1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended November 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number: 0-29752
LEAP WIRELESS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0811062
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10307 PACIFIC CENTER COURT, SAN DIEGO, CA 92121-2779
(Address of Principal Executive Offices) (Zip Code)
(619) 882-6000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $0.0001 par value per share, 17,771,535 shares outstanding
as of January 8, 1999.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOVEMBER 30, 1998 AUGUST 31, 1998
----------------- ---------------
Cash and cash equivalents $ 7,496 $ --
Loans receivable from unconsolidated wireless
operating company - current 31,947 25,227
Loan receivable from related party 10,228 --
Other current assets 3,108 --
--------- ---------
Total current assets 52,779 25,227
--------- ---------
Property - net 2,800 --
Investments in unconsolidated wireless operating companies 194,333 101,719
Loans receivable from unconsolidated wireless
operating companies 21,281 40,076
Other assets 12,873 6,838
--------- ---------
Total assets $ 284,066 $ 173,860
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 3,683 $ 5,789
Loans payable to banks 15,720 9,000
Current portion of long-term debt 10,000 --
--------- ---------
Total current liabilities 29,403 14,789
--------- ---------
Long-term debt 11,542 --
Other liabilities 663
--------- ---------
Total liabilities 41,608 14,789
--------- ---------
Commitments (Notes 3, 8 and 10)
Stockholder's equity:
Preferred stock - authorized 10,000,000 shares
$.0001 par value, no shares issued and outstanding -- --
Common stock - authorized 75,000,000 shares;
$.0001 par value, 17,698,777 shares issued
and outstanding 2 --
Additional Paid-in capital 293,003 --
Combined capital accounts -- 197,598
Deficit accumulated during the development stage (47,608) (36,175)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment (2,939) (2,352)
--------- ---------
Total stockholder's equity 242,458 159,071
--------- ---------
Total liabilities and stockholder's equity $ 284,066 $ 173,860
========= =========
See accompanying notes.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED FOR THE PERIOD
NOVEMBER 30, SEPTEMBER 1, 1995
------------------------------------- (INCEPTION) TO
1998 1997 NOVEMBER 30, 1998
------------ ------------ -----------------
Equity in net loss of unconsolidated
wireless operating companies $ (7,544) $ (967) $ (18,917)
General and administrative expenses (4,364) (737) (30,009)
Interest income 1,526 -- 2,369
Interest expense (1,051) -- (1,051)
------------ ------------ ------------
Loss before income taxes (11,433) (1,704) (47,608)
Income tax expense -- -- --
------------ ------------ ------------
Net loss $ (11,433) $ (1,704) $ (47,608)
============ ============ ============
Net loss per common share $ (0.65)
============
Weighted average common shares outstanding 17,662,760
============
See accompanying notes.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED FOR THE PERIOD
NOVEMBER 30, SEPTEMBER 1, 1995
------------------------------- (INCEPTION) TO
1998 1997 NOVEMBER 30, 1998
--------- --------- ------------------
Operating activities:
Net loss $ (11,433) $ (1,704) $ (47,608)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 124 -- 124
Equity in net loss of unconsolidated wireless
operating companies 7,544 967 18,917
Earned interest accrued to loans receivable (1,219) -- (2,062)
Changes in assets and liabilities:
Other assets (3,200) -- (3,627)
Accounts payable and accrued liabilities (2,533) -- 3,683
Other liabilities 663 -- 663
--------- --------- ---------
Net cash used by operating activities (10,054) (737) (29,910)
--------- --------- ---------
Investing activities:
Purchase of property (2,876) -- (2,876)
Investments in unconsolidated wireless
operating companies (71,414) (1,395) (186,858)
Issuance of loans to unconsolidated
wireless operating companies (15,377) -- (79,837)
Issuance of loan receivable to related party (17,500) -- (17,500)
Repayment of loan receivable to related party 7,500 -- 7,500
Cash paid on acquisition of consolidated
wireless operating companies -- -- (564)
Purchase of wireless communication licenses (689) (6,963)
--------- --------- ---------
Net cash used in investing activities (100,356) (1,395) (287,098)
--------- --------- ---------
Financing activities:
Proceeds from bank loans 6,720 -- 15,720
Borrowings under credit facility 23,315 -- 23,315
Repayment of borrowings under credit facility (7,500) -- (7,500)
Issuance of common stock 103 -- 103
Former parent's investment 95,268 2,132 292,866
--------- --------- ---------
Net cash provided by financing activities 117,906 2,132 324,504
--------- --------- ---------
Net increase in cash and cash equivalents 7,496 -- 7,496
Cash and cash equivalents at beginning of period -- -- --
--------- --------- ---------
Cash and cash equivalents at end of period $ 7,496 $ -- $ 7,496
========= ========= =========
Supplemental disclosure of cash flow information:
Interest received $ 163 $ -- $ 163
========= ========= =========
Supplemental disclosure of noncash investing
and financing activities:
Loan to unconsolidated wireless operating company
converted to equity investment $ 28,196 $ -- $ 28,196
Credit facility fee $ 5,300 $ -- $ 5,300
========= ========= =========
See accompanying notes.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON INCOME (LOSS)-
STOCK ADDITIONAL COMBINED CUMULATIVE
----------------------- PAID-IN CAPITAL ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL ACCOUNTS DEFICIT ADJUSTMENT TOTALS
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 1, 1995 -- $ -- $ -- $ -- $ -- $ -- $ --
(inception)
Transfers from former parent -- -- -- 285 -- -- 285
Net loss -- -- -- -- (396) -- (396)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at August 31, 1996 -- -- -- 285 (396) -- (111)
Transfer from former parent -- -- -- 47,193 -- -- 47,193
Net loss -- -- -- -- (1,154) -- (1,154)
Cumulative translation adjustment -- -- -- -- -- 60 60
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at August 31, 1997 -- -- -- 47,478 (1,550) 60 45,988
Transfers from former parent -- -- -- 150,120 -- -- 150,120
Net loss -- -- -- -- (34,625) -- (34,625)
Cumulative translation adjustment -- -- -- -- -- (2,412) (2,412)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at August 31, 1998 -- -- -- 197,598 (36,175) (2,352) 159,071
September 1, 1998 to November 30,
1998 (Unaudited):
Transfers from former parent -- -- -- 95,268 -- -- 95,268
Net assets distributed by former
parent 17,647,685 2 292,864 (292,866) -- -- --
Exercise of stock options 51,092 -- 139 -- -- -- 139
Net loss -- -- -- -- (11,433) -- (11,433)
Cumulative translation adjustment -- -- -- -- -- (587) (587)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at November 30, 1998 17,698,777 $ 2 $ 293,003 $ -- $ (47,608) $ (2,939) $ 242,458
========== ========== ========== ========== ========== ========== ==========
See accompanying notes.
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LEAP WIRELESS INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
On June 24, 1998, QUALCOMM Incorporated ("QUALCOMM") created a wholly owned
subsidiary, Leap Wireless International, Inc. (the "Company" or "Leap
Wireless"), a Delaware corporation. On September 23, 1998 (the "Distribution
Date"), QUALCOMM distributed all of the outstanding shares of common stock of
the Company to QUALCOMM's stockholders as a taxable dividend (the
"Distribution"). In connection with the Distribution, one share of the Company's
common stock was issued to every four shares of QUALCOMM common stock
outstanding on September 11, 1998. Following the Distribution, QUALCOMM and the
Company are operating as independent companies.
The Company's business strategy is to operate, manage, support and otherwise
participate in Code Division Multiple Access ("CDMA") based wireless
telecommunications businesses and ventures in emerging international markets and
in the United States. Initially, the Company's principal markets for its
intended activities are in Latin America, Eastern Europe, Asia-Pacific and the
United States. QUALCOMM is a major supplier of CDMA subscriber and
infrastructure equipment to the Company's wireless telecommunications
businesses, and the Company expects that QUALCOMM will continue to be a major
supplier for future wireless telecommunications businesses in which the Company
participates.
The Distribution
In connection with the Distribution, QUALCOMM transferred to the Company its
equity interests in the following domestic and international emerging
terrestrial based wireless telecommunications operating companies: Pegaso
Telecomunicaciones, S.A. de C.V. (Mexico), Metrosvyaz Limited (Russia),
Orrengrove Investments Limited (Russia), Chilesat Telefonia Personal, S.A.
(Chile), Chase Telecommunications, Inc. (United States), OzPhone Pty. Ltd.
(Australia), and certain other development stage businesses (the "Leap Wireless
Operating Companies"). QUALCOMM and the Company also agreed that, if certain
events occur within 18 months after the Distribution, QUALCOMM will transfer to
the Company its equity interests and working capital loan related to Telesystems
of Ukraine ("TOU"), a wireless telecommunications company in Ukraine. In
connection with the Distribution, QUALCOMM also transferred to the Company cash
and certain indebtedness of the Leap Wireless Operating Companies owed to
QUALCOMM, as well as certain miscellaneous assets and liabilities. The aggregate
net tangible book value of the assets transferred by QUALCOMM to the Company in
connection with the Distribution was $250 million.
The Company has agreed to assume certain of QUALCOMM's obligations to manage
operations of and finance costs relating to ongoing build-outs of the wireless
telecommunications systems being deployed by the Leap Wireless Operating
Companies, as well as certain miscellaneous liabilities. QUALCOMM will continue
to be a supplier of CDMA equipment and is expected to provide significant vendor
financing to the Company's wireless telecommunications businesses and ventures.
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Basis of Presentation
The accompanying interim consolidated and combined financial statements have
been prepared by Leap Wireless without audit, in accordance with the
instructions to Form 10-Q and, therefore, do not necessarily include all
information and footnotes necessary for a fair presentation of its financial
position, results of operations, of cash flows and of stockholder's equity in
accordance with generally accepted accounting principles. In the opinion of
management, the unaudited financial information for the interim periods
presented reflects all adjustments (which include only normal, recurring
adjustments) necessary for a fair presentation. These consolidated and combined
financial statements and notes thereto should be read in conjunction with the
combined financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1998. Operating results
for interim periods are not necessarily indicative of operating results for an
entire fiscal year. Certain prior period amounts have been reclassified to
conform to the current period presentation. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investments in the Leap Wireless Operating Companies
Investments in corporate entities with less than 20% voting interest are
generally accounted for under the cost method. The Company uses the equity
method to account for investments in corporate entities in which it has voting
interest of 20% to 50% or in which it otherwise exercises significant influence.
Under the equity method, the investment is originally recorded at cost and
adjusted to recognize the Company's share of net earnings or losses and
cumulative translation adjustments of the investee, limited to the extent of the
Company's investment in, advances to and financial guarantees for the investee.
Such earnings or losses of the Company's investees are adjusted to reflect the
amortization of any differences between the carrying value of the investment and
the Company's equity in the net assets of the investee. To accommodate the
reporting of the unconsolidated Leap Wireless Operating Companies, the Company
has generally adopted a one-month lag for the recognition of the Company's share
of net earnings or losses of such investments.
Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings per Share",
which the Company has adopted to compute the net loss per common share amount
for the three months ended November 30, 1998. Historical net loss per share for
the three months ended November 30, 1997 is not presented since the Company did
not exist during that period.
The net loss per common share for the three months ended November 30, 1998
was calculated by dividing the net loss for the period by the weighted average
number of common shares outstanding for the period of 17,662,760. Stock options
for 6,299,623 common shares, the conversion of QUALCOMM's Trust Convertible
Preferred Securities which are convertible into 2,271,060 shares of the
Company's Common Stock, and the exercise of a warrant issued to QUALCOMM for
approximately 5,500,000 shares of the Company's Common Stock have not been
considered in calculating net loss per common share because their effect would
be anti-dilutive. As a result, the Company's basic and diluted net loss per
common share is the same.
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NOTE 2. REPORTING COMPREHENSIVE INCOME
Effective September 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income". This
statement requires the Company to report in the financial statements, in
addition to net income (loss), comprehensive income (loss) and its components.
The adoption of FAS 130 had no impact on the Company's results of operations or
financial position. In accordance with FAS 130, the accumulated balance of other
comprehensive income (loss) is disclosed as a separate component of
stockholders' equity. Prior period financial statements have been reclassified
to conform to the requirements of FAS 130.
Comprehensive income (loss) consisted of the following (in thousands):
THREE MONTHS ENDED FOR THE PERIOD
NOVEMBER 30, SEPTEMBER 1, 1995
-------------------------- (INCEPTION) TO
1998 1997 AUGUST 31, 1998
-------- -------- -----------------
Net loss $(11,433) $ (1,704) $(47,608)
Other comprehensive loss:
Net change in cumulative translation
account (587) (2,345) (2,939)
-------- -------- --------
Comprehensive loss $(12,020) $ (4,049) $(50,547)
======== ======== ========
NOTE 3. INVESTMENTS AND LOANS TO UNCONSOLIDATED LEAP WIRELESS OPERATING
COMPANIES
The Company and its consolidated subsidiaries have equity interests in
companies that hold wireless telephone licenses or are seeking such licenses.
Its participation in each company differs and the Company does not have majority
interests in such companies. The Company's ability to withdraw funds, including
dividends, from its participation in such investments is dependent in many cases
on receiving the consent of the other participants, over which the Company has
no control. The Company and its consolidated subsidiaries have investments in
Leap Wireless Operating Companies consisting of the following (in thousands):
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
Investments at equity $190,334 $ 97,719
Investment at cost 4,000 4,000
-------- --------
$194,334 $101,719
======== ========
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PERCENTAGE OF OWNERSHIP
---------------------------
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
COST INVESTMENT
Chase Telecommunications, Inc. (US) 7.2% 7.2%
EQUITY INVESTMENTS
Chilesat Telefonia Personal, S.A. (Chile) 50% 50%
Pegaso Telecomunicaciones, S.A. de C.V. (Mexico) 33% 49%
Metrosvyaz Limited (Russia) 50% 50%
Orrengrove Investments Limited (Russia) 50% 50%
Condensed combined financial information for the Leap Wireless Operating
Companies during the period under which the Company accounted for the
investments under the equity method is summarized as follows (in thousands):
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ---------
Current assets $ 126,883 $ 73,250
Non-current assets 441,620 170,660
Current liabilities (51,230) (93,064)
Non-current liabilities (149,331) (61,055)
--------- ---------
Total stockholders' capital 367,942 89,791
Other stockholders' share of capital 224,322 40,663
--------- ---------
Company's share of capital 143,620 49,128
Goodwill and other intangible items 46,714 48,591
--------- ---------
Equity investments in unconsolidated wireless
operating companies $ 190,334 $ 97,719
========= =========
THREE MONTHS ENDED
NOVEMBER 30,
------------------------------
1998 1997
-------- --------
Revenues $ 208 $ --
Operating expenses (9,918) (2,128)
Other income (expense), net (3,239) 724
Foreign exchange gains 426 --
-------- --------
Net loss (12,523) (1,404)
Other stockholders' share of net loss (5,223) (437)
-------- --------
Company's share of net loss (7,300) (967)
Amortization of goodwill and other intangible items (244) --
-------- --------
Equity in net loss of unconsolidated
wireless operating companies $ (7,544) $ (967)
======== ========
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As of November 30, 1998, the Leap Wireless Operating Companies had not
commenced significant commercial revenue generating operations.
Chase Telecommunications Holdings, Inc.
In June 1998, the Company agreed to provide a $25 million working capital
facility to Chase Telecommunications Holdings, Inc. ("Chase"). Borrowings under
the facility are subject to interest at prime plus 4 1/2% and are to be repaid
by June 2006. Borrowings are collateralized by substantially all of the assets
of Chase. At November 30, 1998, borrowings under the facility totaled $21.3
million, including $0.8 million of accrued interest, with a remaining loan
commitment of $4.5 million. In December 1998, the Company loaned an additional
$1.5 million to Chase under the facility. See Note 10.
Chilesat Telefonia Personal, S.A.
The Company has a 50% ownership interest in a privately held corporate joint
venture, Chilesat Telefonia Personal, S.A. ("Chilesat PCS"), a development stage
company. The Company holds its shares in Chilesat PCS via a wholly-owned
subsidiary, Inversiones Leap Chile, S.A. ("Inversiones Leap"), formerly named
Inversiones QUALCOMM Chile, S.A. The remaining 50% ownership interest
represented by voting common shares is owned by Telex-Chile S.A. and its
subsidiary Chilesat S.A. (together "Telex-Chile"). The Company recorded $3.4
million and $(0.1) million in equity losses (income) resulting from this
investment during the three months ended November 30, 1998 and 1997,
respectively.
In June 1998, the Company and Inversiones Leap entered into agreements with
Chilesat PCS to provide $35 million in short-term loans, convertible into common
equity if not repaid on or before January 31, 1999. If converted, the Company
and Inversiones Leap would hold voting shares of approximately 65% of Chilesat
PCS. If Telex-Chile contributes at least $17.5 million to Chilesat PCS by
January 31, 1999, the Company and Inversiones Leap have agreed to convert $17.5
million of loans to Chilesat PCS into equity. Between September and November
1998, Inversiones Leap funded an additional $6.7 million under its loan
agreement with Chilesat PCS utilizing additional bank debt. At November 30,
1998, borrowings under the loans to Chilesat PCS totaled $31.9 million. On that
date, the Company had a remaining commitment of $3.1 million under its loan
agreements with Chilesat PCS.
Pegaso Telecomunicaciones, S.A. de C.V.
The Company, through a wholly-owned subsidiary, QUALCOMM PCS Mexico, Inc.,
had a 49% ownership interest in a development stage company, Pegaso
Telecomunicaciones, S.A. de C.V. ("PEGASO"), a Mexico corporation.
During fiscal 1998, the Company advanced a portion of PEGASO's start-up
working capital requirements and provided a loan of $27.4 million to PEGASO. The
purpose of the loan was to fund a portion of the first PCS license payment.
Interest on the loan accrued at a rate of 10% and was added to the principal
amount of the loan outstanding. In September 1998, the Company provided $60.7
million of funding and converted its advances and loan, with accrued interest,
into common stock of PEGASO. The Company's total investment in PEGASO after
these transactions was $100 million. On the same date, other investors also
subscribed for and purchased common stock of PEGASO such that, after these
transactions, the total par value of the common equity of PEGASO was $300
million. As a result, the Company's ownership interest in PEGASO was diluted
from 49% to 33%. As a result of start-up
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expenses incurred by PEGASO, the Company recorded $0.7 million and $0.5 million
in equity losses during the three months ended November 30, 1998 and 1997,
respectively.
QUALCOMM Telecommunications Ltd., Cayman Islands
The Company has a 70% interest in QUALCOMM Telecommunications Ltd.
("QUALCOMMTel Cayman"), a Cayman Islands corporation. QUALCOMMTel Cayman has a
50% interest in Metrosvyaz Limited ("Metrosvyaz"). QUALCOMM and Metrosvyaz have
entered into a $175 million, eight year, multiple drawdown loan facility under
which Metrosvyaz would be able to borrow funds, subject to certain terms and
conditions, to support its business plan, including equipment purchases, and
working capital needs. As of the Distribution Date, the Company assumed $72.4
million of the $175 million financing obligation from QUALCOMM. The $175 million
facility carries a 13% interest rate and borrowings are generally repayable
approximately five years from the date of the draw subject to a final repayment
in August 2006 of any outstanding draws then outstanding. Borrowings under the
facility are collateralized by substantially all the assets of Metrosvyaz.
During fiscal 1998, the Company paid $6.6 million of start-up related costs on
behalf of Metrosvyaz. These advances were later converted to a draw under the
$72.4 million loan facility. In addition, the Company made an additional loan of
$10.7 million under its loan facility with Metrosvyaz. As of November 30, 1998,
the Company had loans totaling $17.9 million to Metrosvyaz, including a facility
fee of $0.6 million, with a remaining commitment of $55.1 million. As a result
of start-up expenses incurred by Metrosvyaz, the Company recorded $2.5 million
and $0.5 million in equity losses resulting from its investment during the three
months ended November 30, 1998 and 1997, respectively.
QUALCOMM Telecommunications Ltd., Isle of Man
The Company has a 70% interest in QUALCOMM Telecommunications Ltd.
("QUALCOMMTel Isle of Man"), an Isle of Man corporation. QUALCOMMTel Isle of Man
holds a 50% investment in Orrengrove Investments Limited ("Orrengrove").
Orrengrove has a 60% interest in Transworld Telecommunications, Inc.,
Transworld Communications Services, Inc., and Transworld Communications
(Bermuda), Ltd. (the "Transworld Companies"). As a result of start-up expenses
incurred by the Transworld Companies, the Company recorded $0.9 million in
equity losses resulting from its investment during the three months ended
November 30, 1998.
NOTE 4. LOAN RECEIVABLE FROM RELATED PARTY
In September 1998, the Company provided a $17.5 million loan (the "Pegaso
Loan") to Pegaso Comunicaciones y Servicios, S.A. de C.V., a Mexican company
96%-owned by Mr. Alejandro Burillo Azcarraga, a member of the Company's Board of
Directors. The Pegaso Loan accrued interest at the rate of 13% per annum.
Principal installments of $7.5 million and $10 million, plus accrued interest,
were repaid in October and December 1998 respectively. The purpose of the Pegaso
Loan was to facilitate investment by Pegaso Comunicaciones y Servicios, S.A. de
C.V. in PEGASO, and to ensure that the investors in PEGASO made all capital
contributions to PEGASO that were required for the acquisition of the Mexican
licenses on September 30, 1998. See Note 7.
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NOTE 5. INVESTMENTS IN OTHER ENTITIES AND ASSETS
The Company, through a wholly-owned subsidiary, OzPhone Pty Limited
("OzPhone"), an Australian company, has several wireless communication licenses
in Australia. At November 30, 1998 the total cost of the licenses were $6.3
million.
In October 1998, the Company agreed to purchase a telecommunications license
from AirGate Wireless, L.L.C. for $19.5 million, paying an escrow deposit of
$0.6 million. The purchase is subject to approval of the Federal Communications
Commission ("FCC").
NOTE 6. LOANS PAYABLE
In July 1998 and between September and November 1998, Inversiones Leap
borrowed $9.0 million and $6.7 million, respectively, under notes payable to two
banks in Chile. The notes bear interest at rates of 8.56% and 7.75% per annum,
respectively, and all amounts borrowed are due to be repaid by February 1999.
NOTE 7. LONG-TERM DEBT
The Company entered into a secured credit facility with QUALCOMM (the "Credit
Facility") on September 23, 1998. The Credit Facility consists of two
sub-facilities. The first sub-facility enables the Company to borrow up to $35.2
million from QUALCOMM. The proceeds from this sub-facility may be used by the
Company solely to meet the normal working capital and operating expenses of the
Company, including salaries and overhead, but excluding, among other things,
strategic capital investments in wireless operators, substantial acquisitions of
capital equipment, and/or the acquisition of telecommunications licenses. The
other sub-facility enables the Company to borrow up to $229.8 million from
QUALCOMM. The proceeds from this second sub-facility may be used by the Company
solely to make certain identified investments.
In September 1998, the Company borrowed $5.3 million under the working capital
sub-facility to pay QUALCOMM a 2% facility fee. In September 1998, the Company
also borrowed $17.5 million under the investment capital sub-facility to make a
short-term loan to a related party (see Note 4). In November 1998, the Company
repaid $7.5 million of the investment capital loan, with the remaining balance
of $10.0 million due and payable on January 15, 1999. The Company borrowed $5.8
million under the investment capital sub-facility to make a further loan to a
Leap Wireless Operating Company.
Of amounts borrowed under the Credit Facility, $11.1 million will be due and
payable approximately eight years following the Distribution Date. QUALCOMM has
a first priority security interest in, subject to some exceptions, substantially
all of the assets of the Company for so long as any amounts are outstanding
under the Credit Facility. The Credit Facility requires the Company to meet
certain financial and operating covenants. Amounts borrowed under the Credit
Facility bear interest at a variable rate equal to LIBOR plus 5.25% per annum.
Interest will be payable quarterly beginning September 30, 2001 and, prior to
such time, accrued interest shall be added to the principal amount outstanding.
At November 30, 1998, $0.4 million of capitalized and accrued interest had been
added to the facility.
NOTE 8. COMMITMENTS
The Company has made guarantees and commitments to invest additional equity
and working capital into certain of the Leap Wireless Operating Companies. As of
November 30, 1998, these commitments
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totaled approximately $62.8 million. The Company expects to fund its commitments
with borrowings under the Credit Facility.
NOTE 9. STOCKHOLDER RIGHTS PLAN
On September 9, 1998, the Company's Board of Directors adopted a
Stockholder Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, the
Board of Directors declared a dividend, payable on September 16, 1998, of one
preferred purchase right (a "Right") for each share of common stock, $.0001 par
value, of the Company outstanding at the close of business on September 11,
1998. Similar Rights will generally be issued in respect to common stock
subsequently issued. Each Right entitles the registered holder to purchase from
the Company a one one-thousandth share of Series A Junior Participating
Preferred Stock, $0.0001 par value per share, at a purchase price of $90
(subject to adjustment). The Rights are exercisable only if a person or group
(an "Acquiring Person"), other than QUALCOMM with respect to its exercise of
the warrant granted to it in connection with the Distribution, acquires
beneficial ownership of 15% or more of the Company's outstanding shares of
common stock. Upon exercise, holders, other than an Acquiring Person, will have
the right (subject to termination) to receive the Company's common stock or
other securities having a market value (as defined) equal to twice the purchase
price of the Right. The Rights, which expire on September 10, 2008, are
redeemable in whole, but not in part, at the Company's option at any time for a
price of $0.01 per Right.
In conjunction with the distribution of the Rights, the Company's Board of
Directors designated 75,000 shares of preferred stock as Series A Junior
Participating Preferred Stock and reserved such shares for issuance upon
exercise of the Rights. At November 30, 1998, no shares of preferred stock were
outstanding.
NOTE 10. SUBSEQUENT EVENT
In December 1998, the Company agreed to purchase substantially all the
assets of Chase for $6.3 million, plus a warrant to purchase 1% of the common
stock in a wholly-owned subsidiary of the Company for $1.0 million, transfer of
the Company's stock ownership and warrants to purchase stock in Chase and
certain contingent earn-outs. This acquisition involves the transfer of licenses
which are subject to approval by the FCC, therefore the final closing of the
transaction will not occur unless approval by the FCC is obtained.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
consolidated and combined financial statements and the notes thereto included in
Item 1 of this Quarterly Report and the audited combined financial statements
and notes thereto and Management's Discussion and Analysis of Results of
Operations and Financial Condition included in the Company's 1998 Annual Report
on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences,
including factors relating to joint ventures and other entities in which the
Company has interests, include: the ability to successfully deploy wireless
networks; the ability to raise sufficient funds to finance such deployment; the
ability to control costs relating to constructing, expanding, and operating the
networks; the ability to attract new subscribers and the rate of growth of the
subscriber base; the usage and revenue generated from subscribers; the level of
airtime and equipment prices; the rate of churn of subscribers; the range of
services offered; the ability to effectively manage growth and the intense
competition in the wireless communications industry, as well as conditions
governing the use of network licenses set by various government and regulatory
authorities; developments in current or future litigation; and the other risks
detailed in the Company's Annual Report on Form 10-K under the heading "Factors
That Could Affect Future Performance."
PRESENTATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations reviews the financial position, results of operations, cash flows and
changes in stockholders' equity of the business that was transferred to the
Company by QUALCOMM Incorporated ("QUALCOMM") on September 23, 1998 as if the
Company were a separate entity for all periods discussed. In addition, the
results of the Company's unconsolidated operating companies (the "Leap Wireless
Operating Companies") have been included as of and for the three months ended
October 31, 1998, a one-month lag.
OVERVIEW
Leap Wireless International, Inc. (the "Company" or "Leap") is a wireless
communications carrier that deploys CDMA telecommunications networks in domestic
and international markets with strong growth potential. In conjunction with its
strategic partners, Leap is building or anticipates building a combination of
fixed and mobile wireless telecommunications systems in Mexico, Chile,
Australia, Russia and the United States. Upon completion of the Company's
pending U.S. spectrum acquisitions, the Company will have interests in existing
and planned telecommunications systems covering 162 million potential customers
of which Leap's equity share will be approximately 62 million.
Domestic and international telecommunications markets are expanding rapidly
as countries seek to increase teledensity (number of telephone lines as a
percentage of the population) and to increase competition among carriers.
Increased demand, decreased government regulation, and new spectrum auctions
have created opportunities for new providers to capture market share. Leap
believes that wireless is the cheapest and fastest way to increase teledensity
in regions not yet connected by copper telephone lines, and that the Company
possesses the expertise to oversee and manage the entry of new wireless
operating companies into these competitive markets.
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Leap's strategy includes identifying and investing in growth markets with
strong local partners who provide familiarity with the market and an ability to
facilitate deployment. For each of its ventures in which it holds a significant
position, Leap is actively involved in the management of the networks, combining
its expertise in international markets with its wireless technical expertise in
CDMA. Leap is committed to bringing the benefits of reliable, cost-effective,
and high-quality voice and data services to its operating company customers.
In the first quarter of fiscal year 1999, Leap became an independent company
and began to trade on the NASDAQ National Market after QUALCOMM distributed
Leap's stock to QUALCOMM's stockholders (the "Distribution"). In addition,
during the first quarter of fiscal 1999, two Leap Wireless operating companies,
Chilesat Telefonia Personal, S.A. ("Chilesat") and Chase Telecommunications,
Inc. ("ChaseTel"), launched commercial service. These are the first two Leap
Wireless operating companies with networks in commercial operation. As of
November 30, 1998, the end of the first quarter, approximately 20,500
subscribers were using wireless service provided by Chilesat and ChaseTel.
Leap's equity share was approximately 8,500 subscribers.
In September 1998, a subsidiary of Pegaso Telecomunicaciones, S.A. de C.V.,
Leap's Mexican joint venture, made its final payment to the Mexican government
for telecommunications licenses awarded to it in the Mexican PCS spectrum
auctions. Pegaso has begun network deployment in Tijuana and plans to launch
commercial service in February 1999.
In October 1998, a wholly owned subsidiary of Leap filed an application with
the Federal Communications Commission (the "FCC") to acquire spectrum covering
3.3 million potential customers in North and South Carolina from AirGate
Wireless, L.L.C. ("Airgate"). Five parties have filed comments with the FCC
opposing the application on the grounds that the Company does not qualify as a
"designated entity." Subsequent to the end of the quarter, Leap announced that
it has also reached an agreement to acquire ChaseTel, a Tennessee wireless
service provider. Leap previously held a 7.2% interest in Chase
Telecommunications Holdings, Inc. ("ChaseTel Holdings"), the parent of ChaseTel.
Leap expects to file an application with the FCC in the near future to transfer
the ChaseTel license to the Company. The bases of the comments filed in
opposition to the AirGate license transfer application would also apply to the
application to transfer the ChaseTel license. The two properties are intended to
serve as initial test markets for Leap's strategy of providing a flat-rate
wireless local area telephone service targeted at the mass consumer market.
After the close of the first quarter of fiscal 1999, Chilesat met its
obligation to complete certain network build-out milestones as required by its
licensing agreement with the Chilean government.
Leap and its operating companies (the "Leap Wireless Operating Companies")
are in the early stages of development and are subject to the risks inherent in
establishing a new business enterprise. Leap's results of operations must be
considered in light of the risks, expenses and difficulties encountered by
companies at this stage of development, particularly companies involved in new
and rapidly evolving international markets and companies experiencing rapid
growth.
As of the end of the first quarter of fiscal 1999, the Leap Wireless
Operating Companies had not commenced significant commercial revenue generating
operations, and Leap has no other current sources of operating income. Revenues
of the operating companies will be derived primarily from fees and usage charges
after they begin commercial operations. Other sources of revenue may include
equipment sales and activation fees. Start-up wireless telecommunications
companies typically require substantial capital
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expenditures for the construction of their networks, license fees and license
acquisition costs. These costs are generally capitalized. In addition, such
companies typically incur significant marketing and other expenses as they begin
commercial operations. Accordingly, as the Leap Wireless Operating Companies
incur increased operating costs and begin to amortize capitalized start-up
costs, Leap's proportionate share of the net losses of its operating companies
will grow.
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL YEAR 1999 COMPARED TO FIRST QUARTER FISCAL YEAR 1998
The Company's net loss in the first quarter of fiscal 1999 was $11.4 million
compared to a net loss of $1.7 million in the corresponding period of the prior
fiscal year.
Equity in net loss of unconsolidated wireless operating companies for the
first quarter of fiscal 1999 was $7.5 million, compared to $1.0 million for the
first quarter of fiscal 1998. The increase consisted primarily of increased Leap
Wireless Operating Company expenses (such as salaries and related benefits,
overhead expenses and professional and consulting fees) associated with license
acquisitions, network development, and marketing activities, increased interest
expense on borrowings, and losses from Orrengrove Investments Ltd., which was
acquired during fiscal 1998.
General and administrative expenses were $4.4 million in the first quarter
of fiscal 1999, compared to $0.7 million in the same period in the prior fiscal
year. The increase is attributed primarily to increased Company staffing and
business development activity related to creating a wireless operating company
in the United States. The Company expects that general and administrative
expenses will continue to increase and that the amounts presented will not be
indicative of future periods due to the pending acquisition and consolidation of
ChaseTel. The Company also expects that it will continue to add to its
managerial resources as it expands its involvement in wireless projects in
various other parts of the world.
Interest income for the first quarter of fiscal 1999 was $1.5 million,
primarily from the Company's loans to the Leap Wireless Operating Companies.
Interest expense for the first quarter of fiscal 1999 was $1.0 million due to
borrowings from banks and under the credit facility with QUALCOMM. There was no
interest income or expense during the first quarter of fiscal 1998.
No provision for income taxes was recognized in the first quarters of fiscal
1999 and 1998 as a result of the net losses incurred.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company expects to have significant future capital requirements over the
next several years in relation to existing operations, current development
projects and additional new projects. Prior to the Distribution of the Company's
stock to QUALCOMM's stockholders on September 23, 1998, the Company's cash
requirements were funded by QUALCOMM. On September 23, 1998, the Company entered
into $265 million credit facility with QUALCOMM which contained a $35.2 million
subfacility to fund working capital and operating expenses of the Company and a
$229.8 million subfacility to fund specified portfolio investments by the
Company. The Company's obligations under the credit facility are secured by
substantially all of the assets of the Company. The Company's credit agreement
with
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QUALCOMM contains covenants typical for a facility of this type, such as a
debt-to-capitalization financial covenant and several operating covenants,
including restrictions on the ability of the Company to incur indebtedness,
merge, consolidate or transfer all or substantially all of its assets, to make
certain sales of assets, to create, incur or to permit the existence of certain
liens and to pay dividends. As a result of these factors, the Company's ability
to obtain additional debt financing may be significantly limited.
As of November 30, 1998, the Company had $243.9 million available to it
under its credit facility. The Company expects to meet its cash requirements for
existing operations and for further investments in its development projects
through fiscal 1999 from available cash balances and borrowings under its credit
facility.
The Company expects that it will have reached its borrowing limit under its
credit facility at or about the end of 1999. At that point, the Company expects
to be highly leveraged. The degree to which the Company is leveraged could have
important consequences, including: (i) the Company's ability to obtain
additional financing in the future may be impaired, (ii) a substantial portion
of the Company's future cash flows from operations may be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available for operations, (iii) the Company may be hindered in its ability
to adjust rapidly to changing market conditions and (iv) the Company's
substantial degree of leverage may make it more vulnerable in the event of a
downturn in general economic conditions or in its business. There can be no
assurance that the Company's future cash flows will be sufficient to meet the
Company's debt service requirements or that the Company will be able to
refinance any of its indebtedness at maturity.
The Company is seeking additional sources of financing to fund its
activities after 1999. Alternatives under consideration include additional debt,
equity financing or other sources. There can be no assurances that additional
financing will be available or, if available, that it will be offered to the
Company on acceptable terms. If the Company does not obtain additional working
capital or financing in 1999, management plans to reduce future capital needs by
reducing or discontinuing the funding of uncommitted investments. In addition,
to the extent necessary, management will consider other strategic modifications
to its operational plans, including reducing corporate activities and possibly
selling all or portions of its interests in one or more of the Leap Wireless
Operating Companies.
OPERATING ACTIVITIES
In the first quarter of fiscal 1999, the Company used $10.1 million for
operating activities, compared to $0.7 million in the first quarter of fiscal
1998. The increase resulted from an increase in net working capital requirements
and an increase in general and administrative expenses. The increase in net
working capital requirements primarily consisted of cash used by QUALCOMM as
liabilities were paid and receivables created prior to the Distribution. The
Company expects that cash used in operating activities will increase further as
the Company continues to expand its project development efforts on existing and
new project opportunities. In addition, the Company expects that cash used for
operating activities will increase substantially in the future as a result of
the Company's pending acquisition and consolidation of ChaseTel and other
Company activities related to its strategy of providing a flat-rate wireless
local area telephone service targeted at the mass consumer market.
INVESTING ACTIVITIES
Cash used in investing activities was $100.4 million in the first quarter of
fiscal 1999 and $1.4 million for the first quarter of fiscal 1998. Investments
in the first quarter of fiscal 1999 consisted
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primarily of a $60.7 million capital contribution to Pegaso which was made
before Leap began to operate as an independent company, loans and advances of
$26.1 million to Leap Wireless Operating Companies, and a net loan of $10
million as described below. The Company and its wholly owned subsidiaries expect
to continue making significant investments and loans to the Leap Wireless
Operating Companies and investments in capital assets, including wireless
network equipment, throughout fiscal 1999. Investment activity in the
corresponding period in fiscal 1998 consisted of start-up expenses advanced to
Leap Wireless Operating Companies in Mexico and Russia.
As previously reported, in September 1998 the Company loaned $17.5 million
to Pegaso Comunicaciones y Servicios, S.A. de C.V., a Mexican company 96%-owned
by Mr. Alejandro Burillo Azcarraga, a member of the Company's Board of
Directors. The purpose of the loan was to facilitate investment by Pegaso
Comunicaciones y Servicios, S.A. de C.V. in Pegaso, the joint venture in which
the Company has an interest. The first principal installment of $7.5 million,
plus accrued interest, was repaid in the first quarter of fiscal 1999.
Subsequent to the end of the quarter, the second and final principal installment
of $10 million, plus accrued interest, was also repaid to the Company.
In October 1998, the Company agreed to purchase 10 MHz F block
telecommunications licenses from AirGate Wireless, L.L.C. for $19.5 million,
subject to the approval of the Federal Communications Commission ("FCC"). The
licenses cover a population of 3.3 million people in portions of North and South
Carolina. Five comments and oppositions have been filed with the FCC in
connection with the Company's application for approval of the license sale. The
comments challenge the Company's status as a "designated entity", which entitles
small businesses to preferential pricing and payment terms when acquiring PCS
frequency in the C and F blocks. Subsequent to the close of the quarter, the
Company filed its response to the comments and oppositions with the FCC.
In December 1998, subsequent to the end of the quarter, the Company agreed
to purchase substantially all of the assets of ChaseTel Holdings, the owner of
ChaseTel, a wireless service provider with 15 MHz C block licenses in Tennessee.
Transfer of ChaseTel's licenses to the Company is subject to the approval of the
FCC. The purchase price for the assets is $6.3 million; a warrant to purchase 1%
of the Company subsidiary that will operate a wireless communications network in
the territories covered by the ChaseTel licenses, exercisable for an aggregate
payment of $1.0 million; the Company's existing stock and warrants to purchase
stock in ChaseTel Holdings; and the right to receive additional compensation
based upon the performance of the business operating under the ChaseTel licenses
during the Company's fifth full fiscal year after the closing of the
acquisition. The licenses cover approximately 6.3 million people in Tennessee,
including the Chattanooga, Nashville, Memphis and Knoxville metropolitan areas,
as well as contiguous portions of six adjacent states. In December 1998,
ChaseTel had approximately $100 million of debt, including a low-interest loan
of approximately $80 million from the FCC, with principal payments deferred
until 2002. This low-interest, deferred payment FCC loan reduces ChaseTel's
operating costs and improves its cash flow from levels that would otherwise
exist.
FINANCING ACTIVITIES
Cash provided by financing activities during the first quarter of fiscal
1999 was $117.9 million, representing $95.3 million of funding from QUALCOMM for
Company operations and investing activities prior to the Distribution and $22.6
million of net borrowings. Cash provided by financing activities during the
first quarter of fiscal 1998 was $2.1 million, representing QUALCOMM's funding
of the Company operations and investing activities in this period.
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LIQUIDITY AND SUBSTANTIAL LEVERAGE OF OPERATING COMPANIES
The Company generally expects that its operating companies will be financed
initially with equity contributions and loans from the Company and its partners.
The Company also expects that its operating companies will seek stand-alone
third party financing after their initial stages of development. In some cases,
the Company and its partners may provide additional equity or loans to operating
companies after their initial contributions.
Although each of the Leap Wireless Operating Companies has obtained
substantial equity contributions, they generally are or may become highly
leveraged as is typical for start-up wireless telecommunications companies. The
ability of these companies to obtain future financings and to meet debt
covenants in connection with such financings will be dependent upon their future
performance, including the generation of revenue and cash flow, and upon
prevailing economic conditions which are beyond their control. In addition, some
of the Leap Wireless Operating Companies are expected to be substantially funded
through equipment financing arrangements from vendors. Such equipment financings
will be contingent upon meeting planned levels of performance. If the operating
companies fail to meet such performance requirements, the related equipment
financings could be materially restricted or terminated.
The Company's credit facility provides it with sufficient liquidity to
contribute the approximately $62.8 million of financing it is contractually
bound to provide the Leap Wireless Operating Companies as of November 30, 1998.
The business plans of these companies, however, call for substantial additional
financing to build-out and operate their planned networks, including substantial
financing for 1999 which these companies have not obtained. Although the Leap
Wireless Operating Companies may be able to reduce their capital requirements by
slowing the deployment of new equipment or by decreasing the scope of their
planned networks, it is likely that these businesses will still require
substantial new financing in 1999. The Leap Wireless Operating Companies are
generally seeking new equity and/or debt from existing investors, equipment
vendors and third parties, and the Company has been assisting them in their
efforts. At this time, however, capital markets have been constrained because of
uncertain worldwide economic conditions, and it is difficult for development
stage companies in emerging markets to raise additional capital. As a result,
the Company cannot provide assurances that the Leap Wireless Operating Companies
will be able to obtain the required additional financing. Further, the failure
of any such Leap Wireless Operating Company to gain required new financing could
have a material adverse effect on such company and, as a result, a material
adverse effect on the Company.
Chilesat, the Company's Chilean joint venture, does not currently have
sufficient funds to repay loans of approximately $35 million due to the Company
in January 1999 and approximately $10 million due to QUALCOMM in January and
February 1999, or to finance continuing activities. If Telex-Chile, the
Company's joint venture partner in Chilesat, contributes at least $17.5 million
to Chilesat by January 31, 1999, the Company and its wholly-owned Chilean
subsidiary have agreed to convert $17.5 million of its loan to Chilesat into
equity. If Chilesat does not repay the Company's loan when due, the Company also
has the option to convert such indebtedness into equity in Chilesat. The Company
has certain funds available under its credit facility for additional loans to
Chilesat to finance additional short-term needs. The Company and Chilesat have
been discussing terms under which the Company would be willing to provide
additional loans and/or equity to Chilesat. The Company and Chilesat have not
yet reached agreement on such terms nor can the Company provide assurances that
it will reach such an agreement with Chilesat. The Company has not yet decided
upon the actions it will take if Chilesat defaults on its loan payment to the
Company.
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Chilesat's failure to obtain additional financing in the near future could
have a material adverse affect on its ongoing operations and network expansion
and, as a result, could have a material adverse affect on the Company. Despite
Chilesat's liquidity problems, the Company believes that Chilesat's PCS network
represents a potentially successful business and is working to assist Chilesat
in securing a mutually satisfactory resolution to Chilesat's liquidity problems.
Telex-Chile has also been experiencing liquidity difficulties and has been
unable to make repayments on its outstanding loans. A Chilean court recently
withdrew the limited protection it had previously granted to Telex-Chile from
many of its significant creditors.
Chilesat has experienced some technical equipment problems with its network,
which is not unusual for a newly deployed, large-scale, wireless communication
system. Chilesat has been working with its equipment vendors to resolve these
problems, and the Company believes changes that a vendor has begun implementing
will promptly resolve such problems, although additional hardware replacement
and software development may be required.
As previously disclosed, the Company and QUALCOMM have agreed to provide or
procure up to $500 million of financing for Metrosvyaz Ltd., a Company joint
venture in Russia ("Metrosvyaz"). As a first stage in this multi-year investment
project, QUALCOMM agreed to provide a loan of $175 million to Metrosvyaz for
working capital and the purchase of QUALCOMM equipment. In connection with the
Distribution, the Company assumed $72.4 million of the loan commitment as a
working capital facility for Metrosvyaz.
Turmoil in the Russian economy has raised issues with respect to the
viability of the networks Metrosvyaz plans to deploy, and to the ability of
Metrosvyaz to repay the loans necessary to deploy such networks. As a result,
Metrosvyaz and the Company have agreed to slow the previously planned deployment
of Metrosvyaz's wireless networks in Russia, and QUALCOMM and Metrosvyaz have
agreed in principal to reduce the amount initially available under the QUALCOMM
loan agreement to finance Metrosvyaz's purchase of QUALCOMM equipment.
Metrosvyaz, QUALCOMM and the Company have also agreed in principle to
restructure the terms of the QUALCOMM loan agreement and the Company's working
capital facility for Metrosvyaz. This reduction and the restructuring reflect
the delays in equipment sales associated with the planned slow-down in network
deployment and the increased risks associated with the current Russian political
and economic situation.
YEAR 2000 ISSUE
The Year 2000 issue arises from the fact that most computer software programs
have been written using two digits rather than four to represent a specific
year. Any computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
As the Company and the Leap Wireless Operating Companies have recently begun
their respective businesses, there exists uncertainty as to the impact the Year
2000 issue could have on the Company. The Company does not believe that the Year
2000 issue will significantly impact its administrative and accounting software,
which have been acquired recently or will be acquired. The Company generally
subjects its vendors to Year 2000 compliance requirements in connection with the
Company's acquisitions of software. Also, the Company believes that the Year
2000 issue will not significantly
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impair the ability of the Leap Wireless Operating Companies' wireless
communications networks to perform as intended. The Leap Wireless Operating
Companies are expected to have direct or indirect computerized interfaces to
third parties relating to the transmission of telecommunications traffic over
local, national and international telecommunications networks. The Leap Wireless
Operating Companies are vulnerable to the failure of such third parties to
adequately address their Year 2000 issues. Such failures, should they occur,
could cause significant disruption to the operations of the Leap Wireless
Operating Companies, including the ability to provide certain services and
correctly bill customers, resulting in the potential for revenue loss and
increased costs. The Company is not currently aware of any significant third
party problems concerning the computerized interfaces, but as the Leap Wireless
Operating Companies have only recently begun network build-out and commercial
activities, they are still evaluating the risk associated with third party
interfaces and the Year 2000 issue. The Company expects to consult with the Leap
Wireless Operating Companies in connection with their risk evaluation and
development of any required remediation plans. The Company is in the process of
developing a risk profile to evaluate all third parties in regard to their
capability to become compliant with Year 2000.
To date, the Company has not incurred any material costs in support of the
Year 2000 issue. The Company estimates that it will spend $500,000 or less in
fiscal year 1999 to review and correct any non-compliant technology systems as
well as to support material third party relationships. The Company has not
developed a contingency plan to handle a worst case scenario.
There can be no assurance that the Company will be able to identify all Year
2000 problems in its systems, the systems of the Leap Wireless Operating
Companies or third party systems with which the Company or the Leap Wireless
Operating Companies will have computerized interfaces in advance of their
occurrence or that the Company will be able to successfully remedy any problems.
The expenses associated with the Company's efforts to remedy any Year 2000
problems, the expenses or liabilities to which the Company may become subject as
a result of such problems or the impact of Year 2000 problems on the ability of
Leap Wireless Operating Companies to do business with the Company could have a
material adverse effect on the Company's business, prospects, operating results
and financial condition.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
10.20 Asset Purchase Agreement among the Company, Chase
Telecommunications Holdings, Inc., Anthony Chase, and Richard
McDugald, dated as of December 24, 1998
27. Financial Data Schedule (Filed with EDGAR filing only.)
(b) Reports on Form 8-K.
On September 18, 1998, the Company filed a Current Report on Form 8-K
which indicated that the Company's Board of Directors had adopted a
Stockholders Rights Plan (the "Rights Plan") on September 9, 1998.
Pursuant to the Rights Plan, the Board of Directors declared a
dividend, payable on September 16, 1998, of one preferred purchase
right (a "Right") for each share of common stock, $.0001 par value, of
the Company outstanding at the close of business on September 11, 1998.
The description and terms of the Rights are set forth in a Rights
Agreement, dated as of September 14, 1998, as the same may be amended
from time to time (the "Agreement"), between the Company and Harris
Trust Company of California, as Rights Agent. A copy of the Rights
Agreement was attached to the Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAP WIRELESS INTERNATIONAL, INC.
Date: January 13, 1999 By: /s/ Harvey P. White
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Harvey P. White
President and Chief Executive Officer
Date: January 13, 1999 By: /s/ Stephen P. Dhanens
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Stephen P. Dhanens
Controller (Chief Accounting Officer)
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