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 $10.7 million and $0.6 million during the three months ended
November 30, 1999 and 1998, respectively.
DISCONTINUED FOREIGN VENTURES
Through a subsidiary, the Company has an interest in Orrengrove Investments
Limited ("Orrengrove"), which in turn owned a 60% interest in three related
companies (the "Transworld Companies") which are being liquidated. The third
party satellite that the Transworld 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, the
Company wrote down its investment in Orrengrove in the fourth quarter of fiscal
1999 to the proceeds it expects to receive in connection with the liquidations.
The Company recorded equity losses from Orrengrove of $0.9 million during the
three months ended November 30, 1998.
Through another subsidiary, the Company owns a 35% interest in Metrosvyaz
Limited ("Metrosvyaz"), 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 through vendor financing from an
equipment supplier and through a working capital facility provided by the
Company. The Company has ceased funding loans to Metrosvyaz and, as a result,
wrote down its remaining $9.6 million investment in Metrosvyaz in the fourth
quarter of fiscal 1999. As described in Note 6, Leap has initiated arbitration
against Metrosvyaz and one of its officers, and Metrosvyaz has subsequently
filed a lawsuit against the Company and certain of its executive officers. The
Company recorded equity losses from Metrosvyaz of $2.5 million during the three
months ended November 30, 1998.
F-45
<PAGE> 145
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 4. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1999 1999
------------ ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Trade accounts receivable............................... $3,445 $2,197
Other accounts receivable............................... 1,238 1,112
------ ------
4,683 3,309
Allowance for doubtful accounts......................... (703) (583)
------ ------
$3,980 $2,726
====== ======
INVENTORIES:
Handsets................................................ $3,337 $4,320
Accessories............................................. 992 1,090
------ ------
$4,329 $5,410
====== ======
</TABLE>
NOTE 5. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30,
1999
------------
(UNAUDITED)
<S> <C>
Credit Agreement, net of facility fee....................... $154,991
Deferred Payment Agreement.................................. 89,220
Note payable to Telex-Chile, net of discount................ 16,607
--------
$260,818
========
</TABLE>
CREDIT AGREEMENT
The Company entered into a secured credit facility (the "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 for working capital needs. The investment
capital sub-facility enables the Company to borrow up to $229.8 million from
Qualcomm for strategic capital investments. At November 30, 1999, the Company
had borrowed $15.0 million and $135.3 million under the working capital
sub-facility and investment capital sub-facility, respectively.
DEFERRED PAYMENT AGREEMENT
Smartcom and Qualcomm are parties to a Deferred Payment Agreement, as
amended, 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
F-46
<PAGE> 146
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
assets. As a result, substantially all the net assets are restricted from
distribution to Leap. Under the terms of the amended agreement, Qualcomm has
agreed to defer collection of principal amounts up to a maximum of $84.5 million
plus accrued and capitalized interest.
NOTE 6. 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.
INFRASTRUCTURE EQUIPMENT PURCHASE AND FINANCING AGREEMENTS
In September 1999, a subsidiary of the Company entered into separate
agreements providing for the purchase of infrastructure equipment and the
financing of such purchases with two major telecommunications suppliers. Under
the agreements, the subsidiary 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 subsidiary'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.
Until the pending acquisition of substantially all the assets of Chase
Telecommunications Holdings is completed, the Company plans to purchase
equipment and services required by Chase Telecommunications Holdings and then
resell the equipment and services to Chase Telecommunications Holdings on
substantially similar terms. If the Company fails to consummate the Chase
Telecommunications Holdings acquisition by September 20, 2000, the Company will
be required to pay in full up to $60.0 million of debt plus accrued interest
incurred from the purchase and sale of equipment and services to Chase
Telecommunications Holdings. As of November 30, 1999, no equipment had been
purchased and resold to Chase Telecommunications Holdings.
Following the closing of the Chase Telecommunications Holdings acquisition,
amounts owed by Chase Telecommunications Holdings to Qualcomm under an equipment
financing agreement become due and payable within five days and will be repaid
from borrowings under one of the new equipment financing agreements. As of
November 30, 1999, Chase Telecommunications Holdings owed approximately $31.0
million to Qualcomm under its equipment financing agreement.
LITIGATION
In September 1999, the Company announced that it had stopped funding loans
to Metrosvyaz. Metrosvyaz had not satisfied certain conditions required for
funding and was in default under its loan agreement with the Company. In
addition, the Company had been prevented from securing full reporting and
documentation of performance, results and expenditures of Metrosvyaz despite
repeated efforts to
F-47
<PAGE> 147
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
obtain that information. Preliminary results of a special investigation of
Metrosyvaz disclosed serious irregularities, including unaccounted for funds and
questionable contracts and payments. On September 29, 1999, the Company issued a
demand for arbitration seeking a full accounting and damages from Metrosvyaz and
one of its directors with respect to these matters. Management cannot determine
the likely outcome of the arbitration.
In December 1999, Metrosvyaz filed suit against the Company and certain of
its officers in the U.S. District Court for the Central District of California.
The Metrosvyaz suit alleges claims for libel, trade libel, intentional and
negligent interference with prospective advantage and breach of fiduciary duty.
The suit seeks compensatory damages in excess of $100 million as well as
punitive damages and injunctive relief. The Company believes the Metrosvyaz
claims are without merit and will vigorously defend against them. The Company
cannot, however, be certain of the outcome of this litigation. If Metrosvyaz
prevails in its claims it could have a material adverse effect on the Company's
business and financial condition.
Various others 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-48
<PAGE> 148
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 7. 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.
Summary information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR
THE THREE MONTHS
ENDED NOVEMBER 30,
---------------------
1999 1998
-------- ---------
(UNAUDITED)
<S> <C> <C>
UNITED STATES
Revenues................................................. $ 2,087 $ 599
Operating loss........................................... (15,498) (4,432)
Operating loss before depreciation and amortization...... (5,810) (3,557)
Capital expenditures..................................... (3,929) (3,522)
Total assets............................................. 101,486 84,177
CHILE
Revenues................................................. 5,448 208
Operating loss........................................... (14,325) (5,424)
Operating loss before depreciation and amortization...... (9,309) (3,582)
Capital expenditures..................................... (2,899) (17,095)
Total assets............................................. 190,297 134,274
MEXICO
Revenues................................................. 1,414 --
Operating loss........................................... (38,024) (534)
Operating loss before depreciation and amortization...... (35,652) (518)
Capital expenditures..................................... (36,279) (60,344)
Purchase of wireless licenses............................ -- (175,864)
Total assets............................................. 508,481 362,204
</TABLE>
F-49
<PAGE> 149
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>
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
--------------------------
1999 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
Total segment revenues.................................. $ 8,949 $ 807
Revenues of unconsolidated wireless operating
companies............................................. (3,501) (807)
Other revenues.......................................... 36 --
-------- --------
Consolidated revenues................................. $ 5,484 $ --
======== ========
Total segment operating losses.......................... $(67,847) $(10,390)
Operating losses of unconsolidated wireless operating
companies............................................. 50,319 13,142
Discontinued foreign ventures........................... -- (3,752)
Corporate and eliminations.............................. (3,085) (3,364)
-------- --------
Consolidated operating loss........................... $(20,613) $ (4,364)
======== ========
Total segment operating losses before depreciation and
amortization.......................................... $(50,771) $ (7,657)
Operating losses before depreciation and amortization of
unconsolidated wireless operating companies........... 38,259 10,409
Discontinued foreign ventures........................... -- (3,752)
Corporate and eliminations.............................. (2,926) (3,240)
-------- --------
Consolidated operating losses before depreciation and
amortization....................................... $(15,438) $ (4,240)
======== ========
</TABLE>
Revenues and long-lived assets related to operations in the United States
and other foreign countries are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
--------------------------
1999 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
United States........................................... $ 36 $ --
Other foreign countries................................. 5,448 --
-------- --------
Total consolidated revenues........................ $ 5,484 $ --
======== ========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1999 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
LONG-LIVED ASSETS:
United States........................................... $ 22,912 $ 23,599
Other foreign countries................................. 240,840 264,369
-------- --------
Total consolidated long-lived assets............... $263,752 $287,968
======== ========
</TABLE>
F-50
<PAGE> 150
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 8. SUBSEQUENT EVENTS
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 account. Matching share
units vest ratably over 3 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.
PENDING WIRELESS LICENSE ACQUISITIONS
On January 7, 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 November 30, 1999, 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. The agreement is subject to FCC approval and
other conditions to closing.
On January 18, 2000, the Company completed the acquisition of the three
wireless licenses from AirGate.
On February 9, 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. The agreement is
subject to FCC approval and other conditions to closing.
* * * *
F-51
<PAGE> 151
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-52
<PAGE> 152
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-53
<PAGE> 153
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-54
<PAGE> 154
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-55
<PAGE> 155
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-56
<PAGE> 156
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-57
<PAGE> 157
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 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.
F-58
<PAGE> 158
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 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
F-59
<PAGE> 159
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
(k) LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the total amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
F-60
<PAGE> 160
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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 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.
F-61
<PAGE> 161
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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-62
<PAGE> 162
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-63
<PAGE> 163
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-64
<PAGE> 164
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-65
<PAGE> 165
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.
(viii) Become liable for a capital lease obligation exceeding US$1
million.
F-66
<PAGE> 166
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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.
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.
F-67
<PAGE> 167
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
(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.
F-68
<PAGE> 168
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(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".
(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
F-69
<PAGE> 169
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
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>
F-70
<PAGE> 170
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
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
F-71
<PAGE> 171
SMARTCOM S.A.
(COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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-72
<PAGE> 172
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-73
<PAGE> 173
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-74
<PAGE> 174
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-75
<PAGE> 175
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-76
<PAGE> 176
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-77
<PAGE> 177
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.
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.
F-78
<PAGE> 178
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
Construction 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
F-79
<PAGE> 179
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-80
<PAGE> 180
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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-81
<PAGE> 181
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.
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
F-82
<PAGE> 182
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-83
<PAGE> 183
ORRENGROVE INVESTMENTS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
1999........................................................ $ 404,000
2000........................................................ 414,000
2001........................................................ 327,000
2002........................................................ 1,000
2003........................................................ --
----------
Total............................................. $1,146,000
==========
</TABLE>
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-84
<PAGE> 184
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-85
<PAGE> 185
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-86
<PAGE> 186
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-87
<PAGE> 187
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-88
<PAGE> 188
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-89
<PAGE> 189
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-90
<PAGE> 190
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-91
<PAGE> 191
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 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
F-92
<PAGE> 192
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (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
F-93
<PAGE> 193
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-94
<PAGE> 194
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-95
<PAGE> 195
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 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,
F-96
<PAGE> 196
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
CREDIT TERM MAXIMUM AMOUNT
------ ---- --------------
<S> <C> <C>
Credit 1 From the date of authorization to December 31, $170,000
2000.............................................
Credit 2 From January 1, 2001 to December 31, 2002........ 100,000
Additional Credit From the date of authorization to December 31, 10,000
2000.............................................
--------
$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-97
<PAGE> 197
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.
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
F-98
<PAGE> 198
PEGASO TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-99
<PAGE> 199
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-100
<PAGE> 200
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-101
<PAGE> 201
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 generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
February 15, 2000
F-102
<PAGE> 202
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, --------------------
1999 1999 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Property and equipment.............................. $ 154 $ -- $ --
Other assets........................................ 129 -- --
-------- -------- --------
Total assets.............................. $ 283 $ -- $ --
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities............ $ 7,142 $ 6,924 $ 4,551
-------- -------- --------
Total current liabilities................. 7,142 6,924 4,551
Commitments and contingencies (Note 8)
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, 54,133,167, 52,000,100 and
100 shares issued and outstanding at November
30, 1999 (unaudited) and August 31, 1999 and
1998, respectively............................. 5 5 --
Additional paid-in capital........................ 64,793 51,995 --
Parent's investment and advances.................. -- 4,115 20,146
Notes receivable from stockholders................ (926) (906) --
Deficit accumulated during the development
stage.......................................... (70,731) (62,133) (24,697)
-------- -------- --------
Total stockholders' equity (deficit)...... (6,859) (6,924) (4,551)
-------- -------- --------
Total liabilities and stockholders' equity
(deficit).............................. $ 283 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-103
<PAGE> 203
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
THREE MONTHS DECEMBER 1, DECEMBER 1, DECEMBER 1,
ENDED YEAR ENDED 1996 1996 1996
NOVEMBER 30, AUGUST 31, (INCEPTION) TO (INCEPTION) TO (INCEPTION) TO
----------------- ------------------- AUGUST 31, AUGUST 31, NOVEMBER 30,
1999 1998 1999 1998 1997 1999 1999
------- ------- -------- -------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
General and
administrative
expenses........... $(3,118) $(1,000) $(16,545) $ (8,896) $ -- $(25,441) $(28,559)
Equity in net loss of
unconsolidated
wireless operating
company............ (5,500) (8,650) (20,900) (11,801) (4,000) (36,701) (42,201)
Interest income...... 20 -- 9 -- 9 29
------- ------- -------- -------- ------- -------- --------
Net loss........ $(8,598) $(9,650) $(37,436) $(20,697) $(4,000) $(62,133) $(70,731)
======= ======= ======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-104
<PAGE> 204
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS PERIOD FROM PERIOD FROM PERIOD FROM
ENDED YEAR ENDED DECEMBER 1, 1996 DECEMBER 1, 1996 DECEMBER 1, 1996
NOVEMBER 30, AUGUST 31, (INCEPTION) TO (INCEPTION) TO (INCEPTION) TO
----------------- ------------------- AUGUST 31, AUGUST 31, NOVEMBER 30,
1999 1998 1999 1998 1997 1999 1999
------- ------- -------- -------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net loss..................... $(8,598) $(9,650) $(37,436) $(20,697) $(4,000) $(62,133) $(70,731)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Equity in net loss of
unconsolidated wireless
operating company........ 5,500 8,650 20,900 11,801 4,000 36,701 42,201
Interest accrued to notes
receivable from
stockholders............. (20) -- (9) -- -- (9) (29)
Changes in assets and
liabilities:
Deposits and other
assets................ (129) -- -- -- -- -- (129)
Accounts payable and
accrued liabilities... 218 -- 2,373 4,551 -- 6,924 7,142
------- ------- -------- -------- ------- -------- --------
Net cash used in operating
activities................... (3,029) (1,000) (14,172) (4,345) -- (18,517) (21,546)
------- ------- -------- -------- ------- -------- --------
Investing activities:
Purchase of property and
equipment.................. (154) -- -- -- -- -- (154)
Investment in and loans to
unconsolidated wireless
operating company.......... (5,500) (8,650) (20,900) (11,801) (4,000) (36,701) (42,201)
------- ------- -------- -------- ------- -------- --------
Net cash used in investing
activities................... (5,654) (8,650) (20,900) (11,801) (4,000) (36,701) (42,355)
------- ------- -------- -------- ------- -------- --------
Financing activities:
Exercise of stock options.... -- -- 1,103 -- -- 1,103 1,103
Parent's investment and
advances................... 8,683 9,650 33,969 16,146 4,000 54,115 62,798
------- ------- -------- -------- ------- -------- --------
Net cash provided by financing
activities................... 8,683 9,650 35,072 16,146 4,000 55,218 63,901
------- ------- -------- -------- ------- -------- --------
Net change in cash............. -- -- -- -- -- -- --
Cash at beginning of period.... -- -- -- -- -- -- --
------- ------- -------- -------- ------- -------- --------
Cash at end of period.......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======== ======== ======= ======== ========
Supplemental disclosure of
non-cash investing and
financing activities:
Issuance of common stock
for parent's advances.... $12,798 $ -- $ -- $ -- $ -- $ -- $ 12,798
Exercise of stock options
for notes receivable..... $ -- $ -- $ 897 $ -- $ -- $ 897 $ 897
</TABLE>
See accompanying notes to consolidated financial statements.
F-105
<PAGE> 205
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFICIT
PARENT'S NOTES ACCUMULATED
COMMON STOCK ADDITIONAL INVESTMENT RECEIVABLE DURING THE
--------------- PAID-IN AND FROM DEVELOPMENT
SHARES AMOUNT CAPITAL ADVANCES STOCKHOLDERS STAGE TOTALS
------ ------ ---------- ---------- ------------ ----------- --------
<S> <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)
Net loss....................... -- -- -- -- -- (37,436) (37,436)
------ --- ------- -------- ----- -------- --------
Balance at August 31, 1999....... 52,000 5 51,995 4,115 (906) (62,133) (6,924)
September 1, 1999 to November 30,
1999 (unaudited):
Parent's investment and
advances..................... -- -- 8,683 -- -- 8,683
Issuance of common stock to
parent....................... 2,133 -- 12,798 (12,798) -- -- --
Interest accrued on notes
receivable from
stockholders................. -- -- -- -- (20) -- (20)
Net loss....................... -- -- -- -- -- (8,598) (8,598)
------ --- ------- -------- ----- -------- --------
Balance at November 30, 1999
(unaudited).................... 54,133 $ 5 $64,793 $ -- $(926) $(70,731) $ (6,859)
====== === ======= ======== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-106
<PAGE> 206
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 have agreed to
acquire. The Cricket service was launched under an agreement that requires the
management of Chase Telecommunications to control the business until the
proposed acquisition receives all necessary governmental approvals and is
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 November
30, 1999 (unaudited). 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 includes the conversion of Leap's
investment and advances into common stock of the Company. In November 1999, the
Company issued 2,133,067 shares of its common stock to Leap related to the
conversion of investments and advances totaling $12.8 million (unaudited)
provided to the Company from June 22, 1999 to November 30, 1999.
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 November 30, 1999, 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
F-107
<PAGE> 207
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenditures, a substantial portion of which is incurred before corresponding
revenues are generated. In 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 $70.7
million for the period from December 1, 1996 (inception) to November 30, 1999
(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. Leap has announced a proposed underwritten public
offering (the "Equity Offering") of 4,000,000 shares of its common stock plus an
option to the underwriters to purchase up to 600,000 shares of its common stock
solely to cover over-allotments. Leap has also announced its intention to issue
units (the "Units Offering") consisting of notes and warrants, with anticipated
gross proceeds of approximately $525.0 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, to complete the pending acquisition of
substantially all of the assets of Chase Telecommunications Holdings and to
acquire additional wireless licenses to be used by the Company to offer Cricket
service. If Leap does not complete the Equity Offering or the Units Offering,
Leap has alternative unused capital resources in place to fund the Company's
cash needs for the next twelve months, but the scope of the planned network
build-outs will be reduced.
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 November 30, 1999 and
consolidated statements of operations and related statements of cash flows for
the three months ended November 30, 1999 and 1998 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.
F-108
<PAGE> 208
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 subsidiary, Cricket Communications,
Inc. All significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
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. 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.
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
F-109
<PAGE> 209
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, ----------------
1999 1999 1998
------------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Property and equipment:
Network under development............................. $ 100 $ -- $ --
Leasehold improvements................................ 54 -- --
------ ------ ------
$ 154 $ -- $ --
====== ====== ======
Other assets:
Billing system licensing agreement.................... $ 50 $ -- $ --
Other................................................. 79 -- --
------ ------ ------
$ 129 $ -- $ --
====== ====== ======
Accounts payable and accrued liabilities:
Trade accounts payable................................ $ 80 $ 32 $4,551
Accrued loss on handset purchase commitment........... 6,274 6,274
Accrued payroll and related benefits.................. 788 618 --
------ ------ ------
$7,142 $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 $50.0 million
working capital facility to Chase Telecommunications. Borrowings under the
facility are subject to interest at an annual rate of prime plus 4 1/2%.
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 all of the assets of Chase Telecommunications Holdings and are
subordinated to Chase Telecommunication's equipment vendor loans. At November
30, 1999 (unaudited) and August 31, 1999, borrowings under the facility totaled
$43.4 million and $36.1 million, including $4.5 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
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 December 1998, Leap and the Company agreed to purchase substantially all
the assets of Chase Telecommunications Holdings, including all of the shares of
Chase Telecommunications for: $6.3 million in cash; the assumption of principal
amounts of liabilities that totaled approximately $109.8 million at
F-110
<PAGE> 210
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
November 30, 1999 (unaudited); a warrant to purchase 1% of the common stock 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 is subject to customary closing
conditions.
Condensed financial information for Chase Telecommunications Holdings is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
NOVEMBER 30, ----------------------
1999 1999 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current assets.................................... $ 3,015 $ 5,963 $ 7,776
Non-current assets................................ 82,293 87,282 83,528
Current liabilities............................... (3,756) (4,063) (2,925)
Non-current liabilities........................... (163,324) (151,145) (122,894)
--------- --------- ---------
Total stockholders' equity (deficit).... (81,772) (61,963) (34,515)
Other stockholders' share of equity (deficit)..... (75,884) (57,502) (32,030)
--------- --------- ---------
Company's share of equity (deficit)............... (5,888) (4,461) (2,485)
--------- --------- ---------
Investment in and loans receivable from Chase
Telecommunications Holdings.................. $ -- $ -- $ --
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM
DECEMBER 1, DECEMBER 1, DECEMBER 1,
THREE MONTHS ENDED 1996 1996 1996
NOVEMBER 30, YEAR ENDED AUGUST 31, (INCEPTION) TO (INCEPTION) TO (INCEPTION) TO
------------------------- ---------------------- AUGUST 31, AUGUST 31, NOVEMBER 30,
1999 1998 1999 1998 1997 1999 1999
----------- ----------- -------- -------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues..... $ 2,087 $ 599 $ 3,337 $ 21 $ -- $ 3,358 $ 5,445
-------- ------- -------- -------- -------- -------- --------
Operating losses....... (12,328) (3,432) (15,317) (4,915) (4,960) (25,192) (37,520)
Other income (expense),
net.................. (7,481) (3,267) (12,131) (20,991) (18,796) (51,918) (59,399)
-------- ------- -------- -------- -------- -------- --------
Net loss............. (19,809) (6,699) (27,448) (25,906) (23,756) (77,110) (96,919)
Other stockholders'
share of net loss.... (12,680) 2,474 (3,052) (14,105) (19,756) (36,913) (49,593)
-------- ------- -------- -------- -------- -------- --------
Company's share of net
loss................. (7,129) (9,173) (24,396) (11,801) (4,000) (40,197) (47,326)
Elimination of
intercompany
transactions......... (1,629) (523) (3,496) -- -- (3,496) (5,125)
-------- ------- -------- -------- -------- -------- --------
Equity in net loss of
Chase
Telecommunications
Holdings........... $ (5,500) $(8,650) $(20,900) $(11,801) $ (4,000) $(36,701) $(42,201)
-------- ------- -------- -------- -------- -------- --------
</TABLE>
F-111
<PAGE> 211
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. 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 $0.5 million for the three months ended November 30, 1999 (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.
NOTE 6. 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 $35,994 and $18,044
for the year ended August 31, 1999 and the three months ended November 30, 1999
(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 creditors of Leap. For the year ended August 31,
1999 and the three months ended November 30, 1999 (unaudited), 111 shares and
154 shares, respectively, of Leap common stock were allocated under the plan for
the Company's employees and the Company's matching contribution amounted to
$1,817 and $3,399, 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.
F-112
<PAGE> 212
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option transactions for the 1999 Cricket Plan follows
(number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS -----------------------------
AVAILABLE NUMBER OF WEIGHTED 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>
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 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.
F-113
<PAGE> 213
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $8.21
=======
</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
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>
$ 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. 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 three months ended November 30, 1999 (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
F-114
<PAGE> 214
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 7. 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 8. COMMITMENTS AND CONTINGENCIES
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. 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.
F-115
<PAGE> 215
CRICKET COMMUNICATIONS HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Until Leap and the Company complete their pending acquisition of
substantially all the assets of Chase Telecommunications Holdings, the Company
plans to purchase equipment and services required by Chase Telecommunications
and then resell the equipment and services to Chase Telecommunications on
substantially similar terms. If Leap and the Company fail to consummate the
Chase Telecommunications Holdings acquisition by September 20, 2000, Leap will
be required to pay in full up to $60.0 million of debt plus accrued interest
incurred for the purchase and sale of equipment and services to Chase
Telecommunications. If any such repayment by Leap occurs, the Company's
obligations to repay Leap shall be subordinate to the Company's obligations
under its existing infrastructure equipment finance agreement. As of November
30, 1999 (unaudited), no equipment had been purchased and resold to Chase
Telecommunications.
Following the closing of the Chase Telecommunications acquisition, amounts
owed by Chase Telecommunications under an existing equipment financing agreement
become due and payable within five days and will be repaid from borrowings under
one of the new equipment financing agreements. As of November 30, 1999
(unaudited), Chase Telecommunications Holdings owed approximately $31.0 million
under its existing equipment financing agreement.
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-116
<PAGE> 216
[Inside Back Cover]
The top portion of the inside back cover page contains a map of the Americas
with the countries of the United States, Mexico and Chile highlighted in color.
The Leap logo is displayed at the top followed by the caption "Focused on the
Americas: Licenses Covering all of Mexico, Chile and Selected U.S. Markets."
Directly beneath the map are pictures of retail stores bearing the Cricket,
Pegaso and SMARTCOM PCS logos. To the left of the pictures of the stores is a
picture of a woman holding a wireless handset.
<PAGE> 217
[LEAP WIRELESS LOGO]
<PAGE> 218
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 WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued February, 16, 2000
4,000,000 Shares
[LEAP WIRELESS LOGO]
COMMON STOCK
------------------------
LEAP WIRELESS INTERNATIONAL, INC. IS OFFERING SHARES OF ITS COMMON STOCK.
INITIALLY, THE INTERNATIONAL UNDERWRITERS ARE OFFERING 800,000 SHARES OUTSIDE
THE UNITED STATES AND CANADA, AND THE U.S. UNDERWRITERS ARE OFFERING 3,200,000
SHARES IN THE UNITED STATES AND CANADA.
------------------------
LEAP WIRELESS INTERNATIONAL, INC.'S COMMON STOCK IS QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "LWIN." ON FEBRUARY 16, 2000, THE REPORTED LAST
SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET SYSTEM WAS $90 3/16
PER SHARE
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 13.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Leap
-------- ------------- -----------
<S> <C> <C> <C>
Per Share................................................... $ $ $
Total.......................................................
</TABLE>
Leap Wireless International, Inc. has granted the underwriters the right to
purchase up to an additional 600,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
ABN AMRO ROTHSCHILD
, 2000
<PAGE> 219
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION OF LEAP
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the SEC registration fee and the NASD filing fee. All of these fees are
being paid by Leap.
<TABLE>
<S> <C>
Registration fee.......................................... $ 64,497
NASD Filing Fee........................................... 28,416
Blue Sky Fees and Expenses................................ 3,000
Legal fees and expenses................................... 400,000
Accounting fees and expenses.............................. 250,000
Printing and engraving expenses........................... 150,000
Miscellaneous............................................. 4,087
--------
Total............................................. $900,000
========
</TABLE>
ITEM 15. 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
II-1
<PAGE> 220
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.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement
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(4) Superceding Warrant, dated as of August 9, 1999, issued to
Qualcomm
4.2.3(4) Form of Voting Agreement, dated as of April 1, 1999, between
the Registrant and various officers and directors of
Qualcomm Incorporated
4.2.4(4) Amended and Restated Agreement Concerning Share Ownership,
dated as of August 4, 1999, between the Registrant and
Qualcomm Incorporated
4.3(2) Rights Agreement, dated as of September 14, 1998, between
the Registrant and Harris Trust Company of California
5.1* Opinion of Latham & Watkins.
10.1(5) Separation and Distribution Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant
10.1.1(4) First Amendment to Separation and Distribution Agreement,
dated as of August 6, 1999, between the Registrant and
Qualcomm
10.2(5) Credit Agreement, dated as of September 23, 1998, between
Qualcomm and the Registrant
10.3(5) Tax Matters Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.4(5) Interim Services Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.5(5) Master Agreement Regarding Equipment Acquisition, dated as
of September 23, 1998, between Qualcomm and the Registrant
10.5.1(4) First Amendment to Master Agreement Regarding Equipment
Procurement, dated as of August 6, 1999, between the
Registrant and Qualcomm
10.6(5) Employee Benefits Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.7(5) Conversion Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.8(5) Assignment and Assumption Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant
</TABLE>
II-2
<PAGE> 221
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.9(6) 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 the Registrant's common stock
10.12(1) Form of the 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 the Registrant's Employee Stock Purchase Plan
10.15(1) Assignment and Assumption of Lease dated August 11, 1998
between Qualcomm and Vaxa International, Inc.
10.16(1) Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers
10.17(7) Loan Agreement, dated as of September 28, 1998, between
Pegaso Comunicaciones y Servicios, S.A. de C.V. and the
Registrant
10.18(7) Promissory Note, executed September 25, 1998, payable to the
Registrant by Pegaso Comunicaciones y Servicios, S.A. de
C.V.
10.19(7) Pledge Agreement, dated September 28, 1998, by and among the
Guarantors, the Issuers and the Registrant
10.20(8) Asset Purchase Agreement, dated December 24, 1998, by and
among Chase Telecommunications Holdings, Inc., Anthony
Chase, Richard McDugald and the Registrant
10.21.1(9) 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(6) 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(4) Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.)
10.23(4) 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(4) 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 406
under the Securities Act of 1933 and Rule 24b-2 under the
Securities Exchange Act of 1934.
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 406 under the Securities Act of 1933 and Rule 24b-2
under the Securities Exchange Act of 1934.
</TABLE>
II-3
<PAGE> 222
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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., 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(10) 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(12) Executive Officer Deferred Stock Plan
10.30* License Purchase Agreement, dated September 11, 1998, by and
between the Registrant and Airgate Wireless, L.L.C.
10.31* First Amendment to License Purchase Agreement, dated
December 17, 1999, by and between Cricket Holdings, Inc. and
Airgate Wireless, L.L.C.
10.32* Agreement to Purchase and Sale of Licenses, dated January 7,
2000, by and between Radiofone PCS, L.L.C. and 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).
</TABLE>
- -------------------------
* Filed herewith.
+ Previously filed.
(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 SEC on April 14, 1999, and
incorporated herein by reference.
(4) 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.
(5) 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.
(6) 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.
II-4
<PAGE> 223
(7) 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.
(8) 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.
(9) Filed as an exhibit to Leap's Current Report on Form 8-K dated May 4, 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, as filed with the SEC on October 20, 1999, as
amended, and incorporated herein by reference.
(11) 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.
(12) 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.
ITEM 17. 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 Section 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant under provisions described in Item 14 or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed part of this
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at such
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 224
SIGNATURES
Under the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, and has duly caused this Amendment
No. 2 to Registration Statement on Form S-3 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 February 15, 2000.
By: /s/ JAMES E. HOFFMANN
---------------------------------------
James E. Hoffmann
Senior Vice President, General
Counsel and Secretary
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
--------- ----- ----
<C> <C> <S>
/s/ HARVEY P. WHITE* Chief Executive Officer and February 15, 2000
- ------------------------------------------------ Director
Harvey P. White
/s/ THOMAS D. WILLARDSON* Senior Vice President, Finance February 15, 2000
- ------------------------------------------------ and Treasurer
Thomas D. Willardson
/s/ THOMAS J. BERNARD* Vice Chairman, President -- February 15, 2000
- ------------------------------------------------ International Business Division
Thomas J. Bernard and Director
/s/ SUSAN G. SWENSON* President, Chief Operating February 15, 2000
- ------------------------------------------------ Officer and Director
Susan G. Swenson
/s/ ALEJANDRO BURILLO AZCARRAGA* Director February 15, 2000
- ------------------------------------------------
Alejandro Burillo Azcarraga
/s/ ROBERT C. DYNES* Director February 15, 2000
- ------------------------------------------------
Robert C. Dynes
/s/ SCOT B. JARVIS* Director February 15, 2000
- ------------------------------------------------
Scot B. Jarvis
/s/ JOHN J. MOORES* Director February 15, 2000
- ------------------------------------------------
John J. Moores
</TABLE>
II-6
<PAGE> 225
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ MICHAEL B. TARGOFF* Director February 15, 2000
- ------------------------------------------------
Michael B. Targoff
Director
- ------------------------------------------------
Jeffrey P. Williams
*By: /s/ JAMES E. HOFFMANN
- ------------------------------------------------
James E. Hoffmann
Attorney-in-fact
</TABLE>
II-7
<PAGE> 226
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement
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(4) Superceding Warrant, dated as of August 9, 1999, issued to
Qualcomm
4.2.3(4) Form of Voting Agreement, dated as of April 1, 1999, between
the Registrant and various officers and directors of
Qualcomm Incorporated
4.2.4(4) Amended and Restated Agreement Concerning Share Ownership,
dated as of August 4, 1999, between the Registrant and
Qualcomm Incorporated
4.3(2) Rights Agreement, dated as of September 14, 1998, between
the Registrant and Harris Trust Company of California
5.1* Opinion of Latham & Watkins.
10.1(5) Separation and Distribution Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant
10.1.1(4) First Amendment to Separation and Distribution Agreement,
dated as of August 6, 1999, between the Registrant and
Qualcomm
10.2(5) Credit Agreement, dated as of September 23, 1998, between
Qualcomm and the Registrant
10.3(5) Tax Matters Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.4(5) Interim Services Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.5(5) Master Agreement Regarding Equipment Acquisition, dated as
of September 23, 1998, between Qualcomm and the Registrant
10.5.1(4) First Amendment to Master Agreement Regarding Equipment
Procurement, dated as of August 6, 1999, between the
Registrant and Qualcomm
10.6(5) Employee Benefits Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.7(5) Conversion Agreement, dated as of September 23, 1998,
between Qualcomm and the Registrant
10.8(5) Assignment and Assumption Agreement, dated as of September
23, 1998, between Qualcomm and the Registrant
10.9(6) 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 the Registrant's common stock
10.12(1) Form of the 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 the Registrant's Employee Stock Purchase Plan
</TABLE>
<PAGE> 227
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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(7) Loan Agreement, dated as of September 28, 1998, between
Pegaso Comunicaciones y Servicios, S.A. de C.V. and the
Registrant
10.18(7) Promissory Note, executed September 25, 1998, payable to the
Registrant by Pegaso Comunicaciones y Servicios, S.A. de
C.V.
10.19(7) Pledge Agreement, dated September 28, 1998, by and among the
Guarantors, the Issuers and the Registrant
10.20(8) Asset Purchase Agreement, dated December 24, 1998, by and
among Chase Telecommunications Holdings, Inc., Anthony
Chase, Richard McDugald and the Registrant
10.21.1(9) 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(6) 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(4) Cricket Communications, Inc. 1999 Stock Option Plan (now
known as Cricket Communications Holdings, Inc.)
10.23(4) 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(4) 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 406
under the Securities Act of 1933 and Rule 24b-2 under the
Securities Exchange Act of 1934.
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 406 under the Securities Act of 1933 and Rule 24b-2
under the Securities Exchange Act of 1934.
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
</TABLE>
<PAGE> 228
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.27(11) 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(10) 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(12) Executive Officer Deferred Stock Plan
10.30* License Purchase Agreement, dated September 11, 1998, by and
between the Registrant and Airgate Wireless, L.L.C.
10.31* First Amendment to License Purchase Agreement, dated
December 17, 1999, by and between Cricket Holdings, Inc. and
Airgate Wireless, L.L.C.
10.32* Agreement to Purchase and Sale of Licenses, dated January 7,
2000, by and between Radiofone PCS, L.L.C. and 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).
</TABLE>
- -------------------------
* Filed herewith.
+ Previously filed.
(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 SEC on April 14, 1999, and
incorporated herein by reference.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Filed as an exhibit to Leap's Current Report on Form 8-K dated May 4, 1999,
and incorporated herein by reference.
<PAGE> 229
(10) 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.
(11) 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.
(12) 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.
<PAGE> 1
EXHIBIT 1.1
4,000,000 SHARES
LEAP WIRELESS INTERNATIONAL, INC.
COMMON STOCK, PAR VALUE $.0001 PER SHARE
UNDERWRITING AGREEMENT
FEBRUARY ___, 2000
<PAGE> 2
February 16, 2000
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Credit Suisse First Boston Corporation
ABN AMRO Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Leap Wireless International, Inc., a Delaware corporation (the
"COMPANY"), proposes to issue and sell to the several Underwriters (as defined
below) 4,000,000 shares of its Common Stock, $.0001 par value per share (the
"FIRM SHARES").
It is understood that, subject to the conditions hereinafter
stated, 3,200,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS")
in connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and 800,000 Firm Shares (the "INTERNATIONAL SHARES") will be
sold to the several International Underwriters named in Schedule II hereto (the
"INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated and
Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston
Corporation and ABN AMRO Incorporated shall act as representatives (the "U.S.
REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited, Donaldson, Lufkin & Jenrette International, Credit Suisse
First Boston (Europe) Limited and ABN AMRO Incorporated shall act as
representatives (the "INTERNATIONAL REPRESENTATIVES") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the "UNDERWRITERS."
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional 600,000 shares of its Common Stock,
$.0001 par value per share (the "ADDITIONAL SHARES") if and to the extent that
the U.S. Representatives shall have determined to exercise, on behalf of the
U.S. Underwriters, the right to purchase such shares of common stock granted to
the U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "SHARES." The shares of
Common Stock, $.0001 par value per share of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement on Form S-3 (File No. 333-93073),
including a prospectus, relating to the Shares. The registration statement
contains two prospectuses to be used in connection with the offering and sale of
the Shares: the U.S. prospectus, to be used in
<PAGE> 3
connection with the offering and sale of Shares in the United States and Canada
to United States and Canadian Persons, and the international prospectus, to be
used in connection with the offering and sale of Shares outside the United
States and Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front cover page. The registration statement as amended at the time it
becomes effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT;" the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "PROSPECTUS." If the
Company has filed an abbreviated registration statement to register additional
shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the
"RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term
"REGISTRATION STATEMENT" shall be deemed to include such Rule 462 Registration
Statement (including, in the case of all references to the Registration
Statement and the Prospectus, documents incorporated therein by reference).
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the Company's knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, (ii) each document, if any, filed or to be filed
pursuant to the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), and incorporated by reference in the Prospectus
complied or will comply when so filed in all material respects with the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, (iii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iv) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except
that the representations and warranties set forth in this paragraph do
not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good
2
<PAGE> 4
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(d) Except for QUALCOMM Telecommunications Limited (Cayman
Islands), Metrosvyaz Limited, QUALCOMM Telecommunications Limited (Isle
of Man), Orrengrove Investments Limited, Transworld Telecommunications,
Inc. and Transworld Communications (Bermuda) Ltd., each subsidiary of
the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole; all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and, except as described in
the Prospectus, are owned directly by the Company or indirectly through
one of its subsidiaries, and are, except as described in the Prospectus,
free and clear of all liens, encumbrances, equities or claims.
(e) To the Company's knowledge, each of Pegaso
Telecommunicaciones S.A de C.V., Pegaso Humanos Recursos S.A. de C.V.,
Pegaso PCS S.A. de C.V. and Pegaso Communiccaciones y Sistemas S.A. de
C.V. (collectively, the "PEGASO ENTITIES") has been duly incorporated,
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital
stock of the Pegaso Entities owned directly or indirectly by the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and those shares of capital stock of the Pegaso entities
owned directly or indirectly by the Company are, except as described in
the Prospectus, free and clear of all liens, encumbrances, equities or
claims. As of the date of this Agreement, the Company owns 28.6% of the
outstanding capital stock of Pegaso Telecommunicaciones S.A de C.V. To
the Company's knowledge, Pegaso Telecommunicaciones S.A de C.V. owns
100% of the outstanding capital stock of each of Pegaso Humanos Recursos
S.A. de C.V., Pegaso PCS S.A. de C.V. and Pegaso Communiccaciones y
Sistemas S.A. de C.V. For purposes of the representations and warranties
contained in this Section 1 other than paragraph (d), the Pegaso
Entities shall be deemed subsidiaries; provided that such
representations and warranties shall be limited to the Company's actual
knowledge with respect to the Pegaso Entities.
3
<PAGE> 5
(f) This Agreement has been duly authorized, executed and
delivered by the Company, and the Company has all requisite corporate
power and authority to (i) execute, deliver and perform its obligations
under this Agreement, and (ii) issue the Shares, in the manner and for
the purpose contemplated by this Agreement.
(g) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(h) The shares of Common Stock outstanding prior to the issuance
of the Shares have been duly authorized and are validly issued, fully
paid and non-assessable.
(i) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(j) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene (i) any provision of applicable law, (ii) the certificate
of incorporation or by-laws of the Company, (iii) any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or (iv)
any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary. No consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states or the
Conduct Rules of NASD Regulation, Inc. in connection with the offer and
sale of the Shares.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(l) There are no legal or governmental proceedings pending or, to
the Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company
or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described
or any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(m) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
4
<PAGE> 6
(n) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(o) The Company and its subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(p) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(q) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement. The rights under Section 4.3 of the Superceding Warrant to
Purchase 4,500,000 Shares of Common Stock of the Company, dated as of
August 9, 1999, in favor of Qualcomm Incorporated ("Qualcomm"), to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement have been waived.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company
and its subsidiaries have not incurred any liability or obligation,
direct or contingent, nor entered into any transaction, in each instance
not in the ordinary course of business, which is material to the Company
and its consolidated subsidiaries, taken as a whole; (ii) the Company
has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its
capital stock; and (iii) there has not been any change in the capital
stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, which is material to the Company and its
consolidated subsidiaries, taken as a whole; except in each case as
described in the Prospectus.
(s) The Company and its subsidiaries have good and marketable
title to all real property and good and marketable title to all personal
property owned by them that is
5
<PAGE> 7
material to the business of the Company and its consolidated
subsidiaries, taken as a whole, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not have a material adverse effect singly or in
the aggregate on the Company and its consolidated subsidiaries, taken as
a whole, or do not materially interfere with the use made and proposed
to be made of such property by the Company and its subsidiaries; and any
real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid and enforceable leases with
such exceptions as do not materially interfere with the use made and
proposed to be made of such property and buildings by the Company and
its subsidiaries, in each case except as described in the Prospectus.
(t) The Company and its subsidiaries own or possess all material
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them. Neither the Company
nor any of its subsidiaries has received any notice of infringement of
or conflict with asserted rights of others with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company
or any of its subsidiaries exists, or, to the knowledge of the Company,
is imminent, except for efforts in Chile by unions to organize the
employees of Smartcom S.A.; and the Company is not aware of any
existing, threatened or imminent labor disturbance by the employees of
any of its principal suppliers, manufacturers or contractors that could
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(v) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which
they are engaged; neither the Company nor any of its subsidiaries has
been refused any insurance coverage sought or applied for, except for a
requested increase in the directors' and officers' liability insurance
coverage which was refused with respect to litigation relating to the
Company's Russian subsidiaries and ventures; and neither the Company nor
any of its subsidiaries has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(w) The Company and its subsidiaries possess all licenses,
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses, except where the failure to so possess
would not singly or in the aggregate have a material adverse effect on
the Company and its consolidated subsidiaries, taken as a whole. Neither
the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such
license, certificate, authorization or permit which, singly or in
6
<PAGE> 8
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the Company and its
consolidated subsidiaries, taken as a whole, except as described in the
Prospectus.
(x) Except as described in the Prospectus, the Company and its
subsidiaries (i) are in compliance in all material respects with any and
all applicable foreign, federal, state and local laws and regulations
relating to wireless communications services ("TELECOM LAWS"), (ii) have
received all material permits, licenses, concessions or other approvals
("TELECOM LICENSES") required of them under applicable Telecom Laws to
conduct their respective businesses, all of which were validly issued
and are in full force and effect, with no material restrictions or
qualifications except as described in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) and (iii) are in compliance in all material respects with all
terms and conditions of any such Telecom License and (iv) are eligible
to acquire and hold C-Block and F-Block licenses (as such terms are set
forth and further defined in 47 C.F.R. Part 24, Subparts H and I) as a
very small business under 47 C.F.R. Section 24.709, and, except as
described in the Prospectus, have received all approvals, consents,
orders or authorizations from the Federal Communications Commission
("FCC") necessary to establish such eligibility.
(y) Each of the Company and its subsidiaries has filed with the
FCC or applicable foreign regulatory authority all necessary and
material reports, documents, instruments, information and applications
required to be filed pursuant to applicable Telecom Laws.
(z) Except as described in the Prospectus, the Company has no
reason to believe, and does not believe, that the Telecom Licenses will
not be renewed for a full term when they are due for renewal.
(aa) Except as described in the Prospectus, the Company and each
of its subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(bb) The Company and its subsidiaries have filed all federal,
foreign, state and local tax returns which have been required to be
filed and have paid all taxes required to be paid and any other
assessment, fine or penalty levied against them, to the extent that any
of the foregoing is due and payable, except, in all cases, for any such
tax, assessment, fine or penalty that is being contested in good faith
(and except in any case in which the failure to so file or pay would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole).
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(cc) The Company reviewed its operations and that of its
consolidated subsidiaries to evaluate the extent to which the business
or operations of the Company or any of its consolidated subsidiaries
would be affected by the "Year 2000 Problem" (that is, any significant
risk that the computer hardware or software applications used by the
Company and its consolidated subsidiaries will not, in the case of dates
or time periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring prior to
January 1, 2000); as a result of such review, the Company has no reason
to believe, and does not believe, that the Year 2000 Problem will have a
material adverse effect on the Company and its consolidated
subsidiaries, taken as a whole. As of the date of this Agreement, the
Company has not experienced any problems or incurred any costs related
to the Year 2000 Problem that are of a character required to be
described or referred to in the Registration Statement or the Prospectus
which have not been accurately described in the Registration Statement
or Prospectus.
(dd) (1) Except as would not singly or in the aggregate have a
material adverse effect on the Company and its consolidated
subsidiaries, taken as a whole, the Company and its subsidiaries have
complied and are in compliance with all federal, state, local and
foreign statutes, executive orders, proclamations, regulations, rules,
directives, decrees, ordinances and similar provisions having the force
or effect of law and all judicial and administrative orders, rulings,
determinations and common law concerning the importation of merchandise,
the export or reexport of products, services and technology, and the
terms and conduct of international transactions applicable to the
Company and its subsidiaries in connection with the conduct of the
Company's or any subsidiary's business (including as the same relates to
record keeping requirements) ("INTERNATIONAL TRADE LAWS AND
REGULATIONS"); (2) except as would not singly or in the aggregate have a
material adverse effect on the Company and its consolidated
subsidiaries, taken as a whole, neither the Company nor any of its
subsidiaries has made or provided any false statement or omission to any
agency of any federal, state or local government, purchasers of
products, or foreign government or foreign agency, in connection with
the exportation of merchandise (including with respect to export
licenses, exceptions and other export authorizations and any filings
required for or related to exportation of any item), the importation of
merchandise or other approvals required by a foreign government or
agency or any other requirement relating to any International Trade Laws
and Regulations; and (3) to the Company's knowledge, neither the Company
nor any of its subsidiaries has made any payment, offer, gift, promise
to give, or authorized or otherwise participated in, assisted or
facilitated any payment or gift related to the Company's or any
subsidiary's business that is prohibited by the United States Foreign
Corrupt Practices Act.
(ee) The Company has provided the Underwriters and counsel for
the Underwriters true and correct copies of (i) the 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, (ii) the Memorandum
of Agreement, dated September 20, 1999, by and between Ericsson Wireless
Communications Inc., the Company and Cricket Wireless Communications,
Inc. or all definitive agreements entered into pursuant to such
Memorandum of Agreement on or before the date hereof, (iii) the Credit
Agreement, dated September 23, 1998, by and
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<PAGE> 10
between the Company and Qualcomm Incorporated ("QUALCOMM"), (iv) the
Second Amended and Restated Deferred Payment Agreement, dated October
12, 1999, by and among Chilesat Telefonia Personal S.A., as Purchaser,
Qualcomm and the Other Vendors Named Therein, Inversiones Leap Wireless
Chile S.A., as Guarantor, Qualcomm, as Administrative Agent, and
Qualcomm, as Collateral Agent and (v) the Letter of Intent, dated April
15, 1999, between Qualcomm and the Company setting forth terms and
conditions pursuant to which Qualcomm will provide financing to Smartcom
S.A. or all definitive agreements entered into pursuant to such Letter
of Intent on or before the date hereof, including in the case of (i),
(ii), (iii), (iv) and (v) above any amendment thereto or restatements
thereof, and all exhibits thereto, as in effect on the date hereof
(collectively, the "VENDOR FINANCING AGREEMENTS").
(ff) Each of the Vendor Financing Agreements (i) has been duly
authorized, executed and delivered by, (ii) constitutes the valid and
binding obligation of and (iii) is enforceable in accordance with its
terms against, the Company and its subsidiaries, to the extent each is a
party thereto and, to the best of the Company's knowledge, the lenders
party thereto, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating
to or affecting enforcement of creditors' rights and rules or laws
concerning equitable remedies. The execution, delivery and performance
of the Vendor Financing Agreements by the Company and any of its
subsidiaries that is a party thereto, the compliance by the Company and
such subsidiaries with all of the provisions thereof and the
consummation of the transactions contemplated thereby do not (1) require
any consent, approval, authorization or other order for, or
qualification with, any court or governmental body or agency (except
such as have already been obtained), except where such failure to obtain
any consent, approval, authorization or other order or qualification
would not singly or in the aggregate have a material adverse effect on
the Company and its subsidiaries, taken as a whole, (2) conflict with or
constitute a breach of any of the terms or provisions of, or a default
under (or an event which with notice or lapse of time, or both, would
constitute a breach of or a default under), (x) the certificate of
incorporation or by-laws of the Company or any of its subsidiaries or
(y) any indenture, loan agreement, mortgage, lease or other agreement or
instrument, to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries are bound, except,
with respect to clause (y), for any such conflict, breach or default
which, singly or in the aggregate, would not have a material adverse
effect on the Company and its consolidated subsidiaries, taken as a
whole, (3) as of the date hereof violate or conflict with any applicable
law or any rule, regulation, judgment, order or decree of any court or
any governmental body or agency having jurisdiction over the Company,
any of its subsidiaries except for any such violation or conflict which
would not singly or in the aggregate have a material adverse effect on
the Company and its consolidated subsidiaries, taken as a whole.
(gg) The consolidated financial statements of the Company
together with related notes set forth in the Prospectus fairly present
the financial condition of the Company and its subsidiaries, as of the
dates indicated, and the results of operations and changes in financial
position for the periods therein specified in conformity with generally
accepted accounting principles consistently applied throughout the
periods
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<PAGE> 11
involved (except as otherwise stated therein); the summary and selected
financial data in the Prospectus present fairly in all material respects
the financial information shown therein and have been prepared and
compiled on a basis consistent with audited financial statements
included therein, except as otherwise stated therein; and the pro forma
financial information and the related notes thereto included in the
Prospectus have been prepared using reasonable assumptions and have been
prepared in accordance with the applicable requirements of the
Securities Act and include all adjustments necessary to present fairly
in all material respects the pro forma financial information included in
the Prospectus at the respective dates and for the respective periods
indicated. PricewaterhouseCoopers LLP, which has reported upon the
audited financial statements included in the Prospectus, is an
independent public accounting firm as required by the Securities Act and
the rules and regulations thereunder.
(hh) No relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries on the one hand, and the
directors, officers, stockholders, customers, suppliers or contractors
of the Company and its subsidiaries, on the other hand, which is
required to be described in the Prospectus which is not so described.
(ii) The Asset Purchase Agreement, dated December 24, 1998, by
and among Chase Telecommunications Holdings, Inc., Anthony Chase,
Richard McDugald and the Company is in full force and effect, and, to
the best of the Company's knowledge, there are no facts or circumstances
existing that would prevent or delay the consummation of the
transactions contemplated by such agreement, subject to obtaining the
approval of the FCC.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its names at U.S.$______ a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained in
this Agreement, and subject to the terms and conditions set forth herein, the
Company agrees to sell to the U.S. Underwriters the Additional Shares, and the
U.S. Underwriters shall have a one-time right to purchase, severally and not
jointly, up to 600,000 Additional Shares at the Purchase Price. If you, the U.S.
Representatives, on behalf of the U.S. Underwriters, elect to exercise such
option, the U.S. Representatives shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the U.S. Underwriters and the
date on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
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<PAGE> 12
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (a) the Shares to be sold hereunder, (b) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of any security outstanding on the date hereof of which the
Underwriters have been advised in writing or which is described in the
Prospectus, (c) the issuance by the Company of shares of Common Stock in
connection with, and as consideration for, acquisitions of wireless licenses,
provided that the persons to whom such shares are issued enter into a "lock-up"
agreement, substantially in the form of Exhibit A hereto or (d) the grant by the
Company of options to purchase Common Stock or the issuance of Common Stock
pursuant to the Company's equity and incentive plans as in effect on the date
hereof, copies of which are incorporated by reference as exhibits to the
Registration Statement.
3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of
U.S.$______ a share under the Public Offering Price, and that any Underwriter
may allow, and such dealers may reallow, a concession, not in excess of
U.S.$_____ a share, to any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 a.m., New York City time, on February ___, 2000,
or at such other time on the same or such other date, not later than March ___,
2000, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than April __, 2000, as shall be designated in
writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "OPTION CLOSING DATE."
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Certificates for the Firm Shares and Additional Shares shall be
in definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations
of the Company to sell the Shares to the Underwriters and the several
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date are subject to the condition that the Registration Statement shall
have become effective not later than February ___, 2000 (New York City time) on
the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any of the Company's debt securities by any "nationally
recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is so material and adverse
that it makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 5(a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date. The officer signing and
delivering such certificate may rely upon the best of his or her
knowledge as to proceedings threatened.
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(c) The Underwriters shall have received on the Closing Date an
opinion of Latham & Watkins, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, and is validly
existing and in good standing under the laws of the State of
Delaware, with corporate power and authority to own its property
and to conduct its business as described in the Prospectus. Based
solely on certificates from public officials, such counsel shall
confirm that the Company is qualified to do business in the
states listed on Schedule ___ hereto;
(ii) each domestic subsidiary of the Company has been duly
incorporated, and is validly existing and in good standing under
the laws of the jurisdiction of its incorporation, with the
corporate power and authority to own its property and to conduct
its business as described in the Prospectus. Based solely on
certificates from public officials, such counsel shall confirm
that such domestic subsidiaries are qualified to do business in
the states listed on Schedule ___ hereto;
(iii) the authorized capital stock of the Company conforms
as to legal matters to the description thereof under the captions
"Description of Leap Capital Stock" and "Capitalization"
contained in the Prospectus;
(iv) the Shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) the shares to be issued and sold by the Company
pursuant to the Underwriting Agreement have been duly authorized
and when issued to and paid for by the Underwriters in accordance
with the terms of this Agreement, will be validly issued, fully
paid and non-assessable, and, to the best of such counsel's
knowledge, free of preemptive rights;
(vi) all of the issued shares of capital stock of each
domestic subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable;
(vii) this Agreement has been duly authorized, executed
and delivered by the Company;
(viii) the Company has all requisite corporate power and
authority to (i) execute, deliver and perform its obligations
under this Agreement, and (ii) issue the Shares, in the manner
and for the purpose contemplated by this Agreement;
(ix) the execution and delivery by the Company of, and the
compliance by the Company with the provisions of, this Agreement
will not result in a violation by the Company of its certificate
of incorporation or by-laws, or the Delaware General Corporation
Law or any federal or California statute, rule or
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regulation known to us to be applicable to the Company (other
than federal or state securities laws or the Communications Act
of 1934, as amended (the "COMMUNICATIONS ACT") or the rules,
regulations, decisions and written policies of the FCC (the "FCC
RULES"), which are specifically addressed elsewhere herein), or,
to the best of such counsel's knowledge, any agreement listed in
the Exhibit Index to the Registration Statement at the time the
Registration Statement becomes effective or any judgment, order
or decree of any governmental body, or agency specifically
directed to the Company or any domestic subsidiary and identified
to such counsel by an officer of the Company as material to the
Company. To the best of such counsel's knowledge, no consent,
approval, authorization or order of, or filing with, any federal
or California court or governmental agency or body is required
for the compliance by the Company with the provisions of this
Agreement, except such as have been obtained or as may be
required under state securities laws in connection with the
purchase and distribution of such Shares by the Underwriters;
(x) the statements in the Prospectus under the captions
"Business - Government Regulation," "Description of Capital
Stock," and "Certain United States Federal Tax Consequences to
Non-U.S. Holders" in each case insofar as such statements
constitute summaries of the legal matters, documents or
proceedings referred to therein, are accurate in all material
respects;
(xi) to the best of such counsel's knowledge, there are no
contracts or other documents, or legal or governmental
proceedings to which the Company or any of its subsidiaries is
party, that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described and filed as
required;
(xii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(xiii) each document filed pursuant to the Exchange Act
and incorporated by reference in the Registration Statement and
the Prospectus (except for financial statements, schedules and
other financial and statistical data included or incorporated by
reference in, or omitted from, the Registration Statement or the
Prospectus as to which such counsel need not express any opinion)
complied when so filed as to form in all material respects with
the requirements for such documents under the Exchange Act and
the applicable rules and regulations of the Commission
thereunder. The Registration Statement and Prospectus (except for
financial statements and schedules and other financial and
statistical data included or incorporated by reference in, or
omitted from, the Registration Statement or the Prospectus as to
which such counsel need not express any opinion) comply as to
form in all material respects with the requirements for
registration statements on Form S-3 under the Securities Act and
the applicable rules and regulations of the Commission
thereunder. In passing
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upon the compliance as to form of each such document filed
pursuant to the Exchange Act and the Registration Statement and
the Prospectus, such counsel may assume that the statements made
and incorporated by reference therein are correct and complete.
(xiv) Schedule I attached thereto includes all licenses,
authorizations, and permits required under the Communications Act
or the FCC Rules, which are necessary for the Company and its
domestic subsidiaries to conduct their business as such counsel
has been advised they are now conducted and as proposed to be
conducted immediately following the Closing Date (the "FCC
LICENSES"). Schedule I attached thereto accurately sets forth
each such license, the name of the licensee, the call letters (if
applicable), the class of service, geographic scope and the
expiration date for each of the FCC Licenses, each of which is in
full force and effect.
(xv) except as described in the Prospectus, other than
rulemaking proceedings or similar proceedings generally affecting
the domestic public cellular mobile radio telecommunications
industry, there is no proceeding before the FCC that is pending
or, to the best of such counsel's knowledge, threatened against
the Company, its domestic subsidiaries or any of their officers,
directors or shareholders, including any FCC complaint,
investigation, notice of apparent liability, order of forfeiture,
proceeding pursuant to an exercise of pre-emptive authority under
47 U.S.C. Section 252, or other administrative action or
proceeding, regarding the business of the Company and its
domestic subsidiaries (i) that is likely to result in a
forfeiture or termination, revocation, adverse modification,
non-renewal, short-term renewal, or other material impairment of
any of the FCC Licenses, or (ii) that reasonably could be
expected to materially and adversely affect the operations or
condition, financial or otherwise, of the Company or its domestic
subsidiaries or the ability of the Company to perform its
obligations under this Agreement.
(xvi) no authorization or approval or other action by, and
no notice to or filing with, the FCC is required under the
Communications Act or the FCC Rules: (i) in connection with the
due execution and delivery by the Company of this Agreement; or
(ii) for the exercise by the Underwriters of any of their
respective rights and remedies under this Agreement.
(xvii) the execution and delivery by the Company of this
Agreement and the performance by the Company of its obligations
under this Agreement (i) do not contravene the Communications Act
or any FCC Rule and (ii) do not and will not result in any
suspension, revocation, material impairment or non-renewal of any
FCC License material to the Company's and its domestic
subsidiaries' operations and business.
In addition, such counsel shall state in the opinion that
it has participated in conferences with officers and other
representatives of the Company, representatives of the
independent public accountants for the Company, and
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<PAGE> 17
representatives of the Underwriters, at which the contents of the
Registration Statement and the Prospectus and related matters
were discussed and, although it is not passing upon, and does not
assume any responsibility for, the accuracy, completeness or
fairness of the statements contained or incorporated by reference
in the Registration Statement and the Prospectus and has not made
any independent check or verification thereof, during the course
of such participation, no facts came to its attention that caused
it to believe that the Registration Statement, at the time it
became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, or that the Prospectus, as of its date, contained an
untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
it being understood that such counsel expresses no belief with
respect to the financial statements, schedules and other
financial and statistical data included or incorporated by
reference in, or omitted from, the Registration Statement or the
Prospectus.
(d) The Underwriters shall have received on the Closing Date an
opinion of O'Melveny & Myers LLP, counsel for the Underwriters, dated
the Closing Date, covering the matters referred to in Sections 5(c)(vi),
5(c)(vii), 5(c)(x) (but only as to the statements in the Prospectus
under "Description of Leap Capital Stock" and "Underwriters") and
clauses (b), (c), and (d) of Section 5(c)(xiv) above.
With respect to clauses (b), (c) and (d) of Section 5(c)(xiv)
above, O'Melveny & Myers LLP may state that its opinion and belief are
based upon its participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and
documents (other than the documents incorporated by reference) and
review and discussion of the contents thereof (including documents
incorporated by reference), but are without independent check or
verification, except as specified.
(e) The Underwriters shall have received on the Closing Date an
opinion of Grasty Quintana Majlis & Cia, outside counsel for Inversiones
Leap Wireless Chile S.A. and Smartcom S.A. (formerly Chilesat Telefonica
Personal S.A.), dated the Closing Date, substantially in the form of
Schedule ___ hereto.
(f) The Underwriters shall have received on the Closing Date an
opinion of Mijares, Angoitia, Cortes y Fuentes, outside counsel for the
Pegaso Entities, dated the Closing Date, substantially in the form of
Schedule ___ hereto.
The opinions of Latham & Watkins described in Section 5(c) above,
Grasty Quintana Majlis & Cia described in Section 5(e) above and
Mijares, Angoitia, Cortes y Fuentes described in Section 5(f) above
shall be rendered to the Underwriters at the request of the Company and
shall so state therein.
(g) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from PricewaterhouseCoopers LLP,
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<PAGE> 18
independent public accountants, containing statements and information of
the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information (including the pro forma financial statements)
contained in the Registration Statement and the Prospectus; provided
that the letter delivered on the Closing Date shall use a "cut-off date"
not earlier than the date hereof.
(h) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company and its
subsidiaries, the due authorization and issuance of the Additional Shares and
other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, three signed copies of the
Registration Statement (including exhibits thereto and documents
incorporated by reference) and for delivery to each other Underwriter a
conformed copy of the Registration Statement (without exhibits thereto
but including documents incorporated by reference) and to furnish to you
in New York City, without charge, prior to 10:00 a.m. New York City time
on the business day next succeeding the date of this Agreement and
during the period mentioned in Section 6(c) below, as many copies of the
Prospectus, any documents incorporated by reference, and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request. The terms "supplement" and "amendment" or "amend" as
used in this Agreement shall include all documents subsequently filed by
the Company with the Commission pursuant to the Securities Exchange Act
of 1934, as amended, that are deemed to be incorporated by reference in
the Prospectus.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or
supplement to which you reasonably object, and to file with the
Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such
Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when
17
<PAGE> 19
the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to
the Underwriters and to the dealers (whose names and addresses you will
furnish to the Company) to which Shares may have been sold by you on
behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in
the Prospectus as so amended or supplemented will not, in the light of
the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending February 28, 2001 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
7. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Company shall pay
or cause to be paid all expenses incident to the performance of its obligations
under this Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all other
fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof to the
Underwriters and dealers, in the quantities hereinabove specified, (ii) all
costs and expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
cost of printing or producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Shares under state securities laws and
all expenses in connection with the qualification of the Shares for offer and
sale under state securities laws as provided in Section 6(d) hereof, including
filing fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky or Legal Investment memorandum, (iv) all filing fees incurred in
connection with the review and qualification of the offering of the Shares by
the National Association of Securities Dealers, Inc., (v) all costs and expenses
incident to the quotation of the Shares on the Nasdaq National Market, (vi) the
cost of printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the costs and
expenses of the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Shares,
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged in
connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered by the
Company in connection with the road show, and (ix) all other costs and expenses
incident to the performance of the obligations of the Company hereunder for
which
18
<PAGE> 20
provision is not otherwise made in this Section. It is understood, however, that
except as provided in this Section 7, Section 8 entitled "Indemnity and
Contribution," and the last paragraph of Section 10 below, the Underwriters will
pay all of their costs and expenses, including, without limitation, fees and
disbursements of their counsel, stock transfer taxes payable on resale of any of
the Shares by them and any advertising expenses connected with any offers they
may make.
8. Indemnity and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages
and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein, provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person
asserting any such losses, claims, damages or liabilities purchased
Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given
by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of
the sale of the Shares to such person, and if the Prospectus (as so
amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the
result of noncompliance by the Company with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls
the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such Underwriter, but only with
reference to information relating to such Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use in
the Registration Statement, any preliminary prospectus, the Prospectus
or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 8(a) or 8(b), such
person (the "INDEMNIFIED PARTY") shall promptly notify the
19
<PAGE> 21
person against whom such indemnity may be sought (the "INDEMNIFYING
PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any indemnified party shall have the right to
retain its own counsel, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the indemnifying
party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all such indemnified parties and that all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case
of parties indemnified pursuant to Section 8(a), and by the Company, in
the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified
party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by
the second and third sentences of this paragraph, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered
into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior
to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in Section
8(a) or 8(b) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering of
the Shares or (ii) if the allocation provided by clause 8(d)(i) above is
not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 8(d)(i)
above but also the relative fault
20
<PAGE> 22
of the Company on the one hand and of the Underwriters on the other hand
in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other hand in connection
with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the
Shares (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover of the Prospectus, bear
to the aggregate Public Offering Price of the Shares. The relative fault
of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Section 8 are several in
proportion to the respective number of Shares they have purchased
hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that
does not take account of the equitable considerations referred to in
Section 8(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 8, no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The remedies provided for in this
Section 8 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any indemnified party at law or in
equity.
(f) The indemnity and contribution provisions contained in this
Section 8 and the representations, warranties and other statements of
the Company contained in this Agreement shall remain operative and in
full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter or by or on behalf
of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
21
<PAGE> 23
9. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
Shares that it has or they have agreed to purchase hereunder on such date, and
the aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 10 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
22
<PAGE> 24
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
23
<PAGE> 25
13. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
LEAP WIRELESS INTERNATIONAL, INC.
By:
--------------------------------
Name:
Title:
S-1
<PAGE> 26
Accepted as of the date hereof:
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
Credit Suisse First Boston Corporation
ABN AMRO Incorporated
Acting severally on behalf
of themselves and the
several U.S. Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
----------------------------------------
Name:
Title:
Morgan Stanley & Co. International Limited
Donaldson, Lufkin & Jenrette International
Credit Suisse First Boston (Europe) Limited
ABN AMRO Incorporated
Acting severally on behalf
of themselves and the several
International Underwriters named in
Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By:
----------------------------------------
Name:
Title:
S-2
<PAGE> 27
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
Credit Suisse First Boston Corporation
ABN AMRO Incorporated
[NAMES OF OTHER UNDERWRITERS]
---------------
Total U.S. Firm Shares ===============
3,200,000
</TABLE>
Schedule I
<PAGE> 28
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Morgan Stanley & Co. International Limited
Donaldson, Lufkin & Jenrette International
Credit Suisse First Boston (Europe) Limited
ABN AMRO Incorporated
---------------
Total International Firm Shares ===============
800,000
</TABLE>
Schedule II
<PAGE> 29
EXHIBIT A
FORM OF LOCK-UP LETTER
December __, 1999
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("MORGAN STANLEY") and possibly Morgan Stanley & Co. International
Limited ("MSIL") propose to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Leap Wireless International, Inc., a Delaware
corporation (the "COMPANY"), providing for the public offering (the "PUBLIC
OFFERING") by the several Underwriters, including Morgan Stanley and possibly
MSIL (the "UNDERWRITERS"), of shares (the "SHARES") of the Common Stock, $.0001
par value per share, of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 90 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 90 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock. Notwithstanding the foregoing (i)
gifts and transfers by will or intestacy or (ii) transfers to (A) the
undersigned's members, partners, affiliates or immediate family or (B) a trust,
the
Exhibit A
1
<PAGE> 30
beneficiaries of which are the undersigned and/or members of the undersigned's
immediate family, shall not be prohibited by this agreement; provided that (x)
the donee or transferee agrees in writing to be bound by the foregoing in the
same manner as it applies to the undersigned and (y) if the donor or transferor
is a reporting person subject to Section 16(a) of the Securities Exchange Act of
1934 (the "EXCHANGE ACT"), any gifts or transfers made in accordance with this
paragraph shall not require such person to, and such person shall not
voluntarily, file a report of such transaction on Form 4 under the Exchange Act.
"IMMEDIATE FAMILY" shall mean spouse, lineal descendants, father, mother,
brother or sister of the transferor and father, mother, brother or sister of the
transferor's spouse.
Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only be
made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
-----------------------------
(Signature)
-----------------------------
(Printed Name)
-----------------------------
-----------------------------
-----------------------------
(Address)
Exhibit A
2
<PAGE> 1
EXHIBIT 5.1
[LATHAM & WATKINS LETTERHEAD]
FEBRUARY 16, 2000
Leap Wireless International, Inc.
10307 Pacific Center Court
San Diego, California 92121
Re: Registration Statement on Form S-3, File No. 333-93073;
4,600,000 Shares of Common Stock par value $.0001 per share
Ladies and Gentlemen:
In connection with the registration by Leap Wireless International, Inc., a
Delaware corporation (the "Company"), of 4,600,000 shares of common stock of the
Company, par value $.0001 per share (the "Shares"), under the Securities Act of
1933, as amended (the "Act"), on a Registration Statement on Form S-3 filed with
the Securities and Exchange Commission (the "Commission") on December 20, 1999
(File No. 333-93073), as amended by Amendment No. 1 thereto filed with the
Commission on January 28, 2000 and Amendment No. 2 thereto filed with the
Commission on February 16, 2000 (collectively, the "Registration Statement"),
you have requested our opinion with respect to the matters set forth below.
In our capacity as your counsel in connection with such registration, we
are familiar with the proceedings taken and proposed to be taken by the Company
in connection with the authorization, issuance and sale of the Shares, and for
the purposes of this opinion, have assumed such proceedings will be timely
completed in the manner presently proposed. In addition, we have made such legal
and factual examinations and inquiries, including an examination of originals or
copies certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion.
<PAGE> 2
Latham & Watkins
Leap Wireless International, Inc.
February 16, 2000
Page 2
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and the conformity
to authentic original documents of all documents submitted to us as copies.
We are opining herein as to the effect on the subject transaction only of
the General Corporation Law of the State of Delaware, including statutory and
reported decisional law thereunder, and we express no opinion with respect to
the applicability thereto, or the effect thereon, of any other laws.
Subject to the foregoing, it is our opinion that the Shares have been duly
authorized, and, upon issuance, delivery and payment therefor in the manner
contemplated by the Registration Statement, will be validly issued, fully paid
and nonassessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to our firm contained under the heading "Legal
Matters."
Very truly yours,
/s/ LATHAM & WATKINS
<PAGE> 1
EXHIBIT 10.30
LICENSE PURCHASE
THIS LICENSE PURCHASE AGREEMENT (the "Agreement") is made the
11th day of September, 1998 by and between Leap Wireless International, Inc., a
Delaware Corporation (the "Buyer") and Airgate Wireless, L.L.C., a Delaware
limited Liability company (the "Seller").
WHEREAS, Seller (i) has acquired the authorization of the Federal
Communications Commission (the "FCC") to construct and operate personal
communication systems ("PCS") in the Basic Trading Areas ("BTAs") listed on
Exhibit A attached hereto (collectively referred to herein as the "Licenses");
WHEREAS, Seller desires to sell to Buyer and Buyer desires to
purchase from Seller all right, title and interest in and to the Licenses; and
WHEREAS, Seller and Buyer desire to enter into this Agreement to
effect the purchase and sale of the Licenses pursuant to the terms set forth
herein except as specifically provided otherwise herein;
WHEREAS, the prior consent of the FCC to the transfer of the
Licenses from the Seller to Buyer is required, and the parties intend that the
transactions contemplated by this Agreement will be consummated only if such
consent is obtained;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, each intending
to be legally bound, do hereby agree as follows:
1. SALE AND PURCHASE OF LICENSES.
(a) Purchase of Licenses. Subject to the terms and conditions set
forth herein, the Seller agrees to sell the Licenses to the Buyer and the Buyer
agrees to purchase the Licenses from the Seller at the Closing (as defined
below).
(b) Purchase Price. Subject to adjustment as provided in
subparagraph (c) below, the purchase price for the Licenses shall be Nineteen
Million Four Hundred Fifty Thousand Dollars ($19,450,000) (the "Purchase
Price"), payable as set forth below:
(1) Upon execution of this Agreement, Buyer shall pay Six
Hundred Thousand Dollars ($600,000) (the "Initial Payment") to an escrow account
(the "Escrow") with Lukas Nace Gutierrez and Sachs, Chartered ("Escrow Agent"),
payable pursuant to an escrow agreement in form and substance as set forth in
Exhibit B. In the event this Agreement terminates pursuant to Section 2(a)
hereof, and the Closing does not occur for a reason attributable to a breach by
Buyer of its obligations under this Agreement, the Initial Payment shall be paid
to Seller upon the termination of this Agreement. Such payment shall constitute
liquidated damages, and Seller shall be entitled to the full amount of the
Initial Payment without having to demonstrate quantifiable damages, it being
recognized that accurate calculation of actual damages would prove
<PAGE> 2
to be impractical.
(2) Delivery of a cash payment in the amount equal to the
difference between the Purchase Price and the sum of (i) the outstanding
principal and accrued interest on the Assumed FCC debt at the time of closing
and (ii) the Initial Payment.
(3) Assumed Liabilities. On the Closing Date, the Buyer
shall assume and agrees to discharge the liabilities and obligations of Seller,
accruing after the Closing Date, under the FCC notes (individually the "FCC
Notes") and security agreements, copies of which Seller shall provide to Buyer
within three (3) business days (the "Assumed FCC Debt"). Subject to the
provisions of subparagraph (c) below, Seller agrees to make all payments due
under the Assumed FCC Debt up to and including the Closing Date. Other than the
Assumed FCC Debt, Buyer shall not assume or be obligated to pay, perform or
otherwise discharge any liability or obligation of the Seller, direct or
indirect, known or unknown, absolute or contingent.
(c) Adjustment to Purchase Price.
(1) If the FCC has not granted the FCC Consent (as
defined below) within six (6) months after the
execution of this Agreement (the "Adjustment Date")
due to concerns about the Buyer's qualifications to
be a "Designated Entity" as provided in Section
3(e) below and the parties have timely entered into
the Management Agreement (as defined below), then
the Purchase Price shall be increased by an amount
equal to the interest payments Seller has made on
the Assumed FCC Debt from the Adjustment Date to
the Closing.
(2) If the FCC shall impose any unjust enrichment
penalty upon Seller solely by virtue of Buyer not
qualifying for the same level Designated Entity
benefits for which Seller qualified, the Purchase
Price shall be increased by the amount of the
penalty imposed upon Seller.
(d) Allocation of Purchase Price. The Purchase Price shall be
allocated such that 10% (Ten percent) ($1,945,000) of the Purchase Price shall
be allocated to the non-capitalization provision set forth in Section 5(f) of
this Agreement; provided that Buyer shall agree to any reasonable sub-allocation
of such Purchase Price, as may exist on a market by market, and may be
determined by Seller. Buyer and Seller will follow and use such allocation in
all income, sales and other tax returns, filings or other related reports made
by them to any governmental agencies. To the extent that disclosures of this
allocation are required to be made by the parties to the Internal Revenue
Service ("IRS") under the provisions of Section 1060 of the Internal Revenue
Code of 1986, as amended (the "Code") or any regulations thereunder, each of
Buyer and Seller will disclose such reports to the other prior to filing with
the IRS.
2. CLOSING.
(a) Closing Date. The Closing shall take place within ten (10)
days after the grant
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of the consent of the Assignment of the licenses to the Buyer by the FCC (the
"FCC Consents") by Final Order on such date as Buyer shall fix by notice in
writing to Seller given at least two (2) Business Days prior thereto. Subject to
Subparagraph 2 (b) below, this Agreement shall terminate automatically if Final
Orders granting the FCC Consents are not issued by June 30, 1999 in which event,
except as provided below, neither party hereto shall have any further obligation
to the other party to consummate the transactions contemplated hereby, and (i)
all rights of the parties theretofore accrued hereunder for breach hereof,
including without limitation, rights to specific performance, shall not thereby
be extinguished and may be prosecuted hereunder as provided in Section 10(a) to
the extent the claimant has been materially damaged by such breach by the other
party, and (ii) each party will promptly redeliver all documents, work papers
and other materials of the other party relating to the transactions contemplated
hereby, whether obtained before or after the execution hereof to the party
furnishing the same, and all other obligations of the parties under this
Agreement shall terminate and (iii) the Initial Payment shall be distributed
from the Escrow to Seller if the Agreement terminates for a reason attributable
to a breach by Buyer of its obligations under the terms of this Agreement. For
purposes of this Agreement, the term "Final Order" shall mean a written action
or order issued by the FCC or other governmental authority (i) which has not
been reversed, stayed, enjoined, set aside, annulled or suspended and (ii) With
respect to which (a) no requests have been filed and are still pending for
administrative or judicial review, reconsideration, appeal or stay and the time
for filing any such requests and the for the FCC or other governmental authority
to set aside the action on its own motion have expired, (b) in the event of
review, reconsideration or appeal, the time for further review, reconsideration
or appeal has expired, and (c) in the event of a stay, such stay has been
dismissed and the time for review, reconsideration or appeal thereof has
expired.
(a) Extension of Closing. If the Closing has not occurred by June
30, 1999 (the "Extension Date"), Buyer shall have the option to either (i) let
this Agreement terminate pursuant to subparagraph (a) above, or (ii) extend the
term of this Agreement for a period of two months by (1) giving written notice
to Seller setting forth the length of such extension and (2) giving the Escrow
Agent written direction to release funds from the Escrow to make payment in the
amount currently scheduled to be paid to the FCC on July 31, 1999.
(b) Closing Place. The Closing shall be held at the offices of
Lukas Nace Gutierrez and Sachs, chartered 1111 19th Street, NW Suite 1200
Washington, D.C. 20036, or any other place that is agreed upon in writing by
Buyer and Seller.
(d) Buyer's Closing Deliveries. Subject to fulfillment or waiver
of the conditions set forth in Article 6, at the Closing the Buyer shall deliver
to the Seller all of the following;
(1) the Initial Payment;
(2) Cash Payment equal to the difference between the
Purchase Price and the sum of (i) the Initial
Payment and (ii) the outstanding principal balance
and accrued interest on the Assumed FCC Debt at the
time of Closing (such cash payment and the Initial
Payment being the "Cash Payment");
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(3) Documents necessary to assume the Assumed FCC debt
or to arrange for such debt to be extinguished and
replaced with debt to the FCC for which Buyer shall
be responsible; and
(4) Such other documents as the Seller may reasonably
request or as may be otherwise necessary to
evidence and effect the transaction contemplated by
this Agreement.
(d) Seller's Closing Deliveries. Subject to fulfillment or waiver
of the conditions set forth in Article 7, at the Closing, the Seller shall
deliver to the Buyer all of the following:
(1) a certificate of good standing of Seller issued
within 30 days prior to the Closing Date by the
Secretary of State of Delaware;
(2) a certificate of an officer or member of Seller,
dated the Closing Date, certifying that as of the
Closing Date, each representation and warranty of
the Seller contained in this Agreement is true and
correct an all material respects and that the
Seller has complied in all material respects with
all of the terms, provisions and covenants of this
Agreement;
(3) A certificate of a Manager of the Seller dated the
Closing Date, as to the written consent of the
Board of Managers authorizing the execution and
performance of this Agreement and the transactions
contemplated hereby;
(4) an assignment of the Licenses in a form reasonably
acceptable to Buyer;
(5) an opinion of Seller's counsel, in a form
reasonably acceptable to both Buyer and Seller and
consistent with industry practices;
(6) all required third party consents to the
consummation by Seller of the transactions
contemplated by this Agreement; and
(7) Such other documents as the Buyer may reasonably
request or as may be otherwise necessary to
evidence and effect the transactions contemplated
by this Agreement.
In addition to the above deliveries, the Seller shall take all
steps and actions as the Buyer may reasonably request or as my otherwise be
necessary to put the Buyer in actual possession or control of the Licenses.
3. REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE BUYER.
The Buyer hereby represents, warrants and covenants to the Seller
as follows:
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(a) Organization, Standing and Power of the Buyer. The Buyer is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. The Buyer has all requisite power and authority
to conduct the business contemplated by it and to own, lease and operate any
properties or assets in connection therewith and has applied for qualification
or is duly qualified to do business as a foreign corporation in good standing in
those jurisdictions, other than the state of its incorporation, in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing would not materially adversely affect the ability of the Buyer to
consummate the transactions contemplated by this Agreement.
(b) Authority; Enforceability. Except for approval by its Board
of Directors which shall be forthcoming within five (5) business days, (i) The
Buyer has all requisite corporate power and authority to enter into this
Agreement, to purchase the Licenses, and to carry out its obligations hereunder;
(ii) the execution, delivery and performance of this Agreement by the Buyer has
been duly and validly authorized by all requisite corporate proceedings on the
part of the Buyer; and (iii) this Agreement is a valid and binding obligation of
the Buyer, enforceable against it in accordance with its terms, except that (A)
such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium rehabilitation, liquidation, conservatorship, receivership or other
similar laws now or hereafter in effect relating to creditors' rights generally
and (B) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefore may be brought.
(c) No Conflicts. The execution and delivery of this Agreement by
the Buyer does not, and the consummation by the Buyer of the transactions
contemplated hereby will not, result in or constitute: (i) a default, breach or
violation of or under the Certificate of Incorporation or the By-laws of the
Buyer or (ii) a default, breach or violation of or under any mortgage, deed of
trust, indenture, note, bond, license, lease agreement or other instrument or
obligation to watch the Buyer is a party or by which any of its properties or
assets are bound, or (iii) a violation of any statute, rule, regulation, order,
judgment or decree of any court, public body or authority by which the Buyer or
any of its properties of assets are bound, or (iv) an event which (with notice
or lapse of time or both) would permit any person to terminate, accelerate the
performance required by, or accelerate the maturity of an indebtedness or
obligation of the Buyer under, any agreement or commitment to which the Buyer is
a party or by which the Buyer is bound or by which any of its properties or
assets are bound, or (v) the creation or imposition of any lien, charge or
encumbrance on any property of the Buyer under any agreement or commitment to
which the Buyer is a party or by which the Buyer is bound or by which any of its
properties or assets are bound, or (vi) an event which would require any consent
under any agreement to which the Buyer is a party or by which the Buyer is bound
or by which any of its properties or assets are bound or any approval,
notification or other action or proceeding by, to or before any governmental
body other than as contemplated by this Agreement, except for any such default,
breach, violation, event or other enumerated circumstance which, individually or
in the aggregate, would not materially adversely affect the ability of the Buyer
to consummate the transactions contemplated by this Agreement.
(d) Actions Pending. There is no action, suit, claim,
investigation or
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<PAGE> 6
proceeding pending or, to the knowledge of the Buyer, threatened, against the
Buyer, which could materially adversely affect its ability to perform under this
Agreement.
(f) FCC Rules. The Buyer is in compliance with all relevant FCC
rules and regulations except for any non-compliances which, individually or in
the aggregate, would not materially adversely affect the ability of the Buyer to
consummate the transactions contemplated by this Agreement, and the completion
Of the transactions contemplated hereby will not violate any FCC rules or
regulations. Buyer or its designated subsidiary is, or prior to Closing shall
use its best efforts to become an entity qualified to hold the Licenses pursuant
to Section 24.709 and 24.720 of the FCC's rules, or any successor rules as a
designated entity and a "very small business" as defined by appropriate FCC
rules and regulations.
(g) No Broker. Except for The Cascade Group, whose fees will be
paid by the Buyer, there is no investment banker, broker, finder or other
intermediary who has been retained by or on behalf of Buyer who might be
entitled to any fee or commission in connection with this Agreement.
4. REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE SELLER.
The Seller represents, warrants and covenants to the Buyer as
follows:
(a) Organization of the Seller. The Seller is duly organized and
validly existing under the laws of Delaware. The Seller has all requisite L.L.C.
power and authority to conduct the business contemplated by it and to own, lease
and operate any properties or assets in connection therewith and has applied for
qualification or is duly qualified to do business as a foreign limited liability
company in good standing in those jurisdictions, other than the state of its
organization, in which the nature of the business conducted or property owned by
it makes such qualification necessary, except where the failure to be so
qualified or in good standing would not materially adversely affect the ability
of the Seller to consummate the transactions contemplated by this Agreement.
(b) Authority; Enforceability. Except for approval by its Board
of Managers, which shall be forthcoming within five (5) business days; (i) the
Seller has all requisite power and authority to enter into this Agreement and to
carry out its obligations hereunder; (ii) the execution, delivery and
performance of this Agreement by the Seller, and the consummation of the
transactions contemplated herein, have been duly and validly authorized by all
requisite proceedings on the part of the Seller; and (iii) this Agreement is a
valid and binding obligation of the Seller, enforceable against it in accordance
with its terms, except that (A) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium, rehabilitation, liquidation,
conservatorship, receivership or other similar laws now or hereafter in effect
relating to creditors' rights generally and (B) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject co
equitable relief, may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
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<PAGE> 7
(c) No Conflicts. The execution and delivery of this Agreement by
the Seller does not, and the consummation by the Seller of the transactions
contemplated hereby will not, result in or constitute: (i) a default, breach or
violation of or under the Certificate of Formation or the Limited Liability
Company Agreement of the Seller, or (ii) a default, breach or violation of or
under any mortgage, deed of trust, indenture, note, bond, license, lease
agreement of other instrument or obligation to which the Seller is a party or by
which any of its properties or assets are bound, or (iii) a violation of any
statute, rule, regulation, order, judgment or decree of any court, public body
or authority by which the Seller or any of its properties or assets are bound,
or (iv) an event which (with notice or lapse of time or both) would permit any
person to terminate, accelerate the performance required by, or accelerate the
maturity of any indebtedness or obligation of the Seller under, any agreement or
commitment to which the Seller is a party or by which the Seller is bound or by
which any of its properties or assets are bound, or (v) the creation or
imposition of any lien, charge or encumbrance or commitment to which the Seller
is a party or by which any of its properties or assets are bound, or (vi) an
event which would require any consent under any agreement to which the Seller is
a party or by which the Seller is bound or by which any of its properties or
assets are bound or any approval, notification or other action or proceeding by,
to or before any governmental body, other than as contemplated by this
Agreement, except for any such default, breach, violation, event or other
enumerated circumstances which, individual or in the aggregate, would not
materially adversely affect the ability of the Seller to consummate the
transactions contemplated by this Agreement.
(d) Actions Pending. Except as provided on Exhibit C, there is no
action, suit, claim, investigation or proceeding pending or, to the knowledge Of
the Seller, threatened, against the Seller, which would materially adversely
affect its ability to perform under this Agreement.
(e) FCC Authorization. Except for consents required prior to
assignment of Licenses that are included in existing lines of credit involving
Silicon Valley Bank and Nations Bank, which consents shall be obtained prior to
Closing, Seller holds the Licenses listed on Exhibit A, free and clear of all
liens, liabilities, claims, obligations, restrictions or other encumbrances
("Obligations") of any kind or nature, other than those obligations imposed on
personal communications service licensees by applicable law or regulation and
the Assumed FCC Debt. Such Licenses are valid and in full force and effect.
(f) FCC Rules. The Seller is, and has always been, in compliance
with all relevant FCC rules and regulations except for any non-compliances
which, individually or in the aggregate, would not materially adversely affect
the ability of the Seller to consummate the transactions contemplated by this
Agreement.
(g) FCC Licenses. Seller his not made any untrue statement of any
material fact, or omitted to disclose any material fact, to the FCC or taken or
failed to take any action, which misstatements or omissions, actions or failures
to act, individually or in the aggregate, would subject to revocation or failure
to renew. No event has occurred with respect to any License which permits, or
after notice or lapse of time or both would permit, revocation or termination
thereof or would result in any other material impairment of the rights of the
holder of the Licenses and Seller shall make any and all payments within the
applicable grace periods provided for under the FCC's rule for amounts due under
the FCC Notes. Seller has no reason to
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<PAGE> 8
believe that the Licenses are not likely to be renewed in the ordinary course or
that the holder of such Licenses would not be entitled to a renewal expectancy
as contemplated by FCC rules and regulations.
(h) Compliance with Laws. The Seller is in material compliance
with the requirements of all federal, state, municipal or local laws, codes,
statutes, ordinances, orders, judgments, decrees, rules and regulations.
(i) No Broker. There is no investment banker, broker, finder or
other intermediary who has been retained by or on behalf of Seller who might be
entitled to any fee or commission in connection with this Agreement.
(j) Full Disclosure. No representation, warranty or statement
made by the Seller in this Agreement contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained herein not misleading. There is no material fact, which materially
adversely affects the Licenses in any material respect, which has not been set
forth or referred to in this Agreement or the Exhibits hereto.
5. ADDITIONAL AGREEMENTS.
(a) Confidentiality. The Seller and the Buyer shall each ensure
that the terms of this Agreement and information concerning the business and
affairs of the other party ("Confidential Information") are kept confidential
unless the other party to this Agreement shall have consented to the disclosure
of such information; provided that the Seller or the Buyer may disclose any such
information (i) as has become generally available to the public (other than
through disclosure by any such party in contravention of this Agreement), (ii)
was generally available to the public at the time of disclosure or may be
required (x) by applicable law or stock exchange regulation, (y) in any report,
statement or testimony submitted to any governmental body having or claiming to
have jurisdiction over any such party or (z) in response to any summons or
subpoena or to comply with any law, order, regulation or ruling, in either case
after reasonable notice to the other party, of such party's intention to make
such disclosure, (iii) to the affiliates of such party and its and their
respective officers, directors, employees, agents and professional consultants
in connection with the purchase and sale of the Licenses, (iv) from the date of
execution of this Agreement until the Closing Date, to lenders, provided that
such lenders agree to become bound by the same terms and conditions of this
Section 5(a), and (v) as required for the FCC Applications.
(b) No Public Announcement. Except as may be required pursuant to
Section 5(a), no party shall make or cause to be made, any press release or
similar public announcement, statement or communication with respect to the
terms and conditions (or the existence of) this Agreement, unless approved in
advance by the other party (which approval may be withhold in such party's sole
discretion). In no event shall any press release or similar public
announcement, statement or communication disclose the Purchase Price.
(c) HSR Filing. As promptly as practicable, and in any event not
later than ten business days, following the execution and delivery of this
Agreement, Buyer and Seller will take
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<PAGE> 9
such action as may be required to be taken by them under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") in connection
with the transactions contemplated hereby. Each of Buyer and Seller will
cooperate in the preparation of, will file on a timely basis, complete and
accurate notification and report forms with respect to the transactions
contemplated hereby, pursuant to the HSR Act and the rules and regulations
promulgated thereunder, and will file on a timely basis such additional
information and documentary materials as may be requested by any governmental
authority pursuant to the HSR Act. Each of Buyer and Seller will request early
termination of the waiting period under the HSR Act. Each of Buyer and Seller
shall, promptly inform the other of any inquiries or communications from any
such governmental authority and provide copies of any written communication
relating thereto. Each of Buyer and Seller shall respond with reasonable
diligence and dispatch to any request for additional information made in
response to such filings.
(d) Reasonable Efforts. Subject to the terms and conditions
herein, each of the parties hereto agrees to use all commercially reasonably
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things reasonably necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transactions contemplated
by this Agreement as promptly as practicable. In case at any time after the
Closing any further action is reasonably necessary to carry out the purposes of
this Agreement, the proper agents, officers and directors of each party hereto
shall take such action.
(e) Disclosure to Parties. If either of the parties should become
aware, prior to Closing, that any of its representations, warranties or
covenants is inaccurate or incapable of being performed, such party shall
promptly give written notice of such inaccuracy or incapability to the other
party provided, however that nothing contained in this Section 5(e) shall
relieve the party bound by such representation, warranty or covenant from
complying with such representation, warranty or covenant.
(f) Non-Competition. Effective at and as of the Closing;
(1) Seller, its officers, directors and controlling
principals covenant and agree, for themselves and their respective affiliates,
that for a period of three (3) years after the Closing, such persons, and their
respective affiliates shall not, directly or indirectly, (i) engage in the
Business within the BTAs covered by the Licenses. For purposes of this
Agreement, Business shall mean a Commercial Mobile Radio Service ("CMRS")
provider, as defined by the FCC other than under the Sprint brand name affiliate
program; or (ii) act as an agent, representative, consultant, officer, director,
partner, employee or independent contractor of any entity or enterprise that
engages in an activity described in clause (i). If, in any judicial proceeding,
a court shall refuse to enforce any of the separate covenants deemed included in
this Section, then such unenforceable covenant shall be deemed eliminated from
these provisions to the extent necessary to permit the remaining separate
covenants to be enforced.
(2) The words "directly or indirectly" as they relate to
any activity prohibited by the terms of this Section mean (i) acting as an
agent, representative, consultant, officer, director, partner, employee or
independent contractor of any entity or enterprise that engages in any such
activity; or (ii) participating in any such entity or enterprise other than
Sprint
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<PAGE> 10
and its related parties as an owner, partner, limited partner, joint venturer,
creditor or stockholder (except as a stockholder holding less than five percent
(5%) interest in a corporation whose shares are actively traded on a regional or
national securities exchange or in the over-the-counter market).
(g) Certain Prohibited Transactions. Without limiting the
generality of subsection (a) above, Seller shall not, without the prior written
approval of Buyer (which approval shall not be unreasonably withheld):
(1) Mortgage, pledge or otherwise encumber any of the
Licenses;
(2) Enter into any contract or commitment relating to the
Licenses;
(3) Enter into any agreement to make any commitment or
offer to provide telephone service to subscribers with
respect to the Licenses;
(4) Waive any material rights relating to the Licenses;
(5) Subject the Licenses to any rights of first refusal by
any third parties;
(6) Transfer or grant any right under, or enter into any
settlement regarding the breach or infringement of, any
intangibles or modify any existing right with respect to
the Licenses; or
(7) Do any other act that would cause any representation
or warranty of Setter to be or become untrue in any
material respect.
(h) Governmental Authorization. Seller shall not cause or permit,
by any act or failure to act, any of the governmental authorizations to expire
or to be surrendered or modified, or take any action that would cause any
governmental authority to institute proceedings for the suspension, revocation,
or material and adverse modification of any of the governmental authorizations
or fail to prosecute with due diligence any pending applications for any
governmental authority in connection with the licenses;
(i) Access to Information. Seller shall give to Buyer and its
counsel, accountants, engineers, and other representatives reasonable access to
all books and records relating to the licenses, and to the officers, employees,
and agents of Seller, and to all books and records, and will furnish or cause to
be furnished to Buyer and its representatives all information relating to the
licenses and Seller that they reasonably request.
(j) Compliance With Laws. Seller shall comply in all material
respects with all laws, rules and regulations in connection with the Licenses
and any of the other matters related to this Agreement. In the event that it
shall receive any notice of violation of any laws, rule or regulation, Seller
shall contest in good faith or cure the violation prior to the Closing Date to
the extent necessary to satisfy the covenant set forth in the first sentence of
this subsection. Seller shall also promptly notify Buyer of such notice.
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(k) No Inconsistent Action. Seller shall not take any action that
is inconsistent with Seller's obligations under this Agreement or that could
hinder or delay the consummation of the transactions contemplated by this
Agreement.
(l) Taxes. Seller shall file in a timely manner all federal,
state, and local tax and information returns hereafter required to be filed by
Seller relating to or in connection with the assets and the operation of the
system and will pay all taxes (and any other charges, duties, penalties,
interest, or fines) which become due pursuant to those returns or pursuant to
any assessment which becomes due and payable unless contested in good faith.
(m) No Shop. From the date of this Agreement, neither Seller (nor
any of its partners, representatives, employees, agents or affiliates) will,
directly or indirectly solicit, initiate, encourage or participate in
negotiations or discussions with respect to, or furnish or cause or permit to be
furnished any information to any person (other than such parties' respective
affiliates or their representatives) in connection with any inquiry or offer for
any purchase or sale of the system, the assets or any part thereof.
(n) Management Agreement. Within 30 calendar days of the
execution of this Agreement, the parties shall execute a management agreement
(the "Management Agreement") that shall include terms consistent with management
agreements entered into in the wireless industry and consistent with all
applicable FCC regulations.
(o) Conveyance of System Design and Planning Materials. Seller
has undertaken certain research and planning activities associated with the
build out and operation of the Licenses. All documents related to such
activities shall be provided to Buyer upon execution of the Management
Agreement, to the extent that Seller is not prohibited from so doing.
(p) FCC Applications. The Buyer shall prepare and with Seller's
consent and approval, not to be unreasonably withheld, file within three (3)
business days from the date of this Agreement, applications (the "FCC
Applications") with the Federal Communications Commission (the "FCC") requesting
its consent to the assignment of the Licenses by the Seller to the Buyer. Buyer
and Seller shall cooperate in the diligent submission of any additional
information requested by the FCC with respect to the FCC Applications, and will
take all commercially reasonable steps necessary and proper for the expeditious
prosecution of the FCC Application to a favorable conclusion.
(q) Within five (5) business days from execution of this
Agreement, (a) Buyer shall obtain approval from its Board of Directors regarding
its execution of this Agreement and (b) Seller shall obtain approval from its
Board of Members regarding its execution of this Agreement. In the event that
either party is unable to obtain such approval that party shall immediately so
notify the other party. Absent such notification, approval will be understood to
have been obtained and each party shall be deemed to be acting in reliance
thereof.
6. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE BUYER TO PURCHASE THE
LICENSES.
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The obligation of the Buyer hereunder to purchase the Licenses is
subject to the satisfaction, at or before the Closing, of each of the following
conditions set forth below, These conditions are for the Buyer's sole benefit
and may be waived by the Buyer at any time in its sole discretion.
(a) Accuracy of the Seller's Representations And Warranties. The
representations and warranties of the Seller (i) that are qualified as to
materiality shall be true and correct and (ii) that are not so qualified shall
be true and correct in all material respects, in each case as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date.
(b) Performance by the Seller. The Seller shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by it at or prior to the Closing.
(c) Certificate of the Seller. The Buyer shall have received a
certificate of a director or executive officer of the Seller, dated as of the
Closing Date, to the effect that (i) the representations and warranties of the
Seller (ii) that are qualified as to materiality shall be true and correct and
(ii) that are not so qualified shall be true and correct in all material
respects, in each case as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date and (ii) the Seller shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by it at or prior to the Closing.
(d) No Injunction. No statute, rule, regulation, order, decree,
ruling or preliminary or permanent injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority of competent
jurisdiction which restrains or prevents the consummation of any of the
transactions contemplated by this Agreement or materially changes the
transactions contemplated hereby.
(e) FCC Applications. The FCC shall have given its consent in
writing to the FCC Applications, which consent shall have been granted by Final
Order.
(f) HSR Approval. The waiting period set forth in the HSR Act, if
applicable, shall have expired or been terminated.
(g) Records. The Seller shall have delivered to the Buyer all
records and files related to the Licenses.
(h) Corporate Approval. The execution and delivery of this
Agreement by Buyer and the performance of its covenants and obligations under it
shall have been duly authorized by all necessary corporate action.
(i) Consents. Seller shall have delivered all third party
consents required for Seller to consummate the transactions contemplated by this
Agreement.
7. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE SELLER TO SELL
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<PAGE> 13
THE LICENSES.
The obligation of the Seller hereunder to sell the Licenses is
subject to the satisfaction, at or before the Closing, of each of the following
conditions set forth below. These conditions are for the Seller's sole benefit
and may be waived by the Seller at any time in its sole discretion.
(a) Accuracy of the Buyer's Representations and Warranties. The
representations and warranties of the Buyer (i) that are qualified as to
materiality shall be true and correct and (ii) that are not so qualified shall
be true and correct in a material respects, in each case as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date.
(b) Performance by the Buyer. The Buyer shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by it at or prior to the Closing.
(c) Certificate of the Buyer. The Seller shall have received a
certificate of a director or executive officer of the Buyer, dated as of the
Closing Date, to the effect that: (i) the representations and warranties of the
Buyer that are qualified as to materiality shall be true and correct (ii) those
representations and warranties that are not so qualified shall be true and
correct in all material respects, in each case as of the date of this Agreement
and as of the Closing Date as though made on and as of the Closing Date and
(iii) the Buyer shall have performed, satisfied and complied in all material
respects with all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by it at or prior to the
Closing.
(d) No Injunction. No statute, rule, regulation, order, decree,
ruling or preliminary or permanent injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority of competent
jurisdiction which restrains and prevents the consummation of any of the
transactions contemplated by this Agreement or materially changes the
transactions contemplated hereby.
(e) FCC Application. The FCC shall have given its consent in
writing to the FCC Applications.
(f) HSR Approval. The waiting period set forth in the HSR Act, if
applicable, shall have expired or been terminated.
(g) Board of Managers Approval. The Board of Managers of the
Seller shall have approved and authorized the transactions contemplated by this
Agreement.
8. TERMINATION.
(a) Termination Before Closing. Notwithstanding anything to the
contrary set forth in this Agreement, this Agreement may be terminated and the
transactions contemplated herein abandoned at any time prior to the Closing:
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<PAGE> 14
(1) Subject to the right of Buyer to extend this
Agreement, by either the Buyer or the Seller if the Closing shall not have
occurred by June 30, 1999; provided, however, that the right to terminate this
Agreement under this Section 8(a)(i) shall not be available to any party who has
failed to fulfill any obligation under this Agreement and has not cured such
failure;
(2) By the Buyer, if any of the conditions set forth in
Article 6 shall have become incapable of fulfillment (other than as a result of
a breach by the Buyer) and shall not have been waived by the Buyer;
(3) By the Seller, if any of the conditions set forth in
Article 7 shall have become incapable of fulfillment (other than as a result of
a breach by the Seller) and shall not have been waived by the Seller;
(4) By either the Buyer or Seller if a court of competent
jurisdiction shall have issued an order, decree or ruling permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement, and such order, decree, ruling or other action shall have become
final and nonappealable;
(5) By either the Buyer or Seller upon the other party
fling, or have filed against it and remain pending for more than 30 days, a
petition under Title 11 of the United States Code or similar state law provision
seeking protection from creditors or the appointment of a trustee, receiver or
debtor in possession; or
(6) By either Buyer or Seller in the event that such party
has not received all required corporate approval within five (5) business days
of the execution of this Agreement, and has timely advised the other party to
that effect.
(b) Effect of Termination. In the event of termination of this
Agreement by either party, such party shall promptly give the other written
notice and, except as otherwise provided herein, this Agreement shall become
void and have no further effect, other than the provisions of Sections 3(g),
4(j), 5(a), 5(b), 9(a) and 9(b). Nothing in this Section 8(b) shall be deemed to
release any party from any liability for breach by such party Of the terms and
provisions of this Agreement.
9. INDEMNIFICATION.
(a) Indemnification by Seller. Notwithstanding the Closing, and
regardless of any investigation made at any time by or on behalf of Buyer or any
information Buyer may have, Seller hereby agrees to indemnify and hold Buyer
harmless against and with respect to, and shall reimburse Buyer for:
(1) Breach. Any and all losses, liabilities, or damages
(collectively, "Damages") resulting from any untrue representation, breach of
warranty, or nonfulfillment of any covenant by Seller contained herein or in any
certificate, document, or instrument delivered by Seller to Buyer hereunder; and
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<PAGE> 15
(2) Legal Matters. Any and all actions, suits,
proceedings, claims, demands, assessments, judgments, costs and expenses,
including reasonable legal fees and expenses (collectively, "Claims"), incident
to any breach described in subparagraph (1) above or incurred in investigating
or attempting to avoid the same or to oppose the imposition thereof, or in
enforcing this indemnity; provided, however, that Seller shall not be required
to indemnify and hold harmless Buyer under this Section 9(a) with respect to
any Damages or Claims (and no claim shall be made against Seller therefore)
unless and until the Damages and/or Claims for which such indemnification is
sought under this Section 9(a) shall exceed in the aggregate $25,000.00 (in
which case indemnification shall relate back to the first dollar of such claim),
and provided further, the aggregate amount for which Seller shall be required to
indemnify and hold harmless Buyer under this Section 9(a) with respect to
Damages and/or Claims shall not exceed the amount of the Purchase Price.
(b) Indemnification by Buyer. Notwithstanding the Closing, and
regardless of any investigation made at any time by or on behalf of Seller or
any information Seller may have, Buyer hereby agrees to indemnify and hold
Seller harmless against and with respect to, and shall reimburse Seller for:
(1) Breach. Any and all damages resulting from any untrue
representation, breach of warranty, or nonfulfillment of any covenant by Buyer
contained herein or in any certificate, document, or instrument delivered by
Buyer to Seller hereunder; and
(2) Legal Matters. Any and all Claims, incident to any
breach described in sub-paragraph (a) above or incurred in investigating or
attempting to avoid the same or to oppose the imposition thereof, or in
enforcing this indemnity, provided, however, that Buyer shall not be required to
indemnify and hold harmless Seller under this Section 9(b) with respect to any
Damages or Claims (and no claim shall be made against Buyer therefore) unless
and until the Damages and/or Claims for which such indemnification is sought
under this Section 9(b) shall exceed in the aggregate $25,000.00 (in which case
indemnification shall relate back to the first dollar of such claim), and
provided further, the aggregate amount for which Buyer shall be required to
indemnify and hold harmless Seller under this Section 9(b) with respect to
Damages and/or Claims shall not exceed the amount of the Cash Payment.
(c) Procedure for Indemnification. The procedure for
indemnification shall be as follows:
(1) Notice. The party claiming indemnification pursuant to
this Section 9 (the "Claimant") shall promptly give notice to the party from
whom indemnification is being claimed pursuant to this Section I (the
"Indemnitor").
(2) Investigation. With respect to claims between the
parties, following receipt of notice from the Claimant of a claim, the
Indemnitor shall have thirty days to make any investigation of the claim that
the Indemnitor deems necessary or desirable. For the purposes of this
investigation, the Claimant agrees to make available to the Indemnitor and/or
its authorized representatives the information relied upon by the Claimant to
substantiate the claim. If the Claimant and the Indemnitor cannot agree as to
the validity and amount of the claim within the
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<PAGE> 16
thirty-day period (or any mutually agreed upon extension thereof), the Claimant
may seek appropriate legal remedy.
(3) Control of Claim. With respect to any claim by a third
party as to which the Claimant is entitled to indemnification hereunder, the
Indemnitor shall have the right at its own expense to participate in or assume
control of the defense of the claim, and the Claimant shall cooperate fully with
the Indemnitor, subject to reimbursement for actual out-of-pocket expenses
incurred by the Claimant as a result of a request by the Indemnitor. If the
Indemnitor elects to assume control of the defense of any third-party claim, the
Claimant shall have the right to participate in the defense of the claim at its
own expense. If the Indemnitor does not elect to assume control or otherwise
participate in the defense of any third party claim, it shall be bound by the
results obtained by the Claimant with respect to the claim.
10. MISCELLANEOUS.
(a) Arbitration. Any dispute controversy or claim between the
parties hereto arising out of or relating to this Agreement or the breach,
termination or invalidity of this Agreement shall be resolved by binding
arbitration. To the fullest extent permitted by law, the arbitration shall be
governed by the United States Arbitration Act (Title 9, U.S. Code) and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA")
(the "Rules") and not the law of any state. The hearing shall be held in
California, unless all, parties to the arbitration agree to a different locale.
There shall be three arbitrators; one shall be selected by Buyer; another by
Seller; and the third by agreement of Buyer and Seller's selected arbitrators.
The arbitrator shall have the power to award specific performance and actual
damages, but shall not have the authority to award punitive damages. The award
of the arbitrators shall be final and binding, and judgment upon the arbitration
award may be entered in any court having jurisdiction. The arbitrators may
consolidate an arbitration under this Agreement with any other arbitration
between or among any of the parties to this Agreement if the subject of the
disputes arise out of or relate essentially to the same facts of the disputes
arise out of or relate essentially to the same facts or transaction(s). If the
arbitrators fail to make such an order, the parties may apply to any court of
competent jurisdiction for such an order.
(b) Expenses. Each parry hereto shall pay its own fees and
expenses incurred in connection with the preparation, execution and performance
of this Agreement.
(c) Survival of Representations, Warranties and Covenants.
Except for Articles 2 and 5 and Section 9(a), none of the
provisions of this Agreement shall survive the Closing; provided, however, that
the representations and warranties contained herein shall survive the Closing
Date for a period of one year.
(d) Successors, Assigns and Binding Effect.
(1) The rights of any party under this Agreement shall not
be assignable by such party hereto prior to the Closing without the written
consent of the other, except that the rights of the Buyer hereunder may be
assigned prior to the Closing, without the
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<PAGE> 17
consent of the Seller, to any of its affiliates or subsidiaries ("Permitted
Assignees").
(2) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and permitted assigns. The
successors and permitted assigns hereunder shall include without limitation, in
the case of the Buyer, any Permitted Assignees as well as the successors in
interest to such Permitted Assignee. Nothing in this Agreement, expressed or
implied, is intended or shall be construed to confer upon any Person other than
the parties and successors and Permitted Assignees, any right, remedy or claim
under or by reason of this Agreement.
(e) Headings. Subject headings are included for convenience only
and shall not affect the interpretation of any provisions of this Agreement.
(f) Notices. All notices, certifications, requests, demands,
payments and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if mailed, by certified mail, first
class postage prepaid, or delivered personally, or if sent by facsimile, with
transmission confirmed by telephone and simultaneously followed by the original
instructions by first class mail, postage prepaid:
If to the Seller:
230 Peachtree NW, Suite 1700
Atlanta, GA 30303
Chris Blane,
Vice President of Business Development
Telephone: (404) 522-8004
Facsimile: (404) 522-0130
with a copy (which shall not constitute notice) to:
Shelley Spencer
Airgate Wireless, L.L.C.
6511 Griffith Road
Laytonsville, MD 20882
Telephone: (301) 540-6222
Facsimile: (301) 540-7930
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<PAGE> 18
If to Buyer:
Leap Wireless International, Inc.
6262 Lusk Boulevard
San Diego, California 92121-2779
Attention: Legal Department
Telephone: (619) 658-4832
Facsimile: (619) 845-6060
with a copy (which shall not constitute notice) to:
Lukas Nace Gutierrez and Sachs, Chartered
1111 19th Street NW Suite 1200
Washington, DC 20036
Telephone: 202-828-9470
Facsimile: 202-842-4485
or to such other address or addresses as may hereafter be specified by notice
given by any of the above to the others. Notices given by United States
certified mail as aforesaid shall be effective on the third business day
following the day on which they were deposited in the mail. Notices delivered in
person shall be effective upon delivery. Notices given by facsimile shall be
effective when transmitted, provided facsimile notice is confirmed by telephone
and is transmitted on a business day during regular business hours.
(f) Governing Law. The Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to the choice of law principles.
(g) Counterparts. This Agreement may be executed simultaneously
in any number of counterparts, each of which shall be deemed an original, but
all such counterparts shall together constitute one and the same instrument.
(h) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby, it being intended that all of the rights and privileges of the
parties hereto shall be enforceable to the fullest extent permitted by law.
(i) Entire Agreement, This Agreement, including the Exhibits and
Schedules hereto, sets forth the entire understanding and agreement of the
parties hereto relating to the matters set forth herein and supersedes all other
understandings, negotiations or agreements between the parties hereto relating
to the matters set forth herein.
(j) Specific Performance. The parties agree that notwithstanding
anything to
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the contrary contained herein, any party may seek a temporary restraining order
or a preliminary injunction from any court of competent jurisdiction in order to
prevent immediate and irreparable injury, loss or damage pending the selection
of an arbitrator to render a decision on the ultimate merits of any dispute,
controversy or claims. The arbitrator once appointed shall have the power to
modify or vacate such temporary restraining order or preliminary injunction.
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<PAGE> 20
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
Buyer: Leap Wireless International, Inc.
By: /s/ S. D. Hutcheson
-------------------------------------
Its: VP, North American Ops
-------------------------------------
Seller: Airgate Wireless, L.L.C.
By: /s/ Chris Blane
-------------------------------------
Its: MANAGER
-------------------------------------
20
<PAGE> 1
EXHIBIT 10.31
FIRST AMENDMENT TO LICENSE PURCHASE AGREEMENT
This First Amendment to License Purchase Agreement (the "First
Amendment") is made the 17th day of December, 1999 by and between Cricket
Holdings, Inc., a Delaware Corporation (the "Buyer") and Airgate Wireless,
L.L.C., a Delaware limited liability company (the "Seller") with respect to that
certain License Purchase Agreement, dated as of September 11, 1998, by and
between Buyer and Seller (the "License Purchase Agreement"). Unless defined
herein capitalized terms shall have the meanings set forth in the License
Purchase Agreement.
WHEREAS, Leap Wireless International, Inc. ("Leap"), the original
"Buyer" under the License Purchase Agreement, has assigned all if its rights
thereunder to Cricket Holdings, Inc., a wholly owned subsidiary of Leap pursuant
to Section 10(d) of the License Purchase Agreement and Buyer has assumed all of
Leap's obligations thereunder.
WHEREAS, the term of the License Purchase Agreement has expired,
and Seller and Buyer would like to extend the term of the License Purchase
Agreement;
WHEREAS, on July 22, Leap was granted Designated Entity status by
the FCC ("DE Status") which DE Status is currently subject to a motion for
reconsideration by a third party;
WHEREAS, Buyer and Seller desire to the amend the terms of the
License Purchase Agreement pursuant to the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, each intending
to be legally bound, do hereby agree as follows:
1. RELEASE OF FUNDS. Upon execution of this Amendment, Buyer will deliver a
letter to the Escrow Agent instructing the Escrow Agent to immediately release
the Initial Payment to Seller.
2. INCREASE THE PURCHASE PRICE. Section 1(b) is hereby amended to increase the
purchase price to twenty five million dollars ($25,000,000).
3. AMENDMENT TO CLOSING. Section 2(a) and (b) of the License Purchase Agreement
is hereby deleted and in lieu thereof the following is inserted:
"Closing Date. The Closing shall take place within seven (7) business
days after the waiting period applicable under the Hart Scott Rodino
Antitrust Improvements Act ("HSR") has expired or has been earlier
terminated provided that Buyer remains eligible to acquire and hold the
Licenses under applicable decisions, orders or similar rulings of the
FCC. If the Closing has not occurred by January 27, 2000, the License
Purchase Agreement shall terminate, unless extended as provided herein,
and neither party hereto shall have any further obligation to the other
party to consummate the transactions
<PAGE> 2
contemplated thereby. The date for termination of the License Purchase
Agreement as described in the preceding sentence shall be extended day
for day for each day beyond December 20, 1999 on which Seller files its
Notification and Report Form under HSR. Buyer shall have the right to
extend the License Purchase Agreement for an additional thirty (30)
days provided that: (i) Buyer advances to the Seller cash from the
Purchase Price in the amount of one million dollars ($1,000,000); and
(ii) the Purchase Price is increased by the amount of quarterly interest
payable on the Licenses to the FCC in January 2000 which is paid by the
Seller prior to or at the Closing (and the assumption of the Assumed FCC
Debt by Buyer)."
4. MANAGEMENT AGREEMENT. Paragraph 5(n) of the License Purchase Agreement is
hereby deleted in its entirety.
5. HSR. The first sentence of Section 5(c) is amended to read in its entirety as
follows:
"The parties shall each file their Notification and Report Forms under
the HSR not later than December 20, 1999."
6. DE STATUS. Paragraph 6(e) of the License Purchase Agreement is hereby amended
by deleting at the end thereof, the clause "which consent shall have been
granted by Final Order".
7. TERMINATION. Paragraphs 8(a)(1) is deleted in its entirety.
8. EXHIBIT A Purchase of Licenses. Exhibit A to the License Purchase Agreement
is hereby amended to delete the F block license for BTA 178, Greenwood, South
Carolina and to exclude this license from the Licenses being purchased herein.
9. CONSIDERATION. The Buyer and Seller agree to negotiate in good faith about
taking some or all of the consideration otherwise to be paid in cash in common
stock of Leap Wireless International, Inc. If the parties do not agree on all
aspects of such change of consideration, all of such consideration shall be
cash.
Except as expressly amended herein, the parties hereby ratify and confirm the
License Purchase Agreement.
IN WITNESS WHEREOF, the parties have executed this First
Amendment as of the date first above written.
Buyer: Cricket Holdings, Inc (as assignee of Leap
Wireless International, Inc.)
By: /s/ S. D. HUTCHESON
-------------------------------------
Its: VICE PRESIDENT
-------------------------------------
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<PAGE> 3
Seller: Airgate Wireless, L.L.C.
By: /s/ CRIS BLANE
-------------------------------------
Its: MANAGER
-------------------------------------
3
<PAGE> 1
EXHIBIT 10.32
AGREEMENT FOR PURCHASE AND SALE OF LICENSES
This Agreement for Purchase and Sale of Licenses (the "Agreement") is
entered into as of this 7th day of January, 2000 (the "Effective Date"), by and
between Radiofone PCS, L.L.C., a Louisiana limited liability company with its
principal place of business located at 3131 N. I-10 Service Road, Metairie,
Louisiana 70002 ("Seller"), and Leap Wireless International, Inc., a Delaware
corporation with its principal place of business located at 10307 Pacific Center
Court, San Diego, California 92121 ("Buyer").
WHEREAS, Seller has acquired the authorization of the Federal
Communications Commission (the "FCC") to construct and operate personal
communication services ("PCS") wireless telecommunications systems ("Systems")
in the Basic Trading Areas ("BTAs") listed on Exhibit A, which is attached
hereto (collectively referred to herein as the "Licenses");
WHEREAS, Seller desires to sell, assign and transfer to Buyer,
and Buyer desires to purchase from Seller, the Licenses described on Exhibit A
on the terms and subject to the conditions set forth herein; and
WHEREAS, the prior consent of the FCC to the transfer of the
respective Licenses from Seller to Buyer is required, and the parties intend
that the transfer of each License contemplated by this Agreement will be
consummated only if such consent to the transfer of each License is obtained.
NOW, THEREFORE, in consideration of the mutual covenants herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto, each intending to be legally bound,
do hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. In this Agreement, the following terms have the
meanings specified or referred to in this Section 1.1 and shall be equally
applicable to both the singular and plural forms. Any agreement referred to
below shall mean such agreement as amended, supplemented and modified from time
to time to the extent permitted by the applicable provisions thereof and by this
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Court Order" means any judgment, order, award or decree of any
foreign, federal, state, local or other court or tribunal and any award in any
arbitration proceeding.
"Denver License" means the License for the Denver BTA described
on Exhibit A attached hereto.
<PAGE> 2
"Encumbrance" means any lien, claim, charge, security interest,
mortgage, pledge, easement, right of first offer or first refusal, conditional
sale or other title retention agreement, defect in title, covenant or other
restriction of any kind.
"Expenses" means any fees or expenses incurred in connection with
investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against under Article X hereunder (including,
without limitation, court filing fees, court costs, arbitration fees or costs,
witness fees, and reasonable fees and disbursements of legal counsel,
investigators, expert witnesses, consultants, accountants and other
professionals).
"FCC Consent" means the consent of the FCC to the assignment of
the Licenses described herein from Seller to Buyer.
"FCC Note and Security Agreement" means that certain Promissory
Note and Security Agreement executed by Seller in favor of the United States
Federal Government, representing installment payment obligations on the Denver
License obtained in the FCC's F-Block auction of PCS spectrum, copies of which
are attached hereto as Exhibit B.
"Final Order" means action by a regulatory authority as to which
(i) no request for stay by such authority of the action is pending, no such stay
is in effect, and, if any deadline for filing any such request is designated by
statute or regulation, it has passed; (ii) no petition for rehearing or
reconsideration of the action is pending before such authority, and the time for
filing any such petition has passed; (iii) such authority does not have the
action under reconsideration on its own motion and the time for such
reconsideration has passed; and (iv) no appeal to a court, or request for stay
by a court, of such authority's action is pending or in effect, and, if any
deadline for filing any such appeal or request is designated by statute or rule,
it has passed.
"Governmental Body" means any foreign, federal, state, local or
other governmental authority or regulatory body.
"IRS" means the Internal Revenue Service.
"Licenses" shall have the meaning set forth in the Recitals to
this Agreement.
"Losses" means any loss, cost, obligation, liability, settlement
payment, award, judgment, fine, penalty, damage, expense, deficiency or other
charge.
"Material Adverse Change" means any material adverse change in
the assets, liabilities, business, condition (financial or otherwise),
operations, results of operations or prospects of Seller.
"Pittsburgh License" means the License for the Pittsburgh BTA
described on Exhibit A attached hereto.
2
<PAGE> 3
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or Governmental Body.
"Requirements of Laws" means any foreign, federal, state and
local laws, statutes, regulations, rules, codes or ordinances enacted, adopted,
issued or promulgated by any Governmental Body or common law.
ARTICLE II
PURCHASE AND SALE
2.1 Purchase of Licenses. On the Pittsburgh Closing Date (as defined
below), upon the terms and subject to the representations, warranties and
conditions of this Agreement, Seller shall sell, transfer, convey, assign, and
deliver to Buyer, and Buyer shall purchase and accept from Seller, the
Pittsburgh License described on Exhibit A, free and clear of all Encumbrances.
On the Denver Closing Date (as defined below), upon the terms and subject to the
representations, warranties and conditions of this Agreement, Seller shall sell,
transfer, convey, assign, and deliver to Buyer, and Buyer shall purchase and
accept from Seller, the Denver License described on Exhibit A, free and clear of
all Encumbrances, except for the FCC Note and Security Agreement related
thereto.
2.2 Purchase Price Payable at Closings.
(a) At the Pittsburgh Closing, Buyer shall pay and deliver to
Seller, in immediately available funds, Eighteen Million Three Hundred Seventy
Thousand U.S. Dollars ($18,370,000) in exchange for the Pittsburgh License.
(b) At the Denver Closing, Buyer shall pay and deliver to Seller,
in exchange for the Denver License: (i) 232,755 (Two Hundred Thirty Two Thousand
Seven Hundred Fifty Five) shares of its Common Stock, $.0001 par value per share
(as adjusted for stock splits, stock combinations and the like occurring prior
to the Denver Closing Date), registered in the name of Seller (the "Leap
Shares"), and (ii) in immediately available funds, an amount equal to $3,430,000
(Three Million Four Hundred Thirty Thousand U.S. Dollars) less the amount of the
Assumed Liabilities (as defined in Section 2.3 below).
2.3 Assumed Liabilities. At the Denver Closing, Buyer shall assume
Seller's obligations under the FCC Note and Security Agreement accruing from and
after the Denver Closing Date in accordance with the terms and subject to the
conditions thereof, but in no event in an amount that exceeds the amount set
forth on Exhibit A adjacent to the Denver License (the "Assumed Liabilities").
Notwithstanding any other provision of this Agreement, except for the Assumed
Liabilities expressly specified in this Section 2.3, Buyer shall not assume, or
otherwise be responsible for any liabilities, obligations or indebtedness of
Seller and its affiliates, whether direct or indirect, liquidated or
unliquidated, known or unknown, whether accrued, absolute, contingent, matured,
unmatured or otherwise, and whether arising out of occurrences prior to, at or
after the date hereof.
3
<PAGE> 4
ARTICLE III
CLOSING
3.1 Closings.
(a) Subject to the fulfillment or waiver of the parties'
respective conditions to closing set forth in Article XIII and Article IX, the
closing of the transfer of the Pittsburgh License (the "Pittsburgh Closing")
shall occur at the offices of Seller, at 10:00 A.M., local time, on a date to be
specified by Buyer to Seller which closing date will not be more than ten (10)
business days after the date on which the FCC, and all other state and federal
regulatory authorities, if any, shall have issued a Final Order consenting to
the transfer of the Pittsburgh License from Seller to Buyer, or such other time
and place as the parties may agree (such date, the "Pittsburgh Closing Date").
(b) Subject to the fulfillment or waiver of the parties'
respective conditions to closing set forth in Article XIII and Article IX, the
closing of the transfer of the Denver License (the "Denver Closing" and together
with the Pittsburgh Closing, the "Closings") shall occur at the offices of
Seller, at 10:00 A.M., local time, on a date to be specified by Buyer to Seller
which closing date will not be more than ten (10) business days after the date
on which the FCC, and all other state and federal regulatory authorities, if
any, shall have issued a Final Order consenting to the transfer of the Denver
License from Seller to Buyer, or such other time and place as the parties may
agree (such date, the "Denver Closing Date" and together with the Pittsburgh
Closing Date, the "Closing Dates").
(c) The parties will use reasonable efforts to conduct the
Closings concurrently. The parties understand and agree, however, that the
respective Closings of the purchase and sale of the Pittsburgh License and the
Denver License are not conditioned upon one another and may occur separately and
independently from one another. The respective Closings shall occur in
accordance with Sections 3.1(a) and (b), regardless of whether the other Closing
is ready to occur or may not occur at all.
3.2. Closing Deliveries. Subject to fulfillment or waiver of the
conditions set forth in Article VIII, at each respective Closing, Buyer shall
deliver to Seller all of the following:
(a) immediately available funds in the respective amounts set
forth in Section 2.2 above, and at the Denver Closing only, the Leap Shares;
(b) at the Denver Closing only, an instrument of assumption of
the FCC Note or at Buyer's sole option, an instrument necessary to arrange for
such debt to be extinguished and replaced with debt to the FCC, for which Buyer
shall be responsible;
(c) A certificate of good standing of Buyer issued within thirty
(30) days prior to the respective Closing Dates by the Secretary of State of the
State of Delaware;
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(d) A certificate of the Secretary of Buyer dated as of the
respective Closing Dates, as to the resolutions of the Board of Directors of
Buyer or written consent of the members thereof authorizing the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby;
(e) a certificate of an officer of Buyer, dated the respective
Closing Dates, certifying that as of such Closing Date, each representation and
warranty of Buyer contained in this Agreement is true and correct in all
material respects and that Buyer has complied in all material respects with all
of its obligations under this Agreement; and
(f) an opinion of Buyer's general counsel, dated as of such
respective Closing Dates, substantially in the form of Exhibit E attached
hereto.
3.3. Seller Closing Deliveries. Subject to fulfillment or waiver of the
conditions set forth in Article IX, at each respective Closing, Seller shall
deliver to Buyer all of the following:
(a) As of the respective Closing Dates, written consent of the
members of Seller authorizing the execution, delivery and performance of this
Agreement and the transactions contemplated hereby;
(b) a certificate of an authorized member of Seller, dated the
respective Closing Dates, certifying that as of such Closing Date, each
representation and warranty of Seller contained in this Agreement is true and
correct in all material respects and that Seller has complied in all material
respects with all of its obligations under this Agreement;
(c) an assignment of the applicable License in a form reasonably
acceptable to Buyer;
(d) an opinion of Seller's FCC regulatory counsel, dated as of
such respective Closing Dates, substantially in the form of Exhibit C attached
hereto;
(e) all required third party consents to the consummation by
Seller of the transactions contemplated by this Agreement; and
(f) such other documents as Buyer may reasonably request or as
may be otherwise necessary to evidence and effect the transactions contemplated
by this Agreement.
In addition to the above deliveries, Seller shall take all steps and actions as
Buyer may reasonably request or as may otherwise be reasonably necessary to put
Buyer in actual possession and control of the Licenses.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that the
statements contained in this Article IV are true and correct as of the date of
this Agreement and will be true and correct as of each Closing Date (as though
then made):
4.1 Organization of Seller. Seller is a limited liability
company, duly organized and validly existing under the laws of the state of its
formation. Seller has all requisite limited liability company power and
authority to conduct the business contemplated by it and to own, lease and
operate any properties or assets in connection therewith, and has applied for
qualification or is duly qualified to do business as a foreign limited liability
company in good standing in those jurisdictions, other than the state of its
organization, in which the nature of the business conducted or property owned by
it makes such qualification necessary, except where the failure to be so
qualified or in good standing would not materially adversely affect the ability
of Seller to consummate the transactions contemplated by this Agreement.
4.2 Authority of Seller. Seller has full power and authority to
own and to operate the Licenses. Seller has full power and authority to execute,
deliver and perform this Agreement and any agreement, document or instrument
executed and delivered pursuant to this Agreement or in connection with this
Agreement. The execution, delivery and performance of this Agreement and any
agreement, document or instrument executed and delivered pursuant to this
Agreement or in connection with this Agreement by Seller have been duly
authorized and approved by all necessary corporate, board, shareholder and
member action of Seller and its members, managers and affiliates. This Agreement
is the legal, valid and binding obligation of Seller enforceable in accordance
with its terms except for the effect thereon of any applicable bankruptcy,
insolvency, reorganization, moratorium, and similar laws affecting the rights of
creditors generally, and general principles of equity.
4.3 No Conflicts. Except for the FCC Consent and the filing
under, and the expiration or termination of applicable waiting period under, the
HSR Act, neither the execution or delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby or compliance with
or fulfillment of the terms, conditions and provisions hereof will (i) result in
the creation or imposition of any Encumbrance upon any of the Licenses, or (ii)
violate or conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default, an event of default or an event creating
rights of acceleration, termination, modification or cancellation or a loss of
rights under, or require any notice to, authorization or approval of, filing
with or consent under (1) Seller's certificate of formation or limited liability
company operating agreement or by-laws; (2) the FCC Note and Security Agreement;
(3) any other material note, indenture, instrument, agreement, mortgage, lease,
license, franchise, permit or other authorization, right, restriction or
obligation to which Seller is a party or any of the Licenses is subject or by
which Seller is bound; (4) any Court Order to which Seller or its members or
managers is a party or any of the Licenses is subject or by which Seller is
bound; or (5) any Requirements of Law affecting Seller or its members or
managers or the Licenses.
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4.4 The Licenses. Seller validly holds the Licenses. Seller has
not commenced or otherwise undertaken any system build-out activities with
respect to the Licenses and has conducted no operations with respect thereto.
Seller has performed as of the Effective Date, and will have performed as of the
respective Closing Dates (other than any required buildout activities), all of
its obligations required to have been performed under the Licenses, and, except
as described in Exhibit D, no event has occurred or condition or state of facts
exists which constitutes or, after notice or lapse of time or both, would
constitute a breach or default under any of the Licenses or the FCC Note and
Security Agreement which permits or, after notice or lapse of time or both,
would permit revocation or termination of any of the Licenses, or which might
adversely affect in any material respect the rights of Seller under any of the
Licenses; no notice of cancellation, of default or of any dispute concerning any
of the Licenses, or of any event, condition or state of facts described in the
preceding clause, has been received by, or is known to, Seller; and each License
is valid, subsisting and in full force and effect and may be assigned and
transferred to Buyer in accordance with this Agreement and will continue in full
force and effect thereafter, in each case without (1) the occurrence of any
breach, default or forfeiture of rights thereunder, or (2) except for the FCC
Consent, the execution by Buyer of a note and security agreement with the FCC
for the Denver License, and the filing under, and expiration or termination of
the applicable waiting period under, the HSR Act, the consent, approval, or act
of, or the making of any filing with, any Governmental Body. Seller has no
reason to believe that the Licenses are not likely to be renewed in the ordinary
course or that the holder of such Licenses would not be entitled to renewal
expectancy as contemplated by FCC rules and regulations. Each of the Licenses
(i) was granted on the grant date specified on Exhibit A, (ii) expires on the
expiration date specified on Exhibit A, and (iii) is subject to the five-year
construction milestone date occurring on the date specified on Exhibit A.
4.5 Title to Licenses. Seller has good and marketable title to
all of the Licenses, free and clear of all Encumbrances, except for the FCC Note
and Security Agreement relating to the Denver License. Upon delivery to Buyer on
each Closing Date, Seller will transfer to Buyer good and marketable title to
the respective License, subject to no Encumbrances, except for the FCC Note and
Security Agreement.
4.6 No Violation, Litigation or Regulatory Action.
(a) The Licenses comply in all material respects with all
applicable Requirements of Law;
(b) Except for the FCC consent and the execution by Buyer of a
Note and Security Agreement with the FCC for the Denver License, Seller and its
managers and members have complied in all material respects with all
Requirements of Law which are applicable to the Licenses; and
(c) There is no investigation, claim, action, suit or other
proceeding pending or, to the best knowledge of Seller, threatened against
Seller, relating to Seller or the Licenses which, if adversely determined,
either would result in the revocation, cancellation, suspension or adverse
modification of any of the Licenses or would have a material adverse effect on
the ability of Seller to perform its obligations hereunder or upon the financial
condition, assets, business,
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prospects or results of operations of Seller, nor is Seller aware of any
reasonable basis for any such investigation, claim, action, suit or proceeding.
4.7 No Finder. No broker or finder has acted on behalf of Seller
in connection with the transactions contemplated hereby.
4.8 Restricted Securities.
(a) Seller understands that the Leap Shares are characterized as
"restricted securities" under the Securities Act of 1933 (as amended and
together with the rules and regulations promulgated thereunder, the "Securities
Act") and that, under the Securities Act and applicable regulations thereunder,
such securities may not be resold, pledged or otherwise transferred without
registration under the Securities Act except in certain limited circumstances.
Seller understands that (i) the Leap Shares are being offered in a transaction
not involving any public offering in the United States within the meaning of the
Securities Act, and the Leap Shares have not yet been registered under the Act,
and (ii) such Leap Shares may be offered, resold, pledged or otherwise
transferred only in a transaction registered under the Securities Act, or
meeting the requirements of Rule 144, or in accordance with another exemption
from the registration requirements of the Act (and based upon an opinion of
counsel if Buyer so requests) and in accordance with any applicable securities
laws of any State of the United States or any other applicable jurisdiction.
(b) Seller understands that (i) the registrar or transfer agent for the
Leap Shares will not be required to accept for registration of transfer any Leap
Shares except upon presentation of evidence satisfactory to Buyer that the
restrictions on transfer under the Securities Act have been complied with and
(ii) any Leap Shares in the form of definitive physical certificates will bear a
legend substantially as set forth below:
"THE SECURITIES EVIDENCED HEREBY WERE ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE
UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND
APPLICABLE STATE SECURITIES LAWS, AND THE SECURITIES EVIDENCED
HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. THE HOLDER OF THE SECURITIES EVIDENCED HEREBY AGREES
FOR THE BENEFIT OF THE CORPORATION THAT (A) SUCH SECURITIES MAY
NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT (1) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT, OR IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON
AN OPINION OF COUNSEL IF THE CORPORATION SO REQUESTS), (2) TO THE
CORPORATION, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE, IN ACCORDANCE
WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
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STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER OF THE SECURITY EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN (A) ABOVE."
4.9 Investment. Seller (a) understands that the Leap Shares have
not been registered under the Securities Act, or under any state securities
laws, and are being offered and sold in reliance upon federal and state
exemptions for transactions not involving any public offering, (b) is acquiring
the Leap Shares solely for its own account for investment purposes, and not with
a view to the distribution thereof in a transaction that would violate the
Securities Act or the securities laws of any State of the United States or any
other applicable jurisdiction, (c) is a sophisticated purchaser with such
knowledge and experience in business and financial matters that Seller is
capable of evaluating the merits and risks of purchasing the Leap Shares, (d)
has received certain information concerning Buyer and its subsidiaries and has
had the opportunity to obtain additional information as desired in order to
evaluate the merits and the risks inherent in holding the Leap Shares, (e) is
able to bear the economic risk and lack of liquidity inherent in holding the
Leap Shares, and (f) is an "accredited investor" within the meaning of Rule
501(a) under the Securities Act.
4.10 FCC Matters.
(a) The Licenses are validly issued in the name of Seller. Seller
and its subsidiaries applied for and obtained the Licenses in compliance
with FCC law, and Seller is, and on each applicable Closing Date will
be, the exclusive holder of the Licenses. The Licenses have been granted
by Final Order. The Licenses are in full force and effect, are
unimpaired by any acts or omissions of the Seller and its affiliates,
are free and clear of any restrictions which might limit the full
operation of the Licenses, other than such restrictions as are imposed
on PCS licensees and/or the wireless telecommunications industry
generally. All reports and other documents required to be filed by
Seller and its affiliates with the FCC and with state regulatory
authorities have been filed. All such reports and documents are correct
in all material respects.
(b) None of the Seller or its subsidiaries have engaged in any
course of conduct which would impair the Seller's ability to remain the
holder of the FCC licenses and such persons are not aware of any reason
why such Licenses might be revoked, canceled, suspended or otherwise
transferred as a result of the transactions contemplated hereby. All
material fees of Seller and its subsidiaries due and payable to
governmental authorities pursuant to the Licenses have been paid
(subject to late fees paid). Subject to obtaining the consent of the FCC
to assign the Licenses to Buyer, Seller has, and on the Closing Date
will have, the absolute and unrestricted right, power and authority
under FCC law to hold the Licenses.
(c) Seller and its subsidiaries are in compliance with Section
310(b) of the Communications Act, and all rules, regulations or policies
of the FCC promulgated thereunder with respect to alien ownership.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
The Buyer hereby represents and warrants to Seller that the
statements contained in this Article V are true and correct as of the date of
Agreement and will be true and correct as of each Closing Date (as though then
made):
5.1 Organization of Buyer. Buyer is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
5.2 Authority of Buyer. Buyer represents and warrants that it has
full power and authority to execute, deliver and perform this Agreement and any
agreement, document or instrument executed and delivered pursuant to this
Agreement or in connection with this Agreement. The execution, delivery and
performance of this Agreement and any agreement, document or instrument executed
and delivered pursuant to this Agreement or in connection with this Agreement by
Buyer have been duly authorized and approved by Buyer. This Agreement is the
legal, valid and binding agreement of Buyer enforceable in accordance with its
terms except for the effect thereon of any applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws affecting the rights of creditors
generally, and general principles of equity.
5.3. No Conflicts. Except for the FCC Consent, the execution by
Buyer of a note and security agreement with the FCC for the Denver License, and
the filing under and expiration or termination of the applicable waiting period
under the HSR Act, neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby nor compliance with
or fulfillment of the terms, conditions and provisions hereof will:
(a) Conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default, an event of default or an event creating
rights of acceleration, termination or cancellation or a loss of rights under:
(1) the Articles of Incorporation or By-laws of Buyer; (2) any material note,
indenture instrument, agreement, license, permit or other right or obligation to
which Buyer is a party or any of its properties is subject or by which Buyer is
bound; (3) any Court Order to which Buyer is a party or by which it is bound; or
(4) any Requirements of Laws affecting Buyer.
(b) Require the approval, consent, authorization or act of, or
the making by Buyer of any declaration, filing or registration with any Person
other than Buyer's registrations and filings pursuant to Section 6.5 below.
5.4. No Finder Fees. No broker or finder has acted on behalf of
Buyer in connection with the transactions contemplated hereby, except for
Katherine Drucker, whose fees shall be the responsibility of Buyer.
5.5. Litigation. Except as disclosed in Buyer's periodic reports
filed with the SEC and press releases, there is no investigation, claim, action,
suit or other proceeding pending
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or, to Buyer's knowledge, threatened against Buyer, which if adversely
determined, would have a material adverse effect on the ability of Buyer to
perform its obligations hereunder, or upon the financial condition, assets,
business, prospects or results of operations of Buyer, nor is Buyer aware of any
reasonable basis for any such investigation, claim, suit or proceeding.
5.6. Qualification. Buyer or its designated subsidiary is legally
qualified to be an FCC licensee generally and specifically with regard to the
Licenses and to Buyer's knowledge, to receive any authorization from any state
or local regulatory authority necessary for it to acquire the Licenses.
5.7 Leap Shares. The Leap Shares to be issued to Seller in
exchange for the consideration set forth in this Agreement, when issued and
delivered in accordance with the terms and conditions hereof, will be duly
authorized, fully paid, validly issued and non-assessable.
ARTICLE VI
ACTION PRIOR TO THE CLOSING DATE
The parties hereto covenant and agree to take the following
actions between the date hereof and the final Closing Date:
6.1 Investigation by Buyer. Seller shall afford to Buyer and its
authorized representatives reasonable access during normal business hours to the
Licenses and Seller to the extent Buyer shall deem reasonably necessary or
desirable and shall furnish to Buyer or its authorized representatives such
additional information concerning the Licenses and Seller as shall be reasonably
requested, including all such information as shall be necessary to enable Buyer
or its representatives to verify the accuracy of the representations and
warranties contained in this Agreement, to verify that the covenants of Seller
contained in this Agreement have been complied with and to determine whether the
conditions set forth in Article VIII have been satisfied. No investigation made
by Buyer or its representatives hereunder shall affect the representations and
warranties of the Seller hereunder.
6.2 Preserve Accuracy of Representations and Warranties. Each of
the parties hereto shall refrain from taking any action that would render any
representation or warranty contained in this Agreement inaccurate in any
material respect as of any Closing Date. Each party shall promptly notify the
other in writing (a) of any action, suit or proceeding that shall be instituted
or threatened against such party to restrain, prohibit or otherwise challenge
the legality of any transaction contemplated by this Agreement, (b) of any
development causing a breach of any of the representations and warranties of
such party in Articles IV or V above, as applicable, or (c) of any lawsuit,
claim, proceeding or investigation that may be threatened, brought, asserted or
commenced against such party which would have been disclosed if such lawsuit,
claim, proceeding or investigation had arisen prior to the date hereof. No
disclosure by any party pursuant to this Section 6.2, however, shall be deemed
to amend or supplement this Agreement or to prevent or cure any
misrepresentation, breach of warranty or breach of covenant therein.
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6.3 Consents of Third Parties; Governmental Approvals.
(a) Consents. Seller will act diligently and reasonably to
secure, before each applicable Closing Date, any consent, approval or waiver, in
form and substance reasonably satisfactory to Buyer, from any party as required
to be obtained to assign or transfer the respective License to Buyer or to
otherwise satisfy the conditions set forth herein; provided that neither Seller
nor Buyer shall have any obligation to offer or pay any consideration in order
to obtain any such consent, or approval; and provided, further, that Seller
shall not make any agreement or understanding affecting the Licenses as a
condition for obtaining any such consent, approval or waiver except with the
prior written consent of Buyer. During the period prior to each applicable
Closing Date, Buyer shall act diligently and reasonably to cooperate with Seller
to obtain the consents, approvals and waivers contemplated by this Section
6.3(a).
(b) FCC Consents. Seller and Buyer shall, as promptly as
practicable from the date of this Agreement, file with the FCC an FCC Form 603
(or other appropriate form) applications seeking consent to assign each
respective License from Seller to Buyer or Buyer's subsidiary. The parties shall
cooperate and use their respective reasonable efforts to prosecute such
applications to a favorable conclusion and shall share equally any filing fees.
(c) HSR Filing. Following the execution and delivery of this
Agreement, Buyer and Seller will take such action, if any, as may be required to
be taken by them under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act") in connection with the transactions contemplated
hereby. Each party will cooperate in the preparation of, will file complete and
accurate notification and report forms with respect to the transactions
contemplated hereby, pursuant to the HSR Act and the rules and regulations
promulgated thereunder, and will file on a timely basis such additional
information and documentary materials as may be requested by any governmental
authority pursuant to the HSR Act. Each party will request early termination of
the waiting period under the HSR Act. Each party shall promptly inform the other
of any inquiries or communications from any such governmental authority and
provide copies of any written communication relating thereto. Each party shall
respond with reasonable diligence and dispatch to any request for additional
information made in response to such filings. Except for the application fee of
Buyer, which shall be paid in full by the Buyer, each of Buyer and Seller shall
bear their respective costs for such compliance under this Section 6.3(c).
6.4 Operations Prior to the Closing Dates. At all times prior to
the final License Closing, Seller shall keep and maintain the Licenses current
and in good standing, including without limitation, making any payment of
principal, accrued interest, penalties or other indebtedness due to the FCC with
respect to the Denver License on a timely basis. Seller shall retain control of
the Licenses at all times prior to the respective Closing. Seller shall not:
(i) Sell, lease, transfer or otherwise dispose of, or
mortgage or pledge, or impose or suffer to be imposed any Encumbrance on, any of
the Licenses, and/or
(ii) Take or agree to take any other action inconsistent
with the consummation of the transactions contemplated by this Agreement.
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6.5 Registration Statement for Resale of Leap Shares.
(a) Shelf Registration Statement. Not later than sixty (60) days
prior to the expected Denver Closing Date, Buyer will file with the Securities
and Exchange Commission (the "SEC") a shelf registration statement under the
Securities Act of 1933 (as amended and together with the rules and regulations
promulgated thereunder, the "Securities Act") registering the Leap Shares for
resale to the public by Seller pursuant to such registration statement and the
prospectus included therein (the "Registration Statement"), free and clear of
any restrictions under the Securities Act except for prospectus delivery
requirements. Buyer shall use all reasonable efforts to cause such Registration
Statement to become effective as promptly as practicable thereafter and, subject
to Section 6.5(b), to remain effective until the expiration of the Resale Period
(as defined in Section 6.5(b) below). Seller agrees to cooperate with and
provide assistance to Buyer, as Buyer may reasonably request, in connection with
any registration and sale of the Leap Shares.
(b) Buyer Obligations. From time to time during the period
commencing on the Denver Closing Date and ending upon the earlier of (x) the
first anniversary of the Denver Closing Date, or (y) such time as Seller shall
have advised Buyer in writing that it has completed its resale of the Leap
Shares delivered hereunder (the "Resale Period") , Buyer shall do the following:
(i) Prepare and deliver to Seller as many copies of the
Prospectus (as hereafter defined) and other documents incident thereto,
including any amendment or supplement to the Prospectus, as Seller may
from time to time reasonably request;
(ii) Use its reasonable efforts to comply with all requirements
imposed upon it by the Securities Act, by the Securities Exchange Act of
1934 (as amended and together with the rules and regulations promulgated
thereunder, the "Exchange Act"), and by the undertakings in the
Registration Statement (including but not limited to the undertakings
required by Item 512(g) of Regulation S-K) so far as is necessary to
permit the continuance of resales of Leap Shares by Seller to the
public, free and clear of any restrictions under the Securities Act
except for prospectus delivery requirements, including the preparation
and filing with the SEC of such amendment and supplements to such
Registration Statement as may be necessary to comply with the provisions
of the Securities Act. If, at any time during the Resale Period, an
event shall occur which makes it necessary to amend or supplement the
Registration Statement or the Prospectus to comply with law or with the
rules and regulations of the SEC, Buyer shall forthwith notify Seller of
the proposed amendment or supplement and prepare and furnish to Seller
such number of copies of an amended or supplemented Registration
Statement or Prospectus that complies with law and with such rules and
regulations as Seller may reasonably request. Seller shall suspend its
sales of Leap Shares pending the preparation and delivery of such
amendment or supplement and until such time as each such amendment or
amendments to the Registration Statement has been declared effective by
the SEC. Buyer authorizes Seller, and any brokers or dealers effecting
sales of the Leap Shares for the account of Seller, to use the
Prospectus, as from time to time amended or supplemented,
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in connection with the sale of the Leap Shares in accordance with
applicable provisions of the Securities Act and state securities laws.
For purposes of this Agreement, the term "Prospectus" means the final
prospectus relating to the Leap Shares most recently included in the
Registration Statement or filed by Buyer pursuant to Rule 424 of the
Securities Act and any amendments or supplements thereto filed by Buyer
pursuant to Rule 424 of the Securities Act and shall include all
documents or information incorporated in any such prospectus by
reference;
(iii) Promptly advise Seller (A) when any post-effective
amendment of the Registration Statement is filed with the SEC and when
any post-effective amendment becomes effective; (B) of any request made
by the SEC for any amendment of or supplement to the Registration
Statement or the Prospectus or for additional information relating
thereto; (C) of any suspension or threatened suspension of the use of
any Prospectus in any state; and (D) of any proceedings commenced or
threatened to be commenced by the SEC or any state securities commission
which would result in the issuance of any stop order or other order or
suspension of use. Buyer agrees to use its reasonable efforts to prevent
or promptly remove any stop order or other order preventing or
suspending the use of the Prospectus during the Resale Period at the
earliest practicable date, and to comply with any such request by the
SEC to amend or supplement the Prospectus;
(iv) Take such action as shall be necessary to qualify and
maintain the qualification of the Leap Shares covered by such
registration under such state securities or "blue sky" laws of those
jurisdictions within the United States and Puerto Rico as shall be
reasonably required to effect offers and sales to the public during the
Resale Period as Seller shall reasonably request; provided, however,
that Buyer shall not be obligated to qualify as a foreign corporation to
do business under the laws of or become subject to taxation in, any
jurisdiction in which it shall not be then qualified, or to file any
general consent to service of process;
(v) Cause the Leap Shares to be registered pursuant to Section
12(b) or 12(g) of the Exchange Act and continually listed, subject to
notice of issuance, on the NASDAQ-NMS or a national securities exchange,
if such exchange is the principal market on which the Leap Shares are
traded, and not subject to any restriction or suspension from trading on
the NASDAQ-NMS or such national securities exchange; provided, however,
that Buyer may deregister the Leap Shares registered pursuant to Section
12(b) or 12(g) of the Exchange Act if such deregistration is in
connection with a merger, dissolution or other transaction in which the
shareholders of Buyer receive prior to such deregistration either cash
or securities that are listed on the NASDAQ-NMS or a national securities
exchange or some combination of cash and such securities; provided,
further, that Buyer may delist the Leap Shares from trading on the
NASDAQ-NMS or national securities exchange if Buyer is concurrently
listing such stock on the New York Stock Exchange or the American Stock
Exchange;
(vi) Provide a transfer agent and registrar for the Leap Shares
registered pursuant to such Registration Statement, not later than the
effective date of such
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registration; and
(vii) Otherwise use its reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make available to
security holders earnings statements satisfying the provisions of
Section 11(a) of the Securities Act, no later than 45 days after the end
of any 12-month period (or 90 days, if such period is a fiscal year),
beginning with the first month of the Company's first fiscal quarter
commencing after the effective date of the Registration Statement, which
earnings statements shall cover said 12-month periods.
(c) Indemnification of Seller. Buyer shall indemnify, defend and
hold harmless Seller, its officers and its directors and any controlling persons
of Seller against and in respect of any losses, claims, damages or liabilities,
joint or several (including legal or other fees and expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage or liability) to which Seller or any of them may become subject under the
Securities Act or otherwise insofar as such losses, claims, damages or
liabilities (or actions with respect thereto) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except to the extent
that any such untrue statement or omission is based upon written information
supplied by Seller or by any of its representatives for use in such Registration
Statement; provided, however, this indemnity agreement shall not inure to the
benefit of Seller, its officers or its directors or any controlling persons of
Seller on account of any loss, claim, damage, liability or action arising from
the sale of Leap Shares to any person if Seller fails to send or give a copy of
the Prospectus (as amended or supplemented) to such person.
(d) Indemnification of Buyer. Seller shall indemnify, defend and
hold harmless Buyer, its officers and its directors and any controlling persons
of Buyer against and in respect of any losses, claims, damages or liabilities,
joint or several (including legal or other fees and expenses reasonably incurred
by any of them in connection with investigating or defending any such loss,
claim, damage or liability) to which Buyer or any such persons may become
subject under the Securities Act or otherwise insofar as such losses, claims,
damages or liabilities (or actions with respect thereto) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
only to the extent that any such untrue statement or omission is based upon
written information with respect to the plan of distribution of Seller supplied
by Seller or its representatives for use in such Registration Statement.
(e) Contribution. If for any reason the indemnification provided
for in the preceding clauses (c) and (d) is unavailable to an indemnified party
as contemplated by the such clauses, then the indemnifying party shall
contribute to the amount paid or payable by the indemnified party as a result of
such loss, claim, damage or liability in such proportion as is appropriate to
reflect not only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party and the
indemnifying party,
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as well as any other relevant equitable considerations.
(f) Procedure for Indemnification The procedure for
indemnification shall be as follows:
(i) Notice. The indemnified party shall promptly give notice to
the indemnifying party of any pending or threatened claim giving rise to
indemnification under subsections 6.5(c) or (d) (a "Claim"), specifying
the factual basis for the Claim and the approximate amount thereof.
(ii) Control of Claim and Settlement. With respect to any Claim
as to which a person is entitled to indemnification hereunder, the
indemnifying party shall have the right at its own expense to
participate in or assume control of the defense of the Claim, and the
indemnified party shall cooperate fully with the indemnifying party,
subject to reimbursement for actual out-of-pocket expenses incurred by
the indemnified party as the result of a request by the indemnifying
party. If the indemnifying party elects to assume control of the defense
of any Claim, the indemnified party shall have the right to participate
in the defense of the Claim at its own expense. If the indemnifying
party does not elect to assume control or otherwise participate in the
defense of any Claim, it shall be bound by the results obtained by the
indemnified party with respect to the Claim. No indemnifying party shall
be liable for any settlement effected without its written consent, not
to be unreasonably withheld or delayed.
(g) Survival. Notwithstanding any other provision of this
Agreement, the indemnification obligations of the parties hereunder shall
survive indefinitely. The provisions set forth in Article X hereof shall not
apply to any facts or circumstances, which are the subject of indemnification
pursuant to Sections 6.5(c) or 6.5(d).
(h) Expenses. Buyer shall pay all expenses incident to the
registration of the Leap Shares under this Section 6.5, including without
limitation, all registration, filing and NASD fees, all fees and expenses of
complying with securities or blue sky laws, all word processing, duplicating and
printing expenses, and the fees and disbursements of counsel for Buyer and its
independent public accountants. With respect to sales of Leap Shares, Seller
shall pay all underwriting discounts and commissions and fees of underwriters,
selling brokers, dealer managers or similar securities industry professionals
relating to the distribution of the Leap Shares, the fees and disbursements of
counsel retained by Seller and transfer taxes, if any.
(i) Seller Information. Notwithstanding anything in this
Agreement to the contrary, if Seller shall have failed to provide all
information to Buyer required to be included in the Registration Statement as to
Seller in sufficient time prior to the Denver Closing Date to enable Buyer to
fulfill its filing obligations under Section 6.5(a) on a timely basis, then (A)
the condition set forth in Section 9.4 shall not be a condition precedent to the
Denver Closing and (B) the date by which Buyer must file the Registration
Statement under Section 6.5(a) shall be extended a reasonable period of time to
reflect the delay caused by Seller's failure to deliver the requisite
information to Buyer.
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(j) Compliance. Seller will observe and comply with the
Securities Act and the general rules and regulations thereunder, as now in
effect and as from time to time amended and including those hereafter enacted or
promulgated, in connection with any offer, sale, pledge, transfer or other
disposition of the Leap Shares or any part thereof.
6.6 Exclusivity. Until the termination of this Agreement, Seller
will not (and the Seller will cause each of its members, managers and affiliates
not to) (a) solicit, initiate, or encourage the submission of any proposal or
offer from any Person relating to the acquisition of the Licenses or (b)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. Seller will notify Buyer immediately if any Person makes any
proposal, offer, inquiry, or contact with respect to any of the foregoing, which
notice shall include the identity of the Person making the proposal, offer,
inquiry or contact, and a summary of the principal terms thereof.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Non-Competition. Effective at and as of the Closing:
(a) Seller, its members, executive officers and principals
covenant and agree, for themselves and their respective affiliates, that for a
period of two (2) years after the respective Closing, such persons, and their
respective affiliates shall not, directly or indirectly, engage in any
activities that may compete with Buyer within the BTAs covered by the respective
License. If, in any judicial proceeding, a court shall refuse to enforce any of
the separate covenants deemed included in this Section 7.1, then such
unenforceable covenant shall be deemed eliminated from these provisions to the
extent necessary to permit the remaining separate covenants to be enforced.
(b) The words "directly or indirectly" as they relate to any
activity prohibited by the terms of this Section 7.1, mean (i) acting as an
agent, representative, consultant, officer, director, partner, employee or
independent contractor of any entity or enterprise that engages in any such
activity; or (ii) participating in any such entity or enterprise as an owner,
partner, limited partner, joint venturer, creditor or stockholder (except as a
stockholder holding less than one percent (1%) interest in a corporation whose
shares are actively traded on a regional or national securities exchange or in
the over-the-counter market).
7.2 Reasonable Efforts. Subject to the terms and conditions
herein, each of the parties hereto agrees to use all commercially reasonably
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things reasonably necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transactions contemplated
by this Agreement as promptly as practicable. In case at any time after a
Closing any further action is reasonably necessary to carry out the purposes of
this Agreement, the proper agents, officers and directors of each party hereto
shall take such action.
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7.3 Governmental Authorizations. Seller shall not cause or
permit, by any act or failure to act, any of its governmental authorizations or
Licenses to expire or to be surrendered or modified, or take any action that
would cause any governmental authority to institute proceedings for the
suspension, revocation, or material and adverse modification of any of such
governmental authorizations or fail to prosecute with due diligence any pending
applications for any governmental authority in connection with the Licenses.
7.4 Market Stand-Off. If at any time Buyer conducts an
underwritten public offering of its Common Stock or other securities, Seller
agrees that it will not, without the prior consent of the underwriters of such
public offering, during the period commencing on the date of the pricing of such
public offering and ending on the earlier of ninety (90) days after the date of
the final prospectus relating to such public offering or June 30, 2000, (a)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Leap Common Stock or any securities convertible into or exercisable or
exchangeable for Leap Common Stock or (b) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of Leap Common Stock, whether any such transaction
described in clause (a) or (b) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The provisions of this
Section 7.4 shall also be for the benefit of Buyer's underwriters in any such
public offering, who shall be deemed to be express third party beneficiaries of
this Section 7.4. Seller agrees to execute and deliver a customary "lock-up"
agreement with Buyer's underwriters in any such public offering containing
substantially the same terms and conditions as this Section 7.4 if requested by
Buyer's underwriters to do so.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
The obligations of Buyer under this Agreement shall be, at the
option of the Buyer, subject to the satisfaction of the conditions set forth
below, on or prior to each respective Closing Date. These conditions are for
Buyer sole benefit and may be waived by Buyer at any time in its sole
discretion.
8.1 No Misrepresentation or Breach of Covenants and Warranties.
There shall have been no material breach by Seller in the performance of any of
its covenants and agreements herein; each of the representations and warranties
of Seller contained or referred to herein shall be true and correct in all
material respects, on such Closing Date as though made on such Closing Date,
except for changes therein specifically permitted by this Agreement or resulting
from any transaction expressly consented to in writing by Buyer.
8.2 No Restraint or Litigation. No action, suit, investigation or
proceeding shall have been instituted to restrain or prohibit or otherwise
challenge the legality or validity of the transactions contemplated hereby.
8.3 Final Order and HSR Approval. The FCC, and all appropriate
state and other governmental authorities, if any, shall have issued a Final
Order granting their consent to (1)
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the transfer of the respective License to Buyer without any additional expenses
or unreasonable requirements imposed on Buyer as a condition to transfer and (2)
with respect to the Denver Closing only, to Buyer's assumption of the FCC Note
and Security Agreement without any conditions materially adverse to Buyer, and
on terms no more onerous to Buyer than are the terms to Seller under the
existing FCC Note and Security Agreement. The applicable waiting period under
the HSR Act, if applicable, shall have expired or been terminated. With respect
to the Denver Closing only, the FCC shall not have issued any adverse changes to
the July 22, 1999 conditional order setting forth the FCC's ruling that Leap is
a "designated entity" qualified to hold C-Block and F-Block licenses.
8.4 Necessary Consents and Corporate Approval. Seller shall have
delivered all third party consents required for Seller to consummate the
transaction contemplated by this Agreement.
8.5 Closing Deliveries. Seller shall have made all of its Closing
Deliveries.
ARTICLE IX
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
The obligations of the Seller under this Agreement shall be, at
the option of the Seller, subject to the satisfaction of the conditions set
forth below, on or prior to each respective Closing Date. These conditions are
for Seller's sole benefit and may be waived by Seller at any time in its sole
discretion.
9.1 No Misrepresentation or Breach of Covenants and Warranties.
There shall have been no material breach by Buyer in the performance of any of
its covenants and agreements herein and each of the representations and
warranties of Buyer contained or referred to in this Agreement shall be true and
correct in all material respects, on each Closing Date as though made on each
Closing Date, except for changes therein specifically permitted by this
Agreement or resulting from any transaction expressly consented to in writing by
Seller or any transaction contemplated by this Agreement.
9.2 No Restraint or Litigation. No action, suit or proceeding by
any Governmental Body shall have been instituted to restrain, prohibit or
otherwise challenge the legality or validity of the transactions contemplated
hereby.
9.3 Closing Deliveries. Buyer shall have made all of its Closing
Deliveries.
9.4 Shelf Registration Statement. For the Denver Closing only,
the Registration Statement shall have been declared effective by the SEC and
shall remain effective as of the Denver Closing Date.
9.5 FCC and HSR Approval. The FCC shall have granted its consent
and approval to (1) transfer the respective License from Seller to Buyer, and
(2) with respect to the
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Denver Closing only, to Buyer's assumption of the FCC Note and Security
Agreement. The applicable waiting period under the HSR Act, if applicable, shall
have expired or been terminated.
ARTICLE X
INDEMNIFICATION
10.1 Survival. All of the representations and warranties of the
Parties contained in Article IV or Article V shall survive the final Closing
hereunder (even if the other Party knew or had reason to know of any
misrepresentation or breach of warranty at the time of such Closing) and shall
continue in full force and effect until the three (3) year anniversary of the
final Closing Date, except that the representations and warranties set forth in
Sections 4.2, 4.5 and 4.6 shall survive the final Closing and continue in full
force and effect forever thereafter.
10.2 Indemnification by Seller. In the event Seller breaches (or
in the event any third party alleges facts that, if true, would mean the Seller
has breached) any of its representations, warranties, and covenants contained
herein and, if there is an applicable survival period pursuant to Section 10.1
above and the Buyer makes a written claim against Seller within such period, or
in the event of any actual or threatened claim, action, suit or proceeding
against Buyer or any of its subsidiaries arising from Seller's ownership or
operation of any License prior to the respective Closing therefor, then the
Seller agrees to indemnify the Buyer and its directors, officers, stockholders,
agents, successors and assigns from and against the entirety of any Losses or
Expenses any such person may incur through and after the date of the claim for
indemnification resulting from, arising out of, relating to, in the nature of,
or caused by the breach (or the alleged breach), or such claim, action suit or
proceeding.
10.3 Indemnification by Buyer. In the event Buyer breaches (or in
the event any third party alleges facts that, if true, would mean Buyer has
breached) any of its representations, warranties, and covenants contained herein
and, if there is an applicable survival period pursuant to Section 10.1 above
and the Seller makes a written claim against Buyer within such period, or in the
event of any actual or threatened claim, action, suit or proceeding against
Seller or any of its subsidiaries arising from Buyer's ownership or operation of
PCS Systems under the Licenses following the respective Closings therefor, then
Buyer agrees to indemnify Seller and its directors, officers, stockholders,
agents, successors and assigns from and against the entirety of any Losses or
Expenses any such person may incur through and after the date of the claim for
indemnification resulting from, arising out of, relating to, in the nature of,
or caused by the breach (or the alleged breach), or such claim, action, suit or
proceeding.
10.4 Certain Limitations. Notwithstanding any provision of this
Agreement to the contrary:
(a) The maximum aggregate liability of Seller or Buyer pursuant
to its indemnification obligations under Section 10.2 or Section 10.3,
respectively, shall be $33,400,000; provided, that such amount shall be reduced
by $15,030,000 if this Agreement is terminated with respect to the Denver
License prior to the Closing thereof, or by $18,370,000 if
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this Agreement is terminated with respect to the Pittsburgh License prior to the
Closing thereof; and
(b) The provisions of Article X shall not apply to any Claims,
Losses or Expenses incurred arising from or related to any material misstatement
contained in or material omission from the Registration Statement or Prospectus
contemplated by Section 6.5 hereof. The indemnification and contribution
provisions under Section 6.5 shall apply exclusively to any such Claims, Losses
or Expenses.
10.5 Notice of Claims.
(a) Any party (the "Indemnified Party") seeking indemnification
under this Article X shall give to the party obligated to provide
indemnification to such Indemnified Party (the "Indemnitor") a notice (a "Claim
Notice") describing in reasonable detail the facts giving rise to any claim for
indemnification hereunder and shall include in such Claim Notice (if then known)
the amount or the method of computation of the amount of such claim, and a
reference to the provision of this Agreement or any agreement, document or
instrument executed pursuant hereto or in connection herewith upon which such
claim is based; provided, that a Claim Notice in respect of any action at law or
suit in equity by or against a third Person as to which indemnification will be
sought shall be given promptly after the action or suit is commenced; provided
further that failure to give such notice shall not relieve the Indemnitor of its
obligations hereunder except to the extent it shall have been prejudiced by such
failure.
(b) Subject to Section 10.4, after the giving of any Claim Notice
pursuant hereto, the amount of indemnification to which an Indemnified Party
shall be entitled under this Article X shall be determined: (i) by the written
agreement between the Indemnified Party and the Indemnitor; or (ii) by a final
judgment or decree of any court of competent jurisdiction. The judgment or
decree of a court shall be deemed final when the time for appeal, if any, shall
have expired and no appeal shall have been taken or when all appeals taken shall
have been finally determined. The Indemnified Party shall have the burden of
proof in establishing the amount of Losses and Expenses suffered by it.
10.6 Third Person Claims.
(a) Subject to Section 10.6(b), the Indemnified Party shall have
the right to conduct and control, through counsel of its choosing, the defense,
compromise or settlement of any third Person claim, action or suit against such
Indemnified Party as to which indemnification will be sought by any Indemnified
Party from any Indemnitor hereunder, and in any such case the Indemnitor shall
cooperate in connection therewith and shall furnish such records, information
and testimony and attend such conferences, discovery proceedings, hearings,
trials and appeals as may be reasonably requested by the Indemnified Party in
connection therewith; provided, that the Indemnitor may participate, through
counsel chosen by it and at its own expense, in the defense of any such claim,
action or suit as to which the Indemnified Party has so elected to conduct and
control the defense thereof; and provided, further, that the Indemnified Party
shall not, without the written consent of the Indemnitor (which written consent
shall not be unreasonably withheld), pay, compromise or settle any such claim,
action or suit, except that no such consent shall be
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required if, following a written request from the Indemnified Party, the
Indemnitor shall fail, within fourteen (14) days after the making of such
request, to acknowledge and agree in writing that, if such claim, action or suit
shall be adversely determined, such Indemnitor has an obligation to provide
indemnification hereunder to such Indemnified Party. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay, settle or
compromise any such claim, action or suit without such consent, provided that in
such event the Indemnified Party shall waive any right to indemnity therefor
hereunder unless such consent is unreasonably withheld.
(b) if any third Person claim, action or suit against any
Indemnified Party is solely for money damages or, where the Seller is the
Indemnitor will have no continuing effect in any material respects on the
Licenses, then the Indemnitor shall have the right to conduct and control,
through counsel of its choosing, the defense, compromise or settlement of any
such third Person claim, action or suit against such Indemnified Party as to
which indemnification will be sought by any Indemnified Party from any
Indemnitor hereunder if the Indemnitor has acknowledged and agreed in writing
that, if the same is adversely determined, the Indemnitor has an obligation to
provide indemnification to the Indemnified Party in respect thereof, and in any
such case the Indemnified Party shall cooperate in connection therewith and
shall furnish such records, information and testimony and attend such
conferences, discovery proceedings, hearings, trials and appeals as may be
reasonably requested by the Indemnitor in connection therewith; provided, that
the Indemnified Party may participate, through counsel chosen by it and at its
own expense, in the defense of any such claim, action or suit as to which the
Indemnitor has so elected to conduct and control the defense thereof.
Notwithstanding the foregoing, the Indemnified Party shall have the right to
pay, settle or compromise any such claim, action or suit, provided that in such
event the Indemnified Party shall waive any right to indemnity therefor
hereunder unless the Indemnified Party shall have sought the consent of the
Indemnitor to such payment, settlement or compromise and such consent was
unreasonably withheld, in which event no claim for indemnity therefor hereunder
shall be waived.
10.7 Amount of Indemnification Payments. In calculating any Loss
or Expense there shall be deducted (i) any insurance recovery in respect thereof
(and no right of subrogation shall accrue hereunder to any insurer) and (ii) the
net present value of any actual tax benefit to the Indemnified Party (or any of
its affiliates) with respect to such Loss or Expense (after taking into account
the actual tax effect of receipt of the indemnification payments).
ARTICLE XI
TERMINATION
11.1 Termination. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated:
(a) by the mutual written consent of Seller and Buyer;
(b) by either Buyer or Seller upon written notice to the other,
in the event the other party (the "Breaching Party") has materially breached its
representations, warranties or covenants contained in this Agreement and failed
to cure such breach within the 30-day cure
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period specified in this subsection; provided, however, that the party claiming
such breach (i) is not itself in material breach of its representations,
warranties or covenants contained herein, (ii) promptly notifies the Breaching
Party in writing (the "Termination Notice") of its intention to terminate this
Agreement, (iii) specifies in such Termination Notice the representation,
warranty or covenant of which the Breaching Party is allegedly in material
breach, and (iv) provides the Breaching Party with thirty (30) days within which
to cure such alleged breach, unless such alleged breach may not reasonably be
cured within such 30-day period;
(c) by either Buyer or Seller upon written notice to the other,
upon the other party's filing, or having filed against it and remaining pending
for more than thirty (30) days, a petition under Title 11 of the United States
Code or similar state law provision seeking protection from creditors or the
appointment of a trustee, receiver or debtor in possession;
(d) by either Buyer or Seller upon written notice to the other,
if a court of competent jurisdiction shall have issued an order, decree or
ruling permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling or
other action shall have become final and non-appealable;
(e) by Buyer upon written notice to Seller upon the occurrence of
a "Seller Default" (as defined below); or
(f) by either Buyer or Seller upon twenty (20) days' prior
written notice of such termination, if the Pittsburgh Closing or the Denver
Closing, or both of them, shall not have occurred on or before the nine (9)
month anniversary of the Effective Date of this Agreement; provided, however,
that if one of the Closings has occurred prior to such termination, this
Agreement shall continue in full force and effect in accordance with its terms
with respect to the particular License for which the Closing already had been
consummated.
For purposes of Section 11.1(e) above, "Seller Default" means: (1) Seller or any
of its subsidiaries has failed to make any payments when due of any principal,
interest, fees, lease rentals, or any and all other amounts owed to third
parties in an aggregate amount in excess of $50,000; (2) Seller or any of its
subsidiaries have breached the Licenses, have failed to make payments of
principal or accrued interest such that Seller cannot deliver good title to the
respective Licenses to Buyer, or have failed to continue to hold the Licenses,
directly or indirectly free and clear of all liens and Encumbrances; (3) the
occurrence of a Material Adverse Change with respect to Seller and its
subsidiaries; (4) Seller or any of its subsidiaries have suffered a material
lapse in the customary types and amounts of insurance coverage carried for their
business, (5) Seller or any of its subsidiaries has defaulted on any of its
outstanding indebtedness to third parties having a principal amount exceeding
$250,000, whether as a result of the failure to pay money or otherwise; (6)
Seller or any of its subsidiaries becomes insolvent, or is unable to pay its
debts as they become due, or makes an assignment for the benefit of creditors,
or files a voluntary petition in bankruptcy, or suffers the filing of an
involuntary petition in bankruptcy, or seeks protection from creditors under any
state law provision, or becomes subject to the appointment of a trustee or
receiver over its assets; or (7) one or more judgments have been entered against
Seller or any of its subsidiaries involving an aggregate amount of greater than
$250,000.
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11.2 Effect of Termination. In the event of termination of this
Agreement by either party, except as otherwise provided herein, all rights and
obligations of the parties under this Agreement shall terminate without any
liability of any party to any other party (except for any liability of any party
then in breach). The provisions of Sections 6.5(c)-(g), Article X and Sections
11.2, 12.1, 12.6, 12.7, 12.11, 12.12, 12.13, and 12.14 shall expressly survive
the expiration or termination of this Agreement. Nothing is this Section 11.2
shall be deemed to release any party from any liability for breach by such party
of the terms and provisions of this Agreement or from any obligations that exist
under separate agreements between the parties.
ARTICLE XII
GENERAL PROVISIONS
12.1 Confidential Nature of Information. Each party agrees that
it will treat in confidence all documents, materials and other information which
it shall have obtained regarding the other party during the course of the
negotiations leading to the consummation of the transactions contemplated hereby
(whether obtained before or after the date of this Agreement), the investigation
provided for herein and the preparation of this Agreement and other related
documents. Such documents, materials and information shall not be communicated
to any third Person except to employees, representatives or partners of Buyer or
Seller with a need to know and such persons shall be informed of the
confidential nature of such information. No party shall use any confidential
information in any manner whatsoever except solely for the purpose of evaluating
the proposed purchase and sale of the Licenses. The obligation of each party to
treat such documents, materials and other information in confidence shall not
apply to any information which (i) is or becomes available to a party hereto
from a source other than another party hereto, (ii) is or becomes available to
the public other than as a result of disclosure by a party or its agents, (iii)
is required to be disclosed under applicable law or judicial process, but only
to the extent it must be disclosed, or (iv) is independently developed by such
party without reference to the confidential information of the other party; (v)
a party reasonably deems necessary to disclose to in order to obtain any of the
consents or approvals contemplated hereby. To the extent the provisions of this
paragraph conflict with the existing Non-Disclosure Agreement ("NDA") between
the parties, the provisions of the NDA shall prevail.
12.2 No Public Announcement. No party shall, without the approval
of the other, make any press release or other public announcement concerning the
transactions contemplated by this Agreement, except as and to the extent that
any such party shall be so obligated by law, in which case the other party shall
be advised and the parties shall use their reasonable efforts to cause a
mutually agreeable release or announcement to be issued; provided that the
foregoing shall not preclude communications or disclosures necessary to
implement the provisions of this Agreement or to comply with accounting and
Securities and Exchange Commission disclosure obligations or applicable FCC
disclosure obligations.
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12.3 Notices. All notices, certifications, requests, demands,
payments and other communications hereunder shall be in writing and shall be
deemed to have been duly given and delivered if mailed, by certified mail, first
class postage prepaid, or delivered personally, or if sent by facsimile, with
transmission confirmed by telephone and simultaneously followed by the original
instructions by first class mail, postage prepaid:
If to Seller:
Radiofone PCS, L.L.C.
3131 N. I- 10 Service Road
Metairie, Louisiana 70002
Telephone: (504) 830-5400
Fax: (504) 830-5498
with a copy (which shall not constitute notice) to:
Karl J. Zimmermann
Baldwin & Haspel, L.L.C.
2200 Energy Centre, 1100 Poydras Street
New Orleans, LA 70163
Telephone: (504) 585-7711
Facsimile: (504) 585-7751
If to Buyer:
Leap Wireless International, Inc.
10307 Pacific Center Court
San Diego, California 92121
Attention: Legal Department
Telephone: (858) 882-6000
Facsimile: (858) 882-6040
or to such other address or addresses as may hereafter be specified by notice
given by any of the above to the others. Notices given by United States
certified mail as aforesaid shall be effective on the third business day
following the day on which they were deposited in the mail. Notices delivered in
person shall be effective upon delivery. Notices given by facsimile shall be
effective when transmitted, provided facsimile notice is confirmed by telephone
and is transmitted on a business day during regular business hours.
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12.4 Successors and Assigns.
(a) The rights of any party under this Agreement shall not be
assignable by such party hereto prior to the Closing without the written consent
of the other, except that the rights of Buyer hereunder may be assigned prior to
the Closing, without the consent of Seller, to any of its affiliates,
subsidiaries, successors and assigns ("Permitted Assignees").
(b) This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their successors and permitted assigns. The successors
and permitted assigns hereunder shall include without limitation, in the case
Buyer, any Permitted Assignees as well as the successors in interest to such
Permitted Assignee. Except pursuant to Section 7.4, nothing in this Agreement,
expressed or implied, is intended or shall be construed to confer upon any
Person other than the parties and successors and Permitted Assignees, any right,
remedy or claim under or by reason of this Agreement.
12.5 Entire Agreement; Amendments. This Agreement and the
Exhibits referred to herein and the documents delivered pursuant hereto contain
the entire understanding of the parties hereto with regard to the subject matter
contained herein or therein, and supersede all prior agreements, understandings
or letters of intent between or among any of the parties hereto, including the
Memorandum of Understanding entered into as of December 7, 1999 by and between
the parties. This Agreement shall not be amended, modified or supplemented
except by a written instrument signed by an authorized representative of each of
the parties hereto.
12.6 Waivers. Any failure of either Buyer or Seller to comply
with any obligation, covenant, agreement or condition herein may be waived by
the other party only by a written instrument signed by the party granting such
waiver, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
12.7 Expenses. Each party hereto will pay all of its own costs
and expenses incident to its negotiation and preparation of this Agreement and
the consummation of the transactions contemplated hereby and thereby, including
the fees, expenses and disbursements of its counsel and advisors. In the event
either party shall bring an action in connection with the performance, breach or
interpretation of this Agreement, the prevailing party in any such action shall
be entitled to recover from the losing party all reasonable costs and expenses
of such action, including attorneys' fees.
12.8 Partial Invalidity. Wherever possible, each provision hereof
shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such provision or provisions or any other provisions hereof,
unless such a construction would be unreasonable; provided, however, that if the
removal of such offending term or provision materially alters the burdens or
benefits of any of the parties under this Agreement, the parties agree to
negotiate in good faith such modifications to this Agreement as are appropriate
to ensure
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the burdens and benefits of each party under such modified Agreement are
reasonably comparable to the burdens and benefits originally contemplated and
expected.
12.9 Execution in Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be considered an original
instrument, but all of which shall be considered one and the same agreement, and
shall become binding when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
12.10 Further Assurances. From time to time following the
Closing, Seller shall execute and deliver, or cause to be executed and
delivered, to Buyer such other instruments of conveyance and transfer as Buyer
may reasonably request or as may be otherwise necessary to more effectively
convey and transfer to, and vest in, Buyer and put the Buyer in possession of,
any part of the Licenses.
12.11 Resolution of Disputes. Except with respect to a breach of
the obligations of confidentiality, non-competition and actions detrimental to
the acquisition of the Licenses contemplated hereunder, as to which the
non-breaching party shall have the right to seek injunctive remedy or other
equitable remedies, senior management employees of Buyer and Seller shall meet
and negotiate in good faith to reach a satisfactory resolution to any dispute
arising in connection with this Agreement. If such negotiations do not result in
a resolution within five (5) days after the first meeting of such
representatives, then any dispute, claim or controversy arising under this
Agreement or in any way related to this Agreement, or its interpretation,
enforceability or inapplicability shall be submitted to binding arbitration at
the election of either party. The arbitration shall be conducted by a single
arbitrator. The arbitration shall be conducted in New York City in accordance
with the Commercial Arbitration Rules of the American Arbitration Association.
The arbitration award shall be final and binding, and judgment on the award may
be entered in any court having jurisdiction thereof.
12.12 Governing Law. This Agreement shall be governed by,
enforced and construed in accordance with the laws of the State of New York, -
without regard to choice of law principles.
12.13 Specific Performance. Notwithstanding anything herein to
the contrary, if either Buyer or Seller fails to perform any of its obligations
under this Agreement, the other party shall have the right, in addition to all
other rights or remedies, to specific performance of the terms hereof.
12.14 Headings. Subject headings are included for convenience
only and shall not effect the interpretation of any provisions of this
Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first above written.
Radiofone PCS, L.L.C. Leap Wireless International, Inc.
By LG PCS, Inc. an
authorized member
By: /s/ Lawrence Garvey By: /s/ Harvey White
----------------------------- ---------------------------
Name: Lawrence Garvey Name: Harvey White
Its: President Its: Chairman and CEO
28
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Amendment No. 2
to Form S-3 (No. 333-93073) 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 Holding, 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 schedule, 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
February 15, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement Form S-3 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
February 14, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Amendment No. 2
to Form S-3 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
February 15, 2000
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Amendment No. 2
to Form S-3 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
February 15, 2000
